Live Oak Bancshares, Inc. (Form: S-1, Received: 06/19/2015 17:33:52)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

As filed with the Securities and Exchange Commission on June 19, 2015

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

LIVE OAK BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

North Carolina

6022

26-4596286

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

1741 Tiburon Drive

Wilmington, North Carolina 28403

(910) 790-5867

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

James S. Mahan III

Chairman and Chief Executive Officer

Live Oak Bancshares, Inc.

1741 Tiburon Drive

Wilmington, North Carolina 28403

(910) 790-5867

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies of all communications to:

Todd H. Eveson

Jonathan A. Greene

Wyrick Robbins Yates & Ponton LLP

4101 Lake Boone Trail, Suite 300

Raleigh, North Carolina 27607

(919) 781-4000

Michael Paul Reed

Christopher J. DeCresce

Covington & Burling LLP

1201 Pennsylvania Avenue, NW

Washington, DC 20004-2401

(202) 662-6000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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

CALCULATION OF REGISTRATION FEE



Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price (1)(2)	Amount of Registration Fee
Common Stock, no par value	$86,250,000	$10,022.25

(1)	Includes the aggregate offering price of additional shares that the underwriters have the right to purchase from the Registrant, if any.

(2)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

SUBJECT TO COMPLETION, DATED JUNE 19, 2015

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS

Shares

LOGO

Common Stock

This is the initial public offering of Live Oak Bancshares, Inc., the parent company and registered bank holding company of Live Oak Banking Company in Wilmington, North Carolina. We are offering shares of our common stock.

Prior to this offering, there has been no public market for our common stock. We currently estimate that the initial public offering price per share will be between $ and $ . We have applied to list our common stock on the NASDAQ Global Market under the symbol “LOB.”

We are an “emerging growth company” as defined under the federal securities laws and are eligible for reduced public company reporting requirements.

Investing in our common stock involves risks. See “ Risk Factors ” beginning on page 24, for a discussion of certain risks that you should consider before making an investment decision to purchase our common stock.


	Per Share	Total
Initial public offering price of common stock	$	$
Underwriting discounts and commissions ⁽¹⁾
Proceeds to us, before expenses

(1)	See “Underwriting” for additional information regarding the underwriting discounts and commissions and certain expenses payable to the underwriters by us.

We have granted the underwriters an option to purchase up to additional shares of our common stock at the initial public offering price, less underwriting discounts and commissions, for a period of up to 30 days from the date of this prospectus.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The shares of our common stock that you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

The underwriters expect to deliver the shares of our common stock against payment on or about , 2015.


S ANDLER O’N EILL + PARTNERS , L . P .

Prospectus dated , 2015.

LOGO

TABLE OF CONTENTS


PROSPECTUS SUMMARY			1
THE OFFERING			12
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA			14
GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES			21
RISK FACTORS			24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			43
USE OF PROCEEDS			45
CAPITALIZATION			46
DILUTION			48
DIVIDEND POLICY			50
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			51
BUSINESS			98
MANAGEMENT			116
EXECUTIVE COMPENSATION AND OTHER MATTERS			124
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS			130
PRINCIPAL SHAREHOLDERS			131
DESCRIPTION OF OUR SECURITIES			133
SUPERVISION AND REGULATION			141
CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS			153
UNDERWRITING			157
WHERE YOU CAN FIND MORE INFORMATION			161
LEGAL MATTERS			161
EXPERTS			161
INDEX TO FINANCIAL STATEMENTS			F-1

ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We and the underwriters have not authorized any person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

Unless otherwise indicated or unless the context requires otherwise, all references in this prospectus to “LOB,” “we,” “us,” “our,” the “Company,” or similar references, mean Live Oak Bancshares, Inc. and its subsidiaries on a consolidated basis. References to “Live Oak Bank” or the “Bank” mean our wholly owned banking subsidiary, Live Oak Banking Company.

INDUSTRY AND MARKET DATA

Industry and market data used in this prospectus has been obtained from independent industry sources and publications available to the public, sometimes with a subscription fee, as well as from research reports prepared for other purposes. We did not commission the preparation of any of the sources or publications referred to in this prospectus. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified the data obtained from these sources. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. Trademarks used in this prospectus are the property of their respective owners, although for presentational convenience we may not use the ^® or the ™ symbols to identify such trademarks.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than $1.0 billion in gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. As an emerging growth company:

•

we may present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

•

we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;

•

we are permitted to provide less extensive disclosure about our executive compensation arrangements;

•

we are not required to hold non-binding advisory votes on executive compensation or golden parachute arrangements; and

•

we can delay the adoption of new or revised accounting standards affecting public companies until those standards would otherwise apply to private companies.

We may take advantage of these provisions for up to five years unless we earlier cease to be an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual gross revenues, have more than $700.0 million in market value of our common stock held by non-affiliates as of

any June 30 before that time, or issue more than $1.0 billion of non-convertible debt in a three-year period. We may choose to take advantage of some but not all of these reduced regulatory and reporting requirements. We have elected in this prospectus to take advantage of scaled disclosure relating to executive compensation arrangements.

Following this offering, we may continue to take advantage of some or all of the reduced regulatory, accounting and reporting requirements that will be available to us as long as we continue to qualify as an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. It is possible that some investors could find our common stock less attractive because we may take advantage of these exemptions. If some investors find our common stock less attractive, there may be a less active trading market for our common stock and our stock price may be more volatile.

iii

PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus and does not contain all the information that you need to consider in making your investment decision. You should carefully read this entire prospectus before deciding whether to invest in our common stock. You should pay special attention to, among other things, our consolidated financial statements and the related notes thereto and the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus to determine whether an investment in our common stock is appropriate for you.

Our Company

We are an established national online platform for small business lending. We believe we have used technology to fundamentally change small business lending by streamlining the borrower experience. We are able to better serve our customers by leveraging technological advantages and our deep industry experience to create an optimized borrowing experience for our customers. We believe our business model mitigates credit risk while capitalizing on technology to efficiently and prudently generate loans and manage our portfolio of loans outstanding. Our guiding principles, in order of priority, are soundness, profitability and growth.

We originate a range of short- and medium-term commercial and construction loans partially guaranteed by the U.S. Small Business Administration, or the SBA, to small businesses and professionals with what we believe are low risk characteristics. We carefully select industries, or “verticals,” on which to focus our lending efforts. Within each vertical we retain individuals who possess extensive industry-specific lending experience. We believe our focus on verticals has allowed Live Oak Bank to extend credit to small businesses and professionals at an average loan size of $1.0 million and has resulted in our historical credit quality outperforming industry averages. Based on a data set consisting of 292 lenders that have originated 300 loans or more under the SBA’s 7(a) program and greater than $25 million in total loans, assembled by our affiliate, Government Loan Solutions, Inc., or GLS, using two separate Freedom of Information Act requests for the twelve month period ended September 30, 2014, we had the lowest default rate among the group at 1.52%. In terms of charge-off rates, we ranked fifth in the same data set at 0.35% for the same period. For the twelve months ended September 30, 2014, the U.S. government’s most recently completed fiscal year, we ranked as the nation’s second largest small business lender, by dollar volume, utilizing the SBA’s 7(a) program. We believe the opportunity to expand our small business lending to new verticals is significant, since we currently only focus our lending efforts towards ten out of more than 1,000 industries identified in the SBA database.

The SBA’s 7(a) program provides up to a 75% guaranty for loans of greater than $150,000. For loans of $150,000 or less, the program provides up to an 85% guaranty. The maximum 7(a) loan amount is $5 million. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender. As such, prudent underwriting and closing processes are essential to effective utilization of the 7(a) program. We believe that the technology we use provides us with a competitive advantage in the closing and servicing of 7(a) program loans, streamlining a process that can otherwise involve an application that includes over 100 documents into an easily-monitored online process.

In addition to focusing on industry verticals, we emphasize developing detailed knowledge of our customers’ businesses. We develop this knowledge, in part, through regular visits to customers’ operations, wherever they are located. We believe that these regular visits generate both for us and for our customer a deep and personalized experience throughout the loan relationship. We develop strong insight into our customers’ credit characteristics and needs while at the same time continually expanding our knowledge base of the vertical in which the customer operates. In turn, we are able to provide our borrowers valuable insight into trends and developments in their industry. We service our customers efficiently throughout the loan process and monitor their performance by means of the technology-based platform we use, which eliminates the need to maintain traditional branch locations and therefore eliminates a significant component of traditional overhead expense associated with banking

franchises. We believe our geographically diverse loan portfolio significantly mitigates risk that would be associated with having a loan portfolio concentrated in one geographic area.

We typically sell the SBA-guaranteed portion (generally 75% of the principal balance) of the loans we originate in the secondary market. We have historically received a premium for these sales. We also sell participating interests in the remaining portion of our loans while retaining an SBA-required 10% unguaranteed interest and the servicing rights to the entire loan. As a result of our business model, our net income to date has been driven primarily by non-interest income rather than interest income.

As of the date of this prospectus, we are no longer classified as a de novo bank. Following the completion of this offering, we expect our regulatory capital ratios to be enhanced. As part of our business strategy following this offering, we expect growth in our loan portfolio through increasing the number of loans we originate that permit future advances (such as construction loans) and by less frequently selling fully funded loans. We believe that by growing our loan portfolio, we will increase our net interest income. Increased levels of interest income are not expected to exceed the premium and servicing income realized from the sale of guaranteed loans. As a result of this strategy, there may be an increase in our held for sale loan portfolio due to an increasing construction loan portfolio.

Historically, since loan sales have served as a primary source of liquidity, we have sold loans immediately following achievement of fully funded status. However, with more stable funding in place, we intend to begin selling fully funded loans less frequently. We believe that by holding fully funded loans for a longer period of time, we will increase our net interest income. This new strategy will also, however, expose us to the risk that a market downturn occurs during the period when we are holding a fully funded loan resulting in a reduced number of potential buyers when we ultimately seek to execute a sale. We believe that this risk is mitigated by the historical stability of the SBA 7(a) secondary market and we intend to continue monitoring capital markets activity for potential downturns via GLS.

In addition, as part of our new strategy we will use the sale of unguaranteed portions of loans primarily to reduce concentration risk. We believe that the risk of retaining the SBA-guaranteed portion of loans we originate will be mitigated by the government guaranty and the fact that we have not historically received any denials or repairs of a guaranty submitted to the SBA to be honored. We also believe that the impact to our allowance for loan loss will also be minimal due to the government guaranty. With respect to the unguaranteed portion of loans that we originate and hold for our own portfolio, we believe that our underwriting policies and ongoing credit administration procedures will help to mitigate the risk of default associated with retaining these assets in our loan portfolio.

Our focus on originating SBA-guaranteed loans in select verticals nationwide has allowed us to organically develop loan portfolio credit characteristics that we believe are attractive. Our portfolio is geographically dispersed throughout all U.S. regions (Southeast, Northeast, Midwest, Southwest, and West) with each region representing between 13% and 30% of our total loan portfolio at March 31, 2015. Only one state (California at 13%) represented more than 10% of our aggregate held-for-investment loan portfolio at March 31, 2015. Additionally, at March 31, 2015 our average unguaranteed exposure per loan was approximately $133 thousand compared to an average outstanding principal balance per loan of approximately $814 thousand.

Our ability to develop and execute on our business model has yielded a compound annual growth rate, or CAGR, in loans originated of 55.2% from May 2007 through March 31, 2015. For the U.S. government’s 2014 fiscal year (ending September 30, 2014), we were the second most active SBA 7(a) lender in the United States by dollar volume, behind only Wells Fargo Bank.

The following table presents the balance and associated percentage of each category of loans held for investment within our loan portfolio at March 31, 2015 and each of December 31, 2014, 2013 and 2012.


	At March 31, 2015						At December 31
	At March 31, 2015						2014						2013						2012
	Total Loans			% of loans in Category of total loans			Total Loans			% of Loans in Category of Total Loans			Total Loans			% of Loans in Category of Total Loans			Total Loans			% of Loans in Category of Total Loans
	*(dollars in thousands)*
Commercial & Industrial	$	86,151			39.16	%	$	81,057			39.84	%	$	57,359			40.36	%	$	34,200			36.66	%
Death Care Management		3,880			1.76			3,603			1.77			1,782			1.25			283			0.30
Family Entertainment Centers		340			0.15			333			0.16			—			100.0			—			—
Healthcare Services		12,945			5.88			12,319			6.06			8,739			6.15			4,996			5.36
Independent Pharmacies		35,114			15.96			34,079			16.75			24,026			16.91			12,192			13.07
Investment Advisors		12,135			5.52			9,660			4.75			2,817			1.98			—			0.00
Veterinary Practices		21,580			9.81			20,902			10.27			19,978			14.06			15,719			16.85
Other		157			0.07			161			0.08			17			0.01			1,010			1.08
Construction & Development		14,533			6.61			9,526			4.68			10,286			7.24			8,503			9.12
Poultry Agriculture		5,460			2.48			3,910			1.92			—			—			—			—
Death Care Management		483			0.22			92			0.05			989			0.70			315			0.34
Healthcare Services		5,150			2.34			2,957			1.45			4,997			3.52			3,136			3.36
Family Entertainment Centers		152			0.07			—			—			—			—			—			—
Independent Pharmacies		456			0.21			215			0.11			101			0.07			637			0.68
Veterinary Practices		2,676			1.22			2,207			1.08			4,199			2.95			4,163			4.46
Other		157			0.07			145			0.07			—			0.00			252			0.27
Owner Occupied
Commercial Real Estate		115,200			52.36			111,620			54.86			74,461			52.40			50,577			54.22
Poultry Agriculture		283			0.13			259			0.13			—			100.0			—			—
Death Care Management		19,270			8.76			18,879			9.28			11,668			8.21			3,703			3.97
Family Entertainment Centers		761			0.35			872			0.43			—			100.0			—			—
Healthcare Services		27,634			12.56			26,173			12.86			11,129			7.83			6,207			6.65
Independent Pharmacies		4,578			2.08			4,750			2.33			3,490			2.46			3,008			3.22
Investment Advisors		2,481			1.13			2,161			1.06			171			0.12			—			0.00
Veterinary Practices		59,615			27.10			57,934			28.48			47,896			33.70			35,554			38.12
Other		578			0.26			592			0.29			107			0.08			2,105			2.26
Commercial Land		4,136			1.88			1,248			0.62			—			100.0			—			—
Poultry Agriculture		4,136			1.88			1,248			0.62			—			100.0			—			—

Total Loans	$	220,020			100.00	%	$	203,451			100.00	%	$	142,106			100.00	%	$	93,280			100.00	%

Net Deferred Costs		2,208						2,060						1,212						592
Discount on SBA 7(a) Unguaranteed		(1,784	)					(1,575	)					(1,969	)					(1,203	)

Loans, Net of Unearned	$	220,444					$	203,936					$	141,349					$	92,669

Technology-Based Platform

We believe that the small business lending market is both broad and underserved by traditional banks. Non-bank lenders have exposed traditional banks’ inability to effectively service the small business customer by utilizing technology-based platforms to increase small businesses’ access to financing. We believe that a simplified, highly automated, and efficient delivery channel can fundamentally change the economics of small-dollar loan origination for financial institutions. Since inception, we have used a technology-based platform to provide financing to small businesses.

We developed and utilize a technology-based platform to facilitate lending to the small business community on a national scale and we have leveraged this technology to optimize our loan origination process, customer experience, reporting metrics, and servicing activity. In 2012, we organized nCino, Inc., or nCino, as a subsidiary to develop this technology. We subsequently spun off nCino as a separate company. The nCino Bank Operating System that we utilize, which is a fully integrated operating system built on Salesforce.com, Inc.’s Force.com cloud computing infrastructure platform, is owned by nCino, and we license the rights to use it. We use the nCino Bank Operating System to generate a real-time view of our loan pipeline, processes, and borrower and credit data. The integration of this system into our day-to-day operations has improved work flow efficiency, minimized loan file and documentation exceptions, and provided unprecedented real-time clarity into our loan portfolio. For example, we are able to segregate data pertaining to loan origination, which we refer to as production, by, among other things, vertical, geography, loan officer, participating bank, referral source, Fair Isaac Corporation, or FICO, score, internal risk grade, debt service coverage, relationship manager and balance sheet exposure. We can examine loans in our loan pipeline by their status and determine what outstanding documents are required prior to submission to the SBA or for closing.

The technology we utilize also streamlines the paperwork that accompanies SBA loans. A typical SBA loan under the 7(a) program may require up to 150 separate loan documents to be submitted. Utilizing this technology-based platform, we collect, track, and organize these documents in a manner that maximizes efficiency and minimizes unnecessary customer contact. We have used this technology to transform the traditional means of loan origination by accelerating our ability to issue proposals, complete underwriting due diligence and finalize commitments often resulting in what we believe has been a competitive advantage over other similar lenders. Our customers are also able to benefit from the technology-based platform we use, as it allows them the ability to track their loan’s progress towards approval and funding through a secure online portal.

In 2012, nCino, Inc. was a majority-owned subsidiary of Live Oak Bancshares. In June 2014, however, we divested our ownership interest in nCino as a distribution to our shareholders with a subsequent investment of $6.1 million later in 2014. At December 31, 2014 the company owned 9.02% of nCino, all of which was sold in February 2015 and as a result we have no direct ownership interest in nCino as of the date of this prospectus. Certain of our directors, officers and employees collectively owned approximately 28.2% of nCino’s outstanding common stock as of March 31, 2015. In addition, our Chief Executive Officer, James “Chip” S. Mahan III, continues to serve as a member of the board of directors of nCino.

Technology-Based Platform Expansion

We are developing a new online lending platform in order to help us with the origination of small business loans of less than $350 thousand through the SBA 7(a) program. We have incurred and expect to incur further development and implementation costs in connection with the proposed expansion. The software development, along with vendor analysis and operational implementation of the platform, is performed in-house by our employees, many of whom previously worked for nCino. Effective April 1, 2015, certain nCino developers who helped create the nCino technology-based platform that we use became employees of the Bank. The combined base salaries of our in-house software developers are approximately $1.0 million per year. Depending on the success of our new online lending platform, we expect to hire additional loan officers, credit administration and

back office personnel to originate, close and service loans originated through this platform. We anticipate that our costs and expenses will be consistent with costs we have historically incurred in connection with our build out of human capital as a function of the growth in our loan originations. According to FDIC data, as of December 31, 2014, there were $288 billion in small business loans of $250 thousand or less and SBA data indicates there were 28.2 million small businesses in the United States in 2011. We believe that this is a market underserved by traditional banking models due to the difficulty in applying traditional underwriting methods to this loan class in a cost effective manner. We intend for this lending platform to aggregate thousands of data points from disparate data sources and utilize automated proprietary small loan credit models and application technology. We believe the credit models and application technology will complement our existing expertise and judgment and align with the credit culture that is pervasive throughout our organization. When the new platform is ready, we intend to initially target the verticals that we currently serve. Based on our current website hit rate, we believe we will receive approximately 100,000 unique website hits in 2015 and that we will be able to convert a significant number of website hits through our demonstrated ability to connect on a personal level with small businesses. Furthermore, we believe that loan data we have derived from 865,000 small business loans over a 20-year period provides us with performance and predictive analytics that give us an advantage over our competitors.

We believe that utilizing the SBA 7(a) program allows us to deliver a product that is more affordable to small businesses. The SBA is encouraging its participating lenders to serve this market, and has replaced the requirement that lenders perform traditional cash analysis with a credit scoring module. This SBA credit scoring module uses the FICO Small Business Scoring Service product. This scoring module assists SBA lenders in the evaluation of credit risk through the use of commercial and consumer data. The module utilizes a variety of data sources and more than 100 combinations of consumer and business analytical models. As a tool for lenders, this scoring module can help streamline the loan approval process. We intend to utilize this scoring module, cash flow considerations and a proprietary score developed by using our extensive internal database of historical SBA-specific loan data, as well as other key data fields to filter on-line applicants. Loans approved through this channel will have a principal amount of less than $350 thousand and carry a 75% to 85% SBA guaranty, with an interest rate ranging from Prime + 2.75% to Prime + 4.75%.

Historical Performance

We have experienced significant growth in assets, loans, deposits and earnings during the last five years, all of which has been achieved organically, as we have not acquired any banks, thrifts, branches, or loans. At March 31, 2015, we had total assets of $723 million, total loans of $526 million, total deposits of $556 million, and total shareholders’ equity of $100 million. Since December 31, 2010, our assets have grown at a CAGR of 29%. For the quarter ended March 31, 2015, our interest income, noninterest income, noninterest expense and net income after tax was $7.0 million, $24.1 million, $14.7 million, and $8.1 million, respectively. Comparing the three month periods ended March 31, 2015 and 2014 our net interest income, noninterest income, noninterest expense and net income have increased by 70%, 97%, 2%, 2,602%, respectively. Our net interest income, noninterest income, noninterest expense and net income have grown from December 31, 2010 to December 31, 2014 at a CAGR of 35%, 23%, 32% and 4%, respectively. From December 31, 2010 to December 31, 2014, our net interest income, noninterest income, noninterest expense and net income before income tax adjusted for one-time nonrecurring expenses, have grown at a CAGR of 35%, 23%, 30% and 22%, respectively. For the year ended December 31, 2014, our net interest income, noninterest income, noninterest expense and net income after tax were $15 million, $60 million, $54 million and $10 million, respectively.

Adjusted for one-time nonrecurring income and expenses, an assumed tax rate of 38.5% as if we had been a C corporation during all of 2014 and during the year ended December 31, 2013, and exclusive of the initial deferred tax liability recorded as a result of the change in tax status from an S corporation to a C corporation, total noninterest income, noninterest expense and net income after tax increased by 66%, 50% and 93%, respectively for

the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014 and 36%, 24% and 39%, respectively, for the year ended December 31, 2014 compared to the year ended December 31, 2013. After the aforementioned nonrecurring adjustments, noninterest income, noninterest expense and net income after tax were $20 million, $15 million and $6 million, respectively for the quarter ended March 31, 2015 and $60 million, $50 million and $14 million, respectively, for the year ended December 31, 2014. After nonrecurring adjustments, noninterest income, noninterest expense and net income after tax was $12 million, $10 million and $3 million, respectively for the quarter ended March 31, 2014 and $44 million, $40 million and $10 million, respectively, for the year ended December 31, 2013. Inclusive of one-time nonrecurring income and expenses, our basic and diluted earnings per share increased by 35% over diluted earnings per share for the quarter ended March 31, 2015 compared to March 31, 2014 and 17% over diluted earnings per share for the year ended December 31, 2014 compared to the year ended December 31, 2013. For more information and a reconciliation of net interest income, noninterest income, noninterest expense and net income adjusted for non-recurring income and expenses to the closest corresponding GAAP measure, see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.” GAAP is defined as accounting principles generally accepted in the United States of America.

Credit quality and on-going credit administration are cornerstones of our franchise. Non-performing loans represented 2.6% of our total assets at March 31, 2015 compared to 2.8% of our total assets at December 31, 2014. Adjusting to eliminate the portion of non-performing loans that carry a SBA guaranty, this ratio becomes 0.4%. Our ratio of net charge-offs to average total loans on book was 0.2% for the quarter ended March 31, 2015 and 0.28% for the year ended December 31, 2014. Our ratio of allowance for loan losses to loans held for investment was 2.4% at March 31, 2015 and our ratio of allowance for loan losses to non-performing loans not guaranteed by the SBA was 178% at March 31, 2015. In evaluating our credit quality we focus on the unguaranteed portion of our loan portfolio. As of March 31, 2015, approximately $185 million of our assets, or approximately 26%, were guaranteed by the SBA.

Vertical Immersion Strategy

We have focused our lending to small businesses and professionals in verticals in which we cultivate deep industry expertise.

The following table sets forth our ten existing industry verticals.


		% of total Loan Originations
Year of Entry	Vertical	Three months ended March 31, 2015	Year ended December 31, 2014		Three months ended March 31, 2014
2007	Veterinary Practices	10.7		18.3		33.2
2009	Healthcare Services (medical/dental/optometry)	22.9		21.5		18.5
2010	Independent Pharmacies	10.2		17.6		24.0
2012	Death Care Management (funeral/cemetery)	4.8		8.5		10.4
2013	Investment Advisors	13.8		11.4		13.9
2014	Family Entertainment Centers	1.4		1.6		—
2014	Poultry Agriculture	36.1		20.2		—
2015	Wine & Craft Beverage	—		—		—
2015	Self-Storage	—		—		—
2015	Hotels	—		—		—

We staff each vertical team with personnel that possess industry-specific knowledge, experience and contacts. For example, our General Manager in the Independent Pharmacies vertical owns two pharmacies and brings broad experience and expertise to his responsibilities of examining, evaluating and closing extensions of credit to independent pharmacies. Our Death Care Management vertical expertise includes the former president and chief operating officer of Service Corporation International (a company that operates a network of more than 2,000 funeral homes and cemeteries), and another individual with over 25 years of experience in the financial services industry has led mergers and acquisitions in the funeral trust space. Our Veterinary Practices vertical benefits from the experience of a licensed veterinarian and attorney who provides an informed perspective to our Veterinary Practices vertical team and customers. Our Family Entertainment Centers, Wine & Craft Beverage, and Self-Storage verticals are led by individuals with more than 20 years of experience each in their respective industries. The General Manager of our Poultry Agriculture vertical has 15 years of poultry agriculture lending experience and has originated more than $450 million in poultry loans. Additionally, we are engaged and active in each of the industries we serve by attending numerous conventions and over 200 trade shows per year, and by speaking at universities and industry events. The table below sets forth our income for each of our ten existing industry verticals for the periods presented.


	Three months ended March 31, 2015								Year ended December 31, 2014
	Loans and fees on loans		Loan servicing revenue ⁽¹⁾		Net gains on sales of loans		Total		Loans and fees on loans		Loan servicing revenue ⁽²⁾		Net gains on sales of loans		Total
	*(in thousands)*
Veterinary Practices		$1,861		$1,686		$3,708		$7,255	$	6,897	$	6,801	$	11,779	$	25,477
Healthcare Services		1,665		595		2,838		5,098		4,897		1,888		10,742		17,527
Independent Pharmacies		929		685		2,221		3,835		3,284		2,414		11,570		17,268
Death Care Management		605		365		1,161		2,131		2,544		1,187		6,621		10,352
Investment Advisors		526		216		3,527		4,269		1,287		479		7,697		9,463
Family Entertainment Centers		72		18		—		90		77		10		921		1,008
Poultry Agriculture		981		22		2,007		3,010		735		18		392		1,145
Wine & Craft Beverage		—		—		—		—		—		—		—		—
Self-Storage		—		—		—		—		—		—		—		—
Hotels		—		—		—		—		—		—		—		—
Other		77		6		(1)		82		170		26		255		451

Total		$6,716		$3,593		$15,461		$25,771	$	19,891	$	12,823	$	49,977	$	82,691

(1)	Excludes $513 thousand increase to revenue from loan servicing asset revaluation.

(2)	Excludes $2,201 thousand reduction to revenue from loan servicing asset revaluation.

We are currently exploring expanding our lending efforts into additional verticals. In selecting these industries, we analyze the SBA historical data relative to default/loss rate, competition, and the size of the industry as well as the business cycles and customer characteristics of each industry. We then look at credit parameters, product types, and pricing that we would need to use in order to establish a market presence in an industry and weigh those factors against our risk tolerance and profitability objectives. Through this analysis, we approximate the percentage of the potential demand we believe we could capture both initially and after market stabilization. We generally will not enter a new vertical, unless we believe we can capture a meaningful portion of the potential small business loan demand within it.

Our customer philosophy and credit culture extend beyond the loan origination phase. Our borrowers have access to a relationship manager in our Business Advisory Group, or BAG, from the time the loan closes through the life of the loan. We continuously work to provide superior service throughout the life of our relationship with each borrower. With our vertical emphasis, we are aware of industry-tailored best practices that we share to help our borrowers succeed.

BAG site visits are mandated for each loan. This enables our lenders to invest quality time with each prospective and current borrower as well as inspect the business. Another goal of the BAG is to obtain current quarterly financial statements and year-end statements from all borrowers. As of March 31, 2015, 96% of current financial statements were on hand for all borrowers. With effective financial reporting processes in place, we have early insight into potential problems that exist with our borrowers. We also engage with our customers in a variety of other ways, from covering the cost of a business consultant for a 3-day period to more complex situations such as working with a borrower to transition out of a practice. We strive to build and maintain a collaborative relationship with the business owner. Through the BAG, we aim to maintain a close relationship with every customer, maintain strong credit monitoring practices and have become a trusted resource for small business owners throughout the U.S.

The Credit Process

We utilize our industry-specific expertise and participation to identify and select credit-worthy borrowers and attractive financing projects prior to the formal underwriting process. We believe our familiarity with and active presence within our verticals allows us to provide ongoing customer service that is relevant for each business owner’s specific industry segment.

We attempt to identify verticals with a statistical history of performance and a low risk profile. We have chosen verticals that display some or all of the following characteristics:

•

Stable cash flows

•

Barriers to entry

•

Broad customer bases without reliance on any single customer

•

Collateral shortfall

•

Limited or no foreign competition

•

Growing demand

•

Rapid cash cycles

•

Recession resistant

•

Limited malpractice risk

•

Underserved by other/traditional banking models

Through our industry expertise, distribution channels, speed-to-market, and differentiated level of borrower experience and customer service, we have increased annual production in each year since May 2007. The growth to date in production has been due to the maturity of certain industry verticals, the establishment of new industry verticals and our origination of loans that are generally larger than the average SBA loan.

The following table summarizes our production by industry vertical for the periods indicated:


	Three months ended March 31,				Years Ended December 31,
	2015		2014		2014		2013		2012		2011		2010		2009		2008		2007
	*(in thousands)*
Veterinary Practices	$	26,492	$	41,358	$	155,217	$	147,661	$	174,768	$	149,485	$	150,788	$	145,920	$	161,230	$	40,226
Healthcare Services		56,892		24,985		182,406		109,317		81,363		69,860		56,580		13,385		150		—
Independent Pharmacies		25,221		32,525		149,453		106,391		103,358		86,757		48,919		—		—		—
Death Care Management		12,011		14,074		72,124		101,736		54,075		—		—		—		—		—
Investment Advisors		34,304		18,805		96,963		33,647		—		—		—		—		—		—
Family Entertainment Centers		3,580		—		13,503		—		—		—		—		—		—		—
Poultry Agriculture		89,559		—		171,644		—		—		—		—		—		—		—
Other		—		3,550		6,780		—		199		535		30		1,275		1,209		775

Total	$	248,058	$	135,297	$	848,090	$	498,752	$	413,763	$	306,637	$	256,317	$	160,580	$	162,589	$	41,001

The following table shows the amount of the SBA-guaranteed portions of the loans we have originated and sold since May 2007:


	Three months ended March 31,				Years Ended December 31,
	2015		2014		2014		2013		2012		2011		2010		2009		2008		2007
	*(in thousands)*
Veterinary Practices	$	29,148	$	25,458	$	97,960	$	115,514	$	129,291	$	117,941	$	107,326	$	138,725	$	52,897	$	—
Healthcare Services		29,012		16,352		99,063		57,361		46,446		50,948		30,120		7,453		—		—
Independent Pharmacies		19,328		21,398		104,446		83,647		66,856		69,553		31,805		—		—		—
Death Care Management		8,095		7,530		53,832		63,156		34,083		—		—		—		—		—
Investment Advisors		28,630		14,562		64,764		19,664		—		—		—		—		—		—
Family Entertainment Centers		—		—		7,286		—		—		—		—		—		—		—
Poultry Agriculture		22,834		—		4,273		—		—		—		—		—		—		—
Other		—		2,288		2,288		—		—		—		—		—		706		—

Total	$	137,047	$	87,588	$	433,912	$	339,342	$	276,676	$	238,442	$	169,251	$	146,178	$	53,603	$	—

Our vertical immersion strategy and our commitment to sound credit underwriting and credit administration are reflected in the credit quality of our loan portfolio. Our borrowers have historically had an average FICO score in excess of 700, using the lowest of scores provided by three credit bureaus at the time of underwriting, and an average debt service coverage ratio of approximately 2.0 to net operating income using the most current borrower financial statements available. To date, we have never had a denial or repair of the SBA guaranty for any loan submitted for payment. The SBA’s policy for honoring the guaranty is based on a thorough review of a lender’s purchase request and all relevant documentation. If a lender is deficient in its origination, management, and servicing of a loan, the SBA will attempt to reach a resolution with the lender, which may involve the lender agreeing to a monetary adjustment in the amount of SBA’s guaranty. This adjustment is referred to as a repair. The SBA may consider a denial of its liability under its guaranty or litigation to recover funds the SBA already paid under its guaranty to the lender (or secondary market holder) if the lender is not negotiating in good faith, the lender is unwilling to agree to a repair that reflects the harm caused to the SBA, or the lender’s actions are sufficiently serious that a repair would be inappropriate.

choosing not to implement a commission-based payment structure, we believe we generate loans of greater credit quality, enhancing overall portfolio performance and aligning our lenders’ interests with those of the entire company. We believe this alignment of interests is a strategic differentiator at Live Oak.

We intend to strategically and opportunistically add new verticals to our portfolio in the future. Our Emerging Markets division continually identifies, researches and evaluates potential new industries.

Deposit Funding

We fund the loans and loan interests that we retain with deposits issued by the Bank. We have historically used deposit products with higher interest costs to the Bank than traditional banks to attract funds while our cost of funds compared to non-bank competitors has historically been significantly lower. We plan to expand the deposit products and services we offer to customers through the use of mobile banking solutions for small businesses, including online banking, discounted merchant services, and remote deposit capture which we believe will lower our cost of funds.

Our Executive Management Team and Board of Directors

Our executive management team has a combined 154 years of banking and financial experience, as well as extensive experience in developing technologies to support online operations and experience within our industry verticals.

James “Chip” S. Mahan III, Chief Executive Officer and Chairman of the Board, has more than 40 years of banking experience and has founded multiple banks, including Cardinal Bancshares, which he took public in 2002, and Security First Network Bank, the nation’s first Internet-only bank and predecessor of S1 Corporation.

William “Lee” L. Williams III is the Vice Chairman of the Company and one of the original founders of the Bank. Prior to starting Live Oak Bank, Mr. Williams spent 19 years in corporate banking at Wachovia and worked for 14 years at Vine Street Financial engaged in SBA lending.

Neil L. Underwood, President, has significant banking and technology experience, and was instrumental in the development of both nCino, Inc. and S1 Corporation.

David G. Lucht, Chief Risk Officer, joined the Live Oak team in May 2007 as a founding member. Prior to joining Live Oak, Mr. Lucht was the Chief Credit Officer, Executive Vice President and Director for First Merit Bank in Akron, Ohio, where he was responsible for leading the turnaround in credit culture and performance of that $10.5 billion bank.

S. Brett Caines, Chief Financial Officer, joined the Live Oak team in June 2007. Prior to joining the Bank, Mr. Caines worked as a Production Engineer for INVISTA and as a Process Engineer for Shell Chemical Company.

Our board of directors consists of experienced individuals, many of whom have direct experience with our chosen industry verticals, allowing them to understand and provide meaningful contributions to both our operations and strategy.

Corporate History

Live Oak Lending Company, our predecessor company, began originating loans to small businesses in May 2007. At that time, we began the application process to become a state-chartered financial institution insured by the Federal Deposit Insurance Corporation, or FDIC. We currently operate through Live Oak Bancshares, Inc.,

formed in 2009, a North Carolina business corporation and registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve System, or the Federal Reserve, and the North Carolina Commissioner of Banks. Our principal subsidiary is Live Oak Banking Company, a North Carolina chartered commercial bank that commenced operations on May 12, 2008 and is subject to regulation by the FDIC and the North Carolina Commissioner of Banks. Our other majority or wholly-owned subsidiaries are 504 Fund Advisors, LLC, or 504FA, Government Loan Solutions, or GLS, and Independence Aviation, LLC, or IA.

During 2011, we formed IA for the sole purpose of purchasing an aircraft to be used by us for business purposes. IA has no other business purpose other than to own and operate aircraft for corporate purposes.

504FA was organized as a joint venture with Pennant Management, Inc. during 2013 to serve as the investment advisor to the 504 Fund, a closed end mutual fund organized to invest in SBA Section 504 loans. 504FA is a SEC-registered investment advisor that serves the 504 Fund and also provides underwriting and management of SBA 504 loans held by the fund. As of the date of this prospectus, we own 91.3% of 504FA.

In 2013, we acquired GLS, which was originally founded in 2006. GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA-guaranteed loans. GLS is our wholly-owned subsidiary.

In January 2012, we formed nCino as our majority-owned subsidiary to further develop and sell the nCino Bank Operating System used to streamline the lending process of financial institutions. nCino’s only business is owning and selling access to its nCino Bank Operating System. At year-end 2013, we owned 45.94% of nCino. In June 2014 we divested our ownership interest in nCino to our shareholders in the form of a dividend. As of the date of this prospectus, we have no direct ownership interest in nCino.

Our principal executive office is located at 1741 Tiburon Drive, Wilmington, North Carolina 28403 and our telephone number is (910) 790-5867. Our Internet address is www.liveoakbank.com . Information on or accessible through our website is not incorporated by reference into and is not part of this prospectus.

Recent Developments

Recent Exploration of Private Offering

During January 2015, we had conversations with five institutional accredited investors regarding a possible private placement of up to 4,000,000 shares of our common stock. On March 14, 2015, we elected to pursue a registered initial public offering of common stock rather than pursue further the possible private placement. There were no offers to buy or indications of interest accepted in connection with the contemplated private placement. This prospectus supersedes any and all offering materials used in connection with the contemplated private placement of our common stock.

THE OFFERING


Common stock offered		shares of our common stock.

Option to purchase additional shares		The underwriters will have an option to purchase up to additional shares of our common stock in this offering, exercisable within 30 days from the date of this prospectus.

Common stock to be outstanding immediately after this offering		shares ( shares if the underwriters exercise their option to purchase additional shares in full).

Securities offered as a percentage of outstanding shares of common stock		%, assuming the underwriters do not exercise their option to purchase additional shares.

Use of proceeds		Assuming an initial public offering price of $ per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, we expect to receive net proceeds from this offering of approximately $ million (or $ million if the underwriters exercise their option to purchase additional shares in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

		We intend to use the net proceeds of this offering to: • support organic growth in our existing industry verticals; • for expansion into new industry verticals; • to develop a new online lending platform for originating loans less than $350 thousand; • to support the growth of our balance sheet as we increase the size of our held for investment loan portfolio; and • for general corporate purposes, including for possible acquisitions of, or investments in, bank or permissible non-bank entities, though, we do not have any agreements or understandings presently with respect to any acquisitions or investments.

		See “Use of Proceeds.”

Dividends		We intend to pay dividends on our common stock, when, as, and if declared by our board of directors or a duly authorized committee thereof. Our ability to declare and pay dividends is limited by state law and by applicable federal and state regulatory restrictions, including the regulations and guidelines of the Federal Reserve applicable to bank holding companies.

		In addition, because we are a bank holding company, our ability to pay dividends on our common stock will be highly dependent upon the receipt of dividends, fees and other amounts from the Bank,



		which, in turn, will be highly dependent upon the Bank’s historical and projected results of operations, liquidity, cash flows and financial condition, as well as various legal and regulatory prohibitions and other restrictions on the ability of the Bank to pay dividends, extend credit or otherwise transfer funds to us. For additional information, see “Dividend Policy.”

Listing		We have applied to list our common stock on the NASDAQ Global Market under the symbol “LOB.”
Risk factors		Investing in our common stock involves risks. See “Risk Factors” for a discussion of factors you should consider carefully before making a decision to invest in our common stock.

Transfer agent and registrar		Broadridge Corporate Issuer Solutions, Inc.

The number of shares of common stock to be outstanding after this offering is based on 28,623,609 shares of common stock outstanding as of March 31, 2015 and excludes the following:

•

does not include as outstanding 2,111,021 shares of our common stock issuable upon the exercise of outstanding stock options as of March 31, 2015 at a weighted average exercise price of $6.48 per share; and

•

does not include as outstanding 4,296,321 shares of our common stock reserved for issuance in connection with stock awards available for issuance under our 2015 Omnibus Stock Incentive Plan as of March 31, 2015.

Unless expressly indicated or the context otherwise requires, all information in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional shares of our common stock in this offering.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The table below sets forth selected historical consolidated financial data and other information for the periods presented. We have derived the selected historical consolidated financial data as of and for the years ended December 31, 2014, 2013 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus and the selected historical consolidated financial data as of and for the year ended December 31, 2011 from our audited consolidated financial statements for this year, which are not included in this prospectus. The information as of and for the three months ended March 31, 2015 and 2014 is unaudited but, in the opinion of our management, contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our financial condition and results of operations for those periods. Results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2015. Our historical results are not necessarily indicative of the results that may be expected in the future.

The selected historical consolidated financial information should be read in conjunction with and is qualified in its entirety by:

•

our audited consolidated financial statements as of and for the years ended December 31, 2014, 2013 and 2012 and related notes included elsewhere in this prospectus;

•

our unaudited consolidated financial statements as of and for the three months ended March 31, 2015 and 2014 and related notes included elsewhere in this prospectus; and

•

the sections in this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”

The performance, asset quality and capital ratios included herein are unaudited and derived from our audited financial statements as of and for the years presented. Average balances have been calculated using daily averages.


	As of March 31, 2015			As of December 31,
	As of March 31, 2015			2014			2013			2012			2011
	*(dollars in thousands)*
*Selected Period End Balance Sheet Data*
Total assets	$	723,032		$	673,315		$	430,355		$	342,468		$	266,157
Cash and due from banks		57,564			39,902			37,244			44,173			27,536
Investment securities available for sale, at fair value		50,777			49,318			19,446			15,416			16,842
Loans held for sale		305,079			295,180			159,438			145,183			111,877
Loans held for investment, net of unearned		220,444			203,936			141,349			92,669			85,721
Total loans held for sale and investment		525,523			499,116			300,787			237,852			197,598
Allowance for loan losses		(5,234	)		(4,407	)		(2,723	)		(5,108	)		(4,617	)
Servicing assets		38,457			34,999			29,053			24,220			18,731
Deposits		556,083			522,080			356,620			286,674			222,163
Long-term borrowings		50,210			41,849			12,325			12,205			8,659
Total shareholders’ equity		100,153			91,814			48,390			33,057			27,583
Tangible shareholders’ equity(1)		100,050			91,711			47,963			33,057			27,583

Selected Historical Consolidated Financial Data (continued)


	As of and for the three months ended March 31,						As of and for the years ended December 31,
	2015			2014			2014			2013			2012			2011
	*(dollars in thousands except per share data)*
*Selected Income Statement Data*
Interest income	$	6,958		$	4,212		$	20,509		$	15,302		$	11,725		$	8,744
Interest expense		1,917			1,251			5,852			4,521			3,628			2,737

Net interest income		5,041			2,961			14,657			10,781			8,097			6,007
Provision for loan losses		1,077			424			2,793			(858	)		2,110			2,855

Net interest income after provision for loan losses		3,964			2,537			11,864			11,639			5,987			3,152
Noninterest income:
Net gains on sales of loans		15,461			10,031			49,977			38,225			33,535			22,612
Other noninterest income		8,594			2,174			10,065			18,242			8,945			9,515
Total noninterest income		24,055			12,205			60,042			56,467			42,430			32,127
Noninterest expense		14,688			14,444			54,470			40,164			33,619			20,967
Income tax expense		5,278			—			7,388			—			—			—
Net income		8,053			298			10,048			27,942			14,798			14,312
Net income attributable to noncontrolling interest		20			—			—			120			1,297			—

Net income attributable to Live Oak Bancshares, Inc.	$	8,073		$	298		$	10,048		$	28,062		$	16,095		$	14,312

Net income (net of tax effect)(2)	$	8,190		$	183		$	10,723		$	17,258		$	9,899		$	8,802
*Per Share Data (Common Stock) Attributable to the Company*
Earnings:
Basic	$	0.28		$	0.01		$	0.42		$	1.38		$	0.83		$	0.82
Diluted(3)		0.27			0.01			0.41			1.37			0.80			0.70
Earnings (net of tax effect)(2):
Basic		0.29			0.01			0.45			0.85			0.51			0.50
Diluted(3)		0.28			0.01			0.44			0.84			0.49			0.43
Dividends(4)		0.05			0.28			2.18			0.48			0.59			0.55
Book value(5)		3.50			4.34			3.21			2.38			1.63			1.46
Tangible book value(1)		3.50			4.34			3.20			2.36			1.63			1.46
*Selected Performance Metrics*
Return on average assets		4.20	%		0.25	%		1.77	%		6.53	%		5.01	%		5.75	%
Return on average equity		35.86			2.49			14.11			62.82			50.62			61.64
Return on average assets (net of tax effect)(2)(6)		4.28			0.15			1.89			4.02			3.08			3.54
Return on average equity (net of tax effect)(2)(6)		36.48			1.53			15.05			38.63			31.13			37.91
Average yield on loans(7)		4.97			4.92			5.00			5.04			4.91			4.82
Average cost of deposits(7)		0.98			1.12			1.06			1.13			1.10			1.22
Net interest margin(7)		2.97			2.94			3.03			2.95			2.83			2.81
Efficiency ratio(1)		50.48			95.24			72.85			59.73			66.54			54.98
Noninterest income to total revenue(8)		82.67			80.48			80.40			83.97			83.99			84.25
Average equity to average assets		11.72			10.03			12.56			10.40			9.89			9.33
Dividend payout ratio (inclusive of tax distributions)(9)		16.88			1,907.72			447.33			10.65			33.56			20.70
Dividend payout ratio (net of tax effect)(2)(9)		16.64			3,106.56			419.17			17.32			54.57			33.66
Dividends paid(25)		1,363			5,685			52,376			9,780			11,499			9,630
Employees at period end(10)		227			152			192			141			94			62

Selected Historical Consolidated Financial Data (continued)


	As of and for the three months ended March 31,						As of and for the years ended December 31,
	2015			2014			2014			2013			2012			2011
	*(dollars in thousands except per share data* *and total number of loans originated)*
*Selected Loan Metrics*
Annual number of loans originated(11)		231			144			742			524			447			322
Annual amount of loans originated(11)	$	248,058		$	135,205		$	848,090		$	498,752		$	413,764		$	306,637
Outstanding borrowers’ principal balance		2,125,653			1,547,454			1,975,500			1,446,772			1,104,160			802,653
Percent of total loans held for sale and investment guaranteed by the SBA(12)		35.05	%		30.41	%		34.48	%		28.72	%		33.96	%		32.86	%
U.S. government guaranteed loans sold at a premium(13)	$	137,047		$	87,586		$	433,912		$	339,342		$	276,676		$	238,442
U.S. government guaranteed loans sold at par for excess servicing(13)		—			—			—			—			—			—
Loans sold not guaranteed by U.S. government(13)		28,483			5,523			55,233			42,932			52,574			12,680
Total loans sold and serviced for others(13)		165,530			93,741			489,145			382,274			329,250			251,122
Outstanding balance of guaranteed loans sold(14)		1,403,968			1,057,048			1,302,828			1,005,764			767,721			550,622
Number of loans serviced(15)		2,610			1,898			2,409			1,780			1,323			929
Average net gain on sale of loans(16)	$	93.40		$	107.73		$	102.17		$	99.99		$	101.85		$	90.05
Average servicing fee on sale of loans(17)		0.83	%		0.94	%		0.89	%		0.89	%		0.84	%		0.95	%
Average servicing fee on sale of loans guaranteed by the SBA(17)		1.00			1.00			1.00			1.00			1.00			1.00
Weighted average servicing fee of sold loans guaranteed by the SBA(18)		1.10			1.14			1.11			1.16			1.24			1.39
Average outstanding loan size(19)	$	814.4		$	815.3		$	820.4		$	812.8		$	834.6		$	864.0
Average balance of loans on balance sheet(20)		204.8			188.3			210.9			173.9			185.1			214.2
Average balance of loans on balance sheet not guaranteed by U.S. government(21)		133.0			130.4			138.2			124.0			122.2			143.8
*Asset Quality Ratios*
Nonperforming loans and foreclosed assets(22)	$	18,898		$	12,157		$	19,063		$	9,038		$	8,825		$	9,871
Nonperforming loans and foreclosed assets not guaranteed by the SBA(22)		2,968			1,635			3,508			2,055			3,763			3,080
Nonperforming loans and foreclosed assets guaranteed by the SBA(22)		15,964			10,522			15,555			6,983			5,062			6,791
Nonperforming loans to total assets(22)		2.61	%		2.48	%		2.78	%		2.02	%		2.51	%		3.71	%
Nonperforming loans not guaranteed by the SBA to total assets(22)		0.41			0.33			0.47			0.40			1.03			1.16
Nonperforming loans guaranteed by the SBA to total assets(22)		2.21			2.15			2.31			1.62			1.48			2.55
Nonperforming loans to loans held for investment(22)		8.57			7.64			9.17			6.15			9.27			11.52
Nonperforming loans not guaranteed by the SBA to loans held for investment(22)		1.33			1.03			1.54			1.21			3.81			3.59
Nonperforming loans guaranteed by the SBA to loans held for investment(22)		7.24			6.62			7.63			4.94			5.46			7.93
Allowance for loan losses to nonperforming loans(22)		27.70			26.43			23.58			31.31			59.44			46.77
Allowance for loan losses to nonperforming loans not guaranteed by the SBA(22)		178.39			196.51			140.48			158.87			144.66			149.90
Allowance for loan losses to nonperforming loans guaranteed by the SBA(22)		32.79			30.54			28.33			38.99			100.91			67.99
Allowance for loan losses to loans held for investment		2.37			2.02			2.16			1.93			5.51			5.39
Allowance for loan losses to loans held for investment not guaranteed by the SBA		2.69			2.30			2.41			2.11			6.34			5.39
Allowance for loan losses to loans held for investment guaranteed by the SBA		25.12			19.66			20.69			21.87			42.39			—
Net charge-offs	$	251		$	(67	)	$	1,109		$	1,888		$	1,860		$	1,461
Net charge-offs of loans not guaranteed by the SBA		251			(67	)		1,109			1,888			1,860			1,461
Net charge-offs of loans guaranteed by the SBA		—			—			—			—			—			—
Net charge-offs to average loans on book outstanding(23)		0.20	%		(0.08	)%		0.28	%		0.66	%		0.82	%		0.85	%
Net charge-offs to average loans not guaranteed by the SBA on book outstanding(23)		0.30			(0.11	)		0.41			1.01			1.19			1.33
Net charge-offs to average loans guaranteed by the SBA on book outstanding(23)								—			—			—			—

Selected Historical Consolidated Financial Data (continued)


	As of March 31,						As of December 31,
	2015			2014			2014			2013			2012			2011
*Capital Ratios*
Tier 1 leverage ratio (Bank)		8.66	%		9.09	%		9.34	%		10.39	%		10.63	%		11.84	%
Tier 1 risk-based capital ratio (Bank)(24)		12.44			11.98			12.43			15.09			16.65			17.13
Total risk-based capital ratio (Bank)(24)		13.47			12.89			13.36			15.95			17.91			18.40
Common Equity Tier 1 (Bank)		12.44			—			—			—			—			—
Total equity to total assets		13.85			9.48			13.64			11.24			9.65			10.36
Tangible shareholders’ equity to tangible assets(1)		13.84			9.46			13.62			11.15			9.65			10.36

Notes to Selected Historical Consolidated Financial Data

(1)

These measures are not measures recognized under United States generally accepted accounting principles, or GAAP, and are therefore considered to be non-GAAP financial measures. See “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.

(2)

We have calculated our net income (net of tax effect), earnings per share (net of tax effect) on a basic and diluted basis, return on average assets (net of tax effect), return on average equity (net of tax effect) and dividend payout ratio (net of tax effect) for each year shown by calculating a provision for income taxes using an assumed annual effective income tax rate of 38.5% for the quarters ended March 31, 2015 and 2014 and the years ended December 31, 2014, 2013, 2012 and 2011, and adjusting our historical net income for each period presented to give effect to the pro forma provision for federal and state income taxes for such year. For the year ended December 31, 2014 we have also excluded the initial deferred tax liability recorded as a result of the change in tax status on August 3, 2014 due to our conversion from an S corporation to a C corporation.

(3)

We calculated our diluted earnings per share for each year shown as our net income divided by the weighted-average number of shares of our common stock outstanding during the relevant year adjusted for the dilutive effect of outstanding options to purchase shares of our common stock. See Note 1 to our audited consolidated financial statements appearing elsewhere in this prospectus for more information regarding the dilutive effect of our outstanding options. The number of pro forma shares outstanding are equal to historical, or stated, shares outstanding in each respective period, as adjusted for stock splits. We calculated earnings per share on a basic and diluted basis and pro forma earnings per share on a basic and diluted basis using the following outstanding share amounts:


	Three month period ended March 31,				Year ended December 31,
	2015		2014		2014		2013		2012		2011
*Share Data*
Weighted average shares outstanding (basic)		28,620,120		20,373,983		23,973,398		20,347,660		19,467,300		17,567,510
Weighted average shares outstanding (diluted)		29,361,841		20,585,406		24,424,181		20,439,130		20,138,360		20,732,190
Shares outstanding at end of period		28,623,609		21,135,080		28,619,930		20,318,330		20,274,950		18,835,410

(4)

Dividends declared include the cash distributions paid to our shareholders in the relevant year to provide them with funds to pay their income tax liabilities incurred as a result of the pass-through of our net taxable income for such year to our shareholders as holders of shares in an S corporation for income tax purposes. The aggregate amounts of such cash distributions relating to the payment of tax liabilities were $0.05 per share and $0.07 per share for the three months ended March 31, 2015 and 2014, respectively and $0.31 per share, $0.33 per share, $0.31 per share, and $0.38 per share for the years ended December 31, 2014, 2013, 2012 and 2011, respectively.

(5)

Book value per share equals our total shareholders’ equity as of the date presented divided by the number of shares of our common stock outstanding as of the date presented. The number of shares of our common stock outstanding as of March 31, 2015 and 2014 and December 31, 2014, 2013, 2012 and 2011 has been presented in note (3) above.

(6)

We have calculated our pro forma return on average assets and pro forma return on average equity for a year by calculating our pro forma net income for that year as described in note 2 above and dividing

that by our average assets and average equity, as the case may be, for that year. We calculate our average assets and average equity for a year by dividing the sum of our total asset balance or total shareholder’s equity balance, as the case may be, as of the close of business on each day in the relevant year and dividing by the number of days in the year.

(7)

We calculate average yield on loans by dividing loan interest income by average loans. We calculate average cost of deposits by dividing deposit expense by average interest-earning deposits. Net interest margin represents net interest income divided by average interest-earning assets.

(8)

We calculate the ratio of noninterest income to total revenue as noninterest income (excluding securities gains or losses) divided by the sum of net interest income plus noninterest income (excluding securities gains or losses).

(9)

We calculate our dividend payout ratio for each year presented as the dividends paid per share for such period (excluding cash distributions made to shareholders in connection with tax liabilities as described in note 4 above) divided by our basic earnings per share and earnings (net of tax) for such year.

(10)

Full time employees exclude employees of nCino for periods when nCino was a consolidated subsidiary. There were six non-Bank employees as of December 31, 2014 and 2013. There were no non-Bank employees as of December 31, 2012.

(11)

Includes the number of notes and amount of the entire note with note dates in the respective year.

(12)

We originate loans primarily through the SBA 7(a) program. Typically, 75% of the note amount of loans originated through the SBA 7(a) program is guaranteed by the SBA. Total loans include the gross loans held for sale and held for investment.

(13)

We have historically operated an originate-sell-and-service model. We primarily sell the U.S. government guaranteed portion of loans at a premium with a 1% servicing fee. Prior to 2010, we primarily sold the guaranteed portion of loans at par for servicing in excess of 1%. Additionally, we sell portions of our loans not guaranteed by the SBA. These loans are typically sold at par.

(14)

This represents the outstanding principal balance of guaranteed loans, as of the last day of the applicable year, that have been sold into the secondary market.

(15)

This represents the number of loans outstanding as of the last day of the applicable year, that we service. We service all of the loans we originate.

(16)

We calculate average net gain on sale of loans by dividing net gains on sales of loans by total loans sold and serviced for others multiplied by 1,000. This ratio represents the average net gain on sale generated from every $1 million of loan sales. Net gain on sale for our guaranteed loans is composed primarily of four components: premium cash, establishment of the servicing asset related to that sale, a discount on the retained unguaranteed portion of the loan and the recognition into income of deferred costs and fees associated with the loan relative to the portion sold. Average net gains on sale of loans by category in the below tables is provided as additional information and does not reconcile directly with total net gains on sale of loans reflected in the Selected Historical Consolidated Financial Data. These averages do not sum to the total reflected in the Selected Historical Consolidated Financial Data because the computation of each individual ratio is derived only from the average balance in the corresponding loan category. For instance, total gains on the sale of guaranteed loans sold at a premium is divided by the respective average balance for only that loan category to arrive at the average

gain for loans held for sale. As a result, the data reflected in this note 16 only reflects average net gains recognized for each loan category presented rather than net gains relative to total loans sold.


Average net gain on sale of loans (dollars in thousands)	Three months ended March 31,						Year ended December 31,
	2015			2014			2014			2013			2012			2011
U.S. government guaranteed loans sold at a premium	$	112.82		$	114.53		$	115.19		$	113.11		$	121.28		$	91.94
U.S. government guaranteed loans sold at par for excess servicing		—			—			—			—			—			—
Loans sold not guaranteed by U.S. government		—			—			(0.08	)		(3.70	)		(0.40	)		54.41

Average net gain on sale of U.S. government guaranteed loans sold at a premium (dollars in thousands)
	2015			2014			2014			2013			2012			2011
Premium cash received	$	98.05		$	99.18		$	101.81		$	103.12		$	108.11		$	93.44
Servicing asset established		24.62			23.79			25.17			24.88			23.17			20.98
Discount on retained portion		(5.55	)		(5.07	)		(5.94	)		(8.23	)		(4.30	)		(18.25	)
Deferred fees and costs		(4.30	)		(3.37	)		(5.86	)		(6.47	)		(5.68	)		(4.23	)
Other adjustments		—			—						(0.19	)		(0.02	)		—

	$	112.82		$	114.53		$	115.18		$	113.11		$	121.28		$	91.94

(17)

We calculate average servicing retained by dividing the total of the servicing percentage multiplied by the amount sold for each loan by the total loans sold and serviced for others.

(18)

We calculate the weighted average servicing fee of sold loans guaranteed by the SBA by dividing the servicing fee multiplied by the total outstanding guaranteed amount sold for each loan by the total outstanding guaranteed amount of loans sold and serviced for others.

(19)

We calculate average outstanding loan size by dividing the outstanding borrower principal balance by the number of loans.

(20)

We calculate average balance of loans by dividing total loans (gross) by the number of loans. We exclude any loans that have been completely charged off.

(21)

We calculate average balance of loans not guaranteed by the SBA by dividing the portion of total loans (gross) not guaranteed by the SBA by the number of loans. We exclude any loans that have been completely charged off.

(22)

Nonperforming loans include nonaccrual loans.

(23)

Average loans on book outstanding includes held for sale and held for investment loans.

(24)

The calculation of our risk-weighted assets for the year ended December 31, 2014 and prior periods has been calculated using the standardized method of the Basel II Framework, as implemented by the Federal Reserve and the FDIC.

(25)

The significant increase in dividends paid to shareholders during 2014 primarily reflects distributions due to a one-time tax effect to shareholders in connection with our conversion from an S-Corporation to a C-Corporation and gains realized from the spin-out of nCino to our shareholders.

GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL MEASURES

Some of the financial measures included in our selected historical consolidated financial data and elsewhere in this prospectus are not measures of financial performance recognized by GAAP. These non-GAAP financial measures are “tangible shareholders’ equity,” “tangible book value per share,” “tangible average equity to tangible average assets,” “efficiency ratio,” and “net income adjusted for non-recurring income and expense.” Our management uses these non-GAAP financial measures in its analysis of our performance.

•

“Tangible shareholders’ equity” is shareholders’ equity less goodwill and other intangible assets. We have not considered loan servicing rights as an intangible asset for purposes of this calculation.

•

“Tangible shareholders’ equity to tangible assets” is defined as the ratio of shareholders’ equity less goodwill and other intangible assets, divided by total assets. We believe this measure is important because it shows relative changes from period to period in equity and total assets, each exclusive of changes in intangible assets. We have not considered loan servicing rights as an intangible asset for purposes of this calculation.

•

“Efficiency ratio” is defined as total noninterest expense divided by the sum of net interest income and noninterest income. We believe this measure is important as an indicator of productivity because it shows the amount of revenue generated for each dollar spent. While the efficiency ratio is a measure of productivity, its value reflects the unique attributes of the “high-touch business model” we employ.

•

“Net income adjusted for non-recurring income and expense” is defined as net income adjusted to exclude significant one-time sources of income and uses of expenses and annualize an estimated corporate income tax expense across all periods being compared. We believe these measures are important as they allow for an evaluation of the core profitability of our business.

•

“Noninterest income, as adjusted” is defined as noninterest income adjusted to exclude significant one time sources of income, including the gain on the deconsolidation of nCino and gain on the sale of our subsequent re-investment in nCino. We believe these measures are important as they allow for an evaluation of the core profitability of our business.

•

“Noninterest expense, as adjusted” is defined as noninterest expense adjusted to exclude significant one time sources of expenses, including costs related to our exploration in 2014 of several capital-raising alternatives that ultimately resulted in a private placement of our common stock. We believe these measures are important as they allow for an evaluation of the core profitability of our business.

•

“Income tax, as adjusted” is defined as income tax expense adjusted to exclude significant one time sources of expenses. We believe these measures are important as they allow for an evaluation of the core profitability of our business.

•

“Tangible book value per share” is defined as total equity reduced by goodwill and other intangible assets divided by total common shares outstanding. We believe this measure is important because it shows changes from period to period in book value per share exclusive of changes in intangible assets. We have not considered loan servicing rights as an intangible asset for purposes of this calculation.

We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these measures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. The following table provides a reconciliation of these non-GAAP financial measures to the most closely related GAAP measure.


	Three months ended March 31,						Years ended December 31,
	2015			2014			2014			2013			2012			2011
	*(dollars in thousands, except share and per share data)*
Total shareholders’ equity	$	100,153		$	46,430		$	91,814		$	48,390		$	33,057		$	27,583
Less:
Goodwill		—			272			—			272			—			—
Other intangible assets		103			155			103			155			—			—

Tangible shareholders’ equity	$	100,050		$	46,003		$	91,711		$	47,963		$	33,057		$	27,583

Shares outstanding		28,623,609			21,135,080			28,619,930			20,318,330			20,274,950			18,835,410
Total assets	$	723,032		$	489,652		$	673,315		$	430,355		$	342,468		$	266,157
Less:
Goodwill		—			272			—			272			—			—
Other intangible assets		103			155			103			155			—			—

Tangible assets	$	722,929		$	489,225		$	673,212		$	429,928		$	342,468		$	266,157

Tangible shareholders’ equity to tangible assets		13.84	%		9.40	%		13.62	%		11.16	%		9.65	%		10.36	%
Tangible book value per share	$	3.50		$	2.18		$	3.20		$	2.36		$	1.63		$	1.46

	Three months ended March 31,						Years ended December 31,
	2015			2014			2014			2013			2012			2011
	*(dollars in thousands)*
Efficiency ratio
Noninterest expense	$	14,688		$	14,444		$	54,470		$	40,164		$	33,619		$	20,967
Net interest taxable equivalent income		5,041			2,961			14,657			10,781			8,097			6,007
Noninterest taxable equivalent income (loss)		24,055			12,205			60,042			56,467			42,430			32,127
Less gain (loss) on sale of securities		—			—			(74	)		11			—			—

Adjusted operating revenue	$	29,096		$	15,166		$	74,773		$	67,237		$	50,527		$	38,134

Efficiency ratio		50.48	%		95.24	%		72.85	%		59.73	%		66.54	%		54.98	%

	Three months ended March 31,						Years ended December 31,
	2015			2014			2014			2013			2012			2011
	*(dollars in thousands, except share and per share data)*
Reconciliation of Net Income to net income adjusted for non-recurring income and expenses
Net income	$	8,073			298		$	10,048		$	28,062		$	16,095		$	14,312
Gain on deconsolidation of subsidiary		—			—			—			(12,212	)		—			—
Gain on sale of non-consolidated affiliate investment		(3,782	)		—			—			—			—			—
Costs related to exploration of alternative capital raises		—			1,673			1,673			—			—			—
Stock grants		—			2,992			2,992			—			—			—
Initial deferred tax liability recorded as a result of change from S to C corporation		—			—			3,252			—			—			—
C corporation income tax expense for (last five months of 2014)		5,278			—			4,136			—			—			—

Adjusted net income before income tax		9,569			4,963			22,101			15,850			16,095			14,312
Estimated income tax at 38.5%		3,684			1,911			8,509			6,103			6,197			5,511

Net income, net of non-recurring income and expenses	$	5,885		$	3,052		$	13,592		$	9,747		$	9,898		$	8,801

Earnings Per Share:
Basic	$	0.21		$	0.15		$	0.57		$	0.48		$	0.51		$	0.50
Diluted	$	0.20		$	0.15		$	0.56		$	0.48		$	0.49		$	0.42

Weighted-average shares outstanding:
Basic		28,620,120			20,373,983			23,973,398			20,347,660			19,467,300			17,567,510
Diluted		29,361,941			20,585,406			24,424,181			20,439,130			20,138,360			20,732,190

Reconciliation of financial statement line items as reported to adjusted for non-recurring income and expenses
Total noninterest income, as reported	$	24,055		$	12,205		$	60,042		$	56,467		$	42,430		$	32,414


	Three months ended March 31,						Years ended December 31,
	2015			2014			2014			2013			2012		2011
	*(dollars in thousands, except share and per share data)*
Gain on deconsolidation of subsidiary	$	—		$	—		$	—		$	(12,212	)	$	—	$	—
Gain on sale of non-consolidated affiliate investment		(3,782	)		—			—			—			—		—

Noninterest income, as adjusted		20,273			12,205			60,042			44,255			42,430		32,414

Noninterest expense, as reported		14,688			14,444			54,470			40,164			33,619		21,253
Costs related to withdrawn 2014 initial public offering in lieu of private placement		—			(1,673	)		(1,673	)		—			—		—
Stock grants		—			(2,992	)		(2,992	)		—			—		—

Noninterest expense, as adjusted		14,688			9,779			49,805			40,164			33,619		21,253

Income tax expense, as reported		5,278			—			7,388			—			—		—
Initial deferred tax liability recorded as a result of change from S to C corporation		—			—			(3,252	)		—			—		—
C corporation income tax expense for (last five months of 2014)		(5,278	)		—			(4,136	)		—			—		—
Estimated income tax at 38.5%		3,684			1,911			8,509			6,103			6,197		5,511

Income tax expense, as adjusted	$	3,684		$	1,911		$	8,509		$	6,103		$	6,197	$	5,511

RISK FACTORS

An investment in our common stock involves certain risks. You should carefully consider the risks described below, as well as the other information included in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially adversely affected by any of these risks, or others. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus.

Risks Related to Our Business

We may experience increased delinquencies and credit losses, which could have a material adverse effect on our capital, financial condition, and results of operations.

Like other lenders, we face the risk that our customers will not repay their loans. A customer’s failure to repay us is usually preceded by missed monthly payments. In some instances, however, a customer may declare bankruptcy prior to missing payments, and, following a borrower filing bankruptcy, a lender’s recovery of the credit extended is often limited. Since many of our loans are secured by collateral, we may attempt to seize the collateral if and when a customer defaults on a loan. However, the value of the collateral might not equal the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our customer. The resolution of nonperforming assets, including the initiation of foreclosure proceedings, requires significant commitments of time from management, which can be detrimental to the performance of their other responsibilities, and which expose us to additional legal costs. Elevated levels of loan delinquencies and bankruptcies in our market area, generally, and among our customers specifically, can be precursors of future charge-offs and may require us to increase our allowance for loan and lease losses, or ALLL. Higher charge-off rates, delays in the foreclosure process or in obtaining judgments against defaulting borrowers or an increase in our ALLL may hurt our overall financial performance if we are unable to increase revenue to compensate for these losses, may increase our cost of funds, and could materially adversely affect our business, results of operations and financial condition.

SBA lending is an important part of our business. Our SBA lending program is dependent upon the federal government, and we face specific risks associated with originating SBA loans.

Our SBA lending program is dependent upon the federal government. As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s Preferred Lender status. If we lose our status as a Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results. Any changes to the SBA program, including changes to the level of guarantee provided by the federal government on SBA loans, may also have a material adverse effect on our business.

We generally sell the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales have resulted in both premium income for us at the time of sale, and created a stream of future servicing income. We may not be able to continue originating these loans or selling them in the secondary market. Furthermore, even if we are able to continue originating and selling SBA 7(a) loans in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of

our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on the non-guaranteed portion of a loan, we share any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us, which could materially adversely affect our business, results of operations and financial condition.

The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our ability to operate profitably.

We are dependent upon the use of intellectual property owned by third parties, and any change in our ability to use, or the terms upon which we may use, this intellectual property could have a material adverse effect on our business.

The technology-based platform that is pivotal to our success is dependent on the use of the nCino Bank Operating System and Salesforce.com, Inc.’s Force.com cloud computing infrastructure platform. We rely on a non-exclusive license to use nCino’s platform. Because our license is non-exclusive, the nCino Bank Operating System is available to other lenders and nothing would prevent our competitors from developing, licensing or using similar technology. Our license currently expires on November 1, 2015, though it will automatically renew for additional one (1) year terms unless either party gives 30 days’ prior written notice of its intent to terminate. Management is currently in the process of finalizing an extension of this agreement to a three year term. Notwithstanding the term of our agreement, our license may be terminated if we are in material breach of the license and do not cure the breach within 30 days. In addition, nCino relies on a license to use the Saleforce.com platform and if nCino were unable to maintain its rights under that license, our ability to rely on the nCino license could be adversely affected. We can offer no assurance that we will be able to renew or maintain our license to use the nCino Bank Operating System on terms that are acceptable. Termination of either of these licenses or the reduction or elimination of our licensed rights may result in our having to negotiate new licenses with less favorable terms, or the inability to obtain access to such licensed technology at all. If we were to lose access to this technology, or were only able to access the technology on less favorable terms, we would not be able to offer our customers the technology-based platform services they seek from us and our business would be materially and adversely affected.

A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber-attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

As a financial institution, our operations rely heavily on the secure data processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of our systems and the technology we use could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of financial assets. We may fail to promptly identify or adequately address any such failures, interruptions or security breaches if they do occur. While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. We may be required to expend significant additional resources in the future to modify and enhance our protective measures.

The nature of our business may make it an attractive target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. The technology-based platform we use

processes sensitive data from our borrowers and investors. While we have taken steps to protect confidential information that we have access to, our security measures and the security measures employed by the owners of the technology in the platform that we use could be breached. Any accidental or willful security breaches or other unauthorized access to our systems could cause confidential customer, borrower and investor information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation, and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in the technology-based platform that we use are exposed and exploited, our relationships with borrowers and investors could be severely damaged, and we could incur significant liability.

Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we and our collaborators may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, federal regulators and many federal and state laws and regulations require companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause customers, borrowers and investors to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, we could lose customers, borrowers, investors and partners and our business and operations could be adversely affected.

Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems. Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.

Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could materially adversely affect our business, financial condition, results of operations and prospects, as well as the value of our common stock.

A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which could have a material adverse effect on our results of operations.

Like all financial institutions, we are subject to similar risks resulting from a weakened economy, such as increased charge-offs and levels of past-due loans and nonperforming assets. Although the U.S. economy has emerged from the severe recession that occurred from 2007 to 2009, economic growth has been slow and uneven, and unemployment levels remain high in many areas of the country. In addition, recovery by many businesses has been impaired by lower consumer spending. A return of prolonged deteriorating economic conditions could adversely affect the ability of our customers to repay their loans, the value of our investments, and our ongoing operations, costs and profitability. These events may cause us to incur losses and may materially adversely affect our business, results of operations and financial condition.

Our loan portfolio mix, which includes owner-occupied commercial real estate loans, could result in increased credit risk in a challenging economy.

Our loan portfolio is concentrated in owner-occupied commercial real estate and owner-occupied commercial business loans. These types of loans generally are viewed as carrying more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about heavy loan concentrations in certain types of commercial real estate loans, including acquisition, construction and development loans, and heavy loan concentrations in certain geographic segments. Because a portion of our loan portfolio is composed of these types of higher-risk loans, we face an increased risk of nonperforming loans that could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, any of which could have a material adverse impact on our business, results of operations and financial condition.

The current economic environment and any deterioration or downturn in the economies or real estate values in the markets we serve could have a material adverse effect on both borrowers’ ability to repay their loans and the value of the real property securing those loans. Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer losses on defaulted loans. Any of these developments could materially adversely affect our business, financial condition, results of operations and prospects.

The fair value of our investment securities can fluctuate due to factors outside of our control.

As of March 31, 2015, the fair value of our investment securities portfolio was approximately $51 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, monetary tapering actions by the Federal Reserve, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects, as well as the value of our common stock. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Our inability to accurately predict the future performance of an issuer or to efficiently respond to changing market conditions could result in a decline in the value of our investment securities portfolio, which could have a material and adverse effect on our business, results of operations and financial condition.

Our allowance for loan losses may prove to be insufficient to cover actual loan losses, which could have a material adverse effect on our financial condition and results of operations.

Our future success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that we will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, including the current economic environment and real estate market, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on our operating results. Our management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our

loans. We maintain an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information.

If our assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and we may need to make adjustments to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance in the form of provisions for loan losses would materially decrease our net income. We expect our allowance to continue to fluctuate; however, given current and future market conditions, our allowance may not be adequate to cover future loan losses.

In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulators could have a negative effect on our operating results and could materially adversely affect our business, results of operations and financial condition.

The valuation of our servicing rights is based on estimates and subject to fluctuation based on market conditions and other factors that are beyond our control.

The fair value of our servicing rights is estimated based upon projections of expected future cash flows generated by the loans we service, historical prepayment rates, future prepayment estimates, portfolio characteristics, interest rates based on interest rate yield curves, volatility, market demand for servicing rights and other factors. While this evaluation process uses historical and other objective information, the valuation of our servicing rights is ultimately an estimate based on our experience, judgment and expectations regarding our servicing portfolio and the broader market. This is an inherently uncertain process and the value of our servicing rights may be adversely impacted by factors that are beyond our control, which may in turn have a material adverse effect on our business, results of operations and financial condition.

We anticipate that going forward we will experience increasing growth in our held for sale loan portfolio due to our increasing construction portfolio or strategic business decisions related to the timing of the sale of loans.

Our revenue model has historically been driven by selling loans, or a portion of the loans, that we originate in the secondary market when fully funded. The growth of our construction portfolio will result in a decrease in the volume of loans sold relative to production in any period, which, in turn, decreases our revenue relative to production in any period. Growth in our held for sale portfolio also exposes us to increased interest rate risk.

We are subject to liquidity risk in our operations.

Liquidity risk is the possibility of being unable, at a reasonable cost and within acceptable risk tolerances, to pay obligations as they come due, to capitalize on growth opportunities as they arise, or to pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses, and capital expenditures. Our liquidity is derived primarily from the sale of loans in the secondary market, retail deposit growth and retention, principal and interest payments on loans and investment securities, net cash provided from operations, and access to other funding sources. Historically, we have relied on brokered and Internet funds as a large portion of our deposit base. Our access to funding sources in amounts adequate to finance our activities or at a reasonable cost could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could adversely affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn, our lack of access to a traditional branch banking network designed to generate core deposits

and adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption in the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Our access to borrowed funds could become limited in the future, and we may be required to pay above market rates for additional borrowed funds, if we are able to obtain them at all, which may adversely affect our business, results of operations and financial condition.

The amount of other real estate owned, or OREO, may increase significantly, resulting in additional losses, and costs and expenses that will negatively affect our operations.

In connection with our banking business, we take title to real estate collateral from time to time through foreclosure or otherwise in connection with efforts to collect debts previously contracted. Such real estate is referred to as other real estate owned, or OREO. As the amount of OREO increases, our losses, and the costs and expenses to maintain the real estate, likewise increase. The amount of OREO we hold may increase due to various economic conditions or other factors. Any additional increase in losses and maintenance costs and expenses due to OREO may have material adverse effects on our business, financial condition, and results of operations. Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory, which may make the disposition of OREO properties more difficult, increase maintenance costs and expenses, and reduce our ultimate realization from any OREO sales. In addition, at the time of acquisition of the OREO we are required to reflect its fair market value in our financial statements. If the OREO declines in value subsequent to its acquisition, we are required to recognize a loss. As a result, declines in the value of our OREO will have a negative effect on our business, results of operations and financial condition. As of March 31, 2015, we had two OREO properties with an aggregate carrying value of $34 thousand. For more information about amounts held in OREO, see Note 9 to our audited consolidated financial statements as of and for the year ended December 31, 2014 included elsewhere in this prospectus.

We are subject to environmental liability risk associated with our lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, results of operations and financial condition.

Our use of appraisals in deciding whether to make a loan secured by real property or how to value the loan in the future may not accurately describe the net value of the collateral that we can realize.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may experience changes in value in relatively short periods of time, especially given heightened economic uncertainty, this estimate might not accurately describe the net value of the real property collateral after the loan has been closed. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. In addition, we rely on appraisals and other valuation techniques to establish the value of our OREO and to determine certain loan impairments. If any of these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of OREO, and our ALLL may not reflect accurate loan impairments. The valuation of the properties securing the loans in our portfolio may negatively impact the continuing value of those loans and could materially adversely affect our business, results of operations and financial condition.

We could be subject to losses, regulatory action or reputational harm due to fraudulent and negligent acts on the part of loan applicants, our borrowers, our employees and vendors.

In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements, property appraisals, title information, employment and income documentation, account information and other financial information. We may also rely on representations of clients and counterparties as to the accuracy and completeness of such information and, with respect to financial statements, on reports of independent auditors. Any such misrepresentation or incorrect or incomplete information may not be detected prior to funding a loan or during our ongoing monitoring of outstanding loans. In addition, one or more of our employees or vendors could cause a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our loan documentation, operations or systems. Any of these developments could have a material adverse effect on our business, results of operations and financial condition.

We may fail to realize all of the anticipated benefits, including estimated cost savings, of potential future acquisitions.

In the future, we may encounter difficulties in obtaining required regulatory approvals or unexpected contingent liabilities from businesses we may acquire. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect our business, results of operations and financial condition. Additionally, given continued market volatility and uncertainty, we may also experience increased credit costs or need to take additional markdowns and allowances for loan losses on assets and loans we may acquire. These increased credit costs, markdowns and allowances could materially adversely affect our financial condition and results of operations, as well as the value of our common stock.

Implementation of our growth strategy depends, in part, on our ability to successfully identify acquisition opportunities and strategic partners that will complement our operating philosophy, and also on the successful integration of their operations with our own. To successfully acquire target companies or establish complimentary lines of business, we must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships and high caliber banking personnel to make these new business lines profitable. In addition, we may not be able to identify suitable opportunities for further growth and expansion. As consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase. We will compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than we do and may be able to pay more for an acquisition than we are able or willing to pay. If we are unable to effectively implement our growth strategies, our business, results of operations and financial condition may be materially and adversely affected.

Changes in the interest rate environment could reduce our net interest income, which could reduce our profitability.

As a financial institution, our earnings depend on our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Additionally, changes in interest rates affect the premiums we may receive in connection with the sale of SBA 7(a) loans in the secondary market, pre-payment speeds of loans for which we own servicing rights, our ability to fund our operations with customer deposits, and the fair value of securities in our investment portfolio. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, affects us more than non-financial companies and can have a significant effect on our net interest income and results of operations. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be

mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin, noninterest income, and results of operations. Further, since we began originating loans in May 2007 we have operated in a period of low market interest rates. In a rising interest rate environment, potential borrowers could seek to defer loans as they wait for interest rates to settle, and borrowers of variable rate loans may be subject to increased interest rates, which could result in a greater rate of default. Rising interest rates may also present additional challenges to our business that we have not anticipated.

We face strong competition from larger, more established competitors.

The banking business is highly competitive, and we experience strong competition from many other financial institutions, including some of the largest commercial banks headquartered in the country, all of which have small business lending divisions, as well as other federally and state chartered financial institutions such as community banks and credit unions, finance and business development companies, peer-to-peer and marketplace lenders and other non-bank lenders.

We compete with these institutions both in attracting deposits and in making loans, primarily on the basis of the interest rates we pay and yield on these products. Many of our competitors are well-established, much larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our industry verticals, we may face a competitive disadvantage as a result of our smaller size. Furthermore, nothing would prevent our competitors from developing or licensing a technology-based platform similar to the technology-based platform we currently use in our business. In addition, many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. We expect competition to continue to intensify due to financial institution consolidation, legislative, regulatory and technological changes, and the emergence of alternative banking sources.

Our ability to compete successfully will depend on a number of factors, including, among other things:

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our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices;

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the scope, relevance and pricing of products and services that we offer;

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customer satisfaction with our products and services;

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industry and general economic trends; and

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our ability to keep pace with technological advances and to invest in new technology.

Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans, which could reduce our profitability. Our failure to compete effectively in our primary markets could cause us to lose market share and could have a material adverse effect our business, results of operations and financial condition.

Prior to August 3, 2014, we were taxed as an S corporation under the Internal Revenue Code, and claims of taxing authorities related to our prior status as an S corporation could harm us.

We voluntarily terminated our S corporation status effective as of August 3, 2014, and we are now treated as a C corporation under the income tax provisions of the Internal Revenue Code of 1986, as amended, which is applicable to most corporations and imposes income tax on the corporation as an entity that is separate and distinct from its shareholders. If the open tax years in which we were an S corporation are audited by the Internal Revenue Service, and we are determined not to have qualified for, or to have violated, our S corporation status, we will be obligated to pay back taxes, interest and penalties, and we do not have the right to reclaim tax distributions that we have made to our shareholders during those periods. These amounts could include federal, state and any local taxes on all of our taxable income while we were an S corporation. Any such claims could result in additional costs to us and could have a material adverse effect on our business, results of operations and financial condition.

Our loan portfolio may be affected by deterioration in real estate markets, including declines in the performance of loans.

Deterioration in real estate markets could result in declining prices and excess inventories. As a result, developers may experience financial deterioration and banking institutions may experience declines in the performance of construction, development and commercial loans. We make credit and reserve decisions based on the current conditions of borrowers or projects combined with our expectations for the future. If conditions are worse than forecast, we could experience higher charge-offs and delinquencies than is provided in the allowance for loan losses, which could materially adversely affect our business, results of operations and financial condition.

A prolonged U.S. government shutdown or default by the U.S. on government obligations would harm our results of operations.

Our results of operations, including revenue, non-interest income, expenses and net interest income, would be adversely affected in the event of widespread financial and business disruption on account of a default by the United States on U.S. government obligations or a prolonged failure to maintain significant U.S. government operations, particularly those pertaining to the SBA or the FDIC. Any such failure to maintain such U.S. government operations would impede our ability to originate SBA loans or our ability to sell such loans in the secondary market, which would materially adversely affect our business, results of operations and financial condition.

Deterioration in the fiscal position of the U.S. federal government and downgrades in U.S. Treasury and federal agency securities could adversely affect us and our subsidiary’s banking operations.

The long-term outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011 downgrade by certain rating agencies of the credit rating of the U.S. government and federal agencies. In addition to causing economic and financial market disruptions, any future downgrade, failure to raise the U.S. statutory debt limit, or deterioration in the fiscal outlook of the U.S. federal government, could, among other things, materially adversely affect the market value of the U.S. government and federal agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect our profitability. Also, the adverse consequences could extend to those to whom we extend credit and could adversely affect their ability to repay their loans. Any of these developments could materially adversely affect our business, results of operations and financial condition.

Deterioration in the commercial soundness of our counterparties could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could create another market-wide liquidity crisis similar to that experienced in late 2008 and early 2009 and could lead to losses or defaults by us or by other institutions. The deterioration or failure of our counterparties would have a material adverse effect on our business, results of operations and financial condition.

We have different lending risks than larger, more diversified banks.

Our ability to diversify our economic risks is limited. We lend primarily to small businesses in selected industries, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories. Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and may have limited operating histories. If economic conditions negatively impact the verticals in which we operate, our business, results of operations and financial condition may be adversely affected.

We attempt to manage our credit exposure through careful monitoring of loan applicants and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, and the economies in which we and our borrowers operate, as well as the judgment of our regulators. This is an inherently uncertain process, and our loan loss reserves may not be sufficient to absorb future loan losses or prevent a material adverse effect on our business, results of operations and financial condition.

We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and retain key personnel.

We are a customer-focused and relationship-driven organization. We expect our future growth to be driven in a large part by the relationships maintained with our customers by our chief executive officer, president, and other senior officers. The unexpected loss of any of our key employees could have an adverse effect on our business, results of operations and financial condition. The implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. We are not party to non-compete or non-solicitation agreements with any of our officers or employees. The market for qualified employees in the businesses in which we operate is competitive, and we may not be successful in attracting, hiring or retaining key personnel. Our inability to attract, hire or retain key personnel could have a material adverse effect on our business, results of operations and financial condition.

Our risk management framework may not be effective in mitigating risks and/or losses to us.

We have implemented a risk management framework to manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial and other modeling methodologies which involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances and it may fail to adequately mitigate risk or loss to us. If our framework is not effective, we could suffer unexpected losses and be subject to potentially adverse regulatory consequences, and our business, results of operations and financial could be materially and adversely affected.

Hurricanes or other adverse weather events could disrupt our operations, which could have an adverse effect on our business or results of operations.

North Carolina’s coastal region is affected, from time to time, by adverse weather events, particularly hurricanes. We cannot predict whether, or to what extent, damage caused by future hurricanes or other weather events will affect our operations. Weather events could cause a disruption in our day-to-day business activities and could have a material adverse effect on our business, results of operations and financial condition.

Outbreaks of avian disease, such as avian influenza, or the perception that outbreaks may occur, could have a material adverse effect on lending operations in our Poultry Agriculture vertical.

Pandemic events beyond our control, such as an outbreak of avian disease, or “bird flu,” could have a material adverse effect on the performance of our portfolio of loans in our Poultry Agriculture vertical and on the demand

for new loans in this vertical. An outbreak of disease could result in governmental restrictions on the import and export of fresh and frozen chicken or other poultry products to or from our customers. This could result in the cancellation of orders and the curtailment of farming operations by our customers and could create adverse publicity that may have a material adverse effect on the performance of our existing loans and future business prospects in our Poultry Agriculture vertical. In addition, consumer fears about avian disease have, in the past, depressed demand for fresh poultry, which may adversely impact the demand for future loans and the performance of our existing loans in our Poultry Agriculture vertical.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting which would harm our business and the trading price of our securities.

If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. We may also face regulatory enforcement or other actions, including the potential delisting of our securities from NASDAQ. This could have an adverse effect on our business, financial condition and results of operations, and could subject us to litigation.

Changes in accounting standards and management’s selection of accounting methods, including assumptions and estimates, could materially impact our financial statements.

From time to time the SEC and the Financial Accounting Standards Board, or FASB, change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. In addition, management is required to use certain assumptions and estimates in preparing our financial statements, including determining the fair value of certain assets and liabilities, among other items. If the assumptions or estimates are incorrect, we may experience unexpected material adverse consequences that could negatively affect our business, results of operations and financial condition.

Our business reputation is important and any damage to it could have a material adverse effect on our business.

Our reputation is very important to sustain our business, as we rely on our relationships with our current, former and potential clients and shareholders, and the industries that we serve. Any damage to our reputation, whether arising from legal, regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, the conduct of our business or otherwise could have a material adverse effect on our business.

Insiders have substantial control over us, and this control may limit our shareholders’ ability to influence corporate matters and may delay or prevent a third party from acquiring control over us.

As of March 31, 2015, our directors and executive officers and their related entities currently beneficially own, in the aggregate, approximately 34.8% of our outstanding common stock. Further, we anticipate that our directors and executive officers and their related entities will beneficially own an aggregate of approximately % of our common stock following this offering (without giving effect to the exercise of the overallotment option granted to the underwriters). The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise. In addition, these shareholders will be able to exercise influence over all matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and

may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other shareholders. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, see the section titled “Principal Shareholders.”

The recognition of gains on the sale of loans contains certain assumptions.

Gains on the sale of loans comprise a significant component of our revenue. Noncash gains recognized in the quarters ended March 31, 2015 and 2014 and the years ended December 31, 2014, 2013 and 2012 were $1.3 million, $848 thousand, $3.5 million, $3.3 million and $3.8 million, respectively. The determination of these noncash gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights retained and deferred fees and costs. The value of retained unguaranteed loans and servicing rights are determined by our wholly owned subsidiary, GLS, which applies market derived factors such as prepayment rates, current market conditions and recent loan sales to arrive at valuations. Deferred fees and costs are determined using internal analysis of the cost to originate loans. Significant errors in assumptions used to compute gains on sale of loans could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and profitability. In addition, while we believe that the valuations provided by GLS are at arm’s length and reflect fair value, and are subject to validation by an independent third party on an annual basis, if such valuations are not reflective of fair market value, then our business, results of operations and financial condition may materially and adversely affected.

Risks Related to Our Regulatory Environment

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including the declaration and payment of cash dividends to shareholders, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth and operations. Should we fail to comply with these regulatory requirements, federal and state regulators could impose additional restrictions on the activities of the Company and the Bank, which could materially adversely affect our business, results of operations and financial condition.

The laws and regulations applicable to the banking industry have recently changed and may continue to change, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our business, results of operations and financial condition.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted on July 21, 2010. The provisions of the Dodd-Frank Act, and its implementing regulations may materially and adversely affect our business, results of operations and financial condition. Some or all of the changes, including the new rulemaking authority granted to the Consumer Financial Protection Bureau, or the CFPB, may result in greater liability, reporting requirements, assessment fees, operational restrictions, capital requirements, and other regulatory burdens applicable to us, and many of our non-bank competitors may remain free from such limitations. Institutions with over $10 billion in assets, unlike us, will also be subject to the CFPB’s supervisory and examination authority. The changes arising out of the Dodd-Frank Act could adversely affect our ability to attract and maintain depositors, to offer competitive products and services, and to expand our business.

Congress may consider additional proposals to change substantially the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies. Such legislation may change existing banking statutes and regulations, as well as our current operating environment significantly. If

enacted, such legislation could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could have an adverse effect on our deposit levels, loan demand, or business and earnings, as well as the value of the common stock.

We may be required to raise additional capital in the future, including to comply with new increased minimum capital thresholds established by our regulators as part of their implementation of Basel III, but that capital may not be available when it is needed and could be dilutive to our existing shareholders, which could adversely affect our financial condition and results of operations.

In July 2013, the Federal Reserve, FDIC and Office of the Comptroller of the Currency approved final rules that establish an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rules implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.

The major provisions of the new rule applicable to us and the Bank are:

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The new rules implement higher minimum capital requirements, including a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. These enhancements both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The new minimum capital to risk-weighted assets, or RWA, requirements are a common equity Tier 1 capital ratio of 4.5% and a Tier 1 capital ratio of 6.0%, which is an increase from 4.0 %, and a total capital ratio that remains at 8.0 %. The minimum leverage ratio (Tier 1 capital to total consolidated assets) is 4.0%. The new rules maintain the general structure of the current prompt corrective action, or PCA, framework while incorporating increased minimum requirements.

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Among the most important changes to the definition of capital are stricter eligibility criteria for regulatory capital instruments that disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, deferred tax assets, or DTAs, mortgage-servicing assets, or MSAs and certain investments in the capital of unconsolidated financial institutions. The new rules also affect the inclusion of mortgage servicing assets, or MSAs, as an element of capital. Specifically, MSAs are limited to 10% of a bank’s common equity Tier 1 capital and the combined balance of MSAs, deferred tax assets, and investments in the common stock of unconsolidated financial institutions is limited to 15% of a bank’s common equity Tier 1 capital. These combined assets must be deducted from common equity to the extent that they exceed the 15% threshold. Any portion of a bank’s MSAs that are not deducted from the calculation of common equity Tier 1 will be subject to a 100% risk weight that will increase to 250% in 2018. In addition, the new rules require that most regulatory capital deductions be made from common equity Tier 1 capital.

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Under the new rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements, and corresponding limits on capital distributions and discretionary bonus payments, will begin on January 1, 2016. After the capital conservation buffer is fully phased in, a banking organization with a buffer greater than 2.5% would not be

subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. When the capital conservation buffer is fully phased in, it would prohibit a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. When the capital conservation buffer is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the PCA well-capitalized thresholds.

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The new rules also increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and make selected other changes in risk weights and credit conversion factors.

We and the Bank were required to comply with the new capital rules beginning on January 1, 2015.

In order to support the operations at the Bank, we may need to raise capital in the future. Our ability to raise capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control.

Accordingly, we may be unable to raise capital, if needed, on terms acceptable to us if at all. If we cannot raise capital when needed, our ability to operate or further expand our operations could be materially impaired. In addition, if we decide to raise equity capital under such conditions, the interests of our shareholders could be diluted.

Our deposit operations are subject to extensive regulation and we expect additional regulatory requirements to be implemented in the future.

We are subject to significant anti-money laundering, “know your customer” and other regulations under applicable law, including the Bank Secrecy Act and the USA Patriot Act, and we could become subject in the future to additional regulatory requirements beyond those that are currently adopted, proposed or contemplated. We expect that federal and state bank regulators will increase their oversight, inspection and investigatory role over our deposit operations and the financial services industry generally. Furthermore, we intend to increase our deposit product offerings and grow our customer deposit portfolio in the future and, as a result, we are, and will continue to be, subject to heightened compliance and operating costs that could adversely affect our business, results of operations and financial condition. In addition, legal and regulatory proceedings and other contingencies will arise from time to time that may have an adverse effect on our business practices and results of operations.

The FDIC Deposit Insurance assessments that we are required to pay may continue to materially increase in the future, which would have an adverse effect on our earnings.

As a member institution of the FDIC, we are assessed a quarterly deposit insurance premium. Failed banks nationwide have significantly depleted the insurance fund and reduced the ratio of reserves to insured deposits. As a result, we may be required to pay significantly higher premiums or additional special assessments that could adversely affect our business, results of operations and financial condition.

On October 19, 2010, the FDIC adopted a Deposit Insurance Fund, or DIF, Restoration Plan, which requires the DIF to attain a 1.35% reserve ratio by September 30, 2020. The Dodd-Frank Act directs the FDIC to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion. In addition, the FDIC modified the method by which assessments are determined and, effective April 1, 2011, adjusted assessment rates, which will range from 2.5 to 45 basis points (annualized), subject to adjustments for unsecured debt and, in the case of small institutions outside the lowest risk category and certain large and highly complex institutions, brokered deposits. Further increased FDIC assessment premiums, due to our risk classification, emergency assessments, or implementation of the modified DIF reserve ratio, could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to this Offering and our Common Stock

An active, liquid, and orderly market for our common stock may not develop and the market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volume, prices and times desired.

Prior to this offering, there was no market for shares of our common stock. An active trading market for our common stock might never develop or be sustained, which could depress the market price of our common stock and affect your ability to sell our shares. The initial public offering price was determined through negotiations between us and the representative of the underwriters and might bear no relationship to the price at which our common stock will trade following the completion of this offering. The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which may be beyond our control. These factors include:

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our operating performance and the operating performance of similar companies;

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the overall performance of the equity markets;

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prevailing interest rates;

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economic, financial, geopolitical, regulatory or judicial events affecting us or the financial markets generally;

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the market for similar securities;

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announcements by us or our competitors of acquisitions, business plans, or commercial relationships;

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threatened or actual litigation;

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any major change in our board of directors or management;

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publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

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whether we declare dividends on our common stock from time to time;

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our creditworthiness;

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the ratings given to our securities by credit rating agencies, if any;

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large volumes of sales of our shares of common stock by existing shareholders; and

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general political and economic conditions.

In addition, the stock market in general, and the market for banks and financial services companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations might be even more pronounced in the trading market for our stock shortly following this offering. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.

Additional expenses following the offering from operating as a public company will adversely affect our profitability.

Following the offering, our noninterest expenses will increase as a result of the additional accounting, legal and various other additional expenses usually associated with operating as a public company and complying with public company disclosure obligations, particularly those obligations imposed by the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act.

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the federal securities laws. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions, or if we choose to rely on additional exemptions in the future. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We have broad discretion in the use of the net proceeds from this offering, and our use of those proceeds may not yield a favorable return on your investment.

We expect to use the net proceeds of this offering to support our long-term growth by enhancing our capital ratios to permit growth initiatives and for general working capital, which may include, among other things, funding growth in our existing industry verticals, expansion into new industry verticals, development of a new online lending platform for originating loans less than $350 thousand, increasing our capital to allow for the retention of more of the loans that we originate in order to increase our on balance sheet earning assets, and for general corporate purposes, including for possible acquisitions of, or investments in, bank or permissible non-bank entities. Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins that we generally earn on loans, potentially adversely affecting our business, results of operations and financial condition.

You will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the net tangible book value of each outstanding share of common stock immediately after this offering. If you purchase common stock in this offering, you will suffer immediate and substantial dilution. At the assumed initial public offering price of $ per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus with net proceeds to us of $ million, after deducting underwriting discounts and commissions and estimated offering expenses, investors who purchase shares in this offering from us will have contributed approximately % of the total amount of funding we have received to date, but the shares purchased from us in this offering will represent only approximately % of the total voting rights. The dilution will be $ per share in the net tangible book value of the common stock from the assumed initial public offering price. In addition, if outstanding options or warrants to purchase shares of our common stock are exercised, there could be further dilution. For more information refer to “Dilution.”

Securities analysts may not initiate or continue coverage on our common stock.

The trading market for our common stock will depend in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts, and they

may not cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline.

Future sales of shares of our common stock by existing shareholders could depress the market price of our common stock.

Upon completion of this offering, there will be shares of our common stock outstanding. The shares being sold in this offering will be freely tradeable immediately after this offering (except for shares purchased by affiliates) and of the remaining shares outstanding on a pro forma as adjusted basis as of , 2015 (assuming no exercise of outstanding options after , 2015), shares may be resold under Rule 144 as of the date of this prospectus, and shares may be sold upon expiration of lock-up agreements 180 days after the date of this offering (subject in some cases to volume limitations). In addition, as of , 2015, there were outstanding options to purchase shares of our common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements. A large portion of these shares and options are held by a small number of persons. Sales by these shareholders or option holders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. We also intend to register all common stock that we may issue under our stock plans. Effective upon the completion of this offering, an aggregate of shares of our common stock will be reserved for future issuance under these plans (assuming no exercise of outstanding options after , 2015). Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

Our ability to pay cash dividends on our securities is limited and we may be unable to pay future dividends.

We may not declare or pay dividends on our securities, including our common stock, in the future. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our board of directors may deem relevant. The holders of our capital stock are entitled to receive dividends when, and if, declared by our board of directors out of funds legally available for that purpose. As part of our consideration to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our business. In addition, our ability to pay dividends is restricted by federal policies and regulations. It is the current policy of the Federal Reserve that bank holding companies should pay cash dividends on capital stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. Further, our principal source of funds to pay dividends is cash dividends that we receive from Live Oak Bank, which, in turn, will be highly dependent upon the Bank’s historical and projected results of operations, liquidity, cash flows and financial condition, as well as various legal and regulatory prohibitions and other restrictions on the ability of the Bank to pay dividends, extend credit or otherwise transfer funds to the Company.

Additional issuances of common stock or securities convertible into common stock may dilute holders of our common stock.

We may, in the future, determine that it is advisable, or we may encounter circumstances where we determine it is necessary, to issue additional shares of common stock, securities convertible into, exchangeable for or that represent an interest in common stock, or common stock-equivalent securities to fund strategic initiatives or other

business needs or to build additional capital. Our board of directors is authorized to cause us to issue additional shares of common stock from time to time for adequate consideration without any additional action on the part of our shareholders. The market price of our common stock could decline as a result of other offerings, as well as other sales of a large block of common stock or the perception that such sales could occur.

We are subject to extensive regulation, and ownership of the common stock may have regulatory implications for holders thereof.

We are subject to extensive federal and state banking laws, including the Bank Holding Company Act of 1956, as amended, or BHCA, and federal and state banking regulations, that will impact the rights and obligations of owners of our common stock, including, for example, our ability to declare and pay dividends on our common stock. Shares of our common stock are voting securities for purposes of the BHCA and any bank holding company or foreign bank that is subject to the BHCA may need approval to acquire or retain more than 5% of the then outstanding shares of our common stock, and any holder (or group of holders deemed to be acting in concert) may need regulatory approval to acquire or retain 10% or more of the shares of our common stock. A holder or group of holders may also be deemed to control us if they own 25% or more of our total equity. Under certain limited circumstances, a holder or group of holders acting in concert may exceed the 25% percent threshold and not be deemed to control us until they own 33% percent or more of our total equity. The amount of total equity owned by a holder or group of holders acting in concert is calculated by aggregating all shares held by the holder or group, whether as a combination of voting or non-voting shares or through other positions treated as equity for regulatory or accounting purposes and meeting certain other conditions. Holders of our common stock should consult their own counsel with regard to regulatory implications.

Holders should not expect us to redeem outstanding shares of our common stock.

Our common stock is a perpetual equity security. This means that it has no maturity or mandatory redemption date and will not be redeemable at the option of the holders. Any decision we may make at any time to propose the repurchase or redemption of shares of our common stock will depend upon, among other things, our evaluation of our capital position, the composition of our shareholders’ equity, general market conditions at that time and other factors we deem relevant. Our ability to redeem shares of our common stock is subject to regulatory restrictions and limitations, including those of the Federal Reserve Board.

Offerings of debt, which would rank senior to our common stock upon liquidation, may adversely affect the market price of our common stock.

We may attempt to increase our capital resources or, if our or the Bank’s regulatory capital ratios fall below the required minimums, we or the Bank could be forced to raise additional capital by making additional offerings of debt or equity securities, senior or subordinated notes, preferred stock and common stock. Upon liquidation, holders of our debt securities and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock.

Anti-takeover provisions could adversely affect our shareholders.

In some cases, shareholders would receive a premium for their shares if we were acquired by another company. However, state and federal law and our articles of incorporation and bylaws make it difficult for anyone to acquire us without approval of our board of directors. For example, our articles of incorporation require a supermajority vote of two-thirds of our outstanding common stock in order to effect a sale or merger of the company in certain circumstances. Consequently, a takeover attempt may prove difficult, and shareholders may not realize the highest possible price for their securities. See “Description of Our Securities — Certain Provisions of Our Articles of Incorporation and Bylaws Having Potential Anti-Takeover Effects.”

Shares of our common stock are not insured deposits and may lose value.

Shares of our common stock will not be savings accounts, deposits or other obligations of any depository institution and will not be insured or guaranteed by the FDIC or any other governmental agency or instrumentality, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this prospectus. As a result, if you acquire shares of our common stock, you may lose some or all of your investment.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information set forth in this prospectus may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements represent our judgment concerning the future and are subject to business, economic and other risks and uncertainties, both known and unknown, that could cause our actual operating results and financial position to differ materially from the forward-looking statements. Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” or “continue,” or the negative thereof or other variations thereof or comparable terminology.

We caution that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including, without limitation:

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deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;

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changes in SBA loan products, including specifically the Section 7(a) program, or changes in SBA standard operating procedures;

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

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

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

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a reduction in or the termination of our ability to use the technology-based platform that is critical to the success of our business model;

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changes in financial market conditions, either internationally, nationally or locally in areas in which we conduct our operations, including, without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices;

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changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;

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fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;

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effective on January 1, 2015 and subject to certain transition periods, changes in minimum capital requirements, adjustments to prompt corrective action thresholds, increased quality of regulatory capital, revised risk-weighting of certain assets, and implementation of a “capital conservation buffer,” included in the final rule promulgated by the Federal Reserve on July 2, 2013, to implement the so-called “Basel III” accords;

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the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;

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governmental monetary and fiscal policies, including the effects of the Federal Reserve’s “Quantitative Easing” program, as well as other legislative and regulatory changes;

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changes in political and economic conditions, including continuing political and economic effects of the global economic downturn and other major developments;

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the impact of heightened regulatory scrutiny of financial products, primarily led by the CFPB;

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our ability to comply with any requirements imposed on the Company or the Bank by our respective regulators, and the potential negative consequences that may result;

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the effect of any mergers, acquisitions or other transactions, to which we or the Bank may from time to time be a party, including, without limitation, our ability to successfully integrate any businesses that we acquire; and

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the risk factors described under the heading “Risk Factors” in this prospectus.

Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date such forward-looking statements are made.

You should read carefully this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify all of our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the shares of common stock offered by us in this public offering will be approximately $ , or $ if the underwriters elect to exercise their option to purchase additional shares in full, based on an assumed initial public offering price of $ per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by $ , or $ if the underwriters elect to exercise their option to purchase additional shares in full, assuming the number of shares offered by us, as indicated on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds of this offering to:

•

support organic growth in our existing industry verticals;

•

for expansion into new industry verticals;

•

to develop a new online lending platform for the origination of loans less than $350 thousand;

•

to support the growth of our balance sheet as we increase the size of our held-for-investment loan portfolio; and

•

for general corporate purposes, including for possible acquisitions of, or investments in, bank or permissible non-bank entities, though, we do not have any agreements or understandings presently with respect to any acquisitions or investments.

Before we apply any of the net proceeds of this offering, the net proceeds likely will be temporarily invested in short-term investment securities. We will have broad discretion in allocating the net proceeds of this offering.

CAPITALIZATION

The following table sets forth our cash and due from banks and our consolidated capitalization, including regulatory capital ratios, at March 31, 2015 on:

•

an actual basis; and

•

on an as adjusted basis to give effect to the net proceeds from the sale by us of shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $ per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto, which are included elsewhere in this prospectus.


	As of March 31, 2015
Shareholders’ equity:	Actual			As Adjusted (1)
				*(dollars in thousands, except* share and per share data and ratios)
Cash and due from banks	$	47,564		$

Long term debt		50,210

Shareholders’ equity:
Common stock, no par value, 110,000,000 shares authorized, 28,623,609 shares issued and outstanding, actual; shares issues and outstanding, as adjusted		103,937
Accumulated deficit		(3,993	)
Accumulated other comprehensive income		209
Non-controlling interest		15
Total shareholders’ equity		100,168

Total capitalization		150,378

Book value per common share		3.50
Tangible book value per common share(2)		3.50
Capital ratios:					Minimum Regulatory Requirement

Tangible common equity to tangible assets(2)		13.84	%
Company regulatory capital ratios:
Tier 1 leverage capital		11.38				5.00	%
CET 1 risk-based capital		15.99				6.50
Tier 1 risk-based capital		15.99				8.00
Total risk-based capital		16.95				10.00
Bank regulatory capital ratios(3):
Tier 1 leverage capital		8.66				5.00
CET 1 risk-based capital		12.44				6.50
Tier 1 risk-based capital		12.44				8.00
Total risk-based capital		13.47				10.00

(1)

A $1.00 increase (or decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (or decrease), as applicable, our net proceeds, after deducting underwriting discounts and commissions and

estimated offering expenses payable by us, by $ (assuming no exercise of the underwriters’ option to purchase additional shares and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same). Similarly, an increase or decrease of one million shares of common stock sold in this offering by us would increase or decrease, as applicable, our net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, by $ , based on an assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus.

(2)

These measures are not measures recognized under GAAP and are therefore considered to be non-GAAP financial measures. See the information set forth under the caption “ GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of these measures to their most directly comparable GAAP measures.

(3)	The as adjusted column assumes that $ million of net cash proceeds from the offering are transferred to the Bank as common equity.

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

Net tangible book value per share is equal to the amount of our shareholders’ equity less intangible assets, divided by the number of shares of common stock outstanding at March 31, 2015. The net tangible book value of our common stock at March 31, 2015 was approximately $100.1 million, or $3.50 per share, based on the number of shares of common stock outstanding at March 31, 2015.

As adjusted net tangible book value per share gives effect to the net proceeds from the sale by us of shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $ per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. At March 31, 2015, the as adjusted net tangible book value of our common stock would have been approximately $ million, or $ per share. This represents an immediate increase in as adjusted net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors, or approximately % of the public offering price of $ per share. Dilution is determined by subtracting as adjusted net tangible book value per share after this offering from the public offering price of $ per share. The following table illustrates this per share dilution:


Assumed initial public offering price per share	$
Net tangible book value per share as of March 31, 2015	$	3.50
Increase in net tangible book value per share attributable to new investors in this offering

As adjusted net tangible book value per share

Dilution per share to new investors in this offering	$

Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) our as adjusted book value by approximately $ million, or approximately $ per share, and the dilution per share to new investors in this offering by approximately $ per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million in the number of shares offered by us, assuming the assumed initial public offering of $ per share remains the same, would result in as adjusted book value of approximately $ million, or $ per share, and the dilution per share to new investors in this offering would be $ per share. Similarly, a decrease of 1.0 million in the number of shares offered by us, assuming the assumed initial public offering price of $ per share remains the same, would result in as adjusted book value of approximately $ million, or $ per share, and the dilution per share to new investors in this offering would be $ per share. The as adjusted information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.

If the underwriters exercise their option to purchase additional shares in full, our as adjusted book value as of March 31, 2015, would have been $ million, or $ per share, representing an immediate increase in as adjusted book value to our existing shareholders of $ per share and immediate dilution to new investors in this offering of $ per share.

The following table summarizes the total consideration paid to us and the average price paid per share by existing shareholders and new investors purchasing common stock in this offering. This information is presented on an as adjusted basis as of March 31, 2015, after giving effect to our sale of shares of common stock in this offering (assuming the underwriters do not exercise their option) at an assumed initial public offering price of $ per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.


	Shares Purchased				Total Consideration				Average Price Per Share
	Number	Percent			Amount	Percent			Average Price Per Share
Existing shareholders				%	$			%	$
New investors in this offering
Total			100.0	%	$		100.0	%

If the underwriters exercise their option to purchase additional shares in full, our existing shareholders would own approximately % and our new investors would own approximately % of the total number of shares of our common stock outstanding after this offering.

The information above excludes 2,111,021 shares of our common stock issuable upon exercise of outstanding stock options at March 31, 2015 at a weighted-average exercise price of $6.48 per share and 4,296,321 shares of our common stock reserved for issuance in connection with stock awards available for issuance under our 2015 Omnibus Stock Incentive Plan. To the extent that any of these stock options are exercised, investors participating in the offering will experience further dilution.

DIVIDEND POLICY

It has been our practice since inception in May 2007 to make distributions to our common shareholders. Until August 3, 2014, we were taxed as an “electing small business corporation”, or S corporation, under Subchapter S of the Internal Revenue Code of 1986, as amended, or the Code. As such, we were not liable for income taxes on our income, but instead we historically paid distributions to our shareholders to assist them in paying income taxes on the pro rata portion of our taxable income that “passed through” to each of our shareholders.

On April 29, 2015, we paid a dividend of $0.03 per share to our shareholders of record as of April 17, 2015. On March 12, 2015, we paid a special dividend to our shareholders for undistributed 2014 tax amounts related to their allocable share of 2014 S corporation taxable income. The amount of this dividend was $1.4 million. In addition, throughout 2014, we distributed approximately $7.1 million to the shareholders for tax amounts related to the S corporation earnings and the taxable gain resulting from our divestiture of nCino, Inc. to our shareholders. We voluntarily terminated our S corporation status effective August 3, 2014, and are now taxed as a C corporation under the Code

We are organized under the North Carolina Business Corporation Act, which prohibits the payment of a dividend if, after giving it effect, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders. In addition, because we are a bank holding company, the Federal Reserve may impose restrictions on cash dividends paid by us. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past four quarters, net of any dividends previously paid during that period, is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the bank holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if any of the holding company’s bank subsidiaries are classified as undercapitalized.

Our ability to pay dividends is largely dependent upon the amount of cash dividends that the Bank pays to us, which distributions are restricted under North Carolina banking laws and regulations. The Bank may make distributions only to the extent that the Bank remains adequately capitalized. In addition, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank. The Office of the
North Carolina Commissioner of Banks and the FDIC also are authorized to prohibit the payment of dividends by a bank under certain circumstances. Such requirements and policies may limit our ability to obtain dividends from the Bank for our cash needs, including payment of dividends to our shareholders and the payment of operating expenses. For additional information on these limitations, see “Supervision and Regulation — Regulation of the Company — Dividends” and “— Live Oak Bank — Dividends.”

Following this offering, we currently intend to declare and pay dividends to common shareholders of up to 10% of our after tax earnings. However, any determination to pay future dividends to shareholders will be dependent upon our operational results, financial condition, capital requirements, business projections, general business conditions, statutory and regulatory restrictions and any other factors that our board of directors deem appropriate. Our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to shareholders.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial information contained in “ Selected Historical Consolidated Financial Data” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements, except as required by law.

Overview of Company Operations

We are an established national online platform for small business lending. We leverage a comprehensive technology-based platform with deep industry experience to optimize the credit extension process and borrowing experience for our customers.

We are organized as a bank holding company headquartered in Wilmington, North Carolina and were incorporated under the laws of North Carolina in December 2008. We conduct business operations primarily through our commercial bank subsidiary, Live Oak Banking Company. The Bank was established in May 2008 as a North Carolina-chartered commercial bank. We believe there is significant opportunity in lending to small businesses nationwide. By focusing on credit quality in verticals where we have a deep understanding, we have the ability to fill a specific market niche. We believe that this niche focus combined with a national presence promotes the origination of high-quality loans. We have never sought to grow for the sake of growth. Rather, we strive to establish ourselves as the preferred lender to, and partner of, small business professionals. As a result, we have provided financing totaling $2.9 billion since May 2007 to fulfill the needs of new and existing business across the U.S.

Our strategy centers on a business model that we believe mitigates credit risk while capitalizing on novel technology in the financial services industry. In the execution of this strategy we focus on extending primarily variable rate loans that are guaranteed by the U.S. Small Business Administration, or the SBA, to small businesses and professionals with what we believe are low risk characteristics. As a result of this strategy, variable rate loans comprised 92.6% and 94.3% of the held-for-investment and held-for-sale loan portfolios, respectively, at March 31, 2015. The cloud-based software we use allows us to maintain a streamlined loan delivery system on a national platform. Our compliance with SBA regulations is enhanced by our lending and credit professionals who possess strong SBA lending backgrounds, and the technology-based platform we use.

Historically we have typically sold the SBA-guaranteed portion (generally 75% of the principal balance) of the loans we originate in the secondary market while we retain servicing, with the remainder of each loan either participated out to a third party or retained on our books. We have historically received a premium for these sales. We also sell participating interests in the remaining portion of our loans while retaining an SBA-required 10% unguaranteed interest and the servicing rights to the entire loan. As a result of our business model, our net income to date has been driven primarily by non-interest income rather than interest income.

We focus on specific industries, which we call “verticals,” with a series of what we believe are low risk characteristics and substantial market size potential. We believe industry specific focus complements our status as an SBA 7(a) Preferred Lender. We carefully select verticals to focus our lending efforts. We are currently exploring expanding our lending efforts into additional verticals. In selecting these industries, we analyze the SBA historical data relative to default/loss rate, competition, and the size of the industry as well as the business cycles and customer characteristics of each industry. We then look at credit parameters, product types, and pricing that we would need to use in order to establish a market presence in an industry and weigh those factors against our risk tolerance and profitability objectives. Through this analysis, we approximate the percentage of the potential demand we believe we could capture both initially and after market stabilization. We are generally reluctant to enter a new vertical, unless we believe we could capture at least % of the potential small business loan demand within it.

Within each vertical we retain individuals who possess extensive industry-specific lending experience. We believe our focus on verticals has allowed us to extend credit to small businesses at an average loan size of $1.0 million and has resulted in our credit quality outperforming industry averages. Based on a data set consisting of 292 SBA 7(a) lenders that have originated 300 loans or more and greater than $25 million dollars in total loans, assembled by our affiliate, Government Loan Solutions, Inc. using two separate Freedom of Information Act requests for the twelve month period ended September 30, 2014, we had the lowest default rate among the group at 1.52%. In terms of charge-off rates, we ranked fifth in the same data set at 0.35% for the same period. For the twelve months ended September 30, 2014, the U.S. Government’s most recently completed fiscal quarter, we ranked as the nation’s second largest small business lender, by dollar volume, utilizing the SBA’s 7(a) program.

Provision expense for the quarter ended March 31, 2015 was $1.1 million or 154% greater than that recorded for the three months ended March 31, 2014. The higher the provision expense in the first quarter of 2015 was primarily attributed to growth in loan originations and reserves on impaired loans. Reserves on impaired loans increased $483 thousand in the first quarter of 2015 compared to a decrease of $329 thousand in the first quarter of 2014.

In 2014 we experienced a significantly higher provision for loan losses compared to 2013. Provision expenses in 2014 were incurred as a result of an increase in reserves on impaired loans of $1.1 million, coupled with loan loss provisions totaling approximately $1.7 million in response to substantial loan growth and increases in qualitative reserves, partially mitigated by our declining loss ratios. Much of our loan growth in 2014 occurred within new lending verticals with higher loss factors due to the Company’s lack of historical experience in those industries. By comparison, provision expenses for 2013 were incurred as a result of a decline in reserves on impaired loans of $2.1 million partially offset by loan loss provisions totaling $1.3 million as a result of improving credit quality and a migration from peer to actual loss history in maturing lending verticals.

We service our customers efficiently throughout the loan process and monitor their performance by means of the technology-based platform we use, which eliminates the need to maintain traditional branch locations and therefore eliminates a significant component of traditional overhead expense associated with banking franchises. As a result, the Bank has no brick-and-mortar branch locations and does not employ any tellers. Our headquarters serves as our sole deposit gathering location for local customers seeking a more traditional interaction for their banking needs. We believe this lack of a concentrated geographic branch footprint significantly mitigates risk that would be associated with having the loan portfolio concentrated in one geographic area.

Conversion from S Corporation to C Corporation

Effective August 3, 2014, we terminated our status as an S corporation and became a C corporation under the Code for income tax purposes. Upon conversion to a C corporation, we recorded a net deferred tax liability of $3.3 million on our balance sheet as of August 4, 2014. Upon recognition of the deferred tax liability we also recorded an offsetting adjustment to income tax expense of $3.3 million, which decreased our after-tax earnings and shareholders’ equity by the same amount.

Critical Accounting Policies and Estimates

We have identified accounting policies that are the most critical to fully understand and evaluate our reported financial results and require management’s most difficult, subjective or complex judgments. Management has reviewed the following critical accounting policies and related disclosures with the audit & risk committee of the Board of Directors.

•

Determination of the allowance for loan losses;

•

Valuation of servicing assets; and

•

Valuation of foreclosed assets.

For a full description of these critical accounting policies, see Note 1 to our audited financial statements contained elsewhere in this prospectus.

Executive Overview of Historical Financial Performance

To date, we have originated loans in all 50 states and certain U.S. territories, primarily across five established industry verticals: veterinary practices, healthcare services, independent pharmacies, death care management and investment advisors. New verticals include family entertainment centers and poultry agriculture, and, in 2015 thus far, wine and craft beverages and self-storage. We believe that our commitment to serving the banking needs of small business clients, the use of an integrated technology-based platform, and our level of servicing has contributed to growth in annual loan production since we commenced operations in 2007. For the U.S. government’s 2014 fiscal year, or the four quarters ending September 30, 2014, we were the second most active SBA 7(a) lender in the United States, by dollar volume, with over $800 million of loans to small businesses in the United States, behind only Wells Fargo Bank.

We have achieved approximately a 55.2% CAGR in loan production from May 2007 through March 31, 2015. The following tables summarize the annual production of the Bank and the amount of the SBA-guaranteed portion of the loans we have sold by industry vertical since May 2007:


	Three Months Ended March 31, 2015		Year Ended December 31,
	Three Months Ended March 31, 2015		2014		2013		2012		2011		2010		2009		2008		2007		Total
	*(dollars in thousands)*
Veterinary Practices	$	26,492	$	155,217	$	147,661	$	174,768	$	149,485	$	150,788	$	145,920	$	161,230	$	40,226	$	1,151,787
Healthcare Services		56,892		182,406		109,317		81,363		69,860		56,580		13,385		150		—		569,953
Independent Pharmacies		25,221		149,453		106,391		103,358		86,757		48,919		—		—		—		520,099
Death Care Management		12,011		72,124		101,736		54,075		—		—		—		—		—		239,946
Investment Advisors		34,304		96,963		33,647		—		—		—		—		—		—		164,914
Family Entertainment Centers		3,580		13,503		—		—		—		—		—		—		—		17,083
Poultry Agriculture		89,559		171,644		—		—		—		—		—		—		—		261,203
Other		—		6,780		—		199		535		30		1,275		1,209		775		10,803

Total	$	248,058	$	848,090	$	498,752	$	413,763	$	306,637	$	256,317	$	160,580	$	162,589	$	41,001	$	2,935,787

The following table shows the amount of the SBA-guaranteed portions of the loans we have originated that we have sold since May 2007:


	Three Months Ended March 31, 2015		Year Ended December 31,
	Three Months Ended March 31, 2015		2014		2013		2012		2011		2010		2009		2008		2007		Total
	*(dollars in thousands)*
Veterinary Practices	$	29,148	$	97,960	$	115,514	$	129,291	$	117,941	$	107,326	$	138,725	$	52,897	$	—	$	788,802
Healthcare Services		29,012		99,063		57,361		46,446		50,948		30,120		7,453		—		—		320,403
Independent Pharmacies		19,328		104,446		83,647		66,856		69,553		31,805		—		—		—		375,635
Death Care Management		8,095		53,832		63,156		34,083		—		—		—		—		—		159,166
Investment Advisors		28,630		64,764		19,664		—		—		—		—		—		—		113,058
Family Entertainment Centers		—		7,286		—		—		—		—		—		—		—		7,286
Poultry Agriculture		22,834		4,273		—		—		—		—		—		—		—		27,107
Other		—		2,288		—		—		—		—		—		706		—		2,994

Total	$	137,047	$	433,912	$	339,342	$	276,676	$	238,442	$	169,251	$	146,178	$	53,603	$	—	$	1,794,451

Credit quality and on-going credit administration are the foundation of our business. The composition of the $2.9 billion in loans originated from May 2007 through March 31, 2015 is reflected below to highlight the portion of loans sold in the secondary market versus the portion of loans retained, as well as the credit quality of those originated loans.


	Guaranteed				Unguaranteed
	*(dollars in thousands)*
	Dollars		% of Total		Dollars		% of Total		Total
Originated loans	$	2,190,655		74.6	$	745,132		25.4	$	2,935,787
Sold loans		1,795,706		89.4		212,233		10.6		2,007,939
Unfunded commitments at March 31, 2015		210,488		73.9		74,291		26.1		284,779
Charge-offs		—		—		8,847		100.0		8,847
Lost SBA guarantees		—		—		—		—		—
Composition of loans at March 31, 2015:
Total loans held for sale		164,206		53.8		140,874		46.2		305,079
Total loans held for investment		21,548		9.8		198,896		90.2		220,444
Impaired nonaccrual loans		15,964		84.5		2,934		15.5		18,897
Impaired accrual loans		4,045		60.5		2,645		39.5		6,691
Potential problem loans (1)	$	1,291		9.1	$	12,971		90.9	$	14,262

(1)	Potential problem loans are defined as currently unimpaired loans that management has identified as having possible credit problems that may cause the borrowers difficulty in complying with current repayment terms.

The vertical approach we employ allows us to immerse ourselves in an industry, enabling us to obtain better clarity on both the business and the borrower, which we believe augments our small business lending ability and the credit quality of our originated loan portfolio. Concentration factors are consistently managed across the portfolio. We closely monitor geographic concentration, industry concentration and concentrations by customer, among other factors. Furthermore, we believe our national lending footprint mitigates the risk of geographically concentrated economic events.

Results of Operations

Performance Summary

Three Months Ended March 31, 2015 vs. Three Months Ended March 31, 2014

For the three months ended March 31, 2015, we reported net income attributable to the Company of $8.1 million, an increase of $7.8 million, compared to net income of $298 thousand for the three months ended March 31, 2014. The net income increase resulted primarily from an increase in noninterest income to $24.1 million at March 31, 2015 from $12.2 million at March 31, 2014 a $11.9 million, or 97.1%, increase. Additionally, noninterest expense was largely unchanged for the three months ended March 31, 2015, compared to March 31, 2014. For the three months ended March 31, 2015, noninterest expense totaled $14.7 million compared to $14.4 million for the three months ended March 31, 2014, a 1.7% increase. Net income attributable to the Company of $8.1 million for the three months ended March 31, 2015 includes an income tax expense of $5.3 million as a result of the conversion to a C corporation in August 2014. We had no income tax expense in the three months ended March 31, 2014. Income before taxes for the quarters ended March 31, 2015 and March 31, 2014 totaled $13.3 million and $298 thousand, respectively.

Year ended December 31, 2014 vs. Year ended December 31, 2013

For the year ended December 31, 2014, we reported net income attributable to the Company of $10.0 million, a decrease of $18.1 million, or (64.2)%, compared to net income of $28.1 million for the year ended December 31, 2013. The net income decrease resulted primarily from an increase in non-operating expenses

incurred in 2014 and the impact of the conversion to a C corporation in August 2014, offset by a moderate increase in noninterest income. The recognition of a one-time gain in January 2013 in connection with the deconsolidation of our previously consolidated subsidiary, nCino, in the amount of $12.2 million resulted in marginal growth in noninterest income of $3.6 million in 2014. Offsetting this one-time gain in fiscal year 2013 were losses recognized for equity method investments of $2.8 million, principally related to allocated losses from nCino of $1.8 million subsequent to its deconsolidation. In June 2014 we divested our ownership in nCino to our shareholders in the form of a dividend with a subsequent cost method investment in nCino of $6.1 million in August of 2014. As of the date of this prospectus we do not own any equity of nCino. For the year ended December 31, 2014, noninterest expense totaled $54.5 million, an increase of 35.6% compared to the year ended December 31, 2013. Net income, excluding non-recurring expenses related to a stock grant to key employees, recognition of a deferred tax liability upon conversion from an S corporation to a C corporation, expenses related to the exploration of capital raising alternatives and C corporation income tax expense for the last five months of 2014, net of an effective tax rate of 38.5% for the full year, totaled approximately $13.6 million in 2014. Adjusted for significant non-recurring income and expenses for fiscal years 2013 and 2014, noninterest income increased $15.8 million or 36% while noninterest expense increased $9.6 million, or 24% in fiscal year 2014 compared to fiscal year 2013. Other than the reasons for the increase in net income before adjustment for non-recurring income and expenses, additional primary drivers of the increase in net income excluding non-recurring items was the exclusion of the deconsolidation gain of $12.2 million from 2013 income along with the exclusion of 2014 expenses related to the foregone initial public offering of $1.7 million and $3.0 million in stock grant expense. After-tax net income adjusted for non-recurring income and expenses for the year ended December 31, 2014 increased $3.8 million, or 39%, compared to the year ended December 31, 2013. For more information and a reconciliation of net income adjusted for non-recurring income and expense see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

For the year ended December 31, 2014, revenue generated from our core banking operations of net interest income, loan servicing revenue, and net gain on sale of loans increased $4.6 million, $2.6 million, and $11.8 million, respectively, compared to the corresponding amounts for the year ended December 31, 2013. The net gain on sale of loans was positively impacted by an increase in the volume of guaranteed loans sold of $94.6 million, as well as by an increase in the revenue recognized for each loan sold. Gross revenue recognized for loan sales increased from an average $113.1 thousand per million for fiscal year 2013 to an average of $115.2 thousand per million for fiscal year 2014, due to changes in market rates. For the same period, the net loss resulting from the revaluation of servicing rights totaled $2.2 million, a decrease of $146 thousand compared to the year ended December 31, 2013, as a result of amortization of the serviced portfolio, changes in prepayment speeds, and prevailing market conditions. As the current market improves or deteriorates, the value of the existing servicing asset responds accordingly. For core banking activities, noninterest expense increased approximately $9.2 million, or 24.0%, compared to the year ended December 31, 2013, primarily as the result of increasing personnel and infrastructure to support growth in the loan portfolio. For the year ended December 31, 2014, the allowance for loan loss provision expense increased $3.7 million, or 425.5%, compared to the year ended December 31, 2013, due to a change in the methodology in the reserve for impaired loans and a $63 million increase in total loans held for investment.

Year ended December 31, 2013 vs. Year ended December 31, 2012

For the year ended December 31, 2013, we reported net income attributable to the Company of $28.1 million, an increase of $12.0 million, or 74.4%, compared to net income of $16.1 million for the year ended December 31, 2012. The increase resulted primarily from the recognition of a one-time gain in January 2013 in connection with the deconsolidation of our previously consolidated subsidiary, nCino in the amount of $12.2 million. Offsetting this one-time gain were losses recognized for equity method investments of $2.8 million, principally related to allocated losses from nCino subsequent to its deconsolidation. For the year ended December 31, 2013, revenue generated from our core banking operations of net interest income and net gain on sale of loans increased $2.7 million and $4.7 million, respectively, compared to the corresponding amounts for the year ended December 31, 2012. The net gain on sale of loans was positively impacted by an increase in the

volume of guaranteed loans sold of $62.6 million, and negatively impacted by a reduction in the revenue recognized for each loan sold as the premium market for guaranteed 7(a) loans compressed from an average $121.3 thousand per million for fiscal year 2012 to an average of $113.1 thousand per million for fiscal year 2013, due to changes in market rates. For the same period, servicing revenue and revaluation of servicing rights decreased $420 thousand as a result of amortization of the serviced portfolio, changes in prepayment speeds, and prevailing market conditions. As the current market improves or deteriorates, the value of the existing servicing asset responds accordingly. Noninterest expense increased $6.5 million, or 19.3%, compared to the year ended December 31, 2012, primarily as a result of increasing personnel and infrastructure to support growth in the loan portfolio. For the year ended December 31, 2013, an allowance for loan loss provision expense decreased $3.0 million, or 140.7%, compared to the year ended December 31, 2012, due to improving credit quality.

Net Interest Income and Margin

Net interest income, a secondary contributor to our earnings, represents the difference between the income that we earn on our interest-earning assets and the cost to us of our interest-bearing liabilities. Our net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that we earn or pay on them. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.”

Three Months Ended March 31, 2015 vs. Three Months Ended March 31, 2014

For the three months ended March 31, 2015, our net interest income increased $2.1 million, or 70.2%, to $5.0 million compared to the three months ended March 31, 2014. This increase was due to growth in average interest earning assets, relatively stable asset yields and a relatively stable cost of funds. Average interest earning assets increased by $280.5 million, or 68.6%, for the three months ended March 31, 2015 compared to the three months ended March 31, 2014, while the related yield on average interest earning assets decreased by three basis points to 4.09%. While the corresponding cost of funds on interest bearing liabilities for the three months ended March 31, 2014 declined slightly by three basis points to 1.18%, the average balance in interest bearing liabilities increased by $248.8 million, or 60.3%. As indicated in the following rate volume table, the slight drop in the cost of funds was outpaced by the effect of increased volumes of interest bearing liabilities, resulting in increased interest expense for the three months ended March 31, 2015 of $0.7 million. For the three months ended March 31, 2015 compared to the three months ended March 31, 2014, our net interest margin increased from 2.90% to 2.97%.

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


	Three Months Ended March 31,
	2015								2014
	Average Balance			Interest		Average Yield/ Rate			Average Balance			Interest		Average Yield/ Rate
	*(dollars in thousands)*
Interest earning assets:
Interest earning balances in other banks	$	82,036		$	66		0.33	%	$	52,518		$	23		0.18	%
Investment securities		58,910			176		1.21			19,407			100		2.06
Loans held for sale		336,520			4,164		5.02			202,582			2,472		4.88
Loans held for investment		211,944			2,552		4.88			134,370			1,617		4.81

Total interest earning assets		689,410			6,958		4.09			408,877			4,212		4.12

Less: allowance for loan losses		(4,403	)							(2,734	)
Non-interest earning assets		93,816								77,479

Total assets	$	778,823							$	483,622

Interest bearing liabilities:
Money market accounts	$	310,992		$	596		0.78	%	$	212,648		$	632		1.19	%
Certificates of deposit		297,153			880		1.20			186,167			466		1.00

Total deposits		608,145			1,476		0.98			398,815			1,098		1.10

Small business lending fund		6,800			25		1.50			6,800			25		1.50
Notes payable to investors		—			—		—			3,623			91		10.00
Other borrowings		46,510			416		3.63			3,342			37		4.43

Total interest bearing liabilities		661,455			1,917		1.18			412,580			1,251		1.21

Non-interest bearing deposits		13,415								12,435
Non-interest bearing liabilities		12,662								6,473
Redeemable equity		—								3,605
Shareholders’ equity		91,316								48,529
Noncontrolling interest		(25	)							—

Total liabilities and shareholders’ equity	$	778,823							$	483,622

Net interest income and interest rate spread				$	5,041		2.92	%				$	2,961		2.91	%

Net interest margin							2.97								2.90

Ratio of average interest-earning assets to average interest- bearing liabilities							104.23	%							99.10	%

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


	Three Months Ended March 31,
	2015									2014
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Rate			Volume			Total			Rate			Volume			Total
	*(dollars in thousands)*
Interest income:
Interest earning balances in other banks	$	25		$	18		$	43		$	(30	)	$	(4	)	$	(34	)
Investment securities		(85	)		161			76			(28	)		24			(4	)
Loans held for sale		46			1,646			1,692			(127	)		521			394
Loans held for investment		1			934			935			(60	)		475			415
Subsidiary note receivable		—			—			—			(30	)		(30	)		(60	)

Total interest income		(13	)		2,759			2,746			(275	)		986			711


Interest expense:
Money market accounts		(276	)		240			(36	)		(81	)		126			45
Certificates of deposit		111			303			414			69			97			166
Notes payable to investors		(46	)		(45	)		(91	)		—			—			—
Other borrowings		(53	)		432			379			(41	)		30			(11	)

Total interest bearing liabilities		(264	)		930			666			(53	)		253			200

Net interest income	$	(251	)	$	1,829		$	2,080		$	(225	)	$	733		$	511

Year ended December 31, 2014 vs. Year ended December 31, 2013

For the year ended December 31, 2014, net interest income increased $3.9 million, or 36%, to $14.7 million compared to the year ended December 31, 2013. This increase was due to growth in average interest earning assets combined with higher asset yields and a relatively stable cost of funds. Average interest earning assets increased by $117.7 million, or 32.2%, from fiscal year 2013 to 2014, while the related yield on average interest earning assets increased by six basis points to 4.24%, or an equivalent of $5.2 million. As a strategic initiative to develop market share as a de novo bank, we offered loans at highly competitive market rates in the development phase of our business. As the business evolved, we began pricing loans commensurate with premium market rates and the added value that accompanies each loan from our business advisory group, or BAG. We formed the BAG in 2010 to enhance our borrower experience by focusing specifically on the needs of our borrowers within each vertical. The BAG provides complementary advisory service to customers, such as receivables and inventory review, in conjunction with periodic financial health reviews which deepen existing relationships. While the corresponding cost of funds on interest bearing liabilities for fiscal year 2014 declined slightly by two basis points to 1.23%, the average balance in interest bearing liabilities increased by $111.7 million or 30.8%. As indicated in the below rate volume table, the slight drop in the cost of funds was outpaced by the effects of the increased volumes of interest bearing liabilities resulting in increased interest expense for fiscal year 2014 of $1.3 million. The primary mitigating factor to rising cost of funds was growth in total deposits in conjunction with the reduction of rates by seven basis points during fiscal year 2014. For the year ended December 31, 2014 compared to the year ended December 31, 2013, our net interest margin increased from 2.95% to 3.03% due to the aforementioned affects. As a bank without a branch network, we gather deposits over the Internet and in the community in which we are headquartered. Due to the nature of a branchless bank and low overhead required for deposit gathering, the rates we are able to offer are above the industry average. The Bank began, on a limited basis, publicly promoting its deposit products in fiscal year 2012, which accounts for the increase in interest bearing liabilities.

Year ended December 31, 2013 vs. Year ended December 31, 2012

For the year ended December 31, 2013, net interest income increased $2.7 million, or 33.1%, to $10.8 million compared to the year ended December 31, 2012. This increase was due to growth in average interest earning assets combined with higher asset yields and a relatively stable cost of funds. Average interest earning assets increased by $80.3 million, or 28.1%, from fiscal year 2012 to 2013, while the related yield on average interest earning assets increased by eight basis points to 4.18%, or an equivalent of $3.6 million. As a strategic initiative to develop market share as a de novo bank, we offered loans at highly competitive market rates in the development phase of our business. As the business evolved, we began pricing loans commensurate with premium market rates and the added value that accompanies each loan from our BAG. While the corresponding cost of funds on interest bearing liabilities for fiscal year 2013 declined slightly by four basis points to 1.25%, the average balance in interest bearing liabilities increased by $80.1 million or 28.4%. As indicated in the below rate volume table, the slight drop in the cost of funds was outpaced by the effects of the increased volumes of interest bearing liabilities resulting in increased interest expense for fiscal year 2013 of $893 thousand. The primary mitigating factor to rising cost of funds was growth in money market funds in conjunction with lowering of money market rates by 13 basis points during fiscal year 2013. For the year ended December 31, 2013 compared to the year ended December 31, 2012, our net interest margin increased from 2.83% to 2.95% due to the aforementioned affects. As a bank without a branch network, we gather deposits over the Internet and in the community in which we are headquartered. Due to the unique nature of a branchless bank and low overhead required for deposit gathering, the rates we are able to offer are above the industry average. The Bank began, on a limited basis, publicly promoting its deposit products in fiscal year 2012, which accounts for the increase in interest bearing liabilities.

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


	Year Ended December 31,
	2014								2013								2012
	Average Balance			Interest		Average Yield/ Rate			Average Balance			Interest		Average Yield/ Rate			Average Balance			Interest		Average Yield/ Rate
	*(dollars in thousands)*
Interest earning assets:
Interest earning balances in other banks	$	56,053		$	163		0.29	%	$	58,319		$	126		0.22	%	$	42,259		$	80		0.19	%
Investment securities		29,634			455		1.53			17,543			391		2.23			15,726			467		2.97
Loans held for sale		306,026			15,421		5.04			232,632			11,815		5.08			189,924			9,456		4.98
Loans held for investment		91,964			4,470		4.86	%		54,468			2,666		4.89	%		37,841			1,722		4.55
Subsidiary note receivable		—			—		—			3,039			304		10.00			—			—		0.00

Total interest earning assets		483,677			20,509		4.24			366,001			15,302		4.18			285,755			11,725		4.10

Less: Allowance for loan losses		(3,228	)							(5,146	)							(5,279	)
Non-interest earning assets		86,853								68,779								41,013

Total assets	$	567,302							$	429,634							$	321,489

Interest bearing liabilities:
Savings	$	—		$	—		—	%	$	—		$	—		0.00	%	$	275		$	3		1.09	%
Money market accounts		215,745			2,270		1.05			186,265			2,401		1.29			107,513			1,530		1.42
Certificates of deposit		231,675			2,461		1.06			163,686			1,546		0.94			161,826			1,442		0.89

Total Deposits		447,420			4,731		1.06			349,951			3,947		1.13			269,614			2,975		1.10

Small business lending fund		6,800			102		1.50			6,800			102		1.50			6,800			102		1.50
Notes payable to investors		2,717			272		10.00			3,623			362		9.99			3,623			362		9.99
Other borrowings		16,983			747		4.40			1,826			110		6.02			2,044			189		9.25

Total interest bearing liabilities		473,920			5,852		1.23			362,200			4,521		1.25			282,081			3,628		1.29

Non-interest bearing deposits		11,492								15,732								5,265
Non-interest bearing liabilities		8,264								4,350								2,775
Redeemable equity		2,391								2,681								216
Shareholders’ equity		71,235								44,671								31,799
Noncontrolling interest		—								—								(647	)

Total liabilities and shareholders’ equity	$	567,302							$	429,634							$	321,489

Net interest income and interest rate spread				$	14,657		3.01	%				$	10,781		2.93	%				$	8,097		2.82	%

Net interest margin							3.03								2.95								2.83

Ratio of average interest-earning assets to average interest-bearing liabilities							102.06	%							101.05	%							101.30	%

multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.


	Year Ended December 31,
	2014									2013
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Rate			Volume			Total			Rate			Volume			Total
	*(dollars in thousands)*
Interest income:
Interest earning balances in other banks	$	43		$	(6	)	$	37		$	13		$	33		$	46
Investment securities		(164	)		228			64			(123	)		47			(76	)
Loans held for sale		(107	)		3,713			3,606			212			2,147			2,359
Loans held for investment		(25	)		1,829			1,804			159			785			944
Subsidiary note receivable		(152	)		(152	)		(304	)		152			152			304

Total interest income		(405	)		5,612			5,207			413			3,164			3,577


Interest expense:
Savings		—			—			—			(1	)		(2	)		(3	)
Money market accounts		(476	)		345			(131	)		(197	)		1,068			871
Certificates of deposit		233			682			915			87			17			104
Notes payable to investors		1			(91	)		(90	)		—			—			—
Other borrowings		(153	)		791			638			(62	)		(17	)		(79	)

Total interest bearing liabilities		(395	)		1,727			1,332			(173	)		1,066			893

Net interest income	$	(10	)	$	3,885		$	3,875		$	586		$	2,098		$	2,684

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

Losses inherent in loan relationships are mitigated by the portion of the loan that is guaranteed by the SBA. A typical SBA 7(a) loan carries a 75% guarantee, which greatly reduces the risk profile of these loans. Our focus on compliance with regulations and guidance from the SBA is paramount to our continued success within this space. As discussed in the paragraphs below, we believe that the risk associated with our portfolio should be assessed with greater emphasis placed on the unguaranteed exposure.

Three Months Ended March 31, 2015 vs. Three Months Ended March 31, 2014

For the three months ended March 31, 2015, the provision for loan losses was $1.1 million, an increase of $0.7 million, or 154.0%, compared to the same period in 2014. The higher provision for loan losses for the three months ended March 31, 2015 was in response to substantial loan growth. Much of our loan growth occurred within new lending verticals with higher loss factors due to our lack of historical experience in those industries. Net loan charge-offs were $250.6 thousand for the three months ended March 31, 2015 compared to net recoveries of $66.9 thousand for the three months ended March 31, 2014. In addition, at March 31, 2015, nonperforming loans not guaranteed by the SBA totaled $2.9 million, which was 1.3% of our held-for-investment loan portfolio compared to $1.6 million, or 1.0%, of loans held for investment at March 31, 2014.

Year ended December 31, 2014 vs. Year ended December 31, 2013

For the year ended December 31, 2014, the provision for loan losses was $2.8 million, an increase of $3.7 million, or 425.5%, compared to the same period in 2013. The higher provision for loan losses in 2014 was

primarily the result of an increase in reserves on impaired loans of $1.1 million, coupled with loan loss provisions totaling approximately $1.7 million in response to substantial loan growth and increases in qualitative reserves, partially mitigated by our declining loss ratios. Much of our loan growth occurred within new lending verticals with higher loss factors due to the Company’s lack of historical experience in those industries. Net loan charge-offs were $1.1 million for the fiscal year ended December 31, 2014, compared to $1.89 million for fiscal year 2013, equating to 0.28% and 0.66% of average loans for the respective periods. In addition, at December 31, 2014, nonperforming loans not guaranteed by the SBA totaled $3.1 million, which was 1.5% of our held-for-investment loan portfolio compared to $1.7 million, or 1.2%, of loans held for investment at December 31, 2013.

Year ended December 31, 2013 vs. Year ended December 31, 2012

For the year ended December 31, 2013, the provision for loan losses was recorded as a recovery of $858 thousand, a decrease of $3.0 million, or (140.7%), compared to the same period in 2012. The lower provision for loan losses for the year ended 2013 was primarily the result of a decline in specific reserves on impaired loans of $2.1 million partially offset by loan loss provisions totaling approximately $1.3 million, as a result of improving credit quality and a migration from peer to actual loss history in maturing lending verticals, from December 31, 2013 to December 31, 2012. Evidence of the improving credit quality is reflected principally in the stabilization of net loan charge-offs for 2013. Net loan charge-offs were $1.89 million for the fiscal year ended December 31, 2013, compared to $1.86 million for fiscal year 2012, equating to 0.66% and 0.82% of average loans for the respective periods. In addition, at December 31, 2013, nonperforming loans not guaranteed by the SBA totaled $1.7 million, which was 1.2% of our held for investment loan portfolio compared to $3.5 million, or 3.8%, of loans held for investment at December 31, 2012. The stabilization of charge off experience, declining nonperforming loan balances which were not guaranteed by the SBA, and our migration from peer-based historical loss data to our own actual historical loss rates, all contributed to a lower provision in fiscal year 2013. However, the impact of these trends was somewhat offset by significant growth in our loans held for investment portfolio.

Noninterest Income

Noninterest income, a primary contributor to our earnings, principally represents income from the sale of SBA-guaranteed loans. This income is comprised of loan servicing revenue and revaluation and net gains on sales of loans. Our revenue from the sale of loans depends upon volume and rates of loans as well as the cost and availability of funds to bridge between funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as cost to service, prepayment speeds and default rates. Other less common elements of noninterest income include nonrecurring gains and losses on investments.

The following table shows the components of noninterest income and the dollar and percentage changes for the three months ended March 31, 2015 and 2014.


	Three Months Ended March 31						2014/2015 Increase
	2015			2014			Amount		Percent
	*(dollars in thousands)*
Noninterest income:
Loan servicing revenue	$	3,984		$	3,320		$	664		20.0	%
Loan servicing revaluation		122			(620	)		742		119.7
Net gains on sales of loans		15,461			10,031			5,430		54.1
Equity in income (loss) of non-consolidated affiliates		(26	)		(994	)		968		97.4
Gain on sale of investment in non-consolidated affiliate		3,782			—			3,782		100.0
Other noninterest income		732			468			264		56.4

Total noninterest income	$	24,055		$	12,205		$	11,850		97.1	%

Three Months Ended March 31, 2015 vs. Three Months Ended March 31, 2014

For the three months ended March 31, 2015, noninterest income increased by $11.9 million, or 97.1%, compared to the three months ended March 31, 2014. Increases in the serviced loan portfolio and the volume of loans sold in the secondary market, the core components of our business, contributed $6.1 million to noninterest income growth, including $664 thousand of increased servicing revenue and $5.4 million of increased gains on sale of loans.

While portions of the loans that we originate are sold and generate premium revenue, servicing rights for all loans that we originate are retained by the Bank. In exchange for continuing to service loans that are sold, the Bank receives fee income represented in loan servicing revenue equivalent to one percent of the outstanding sold loan balance. In addition, the cost of servicing sold loans is approximately 0.40% which is included in the loan servicing revaluation computations. Unrecognized servicing revenue is reflected in a servicing asset recorded on our balance sheet. Revenues associated with the servicing of loans are recognized over the expected life of the loan as a reduction of the servicing asset. For the three months ended March 31, 2015, loan servicing revenue increased $664 thousand, or 20.0%, compared to the three months ended March 31, 2014, as a result of an increase in the average outstanding balance of guaranteed loans sold. At March 31, 2015, the outstanding balance of guaranteed loans sold in the secondary market was $1.4 billion, with a weighted average servicing rate of 1.10%. At March 31, 2014, the outstanding balance of guaranteed loans sold was $1.1 billion, with a weighted average servicing rate of 1.14%. Prior to January 2010, we sold loans for servicing in excess of 1.0%. As loans sold for servicing in excess of 1.0% prior to fiscal year 2010 amortize, we expect that the weighted average servicing rate will approach and stabilize at approximately 1.0%.

We revalue our serviced loan portfolio at least quarterly. The revaluation considers the amortization of the portfolio, current market conditions for premium loan sales, and current prepayment speeds. For the three months ended March 31, 2015, the loan servicing revaluation adjustment decreased by $742 thousand or 119.7%, moving to a positive $121.8 thousand compared to the three months ended March 31, 2014. At March 31, 2015, the positive loan servicing revaluation balance of $121.8 thousand was principally attributed to $1.6 million related to changes in market conditions partially offset by $1.3 million in amortization of the serviced portfolio and $201 thousand related to changes in prepayment speeds. In comparison, the loan servicing revaluation balance at March 31, 2014 of $620 thousand was composed of $1.8 million from amortization of the serviced portfolio and $121 thousand from changes in prepayment speeds, partially offset by $1.2 million in value arising from positive market conditions at that time.

For the three months ended March 31, 2015, net gains on sales of loans increased $5.4 million, or 54.1%, compared to the three months ended March 31, 2014. The increase was primarily due to an increase in the volume of guaranteed loans sold by $49.5 million, or 56.5%, from $87.6 million for the three months ended March 31, 2014 to $137.0 million for the three months ended March 31, 2015. The premium market had a negligible impact on the net gain on sale of loans. The average net gain on sale was somewhat higher at $114.5 thousand of revenue for each $1 million in loans sold for the three months ended March 31, 2014, compared to $112.8 thousand of revenue for each $1 million sold for the three months ended March 31, 2015. Cash received for the loans sold during the three months ended March 31, 2015 and 2014 was $181.0 million and $103.1 million, respectively.

The growth of noninterest income for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was enhanced by a gain of $3.8 million on the sale of our subsequent investment in nCino. This sale of our investment in this non-consolidated affiliate comprised 100% of our investment in nCino. Gross proceeds from this sale were used to repay in full the $6.1 million in short term borrowings outstanding at December 31, 2014. At March 31, 2015, we did not have any equity or cost method investments in non-consolidated affiliates.

The following table shows the components of noninterest income and the dollar and percentage changes for the years ended December 31, 2014, 2013 and 2012.


										2013/2014						2012/2013
	Year Ended December 31									Increase (Decrease)						Increase (Decrease)
	2014			2013			2012			Amount			Percent			Amount			Percent
	*(dollars in thousands)*
Noninterest income — excluding nCino, LLC:
Loan servicing revenue	$	15,599		$	11,535		$	9,268		$	4,064			35.2	%	$	2,267			24.5	%
Loan servicing revaluation		(4,977	)		(3,609	)		(922	)		(1,368	)		37.9			2,687			291.4
Net gains on sales of loans		49,977			38,225			33,535			11,752			30.7			4,690			14.0
Gain on deconsolidation of subsidiary		—			12,212			—			(12,212	)		100.0			12,212			100.0
Equity in income (loss) of non-consolidated affiliates		(2,221	)		(2,756	)		—			535			(19.4	)		(2,756	)		(100.0	)
Gain on sale of securities available for sale		(74	)		11			—			(85	)		(772.7	)		11			100
Other noninterest income		1,738			684			57			1,054			154.1			627			1,100.0

Subtotal	$	60,042		$	56,302		$	41,938		$	3,740			6.6	%	$	14,364			34.3	%
Noninterest income — nCino, LLC:
Software professional services	$	—		$	103			234			(103	)		(100.0	)%		(131	)		(56.0	)%
Software subscription fee		—			56			297			(56	)		(100.0	)		(241	)		(81.1	)
Sales of support contracts		—			6			11			(6	)		(100.0	)		(5	)		(45.5	)

Subtotal		—			165			542			(165	)		(100.0	)%		(377	)		(69.6	)%

Total noninterest income	$	60,042		$	56,467		$	42,480		$	3,575			6.3	%	$	13,987			32.9	%

Year ended December 31, 2014 vs. Year ended December 31, 2013

For the year ended December 31, 2014, noninterest income increased by $3.6 million, or 6.3%, compared to the year ended December 31, 2013. Increases in loan production, the core component of our business, as well as the volume of loans sold in the secondary market, contributed $15.9 million to noninterest income growth, including $4.1 million of increased servicing revenue and $11.8 million of increased gains on sale of loans.

For the year ended December 31, 2014, net gains on sales of loans increased $11.8 million, or 30.7%, compared to the year ended December 31, 2013. The increase was primarily due to an increase in the volume of guaranteed loans sold by $94.6 million, or 27.9%, from $339.3 million for the year ended December 31, 2013 to $433.9 million for the year ended December 31, 2014. The increase was also the result of an improvement in the premium market from an average of $113.1 thousand per $1 million for the year ended December 31, 2013 to an average of $115.2 thousand per $1 million sold for the year ended December 31, 2014. The book value of loans sold during the years ended December 31, 2014 and 2013 was $434 million and $339 million, respectively. Cash received for the loans sold during the year ended December 31, 2014 and 2013 was $478 million and $374 million, respectively.

While portions of the loans that we originate are sold, generating premium revenue, servicing rights for all loans that we originate are retained by the Bank. In exchange for continuing to service loans that are sold, the Bank receives fee income represented in loan servicing revenue equivalent to one percent of the loan balance. In addition, the cost of servicing sold loans is approximately 0.40% which is included in the loan servicing revaluation computations. Unrecognized servicing revenue is reflected in a servicing asset recorded on our balance sheet. Revenues associated with the servicing of loans are recognized over the expected life of the loan as a reduction of the servicing asset. For the year ended December 31, 2014, loan servicing revenue increased $4.1 million, or 35.2%, compared to the year ended December 31, 2013, as a result of an increase in the average

outstanding balance of guaranteed loans sold due to an increase in the volume of loans sold throughout the year. At year end December 31, 2014, the outstanding balance of loans sold in the secondary market was $1.3 billion, with a weighted average servicing rate of 1.11%. For the year ended December 31, 2013, the outstanding balance of loans sold was $1 billion, with a weighted average servicing rate of 1.16%. Prior to January 2010, we sold loans for servicing in excess of 1.0%. As loans sold for servicing in excess of 1.0% prior to fiscal year 2010 amortize, we expect that the weighted average servicing rate will approach and stabilize at approximately 1.0%.

For the year ended December 31, 2014, the loan servicing revaluation adjustment increased by $1.4 million or 37.9% over the year ended December 31, 2013. Much of this increase was associated with the continued growth in the loan portfolio serviced. At December 31, 2014 our loan servicing revaluation balance of $5.0 million was comprised of $5.9 million in amortization of the serviced portfolio and $550 thousand related to changes in prepayment speeds, partially offset by $1.5 million in an upward adjustment in value arising from market conditions at that time. In comparison, the loan servicing revaluation balance at December 31, 2013 of $3.6 million was comprised of $3.6 million from amortization of the serviced portfolio and $77 thousand from a negative adjustment in value arising from market conditions at that time, partially offset by $29 thousand in revenue related to changes in prepayment speeds.

The growth of noninterest income from fiscal year 2013 to fiscal year 2014 was heavily dampened by the one-time gain of $12.2 million in fiscal year 2013. For the year ended December 31, 2013, the gain on the deconsolidation of our investment in nCino was $12.2 million, which resulted from the combination of a gain of $9.7 million related to the measurement of the retained investment in nCino at fair value and $2.5 million related to the recovery of negative net assets in nCino at the date of deconsolidation.

For the year ended December 31, 2014, we had one equity method investment: 504 Fund Advisors, LLC, or 504 FA, which totaled $231.4 thousand. Losses attributable to 504 FA for the year ended December 31, 2014 totaled $410.8 thousand compared to a partial-year net loss of $107.8 thousand for the year ended December 31, 2013.

For the six months ended June 30, 2014, we carried ownership in nCino as an equity method investment. Our ownership of nCino was distributed pro rata to our shareholders at June 30, 2014. Losses attributable to nCino for the six months ended June 30, 2014, totaled $1.8 million compared to a net loss of $2.6 million for the year ended December 31, 2013.

On August 4, 2014, we acquired 9.0% ownership through the purchase of shares from an existing nCino shareholder. For the year ended December 31, 2014, we carried ownership of nCino as a cost method investment totaling $6.1 million. As of the date of this prospectus, we no longer hold an ownership interest in nCino.

Year ended December 31, 2013 vs. Year ended December 31, 2012

For the year ended December 31, 2013, noninterest income increased by $14.0 million, or 32.9%, compared to the year ended December 31, 2012. Increases in loan production, the core component of our business, as well as the volume of loans sold in the secondary market, contributed $7.0 million to noninterest income growth, including $2.3 million of increased servicing revenue and $4.7 million of increased net gains on sale of loans.

For the year ended December 31, 2013, net gains on sales of loans increased $4.7 million, or 14.0%, compared to the year ended December 31, 2012. The increase was primarily due to an increase in the volume of guaranteed loans sold by $62.6 million, or 22.6%, from $276.7 million for the year ended December 31, 2012 to $339.3 million for the year ended December 31, 2013. The increase was partially offset by a decrease in the premium market from an average of $121.3 thousand per $1 million for the year ended December 31, 2012 to an average of $113.1 thousand per $1.0 million sold for the year ended December 31, 2013. We believe the decrease in 2013 represented a return to premiums more in line with historical trends. The book value of loans sold during the years ended December 31, 2013 and 2012 was $339 million and $277 million, respectively. Cash received for the loans sold during the year ended December 31, 2013 and 2012 was $374 million and $307 million, respectively.

For the year ended December 31, 2013, loan servicing revenue increased $2.3 million, or 24.5%, compared to the year ended December 31, 2012, as a result of an increase in the average outstanding balance of guaranteed loans sold due to an increase in the volume of loans sold throughout the year. At year end December 31, 2013, the outstanding balance of loans sold in the secondary market was $1 billion, with a weighted average servicing rate of 1.16%. For the year ended December 31, 2012, the outstanding balance of loans sold was $767.7 million, with a weighted average servicing rate of 1.24%. Prior to January 2010, we sold loans for servicing in excess of 1.0%. As loans sold prior to fiscal 2010 amortize, we expect that the weighted average servicing rate will approach and stabilize at approximately 1.0%.

For the year ended December 31, 2013, the loan servicing revaluation adjustment increased by $2.7 million or 291.4% over the year ended December 31, 2012. Much of this increase was associated with the significant growth in the loan portfolio serviced and related amortization. At December 31, 2013, the loan servicing valuation balance of $3.6 million was comprised of $3.5 million from amortization of the serviced portfolio and $77 thousand from a negative adjustment in value arising from market conditions at that time, partially offset by $29 thousand in revenue related to changes in prepayment speeds. In comparison, the loan servicing valuation balance at December 31, 2012 of $922 thousand was comprised of $3.3 million from amortization of the serviced portfolio, partially offset by a $640 thousand charge related to changes in prepayment speeds and $1.7 million positive adjustment in value arising from market conditions at that time. We revalue servicing rights retained at least quarterly and consider the amortization of the portfolio, current market conditions for premium loan sales, and current prepayment speeds. Loans sold prior to 2010 resulted in a larger servicing asset component per loan sale as a function of the servicing retained in excess of 1.0%. Accordingly, the amortization of servicing rights retained from periods prior to fiscal 2011 results in significant decreases in the servicing asset value in subsequent periods. Additionally, the progression into a higher interest rate environment results in a higher prepayment speed, as our loans have historically been primarily variable rate loans adjusting quarterly, which reduces the servicing asset value.

On January 28, 2013, our ownership in nCino declined by 21.54%, from 64.36% to 42.82%. This decrease in ownership and related influence occurred as a result of nCino selling additional equity to outside investors for $7.5 million, which we refer to as the nCino Capital Raise. As a result, we deconsolidated nCino and accounted for its remaining 42.82% investment using the equity method. We did not receive any consideration in conjunction with the nCino Capital Raise.

The fair value of our retained noncontrolling investment in nCino at the date of deconsolidation ($9.7 million) was determined based upon the sales price of nCino equity in conjunction with the nCino Capital Raise ($1.485 per share multiplied by 6,500,000 nCino shares, identical to those sold to and owned by us). The nCino Capital Raise was comprised of 71 individual investors and raised an aggregate of $7.5 million. A second capital raise of $1.4 million occurred in April 2013, comprised of 41 individual investors at $1.485 per share as well. Due to the quantity of individual investors, we considered the nCino Capital Raise a reasonable representation of the entity’s fair value. In addition, due to cumulative losses experienced by nCino, our carrying amount in the remaining noncontrolling interest at the date of deconsolidation was a negative $2.5 million. Management’s interpretation on ASC 810’s guidance on deconsolidation of a subsidiary indicates that when the carrying amount of the net assets of the subsidiary is negative, the investment carrying amount should be adjusted to zero, with the contra credited to income.

We accounted for our investment in nCino as an equity method investment. Our carrying value of the investment in nCino was $11.3 million as of December 31, 2013. The fair value of the nCino investment at December 31, 2013 was approximately $21.1 million. Total nCino units owned by us at December 31, 2013 totaled 8,174,409. Based on this transaction and our evaluation of financial valuation data prepared by the investors in the transaction, we did not consider the investment impaired at December 31, 2013.

Our 2013 ownership of nCino up to the January 28, 2013 deconsolidation date was 64.36%. The net losses attributable to nCino for that period were $337 thousand, with $217 thousand of that amount allocated to us. For fiscal 2012 our ownership of nCino was also 64.36%. The net losses attributable to nCino for the full year of

2012 were $3.6 million, with $2.3 million of that amount allocated to us. nCino was formed in 2012, so there were no business operations in fiscal 2011.

For the year ended December 31, 2013, we had two equity method investments: nCino, and 504 FA, which totaled $11.5 million. Losses attributable to these entities for the year ended December 31, 2013 totaled $2.8 million.

Noninterest Expense

Noninterest expense comprises all operating costs of the Company, such as travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense.

The following table shows the components of noninterest expense and the related dollar and percentage changes for the three months ended March 31, 2015 and 2014.


	Three Months Ended March 31				2014/2015 Increase (Decrease)
	2015		2014		Amount			Percent
	*(dollars in thousands)*
Noninterest expense
Salaries and employee benefits	$	8,355	$	9,701	$	(1,346	)		(13.9	)%
Non staff expenses:
Travel expense		1,460		750		710			94.7	%
Professional services expense		908		935		(27	)		(2.9	)%
Advertising and Marketing expense		1,008		798		210			26.3	%
Occupancy expense		457		437		20			4.6	%
Data processing expense		893		429		464			108.2	%
Equipment expense		404		253		151			59.7	%
Other expense		1,203		1,141		62			7.7	%

Total non-staff expenses		6,333		4,743		1,590			33.5
Total noninterest expense	$	14,688	$	14,444	$	244			1.7	%

Three Months Ended March 31, 2015 vs. Three Months Ended March 31, 2014

For the three months ended March 31, 2015, we recognized $14.7 million in total noninterest expense, an increase of $244 thousand, or 1.7%, compared to the three months ended March 31, 2014. The nominal growth in total noninterest expense was the result of a $1.3 million decrease in staff expenses for the period ended March 31, 2015, offset by increases in travel, data processing and advertising expense. During the period ended March 31, 2014, $3.0 million in compensation expense was recognized for stock grants to key employees. Noninterest expense not related to compensation increased $1.6 million during the period ended March 31, 2015 compared to the same period in 2014.

Salaries and employee benefits : For the three months ended March 31, 2015, total personnel expense decreased by $1.3 million, or (13.9)%, to $8.4 million compared to the three months ended March 31, 2014. This decrease resulted primarily from $4.4 million of stock grants and associated tax payments during the three months ended March 31, 2014. Excluding the stock grant and associated taxes, salaries and benefits increased $3.0 million, or 57.6%, for the three months ended March 31, 2015 from $5.3 million for the three months ended March 31, 2014. The increase was the result of further investment in human capital to support our growing loan production and service portfolio.

Travel expense : For the three months ended March 31, 2015, total travel costs increased by $710 thousand, or 94.7%, to $1.5 million compared to the three months ended March 31, 2014. Travel costs are a crucial element of our national footprint since we do not maintain brick and mortar locations. The increase in travel-related expenses was the result of our growing loan production 83.5% from $135.2 million for the three months ended March 31, 2014 to $248.1 million for the three months ended March 31, 2015. Travel costs also increased due to

our customer relationship management strategy via our business advisory group, or BAG, one of our primary differentiators, as a result of servicing a $2.1 billion loan portfolio as of March 31, 2015. Travel expense represented 9.9% of total noninterest expense.

Professional service expense : For the three months ended March 31, 2015, the total cost of professional services decreased by $27 thousand, or (2.9)%, compared to the three months ended March 31, 2014. The decrease was primarily attributable to consulting expenses we incurred during the three months ended March 31, 2014 during the exploration of various capital raising opportunities.

Data processing expense: For the three months ended March 31, 2015, the total costs associated with data processing and development increased $464 thousand, or 108.2%, to $893 thousand from $429 thousand for the three months ended March 31, 2014. This increase was primarily due to the resources dedicated to customization of the nCino platform for the Bank.

Advertising and Marketing expense : For the three months ended March 31, 2015, the total costs of advertising and marketing was $1.0 million, an increase of $0.2 million, or 26.3%, compared to the three months ended March 31, 2014. The increase was due primarily to our efforts to promote brand recognition in newer verticals through advertising and trade show presence.

The following table shows the components of noninterest expense and the related dollar and percentage changes for the years ended December 31, 2014, 2013 and 2012.


	Year Ended December 31						2013/2014 Increase (Decrease)						2012/2013 Increase (Decrease)
	2014		2013		2012		Amount			Percent			Amount			Percent
	*(dollars in thousands)*
Noninterest expense — excluding nCino, Inc.:
Salaries and employee benefits	$	29,165	$	20,417	$	15,757	$	8,748			42.85	%	$	4,660			29.57	%
Non staff expenses:
Travel expense		5,392		4,442		2,825		950			21.39	%		1,617			57.24	%
Professional services expense		4,100		2,181		1,812		1,919			87.99	%		369			20.36	%
Advertising and Marketing expense		3,316		2,305		1,975		1,011			43.86	%		330			16.71	%
Occupancy expense		1,771		1,676		666		95			5.67	%		1,010			151.65	%
Data processing expense		2,660		1,748		1,405		912			52.17	%		343			24.41	%
Equipment expense		1,422		1,042		707		380			36.47	%		335			47.38	%
Other expense		6,644		5,881		4,133		763			12.97	%		1,748			42.29	%

Total non-staff expenses excluding nCino, Inc.		25,305		19,275		13,523		6,030			31.28	%		5,752			42.53	%

Total noninterest expense excluding nCino, Inc.		54,470		39,692		29,280		14,778			37.23	%		10,412			35.56	%
Noninterest expense — nCino, Inc.:
Salaries and employee benefits		—		349		2,211		(349	)		(100.00	)%		(1,862	)		(84.22	)%
Travel expense		—		16		290		(16	)		(100.00	)%		(274	)		(94.48	)%
Professional services expense		—		56		768		(56	)		(100.00	)%		(712	)		(92.71	)%
Advertising and Marketing expense		—		11		206		(11	)		(100.00	)%		(195	)		(94.66	)%
Occupancy expense		—		2		13		(2	)		(100.00	)%		(11	)		(84.62	)%
Data processing expense		—		1		15		(1	)		(100.00	)%		(14	)		(93.33	)%
Equipment expense		—		—		31		—			(100.00	)%		(31	)		(100.00	)%
Other expense		—		37		855		(37	)		(100.00	)%		(818	)		(95.61	)%

Total noninterest expense of nCino, LLC		—		472		4,389		(472	)		(100.00	)%		(3,917	)		89.25	)%

Total noninterest expense	$	54,470	$	40,164	$	33,669	$	14,306			35.62	%	$	6,495			19.29	%

Year ended December 31, 2014 vs. Year ended December 31, 2013

For the year ended December 31, 2014, we recognized $54.5 million in total noninterest expense, an increase of $14.3 million, or 35.6%, compared to the year ended December 31, 2013. Excluding nCino, total noninterest expense increased by $14.8 million, or 37.2%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. We discuss the primary drivers of this increase below.

Salaries and employee benefits : For the year ended December 31, 2014, total personnel expense increased by $8.4 million, or 40.4%, compared to the year ended December 31, 2013. Excluding nCino, personnel expense increased by $8.7 million, or 42.9%, from the year ended December 31, 2013 to $29.2 million for the year ended December 31, 2014 and represented 53.5% of our total noninterest expense for the year ended December 31, 2014. This increase primarily resulted from an increase in our full-time equivalent employees from 141 at December 31, 2013 to 192 at December 31, 2014 to support our loan production, balance sheet, and income growth. The increase in personnel expenses from 2013 to 2014 also included $4.4 million of salary and employee benefits in restricted stock and stock grant related expenses.

Travel expense : For the year ended December 31, 2014, total travel costs increased by $934 thousand, or 21.0%, compared to the year ended December 31, 2013. Travel costs are a crucial element of our national footprint since we do not maintain brick and mortar locations. The increase in travel-related expenses is the result of growing loan production 70.0% from $498.8 million for the year ended December 31, 2013 to $848.1 million for the year ended December 31, 2014. Travel costs also increased due to our relationship management via our BAG, one of our primary differentiators, as a result of servicing a $2.0 billion loan portfolio as of December 31, 2014, compared to a $1.4 billion loan portfolio as of December 31, 2013. Travel expense was $5.4 million for fiscal year 2014 and represented 9.9% of total noninterest expense. Exclusive of nCino, travel expense increased $950 thousand, or 21.4%, from 2013 to 2014.

Professional service expense : For the year ended December 31, 2014, the total cost of professional services increased by $1.9 million, or 83.3%, compared to the year ended December 31, 2013. The increase is primarily attributable to the expenses we incurred in 2014 in exploring various capital raising opportunities. Professional service expense related solely to nCino declined by $56 thousand from fiscal year 2013 to 2014 as a result of the deconsolidation in January of 2013.

Advertising and Marketing expense : For the year ended December 31, 2014, the total costs of advertising and marketing totaled $3.3 million, an increase of $1.0 million, or 43.2%, compared to the year-ended December 31, 2013. The primary driver of the increase is growing brand recognition in newer verticals. Excluding nCino, advertising and marketing increased 43.9%.

Year ended December 31, 2013 vs. Year ended December 31, 2012

For the year ended December 31, 2013, we recognized $40.2 million in total noninterest expense, an increase of $6.5 million, or 19.3%, compared to the year ended December 31, 2012. Excluding nCino, total noninterest expense increased by $10.4 million, or 35.6%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. We discuss the primary drivers of this increase.

Salaries and employee benefits : For the year ended December 31, 2013, total personnel expense increased $2.8 million, or 15.6%, compared to the year ended December 31, 2012. Excluding nCino, personnel expense increased by $4.7 million, or 29.6%, from the year ended December 31, 2012 to $20.4 million for the year ended December 31, 2013 and represented 51.4% of our total noninterest expense for the year ended December 31, 2013. This increase primarily resulted from an increase in our full-time equivalent employees from 94 at December 31, 2012 to 141 at December 31, 2013 to support our loan production, balance sheet, and income growth. Salaries and benefits expense for nCino declined from fiscal year 2012 to 2013 by $1.9 million, or 84.2%, compared to the year ended December 31, 2012, due to the deconsolidation of this investment in January of 2013. The increase in personnel expenses from 2013 to 2014 also included $623 thousand of salary and employee benefits in restricted stock and stock grant related expenses.

Travel expense : For the year ended December 31, 2013, total travel costs increased by $1.3 million, or 43.1%, compared to the year ended December 31, 2012. The increase in travel-related expenses is the result of growing loan production 20.5% from $413.8 million for the year ended December 31, 2012 to $498.8 million for the year ended December 31, 2013. Travel costs also increased due to our relationship management via our BAG, as a result of servicing a $1.4 billion loan portfolio as of December 31, 2013 compared to a $1.1 billion loan portfolio as of December 31, 2012. Travel expense, excluding nCino, was $4.4 million for fiscal year 2013 and represented 11.2% of total noninterest expense. Exclusive of nCino, travel expense increased $1.6 million, or 57.2%, from 2012 to 2013.

Professional service expense : For the year ended December 31, 2013, the total cost of professional services decreased by $343 thousand, or 13.3%, compared to the year ended December 31, 2012. The primary basis for this decline in expenses is due to fees paid by nCino in the development of its technology products. Professional service expense related solely to nCino declined by $712 thousand from fiscal year 2012 to 2013 as a result of the deconsolidation in January of 2013.

Discussion and Analysis of Financial Condition

March 31, 2015 vs. December 31, 2014

Total assets at March 31, 2015 were $723.0 million, an increase of $49.7 million, or 7.4%, compared to total assets of $673.3 million at December 31, 2014.

Cash and cash equivalents were $47.6 million at March 31, 2015, an increase of $17.7 million, or 59.1%, compared to $29.9 million at December 31, 2014, primarily as a result of increases in the deposit portfolio.

Total investment securities increased $1.5 million during the first three months of 2015, from $49.3 million at December 31, 2014 to $50.8 million at March 31, 2015, an increase of 3.0%. The portfolio is comprised of U.S. federal agency securities, residential mortgage backed securities and a mutual fund.

Loans held for sale increased $9.9 million, or 3.4%, during the first three months of 2015, from $295.2 million at December 31, 2014 to $305.1 million at March 31, 2015. The increase was primarily the result of new loan originations.

Loans held for investment increased $16.5 million, or 8.1%, during the first three months of 2015, from $203.9 million at December 31, 2014 to $220.4 million at March 31, 2015. The increase was primarily the result of new loan originations.

Premises and equipment increased $2.8 million, or 8.1%, during the first quarter of 2015, from $35.3 million to $38.1 million. The increase was the result of construction progress on our second office building in Wilmington, North Carolina.

Servicing assets increased $3.5 million, or 9.9%, during the first three months of 2015, from $35.0 million to $38.5 million. The increase was primarily the result of loan sales during the first quarter of 2015 significantly outpacing the amortization of the existing serviced portfolio. Market conditions affecting the value of the sold loan portfolio were largely unchanged during the quarter ended March 31, 2015 compared to December 31, 2014.

At March 31, 2015, we did not have any investments in non-consolidated subsidiaries. This is a decrease of $6.3 million from December 31, 2014. During the period ended March 31, 2015, 100% of our cost method investment in nCino was sold for a gain of $3.8 million and our ownership in 504 FA increased from 50% to 91.3%, resulting in it becoming a consolidated subsidiary with an 8.7% noncontrolling interest held by a third party investor.

Total deposits were $556.1 million at March 31, 2015, an increase of $34.0 million, or 6.5%, from $522.1 million at December 31, 2014. The increase in deposits was primarily to support our growth in loan origination.

At March 31, 2015, we did not carry a balance of short term borrowings. During the period ended March 31, 2015, the $6.1 million short term borrowing was paid in full.

Long term borrowings increased $8.4 million, or 20.0%, from $41.8 million at December 31, 2014, to $50.2 million at March 31, 2015. The increase was primarily the result of construction financing for our second building and operational expenses of our holding company.

Shareholders’ equity at March 31, 2015 was $100.2 million as compared to $91.8 million at December 31, 2014. The book value per share was $3.50 at March 31, 2015 and average equity to average assets was 11.7% for the three months ended March 31, 2015 as compared to a book value per share of $3.21 and average equity to average assets of 10.8% for the year ended December 31, 2014. The change in shareholders’ equity reflects net income to common shareholders for the three months ended March 31, 2015 of $8.1 million. We did not declare any cash dividends during the three months ended March 31, 2015.

March 31, 2015 vs. December 31, 2014 , 2013 and 2012

For the quarter ended March 31, 2015, total assets increased $49.7 million, or 7.4%, to $723.0 million compared to total assets of $673.3 at December 31, 2014. Our loan originations for the three months ended March 31, 2015 totaled $248.1 million. While our new loan originations totaled $848.1 million for the twelve months ended December 31, 2014, we were able to maximize annual return on capital and assets by selling portions of our loans for a premium. As a result, our total assets increased only $243.0 million, or 56.5%, to $673.3 million at December 31, 2014, from $430.4 million at December 31, 2013, primarily due to growth in our combined held for investment and held for sale loan portfolios of $198.3 million. Our total assets increased $87.9 million, or 25.7%, to $430.4 million at December 31, 2013, as compared to $342.5 million at December 31, 2012, primarily due to growth of $62.9 million in our combined held for investment and held for sale loan portfolios.

Construction loans are eligible for sale in the secondary market when they fully fund. At March 31, 2015, our undisbursed loan commitments related to construction loans totaled $284.8 million. If all construction loans in our portfolio at March 31, 2015 were fully funded, the Bank would have had an additional $365.8 million in guaranteed loans available for sale. At December 31, 2014 our undisbursed loan commitments related to construction loans amounted to $240.8 million. If all construction loans on the books at December 31, 2014 were fully funded the Bank would have an additional $311.4 million in guaranteed loans classified as available for sale. The noninterest revenue on these loans will not be recognized until they are actually sold.

Loans. As of December 31, 2014, 2013, and 2012, the cumulative total outstanding principal balance of guaranteed loans sold since May 2007 totaled $1.3 billion, $1.0 billion, and $767.7 million, respectively. We sell a significant portion of our loans in the secondary market while we continue to service the loans we sell in full. As of March 31, 2015, and December 31, 2014, 2013, and 2012, combined loans held for investment and held for sale totaled $525.5 million, $499.1 million, $300.8 million, and $237.9 million, respectively. Any loan or portion of a loan that we have the intent and ability to sell is carried as held for sale.

The average age of our held for sale portfolio as of December 31, 2014 was 13.6 months from origination date. Less than 10% of our current held for sale portfolio is older than two years. The majority of held for sale loans over one year old are comprised of construction loans. Construction loans typically have extended build out periods that inherently result in longer lead times between origination and the ultimate sale date. Approximately 20% of our held for sale portfolio is aged between one and two years. All loans classified as special mention (risk grade 5) or worse or being identified as impaired are excluded in our held for sale loan portfolio.

As of March 31, 2015, and December 31, 2014, 2013, and 2012, loans held for investment totaled $220.4 million, $203.9 million $141.3 million, and $92.7 million, respectively. The significant increase in loans held for investment is the result of a change in the classification of loans held for investment. Traditionally, the SBA requires the originating lender to retain 10% of the outstanding loan balance comprised of unguaranteed dollars. Only with permission may an SBA lender sell down to a 5% retained unguaranteed balance. In fiscal year 2012, we were granted permission by the SBA to sell an additional 5% of the unguaranteed balance on loans originated prior to June 30, 2012, resulting in a reclassification of $35.1 million of loans from held for investment to held for sale during that year. This permission expired on June 30, 2014, and resulted in a held for investment classification for a full 10% of the principal balance of SBA 7(a) loans. The following table presents the balance and associated percentage of each category of loans held for investment within our loan portfolio at the three most recently completed fiscal year ends.


	At March 31, 2015					At December 31
	At March 31, 2015					2014					2013					2012
	Total Loans		% of loans in Category of total loans			Total Loans		% of Loans in Category of Total Loans			Total Loans		% of Loans in Category of Total Loans			Total Loans		% of Loans in Category of Total Loans
	*(dollars in thousands)*
Commercial & Industrial	$	86,151		39.16	%	$	81,057		39.84	%	$	57,359		40.36	%	$	34,200		36.66	%
Death Care Management		3,880		1.76			3,603		1.77			1,782		1.25			283		0.30
Family Entertainment Centers		340		0.15			333		0.16			—		100.0			—		—
Healthcare Services		12,945		5.88			12,319		6.06			8,739		6.15			4,996		5.36
Independent Pharmacies		35,114		15.96			34,079		16.75			24,026		16.91			12,192		13.07
Investment Advisors		12,135		5.52			9,660		4.75			2,817		1.98			—		0.00
Veterinary Practices		21,580		9.81			20,902		10.27			19,978		14.06			15,719		16.85
Other		157		0.07			161		0.08			17		0.01			1,010		1.08
Construction & Development		14,533		6.61			9,526		4.68			10,286		7.24			8,503		9.12
Poultry Agriculture		5,460		2.48			3,910		1.92			—		—			—		—
Death Care Management		483		0.22			92		0.05			989		0.70			315		0.34
Healthcare Services		5,150		2.34			2,957		1.45			4,997		3.52			3,136		3.36
Family Entertainment Centers		152		0.07			—		—			—		—			—		—
Independent Pharmacies		456		0.21			215		0.11			101		0.07			637		0.68
Veterinary Practices		2,676		1.22			2,207		1.08			4,199		2.95			4,163		4.46
Other		156		0.07			145		0.07			—		0.00			252		0.27
Owner Occupied
Commercial Real Estate		115,200		52.36			111,620		54.86			74,461		52.40			50,577		54.22
Poultry Agriculture		283		0.13			259		0.13			—		100.0			—		—
Death Care Management		19,270		8.76			18,879		9.28			11,668		8.21			3,703		3.97
Family Entertainment Centers		761		0.35			872		0.43			—		100.0			—		—
Healthcare Services		27,634		12.56			26,173		12.86			11,129		7.83			6,207		6.65
Independent Pharmacies		4,578		2.08			4,750		2.33			3,490		2.46			3,008		3.22
Investment Advisors		2,481		1.13			2,161		1.06			171		0.12			—		0.00
Veterinary Practices		59,615		27.10			57,934		28.48			47,896		33.70			35,554		38.12
Other		578		0.26			592		0.29			107		0.08			2,105		2.26
Commercial Land		4,136		1.88			1,248		0.62			—		100.0			—		—
Poultry Agriculture		4,136		1.88			1,248		0.62			—		100.0			—		—

Total	$	220,020		100.00	%	$	203,451		100.00	%	$	142,106		100.00	%	$	93,280		100.00	%

Regardless of the classification reflected above and discussed in more detail below, the loans we originate are generally to small businesses where operating cash flow is the primary source of repayment, but may also include collateralization by real estate, inventory, accounts receivable, equipment and/or personal guarantees. When collateral includes real estate it is typically owner-occupied. These common attributes among all loans we fund is a product of our specialization as a SBA lender.

Commercial & Industrial . Commercial and Industrial, or C&I, loans increased $5.1 million, or 6.3%, during the three months ended March 31, 2015 to $86.2 million. Increases in C&I loans from December 31, 2013, to December 31, 2014 occurred in all verticals, with most of the growth occurring in Independent Pharmacies due to our marketing efforts and brand

recognition in the pharmacy industry. Overall, C&I loans increased $23.7 million, or 41.3%, from December 31, 2013, to December 31, 2014. Our growth in and expansion into verticals such as Independent Pharmacies and Investment Advisors resulted in higher growth rates in the C&I portfolio. Real estate collateral on C&I loans is often not part of the loan balance and is owner occupied. The premises for industries in C&I loans tend to have either a small real estate component or the business occupies a leasehold space. Terms for C&I loans are generally ten years.

Construction & Development . Construction and Development, or C&D, loans increased $5.0 million, or 52.5%, during the three months ended March 31, 2015, to $14.5 million with the largest increase in our Healthcare vertical. C&D loans decreased $760 thousand, or 7.4%, from December 31, 2013, to December 31, 2014. The decrease was primarily the result of a reduction in the construction periods for loans in our Healthcare Services and Veterinary Practices verticals as we built our internal infrastructure and expanded or our construction department by hiring additional employees to manage and disburse project funds. Loan origination in the construction and development category increased substantially due to industry emphasis on facility expansion primarily in the Poultry Agriculture vertical. Terms for C&D loans are generally approximately 20 to 25 years.

Owner Occupied Commercial Real Estate . Commercial Real Estate, or CRE, loans increased $3.6 million, or 3.2%, to $115.2 million during the three months ended March 31, 2015. Loans categorized as CRE loans increased $37.2 million, or 49.9%, from December 31, 2013, to December 31, 2014. The largest percentage increase was in the Investment Advisor vertical, which grew 1,163.7%, as we grew market share in fiscal year 2014 through an increase in distribution channels and brand recognition. Financing provided to this vertical tends to be for refinance or acquisition purposes, with very limited construction and development. Loans classed as CRE loans in the Healthcare Services, Death Care Management, and Veterinary Practices verticals increased $15.0 million, $7.2 million, $10.0 million, respectively, in fiscal year 2014 as a result of the completion of construction projects from prior year originations.

Loan Concentration

Loan concentrations may exist when there are borrowers engaged in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers or portfolios to be similarly impacted by economic or other conditions. The breakdown of total held for sale loans, as a percentage of total loans by industry sector is as follows:


	At March 31, 2015						At December 31, 2014						At December 31, 2013						At December 31, 2012
	Concentration Risk (SBA Guaranteed)						Concentration Risk (SBA Guaranteed)						Concentration Risk (SBA Guaranteed)						Concentration Risk (SBA Guaranteed)
	Unguaranteed		Guaranteed		Total		Unguaranteed		Guaranteed		Total		Unguaranteed		Guaranteed		Total		Unguaranteed		Guaranteed		Total
	*(dollars in thousands)*
Commercial & Industrial	$	46,344	$	21,957	$	68,301	$	52,348	$	26,905	$	79,253	$	32,024	$	19,714	$	51,738	$	32,283	$	23,269	$	55,552
Agriculture		1		2		3		—		—		—		—		—		—		—		—		—
Death Care Management		1,979		3,100		5,079		2,312		2,855		5,167		1,166		2,740		3,906		279		547		826
Family Entertainment Centers		511		1,051		1,562		500		963		1,463		—		—		—		—		—		—
Healthcare		7,839		3,411		11,250		5,250		4,979		10,230		3,404		2,866		6,270		4,804		5,498		10,302
Independent Pharmacies		17,594		5,784		23,378		24,513		6,696		31,209		13,272		8,058		21,330		14,353		8,757		23,110
Registered Investment Advisors		9,182		3,691		12,873		9,471		5,667		15,139		3,355		2,719		6,074		—		—		—
Veterinary Industry		8,238		4,918		13,156		9,301		5,744		15,046		9,800		3,202		13,002		12,797		8,325		21,122
Other Industries		1,000		—		1,000		1,000		—		1,000		1,026		131		1,157		50		142		192
Construction & Development		22,980		108,030		131,010		5,739		28,568		34,307		12,195		44,930		57,125		5,961		38,560		44,521
Agriculture		8,190		40,952		49,142		2,246		11,230		13,476		—		—		—		—		—		—
Death Care Management		1,099		3,622		4,721		36		179		214		1,374		5,235		6,609		126		1,451		1,578
Family Entertainment Centers		228		1,139		1,367		—		—		—		—		—		—		—		—		—
Healthcare		8,530		38,637		47,167		1,764		8,695		10,459		6,493		26,427		32,920		1,510		12,520		14,030
Independent Pharmacies		684		3,420		4,104		—		—		—		151		158		309		676		3,166		3,841
Veterinary Industry		4,014		19,089		23,103		1,677		8,385		10,062		4,176		13,110		17,286		3,650		21,423		25,073
Other		235		1,171		1,406		16		79		95		—		—		—		—		—		—
Owner Occupied		63,082		25,121		88,203		78,964		77,943		156,906		40,708		9,391		50,099		38,370		7,365		45,735
Agriculture		425		—		425		1,809		9,043		10,852		—		—		—		—		—		—
Death Care Management		13,501		2,152		15,653		15,572		4,744		20,315		12,015		3,528		15,543		3,273		449		3,723
Family Entertainment Centers		1,600		—		1,600		1,771		806		2,577		—		—		—		—		—		—
Healthcare		18,812		10,629		29,441		24,668		33,787		58,455		6,173		1,822		7,995		5,987		107		6,094
Independent Pharmacies		2,997		—		2,997		5,082		3,155		8,237		3,528		—		3,528		1,661		658		2,318
Registered Investment Advisors		2,147		1,732		3,879		2,731		2,464		5,195		220		109		329		—		—		—
Veterinary Industry		22,940		10,608		33,548		26,237		22,932		49,168		18,088		3,932		22,020		27,449		6,151		33,600
Other		660		—		660		1,094		1,012		2,106		684		—		684		—		—		—
Commercial Land		7,808		6,179		13,987		5,472		16,121		21,593		—		—		—		—		—		—
Agriculture		7,808		6,179		13,987		5,472		16,121		21,593		—		—		—		—		—		—

Total	$	140,213	$	161,288	$	301,501	$	142,522	$	149,536	$	292,059	$	84,927	$	74,035	$	158,963	$	76,614	$	69,194	$	145,808

Whenever a loan held for sale exhibits credit quality issues (i.e., the loan is on nonaccrual, delinquent more than 30 days, downgraded to special mention, risk grade 5, or greater) it is transferred to loans held for investment. Accordingly all loans experiencing charge-offs are classified as held for investment. For loans transferred from held for sale to held for investment during the three months ended March 31, 2015 and 2014 and during the twelve months ended December 31, 2014, 2013 and 2012 there have been -0-, $146 thousand, $211 thousand, $539 thousand and $1,036 thousand in charge offs, respectively. For loans transferred from held for investment to held for sale during the three months ended March 31, 2015 and 2014 and the twelve months ended December 31, 2014, 2013 and 2012 there have been -0-, -0-, $15 thousand, $3 thousand and $77 thousand in charge offs, respectively. As of March 31, 2015, December 31, 2014, 2013 and 2012 there were no loans classified as held for sale which were identified as being impaired or on nonaccrual status.

The breakdown of total held for investment loans, as a percentage of total loans by industry sector is as follows:


	At March 31, 2015						At December 31, 2014						At December 31, 2013						December 31, 2012
	Concentration Risk (SBA Guaranteed)						Concentration Risk (SBA Guaranteed)						Concentration Risk (SBA Guaranteed)						Concentration Risk (SBA Guaranteed)
	Unguaranteed		Guaranteed		Total		Unguaranteed		Guaranteed		Total		Unguaranteed		Guaranteed		Total		Unguaranteed		Guaranteed		Total
	*(dollars in thousands)*
Commercial & Industrial	$	76,507	$	9,644	$	86,151	$	71,507	$	9,550	$	81,057	$	52,250	$	5,109	$	57,359	$	34,200	$	3,470	$	30,730
Death Care Management		3,880		—		3,880		3,603		—		3,603		1,782		—		1,782		283		—		283
Family Entertainment Centers		340		—		340		333		—		333		—		—		—		—		—		—
Healthcare Services		9,474		3,471		12,946		8,779		3,540		12,319		—		—		—		—		—		—
Dental Industry		—		—		—		—		—		—		7,164		1,575		8,739		4,996		432		4,564
Independent Pharmacies		32,670		2,444		35,114		31,686		2,393		34,079		24,026		—		24,026		12,192		—		12,192
Investment Advisors		12,135		—		12,135		9,660		—		9,660		2,817		—		2,817		—		—		—
Veterinary Practices		17,968		3,612		21,580		17,406		3,496		20,902		16,444		3,534		19,978		15,719		3,038		12,681
Other		39		117		156		40		121		161		17		—		17		1,009		—		1,009
Construction & Development		14,533		—		14,533		9,526		—		9,526		10,286		—		10,286		8,503		758		7,745
Poultry Agriculture		5,460		—		5,460		3,910		—		3,910		—		—		—		—		—		—
Death Care Management		483		—		483		92		—		92		989		—		989		315		—		315
Family Entertainment Centers		152		—		152		—		—		—		—		—		—		—		—		—
Healthcare Services		5,150		—		5,150		2,957		—		2,957		—		—		—		—		—		—
Dental Industry		—		—		—		—		—		—		4,997		—		4,997		3,388		758		2,630
Independent Pharmacies		456		—		456		215		—		215		101		—		101		637		—		637
Veterinary Practices		2,676		—		2,676		2,207		—		2,207		4,199		—		4,199		4,163		—		4,163
Other		156		—		156		145		—		145		—		—		—		—		—		—
Owner Occupied		103,354		11,846		115,200		99,858		11,762		111,620		67,152		7,309		74,461		50,551		7,754		42,797
Poultry Agriculture		283		—		283		259		—		259		—		—		—		—		—		—
Death Care Management		17,763		1,507		19,270		17,354		1,525		18,879		11,668		—		11,668		3,703		—		3,703
Family Entertainment Centers		761		—		761		872		—		872		—		—		—		—		—		—
Healthcare Services		25,715		1,919		27,634		24,254		1,919		26,173		—		—		—		—		—		—
Dental Industry		—		—		—		—		—		—		10,329		800		11,129		10		1		11
Independent Pharmacies		4,578		—		4,578		4,750		—		4,750		3,490		—		3,490		3,008		1,385		1,623
Investment Advisors		2,481		—		2,481		2,161		—		2,161		171		—		171		—		—		—
Veterinary Practices		51,470		8,145		59,615		49,903		8,031		57,934		41,387		6,509		47,896		35,528		4,575		30,953
Other		303		275		578		305		287		592		107		—		107		1,732		—		1,732
Commercial Land		4,136		—		4,136		1,248		—		1,248		—		—		—		—		—		—
Poultry Agriculture		4,136		—		4,136		1,248		—		1,248		—		—		—		—		—		—

Total	$	198,530	$	21,490	$	220,020	$	182,139	$	21,312	$	203,451	$	129,688	$	12,418	$	142,106	$	93,254	$	11,982	$	81,272

Loans held for investment generally consist of loans classified as special mention (5 rated) or worse, identified as impaired and the unguaranteed portion required to be retained by the SBA. At March 31, 2015, our total guaranteed loans held for investment classified as special mention or worse totaled $21.5 million with $16.0 million on a nonaccrual basis. Of our total guaranteed loans held for investment at December 31, 2014, $21.3 million was classified as special mention or worse with $15.6 million on a non—accrual basis. Presently, we classify the guaranteed portion of all performing loans as held for sale.

Loans to veterinarians represent $81.0 million, or 39.8%, of the total held for investment balance. The Veterinarian vertical was our original vertical and formed the basis of our existing model. From inception in May 2007 through December 31, 2014, we originated $1.1 billion of loans to small business professionals in the Veterinarian vertical, with $802.5 million in outstanding principal remaining in our servicing portfolio and $81.0 million held for investment. Loans to Independent Pharmacies represent the next largest vertical at $39.0 million, or 19.2%, of the total held for investment balance. From May 2007 through December 31, 2014, we originated $494.9 million to small business professionals in the Independent Pharmacies vertical with $387.1 million in outstanding principal remaining in our servicing portfolio and $78.5 million on book. We believe the risk associated with industry concentration is mitigated by the geographical diversity of our overall loan portfolio with loans originated in each of the fifty U.S. states and certain U.S. territories. Additionally, we have demonstrated the ability to expand our lending activities into selected new verticals and we intend to continue this expansion in the future. To the extent that we are successful in expanding into new verticals, we believe any risk related to concentration within any one industry will be further mitigated.

The following table provides a summary of total loans by size and category as of March 31, 2015 and December 31, 2014. The breakout of the categories is based on total held for investment balances.


	March 31, 2015				December 31, 2014
	Less than $5 million				Less than $5 million
	Amount		Number		Amount		Number
	*(dollars in thousands)*
Commercial & Industrial	$	86,151		1,173	$	81,057		1,067
Agriculture		—		2		—		—
Death Care Management		3,880		31		3,603		27
Family Entertainment Centers		340		3		333		3
Healthcare Services		12,945		163		12,319		153
Independent Pharmacies		35,114		404		34,079		381
Investment Advisors		12,135		188		9,660		141
Veterinary Practices		21,580		379		20,902		358
Other		156		3		161		4
Construction & Development		14,533		217		9,526		166
Poultry Agriculture		5,460		91		3,910		64
Death Care Management		483		9		92		5
Family Entertainment Centers		152		3		—		—
Healthcare Services		5,150		74		2,957		54
Independent Pharmacies		456		6		215		4
Veterinary Practices		2,676		32		2,207		37
Other		156		2		145		2
Owner Occupied		115,200		1,118		111,620		1,062
Poultry Agriculture		283		2		259		2
Death Care Management		19,270		147		18,879		142
Family Entertainment Centers		761		5		872		6
Healthcare Services		27,634		282		26,173		267
Independent Pharmacies		4,578		48		4,750		49
Investment Advisors		2,481		27		2,161		22
Veterinary Practices		59,615		602		57,934		568
Other		578		5		592		6
Commercial Land		4,136		39		1,248		22
Poultry Agriculture		4,136		39		1,248		22

Total	$	220,020		2,547	$	203,451		2,317

The maximum loan size under the SBA 7(a) program is $5.0 million. The average loan size at origination for our portfolio in our chosen industries in 2014 was $1.0 million. At December 31, 2014, no single loan had an outstanding borrower principal balance greater than $4.7 million. At December 31, 2014, the average outstanding balance per loan was approximately $820 thousand. Outstanding principal balance equaled or exceeded $3.0 million on 18 client relationships and cumulatively totaled $63.5 million at December 31, 2014. Of this $63.5 million in outstanding principal, $6.3 million was held for investment. The outstanding principal balance of the full loan portfolio totaled $2.0 billion of which $203.5 million was held for investment.

Loan Maturity

As of March 31, 2015, $645 thousand, or 0.3%, of the held for investment balance matures in less than five years. Loans maturing in greater than five years total $219.4 million. The variable rate portion of our total held for investment portfolio at March 31, 2015 was 92.6%. As of December 31, 2014, $1.8 billion, or 92.4%, of our borrowers’ total outstanding principal loans were variable rate loans that adjust at specified dates based on the prime lending rate or other variable indices. As of December 31, 2014, $1.7 billion, or 84.4%, of our borrowers’ total outstanding principal loans were variable rate loans that adjust on either a calendar monthly or calendar quarterly basis using the prime lending rate or other variable indices. At December 31, 2014, 92.8%, or $462.9 million, of our combined held for sale and held for investment loan portfolio was comprised of variable rate loans. At December 31, 2014, $1.6 million, or 0.8%, of the held for investment balance matures in less than five years. Loans maturing in greater than five years total $201.9 million of the total $203.5 million. The variable rate portion of the total held for investment loans is 92.8%, which reflects our strategy to minimize interest rate risk through the use of variable rate products.


	At March 31, 2015 Remaining Contractual Maturity of Total Held for Investment Loans								At December 31, 2014 Remaining Contractual Maturity of Total Held for Investment Loans
	One Year or Less		After One Year and Through Five Years		After Five Years		Total		One Year or Less		After One Year and Through Five Years		After Five Years		Total
	*(dollars in thousands)*
Fixed rate loans:	$	—	$	—	$	16,225	$	16,225	$	—	$	—	$	14,675	$	14,675
Commercial & Industrial		—		—		4,281		4,281		—		—		4,115		4,115
Death Care Management		—		—		919		919		—		—		924		924
Healthcare Services		—		—		1,068		1,068		—		—		1,208		1,208
Independent Pharmacies		—		—		683		683		—		—		691		691
Investment Advisors		—		—		432		432		—		—		447		447
Veterinary Practices		—		—		1,177		1,177		—		—		845		845
Construction & Development		—		—		145		145		—		—		58		58
Death Care Management		—		—		28		28		—		—		45		45
Healthcare		—		—		24		24
Veterinary Practices		—		—		93		93		—		—		13		13
Owner Occupied		—		—		11,058		11,058		—		—		10,502		10,502
Poultry Agriculture		—		—		117		117		—		—		118		118
Death Care Management		—		—		3,741		3,741		—		—		3,761		3,761
Healthcare Services		—		—		3,358		3,358		—		—		3,102		3,102
Investment Advisors		—		—		399		399		—		—		286		286
Veterinary Practices		—		—		3,443		3,443		—		—		3,235		3,235
Secured By Farmland		—		—		740		740		—		—		—		—
Agriculture		—		—		740		740		—		—		—		—
Variable rate loans:		—		645		203,150		203,796		—		1,555		187,221		188,776
Commercial & Industrial		—		344		81,526		81,869		—		1,215		75,727		76,942
Death Care Management		—		—		2,961		2,961		—		23		2,656		2,679
Family Entertainment Centers		—		—		340		340		—		—		333		333
Healthcare Services		—		9		11,867		11,876		—		60		11,051		11,111
Independent Pharmacies		—		69		34,362		34,431		—		96		33,292		33,388
Investment Advisors		—		—		11,703		11,703		—		—		9,213		9,213
Veterinary Practices		—		266		20,136		20,402		—		1,036		19,021		20,057
Other		—		—		156		156		—		—		161		161
Construction & Development		—		—		14,388		14,388		—		—		9,468		9,468
Poultry Agriculture		—		—		5,460		5,460		—		—		3,910		3,910
Death Care Management		—		—		455		455		—		—		79		79
Family Entertainment Centers		—		—		152		152		—		—		—		—
Healthcare Services		—		—		5,126		5,126		—		—		2,957		2,957
Independent Pharmacies		—		—		456		456		—		—		215		215
Veterinary Practices		—		—		2,583		2,583		—		—		2,162		2,162
Other		—		—		156		156		—		—		145		145
Owner Occupied		—		301		103,840		104,141		—		340		100,778		101,118
Poultry Agriculture		—		—		166		166		—		—		141		141
Death Care Management		—		—		15,528		15,528		—		—		15,118		15,118
Family Entertainment Centers		—		—		761		761		—		—		872		872
Healthcare Services		—		—		24,276		24,276		—		—		23,072		23,072
Independent Pharmacies		—		—		4,578		4,578		—		—		4,750		4,750
Investment Advisors		—		—		2,081		2,081		—		—		1,874		1,874
Veterinary Practices		—		23		56,149		56,173		—		50		54,649		54,699
Other		—		278		300		578		—		290		302		592
Commercial Land		—		—		3,397		3,397		—		—		1,248		1,248
Poultry Agriculture		—		—		3,397		3,397		—		—		1,248		1,248

Total	$	—	$	645	$	219,375	$	220,020	$	—	$	1,555	$	201,896	$	203,451

Investment Securities

Investment securities totaled $50.8 million at March 31, 2015, an increase of $1.5 million, or 3.0%, compared to $49.3 million at December 31, 2014. The increase in our investment portfolio in the first quarter of 2015 was primarily related to our $1.9 million investment in the 504 Fund mutual fund offset by principal reduction on mortgage backed securities.

Our investment securities portfolio consists entirely of available-for-sale securities. We purchase securities for our investment securities portfolio to manage interest rate risk, ensure a stable source of liquidity and to provide a steady source of income in excess of our cost of funds.

The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.


	At March 31				At December 31,
	2015				2014				2013				2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
					*(dollars in thousands)*
Available-for-sale securities:
Agency direct obligations	$	35,218	$	35,498	$	35,207	$	35,309	$	5,315	$	5,262	$	3,425	$	3,517
Agency mortgage-backed securities		13,318		13,379		13,973		14,009		14,322		14,184		11,449		11,899
Mutual Fund		1,900		1,900		—		—		—		—		—		—

Total available-for-sale	$	50,436	$	50,777	$	49,180	$	49,318	$	19,637	$	19,446	$	14,874	$	15,416

Total securities	$	50,436	$	50,777	$	49,180	$	49,318	$	19,637	$	19,446	$	14,874	$	15,416

The $48.9 million of U.S. agency direct obligations and agency mortgage-backed securities in our investment portfolio as of March 31, 2015 was spread across five different issuers. There are 24 unique securities that have an average balance of $2.0 million, with the largest single security having a fair value of $10.0 million as of March 31, 2015.

At March 31, 2015, the duration of our overall available-for-sale securities portfolio was approximately 3.58 years.

The following table sets forth the stated maturities and weighted average yields of investment securities at March 31, 2015. Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges excluding mutual funds. These repricing schedules are not reflected in the tables below.


			At March 31, 2015
	Total Amortized Cost		After One to Five Years					After Five to Ten Years					After Ten Years
	Total Amortized Cost		Amortized Cost		Average Yield			Amortized Cost		Average Yield			Amortized Cost		Average Yield
	*(dollars in thousands)*
Available-for sale-securities:
Agency direct obligations	$	35,218	$	35,218		1.06	%	$	—		—	%	$	—		—	%
Agency mortgage-backed securities		13,318		—		—			1,316		2.84			12,002		2.97

Total available for sale securities	$	48,536	$	35,218		1.06		$	1,316		2.84		$	12,002		2.97

Total securities	$	48,536	$	35,218		1.06	%	$	1,316		2.84	%	$	12,002		2.97	%

Deposits

The following table sets forth the composition of our deposits.


	March 31					At December 31,
	2015					2014					2013					2012
	Total		Percent			Total		Percent			Total		Percent			Total		Percent
	*(dollars in thousands)*
Period end:
Noninterest-bearing demand deposits	$	4,390		0.79	%	$	14,728		2.82	%	$	13,022		3.65	%	$	2,479		0.86	%
Interest-bearing deposits:
Savings		—		—			—		—			—		—			—		—
Money market		281,084		50.55			211,682		40.55			191,041		53.57			156,295		54.52
Time deposits		270,609		48.66			295,670		56.63			152,557		42.78			127,900		44.62

Total period end deposits	$	556,083		100.00	%	$	522,080		100.00	%	$	356,620		100.00	%	$	286,674		100.00	%

Average:
Noninterest-bearing demand deposits	$	13,415		2.16	%	$	11,492		2.51	%	$	15,732		4.30	%	$	5,265		1.92	%
Interest-bearing deposits:
Savings		—		—			—		—			—		—			275		0.10
Money market		310,992		50.03	%		215,745		47.01			186,265		50.94			107,513		39.11
Time deposits		297,153		47.81	%		231,675		50.48			163,686		44.76			161,826		58.87

Total average deposits	$	621,560		100.00	%	$	458,912		100.00	%	$	365,683		100.00	%	$	274,879		100.00	%

Our deposits increased to $556.1 million at March 31, 2015 from $522.1 million at December 31, 2014, an increase of $34.0 million, or 6.5%. This increase was primarily due to the growth of our customer base, enhanced by a nationwide marketing campaign with attractive rates in a market with the continued lack of attractive alternative investments for our customers. Our noninterest-bearing deposits decreased $10.3 million, or 70.2%, during this period, and our interest-bearing deposits increased $44.3 million, or 8.7%, during the same period. The growth in accounts during the first quarter of 2015 was primarily in core money market and time deposits.

We made a concerted effort to change our deposit mix beginning in 2012 to emphasize core deposit money market accounts and reduce our wholesale funding percentages. During 2013, our focus was to continue to increase our core deposits and sustain our percentage mix. During 2014, we advertised attractive rates with laddered maturity terms for time deposits in our local market to match funding with our new Poultry Agriculture vertical loans. In early 2015, we launched a nationwide marketing campaign through a rate listing website and also started allowing customers to open accounts online.

At March 31, 2015, the aggregate balance of time deposit accounts individually equal to or greater than $100,000 totaled $244 million. At March 31, 2015, 53% of all time deposit accounts in amounts equal to or greater than $100,000 were scheduled to mature within one year. The maturity profile of our time deposits as follows:


Maturity Period at March 31, 2015	Three months or less		More than three months to six months		More than six months to twelve months		More than twelve months
	*(dollars in thousands)*
Time deposits, $100,000 and over	$	16,330	$	22,139	$	90,497	$	115,102
Other time deposits		2,198		2,139		11,303		10,901
Total time deposits	$	18,528	$	24,278	$	101,800	$	126,003

On September 19, 2014, we entered into a $6.1 million short term line of credit with an unaffiliated commercial bank. Interest accrues at 30 day LIBOR plus 3.50% for a term of 12 months with a rate at December 31, 2014 of 3.654%. At December 31, 2014, we had $6.1 million outstanding on the loan. On February 23, 2015, we repaid the loan in full.

Total long-term borrowings increased $8.4 million at March 31, 2015 from December 31, 2014, as a result of the following:

On May 12, 2014, Independence Aviation LLC financed the purchase of an airplane by entering into a promissory note with an unaffiliated commercial bank in the amount of $6 million which carries a fixed rate of 4.97% for a term of 59 months. Monthly payments are set at $48 thousand with all principal and accrued interest due on May 12, 2019. There is $5.8 million outstanding on this note at March 31, 2015.

On August 1, 2014, we entered into a note payable line of credit of $15 million with an unaffiliated commercial bank, secured by 100% of Live Oak Banking Company’s outstanding common stock. At March 31, 2015 there was $7.2 million advanced on this line of credit. Interest accrues at 30 day LIBOR plus 4.00% for a term of 36 months with a rate at March 31, 2015 of 4.173%. Payments are interest only with all principal and accrued interest due on August 1, 2017. The terms of this loan require us to maintain minimum capital, liquidity and asset quality ratios. There is $7.8 million remaining available credit on this line of credit at March 31, 2015.

On September 11, 2014, we financed the construction of an additional building located on our Tiburon Drive campus for a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at our Tiburon Drive main office location. At March 31, 2015, $19.5 million had been advanced on the construction line of credit. Payments are interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments beginning in October 2016 will be $146 thousand with all principal and accrued interest due on September 11, 2021. The terms of this loan require us to maintain minimum capital, liquidity and Texas ratios. There is $4.5 million remaining available credit on this construction line at March 31, 2015.

On September 18, 2014, we entered into a note payable line of credit of $8.1 million with an unaffiliated commercial bank, with $5 million outstanding at March 31, 2015. The note is unsecured and accrues interest at 30 day LIBOR plus 3.50% for a term of 36 months with a rate at March 31, 2015 of 3.671%. Payments are interest only with all principal and accrued interest due on September 18, 2017. There is $3.1 million remaining available credit on this note at March 31, 2015.

On March 10, 2015, we refinanced an existing loan between Independence Aviation LLC and Live Oak Banking Company with an unaffiliated commercial bank in the amount of $1.2 million, which carries a fixed rate of 4.96% for a term of 51 months. Monthly payments are set at $9 thousand with all principal and accrued interest due on June 10, 2019.

With the acquisition of GLS on September 1, 2013, we assumed the liability for a note payable due to a former GLS partner with an outstanding balance of $250 thousand at the time of acquisition. The outstanding balance includes all interest due. At March 31, 2015, the note has six months remaining with equal monthly payments of $10 thousand until scheduled maturity on August 1, 2015.

Small Business Lending Fund

In April 2011, we elected to participate in the Small Business Lending Fund program, or the SBLF program, whereby the U.S. Treasury agreed to purchase $6.8 million in senior debt securities from us. During the initial interest period the applicable interest rate is set at 1.5%. For all remaining interest periods, which commenced on September 13, 2011, upon receipt of SBLF funds, the interest rate is determined based on a formula which encompasses the percentage change in qualified lending as well as a non-qualifying portion percentage. This rate can range from 1.5% to 10.8%. At March 31, 2015, the interest rate was 1.5%. Interest is payable quarterly in

arrears. With the approval of our primary federal regulator, the Federal Reserve, we may exit the SBLF program at any time simply by repaying the full principal amount of the senior debt securities together with any accrued but unpaid interest. We may also repay our SBLF funding in partial payments, as long as each partial payment is at least 25% of the original funding amount. All SBLF senior debt securities will mature on September 13, 2021, at which time all principal and accrued but unpaid interest will be due.

Risk Management

Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates as well as a reduction in the value of our servicing asset based on a borrower’s propensity to refinance a variable rate loan in a rising rate environment. Changes in interest rates may result in changes in the values of financial instruments, such as available for sale securities, which are accounted for on a mark-to-market basis, and the value of our variable rate loans for sale in the secondary market as prepayment speeds will increase for variable rate loans in a rising rate environment

Other risks that we face include operational risks, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology, and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers due to unforeseen circumstances. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

Credit Risk

Analysis of Nonperforming and Classified Assets. We place loans on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that, if we have determined based upon current information available to us that the timely collection of principal or interest is not probable. When a loan is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan are applied to the outstanding principal as determined at the time of collection of the loan.

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

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


	At March 31,			At December 31,
	2015			2014			2013			2012
	*(dollars in thousands)*
Nonaccrual loans:
Commercial & Industrial		$6,780		$	7,133		$	4,099		$	2,955
Healthcare Services		2,537			2,652			772			581
Independent Pharmacies		1,219			1,224			—			—
Veterinary Practices		3,024			3,257			3,327			2,374
Owner Occupied Commercial Real Estate		12,118			11,559			4,598			5,638
Death Care Management		1,699			1,721			—			—
Healthcare Services		2,307			2,312			58			—
Veterinary Practices		7,837			7,251			4,540			4,935
Other Industries		275			275			—			703

Total nonperforming loans	$	18,898		$	18,692		$	8,697		$	8,593

Total accruing loans past due 90 days or more	$	—		$	—		$	—		$	—

Foreclosed assets	$	34		$	371		$	341		$	232

Nonaccrual troubled debt restructuring	$	10,721		$	9,805		$	5,781		$	5,426

Total troubled debt restructurings		11,513			10,611			9,736			9,120
Less nonaccrual troubled debt restructurings		(10,721	)		(9,805	)		(5,781	)		(5,426	)

Total nonperforming assets and troubled debt restructurings	$	19,724		$	19,869		$	12,993		$	12,519

Total nonperforming loans to total loans		8.57%			9.17	%		6.15	%		9.27	%
Total nonperforming loans to total assets		2.61%			2.78	%		2.02	%		2.51	%
Total nonperforming assets and troubled debt restructurings to total assets		2.73%			2.95	%		3.02	%		3.65	%


	At March 31, 2015			At December 31,
	At March 31, 2015			2014			2013			2012
	*(dollars in thousands)*
Nonaccrual loans guaranteed by U.S. government:
Commercial & Industrial	$	6,358		$	6,620		$	3,849		$	2,386
Healthcare Services		2,306			2,368			660			432
Independent Pharmacies		1,135			1,139			—			—
Veterinary Practices		2,917			3,113			3,189			1,954
Owner Occupied Commercial Real Estate		9,606			8,935			3,134			2,676
Death Care Management		1,487			1,505			—			—
Healthcare Services		1,918			1,919			—			—
Veterinary Practices		5,926			5,236			3,134			2,676
Other Industries		275			275			—			—

Total nonperforming loans guaranteed by the SBA	$	15,964		$	15,555		$	6,983		$	5,062

Total accruing loans past 90 days or more guaranteed by the SBA	$	—		$	—		$	—		$	—

Foreclosed assets guaranteed by the SBA	$	—		$	—		$	—		$	—

Nonaccrual troubled debt restructuring guaranteed by the SBA		9,099			8,433			4,814			3,097

Total troubled debt restructurings guaranteed by the SBA		9,099			8,433			6,139			4,476
Less nonaccrual troubled debt restructurings guaranteed by the SBA		(9,099	)		(8,433	)		(4,814	)		(3,097	)

Total nonperforming assets and troubled debt restructurings guaranteed by the SBA	$	15,964		$	15,555		$	8,308		$	6,441

Total nonperforming loans not guaranteed by the SBA to total held for investment loans		1.33	%		1.54	%		1.21	%		3.81	%

Total nonperforming loans not guaranteed by the SBA to total assets		0.41	%		0.47	%		0.40	%		1.03	%

Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets		0.52	%		0.64	%		1.09	%		1.77	%

Our total nonperforming assets and troubled debt restructurings at March 31, 2015 were $19.7 million, which represented a $145 thousand, or 0.7%, decrease from December 31, 2014. Total nonperforming assets at March 31, 2015 were composed of $18.9 million in nonaccrual loans and $33.5 thousand of foreclosed assets. Of the $18.9 million of nonperforming assets, $16.0 million carried a SBA guaranty, leaving unguaranteed exposure of $2.9 million in total nonperforming assets at March 31, 2015.

As a percentage of the Bank’s total capital, nonperforming loans represented 24.9% at March 31, 2015. Considering that the greater magnitude of risk resides in the unguaranteed portion of nonperforming loans and adjusting the ratio to include only the unguaranteed portion of nonperforming loans as a percent of the Bank’s total capital results in a ratio of 3.9% at March 31, 2015.

As of March 31, 2015, our potential problem loans and impaired loans totaled $41.3 million. Risk Grades 5 through 8 represent the spectrum of criticized and impaired loans. Loans in the Veterinary Practices vertical comprise 56.6% of the total potential problem and impaired loans. At March 31, 2015, the portion of criticized loans guaranteed by the SBA totaled $21.5 million resulting in unguaranteed exposure risk of $19.8 million, or 10.0% of our total held for investment unguaranteed exposure.

Total SBA-guaranteed loans deemed impaired at December 31, 2014, 2013 and 2012 were $19.5 million, $9.8 million and $7.0 million, respectively. As of December 31, 2014, our total nonperforming assets and troubled debt restructurings were $19.9 million, which represented a $6.9 million, or 52.9%, increase from

December 31, 2013. The nonperforming assets were comprised of $18.7 million of nonaccrual loans, $371 thousand of foreclosed assets. Of the $19.1 million of nonperforming assets, $15.6 million carried a SBA guaranty, which mitigates the risk of the nonperforming asset yielding unguaranteed exposure of $3.5 million. Our unguaranteed exposure relating to nonperforming assets at December 31, 2014 decreased $1.5 million from the year ended December 31, 2013.

As a percentage of the Bank’s total capital, nonperforming loans represented 30.2% for the year ended December 31, 2014, compared to nonperforming loans at 17.3% of the Bank’s total capital for the year ended December 31, 2013. Considering that the greater magnitude of risk resides in the unguaranteed portion of nonperforming loans and adjusting the ratio to include only the unguaranteed portion of nonperforming loans as a percent of the Bank’s total capital results in ratios at December 31, 2014 and 2013 of 5.1% and 3.4%, respectively.

As of December 31, 2013, our total nonperforming assets and troubled debt restructurings totaled $13.0 million, a $0.5 million, or 3.8%, increase from December 31, 2012. The nonperforming assets were comprised of $8.7 million of nonaccrual loans, $0.3 million of foreclosed assets. Of the $13.0 million of nonperforming assets and troubled debt restructurings, $8.3 million carried a U.S. government guaranty, which mitigates the risk of the nonperforming asset yielding unguaranteed exposure of $4.7 million.

As a percentage of the Bank’s total capital, nonperforming loans represented 17.3% for the year ended December 31, 2013 compared to nonperforming loans at 21.1% for the year ended December 31, 2012. Adjusting the same measurement considering that the greater magnitude of risk resides in the unguaranteed portion of nonperforming loans results in ratios to the Bank’s total capital at December 31, 2013 and 2012, of 3.4% and 8.7%, respectively.

As of December 31, 2014, our potential problem and impaired loans totaled $41.0 million. Risk Grades 5 through 8 represent the spectrum of criticized and impaired loans. Loans in the Veterinary Practices vertical comprise 56.2% of the total potential problem and impaired loans. The majority of the impaired loans in this industry were originated in our early years. We believe that our underwriting and credit quality standards have improved as our business has matured. The portion of criticized loans guaranteed by the SBA totaled $21.3 million resulting in unguaranteed exposure risk of $19.7 million, or 10.8% of our total unguaranteed exposure. This compares to total criticized and impaired loans of $31.2 million at December 31, 2013, of which $12.4 million was guaranteed by the SBA.

The Bank does not classify loans that experience insignificant payment delays and payment shortfalls as impaired. The Bank considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would provide a modification for a customer experiencing what we consider to be a short term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a onetime expense, stronger than expected start-up, slower than expected start-up, construction issues or other short term issues. In all cases, credit will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan long term. To date, the only types of short term modifications the Bank has given are payment deferral and interest only extensions. The Bank does not alter the rate or lengthen the amortization of the note due to insignificant payment delays. Short terms modifications are not classified as troubled debt restructurings, or TDRs, because they do not meet the definition set by the FDIC and Accounting Standards.

The dollar amount of short-term modifications of loans held for investment not classified as TDRs during fiscal 2014, 2013 and 2012 was $3.4 million, $1.3 million and $1.3 million, respectively. There were 23, 9 and 11 short-term modifications not classified as TDRs in fiscal 2014, 2013 and 2012, respectively.

Management endeavors to be proactive in its approach to identify and resolve problem loans and is focused on working with the borrowers and guarantors of these loans to provide loan modifications when warranted. We implement an aggressive approach to identifying and classifying loans as criticized, Risk Grade 5. For example,

for the years ended December 31, 2014 and 2013, Risk Grade 5 loans alone totaled $9.8 million and $9.9 million, respectively. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, the relative size and composition of the loan portfolio, and our management’s degree of success in resolving problem assets, we believe our aggressive stance to early identification and intervention is the key to successfully managing a small business loan portfolio.

Interest income that would have been recorded for the year ended December 31, 2014 and for the year ended December 31, 2013 had nonaccrual loans been current throughout the period amounted to $0.4 million and $0.2 million, respectively.

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

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

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

The allowance for loan losses consists of the following key elements:

•

Specific allowance for identified impaired loans. For such loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral value if the loan is collateral dependent) or observable market price of the impaired loan are lower than the carrying value of that loan.

Independent appraisals are obtained for all collateral dependent loans deemed impaired when collateral value is expected to exceed $5 thousand. After initially measured for impairment, new appraisals are ordered on at least an annual basis for all real estate secured loans. Non-real estate secured loan appraisal values are reevaluated and assessed throughout the year based upon interim changes in collateral and market conditions. Liquidation expense discounts for real estate secured loans generally include a 6% to 10% sales commission. For circumstances where real estate appraisals are over one year old, a 10% to 20% discount is generally applied.

•

General valuation allowance. This component represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans. For this portion of the allowance, loans are reviewed based on industry, stage and structure and are assigned allowance percentages based on historical loan loss experience adjusted for qualitative factors. Qualitative factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date, may include changes in lending policies and procedures; changes in national and local economic and business conditions, including the condition of various market segments; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and staff; changes in the volume and severity of past due and classified loans and in the volume of nonaccruals, troubled debt restructurings, and other loan modifications; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated and inherent credit losses in the Bank’s current portfolio.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.


	At March 31, 2015										At December 31,
	At March 31, 2015										2014										2013
	Amount		Total Loans		% of Total Allowance			% of Loans in Category of Total Loans			Amount		Total Loans		% of Total Allowance			% of Loans in Category of Total Loans			Amount		Total Loans		% of Total Allowance			% of Loans in Category of Total Loans
	*(dollars in thousands)*
Commercial & Industrial	$	2,063	$	86,151		39.42	%		39.16	%	$	1,369	$	81,057		31.06	%		39.84	%	$	862	$	57,359		31.66	%		40.36	%
Death Care Management		2		3,880		0.04			1.76			2		3,603		0.04			1.77			2		1,782		0.07			1.25
Family Entertainment Centers		35		340		0.66			0.15			29		333		0.66			0.16			—		—		—			—
Healthcare Services		1,367		12,946		26.12			5.88			875		12,319		19.85			6.06			334		8,739		12.27			6.15
Independent Pharmacies		435		35,114		8.31			15.96			336		34,079		7.62			16.75			132		24,026		4.85			16.91
Investment Advisors		3		12,135		0.06			5.52			7		9,660		0.16			4.75			74		2,817		2.72			1.98
Veterinary Practices		212		21,580		4.06			9.81			114		20,902		2.59			10.27			304		19,978		11.16			14.06
Other		9		156		0.17			0.07			6		161		0.14			0.08			16		17		0.59			0.01
Construction & Development		755		14,533		14.42			6.61			586		9,526		13.30			4.68			350		10,286		12.85			7.24
Poultry Agriculture		449		5,460		8.59			2.48			362		3,910		8.22			1.92			—		—		—			—
Death Care Management		3		483		0.06			0.22			1		92		0.02			0.05			10		989		0.37			0.70
Family Entertainment Centers		16		152		0.31			0.07			—		—		—			—			—		—		—			—
Healthcare Services		203		5,150		3.87			2.34			145		2,957		3.29			1.45			242		4,997		8.89			3.52
Independent Pharmacies		8		456		0.15			0.21			4		215		0.09			0.11			2		101		0.07			0.07
Veterinary Practices		29		2,676		0.56			1.22			27		2,207		0.61			1.08			96		4,199		3.52			2.95
Other		47		156		0.89			0.07			47		145		1.07			0.07			—		—		0.00			0.00
Owner Occupied		2,062		115,200		39.40			52.36			2,291		111,620		51.99			54.86			1,511		74,461		55.49			52.40
Poultry Agriculture		22		283		0.42			0.13			25		259		0.57			0.13
Death Care Management		25		19,270		0.48			8.76			77		18,879		1.75			9.28			60		11,668		2.20			8.21
Family Entertainment Centers		94		761		1.80			0.35			89		872		2.02			0.43			—		—		—			—
Healthcare Services		650		27,634		12.42			12.56			794		26,173		18.02			12.86			320		11,129		11.75			7.83
Independent Pharmacies		36		4,578		0.68			2.08			32		4,750		0.72			2.33			54		3,490		1.98			2.46
Investment Advisors		—		2,481		0.00			1.13			—		2,161		—			1.06			4		171		0.15			0.12
Veterinary Practices		1,121		59,615		21.42			27.10			1,122		57,934		25.46			28.48			965		47,896		35.44			33.70
Other		114		578		2.19			0.26			152		592		3.45			0.29			108		107		3.97			0.08
Commercial Land		354		4,136		6.75			1.88			161		1,248		3.65			0.61			—		—		—			—
Poultry Agriculture		354		4,136		6.75			1.88			161		1,248		3.65			0.61			—		—		—			—

Total	$	5,234	$	220,020		100.00	%		100.00	%	$	4,407	$	203,451		100.00	%		100.00	%	$	2,723	$	142,106		100.00	%		100.00	%

Loan Risk Grades.

The following tables summarize the risk grades of each category as of March 31, 2015, December 31, 2014, 2013 and 2012.


March 31, 2015	Risk Grades 1 - 4		Risk Grade 5		Risk Grade 6		Risk Grade 7		Total
	*(dollars in thousands)*
Commercial & Industrial	$	68,832	$	4,027	$	12,568	$	724	$	86,151
Agriculture		—		—		—		—		—
Death Care Management		3,880		—		—		—		3,880
Family Entertainment Centers		340		—		—		—		340
Healthcare Services		7,511		544		4,167		724		12,946
Independent Pharmacies		29,177		2,039		3,898		—		35,114
Investment Advisors		12,135		—		—		—		12,135
Veterinary Practices		15,789		1,288		4,503		—		21,580
Other Industries		—		156		—		—		156
Construction & Development		14,533		—		—		—		14,533
Poultry Agriculture		5,460		—		—		—		5,460
Death Care Management		483		—		—		—		483
Family Entertainment		152		—		—		—		152
Healthcare Services		5,150		—		—		—		5,150
Independent Pharmacies		456		—		—		—		456
Veterinary Practices		2,676		—		—		—		2,676
Other		156		—		—		—		156
Owner Occupied Commercial Real Estate		91,223		4,957		15,979		3,041		115,200
Poultry Agriculture		283		—		—		—		283
Death Care Management		16,944		627		1,698		—		19,269
Family Entertainment Centers		761		—		—		—		761
Healthcare Services		23,875		1,308		2,451		—		27,634
Independent Pharmacies		4,539		40		—		—		4,579
Investment Advisors		2,481		—		—		—		2,481
Veterinary Practices		42,038		2,982		11,830		2,765		59,615
Other Industries		302		—		—		276		578
Commercial Land		4,136		—		—		—		4,136
Poultry Agriculture		4,136		—		—		—		4,136

Total	$	178,724	$	8,984	$	28,547	$	3,765	$	220,020


	Risk Grades 1 - 4		Risk Grade 5		Risk Grade 6		Risk Grade 7		Total
	*(dollars in thousands)*
December 31, 2014
Commercial & Industrial	$	63,777	$	4,546	$	11,907	$	827	$	81,057
Death Care Management		3,603		—		—		—		3,603
Family Entertainment Centers		333		—		—		—		333
Healthcare Services		6,995		538		3,959		827		12,319
Independent Pharmacies		27,673		2,726		3,680		—		34,079
Investment Advisors		9,660		—		—		—		9,660
Veterinary Practices		15,513		1,121		4,268		—		20,902
Other Industries		—		161		—		—		161
Construction & Development		9,526		—		—		—		9,526
Poultry Agriculture		3,910		—		—		—		3,910
Death Care Management		92		—		—		—		92
Healthcare Services		2,957		—		—		—		2,957
Independent Pharmacies		215		—		—		—		215
Veterinary Practices		2,207		—		—		—		2,207
Other		145		—		—		—		145
Owner Occupied Commercial Real Estate		87,883		5,219		15,452		3,066		111,620
Poultry Agriculture		259		—		—		—		259
Death Care Management		16,519		639		1,721		—		18,879
Family Entertainment Centers		872		—		—		—		872
Healthcare Services		22,778		938		2,457		—		26,173
Independent Pharmacies		4,709		41		—		—		4,750
Investment Advisors		2,161		—		—		—		2,161
Veterinary Practices		40,281		3,601		11,261		2,791		57,934
Other Industries		304		—		13		275		592
Commercial Land		1,248		—		—		—		1,248
Poultry Agriculture		1,248		—		—		—		1,248

Total	$	162,434	$	9,765	$	27,359	$	3,893	$	203,451


	Risk Grades 1 - 4		Risk Grade 5		Risk Grade 6		Risk Grade 7		Total
	*(dollars in thousands)*
December 31, 2013
Commercial & Industrial	$	44,786	$	4,769	$	4,126	$	3,678	$	57,359
Death Care Management		1,782		—		—		—		1,782
Healthcare Services		5,538		941		1,507		753		8,739
Independent Pharmacies		20,969		2,353		704		—		24,026
Investment Advisors		2,817		—		—		—		2,817
Veterinary Practices		13,663		1,475		1,915		2,925		19,978
Other Industries		17		—		—		—		17
Construction & Development		8,981		1,305		—		—		10,286
Death Care Management		989		—		—		—		989
Healthcare Services		4,934		63		—		—		4,997
Independent Pharmacies		101		—		—		—		101
Veterinary Practices		2,957		1,242		—		—		4,199
Owner Occupied Commercial Real Estate		57,120		3,797		10,023		3,521		74,461
Death Care Management		11,312		—		356		—		11,668
Healthcare Services		9,218		423		1,430		58		11,129
Independent Pharmacies		3,189		—		301		—		3,490
Investment Advisors		171		—		—		—		171
Veterinary Practices		33,226		3,374		7,833		3,463		47,896
Other Industries		4		—		103		—		107

Total	$	110,887	$	9,871	$	14,149	$	7,199	$	142,106


	Risk Grades 1 - 4		Risk Grade 5		Risk Grade 6		Risk Grade 7		Total
	*(dollars in thousands)*
December 31, 2012

Commercial & Industrial	$	26,266	$	2,639	$	2,762	$	2,533	$	34,200
Death Care Management		283		—		—		—		283
Healthcare Services		4,138		53		224		581		4,996
Independent Pharmacies		11,185		1,007		—		—		12,192
Veterinary Practices		9,650		1,579		2,538		1,952		15,719
Other Industries		1,010		—		—		—		1,010
Construction & Development		7,644		—		859		—		8,503
Death Care Management		315		—		—		—		315
Healthcare Services		2,277		—		859		—		3,136
Independent Pharmacies		637		—		—		—		637
Veterinary Practices		4,163		—		—		—		4,163
Other Industries		252		—		—		—		252
Owner Occupied Commercial Real Estate		31,333		5,689		9,336		4,219		50,577
Death Care Management		3,703		—		—		—		3,703
Healthcare Services		4,068		—		2,139		—		6,207
Independent Pharmacies		1,315		—		1,693		—		3,008
Veterinary Practices		20,964		5,689		4,682		4,219		35,554
Other Industries		1,283		—		822		—		2,105

Total	$	65,243	$	8,328	$	12,957	$	6,752	$	93,280

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the years indicated.


	As of and for the Three Months Ended March 31,					As of and for the Year Ended December 31,
	2015			2014		2014			2013			2012			2011
	*(dollars in thousands)*
Allowance for Loan & Lease Losses:
Beginning Balance	$	4,407		$	2,723	$	2,723		$	5,108		$	4,617		$	3,438
Provision		1,077			423		2,793			(858	)		2,110			2,855
Charge offs		(251	)		—		(1,213	)		(1,948	)		(1,986	)		(1,732	)
Commercial & Industrial		(172	)		—		(698	)		(688	)		(454	)		(663	)
Healthcare Services		(28	)		—		(209	)		(419	)		(70	)		(58	)
Independent Pharmacies		(144	)		—		(294	)		—			—			—
Veterinary Practices		—			—		(195	)		(269	)		(384	)		(605	)
Owner Occupied		(79	)		—		(515	)		(1,260	)		(1,532	)		(1,069	)
Death Care Management		—			—		(135	)		—			—			—
Healthcare Services		—			—		(25	)		(76	)		—			—
Veterinary Practices		(79	)		—		(263	)		(819	)		(1,501	)		(1,069	)
Other		—			—		(92	)		(365	)		(31	)		—
Recoveries		1			67		104			60			126			271
Commercial & Industrial		—			4		32			27			120			225
Healthcare Services		—			1		17			2			8			—
Veterinary Practices		—			3		15			25			112			225
Owner Occupied		1			63		72			33			6			46
Veterinary Practices		1			63		72			32			6			46
Other		—			—		—			1			—			—
Net transfer to loans held for sale		—			—		—			361			241			(215	)

Ending Balance	$	5,234		$	3,213	$	4,407		$	2,723		$	5,108		$	4,617

Interest Rate Risk and Market Risk

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

We have a total cumulative gap in interest-earning assets and interest-bearing liabilities of 10.64% as of December 31, 2014, indicating that, overall, our assets will reprice before our liabilities. The majority of both our loans and deposits have short-term repricing capabilities. We have a funding model which differs from that of traditional banks. The majority of our revenue is attributable to non-interest income so we are less dependent on net interest income when compared to a traditional bank model. With our non-traditional funding model, we do not have the traditional bank branch network and can operate with lower overhead costs to offset the higher cost of funds used to attract deposits.

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

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

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

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth an approximation of our NII sensitivity exposure for the 12-month periods ending December 31, 2015 and 2016 and our EVE sensitivity at December 31, 2014. The simulation uses projected repricing of assets and liabilities at December 31, 2014 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on interest income simulation. Because of the large percentage of variable rate loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. Our loan portfolio consists primarily of SBA 7(a) loans, 84.4% quarterly or monthly adjustable with the prime rate or 3-month LIBOR, and our prepayment speeds react differently in a rising rate environment. Generally, when interest rates rise, our prepayments tend to increase; the opposite reaction from typical bank loan portfolios. In a rising rate environment, our quarterly adjustable borrowers seek to fix their payments so the loans prepay faster as borrowers refinance into fixed rate products with another lender. When interest rates fall, prepayments tend to slow down. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe such assumptions to be reasonable, approximate actual future activity may differ from the assumed prepayment rates presented below.


	Estimated Increase/Decrease in Net Interest Income		Estimated Percentage Change in EVE
Basis Point (“bp”) Change in Interest Rates	12 Months Ending December 31, 2015	12 Months Ending December 31, 2016	As of December 31, 2014
+400	13.0%	16.1%	(6.0)%
+300	9.7	12.0	(5.0)
+200	6.4	8.0	(3.6)
+100	3.2	4.0	(2.0)
-100	(6.1)	(7.7)	0.7

Rates are increased instantaneously at the beginning of the projection. The results show that we are asset sensitive and that net interest income will increase as rates rise and will decrease as rates decline. Sensitivity will increase in the second year of the projection due to interest rates increasing or decreasing for the full year and also due to the other assumptions used in the analysis as noted previously. Interest rates do not normally move all at once or evenly over time, but we believe that the analysis is useful to understanding the potential direction and magnitude of net interest income changes due to changing interest rates.

The EVE analysis shows that we would theoretically lose market value in a rising rate environment. The analysis assumes that amortizing assets will experience higher prepayments as rates increase, causing asset values to decline. The opposite will be true for a declining rate environment, where we will expect to see our market value increase as the variable-rate loans and securities in our portfolio increase in value. This is primarily due to the increased prepayment speeds in a rising rate environment in our predominantly variable-rate loan portfolio, causing our assets to devalue at a faster rate than our liabilities.

Liquidity Risk

Liquidity Management. Liquidity management is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of loan sales in the secondary market, deposit inflows, and the sale of unguaranteed loans. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, loan sales and security sales are greatly influenced by general interest rates, economic conditions, and competition.

Our primary source of funds to originate new loans is derived from deposits, loans sales and premium cash received; and, since inception, we have relied heavily on brokered deposits and Internet deposits to supplement our funding needs. All funds obtained from these sources are designated as brokered deposits. In addition, we use a rate listing service to advertise rates to banks, credit unions, and other institutional entities. We designate deposits obtained from this source as Internet deposits. To date, depositors of brokered and Internet funds have been willing to place deposits with us at competitive market rates. To attract deposits from local and nationwide consumer and commercial markets, we have historically paid above-market rates, which we have been able to pay due to our low overhead and branchless business model. We utilize local print media, marketing at trade shows, rate listing services and website advertising to attract deposits from consumer and commercial sources. In 2012, the Bank embarked on a course to increase relationship deposits in the local area and among our existing customers through above market rate offerings. In early 2015, we began advertising above market rates for time deposits on a rate listing website to a nationwide market for individual accounts only and have begun offering customers the ability to open accounts online. There is risk in using rate to attract depositor relationships. We believe this risk is mitigated to some degree by our ability to continue to offer higher rates due to the low overhead of our deposit model. Tapping into the existing loan customer base as a deposit source has been less successful than our marketing efforts in our local market. Due to the limited number of deposit products currently offered, there has not been a substantial attraction of our loan customer base. Additionally, we do not have a source of low-cost, long term borrowings outside of our certificate of deposit offerings.

With a higher rate offering to generate interest, we attracted some longer term certificates of deposit. We intend to have various term offerings to match our funding needs. Plans for the last half of 2015 are to market commercial checking accounts to selected business customers. We intend to target our marketing efforts on our existing vertical lines of business in phases, beginning first with the veterinary market since they are our longest-term customer base. The commercial checking account will be a no-fee based account with emphasis on electronic banking and tailored to individual vertical needs. Personal checking accounts will be offered to the business owners and their employees as well. Also, we plan to expand the deposit products and services offered to customers through the use of mobile banking solutions. With no plans to establish a brick-and-mortar branch network, online and mobile banking offers a means to meet customer needs and better efficiency through technology compared to traditional branch networks. We believe that mobile banking provides us the opportunity to further leverage the technological competency we have demonstrated since inception. We believe we have an opportunity to provide deposit solutions for our growing small business loan customer base.

We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management, funds management and liquidity policies. The objective of the liquidity policy is to reduce the risk to our earnings and capital arising from the inability to meet obligations in a timely manner

without incurring unacceptable losses. This entails ensuring sufficient funds are available at a reasonable cost to meet potential demands from both fund providers and borrowers. Liquid assets, defined as cash, due from banks, certificates of deposit, federal funds sold, repurchase agreements, and available-for-sale securities, were 14.9% of total assets at March 31, 2015. Excess liquid assets are generally invested in investment grade available-for-sale securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2015, liquid assets totaled $108.3 million. Cash and due from banks totaled $47.6 million and certificates of deposit with other banks totaled $10.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $50.8 million at March 31, 2015. Additionally, at March 31, 2015, we had the ability to access $73.6 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. We also maintain $25.5 million of unsecured and $1.0 million in secured lines of credit from five financial institutions to access federal funds. We had no outstanding balances on the unsecured or secured lines of credit as of March 31, 2015. In addition, we have a $5.0 million repurchase agreement in place with Raymond James at March 31, 2015. In addition, as of March 31, 2015, we had an outstanding liability of $4.7 million related to a guaranty to an unaffiliated commercial bank on a secured loan for an employee. In long term borrowings, we had $45.5 million outstanding at March 31, 2015 primarily related to the construction line of credit on our new facility with $4.5 million remaining to disburse. In addition, we have $10.9 million available credit on other notes payable for funding needs. We believe that our liquid assets combined with the available lines provide adequate liquidity to meet our current financial obligations for at least the next 12 months.


	Payments Due by Period
	Total		Less than One Year		One to Three Years		Three to Five Years		More Than Five Years
	*(dollars in thousands)*
Contractual Obligations
Deposits without stated maturity	$	281,084	$	281,084	$	—	$	—	$	—
Time deposits		270,609		144,605		77,876		48,128		—
Long term borrowings		50,210		395		14,453		12,691		22,682
Operating lease obligations		1,599		387		889		323		—
Total	$	628,569	$	456,206	$	92,940	$	56,545	$	22,961

Capital Management. Our management seeks to maintain adequate capital to support anticipated asset growth, operating needs and unexpected risks, and to ensure that we and the Bank are in compliance with all current and anticipated regulatory capital guidelines. Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of capital stock or other securities. To date, we have employed a self-funding capital model. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments.

Regulatory capital ratios for us and the Bank exceeded minimum federal regulatory guidelines for a well-capitalized depository institution as of March 31, 2015, December 31, 2014, 2013 and 2012. See Note 13 to the consolidated financial statements for further information. Capital ratios for us and the Bank, compared to the minimum regulatory ratios to be considered “well capitalized” and “adequately capitalized,” are set forth below.


	At March 31, 2015		At December 31,									Minimum Ratio to be “Well Capitalized”		Minimum Ratio to be “Adequately Capitalized”
	At March 31, 2015		2014			2013			2012			Minimum Ratio to be “Well Capitalized”		Minimum Ratio to be “Adequately Capitalized”
The Company:
Common Equity Tier 1		15.99		N/A			N/A			N/A			6.5		4.5
Total risk-based capital ratio		16.95		19.63	%		17.96	%		17.21	%		10.0		8.0
Tier 1 risk-based capital ratio		15.99		17.41			14.99			13.05			8.0		6.0
Tier 1 leverage ratio		11.38		13.38			10.30			8.39			5.0		4.0
Tangible equity to tangible assets ratio		13.84		13.62			11.15			9.65			N/A		N/A
Tangible equity to risk-weighted assets ratio		18.31		18.12			14.96			14.08			N/A		N/A
Live Oak Bank:
Common Equity Tier 1		12.44		N/A			N/A			N/A			6.5		4.5
Total risk-based capital ratio		13.47		13.36			15.95			17.91			10.0		8.0
Tier 1 risk-based capital ratio		12.44		12.43			15.09			16.65			8.0		6.0
Tier 1 leverage ratio		8.66		9.34			10.39			10.63			5.0		4.0

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and letters of credit.

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and any existing collateral has no value. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at December 31, 2014, 2013 and 2012 are as follows:


	At March 31, 2015		At December 31,
	At March 31, 2015		2014		2013		2012
			*(dollars in thousands)*
Commitments to extend credit(1)	$	586,037	$	537,957	$	221,487	$	216,010
Plexus Capital — Fund II investment commitment		100		100		100		—
Plexus Capital — Fund III investment commitment		350		350		413		138

Total commitments	$	586,487	$	538,401	$	222,000	$	216,148

(1)	Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments may require payment of a fee and generally have fixed expiration dates or other termination clauses.

Impact of Recent Accounting Pronouncements

The information required by this item is included in Note 1 to the audited consolidated financial statements included elsewhere in this prospectus.

Effect of Inflation and Changing Prices

The financial statements and related financial data presented in this prospectus have been prepared in accordance with U.S. GAAP, which requires the measurement of financial condition and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

BUSINESS

Our Company

We are an established national online platform for small business lending. We believe we have used technology to fundamentally change small business lending by streamlining the borrower experience. We are able to better serve our customers by leveraging technological advantages and combining that with deep industry experience to create an optimized borrowing experience for our customers. We believe that our business model mitigates credit risk while capitalizing on technology to efficiently and prudently generate loans and manage our portfolio of loans outstanding. Our guiding principles, in order of priority, are soundness, profitability and growth.

We originate loans partially guaranteed by the U.S. Small Business Administration, or the SBA, to small businesses and professionals with what we believe are low risk characteristics. We carefully select industries, or “verticals,” on which to focus our lending efforts. Within each vertical we retain individuals who possess extensive industry-specific lending experience. We believe our focus on verticals has allowed Live Oak Bank to extend credit to small businesses and professionals at an average loan size of $1.0 million and has resulted in our credit quality outperforming industry averages.
Based on a data set consisting of 292 lenders that have originated 300 loans or more under the SBA’s 7(a) program and greater than $25 million dollars in total loans, assembled by our affiliate, Government Loan Solutions, Inc., or GLS, using two separate Freedom of Information Act requests for the twelve month period ended September 30, 2014, we had the lowest default rate among the group at 1.52%. In terms of charge-off rates, we ranked fifth in the same data set at 0.35% for the same period. For the twelve months ended September 30, 2014, the U.S. government’s most recently completed fiscal quarter, we ranked as the nation’s second largest small business lender, by dollar volume, utilizing the SBA’s 7(a) program. We believe the opportunity to expand our small business lending to new verticals is significant, since we currently only focus our lending efforts towards ten out of more than 1,000 industries identified in the SBA database. The SBA’s 7(a) program provides up to a 75% guaranty for loans greater than $150,000. For loans of $150,000 or less, the program provides up to an 85% guaranty. The maximum 7(a) loan amount is $5 million. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender. As such, prudent underwriting and closing processes are essential to effective utilization of the 7(a) program. We believe that the technology we use provides us with a competitive advantage in the closing and servicing of 7(a) program loans.

As part of our business strategy following this offering, we expect growth in our loan portfolio through increasing the number of loans we originate that permit future advances (such as construction loans) and by less frequently selling fully funded loans. We believe that by growing our loan portfolio, we will increase our net interest income. Increased levels of interest income are not expected to exceed the premium and servicing income realized from the sale of guaranteed loans.

GLS has maintained a database of transactions involving the SBA-guaranteed portion of loans since 2002 that includes outsourced trades managed by GLS for it lender clients and trade level data contributions from its loan purchasing partners. Through these mechanisms, GLS records approximately 200 to 300 trades per month for use in its valuation, consulting and analytics businesses. The below chart reflects historical gain on sale trends comprised of the trade level data maintained in the GLS database for loans with 10-year and 25-year maturities with an interest rate of Prime plus 2.00%, which is consistent with our typical loan structure.

Gain on Sale ($000) per $1MM Sold

Historical SBA Average

LOGO

Our focus on originating SBA-guaranteed loans in select verticals nationwide has allowed us to organically develop loan portfolio credit characteristics that we believe are attractive. Our portfolio is geographically dispersed throughout all U.S. regions (Southeast, Northeast, Midwest, Southwest, and West) with each region representing between 12% and 29% of our total loan portfolio during 2014. Only one state (California at 13.2%) represented more than 10% of our aggregate held-for-investment loan portfolio at year-end 2014. Additionally, at March 31, 2015 our average unguaranteed exposure per loan was approximately $133,000 compared to an average outstanding principal loan balance of approximately $814,000.

Our ability to develop and execute on our business model has yielded a CAGR in loans originated of 55.2% from May 2007 through March 31, 2015. For the U.S. government’s 2014 fiscal year (ending September 30, 2014), we were the second most active SBA 7(a) lender in the United States by dollar volume, behind only Wells Fargo Bank.

Technology-Based Platform

We believe that the small business lending market is both broad and underserved by traditional banks. Non-bank lenders have exposed traditional banks’ inability to effectively service the small business customer by utilizing technology-based platforms to increase small businesses’ access to financing. Since inception, we have used a technology-based platform to provide financing to small businesses. To date, our average loan size is $1 million with an established origination channel for small business lending via the technology-based platform we use. We believe the industry-standard processes for originating small-dollar loans to businesses needs to be

revamped. We further believe that a simplified, highly automated, and efficient delivery channel can fundamentally change the economics of small loan origination for financial institutions.

We developed and utilize a technology-based platform to facilitate lending to the small business community on a national scale and we have leveraged this technology to optimize our loan origination process, customer experience, reporting metrics, and servicing activity. The nCino Bank Operating System that we utilize, which is a fully integrated operating system built on Salesforce.com, Inc.’s Force.com cloud computing infrastructure platform, is owned by nCino, Inc., or nCino, and we license the rights to use it. We use the nCino Bank Operating System to generate a real-time view of our loan pipeline, processes, and borrower and credit data. The integration of this system into our day-to-day operations has improved work flow efficiency, minimized loan file and documentation exceptions, and provided unprecedented real-time clarity into our loan portfolio. For example, we are able to segregate data pertaining to loan origination, which we refer to as production, among other things, vertical, geography, loan officer, participating bank, referral source, FICO score, internal risk grade, debt service coverage, relationship manager and balance sheet exposure. We can examine loans our loan pipeline by their status and determine what outstanding documents are required prior to submission to the SBA or for closing.

The technology we utilize also streamlines the paperwork that accompanies SBA loans. A typical SBA loan under the 7(a) program may require up to 150 separate loan documents to be submitted. Utilizing this technology-based platform, we collect, track, and organize these documents in a manner that maximizes efficiency and minimizes unnecessary customer contact. We have used this technology to transform the traditional means of loan origination by accelerating our ability to issue proposals, complete due diligence and finalize commitments. Our customers are also able to benefit from the technology-based platform we use, as it allows them the ability to track their loan’s progress towards approval and funding through a secure online portal.

Our software service agreement for use of the nCino Bank Operating System program and Salesforce.com, Inc’s Force.com cloud computing infrastructure program currently expires on November 1, 2015. The term of the license automatically extends for renewal terms of one year, unless either party provides the other with 30 days, prior written notice of its intent to terminate the agreement. Management is currently in the process of extending this license for an additional three-year term. The agreement obligates nCino to provide the Bank with a subscription for the nCino Bank Operating System and also to provide the Bank with certain support and professional services customary for software license agreements. Under the terms of the agreement, nCino retains all intellectual property rights and title to the software. The agreement also contains customary representations, warranties and limitation of liability provisions. The agreement grants a license for a specified number of users at an estimated annual cost of approximately $481 thousand.

In 2012, nCino, Inc. was a majority-owned subsidiary of Live Oak Bancshares. During 2014, however, we divested our ownership interest to our shareholders and we have no direct ownership interest in nCino as of the date of this prospectus. Certain of our directors, officers and employees own approximately 28.2% of nCino’s outstanding common stock as of March 31, 2015. In addition, our Chief Executive Officer, James “Chip” S. Mahan III, continues to serve as a member of the board of directors of nCino and our President, Neil L. Underwood was one of the creators of nCino.

Technology-Based Platform Expansion

Effective April 1, 2015, certain nCino developers who helped create the nCino technology-based platform that we use became employees of the Bank. The nature of the costs expected to be incurred with the development of our online lending platform include development and implementation costs. The software development, along with vendor analysis and operational implementation of the platform, is performed in-house by employees of our Company, many of whom previously worked for nCino. The combined base salaries of our in-house software developers are approximately $1.0 million per year. Depending on the success of our new online lending platform, additional loan officers, credit administration and back office personnel will be hired to originate, close

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and service loans originated through this platform. We anticipate that our costs and expenses will be consistent with the build out of human capital as a function of the growth in loan origination. With this team, we are developing a new online lending platform in order to help us with the origination of small business loans less than $350 thousand through the SBA 7(a) program. The platform we currently use, which we license from nCino, has the capability to originate loans less than $350 thousand, however, we believe that the current system would not allow us to do so efficiently. We believe our new platform will allow us to make smaller loans to small businesses in an efficient and cost effective manner by reducing the cost per transaction through automation. According to FDIC data, as of December 31, 2014, the most recent date that this information is available, there were $288 billion in small business loans of $250 thousand or less and SBA data indicates there were 28.2 million small businesses in the United States in 2011. We believe that this is a market underserved by traditional banking models due to the difficulty in applying traditional underwriting methods to this loan class in a cost effective manner. Our lending platform will aggregate thousands of data points from disparate data sources, including vendors, to assist in our analysis of the small business credit and utilize automated proprietary small loan credit models and application technology. The sources for data used to make our decision include vendors in the fraud detection, ID verification, and credit scoring industries as well as our own proprietary loan performance data provided by GLS. We believe the credit models and application technology will complement our existing expertise and judgment and align with the credit culture that is pervasive throughout our organization. With this new platform, we intend to initially target the verticals that we currently serve. Based on our current hit rate, we believe we will receive approximately 100,000 unique website hits in 2015 and that we will be able to convert a significant number of website hits through our demonstrated ability to connect on a personal level with small businesses. Furthermore, we believe that loan data we have derived from 865,000 small business loans over a 20-year period provides us with performance and predictive analytics that give us an advantage over our competitors.

We believe that utilizing the SBA 7(a) program allows us to deliver a product that is more affordable to small businesses. The SBA is encouraging its participating lenders to serve this market, and has replaced the requirement that lenders perform traditional cash analysis with a credit scoring module. The SBA’s credit scoring module uses the FICO Small Business Scoring Service product. This scoring module assists SBA lenders in the evaluation of credit risk through the use of commercial and consumer data. The module utilizes a variety of data sources and more than 100 combinations of consumer and business analytical models. As a tool for lenders, this scoring module can help streamline the loan approval process. We intend to utilize this scoring module, cash flow considerations and a proprietary score developed by using our extensive internal database of historical SBA specific loan data, as well as other key data fields to filter on-line applicants. Loans approved through this channel will have a principal amount of less than $350 thousand and carry a 75% to 85% SBA guaranty, with an interest rate ranging from Prime + 2.75% to Prime + 4.75%.

Vertical Immersion Strategy

We have focused our lending to small businesses and professionals in specific industry segments, or verticals, in which we build deep industry expertise. Our ten existing industry verticals consist of the following:

Veterinary Practices – Through private practices and hospitals, our veterinary customers provide care for the health of animals through the diagnosis, treatment, and research of diseases of animals, primarily household pets.

Healthcare Services – The Healthcare Services vertical primarily includes dental and medical professionals operating as individuals or in small groups to provide services to clients. Dentists diagnose and treat problems related to oral health and provide care instruction. Medical professionals include general or specialized physicians providing individual patient care. Physicians diagnose and treat injuries and illnesses; prescribe, perform, and interpret diagnostic tests; and counsel patients on a variety of health related issues.

Independent Pharmacies – Independent pharmacists dispense medications prescribed by healthcare practitioners and provide information to their customers about medications and the use of medications. They differentiate themselves from franchise, or chain, pharmacies through drug compounding and offerings of specialized services, such as home delivery.

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Death Care Management – Our Death Care Management vertical includes funeral homes, cemeteries, and crematories. Funeral homes and crematories organize and manage the details of funeral services. Services vary in complexity and style depending upon the client and range from small, intimate groups to large celebrations of life.

Investment Advisors – Investment advisors provide financial guidance to their client base. Specific activities include the management of personal/family investment portfolios, guidance with investments and taxes, and general advisement on life decisions effecting wealth management and financial planning.

Family Entertainment Centers – Family entertainment centers includes a variety of activities typically in a specialized setting. Our borrowers provide to their customers locations to engage in a variety of family activities including miniature golf, roller skating, bowling, arcades and gaming, go-karting, and waterpark play.

Poultry Agriculture – Our poultry farming customers grow chickens for the purpose of consumption. Poultry farmers contract with large poultry companies, called integrators, to raise chickens. Poultry farmers provide a facility, controlled environmental conditions, and labor to grow chickens to the desired size until picked up by the integrator.

Wine & Craft Beverage* – The Craft Beverage industry includes producers of wine, spirits and beer as well as affiliated industries such as custom crush facilities, bulk wine storage facilities, mobile bottling lines, fulfillment service providers, and manufacturers of barrels, corks, foils and bottles.

Self-Storage* – Our borrowers provide self-storage units to consumers. The number of Self-Storage facilities in the United States has more than doubled between 1998 and 2005. This growth is attributed to increased mobility of the U.S. work force and the tendency of many Americans to acquire more belongings than they have the ability to store within their dwelling.

Hotels* – According to the American Hotel and Lodging Association, there are 52,887 hotel properties in the United States that generated an aggregate of $163 billion of revenue in 2013, up 5.4% over 2012 revenues. We plan to develop an SBA product targeted toward projects in the mid-scale and economy chain scale segments of the hotel industry.

*These groups were started in 2015 and did not generate any loans in 2014. There is no financial disclosure relating to these verticals in the prospectus. For more information, see “— Recently Added Verticals” below.

We are engaged and active in each of the industries we serve by attending conventions and trade shows, and by speaking at universities and industry events. We staff each vertical team with personnel that possess industry-specific knowledge, experience and contacts. For example, our General Manager in the Independent Pharmacies owns two pharmacies and brings broad experience and expertise to his responsibilities of examining, evaluating and closing extensions of credit to independent pharmacies. Our Death Care Management vertical expertise includes the former president and chief operating officer of Service Corporation International (a company that operates a network of more than 2,000 funeral homes and cemeteries), and another individual with over 25 years of experience in the financial services industry has led M&A in the funeral trust space. Our Veterinary Practices vertical benefits from the experience of a licensed veterinarian and attorney who provides an informed perspective to our Veterinary Practices vertical team and customers. Our Family Entertainment Centers, Wine & Craft Beverage, and Self-Storage verticals are led by individuals with more than 20 years each in their respective industries. The General Manager of our Poultry Agriculture vertical has 15 years of agriculture lending experience and has originated more than $450 million in poultry loans.

Recently Added Verticals

Funeral and Cemetery Trust Services

We believe that the trust services market for the funeral and cemetery industry is underserved in the United States. Over the past decade, numerous banks have exited this business, which we believe is due to the lack of knowledgeable employees, inadequate compliance oversight and the misunderstanding of state regulations pertaining to the administration of the trust funds. According to IBISWorld, the U.S. funeral market generated

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annual revenue of near $16 billion in 2014, while the cemetery market generated annual revenues of near $4 billion. These industries have combined sales of near $4 billion annually for both preneed trust and preneed insurance products. We estimate that the assets under care for the preneed contracts are in excess of $20 billion. In addition to the provision of a much needed service and cross selling opportunities, earnings will be enhanced by fee income from trust services as well as generation of low cost deposits as a result of trust assets held in cash. We believe other banks accept funeral and cemetery trust funds without the proper administration and investment skills necessary to provide a quality product for the funeral home or cemetery owner. We intend to fill this gap in our existing Death Care Management vertical with a seasoned team of funeral and cemetery trust professionals operating under our established business model.

Our team of ten trust professionals average almost 20 years each in the funeral and cemetery trust industry. Our people are the foundation of this line of business and will be the crucial relationship element from which we intend to grow our business. The team consists of four Senior Relationship Managers who have served many of the largest funeral and cemetery trust companies in this industry, a dedicated funeral and cemetery trust legal counsel, a sales and marketing representative with over 30 years in the industry, a CPA/CPF with over 20 years in the trust industry and three seasoned operations specialists. We believe our team coupled with the technology-based platform we use provides us with a significant advantage to capitalize within an existing vertical and deliver high quality profitable trust services to the funeral and cemetery industry.

Wine & Craft Beverage

The Wine & Craft Beverage industry includes producers of wine, spirits and beer as well as affiliated industries such as custom crush facilities, bulk wine storage facilities, mobile bottling lines, fulfillment service providers, and manufacturers of barrels, corks, foils and bottles. According to the International Organization of Vine and Wine, an intergovernmental organization, the United States is the largest wine market in the world. The industry is vibrant with over 8,000 wineries in the U.S. The Craft Beer industry has experienced significant growth since 2009, growing from approximately 1,600 breweries in the U.S. to approximately 2,800 in 2013. Craft Beer production in the year 2013 was 15,585,364 barrels (7.8% of total beer market in the U.S.). This figure represents a 17.7% increase in production over 2012. We have hired a team of three commercial lenders with decades of experience in the winery industry. The addition of these professionals provides us with an experienced team that has an intimate understanding of the Wine & Craft Beverage industry.

Self-Storage

According to the Self-Storage Association, the non-profit trade association of the self-storage industry, this industry has been the fastest growing segment of the commercial real estate industry over the last forty years. The industry demonstrated recession resistant qualities during the economic downturn in 2008. Self-Storage represents a relatively new opportunity within the SBA lending industry. Prior to October 1, 2010, the SBA viewed Self-Storage as investment real estate instead of an operating business and therefore excluded these projects from eligibility. This timeline limits both the historical data available for review as well but provides an opportunity for any SBA lender to establish a recognized brand within this industry and a first mover advantage. We have hired a seasoned Self-Storage professional with 20 years of sales leadership experience to serve as our domain expert for this vertical. There are approximately 48,500 primary Self-Storage facilities and approximately 52,500 total facilities in the United States with industry revenues exceeding $24 billion.

Hotels

According to the American Hotel and Lodging Association, there are 52,887 hotel properties in the US that generated an aggregate of $163 billion of revenue in 2013, up 5.4% over 2012 revenues. Live Oak plans to develop an SBA product targeted toward projects in the mid-scale and economy chain scale segments of the hotel industry. Travel and tourism is among the largest services export industries and is one of the largest employers in the United States. Additionally, the hotel industry ranks as one of the top 10 largest industries in 49 of the 50 states.

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The table below sets forth our income for each of our ten industry verticals for the periods presented.


	Three months ended March 31, 2015								Year ended December 31, 2014
	Loans and fees on loans		Loan servicing revenue ⁽¹⁾		Net gains on sales of loans		Total		Loans and fees on loans		Loan servicing revenue ⁽²⁾		Net gains on sales of loans		Total
	(in thousands)
Veterinary Practices		$1,861		$1,686		$3,708		$7,254	$	6,897	$	6,801	$	11,779	$	25,477
Healthcare Services		1,665		595		2,838		5,097		4,897		1,888		10,742		17,527
Independent Pharmacies		929		685		2,221		3,835		3,284		2,414		11,570		17,268
Death Care Management		605		365		1,161		2,131		2,544		1,187		6,621		10,352
Investment Advisors		526		216		3,527		4,269		1,287		479		7,697		9,463
Family Entertainment Centers		72		18		—		90		77		10		921		1,008
Poultry Agriculture		981		22		2,007		30,010		735		18		392		1,145
Wine & Craft Beverage		—		—		—		—		—		—		—		—
Self-Storage		—		—		—		—		—		—		—		—
Hotels		—		—		—		—		—		—		—		—
Other		77		6		(1)		82		170		26		255		451

Total		$6,716		$3,593		$15,461		$25,770	$	19,891	$	12,823	$	49,977	$	82,691

(1)	Excludes $513 thousand increase to revenue from loan servicing asset revaluation.

(2)	Excludes $2,201 thousand reduction to revenue from loan servicing asset revaluation.

In addition to our ten existing verticals, we are currently analyzing potential expansion into five new industries, including home health care, independent attorneys, recreational vehicle parks, independent insurance agents and assisted living facilities.

Our customer philosophy and credit culture extend beyond the loan origination phase. Our borrowers have access to a relationship manager in our BAG, from the time the loan closes through the life of the loan. We continuously work to provide superior service throughout the life of our relationship with the borrower. With our vertical emphasis, we are aware of industry-tailored best practices that we share to help our borrowers succeed.

BAG site visits are mandated for each loan. This enables lenders to invest quality time with each prospective and current borrower as well as inspect the business. Another goal of the BAG is to obtain current quarterly financial statements and year-end statements from all borrowers. As of March 31, 2015, 96% of current financial statements were on hand for all borrowers. With effective financial reporting processes in place, we have early insight into potential problems that exist with our borrowers. We also engage with our customers in a variety of other ways, from covering the cost of a business consultant for a 3-day period to more complex situations such as working with a borrower to transition out of a practice. We strive to build and maintain a collaborative relationship with the business owner. Through the BAG, we aim to maintain a close relationship with every customer, maintain strong credit monitoring practices and have become trusted resource for small business owners throughout the U.S.

The Credit Process

We utilize our industry-specific expertise and participation to identify and select credit-worthy borrowers and attractive financing projects prior to the formal underwriting process. We believe our familiarity with and active presence in the verticals we focus on allows us to provide ongoing customer service that is relevant for each business owner’s specific industry segment.

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We attempt to identify verticals with a statistical history of performance and a low risk profile. We have chosen verticals that display some or all of the following characteristics:

•

Stable cash flows

•

Barriers to entry

•

Broad customer bases without reliance on any single customer

•

Collateral shortfall

•

Limited to no foreign competition

•

Growing demand

•

Rapid cash cycles

•

Recession resistant

•

Limited malpractice risk

•

Underserved by other/traditional banking models


	Three Months Ended March 31, 2015		Year Ended December 31,
	Three Months Ended March 31, 2015		2014		2013		2012		2011		2010		2009		2008		2007		Total
	*(dollars in thousands)*
Veterinary Practices		$26,492	$	155,217	$	147,661	$	174,768	$	149,485	$	150,788	$	145,920	$	161,230	$	40,226	$	1,151,787
Healthcare Services		56,892		182,406		109,317		81,363		69,860		56,580		13,385		150		—		569,953
Independent Pharmacies		25,221		149,453		106,391		103,358		86,757		48,919		—		—		—		520,099
Death Care Management		12,011		72,124		101,736		54,075		—		—		—		—		—		239,946
Investment Advisors		34,304		96,963		33,647		—		—		—		—		—		—		164,914
Family Entertainment Centers		3,580		13,503		—		—		—		—		—		—		—		17,083
Poultry Agriculture		89,559		171,644		—		—		—		—		—		—		—		261,203
Other		—		6,780		—		199		535		30		1,275		1,209		775		10,803

Total		$248,058	$	848,090	$	498,752	$	413,763	$	306,637	$	256,317	$	160,580	$	162,589	$	41,001	$	2,935,787

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The following table shows the amount of the SBA-guaranteed portions of the loans we have originated that we have sold since May 2007:


	Three Months Ended March 31, 2015		Year Ended December 31,
	Three Months Ended March 31, 2015		2014		2013		2012		2011		2010		2009		2008		2007		Total
	*(dollars in thousands)*
Veterinary Practices	$	29,148	$	97,960	$	115,514	$	129,291	$	117,941	$	107,326	$	138,725	$	52,897	$	—	$	788,802
Healthcare Services		29,012		99,063		57,361		46,446		50,948		30,120		7,453		—		—		320,403
Independent Pharmacies		19,328		104,446		83,647		66,856		69,553		31,805		—		—		—		375,635
Death Care Management		8,095		53,832		63,156		34,083		—		—		—		—		—		159,166
Investment Advisors		28,630		64,764		19,664		—		—		—		—		—		—		113,058
Family Entertainment Centers		—		7,286		—		—		—		—		—		—		—		7,286
Poultry Agriculture		22,834		4,273		—		—		—		—		—		—		—		27,107
Other		—		2,288		—		—		—		—		—		706		—		2,994

Total	$	137,047	$	433,912	$	339,342	$	276,676	$	238,442	$	169,251	$	146,178	$	53,603	$	—	$	1,794,451

Our vertical immersion strategy and our commitment to sound credit underwriting and credit administration are reflected in the credit quality of our loan portfolio. Our borrowers have historically had an average Fair Isaac Corporation, or FICO, score in excess of 700 using the lowest of scores provided by three credit bureaus at the time of underwriting and an average debt service coverage ratio of approximately 2.0 to net operating income using the most current borrower financial statements available. To date, we have never had a denial or repair of the SBA guaranty for any loan submitted for payment. The SBA’s policy for honoring the guaranty is based on a thorough review of a lender’s purchase request and all relevant documentation. If a lender is deficient in its origination, management, and servicing of a loan, the SBA will attempt to reach a resolution with the lender, which may involve the lender agreeing to a monetary adjustment in the amount of SBA’s guaranty. This adjustment is referred to as a repair. The SBA may consider a denial of its liability under its guaranty or litigation to recover funds the SBA already paid under its guaranty to the lender (or secondary market holder) if the lender is not negotiating in good faith, the lender is unwilling to agree to a repair that reflects the harm caused to the SBA, or the lender’s actions are sufficiently serious that a repair would be inappropriate.

We do not pay our lenders commissions. Our management believes that incentivizing our lenders to produce more loans through the payment of commissions creates an inherent conflict with sound credit administration. By choosing not to implement a commission-based payment structure, we believe we generate loans of greater credit quality, enhancing overall portfolio performance and aligning lenders’ interests with those of the entire company. We believe this alignment of interests is a strategic differentiator at Live Oak.

We intend to strategically and opportunistically add new industries to our portfolio in the future. Our Emerging Markets division continually identifies, researches and evaluates potential new industry verticals.

Deposit Funding

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products and services we offer to customers through the use of mobile banking solutions for small businesses, including online banking, discounted merchant services, and remote deposit capture in an effort to increase our core deposits.

Our Executive Management Team, Key Employees and Board of Directors

James S. Mahan III — Chairman and Chief Executive Officer

Mr. Mahan is the Founder, CEO and Chairman of the board of directors of the Company. Mr. Mahan is a founding member of nCino and serves on nCino’s board of directors. Prior to Live Oak Bank, Mr. Mahan was the Chief Executive Officer and Chairman of the Board for S1 Corporation and founder of Security First Network Bank, the world’s first Internet bank. Under his leadership, S1 Corporation grew to become a $234 million software and services provider in only six years, averaging more than 200 percent growth year over year. At its peak, S1 had a market capitalization of over $6 billion. During his term as CEO, Mahan was ranked as one of the 10 Most Influential Personalities in Financial Services by FutureBanker magazine. Prior to founding Security First Network Bank and S1 Corporation, Mahan launched Cardinal Bancshares, where he served as Chairman and Chief Executive Officer. Mahan built Cardinal into an institution with approximately $675 million in total assets and took the company public in 1992. Before launching Cardinal, Mr. Mahan spent several years with Citizens Union National Bank & Trust Co., serving as President, Chief Operating Officer and Vice Chairman and becoming Chairman and Chief Executive Officer in 1984. In 1986, Mr. Mahan formed an investment group that purchased Citizens Union and subsequently sold it to BankOne Corp. of Columbus, Ohio. Mr. Mahan began his career in 1973 at Wachovia Bank & Trust Co. in Winston-Salem, NC, after graduating with a Bachelor’s degree in Economics from Washington & Lee University in Lexington, VA.

William L. Williams III — Vice Chairman of the Board of Directors

Mr. Williams III is the Vice Chairman of the Company and one of the original founders of the Bank. Prior to starting Live Oak Bank, Mr. Williams spent 19 years in corporate banking at Wachovia and worked for 14 years at Vine Street Financial doing SBA lending. Mr. Williams began his banking career in 1973 at Wachovia, where he worked with Wachovia Services, Inc, then Wachovia Regional Corporate Lending, calling on and lending to mid-market regional companies. In 1987, he relocated to Wilmington, NC, where he managed the Wachovia Corporate Lending group for the three county area of Southeastern North Carolina. In 1992, he re-joined Mr. Mahan at Cardinal Bancshares as they began Vine Street Financial, a niche SBA lending division, of Vine Street Trust Company. Mr. Williams held several positions within this group including President and Senior SBA lender. Through a series of mergers/acquisitions, Vine Street Financial became a division of BB&T, where Mr. Williams served as a senior SBA lender, resigning in May of 2007 to found Live Oak Bank. Mr. Williams graduated in 1973 from the University of North Carolina-Chapel Hill with a BS degree in Business Administration. He has, and is currently serving on several private company boards, as Managing Member, and has served in the capacity of President and Treasurer on numerous charitable and “not for profit” groups in Wilmington and elsewhere in North Carolina. Mr. Williams’ 40 years of corporate banking experience, including deep experience in the SBA lending sector and his involvement as a founder and organizer of our Company, make him uniquely qualified to serve as Vice Chairman of our board of directors and as an executive officer of the Bank.

Neil L. Underwood — President and Director

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Enterprise division. S1, since acquired by ACI Worldwide, Inc. (ACIW), built and deployed Financial Services systems such as online banking, payments and mobile solutions to over 3,000 financial institutions worldwide. Before S1, Mr. Underwood played a key role in launching the Americas division of Brokat Technologies AG, a global financial services software supplier based in Stuttgart, Germany. Acting as Chief Operating Officer, he was responsible for Retail and Wholesale Banking solutions for the Americas. Mr. Underwood came to Brokat as a principal of Transaction Software, which was acquired in May of 1999. A native of Miami, FL, Underwood holds a Bachelor’s Degree of Science in Industrial Engineering from the Georgia Institute of Technology. Mr. Underwood’s experience in the technology sector, coupled with a talented approach to management and resource utilization, makes him ideally suited to serve as a member of our board and president of the Bank.

David G. Lucht — Chief Risk Officer and Director

Mr. Lucht is the Chief Risk Officer for Live Oak Bank. Before joining Live Oak Bank in May of 2007 as a founding member of executive management and the board of directors, Mr. Lucht held executive positions with several different banking institutions, including Chief Credit Officer, Executive Vice President and Director for First Merit Bank, Akron, OH, where he was responsible for leading a turnaround in credit culture and performance of the $10.5 billion bank. Prior to First Merit, Mr. Lucht served as Senior Credit Officer of National City Bank, Cleveland, OH. A native of Ohio, Mr. Lucht began his banking career with National City Bank in 1985 after graduating from Kent State University with his Master’s in Business Administration. He obtained his undergraduate Bachelor of Science degree in Marketing at Miami University in Ohio. Mr. Lucht’s approach to the identification and management of credit risk is one of the keystones of our organization. He has helped to positively shape the corporate culture of the Company since inception and his leadership at the board and executive management levels, which has contributed to our success to date, qualifies him to serve as a member of our board and as an executive officer.

S. Brett Caines — Chief Financial Officer

Mr. Caines is the Chief Financial Officer for the Company and the Bank. Mr. Caines joined Live Oak Lending, Inc., the precursor to Live Oak Banking Company, in 2007 as its finance officer after obtaining an MBA from the University of North Carolina, Wilmington. Mr. Caines was integral in the establishment of Live Oak Banking Company and its initial operations that commenced in 2008. In his role as finance officer, Mr. Caines was foundational in the formation of the Accounting and Capital Markets Departments. In January 2011, Mr. Caines became the Chief Financial Officer of the Company and Live Oak Bank. Prior to joining Live Oak Lending Company, Mr. Caines worked as a Production Engineer for INVISTA and as a Process Engineer for Shell Chemical Company. Mr. Caines holds a Bachelor of Science degree in Chemical Engineering from North Carolina State University.

J. William Holt, III — Chief Revenue Officer

Mr. Holt joined the Company in 2014 as the Chief Revenue Officer. Prior to joining the Company, Mr. Holt held executive positions with several large financial institutions. His 26 year career in commercial banking includes responsibilities for leading and managing technology, product solutions and communication of strategies to enable financial results. He is also experienced in recruiting talent and managing execution to achieve financial results. Mr. Holt is a graduate of Furman University in Greenville, SC with a Bachelor of Science in Economics and Business Administration.

J. Wesley Sutherland — Chief Accounting Officer

Mr. Sutherland joined the Company in 2014 as the Chief Accounting Officer. He has 20 years of experience in navigating the accounting and reporting issues confronting the financial institution industry. Prior to joining the Company, Mr. Sutherland was the founder and owner of an accounting and consulting firm, an audit partner in the financial institutions services group of Dixon Hughes (now Dixon Hughes Goodman) and had served as the

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president of a $300 million mutual savings bank. Mr. Sutherland worked, earlier in his career, in the banking practices of two national firms and served as a financial analyst for a Fortune 500 company. He is a graduate of James Madison University in Harrisonburg, VA with a Bachelor of Business Administration in Accounting.

William H. Cameron — Director

Mr. Cameron has served on the Company’s board of directors since November 2013 and chairs the Company’s nominating and corporate governance committee and serves on both the audit and compensation committees. Mr. Cameron has extensive prior experience as a director of a financial institution, having served as a founding director of Port City Capital Bank and as a director of Crescent Financial Corporation and Crescent State Bank (now Yadkin Financial Corporation and Yadkin Bank) following its acquisition of Port City Capital Bank in 2006. Mr. Cameron has extensive executive experience in corporate and real estate finance, real estate development, and private equity. He has been President of Cameron Management, Inc. since 2000 and has held leadership positions in a number of businesses over the last 25 years. Mr. Cameron served as Chief Operating Officer of Atlantic Telecasting Corporation, the NBC television affiliate in Wilmington, North Carolina. Mr. Cameron holds a B.S. in Business Administration and a Juris Doctor degree from the University of North Carolina at Chapel Hill. He has successfully completed the North Carolina Bank Directors’ College and has participated in numerous Advanced Bank Directors’ College programs. As an active business, civic and charitable leader, Mr. Cameron serves on the board of numerous organizations including Cape Fear Memorial Foundation and Champion McDowell Davis Foundation. He is president of Cameron Management, Inc. and president of the Dan Cameron Family Foundation, Inc. which has made significant contributions to the economic and cultural development of the Wilmington area. We believe Mr. Cameron’s prior experience as a director of two FDIC insured financial institutions over a period of 10 years brings to our board critical skills related to financial oversight of complex organizations, strategic planning and corporate governance and qualifies him to serve as one of our directors.

Diane B. Glossman — Director

Ms. Glossman has served as a member of our board of directors since August 2014. She serves on the audit & risk committee and the Bank’s Asset Liability Management Committee. Ms. Glossman is a retired investment analyst with over 25 years of experience as an analyst and over a decade of governance experience on boards. Ms. Glossman also currently serves on the boards of directors of Ambac Assurance Company, WMI Holdings Corp., Powa Technologies Group Ltd and QBE NA . She periodically performs consulting projects, primarily for various financial institutions. Previously, Ms. Glossman served on the board of directors of A.M. Todd Company from 1998 to July 2011, and as an independent trustee on State Street Global Advisors mutual fund board from October 2009 to April 2011. Ms. Glossman was a six-time member of Institutional Investor’s All-America Research Team and a member of the top ranked Global Bank Research team, along with winning the 2003 Wall Street Journal survey in the broker/dealer category, and was ranked for several years in the Reuters large cap and mid cap bank surveys by both fund managers and companies. Further, she was a frequent commentator on industry and company events for such entities as The Nightly Business Report, The Wall Street Journal, Financial Times, New York Times, The Economist, CNN, CNBC, and various trade publications. Ms. Glossman earned a B.S. in economics from the Wharton School at the University of Pennsylvania with a double major in finance and health care administration, having also attended the University of California at Davis. Ms. Glossman was awarded her Chartered Financial Analyst designation (CFA). We believe that Ms. Glossman’s depth of experience and financial expertise to qualify her to serve as one of our directors.

Glen F. Hoffsis — Director

Dr. Glen F. Hoffsis has served as a member of our board of directors since March 2007. He serves on the nominating and corporate governance committee and the Bank’s Asset Liability Management Committee. He is a veterinarian who has devoted most of his career to veterinary colleges as a clinician, teacher, researcher and administrator. Retiring in July 2013 as dean of the College of Veterinary Medicine at the University of Florida,

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Hoffsis was appointed dean of the newly established Lincoln Memorial University College of Veterinary Medicine effective July 2014, after serving as a consultant to LMU-CVM for several months. He has held many professional positions and currently serves on the board of directors of Banfield Pet Hospitals of Portland, OR. He is a diplomate of the American College of Veterinary Internal Medicine. Dr. Hoffsis is well known and respected within the veterinary profession. We believe that his wide range of knowledge and perspective relative to the business of veterinary medicine brings important skills to our board and qualifies him to serve on the board.

Howard K. Landis III — Director

Mr. Landis has served as a member of our board of directors since March 2007. He serves on the audit & risk committee and compensation committee. Since 2005, Mr. Landis has been a general partner of Plexus Capital, a small business investment company. He has 25 years of experience in the banking industry, which includes serving as the CEO of RBC Centura Bank’s US Operations from 2001 to 2004 after serving as Chief Credit Officer, Chief Risk Officer, and President of Centura Bank. Mr. Landis graduated with a Bachelor of Science in Business Administration and a Master’s in Business Administration from the University of North Carolina at Chapel Hill. We believe Mr. Landis’ 25 years of prior experience in the banking industry, including his service as CEO of a FDIC-insured financial institution with over $20 billion in total assets, brings to our board critical skills related to financial oversight of complex organizations, strategic planning and corporate governance and qualifies him to serve as one of our directors.

Miltom E. Petty — Director

Mr. Petty has served as a member of our board of directors since August 2010. He serves as the chair of our audit & risk committee. Since June, 1977, Mr. Petty has served as the Chief Financial Officer of Carolina Hosiery Mills, Inc., a privately held manufacturing and real estate development company. Since August 2013, Mr. Petty has served as a director of Trust Company of the South. Mr. Petty graduated with a Bachelor of Science degree in Business Administration from the University of North Carolina at Chapel Hill. He has held an active CPA license from the State of North Carolina for 40 years. We believe Mr. Petty’s experience as a chief financial officer of Carolina Hosiery Mills, Inc., familiarity with accounting standards, and his ability to serve as our audit & risk committee financial expert, bring to our board important skills and qualify him to serve on our board.

Jerald L. Pullins — Director

Mr. Pullins has served as a member of our board of directors since October 2011. He serves on the audit & risk committee, the Bank’s Asset Liability Management Committee and is chair of the compensation committee. Mr. Pullins brings nearly thirty-five years of experience in the healthcare, real estate, mortgage banking, funeral, cemetery and insurance industries. This combined with his MA degree from the University of Kansas and MBA from the University of Texas provides a wealth of financial expertise to the Board. He received an honorable discharge as a 1st Lieutenant from the United States Army after serving in Vietnam. Throughout his successful career, he has directed and managed finance, administration, accounting and operational functions at companies across a range of industries. Mr. Pullins serves on the board of U.S. Physical Therapy, Inc., is Chairman of the board of directors of PetPartners, LLC, and is a managing member of SeniorCare Homes, LLC, which develops, owns and operates supervised residential homes for seniors with memory impairment conditions. We believe that his wide range of knowledge of accounting, finance and administration across many business industries brings important skills to our board and qualifies him to serve on the board.

U.S. Small Business Administration

The SBA was established in 1953 to aid, counsel, assist and protect the interests of small business concerns. The SBA operates as an independent agency of the federal government and provides small businesses with the following four programmatic functions: (i) access to capital, (ii) entrepreneurial development, (iii) government

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contracting and (iv) advocacy. The Office of Capital Access, or the OCA, within the SBA helps small businesses access capital and obtain financing which might not otherwise be available through traditional sources. In turn, the government provides a credit enhancement to lenders through a partial guaranty.

The OCA is primarily responsible for the 7(a) and 504 loan programs. All of the Bank’s loans that have been extended under the SBA 7(a) loan program must meet a certain set of specified criteria. Under this program, the United States government guarantees between 50% and 90% of each loan. To date, the Bank has received the guaranteed portion on all originated loans.

Live Oak Banking Company has status as a member of the Preferred Lenders Program, or PLP, as designated by the SBA. Through the PLP, the SBA delegates the final credit extension decision to certain lending institutions, as well as most servicing and liquidation authority. To be considered for PLP status, lenders must not only exhibit a strong record with the SBA, but also demonstrate clear proficiency in processing and servicing SBA loans. The Bank’s technology-based platform has served as a contributing factor in demonstrating these proficiencies. Of the lenders actively extending SBA loans, approximately 15% have the PLP designation.

Lending Activities

General . We provide a range of short- to medium-term commercial and construction loans with an emphasis on SBA 7(a) loans, mortgage, and construction loans. Our loans are typically secured by liens on business assets and mortgages on commercial properties and in part by SBA guarantees. Management focuses on global net operating cash flow and the borrower’s ability to repay, which normally is measured as the cash flow generated from the borrower’s operations. Management’s minimum coverage for global net operating cash flow from recurring operational sources ranges from 1.15% to 1.75% of the borrower’s debt service requirements. Additionally, management views collateral as a secondary or tertiary source of repayment necessary to meet regulatory loan-to-value guidelines. We have traditionally carried a large percentage of variable rate loans in our portfolio. Variable rate loans accounted for 92.6% of the held for investment loan balances outstanding as of March 31, 2015, while fixed rate loans accounted for 7.4% of the balances.

Our loan policies and procedures establish the basic guidelines governing our lending operations. Generally, these guidelines address the types of loans that we seek, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. Our policies are reviewed and approved at least annually by the board of directors of our subsidiary bank. We supplement our own supervision of the loan underwriting and approval process with periodic loan audits by internal personnel and outside professionals experienced in loan review work.

SBA 7(a) Loans.

SBA 7(a) Guaranty Loan — The SBA 7(a) guaranty loan is a maximum loan amount of $5 million, which has a maximum guarantee from the SBA of 85% for loans of $150,000 or less and 75% for loans greater than $150,000. This loan is available to all eligible commercial borrowers for acquisition, construction, permanent financing, and in some cases, refinancing.

SBA Express Loan — This SBA guaranty program provides for a smaller SBA loan, up to $350 thousand, with a 50% guaranty. This loan is available to all SBA eligible borrowers for smaller needs, such as equipment financing and working capital needs.

SBA 7(a) Pari-Passu Loan — This SBA 7(a) loan structure is used on the occasion when the loan requested amount exceeds the $5 million maximum loan amount of the SBA 7(a) loan. The structure ties a conventional first mortgage loan with the SBA 7(a) $5 million (75% guaranteed) loan in a second mortgage position for a total combined amount of greater than $5 million. These two loans share the collateral and the SBA guaranty on a “Pari-Passu” basis.

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SBA 504 Loan — This SBA loan program is used only for acquisitions, expansions, and new construction. This program is structured such that the Bank provides for a conventional first mortgage and the SBA authorizes a second mortgage loan, fully funded by the SBA and fully subordinate to both payment and liquidation to the first mortgage. Further, the SBA 504 second mortgage loan benefits the borrower by offering a 20-year fixed rate based approximately on the 10-year Treasury Note plus 110 basis points.

Commercial Loans

The Bank also originates non-SBA-affiliated loans from time to time, including conventional commercial business loans to small and medium-sized businesses in the United States. Conventional commercial loans to borrowers are based on the soundness of the borrower’s historic financial statements and business model and may include (by way of example and not limitation): (a) the release of the SBA 7(a) guaranty on an existing seasoned loan, where the Bank has the opportunity to re-qualify the borrower for a new SBA 7(a) or SBA 504 loan financing a new project; or (b) standard conventional commercial loans where loan characteristics place the loan in a very sound credit quality class and payment of SBA fees are unjustified.

The Bank does not engage in sub-prime lending or consumer finance and there are no plans to engage in any such activities in the future. Furthermore, it is the Bank’s policy not to make loans to insiders that would come within the scope of Regulation O of the Federal Reserve Board of Governors.

Construction Loans

Due to the inherently risky nature of construction lending, the Bank maintains strict controls on loans involving funds to be used for the construction or upfit of commercial space. Almost all of our construction loans are disbursed under the SBA 7(a) program, which typically carries a minimum U.S. government guaranty of 75%.

During underwriting, construction loans are evaluated by our senior lenders who have considerable experience in the vertical. Each proposed loan is evaluated based on cash-flow of the business relative to the total anticipated debt load, rather than pro-forma estimates for future growth or the liquidation of collateral in the event of a default. The Bank does view collateral as a means of repayment in underwriting construction loans.

All of the Bank’s construction projects are for properties that are owner-occupied and non-speculative in nature. An experienced third party inspector reviews the plans and specifications (and corresponding budget) of each project prior to closing, as well as monitors the draw process following regular site visits after closing. In addition to evaluating each project, Live Oak Bank underwrites each proposed general contractor to determine whether or not it is capable of performing the proposed project. In some instances, Live Oak requires a “Completion Guaranty” from our third party monitoring firm to ensure all entities (the Bank and the customer) that the deal will be completed on time and within budget.

Significant resources are dedicated to the management of this aspect of our business. All construction draws and corresponding documentation are managed from our corporate headquarters in Wilmington, North Carolina. All draws require an inspection report performed by a third-party monitoring company. Construction-specific technology is employed to create a transparent and viable portfolio that is monitored to mitigate risk.

Credit Underwriting and Loan Approval Process

Certain credit risks are inherent in making loans. These risks include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment risks by adhering to internal credit limits, a multi-layered approval process for larger loans, documentation examination, and follow-up procedures for any exceptions to credit policies.

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The credit committee of the Bank’s management establishes policies to protect the Bank from excessive credit risk. The credit committee meets at least quarterly and consists of the Chief Risk Officer, Chief Credit Officer, Senior Credit Officer, Credit Officer, President, and a designated General Manager. A member of the Bank’s board of directors may participate as a member of the credit committee. The credit committee approves any loan with over $750 thousand of unguaranteed credit exposure. A quorum will be a minimum of three members, one of which must be a co-chair (the Chief Risk Officer, Chief Credit Officer and Senior Credit Officer are the co-chairs). A majority of the members must be in favor of the credit for approval. Any tie votes will be broken by either the chairman or vice-chairman of the credit committee. Our credit administration department approves loans with under $750 thousand of unguaranteed credit exposure. All credits with net exposure between $500 thousand and $750 thousand are presented to the credit committee for review while any credits under $500 thousand are available for review by the credit committee. Loan approvals will expire after 90 days. Any loan not closed within that time period needs to have the approval reaffirmed.

Preferred Lenders Program

Live Oak Bank has status as a member of the PLP, as designated by the SBA. The SBA established the Preferred Lenders Program, or “PLP”, in 1983 to streamline the procedures necessary to provide financial assistance to small businesses. The preferred lender status allows Live Oak Bank to expedite SBA loan approval, closing and servicing functions through this delegated authority. Approximately 15% of active SBA lenders have PLP status; however, for fiscal year 2014, PLP lenders accounted for 24% of the number of loans approved in the SBA 7(a) program and 61% of the approved amount.

Credit Administration and Loan Review

We emphasize a strong credit culture based on traditional credit measures and our knowledge of our identified industry verticals through experienced relationship managers. We maintain a continuous internal loan review system and engage an independent consultant on a periodic basis to review loan files on a test basis and assess our loan grading. Our policy requires credit review, internal and external, to review 30% of the Bank’s loan portfolio on an annual basis.

Our dedication to a strong credit culture is based on a long-term view of our portfolio that is not driven by short-term earnings goals. Our organization’s guiding principles are soundness, profitability and growth, in that order. The primacy of soundness as a guiding principle of our organization drives a focus on credit administration processes. Credit administration processes were designed by our Chief Risk Officer, David G. Lucht. Mr. Lucht has 29 years of experience in commercial banking, with a focus on credit underwriting, credit administration and SBA lending. Our credit administration, credit review and loan operation systems focus on approving sound credits while meeting numerous regulatory requirements including compliance regulations. Our strong credit culture impacts the way we think about loan officer compensation. The compensation of our loan officers is not based on origination. Instead, loan officers are incented based on the performance of our organization as a whole and are further expected to make a significant investment in our common stock. This compensation structure drives credit mindedness in our loan officers because they are incentivized by our overall profitability rather than the volume of loan originations.

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While our loan portfolio is composed largely of SBA loans, the historical national SBA default rate is typically higher than that of SBA loans held in the Bank’s portfolio. We believe this differential is attributed largely to our focus on credit administration and vertical immersion strategy. The below table reflects historical national SBA default rates compared to those of the Bank, specific to only those loans as originated in each year presented.


Vintage	Live Oak Loan Originations		Default Rate				Charge-off Rate
Vintage	Live Oak Loan Originations		Live Oak (%)		All SBA (%)		Live Oak (%)		All SBA (%)
	(dollars in thousands)
Year Ended December 31, 2008	$	162,589		14.32		25.84		1.98		9.91
Year Ended December 31, 2009		160,580		4.93		14.22		0.47		3.48
Year Ended December 31, 2010		256,317		1.68		7.55		0.16		1.15
Year Ended December 31, 2011		306,637		2.93		4.29		0.23		0.45
Year Ended December 31, 2012		413,764		1.29		2.95		0.09		0.17
Year Ended December 31, 2013		498,752		0.56		1.21		0.07		0.05
Year Ended December 31, 2014		848,090		—		0.14		—		—
Three Months Ended March 31, 2015		248,058		—		—		—		—

Total	$	2,894,787		1.84		4.03		0.21		0.93

Lending Limits

Our lending activities are subject to a variety of lending limits imposed by federal and state law. In general, the Bank is subject to a legal limit on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus, plus an additional 10% of the Bank’s capital and surplus if the amount that exceeds the 15% limit is secured by readily marketable collateral. Based upon the capitalization of the Bank as of March 31, 2015, the Bank’s legal lending limit to any individual borrower was $8.8 million. In addition, the Bank has imposed an internal lending limit of $2 million, $1.5 million and $1 million for loans risk graded 1-2, 3 and 4, respectively, to any individual borrower.

Loan Participations and Sale of SBA Guaranteed Assets

We have sold over $1.8 billion in SBA guaranteed loan assets in the secondary market since May 2007. We also periodically sell participations in non-guaranteed loan assets to other financial institutions. The sale of loan assets to other financial institutions allows us to manage our balance sheet and achieve a less concentrated loan portfolio.

Competition

Commercial banking in the United States is extremely competitive. We compete with national banking organizations including the largest commercial banks headquartered in the country, all of which have small business lending divisions. We also compete with other federally and state chartered financial institutions such as community banks and credit unions, finance and business development companies, peer-to-peer and marketplace lenders and other non-bank lenders. Most of our competitors have higher legal lending limits than we do and are also able to provide more services and make greater use of media advertising.

Despite the intense level of competition among small business lenders, we believe that we occupy a category of lender distinct from our competitors, having both the benefit of deposit funding and the ability to grow quality assets. One of our principal advantages is the technology-based platform we use, which we believe has accelerated our ability to issue proposals, complete credit due diligence and finalize commitments. We believe that our personnel also provide a competitive advantage, not only because they are industry participants with relevant experience in our identified verticals but also because many have made meaningful equity investments in our company, fostering a sense of ownership.

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We license the nCino bank operating system on a nonexclusive basis. As a result, this technology is available to other lenders. While the nCino bank operating system that we utilize is available to other lenders, we believe that our ability to actively develop and improve upon the existing platform with our in-house developers gives us a competitive advantage over our competitors who also may use this platform.

Properties

The following table sets forth the location of our main office, as well as additional offices and certain information relating to the facilities.


Office	Address	Year Opened	Approximate Square Footage	Owned or Leased
Main Office	1741 Tiburon Dr	2013	36,000	Owned

Satellite Wilmington Office	2605 Irongate Dr Ste. 100	2013	10,632	Leased

Atlanta Loan Production Office	3060 Peachtree Rd Ste. 1220	2010	4,455	Leased

Fayetteville, AR Office	2827 E Millennium Pl Ste 2	2014	1,575	Leased

Gainesville, GA Office	500 Jesse Jewell Pkwy Ste. 200	2014	843	Leased

Santa Rosa, CA Office	100 B Street Ste. 100	2015	2,386	Leased

Houston, TX Relationship Office	16801 Greenspoint Park Dr Ste. 395	2015	3,387	Leased

We believe that our properties are maintained in good operating condition and are suitable and adequate for our operational needs.

Employees

As of March 31, 2015, we had 227 full-time employees and 36 part-time employees. None of our employees is covered by a collective bargaining agreement and we consider relations with our employees to be good.

Legal Proceedings

As of the date of this prospectus, we are not aware of any threatened or pending material legal proceedings against us or our subsidiary bank.

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MANAGEMENT

General

The following table sets forth information concerning our directors and executive officers. Each member of our board of directors also serves as a member of the board of directors of Live Oak Bank.


Name	Age		With Company Since		Position
James S. Mahan III(2)		63		2007	Chairman and Chief Executive Officer
William L. Williams III(3)		63		2007	Vice Chairman and Director
Neil L. Underwood		45		2010	President and Director
David G. Lucht(3)		58		2007	Chief Risk Officer and Director
S. Brett Caines		36		2007	Chief Financial Officer
William H. Cameron(1)(2)(3)		61		2013	Director
Diane B. Glossman(1)		59		2014	Director
Glen F. Hoffsis(3)		74		2007	Director
Howard K. Landis III(1)(2)		58		2007	Director
Miltom E. Petty(1)		63		2010	Director
Jerald L. Pullins(1)(2)		73		2010	Director

(1)	Member of the audit & risk committee.

(2)	Member of the compensation committee.

(3)	Member of the nominating and corporate governance committee.

Executive Officers and Directors

A biographical summary of the experience of our executive officers and directors is set forth below:

James S. Mahan III — Chairman and Chief Executive Officer

William L. Williams III — Vice Chairman of the Board of Directors

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at Vine Street Financial doing SBA lending. Mr. Williams began his banking career in 1973 at Wachovia, where he worked with Wachovia Services, Inc, then Wachovia Regional Corporate Lending, calling on and lending to mid-market regional companies. In 1987, he relocated to Wilmington, NC, where he managed the Wachovia Corporate Lending group for the three county area of Southeastern North Carolina. In 1992, he re-joined Mr. Mahan at Cardinal Bancshares as they began Vine Street Financial, a niche SBA lending division, of Vine Street Trust Company. Mr. Williams held several positions within this group including President and Senior SBA lender. Through a series of mergers/acquisitions, Vine Street Financial became a division of BB&T, where Mr. Williams served as a senior SBA lender, resigning in May of 2007 to found Live Oak Bank. Mr. Williams graduated in 1973 from the University of North Carolina-Chapel Hill with a BS degree in Business Administration. He has, and is currently serving on several private company boards, as Managing Member, and has served in the capacity of President and Treasurer on numerous charitable and “not for profit” groups in Wilmington and elsewhere in North Carolina. Mr. Williams’ 40 years of corporate banking experience, including deep experience in the SBA lending sector and his involvement as a founder and organizer of our Company, make him uniquely qualified to serve as Vice Chairman of our board of directors and as an executive officer of the Bank.

Neil L. Underwood — President and Director

Mr. Underwood currently serves as President of the Company and Live Oak Bank. Mr. Underwood is a cofounder of nCino and helps to set technological direction for the company. Prior to joining the Bank, Underwood served as General Manager of S1 Corporation (SONE), where he was responsible for the S1 Enterprise division. S1, since acquired by ACI Worldwide, Inc. (ACIW), built and deployed Financial Services systems such as online banking, payments and mobile solutions to over 3,000 financial institutions worldwide. Before S1, Mr. Underwood played a key role in launching the Americas division of Brokat Technologies AG, a global financial services software supplier based in Stuttgart, Germany. Acting as Chief Operating Officer, he was responsible for Retail and Wholesale Banking solutions for the Americas. Mr. Underwood came to Brokat as a principal of Transaction Software, which was acquired in May of 1999. A native of Miami, FL, Underwood holds a Bachelor’s Degree of Science in Industrial Engineering from the Georgia Institute of Technology. Mr. Underwood’s experience in the technology sector, coupled with a talented approach to management and resource utilization, makes him ideally suited to serve as a member of our board and president of the Bank.

David G. Lucht — Chief Risk Officer and Director

S. Brett Caines — Chief Financial Officer

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foundational in the formation of the Accounting and Capital Markets Departments. In January 2011, Mr. Caines became the Chief Financial Officer of the Company and Live Oak Bank. Prior to joining Live Oak Lending Company, Mr. Caines worked as a Production Engineer for INVISTA and as a Process Engineer for Shell Chemical Company. Mr. Caines holds a Bachelor of Science degree in Chemical Engineering from North Carolina State University.

William H. Cameron — Director

Diane B. Glossman — Director

Glen F. Hoffsis — Director

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veterinarian who has devoted most of his career to veterinary colleges as a clinician, teacher, researcher and administrator. Retiring in July 2013 as dean of the College of Veterinary Medicine at the University of Florida, Hoffsis was appointed dean of the newly established Lincoln Memorial University College of Veterinary Medicine effective July 2014, after serving as a consultant to LMU-CVM for several months. He has held many professional positions and currently serves on the board of directors of Banfield Pet Hospitals of Portland, OR. He is a diplomate of the American College of Veterinary Internal Medicine. Dr. Hoffsis is well known and respected within the veterinary profession. We believe that his wide range of knowledge and perspective relative to the business of veterinary medicine brings important skills to our board and qualifies him to serve on the board.

Howard K. Landis III — Director

Miltom E. Petty — Director

Jerald L. Pullins — Director

Mr. Pullins has served as a member of our board of directors since October 2011. He serves on the audit & risk committee, the Bank’s Asset Liability Management Committee and is chair of the compensation committee. Mr. Pullins brings nearly thirty-five years of experience in the healthcare, real estate, mortgage banking, funeral, cemetery and insurance industries. This experience, combined with his MA degree from the University of Kansas and MBA from the University of Texas, provides a wealth of financial expertise to the Board. He received an honorable discharge as a 1st Lieutenant from the United States Army after serving in Vietnam. Throughout his successful career, he has directed and managed finance, administration, accounting and operational functions at companies across a range of industries. Mr. Pullins serves on the board of U.S. Physical Therapy, Inc., is Chairman of the board of directors of PetPartners, LLC, and is a managing member of SeniorCare Homes, LLC, which develops, owns and operates supervised residential homes for seniors with memory impairment conditions. We believe that his wide range of knowledge of accounting, finance and administration across many business industries brings important skills to our board and qualifies him to serve on the board.

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Director Independence

In connection with this offering, we have applied to list our common stock on the NASDAQ Global Market. Under the rules of NASDAQ, independent directors must comprise a majority of a listed company’s board of directors within a specified period of time after the completion of this offering. In addition, the rules of NASDAQ require that, subject to specified exceptions, each member of a listed company’s audit, compensation, and nominating and corporate governance committees be independent, provided however that, in accordance with the phase-in provisions set forth in the rules of NASDAQ, our audit & risk committee will have at least one independent member by the effective date of the registration statement of which this prospectus is a part, at least two independent members within 90 days of the effective date of the registration statement of which this prospectus is a part and all members will be independent within one year of the effective date of the registration statement of which this prospectus is a part. Under the rules of NASDAQ, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Audit & risk committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act, and compensation committee members must also satisfy the independence criteria set forth in Rule 10C-1 under the Exchange Act.

In order to be considered independent for purposes of Rule 10A-3 and Rule 10C-1, a member of an audit committee or compensation committee of a listed company may not, other than in his or her capacity as a member of the committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

Our board of directors has undertaken a review of the independence of each director and considered whether each director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, our board of directors determined that Ms. Glossman and Messrs. Cameron, Hoffsis, Landis and Petty are “independent directors” as defined under the applicable rules and regulations of the SEC and the listing requirements and rules of NASDAQ. Under NASDAQ rules, independent directors must comprise a majority of our Board of Directors within a specified period of time after the completion of this offering. NASDAQ rules, as well as those of the SEC, also impose several other requirements with respect to the independence of our directors.

Family Relationships

There is no family relationship between any of our directors, executive officers or persons nominated to become a director or executive officer.

Board of Directors

Composition of our Board of Directors upon the Closing of this Offering

Our bylaws provide that our board of directors must consist of between five and twelve directors, and such number of directors within this range may be determined from time to time by resolution of our board of directors or our shareholders. As of the date of this prospectus and upon closing of this offering, we will have ten directors.

Our articles of incorporation provide that our directors may be removed only for cause by the affirmative vote of the holders of at least a majority of the votes that all our shareholders would be entitled to cast in an annual election of directors. Directors are elected at the annual meeting of our shareholders. Those nominees who receive the highest number of votes are deemed to have been elected. Shareholders are not entitled to cumulative voting in the election of our directors.

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Committees of our Board of Directors

Our board of directors has the authority to appoint committees to perform certain management and administrative functions. Our board of directors has three permanent committees: the audit & risk committee, the compensation committee, and the nominating and corporate governance committee. The board adopted written charters for each of these committees in February 2014, all of which will be available on our website upon the closing of this offering. In addition, from time to time, special committees may be established under the direction of our board of directors when necessary to address specific issues.

Audit & Risk Committee

We have an audit & risk committee consisting of Messrs. Petty (Chair), Landis, Cameron, Pullins and Ms. Glossman. Upon the closing of this offering, our audit & risk committee will be responsible for, among other things:

•

appointing, terminating, compensating, and overseeing the work of any accounting firm engaged to prepare or issue an audit report or other audit, review or attest services;

•

reviewing and approving, in advance, all audit and non-audit services to be performed by the independent auditor, taking into consideration whether the independent auditor’s provision of non-audit services to us is compatible with maintaining the independent auditor’s independence;

•

reviewing and discussing the adequacy and effectiveness of our accounting and financial reporting processes and controls and the audits of our financial statements;

•

establishing and overseeing procedures for the receipt, retention, and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by our employees regarding questionable accounting or auditing matters;

•

investigating any matter brought to its attention within the scope of its duties and engaging independent counsel and other advisors as the audit & risk committee deems necessary;

•

determining compensation of the independent auditors and of advisors hired by the audit & risk committee and ordinary administrative expenses;

•

reviewing and discussing with management and the independent auditor the annual and quarterly financial statements prior to their release;

•

monitoring and evaluating the independent auditor’s qualifications, performance, and independence on an ongoing basis;

•

reviewing reports to management prepared by the internal audit function, as well as management’s response;

•

reviewing and assessing the adequacy of the formal written charter on an annual basis;

•

reviewing and approving related-party transactions for potential conflict of interest situations on an ongoing basis;

•

monitoring our risk profile and providing input to management on risk appetite, risk profile, and regulatory requirements;

•

approving our risk management framework and periodically reviewing and evaluating the adequacy and effectiveness of such framework;

•

overseeing management’s implementation of and conformance with our significant risk management policies, procedures, limits and tolerances;

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•

discussing with management our major risk exposures and reviewing the steps management has taken to identify, monitor and control such exposures;

•

reviewing the independence, authority and adequacy of our risk management function; and

•

handling such other matters that are specifically delegated to the audit & risk committee by our board from time to time.

Our board of directors has affirmatively determined that Mr. Petty satisfies the requirements for independence and financial literacy under the rules and regulations of NASDAQ and the SEC, and that he qualifies as an “audit committee financial expert” as defined in the SEC rules and satisfies the financial sophistication requirements of NASDAQ. As discussed above in “Management — Director Independence,” Mr. Pullins is not independent for audit committee purposes under SEC rules, and we will rely on the phase-in rules of NASDAQ with respect to the independence of the audit committee following this offering.

Compensation Committee

We have a compensation committee consisting of Messrs. Pullins (Chair), Landis, and Cameron, each of whom is a non-employee member of our board of directors, and Mr. Mahan, Chairman and CEO who is an employee member of our board of directors. Upon the closing of this offering, our compensation committee will be responsible for, among other things:

•

reviewing and approving the compensation, employment agreements and severance arrangements, and other benefits of all of our executive officers and key employees;

•

reviewing and approving, on an annual basis, the corporate goals and objectives relevant to the compensation of the executive officers, and evaluating their performance in light thereof;

•

reviewing and making recommendations, on an annual basis, to the board with respect to director compensation;

•

reviewing any analysis or report on executive compensation required to be included in the annual proxy statement and periodic reports pursuant to applicable federal securities rules and regulations, and recommending the inclusion of such analysis or report in our proxy statement and period reports;

•

reviewing and assessing, periodically, the adequacy of the formal written charter; and

•

such other matters that are specifically delegated to the compensation committee by our board from time to time.

Our board of directors has determined that each member of our compensation committee, other than Messrs. Mahan and Pullins, meet the requirements for independence under the rules of NASDAQ and SEC rules and regulations, and qualifies as an “outside director” for purposes of Section 162(m) of the Code. We intend to rely on the phase-in rules of NASDAQ with respect to the independence of the compensation committee following this offering.

Nominating and Corporate Governance Committee

Upon the effectiveness of this registration statement, our nominating and corporate governance committee will consist of Messrs. Cameron (Chair) and Hoffsis, each of whom is a non-employee member of our board of directors, and Messrs. Lucht and Williams, who are employee members of our board of directors. Upon completion of this offering, our nominating and corporate governance committee will be responsible for, among other things:

•

identifying and screening candidates for our board, and recommending nominees for election as directors;

•

establishing procedures to exercise oversight of the evaluation of the board and management;

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•

developing and recommending to the board a set of corporate governance guidelines, as well as reviewing these guidelines and recommending any changes to the board;

•

reviewing the structure of the board’s committees and recommending to the board for its approval directors to serve as members of each committee, and where appropriate, making recommendations regarding the removal of any member of any committee;

•

developing and reviewing our code of conduct, evaluating management’s communication of the importance of our code of conduct, and monitoring compliance with our code of conduct;

•

reviewing and assessing the adequacy of the formal written charter on an annual basis; and

•

generally advising our board on corporate governance and related matters.

Our board of directors has determined that each member of our nominating and corporate governance committee, other than Messrs. Lucht and Williams, meet the requirements for independence under the rules of NASDAQ. We intend to rely on the phase-in rules of NASDAQ with respect to the independence of the nominating and corporate governance committee.

Compensation Committee Interlocks and Insider Participation

With the exception of Mr. Mahan, none of the members of our compensation committee is or has been an officer or employee of our company. None of our executive officers currently serve, or in the past year has served, as a member of the compensation committee or director (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers serving on our compensation committee or our board of directors.

Code of Conduct

In connection with this offering, we adopted a revised code of ethics relating to the conduct of our business by all of our employees, officers, and directors, as well as a code of conduct specifically for our principal executive officer and senior financial officers. This policy will be posted on our website upon completion of this offering.

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EXECUTIVE COMPENSATION AND OTHER MATTERS

The following summary compensation table shows all cash and non-cash compensation paid to or received or deferred by James S. Mahan III, Neil L. Underwood, David G. Lucht and S. Brett Caines who we refer to as our “named executive officers,” for services rendered to us and the Bank in all capacities during the fiscal year ended December 31, 2014. Compensation paid to our named executive officers consisted of cash salary, non-equity incentive plan compensation paid in cash, 401(k) matching contributions, insurance premiums paid on behalf of each of the named executive officers and certain perquisites.

Summary Compensation Table


Name and Principal Position	Year		Salary		Bonus		Option Awards		Stock Awards			Non-Equity Incentive Plan Compensation(1)		Non-Qualified Deferred Compensation Earnings		All Other Compensation(2)			Total
James S. Mahan III		2014	$	512,025	$	—	$	—	$	—		$	190,878	$	—	$	90,741		$	793,644
Chairman and Chief Executive Officer		2013		547,617		—		—		—			288,171		—		42,084			877,872

Neil L. Underwood		2014		424,383		—		—		—			155,142		—		40,785			620,310
President		2013		424,218		—		—		955,548			203,658		—		494,643	(3)		2,078,067

David G. Lucht		2014		390,000		—		—		1,320,000	(4)		142,634		—		845,821	(3)		2,698,455
Executive Vice President and Chief Risk Officer		2013		390,000		—		—		—			196,731		—		41,676			628,407

S. Brett Caines		2014		239,128		—		—		1,320,000	(4)		85,208		—		843,193	(3)		2,487,529
Chief Financial Officer		2013		220,983		—		—		—			106,807		—		38,945			366,735

(1)	Final payout from the terminated 2013 Employee Profit Sharing Plan, paid in 2014. The amount paid is based on the employee’s base salary and the plan’s profit sharing formula.

(2)

Includes accrued but unused vacation time, 401(k) matching contributions and the dollar value of insurance premiums paid on behalf of the named officers for group term life, health, dental and disability insurance. Also includes an automobile allowance, business travel allowance, personal use of Company aircraft and country club dues paid to, or on behalf of, the named executives. The cost for personal use of the Company’s aircraft was calculated using Standard Industry Fare Level (“SIFL”) rules utilizing Professional Flight Management software. The unreimbursed cost of an employee’s nonbusiness use of the Company’s aircraft must be included as income for federal income tax purposes. SIFL is the IRS accepted method for valuing the use. The value, based on the SIFL method, is included in other compensation.

(3)	Also includes $661,592 in payments to cover taxes associated with a restricted stock award granted and fully vested in 2014 and $150,205 in non-cash compensation related to distributed nCino shares.

(4)

Discretionary award based on Messrs. Lucht and Caines’ long-term employment and instrumental involvement in the early development of the Company. The Company chose to recognize their contribution to the Company’s success and provided incentive to retain their services to aid in the future success of the Company.

Employment Agreements

Our named executive officers serve at the discretion of our board of directors and are not party to employment agreements.

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Omnibus Plan

The shareholders of the Company approved the 2015 Omnibus Stock Incentive Plan at the 2015 annual meeting of shareholders. The 2015 Omnibus Plan authorizes the issuance of awards covering up to 4,300,000 shares of the Company’s common stock. The awards may be issued in the form of incentive stock option grants, non-qualified stock option grants, restricted stock grants, long-term incentive compensation units, or stock appreciation rights. There were no awards granted under this plan in 2014 or 2013.

2008 Incentive Stock Option Plan

At the 2008 annual meeting of shareholders, the shareholders approved the adoption of the Live Oak Banking Company 2008 Incentive Stock Option Plan, or the 2008 Plan.

Options granted under the 2008 Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code. Under the Code, options are afforded favorable tax treatment to recipients upon compliance with certain restrictions but do not result in tax deductions to the Company. The purpose of the 2008 Plan is to increase the performance incentive for employees of the Bank, to encourage the continued employment of current employees and to attract new employees by facilitating their purchase of a stock interest in the Company.

The 2008 Plan is administered by the compensation committee of the board of directors. No member of the Board who is not also an employee of the Company or the Bank is eligible to receive stock options under the 2008 Plan. Employees of the Bank are eligible to receive options under the 2008 Plan at no cost to them other than the option exercise price. Any options granted under the 2008 Plan are subject to a minimum three-year vesting schedule, whereby 33% of the total options granted would vest on each anniversary of the date of grant until all options are vested. Generally, the exercise price for options granted pursuant to the 2008 Plan may not be less than 100% of the fair market value of the shares on the date of grant. No option will be exercisable more than ten years after the date that it is granted. In the case of an employee who owns more than 10% of the outstanding shares of common stock of the Company at the time the stock option is granted, the option price may not be less than 110% of the fair market value of the shares on the date of the grant, and the option shall not be exercisable more than five years from the date it is granted. The optionee cannot transfer or assign any option other than by will or in accordance with the laws of descent and distribution. In the event the optionee is discharged for cause or voluntary separation on the part of an optionee (but not separation due to retirement or disability) the options, vested and unvested will immediately terminate. In the event of an optionee’s retirement, any unvested options will vest and the options will continue to be exercisable for three months following retirement. In the event an optionee becomes disabled or dies, any unvested options will vest and the options will continue to be exercisable for twelve months following the date of disability or death.

Subject to alternative minimum tax rules under the Code, a recipient of a stock option under the 2008 Plan will not be taxed upon either the grant of the option or on the date he or she exercises such option. Unless subject to the alternative minimum tax, a recipient will be taxed only upon the sale of the stock underlying the option and will be taxed on the difference between the option price and the sales price of the stock. The taxable amount will be treated as capital gain. If the incentive option requirements are satisfied, the Company will receive no corresponding deduction for any portion of the stock option.

In the event of increases, decreases or changes in the Company’s outstanding common stock resulting from a stock dividend, recapitalization, reclassification, stock split, combination or similar event, or resulting from an exchange of shares or merger or other reorganization in which the Bank is the surviving entity, the Board shall make equitable proportionate adjustments in the aggregate number and kind of shares available under the 2008 Plan, the number and kind of shares which are covered by each then outstanding incentive stock option, and in the exercise price of each unexercised incentive stock option. Unless amended by the Board, the standard option grant agreement shall be binding upon any successor to the Company. However, except upon a “change in control” (as defined in the option grant agreement), the 2008 Plan and any options granted thereunder shall terminate upon the effective date of the Company’s dissolution or liquidation.

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The Board may, from time to time, amend, modify, suspend, terminate or discontinue the 2008 Plan without notice. However, no such action will adversely affect any optionee’s rights under any then outstanding incentive stock option without such optionee’s prior written consent. In addition, approval of the Company’s shareholders is required for any modification or amendment of the 2008 Plan that (a) increases the aggregate number of shares of common stock available for issuance under the 2008 Plan, (b) changes the provisions of the 2008 Plan with respect to the determination of persons to whom incentive stock options may be granted, or (c) otherwise materially increases the benefits accruing to optionees under the 2008 Plan. Consistent with the terms of the 2008 Plan, the Board may modify any outstanding incentive stock option pursuant to a written agreement with the optionee.

The 2008 Plan was adopted by the board of directors of the Company in connection with the reorganization of the Bank into the holding company form of organization on March 31, 2009. Upon adoption of the 2008 Plan by the Company, all outstanding options to purchase shares of the Bank were converted into options to purchase shares of the Company’s common stock.

A total of 772,570 shares of our common stock remain available for grant under the 2008 Plan at December 31, 2014. In the event the outstanding shares of the Company’s common stock are increased, decreased, changed into or exchanged for a different number or kind of securities as a result of a stock split, reverse stock split, stock dividend, recapitalization, merger, share exchange, acquisition, combination, or reclassification, then appropriate proportionate adjustments will be made in the aggregate number or kind of shares of stock that may be issued under the 2008 Plan.

Restricted Stock Plan

The board of directors has adopted and the shareholders have approved a restricted stock plan which provides for the grant of restricted common stock to eligible employees. Under the plan, the Company may issue shares of its common stock to employees. The transfer of these shares is restricted such that the employee cannot transfer the shares until the shares “vest” and the transfer restrictions lapse. The purpose of the plan is to encourage and motivate key employees to contribute to the successful performance of the Company and to promote the growth of the value of the Company’s common stock. The plan provides participating employees with an ownership interest in the Company and thus achieves a unity of purpose between employees and shareholders. The plan also helps retain key employees.

The plan is administered by the compensation committee. In order to be eligible for participation in the plan, an individual must be a full-time employee of the Company or one of its subsidiaries and must be identified by the compensation committee as an employee who is in a position to contribute to the long-term success of the Company. In determining awards under the plan, the compensation committee takes into account the nature of the services rendered by the eligible employees, their present and potential contributions to the success of the Company, and such other factors as the compensation committee deems relevant.

A total of 164,290 shares of our common stock remain available for grant under the plan at December 31, 2014. In the event the outstanding shares of the Company’s common stock are increased, decreased, changed into or exchanged for a different number or kind of securities as a result of a stock split, reverse stock split, stock dividend, recapitalization, merger, share exchange, acquisition, combination, or reclassification, then appropriate proportionate adjustments will be made in the aggregate number or kind of shares of stock that may be issued under the plan.

Each issuance of restricted stock is evidenced by a restricted stock grant agreement between the Company and the employee. The grant agreement sets forth the terms and conditions of the restrictions on the shares, including the vesting schedule, if any.

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Outstanding Equity Awards at Fiscal Year-End

There were no outstanding equity awards held by any of our named executive officers at December 31, 2014. No stock options were exercised by the named executive officers during 2014. On March 26, 2014, S. Brett Caines and David G. Lucht were awarded 300,000 shares of stock each at the then current market value of $4.40 per share. Based on the Company’s granted shares, Mr. Caines and Mr. Lucht were granted 115,542 shares of nCino common stock each at the then current market value of $1.30 per share during the transfer of shares based on each shareholder’s percentage ownership in the Company.

Employee Bonus Plan

Our employee bonus plan (the “Bonus Plan”) allows eligible employees to participate in a bonus pool based on our profitability. The Bonus Plan awards each participating employee a quarterly bonus based on the bank’s ability to meet and/or exceed its quarterly budget for bank-level pre-tax net income. No quarterly bonus shall exceed 3% of the employee’s annual base salary. Should the bank fail to meet its quarterly budget, yet exceed its annual budget, the quarterly bonus that was not paid out is eligible to be made up at the end of the fiscal year. Eligible employees and directors participating in the Bonus Plan for the full year will receive 12% of base salary when the bank meets is bank-level pre-tax budget.

Employee Stock Purchase Plan

In 2010, we adopted an Employee Stock Purchase Plan (2010 ESPP). Under this plan, eligible employees were able to withhold post-tax dollars from their monthly payroll to be placed in a money market account for bi-annual purchases of the Company’s common stock. In order for employees to be eligible to contribute to this program, they must have completed one year of service with the Company. Eligible employees’ money market accounts were swept on March 15 ^th and September 15 ^th each year, up to the amount that would purchase whole shares of stock, not to exceed $25,000 per employee per calendar year. In order to preserve the S-Corporation election, the we discontinued the 2010 ESPP in October 2013.

Subsequent to conversion to a C corporation in 2014, we again adopted an Employee Stock Purchase Plan (ESPP) on October 8, 2014, within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under this plan eligible employees were able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in this plan they must be employed or on an authorized leave of absence from the Company or any subsidiary immediately prior to the grant date. ESPP stock purchases cannot exceed $25,000 per employee per calendar year. Options to purchase shares under the ESPP in 2014 were granted at a 15% discount to fair market value.

Director Compensation

Each non-employee director is paid a retainer of $2,000 per month. The chairman of the audit & risk committee receives an additional monthly retainer of $1,000. The Outside Director Profit Sharing Plan was terminated in 2013. Effective January 1, 2014, each non-employee director is eligible to participate in the Bank’s Bonus Plan based on their annualized fees in the same quarterly percentage payout awarded to eligible employees under the Bonus Plan.

The following table presents a summary of all compensation paid by us to our directors who are not employees for their service as such during the year ended December 31, 2014.


Name	Fees Earned or Paid in Cash		Stock Awards		Option Awards		Non-Equity Incentive Plan Compensation(5)		Nonqualified Deferred Compensation Earnings		All Other Compensation			Total
William H. Cameron	$	24,000		—	$	132,000	$	6,367		—	$	704	(1)	$	163,071
Diane B. Glossman(2)		10,000		—		319,020		480		—		—			329,500
Glen F. Hoffsis		24,000		—		132,000		8,837		—		—			164,837
Howard K. Landis III		24,000		—		132,000		8,837		—		—			164,837
Miltom E. Petty(3)		36,000		—		132,000		13,255		—		—			181,255
Jerald L. Pullins		24,000		—		132,000		8,837		—		455,600	(4)		620,437

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(1)	Includes personal use of the Company’s aircraft, calculated using SIFL rules utilizing Professional Flight Management software.

(2)	Ms. Glossman joined the board of directors effective August 22, 2014.

(3)	Includes an additional monthly retainer of $1,000 per month for service as chairman of the audit & risk committee.

(4)	Includes $405,600 in payments to cover taxes associated with stock options and consulting fees of $50,000.

(5)	Includes $36,000 final payout under the terminated 2013 Outside Director Profit Sharing Plan and $12,000 payout under the 2014 Bonus Plan.

2008 Nonstatutory Stock Option Plan

At the 2008 annual meeting of shareholders, the shareholders approved the adoption of the Live Oak Banking Company 2008 Nonstatutory Stock Option Plan, or the 2008 Directors’ Plan.

Options granted under the 2008 Directors’ Plan do not qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code. The purpose of the 2008 Directors’ Plan is to encourage the continued participation of members of our board of directors, to align the interests of directors with those of shareholders and to facilitate the recruitment of new members of the board of directors as necessary or desirable.

The 2008 Directors’ Plan is administered by the board of directors. Members of the board of directors of the Company and members of the board of directors of its subsidiaries, including the Bank, are eligible to receive options under the 2008 Directors’ Plan at no cost to them other than the option exercise price. Any options granted under the 2008 Directors’ Plan are subject to a minimum three-year vesting schedule, whereby 33% of the total options granted would vest on each anniversary of the date of grant until all options are vested. Generally, the exercise price for options granted pursuant to the 2008 Directors’ Plan may not be less than 100% of the fair market value of the shares on the date of grant. No option will be exercisable more than ten years after the date that it is granted. The optionee cannot transfer or assign any option other than by will or in accordance with the laws of descent and distribution. In the event a director’s tenure as a member of the board of directors terminates for any reason, options granted under the 2008 Directors’ Plan, vested and unvested, will immediately terminate. In the event of an optionee’s retirement, any unvested options will vest and the options will continue to be exercisable for three months following retirement. In the event an optionee becomes disabled or dies, any unvested options will vest and the options will continue to be exercisable for twelve months following the date of disability or death.

In the event of increases, decreases or changes in our outstanding common stock resulting from a stock dividend, recapitalization, reclassification, stock split, combination or similar event, or resulting from an exchange of shares or merger or other reorganization in which the Bank is the surviving entity, the Board shall make equitable proportionate adjustments in the aggregate number and kind of shares available under the 2008 Directors’ Plan, the number and kind of shares which are covered by each then outstanding incentive stock option, and in the exercise price of each unexercised incentive stock option. Unless amended by our board of directors, the standard option grant agreement shall be binding upon any successor to the Company. However, except upon a “change in control” (as defined in the option grant agreement), the 2008 Directors’ Plan and any options granted thereunder shall terminate upon the effective date of the Company’s dissolution or liquidation.

Our board of directors may, from time to time, amend, modify, suspend, terminate or discontinue the 2008 Directors’ Plan without notice. However, no such action will adversely affect any optionee’s rights under any then outstanding stock option without such optionee’s prior written consent. In addition, approval of our shareholders is required for any modification or amendment of the 2008 Directors’ Plan that (a) increases the aggregate number of shares of common stock available for issuance under the 2008 Directors’ Plan, (b) changes the provisions of the 2008 Directors’ Plan with respect to the determination of persons to whom stock options

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may be granted, or (c) otherwise materially increases the benefits accruing to optionees under the 2008 Directors’ Plan. Consistent with the terms of the 2008 Directors’ Plan, the Board may modify any outstanding stock option pursuant to a written agreement with the optionee.

The 2008 Directors’ Plan was adopted by our board of directors in connection with the reorganization of the Bank into the holding company form of organization on March 31, 2009. Upon adoption of the 2008 Directors’ Plan by the Company, all outstanding options to purchase shares of the Bank were converted into options to purchase shares of the Company’s common stock.

A total of 705,000 shares of our common stock remain available for grant under the 2008 Directors’ Plan at December 31, 2014. In the event the outstanding shares of the Company’s common stock are increased, decreased, changed into or exchanged for a different number or kind of securities as a result of a stock split, reverse stock split, stock dividend, recapitalization, merger, share exchange, acquisition, combination, or reclassification, then appropriate proportionate adjustments will be made in the aggregate number or kind of shares of stock that may be issued under the 2008 Directors’ Plan.

Outside Director Profit Sharing Plan

Effective January 1, 2013, we adopted an outside director profit sharing plan. Eligible directors participated in an award based on their annual director fees in the same quarterly percentage payout awarded under our employee profit sharing plan. The Outside Director Profit Sharing Plan was terminated in 2013.

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CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

Transactions with Affiliates

Neither we nor the Bank have any outstanding loans to directors, executive officers or their related interests. Traditionally, we do not make such loans and it is the policy of the Bank not to make loans that are subject to Regulation O of the Board of Governors of the Federal Reserve System. To the extent loans are ever made to directors or officers in the future, such loans (i) will be made in the ordinary course of business; (ii) will be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender and (iii) will not involve more than the normal risk of collectability or present other unfavorable features. At December 31, 2014, total loans outstanding to members of the Board, executive officers and affiliates were $6.7 million. We refer to such loans as related party loans. During the first three months of 2015, $150 thousand in principal advances were made and $1 million in principal curtailments were received, resulting in total related party loans of $5.8 million at March 31, 2015.

The Bank leases the premises of its former main office from Cameron Management. William H. Cameron, a member of our board of directors, is a principal of Cameron Management. The current lease for this facility expires July 31, 2015. Total lease payments of $25,000 and $100,000 were paid to Cameron Management by the Bank during the three months ended March 31, 2015 and year ended December 31, 2014, respectively. In the opinion of management, the terms of the lease are no less favorable to the Bank than would be available from an independent third party lessor and Mr. Cameron was not affiliated with the Company or the Bank when the lease was originally executed in 2013.

The Bank currently sub-leases office space to nCino, pursuant to a lease signed in November 2013. nCino is an affiliate of us and the Bank. At December 31, 2013, the Company owned 45.9% of the outstanding common stock of nCino and our directors, officers and employees owned an additional 18.4%. At December 31, 2014 the Company owned 9.0% of the outstanding common stock of nCino and our directors, officers and certain of our employees collectively owned 39.8% of nCino’s common stock. In addition, Messrs. Mahan, Underwood and Lucht were members of the board of directors of nCino during 2014. In June 2014 the Company divested of its ownership in nCino to shareholders in the form of a dividend. As of March 31, 2015, the Company owned none of the outstanding common stock of nCino and directors, officers and employees of the Company collectively owned approximately 28.2% of nCino’s outstanding common stock. In addition, Mr. Mahan is the only remaining member of the board of directors of nCino from the Company as of March 31, 2015. In the opinion of management, the terms and conditions of nCino’s lease are no less favorable to the Bank than those that would be available to an independent third party lessee. nCino paid the Bank total lease payments of $20,000 and $78,000 during the three months ended March 31, 2015 and year ended December 31, 2014, respectively.

The Bank is currently party to a software service agreement with nCino. In the opinion of management, the terms of the Bank’s software service agreement with nCino are no less favorable to the Bank than would be available from an independent third party software provider. Total payments of approximately $432,000 million and $1.6 million were paid to nCino by the Bank during the three months ended March 31, 2015 and year ended December 31, 2014, respectively. The Bank’s transactions with nCino comply with the quantitative and qualitative requirements of Sections 23A and 23B of the Federal Reserve Act, as amended, and Regulation W of the Board of Governors of the Federal Reserve System.

As of March 31, 2015, and December 31, 2014, the Bank had invested an aggregate of $550,000 in Plexus Fund II and Plexus Fund III, each of which are qualifying small business investment funds managed by Plexus Capital, a registered small business investment company based in Raleigh, North Carolina. The Bank has committed to invest an additional $450,000 in Plexus Fund III, upon capital call. Mr. Landis, a member of our board of directors, is a principal of Plexus Capital.

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PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 31, 2015, as adjusted to reflect the sale of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares in full), for:

•

each of our named executive officers;

•

each of our directors;

•

all of our named executive officers and directors as a group; and

•

each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock.

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Shares of common stock that may be acquired by an individual or group within 60 days of March 31, 2015 pursuant to the exercise of options, warrants or other rights, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. The table below calculates the percentage of beneficial ownership of our common stock based on 28,623,609 shares of voting and non-voting common stock outstanding as of March 31, 2015.

Except as indicated in footnotes to this table, we believe that the shareholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such shareholders. Unless otherwise indicated, the address for each director and executive officer listed is: c/o Live Oak Bancshares, Inc., 1741 Tiburon Drive, Wilmington, NC 28403.


	Shares Beneficially Owned Prior to this Offering				Shares Beneficially Owned After this Offering
Name	Number		%		Number	%
Directors and named executive officers:
James S. Mahan III(1)		6,103,300		21.3
William L. Williams III(2)		1,252,520		4.4
Neil L. Underwood		1,050,010		3.7
David G. Lucht(3)		265,000		0.9
Stephen Brett Caines(5)		426,050		1.5
William H. Cameron(4)(7)		215,670		0.8
Diane B. Glossman		5,000		0.0
Glen F. Hoffsis(7)		64,290		0.2
Howard K. Landis III(7)		202,993		0.7
Miltom E. Petty(7)		84,410		0.3
Jerald L. Pullins(7)		239,380		0.8
All directors and executive officers as a group (11 persons)		9,908,623		34.6

Greater than 5% shareholders:
Maurice J Koury		1,950,560		6.8
Wellington Management(6)		7,048,300		24.6

(1)	Includes 3,104,530 shares held by the James S. Mahan III Revocable Trust over which Mr. Mahan has sole investment and voting power and 2,998,770 shares held by the Marguerite D. Mahan Revocable Trust.

(2)	William L. Williams III has shared voting rights on 1,200,000 jointly-held shares, shared voting rights on 14,110 shares held by Spoint-ILM, LLC, includes 14,100 shares held in an IRA custodial account and 650,000 shares are pledged as security for personal loans.

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(3)	Includes shared voting rights on 265,000 jointly-held shares.

(4)	Includes 470 shares held by the GST-Exempt Trust for William H. Cameron and excludes 10,890 shares held by the Mary Jo Cameron Revocable Trust.

(5)	Includes shared voting rights on 351,000 jointly-held shares.

(6)

Includes 2,324,770 voting and 4,723,530 non-voting shares of common stock held by the following funds managed by Wellington Management: 2,155,050 held by Bay Pond Investors USB, LLC; 2,962,740 shares held by Bay Pond Partners, L.P.; 836,200 shares held by Ithan Creek Investors USB, LLC; 553,950 shares held by Wolf Creek Investors USB, LLC; and 540,360 shares held by Wolf Creek Partners, L. P. The funds managed by Wellington Management own 100% of all of the shares of non-voting common stock.

(7)	Includes 3,000 options that fully vested on March 26, 2015.

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DESCRIPTION OF OUR SECURITIES

The following is a summary of the material provisions of our articles of incorporation and bylaws.

General

Our amended and restated articles of incorporation authorize the issuance of 110,000,000 total shares of common stock. Of these authorized shares, there are 100,000,000 authorized shares of voting common stock, no par value per share, of which there were 23,900,079 shares outstanding on March 31, 2015, and 10,000,000 authorized shares of non-voting common stock, of which there were 4,723,530 shares outstanding on March 31, 2015. Our articles of incorporation also authorize the issuance of 1,000,000 shares of preferred stock, of which there were no shares outstanding at March 31, 2015.

The common stock we are offering through this prospectus is voting common stock. Upon completion of this offering (assuming the underwriters do not exercise their option to purchase additional shares), there will be shares of voting and non-voting common stock outstanding. Up to an additional shares of voting common stock will be issuable upon exercise of outstanding options granted under our stock option plans.

Common Stock

Aside from voting rights, as described more fully below, all rights of holders of voting common stock are identical to the rights of holders of non-voting common stock. Our non-voting common stock automatically converts to voting common stock if it is transferred to a subsequent holder in a “permitted transfer,” as that term is defined in our amended and restated articles of incorporation.

A “permitted transfer” is a transfer (i) to an affiliate of the holder or to the Company, (ii) in a widespread public distribution (including a transfer to an underwriter for the purpose of conducting a widespread public distribution such as the public offering contemplated by this prospectus), (iii) in transfers in which no transferee (or group of associated transferees) would receive 2% or more of any class of the voting securities of the Company, or (iv) to a transferee that would control more than 50% of the voting securities of the Company without any transfer from the transferor.

Dividend Rights

As a North Carolina corporation, we are not directly subject to the restrictions on the payment of cash dividends applicable to the Bank. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. See the section entitled “Supervision and Regulation” for more information.

Holders of shares of our common stock are entitled to receive such cash dividends as the board of directors may declare out of legally available funds. However, our payment of cash dividends will be subject to the restrictions of North Carolina law applicable to the declaration of distributions to shareholders by a business corporation. Under such provisions, distributions, including cash dividends, may not be paid if, after giving effect to such cash dividend or other distribution, a corporation would not be able to pay its debts as they become due in the usual course of business or the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed to satisfy certain preferential liquidation rights. Our ability to pay cash dividends to the holders of shares of our common stock is, at the present time and for the foreseeable future, largely dependent upon the amount of cash dividends that our subsidiary bank pays to us.

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Voting Rights

Each share of our voting common stock entitles the holder thereof to one vote on all matters upon which shareholders have the right to vote. Our shareholders are not entitled to cumulate their votes for the election of directors.

Shares of our non-voting common stock do not have voting rights, except to the extent otherwise required by law.

Assessment and Redemption

Our common stock is not subject to redemption or any sinking fund and all outstanding shares are fully paid and non-assessable.

Liquidation Rights

In the event of any liquidation, dissolution or winding up of our affairs, the holders of shares of our common stock are entitled to receive, after payment of all debts and liabilities, all of our remaining assets available for distribution in cash or in kind. In the event of any liquidation, dissolution or winding up of our subsidiary bank, we, as the sole shareholder of such bank’s common stock, would be entitled to receive all remaining assets of the bank available for distribution in cash or in kind after payment of all debts and liabilities of the bank including all deposits and accrued interest on deposits.

Preemptive Rights; Redemption

Holders of shares of our common stock are not entitled to preemptive rights with respect to any shares that may be issued. Our common stock is not subject to call or redemption.

Preferred Stock

Our articles of incorporation, as amended, authorize the issuance of 1,000,000 shares of preferred stock, no par value per share. As of the date of this prospectus, there were no shares of our preferred stock issued and outstanding.

Our articles of incorporation, subject to certain limitations, authorize our board of directors from time to time by resolution and without further shareholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the preferences, limitations and relative rights of such shares of preferred stock.

Authorized But Unissued Shares

North Carolina law does not require shareholder approval for any issuance of authorized shares. Authorized but unissued shares may be used for a variety of corporate purposes, including future public or private offerings to raise additional capital or to facilitate corporate acquisitions. One of the effects of the existence of authorized but unissued shares may be to enable the board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. This would protect the continuity of our management and possibly deprive the shareholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.

Certain Provisions of Our Articles of Incorporation and Bylaws Having Potential Anti-Takeover Effects

General

The following is a summary of the material provisions of our articles of incorporation and bylaws that address matters of corporate governance and the rights of shareholders. Certain of these provisions may delay or prevent

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takeover attempts not first approved by our board of directors (including takeovers which certain shareholders may deem to be in their best interests). These provisions also could delay or frustrate the removal of incumbent directors or the assumption of control by shareholders. All references to the “articles of incorporation” and “bylaws” are to the articles of incorporation and bylaws of the Company in effect at the date of this prospectus.

Removal of Directors; Filling Vacancies

Our articles of incorporation provide that shareholders may remove one or more of the directors with cause which includes: (i) criminal prosecution and conviction during the course of a director’s service for an act of fraud, embezzlement, theft or personal dishonesty; (ii) the prosecution and conviction of any criminal offense involving dishonesty or breach of trust; or (iii) the occurrence of any event resulting in a director being excluded from coverage, or having coverage limited as to the director when compared to other covered directors under any of the fidelity bonds or insurance policies covering the directors, officers or employees. Vacancies occurring in the board of directors may be filled by the shareholders, by a majority of the remaining directors even though such majority constitutes less than a quorum, or by the sole remaining director. A director elected to fill a vacancy shall serve only until the next meeting of shareholders at which directors are elected.

Amendment of Bylaws

Subject to certain restrictions described below, either a majority of the board of directors or our shareholders may amend or repeal the bylaws. A bylaw adopted, amended or repealed by the shareholders may not be readopted, amended or repealed by the board. Generally, our shareholders may adopt, amend or repeal the bylaws in accordance with the North Carolina Business Corporation Act.

Special Meetings of Shareholders

Our bylaws provide that special meetings of shareholders may be called only by our chairman, president or at the request of the board of directors.

Supermajority Vote for Change-in-Control

Unless approved by a majority of the board of directors who are not affiliated with a proposed transaction, approval by holders of at least two-thirds of the outstanding shares of our common stock is required to effect any agreement, plan or arrangement providing for a merger, consolidation, share exchange or any other transaction requiring approval of the shareholders. With approval of the board of directors, the approval by holders of a majority of our voting securities would be required to affect any such transaction.

Certain Provisions of North Carolina Law

We have opted out of the North Carolina Shareholder Protection Act and the North Carolina Control Share Acquisition Act. The Shareholder Protection Act generally requires that, unless certain “fair price” and other conditions are met, the affirmative vote of the holders of 95.0% of the voting shares of a corporation is necessary to adopt or authorize a business combination with any other entity, if that entity is the beneficial owner, directly or indirectly, of more than 20.0% of the voting shares of the company. The Control Share Acquisition Act provides that any person or party who acquires or makes a bona fide offer to acquire “control shares” (defined as a number of shares which, when added to other shares held, gives the holder voting power in the election of directors equal to 20.0%, 33.3% or a majority of all voting power) may only vote those shares if the remaining shareholders of the corporation, by resolution, permit those shares to be voted. If the shareholders of the corporation permit the “control shares” to be accorded voting rights and the holder of the “control shares” has a majority of all voting power for the election of directors, the other shareholders of the corporation have the right to the redemption of their shares at the fair value of the shares at the date prior to the date on which the vote was taken which gave voting rights to the “control shares.”

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Certain Provisions of Federal Law

The acquisition of more than 10.0% of our outstanding common stock may, in certain circumstances, be subject to the provisions of the Change in Bank Control Act of 1978. The FDIC has also adopted a regulation pursuant to the Change in Bank Control Act which generally requires persons who at any time intend to acquire control of an FDIC-insured state-chartered non-member bank, either directly or indirectly through an acquisition of control of its holding company, to provide 60 days prior written notice and certain financial and other information to the FDIC. Control for the purpose of this Act exists in situations in which the acquiring party has voting control of at least 25.0% of any class of voting stock or the power to direct the management or policies of the bank or the holding company. However, under FDIC regulations, control is presumed to exist where the acquiring party has voting control of at least 10.0% of any class of voting securities if (a) the bank or holding company has a class of voting securities which is registered under Section 12 of the Exchange Act, or (b) the acquiring party would be the largest holder of a class of voting shares of the bank or the holding company. The statute and underlying regulations authorize the FDIC to disapprove a proposed acquisition on certain specified grounds.

Prior approval of the Federal Reserve Board would be required for any acquisition of control of the company or the bank by any bank holding company under the Bank Holding Company Act. Control for purposes of the Bank Holding Company Act would be based on, among other factors, a 25.0% voting stock test or on the ability of the holding company otherwise to control the election of a majority of our board of directors. As part of such acquisition, the acquiring company (unless already so registered) would be required to register as a bank holding company under the Bank Holding Company Act.

The Exchange Act requires that a purchaser of any class of a corporation’s securities registered under the Exchange Act notify the SEC and such corporation within 10 days after its purchases exceed 5.0% of the outstanding shares of that class of securities. This notice must disclose the background and identity of the purchaser, the source and amount of funds used for the purchase, the number of shares owned and, if the purpose of the transaction is to acquire control of the corporation, any plans to materially alter the corporation’s business or corporate structure. In addition, any tender offer to acquire a corporation’s securities is subject to the limitations and disclosure requirements of the Exchange Act.

Indemnification of Directors and Officers

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons under the provisions discussed above or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Common Stock Financing

In August 2014, we completed a common stock financing with Wellington Management, an institutional accredited investor. In the transaction, we issued 7,048,300 split-adjusted shares, in the aggregate, of our voting common stock and non-voting common stock at a purchase price per share of $10.63, for an aggregate purchase price of $74.9 million. As of March 31, 2015, Wellington Management beneficially held approximately 24.6% of our outstanding common stock, of which 2,324,770 shares are voting common stock and 4,723,530 shares are non-voting common stock.

In connection with the common stock financing, we also entered into a Significant Shareholders Agreement with Wellington Management and certain key holders of our common stock. Under this agreement, the parties agreed to vote their shares of common stock in such a manner so as to elect certain individuals or designees to our board of directors, including our Chairman and Chief Executive Officer, James S. Mahan III, our three executive officers who currently serve as members of the board of directors, and a board member designated by Wellington Management. Additionally, the Significant Shareholders Agreement requires that the board of

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directors include certain non-management directors. The Significant Shareholders Agreement agreement also provides for tag-along rights for Wellington Management in connection with the sale of shares of our common stock by certain insiders. This agreement will terminate upon the closing of the offering contemplated by this prospectus.

Also in connection with the common stock financing, we entered into a Registration and Other Rights Agreement with the Wellington Management. This agreement provides Wellington Management with demand registration rights, piggyback registration rights, certain information and board observation rights, and rights of participation with respect to future stock offers. With the exception of the demand registration rights and piggyback registration rights afforded under the agreement, such rights terminate upon the closing of the offering contemplated by this prospectus. See “ — Registration Rights” below for more detail on the demand registration rights and piggyback registration rights held by Wellington Management.

Registration Rights

U.S. Treasury

Under certain circumstances, which do not apply to this offering, the U.S. Treasury has the right to require us to register on its behalf our outstanding subordinated debt securities we issued to the U.S. Treasury under the Small Business Lending Fund program. Holders of our outstanding SBLF debt securities have no right to exchange or convert such securities into any other of the Company’s securities.

Wellington Management

Wellington Management controlled holders of shares of our common stock are entitled to the following rights with respect to the registration of such shares for public resale under the Securities Act, pursuant to a registration and other rights agreement by and among us and such stockholders. We refer to the shares owned by Wellington Management controlled stockholders collectively as “registrable securities.”

The registration of registrable securities as a result of the following rights being exercised would enable the holders to trade these shares without restriction under the Securities Act when the applicable registration statement is declared effective. We will be required to pay all expenses, other than underwriting discounts and commissions, related to any registration statement filed pursuant to the exercise of these registration rights.

Demand Registration Rights

If at any time after six months following the effective date of this offering the holders of at least a majority of the registrable securities then outstanding request in writing that we file a registration statement on Form S-1 covering the registration of registrable securities with an anticipated aggregate offering price of at least $5.0 million, we may be required to register such registrable securities. Additionally, if, at any time we are eligible to use a Form S-3 registration statement, the holders of at least a majority of the registrable securities then outstanding request in writing that we file a registration statement on Form S-3 covering the registration of registrable securities with an anticipated aggregate offering price of at least $1.0 million, we may be required to register such registrable securities. Depending on certain conditions set forth in the registration and other rights agreement by and among us and such stockholders, however, we may defer either such registration for up to 60 days. If the holders requesting registration intend to distribute their shares by means of an underwriting, the underwriters of such offering will have the right to limit the number of shares to be underwritten for reasons related to the marketing of the shares.

Piggyback Registration Rights

If at any time we propose to register any of our securities under the Securities Act, the holders of registrable securities will be entitled to notice of the registration and to include all or a portion of their registrable securities in the registration. These piggyback registration rights are subject to specific conditions and limitations set forth

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in the registration and other rights agreement by and among us and such stockholders, including the right of the underwriters to limit the number of shares included in any such registration under specific circumstances. We have the right to terminate or withdraw any registration initiated by us prior to the effectiveness of such registration statement whether or not the holders of registrable securities have elected to include their shares in the registration.

The registration rights granted to Wellington Management controlled holders will terminate on the fifth anniversary of this offering.

Transfer Agent and Securities Registrar

The transfer agent and securities registrar for our common stock is Broadridge Corporate Issuer Solutions, Inc., Brentwood, New York.

Exchange Listing

We have applied to list our common stock on the NASDAQ Global Market under the symbol “LOB.”

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for shares of our common stock. Future sales of substantial amounts of shares of our common stock, including shares issued upon the exercise of outstanding options, in the public market after this offering, or the possibility of these sales occurring, could adversely affect the prevailing market price for our common stock or impair our ability to raise equity capital.

Upon completion of this offering, we expect to have shares of common stock outstanding (assuming the underwriters do not exercise their option to purchase additional shares). Of these shares, the shares of our common stock sold by us in this offering will be freely tradable without further restriction or registration under the Securities Act, except that any shares purchased by our “affiliates” may generally only be resold in compliance with Rule 144 under the Securities Act, which is described below. The remaining outstanding shares, will be deemed to be “restricted securities” as that term is defined in Rule 144. Restricted securities may be resold in the U.S. only if they are registered for resale under the Securities Act or an exemption from registration is available.

Lock-Up Agreements

Our executive officers and directors, certain executive officers and directors of Live Oak Bank and certain other persons, who will own in the aggregate approximately shares of our common stock after this offering (assuming they do not purchase any shares in this offering), have entered into lock-up agreements under which they have generally agreed not to sell or otherwise transfer their shares for a period of 180 days after the closing of this offering. For additional information, see “Underwriting — Lock-Up Agreements.” As a result of these contractual restrictions, shares of our common stock subject to lock-up agreements will not be eligible for sale until these agreements expire or the underwriters waive or release the shares of our common stock from these restrictions.

Following the lock-up period, all of the shares of our common stock that are restricted securities or are held by our affiliates as of the date of this prospectus will be eligible for resale in the U.S. only if they are registered for resale under the Securities Act or an exemption from registration, such as Rule 144, is available.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, any person who is not an affiliate of ours and has held their shares for at least six months, including the holding period of any prior owner other than one of our affiliates, may sell their shares without regard to volume limitations. Sales of our common stock by any such person would be subject to the availability of current public information about us if the shares to be sold were beneficially owned by such person for less than one year. In addition, under Rule 144, any person who is not an affiliate of ours and has held their shares for at least one year, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares immediately upon the closing of this offering without regard to whether current public information about us is available. Beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is an affiliate of ours and who has beneficially owned restricted securities for at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell a number of restricted shares within any three-month period a number of shares that does not exceed the greater of:

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1% of the number of shares of our common stock then-outstanding, which will equal approximately shares immediately after this offering (or shares if the underwriters exercise their option to purchase additional shares of our common stock in full); and

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the average weekly trading volume in our common stock during the four calendar weeks preceding the date of filing of a Notice of Proposed Sale of Securities pursuant to Rule 144 with respect to the sale.

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Sales under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and the availability of current public information about us.

Subject to the 180-day lock-up period described above, approximately shares of our common stock will be eligible for sale under Rule 144 subject to limitations on sales by affiliates. We cannot estimate the number of shares of our common stock that our existing shareowners will elect to sell under Rule 144.

Rule 701

Rule 701 generally allows a shareholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144 but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. However, all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701.

Form S-8 Registration Statement

We intend to file with the SEC a registration statement on Form S-8 covering the shares of common stock reserved for issuance upon the exercise of stock options under our stock incentive plans and Employee Stock Purchase Plan. That registration statement is expected to be filed and become effective as soon as practicable after the closing of this offering. Upon effectiveness of this S-8 registration statement, the shares of common stock covered by that registration statement will be eligible for sale in the public market, subject to the lock-up agreements and Rule 144 restrictions described above.

Registration Rights

For a description of registration rights held by third parties with respect to certain of our outstanding securities, see “Description of Our Securities — Registration Rights.”

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SUPERVISION AND REGULATION

Bank holding companies and state commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect the Company and Live Oak Bank. This summary contains what management believes to be the material information related to the supervision and regulation of the Company and Live Oak Bank but is not intended to be an exhaustive description of the statutes or regulations applicable to their respective businesses. Supervision, regulation and examination of the Company and Live Oak Bank by the regulatory agencies are intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”) and the financial system rather than shareholders of the Company and Live Oak Bank. We cannot predict whether or in what form any proposed statute or regulation will be adopted or the extent to which the business of the Company and Live Oak Bank may be affected by a statute or regulation. Changes in such laws and regulations may have a material effect on our business and prospects.

Federal Bank Holding Company Regulation and Structure

As a registered bank holding company, we are subject to regulation under the BHCA and to the supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Live Oak Bank has a North Carolina state charter and is subject to regulation, supervision and examination by the FDIC and the North Carolina Commissioner of Banks, or NCCOB.

The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before:

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it may acquire direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank;

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it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or

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it may merge or consolidate with any other bank holding company.

The BHCA further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or that would substantially lessen competition in the banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anti-competitive effects. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues focuses, in part, on the performance under the Community Reinvestment Act of 1977, both of which are discussed elsewhere in more detail.

Subject to various exceptions, the BHCA and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is also presumed to exist, although rebuttable, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

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the bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934, as amended, or the Exchange Act; or

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no other person owns a greater percentage of that class of voting securities immediately after the transaction.

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Our common stock will be registered under Section 12 of the Exchange Act following the conclusion of this offering. The regulations provide a procedure for challenging rebuttable presumptions of control.

The BHCA generally prohibits a bank holding company from retaining direct or indirect ownership or control of any voting shares of any company which is not a bank or bank holding company or engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries and acquiring or retaining direct or indirect control of any company engaged in any activities other than activities closely related to banking or managing or controlling banks. In determining whether a particular activity is permissible, the Federal Reserve considers whether performing the activity can be expected to produce benefits to the public that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or control of any subsidiary when the continuation of the activity or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.

Under the BHCA, a bank holding company may file an election with the Federal Reserve to be treated as a financial holding company and engage in an expanded list of financial activities. The election must be accompanied by a certification that all of the company’s insured depository institution subsidiaries are “well capitalized” and “well managed.” Additionally, the Community Reinvestment Act of 1977 rating of each subsidiary bank must be satisfactory or better. If, after becoming a financial holding company and undertaking activities not permissible for a bank holding company, the company fails to continue to meet any of the prerequisites for financial holding company status, the company must enter into an agreement with the Federal Reserve to comply with all applicable capital and management requirements. If the company does not return to compliance within 180 days, the Federal Reserve may order the company to divest its subsidiary banks or the company may discontinue or divest investments in companies engaged in activities permissible only for a bank holding company that has elected to be treated as a financial holding company. We have not filed an election to become a financial holding company.

Under Federal Reserve policy and as has been recently codified by the Dodd-Frank Act, the Company is expected to act as a source of financial strength for Live Oak Bank and to commit resources to support Live Oak Bank. This support may be required at times when we might not be inclined to provide it or it might not be in our best interests or the best interests of our shareholders. In addition, any capital loans made by the Company to Live Oak Bank will be repaid only after Live Oak Bank’s deposits and various other obligations are repaid in full.

Live Oak Bank is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations and is supervised and examined by state and federal bank regulatory agencies. The FDIC and the NCCOB regularly examine the operations of Live Oak Bank and are given the authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions. These agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Bank Merger Act

Section 18(c) of the Federal Deposit Insurance Act, popularly known as the “Bank Merger Act,” requires the prior written approval of appropriate federal bank regulatory agencies before any bank may (i) merge or consolidate with, (ii) purchase or otherwise acquire the assets of, or (iii) assume the deposit liabilities of, another bank if the resulting institution is to be a state nonmember bank.

The Bank Merger Act prohibits the applicable federal bank regulatory agency from approving any proposed merger transaction that would result in a monopoly, or would further a combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States. Similarly, the Bank Merger

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Act prohibits the applicable federal bank regulatory agency from approving a proposed merger transaction whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade. An exception may be made in the case of a merger transaction whose effect would be to substantially lessen competition, tend to create a monopoly, or otherwise restrain trade, if the applicable federal bank regulatory agency finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.

In every proposed merger transaction, the applicable federal bank regulatory agency must also consider the financial and managerial resources and future prospects of the existing and proposed institutions, the convenience and needs of the community to be served, and the effectiveness of each insured depository institution involved in the proposed merger transaction in combating money-laundering activities, including in overseas branches.

State Law

Live Oak Bank is subject to extensive supervision and regulation by the NCCOB. The NCCOB oversees state laws that set specific requirements for bank capital and that regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The NCCOB supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and banks are required to make regular reports to the NCCOB describing in detail their resources, assets, liabilities, and financial condition. Among other things, the NCCOB regulates mergers and consolidations of state-chartered banks, capital requirements for banks, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

The NCCOB has extensive enforcement authority over North Carolina banks. Such authority includes the ability to issue cease and desist orders and to seek civil money penalties. The NCCOB may also take possession of a North Carolina bank in various circumstances, including for a violation of its charter or of applicable laws, operating in an unsafe and unsound manner, or as a result of an impairment of its capital, and may appoint a receiver.

On October 1, 2012, the North Carolina Banking Law Modernization Act became effective and many of the state banking laws to which Live Oak Bank is subject were amended. Under the revised banking laws, the NCCOB continues to enforce specific requirements for bank capital, the payment of dividends, loans to officers and directors, record keeping, and types and amounts of loans and investments made by commercial banks. It is not possible to predict fully the future effects that this legislation may have on the business and earnings of Live Oak Bank.

The Company is also required to maintain registration as a bank holding company with the NCCOB. Subject to certain exceptions, the Company may not acquire control over another bank or bank holding company or consummate a merger or other combination transaction with another company without the prior approval of the NCCOB. The NCCOB also has authority to assert civil money penalties against a holding company if the NCCOB determines such holding company to be in violation of any banking laws and the holding company fails to comply with an NCCOB order to cease and desist such violations of law.

Payment of Dividends and Other Restrictions

The Company is a legal entity separate and distinct from the Bank. While there are various legal and regulatory limitations under federal and state law on the extent to which banks can pay dividends or otherwise supply funds to holding companies, the principal source of cash revenues for the Company is dividends from the Bank. The relevant federal and state regulatory agencies have authority to prohibit a state bank or bank holding company, which would include the Bank and the Company, from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of a bank, be deemed to constitute an unsafe or unsound practice in conducting its business.

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North Carolina commercial banks, such as Live Oak Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Specifically, an insured depository institution, such as Live Oak Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).

The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past four quarters is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if any of the holding company’s bank subsidiaries are classified as undercapitalized.

A bank holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve.

Capital Adequacy

The Company must comply with the Federal Reserve’s established capital adequacy standards, and Live Oak Bank is required to comply with the capital adequacy standards established by the FDIC. The Federal Reserve has promulgated two basic measures of capital adequacy for bank holding companies: a risk-based measure and a leverage measure. A bank holding company must satisfy all applicable capital standards to be considered in compliance.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, account for off-balance-sheet exposure and minimize disincentives for holding liquid assets.

Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items. Under revised capital standards that apply to us and the Bank as of January 1, 2015, the minimum risk-based capital ratios are a common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a Tier 1 capital to risk-weighted assets ratio of 6%, and a total capital to risk-weighted assets ratio of 8%. In addition, to avoid restrictions on capital distributions and discretionary bonus payments, we and the Bank are required to meet a capital conservation buffer of common equity Tier 1 capital in addition to the minimum common equity Tier 1 capital ratio. The capital conservation buffer will be phased in beginning January 1, 2016 until January 1, 2019, at which point it will be set at 2.5% common equity Tier 1 capital to risk-weighted assets, which sits “on top” of the 4.5% minimum common equity Tier 1 to risk-weighted assets ratio. Common equity Tier 1 capital is predominantly comprised of retained earnings and common stock instruments (that meet strict delineated criteria), net of treasury stock, and after making necessary capital deductions and adjustments. Tier 1 capital is comprised of common equity Tier 1 capital plus Additional Tier 1 capital, which consists of noncumulative perpetual preferred stock and similar instruments meeting specified eligibility criteria and “TARP” preferred stock and other instruments issued under the Emergency Economic Stabilization Act of 2008. Total capital is comprised of Tier 1 capital plus Tier 2 capital, which consists of subordinated debt with a minimum original maturity of at least five years and a limited amount of loan loss reserves.

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At March 31, 2015, Live Oak Bank’s risk-based capital ratios, as calculated under the revised capital standards applicable as of January 1, 2015, were 12.44% common equity Tier 1 capital to risk weighted assets, 12.44% Tier 1 capital to risk weighted assets, and 13.47% total capital to risk weighted assets.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 capital to average total on-balance sheet assets, less goodwill and certain other intangible assets, of 4% for bank holding companies. The Company’s ratio at March 31, 2015 was 8.66% compared to 13.38% at December 31, 2014. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indications of capital strength in evaluating proposals for expansion or new activities.

Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business. As described below, the FDIC can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements.

The Federal Deposit Insurance Act, or FDI Act, requires the federal regulatory agencies to take “prompt corrective action” if a depository institution does not meet minimum capital requirements. The FDI Act establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

The federal bank regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels applicable to FDIC-insured banks. The relevant capital measures are the Total Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio, Common Equity Tier 1 Capital ratio and the leverage ratio. As of January 1, 2015, an FDIC-insured bank was:

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“well capitalized” if it has a Total Risk-Based Capital ratio of 10% or greater, a Tier 1 Risk-Based Capital ratio of 8% or greater, a Common Equity Tier 1 Capital ratio of 6.5% or greater and a leverage ratio of 5% or greater and is not subject to any order or written directive by the appropriate regulatory authority to meet and maintain a specific capital level for any capital measure;

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“adequately capitalized” if it has a Total Risk-Based Capital ratio of 8% or greater, a Tier 1 Risk-Based Capital ratio of 6% or greater, a Common Equity Tier 1 Capital ratio of 4.5% or greater and a leverage ratio of 4% or greater and is not “well capitalized”;

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“undercapitalized” if it has a Total Risk-Based Capital ratio of less than 8%, a Tier 1 Risk-Based Capital ratio of less than 6%, a Common Equity Tier 1 Capital ratio of less than 4% or a leverage ratio of less than 4%;

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“significantly undercapitalized” if it has a Total Risk-Based Capital ratio of less than 6%, a Tier 1 Risk-Based Capital ratio of less than 4%, a Common Equity Tier 1 Capital ratio of less than 3% or a leverage ratio of less than 3%; and

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“critically undercapitalized” if its tangible equity is equal to or less than 2% of average quarterly tangible assets.

An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of March 31, 2015, Live Oak Bank had capital levels that qualify as “well capitalized” under the regulations applicable as of January 1, 2015.

The FDI Act generally prohibits an FDIC-insured bank from making a capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank is or would thereafter be

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“undercapitalized.” “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. The federal regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan until the institution has been adequately capitalized on average during each of four consecutive calendar quarters. The aggregate liability of the parent holding company under such guaranty is limited to the lesser of: (i) an amount equal to 5% of the bank’s total assets at the time it became “undercapitalized”; and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

“Significantly undercapitalized” insured banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets and the cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. A bank that is not “well capitalized” is also subject to certain limitations relating to brokered deposits.

The regulatory capital framework under which the Company and Live Oak Bank operate has recently changed in significant respects as a result of the Dodd-Frank Act, which was enacted in July 2010, and other regulations, including the separate regulatory capital requirements put forth by the Basel Committee on Banking Supervision, commonly known “Basel III.”

The major provisions of the new rule applicable to us and the Bank are:

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The new rules implement higher minimum capital requirements described above in this section, including a new common equity Tier 1 capital requirement and capital conservation buffer, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets (MSAs), deferred tax assets (DTAs), and certain investments in the capital of unconsolidated financial institutions. These enhancements both improve the quality and increase the quantity of capital required to be held by banking organizations compared to the previous capital rules, better equipping the U.S. banking system to deal with adverse economic conditions.

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The new rules also affect the inclusion of mortgage servicing assets, or MSAs, as an element of capital. Specifically, MSAs are limited to 10% of a bank’s common equity Tier 1 capital and the combined balance of MSAs, deferred tax assets, and investments in the common stock of unconsolidated financial institutions is limited to 15% of a bank’s common equity Tier 1 capital. These combined assets must be deducted from common equity to the extent that they exceed the 15% threshold. Any portion of a bank’s MSAs that are not deducted from the calculation of common equity Tier 1 will be subject to a 100% risk weight that will increase to 250% in 2018.

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Compliance by the Company and Live Oak Bank with these new capital requirements will likely affect their respective operations.

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The Volcker Rule

Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, including hedge funds and private equity funds. The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities. The Volcker Rule becomes fully effective in July 2015, and banking entities currently have until July 2016 to divest certain legacy investments in covered funds. The Volcker Rule is not expected to have a material impact on our operations.

Acquisitions

We must comply with numerous laws related to any potential acquisition activity. Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve. The acquisition of non-banking companies is also regulated by the Federal Reserve. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states has opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years, and to certain deposit market-share limitations. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law. Additionally, since passage of the Dodd-Frank Act, a bank is now permitted to open a de novo branch in any state if that state would permit a bank organized in that state to open a branch.

Restrictions on Affiliate Transactions

Sections 23A and 23B of the Federal Reserve Act establish parameters for a bank to conduct “covered transactions” with its affiliates, with the objective of limiting risk to the insured bank. Generally, Sections 23A and 23B (i) limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and limit the aggregate of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those that would be provided to a non-affiliate. The term “covered transaction” includes the making of loans to the affiliate, purchase of assets from the affiliate, issuance of a guaranty on behalf of the affiliate and several other types of transactions.

The Dodd-Frank Act imposes new restrictions on transactions between affiliates by amending these two sections of the Federal Reserve Act. Under the Dodd-Frank Act, restrictions on transactions with affiliates are enhanced by (i) including among “covered transactions” transactions between bank and affiliate-advised investment funds; (ii) including among “covered transactions” transactions between a bank and an affiliate with respect to securities repurchase agreements and derivatives transactions; (iii) adopting stricter collateral rules; and (iv) imposing tighter restrictions on transactions between banks and their financial subsidiaries.

FDIC Insurance Assessments

The assessment rate paid by each DIF member institution is based on its relative risks of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Live Oak Bank’s insurance assessments during 2014 and 2013 were $251 thousand

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and $263 thousand, respectively. Because of the growing number of bank failures and costs to the DIF, the FDIC required a special assessment during 2009. An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The FDIC may terminate insurance of deposits upon a finding that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

The Dodd-Frank Act expands the base for FDIC insurance assessments, requiring that assessments be based on the average consolidated total assets less tangible equity capital of a financial institution. On February 7, 2011, the FDIC approved a final rule to implement the foregoing provision of the Dodd-Frank Act. Among other things, the final rule revises the assessment rate schedule to provide initial base assessment rates ranging from 5 to 35 basis points, subject to adjustments which could increase or decrease the total base assessment rates. The FDIC has three possible adjustments to an institution’s initial base assessment rate: (1) a decrease of up to five basis points (or 50% of the initial base assessment rate) for long-term unsecured debt, including senior unsecured debt (other than debt guaranteed under the Temporary Liquidity Guarantee Program) and subordinated debt; (2) an increase for holding long-term unsecured or subordinated debt issued by other insured depository institutions known as the Depository Institution Debt Adjustment; and (3) for institutions not well rated and well capitalized, an increase not to exceed 10 basis points for brokered deposits in excess of 10 percent of domestic deposits.

The law also gives the FDIC enhanced discretion to set assessment rate levels.

The FDIC also collects a deposit-based assessment from insured financial institutions on behalf of the Financing Corporation, or the FICO. The funds from these assessments are used to service debt issued by FICO in its capacity as a financial vehicle for the Federal Savings & Loan Insurance Corporation. The FICO assessment rate is set quarterly and in 2014 ranged from .155 basis points in the first quarter to .150 basis points in the fourth quarter per $100 of assessable deposits. These assessments will continue until the debt matures in 2017 through 2019.

Community Reinvestment Act

The Community Reinvestment Act requires federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low and moderate-income borrowers in their local communities. An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions are examined using a performance-based lending, investment and service test. Small institutions are examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.

The Community Reinvestment Act regulations provide for certain disclosure obligations. Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s Community Reinvestment Act performance and to review the institution’s Community Reinvestment Act public file. Each lending institution must maintain for public inspection a file that includes a listing of branch locations and services, a summary of lending activity, a map of its communities and any written comments from the public on its performance in meeting community credit needs. The Community Reinvestment Act requires public disclosure of the regulators’ written Community Reinvestment Act evaluations of financial institutions. This promotes enforcement of Community Reinvestment Act requirements by providing the public with the status of a particular institution’s community reinvestment record.

The Gramm-Leach-Bliley Act made various changes to the Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual Community Reinvestment Act reports relating to such agreements must be made available to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no

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new activities authorized under the Gramm-Leach-Bliley Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory Community Reinvestment Act rating in its latest Community Reinvestment Act examination. Live Oak Bank operates under an approved CRA strategic plan and received an “Outstanding” rating in its last CRA examination, which was conducted as of April 15, 2013.

Additional Legislative and Regulatory Matters

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. The USA PATRIOT Act also requires the Secretary of the Treasury to prescribe by regulation minimum standards that financial institutions must follow to verify the identity of customers, both foreign and domestic, when a customer opens an account. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

Sarbanes-Oxley mandates for public companies, such as the Company following this offering, a variety of reforms intended to address corporate and accounting fraud and provides for the establishment of the PCAOB, which enforces auditing, quality control and independence standards for firms that audit SEC-reporting companies. Sarbanes-Oxley imposes higher standards for auditor independence and restricts the provision of consulting services by auditing firms to companies they audit and requires that certain audit partners be rotated periodically. It also requires chief executive officers and chief financial officers, or their equivalents, to certify the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement, and increases the oversight and authority of audit committees of publicly traded companies.

Fiscal and Monetary Policy

Banking is a business which depends on interest rate differentials for success. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the significant portion of a bank’s earnings. Thus, our earnings and growth will be subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve and the reserve requirements on deposits. The nature and timing of any changes in such policies and their effect on our business and results of operations cannot be predicted.

Current and future legislation and the policies established by federal and state regulatory authorities will affect our future operations. Banking legislation and regulations may limit our growth and the return to their investors by restricting certain of our activities.

In addition, capital requirements could be changed and have the effect of restricting the activities of the Company or requiring additional capital to be maintained. We cannot predict with certainty what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our business and results of operations.

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Real Estate Lending Evaluations

The federal regulators have adopted uniform standards for evaluations of loans secured by real estate or made to finance improvements to real estate. Banks are required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. The regulations establish loan to value ratio limitations on real estate loans. Live Oak Bank’s respective loan policies establish limits on loan to value ratios that are equal to or less than those established in such regulations.

Commercial Real Estate Concentrations

Lending operations of commercial banks may be subject to enhanced scrutiny by federal banking regulators based on a bank’s concentration of commercial real estate loans. On December 6, 2006, the federal banking regulators issued final guidance to remind financial institutions of the risk posed by commercial real estate, or CRE, lending concentrations. CRE loans generally include land development, construction loans, and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:

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total reported loans for construction, land development and other land, or C&D, represent 100% or more of the institution’s total capital; or

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total CRE loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s CRE loan portfolio has increased over 50% or more during the prior 36 months.

As of March 31, 2015, our C&D concentration as a percentage of bank capital totaled 234.07% and our CRE concentration, net of owner-occupied loans, as a percentage of capital totaled 28.82%.

Limitations on Incentive Compensation

In October 2009, the Federal Reserve issued proposed guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking or undermine the safety and soundness of the organization. In connection with the proposed guidance, the Federal Reserve announced that it would review incentive compensation arrangements of bank holding companies such as the Company as part of the regular, risk-focused supervisory process.

In June 2010, the Federal Reserve issued the incentive compensation guidance in final form and was joined by the FDIC, and the Office of the Comptroller of the Currency. The final guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide employees incentives that appropriately balance risk and reward and, thus, do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

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Economic Environment

The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits. The Federal Reserve’s monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of these policies on our business and earnings cannot be predicted.

Evolving Legislation and Regulatory Action

In 2009, many emergency government programs enacted in 2008 in response to the financial crisis and the recession slowed or wound down, and global regulatory and legislative focus has generally moved to a second phase of broader regulatory reform and a restructuring of the entire financial regulatory system. The Dodd-Frank Act was signed into law in 2010 and implements many new changes in the way financial and banking operations are regulated in the United States, including through the creation of a new resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies and numerous other provisions intended to strengthen the financial services sector. Pursuant to the Dodd-Frank Act the Financial Stability Oversight Council, or the FSOC, was created and is charged with overseeing and coordinating the efforts of the primary U.S. financial regulatory agencies (including the Federal Reserve, the FDIC and the SEC) in establishing regulations to address systemic financial stability concerns. Under the Dodd-Frank Act the CFPB was also created as a new consumer financial services regulator. The CFPB is authorized to prevent unfair, deceptive and abusive practices and ensure that consumers have access to markets for consumer financial products and services and that those such markets are fair, transparent and competitive.

New laws or regulations or changes to existing laws and regulations, including changes in interpretation or enforcement, could materially adversely affect our financial condition or results of operations. Many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years. As a result, the overall financial impact on the Company and Live Oak Bank cannot be anticipated at this time.

Small Business Lending Fund

The Small Business Jobs Act of 2010 created the Small Business Lending Fund to invest capital into community banking organizations. Through the fund, the U.S. Department of the Treasury (the “U.S. Treasury”) invested in financial institutions through the purchase of senior preferred stock or indebtedness. The U.S. Treasury could invest up to 5% of risk-weighted assets for financial institutions with $1 billion of total assets or less as of December 31, 2009, or up to 3% of risk-weighted assets for financial institutions with more than $1 billion, but less than $10 billion, in total assets on that date. In April 2011, the Company elected to participate in the program and issued $6.8 million in senior securities to the U.S. Treasury (“SBLF Securities”).

The starting point for interest rates on long term indebtedness issued by participants to the U.S. Treasury is 7.7% for S corporations. Financial institutions could “buy down” the rate to as low as 1.5% by increasing their level of qualified small business lending. The increase will be measured based on the increase over a “baseline level,” which is generally the average amount of small business lending reported by that institution in its call report for the four full quarters immediately preceding the date of enactment of the Small Business Jobs and Credit Act, less (a) net loan charge-offs with respect to small business lending, and (b) gains realized from mergers, acquisitions or purchases of loans after origination. For every 2.5% by which the amount of small business lending has increased, the dividend or interest rate on senior preferred stock is reduced. If, however, small business lending has remained the same or decreased relative to the baseline level in the eighth quarter, the

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interest rate the participant would pay would increase to 10.8% beginning in the tenth quarter and continuing until the end of the four-and-a-half year period from initial funding. After the four-and-a-half-year period from initial funding, the interest rate will increase to 13.8% until the long term debt issued to the U.S. Treasury is redeemed.

By the terms of the SBLF Securities, if we miss a quarterly interest payment on such securities, we will not be allowed to effectuate a repurchase or declare or pay dividends on our securities until all accrued interest on the SBLF Securities has been paid in full. If we miss an interest payment on SBLF Securities for five quarterly interest periods or more, whether or not consecutive, the U.S. Treasury will have the right, but not the obligation, to elect a representative to serve as an observer on our board of directors, until we pay full interest for four consecutive interest periods.

The SBLF Securities hold certain consent rights with respect to (i) any authorization or issuance of stock ranking senior to the SBLF Securities, (ii) any amendment to the terms of the SBLF Securities or our organizational documents that adversely affects the rights of the SBLF Securities, (iii) any merger or exchange which would affect the rights of the SBLF Securities and (iv) any sale of all or substantially all of our assets if the proceeds will not be used to redeem all outstanding SBLF Securities. We may redeem the SBLF Securities at any time, in whole or in part, with the approval of the Federal Reserve and in increments of at least 25% of the original principal amount, or 100% of the remaining amount if less than the 25% of the principal amount is outstanding.

Federal and State Taxation

The Company and its subsidiaries file a consolidated federal income tax return and separate state income tax returns in North Carolina. All the returns are filed on a calendar year basis. Consolidated income tax returns have the effect of eliminating intercompany income and expense, including dividends, from the computation of consolidated taxable income for the taxable year in which the items occur. In accordance with an income tax sharing agreement, income tax charges or credits are allocated among Live Oak and its subsidiaries on the basis of their respective taxable income or taxable loss that is included in the consolidated income tax return.

Banks and bank holding companies are subject to federal and state income taxes in essentially the same manner as other corporations. Taxable income is generally calculated under applicable sections of the Internal Revenue Code of 1986, as amended (the “Code”), with some modifications required by state law. Although Live Oak’s federal income tax liability is determined under provisions of the Code, which is applicable to all taxpayers, Sections 581 through 597 of the Code apply specifically to financial institutions.

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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes certain material U.S. federal income tax consequences applicable to “U.S. holders” (as defined below) with respect to the purchase, ownership and disposition of our common stock. This summary is limited to investors who will hold our common stock as a capital asset and does not discuss all aspects of U.S. federal income taxation that may be important to particular investors in light of their individual circumstances. In addition, this summary does not address any state, local or non-U.S. tax consequences or any tax consequences applicable to any holders of common stock that are not U.S. holders.

This discussion does not address the tax consequences to investors who are subject to special tax rules, including:

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banks and other financial institutions;

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insurance companies;

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governments and governmental entities;

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dealers in securities or currencies;

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traders in securities that elect to use a mark-to-market method of accounting;

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persons who will hold our common stock as part of a straddle, hedge, conversion, constructive sale, or other integrated security transaction for U.S. federal income tax purposes;

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regulated investment companies;

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real estate investment trusts;

•

thrift institutions;

•

a person who purchases or sells our common stock as part of a wash sale for tax purposes;

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U.S. expatriates;

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tax-exempt organizations;

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persons whose functional currency is not the U.S. dollar;

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persons who are subject to alternative minimum tax;

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persons acquiring their shares of our common stock through the exercise of an employee stock option or otherwise as compensation; and

•

partnerships and other pass-through entities.

These investors may be subject to tax rules that differ significantly from those summarized below.

If a partnership (including any other entity treated as a partnership for U.S. federal income tax purposes) is a holder of our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. If you are an entity taxable as a partnership, or a member or partner of an entity taxable as a partnership, holding our common stock, you should consult your own tax advisors as to the particular U.S. federal income tax consequences of the purchase, ownership and disposition of our common stock.

For purposes of this summary, you are a “U.S. holder” if you are a beneficial owner of our common stock and you are for U.S. federal income tax purposes (i) an individual citizen or resident of the U.S., (ii) a corporation created or organized in the U.S. or under the laws of the U.S., any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if it (A) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (B) has a valid election in effect under applicable U.S.Treasury regulations to be treated as a U.S. person.

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This summary is based upon current provisions of the Code, U.S. Treasury regulations promulgated under the Code and judicial and administrative authority, all of which are subject to differing interpretations or change, possibly with retroactive effect. You are urged to consult your own tax advisor regarding the U.S. federal, state, local, and non-U.S. income and other tax considerations of the purchase, ownership, and disposition of our common stock.

U.S. Holders

Distributions on Our Common Stock

In general, if distributions are made with respect to our common stock, the distributions will be treated as dividends to the extent of our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. Any portion of a distribution in excess of our current and accumulated earnings and profits is treated first as a nontaxable return of capital reducing your tax basis in our common stock. Any amount in excess of your tax basis is treated as capital gain, the tax treatment of which is discussed below under “U.S. Holders — Sale or Redemption of Our Common Stock.”

Under current law, distributions paid to a U.S. holder that is an individual or other non-corporate holder of our common stock will generally be subject to a reduced maximum federal income tax rate, to the extent such distributions are treated as dividends and are treated as “qualified dividend income” for U.S. federal income tax purposes. The maximum tax rates for qualified dividend income are based on such U.S. holder’s level of overall taxable income for the year, and the applicable thresholds are adjusted annually for inflation.

Qualified dividend income will be subject to a maximum rate of 20% to the extent such a U.S. holder’s taxable income exceeds the threshold for the highest marginal income tax bracket, which for 2015 is $464,850 for joint filers or surviving spouses, $439,000 for heads of household, $413,200 for single filers, and $232,425 for married taxpayers filing separately. A zero percent income tax rate will apply to qualified dividend income to the extent such a U.S. holder’s taxable income, exclusive of qualified dividend income, is less than other applicable thresholds, which for 2015 are $74,900 for joint filers or surviving spouses, $50,200 for heads of household, $37,450 for single filers, and $37,450 for married taxpayers filing separately. All other qualified dividend income for such a U.S. holder will be subject to a maximum tax rate of 15%.

The rate reduction does not apply to dividends that are paid to individual shareholders with respect to common stock that is held for 60 days or less during the 121-day period beginning on the date that is 60 days before the date on which our common stock becomes ex-dividend. Furthermore, the rate reduction does not apply to dividends received to the extent that an individual holder elects to treat the dividends as “investment income” for purposes of determining the holder’s limit for the deduction of investment interest under Section 163(d) of the Code. In addition, see “Medicare Tax on Unearned Income” below for the possible application of an additional 3.8% Medicare tax on certain dividends and other “net investment income.”

Dividends received by corporate holders of our common stock may be eligible for a dividends received deduction equal to 70% of the amount of the distribution, subject to applicable limitations, including limitations related to “debt financed portfolio stock” under Section 246A of the Code and to the holding period requirements of Section 246 of the Code. In addition, any amount received by a corporate holder that is treated as a dividend may, depending on the circumstances, constitute an “extraordinary dividend” subject to the provisions of Section 1059 of the Code. Under Code Section 1059, a corporate holder that has held shares for two years or less before the dividend announcement date generally must reduce the income tax basis of all of the holder’s shares (but not below zero) by the “non-taxed portion” of any “extraordinary dividend” and, if the non-taxed portion exceeds the holder’s income tax basis for the shares, must treat any excess as gain from the sale or exchange of the shares in the year the payment is received. Individual holders of our common stock who receive any “extraordinary dividends” that are treated as “qualified dividend income” (as discussed above) will be required to treat any losses on the sale of such common stock as long-term capital losses to the extent of such dividends. We strongly encourage you to consult your own tax advisor regarding the extent, if any, to which these provisions may apply to you in light of your particular facts and circumstances.

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In general, for purposes of meeting the holding period requirements for both the dividends received deduction and the reduced maximum tax rate on qualified dividends described above, U.S. holders may not count towards their holding period any period in which they (i) have the option to sell, are under a contractual obligation to sell, or have made (and not closed) a short sale of our common stock, or substantially identical stock or securities, (ii) are the grantor of an option to buy our common stock, or substantially identical stock or securities or (iii) otherwise have diminished their risk of loss on our common stock by holding one or more other positions with respect to substantially similar or related property. The U.S. Treasury regulations provide that a taxpayer has diminished its risk of loss on stock by holding a position in substantially similar or related property if the taxpayer is, for example, the beneficiary of a guarantee, surety agreement or similar arrangement that provides for payments that will substantially offset decreases in the fair market value of the stock.

In addition, the Code disallows the dividends received deduction as well as the reduced maximum tax rate on qualified dividend income if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. U.S. holders are advised to consult their own tax advisors regarding the implications of these rules in light of their particular circumstances.

Sale or Redemption of Our Common Stock

On the sale, exchange, or other disposition of our common stock to a party other than us, you generally will realize capital gain or loss in an amount equal to the difference between (i) the amount of cash and the fair market value of any property you receive on the sale (not including any amount attributable to declared and unpaid dividends, which will be taxable as described above under “U.S. Holders – Distributions on Our Common Stock,” to U.S. holders of record who have not previously included such dividends in income) and (ii) your adjusted income tax basis in the common stock. Any such capital gain or loss will constitute long-term capital gain or loss if you have held (or are treated as having held) your common stock for more than one year as of the date of the sale or exchange.

Under current law, if a U.S. holder is an individual or other non-corporate holder, net long-term capital gain realized by such U.S. holder is subject to a reduced maximum tax rate of 20%, 15% or 0% depending upon the taxable income level of such U.S. holder. The applicable income threshold and applicable maximum rates for long-term capital gain are the same as apply to qualified dividend income of an individual holder and are set forth above under “Distributions on Our Common Stock.” The deduction of capital losses is subject to limitations. See “Medicare Tax on Unearned Income” below for the possible application of an additional Medicare tax on certain “net investment income.” We strongly encourage you to consult your own tax advisors regarding applicable rates, holding periods and netting rules for capital gains and losses in light of your particular facts and circumstances. Certain limitations exist on the deduction of capital losses by both corporate and non-corporate taxpayers.

Medicare Tax on Unearned Income

For taxable years beginning after December 31, 2012, a U.S holder that is an individual, an estate, or a trust that does not fall into a special class of trusts that is exempt from such tax will be subject to a 3.8% Medicare tax on the lesser of (i) the U.S. holder’s “net investment income” (“undistributed net taxable income” in the case of a trust) for the relevant taxable year and (ii) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be $250,000 for joint filers or surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for other individuals). A U.S. holder’s net investment income will generally include the dividend income and any net gains from the disposition of our common stock, unless such dividend income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. holder that is an individual, estate or trust, you are urged to consult your own tax advisor regarding the applicability of this Medicare tax to your income and gains in respect of your investment in our common stock.

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Information Reporting and Backup Withholding

Information reporting will generally apply to non-corporate U.S. holders with respect to payments of dividends on our common stock and to certain payments of proceeds on the sale or other disposition of our common stock. Certain non-corporate U.S. holders may be subject to U.S. backup withholding on payments of dividends on our common stock and certain payments of proceeds on the sale or other disposition of our common stock unless the beneficial owner of our common stock furnishes the payor or its agent with a taxpayer identification number, certified under penalties of perjury, and certain other information, or otherwise establishes, in the manner prescribed by law, an exemption from backup withholding. The applicable rate for backup withholding is based on the individual income tax rates and for 2015 will be 28% of applicable proceeds.

U.S. backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a credit against a U.S. holder’s U.S. federal income tax liability, which may entitle the U.S. holder to a refund, provided the U.S. holder timely furnishes the required information to the Internal Revenue Service.

THE FOREGOING DISCUSSION IS ONLY A SUMMARY. IT DOES NOT ADDRESS ALL ASPECTS OR DETAILS OF FEDERAL TAXATION THAT MIGHT BE RELEVANT OR MATERIAL TO INVESTORS IN CONNECTION WITH AN INVESTMENT IN OUR COMMON STOCK. THIS TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY AND DOES NOT ADDRESS SPECIFIC STATE, LOCAL, FOREIGN OR OTHER TAX LAWS. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, PROSPECTIVE INVESTORS ARE ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF INVESTING IN OUR COMMON STOCK, INCLUDING THE EFFECT AND APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.

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UNDERWRITING

We are offering the shares of our common stock described in this prospectus in an underwritten offering in which we and Sandler O’Neill & Partners, L.P., Keefe Bruyette & Woods, Inc. and SunTrust Robinson Humphrey, Inc., as representatives for the underwriters named below, will enter into an underwriting agreement with respect to the shares of our common stock being offered hereby. Subject to certain conditions, each underwriter has severally agreed to purchase, and we have agreed to sell, the number of shares of our common stock indicated in the following table:


Underwriter		Number of Shares
Sandler O’Neill & Partners, L.P.
Keefe Bruyette & Woods, Inc.
SunTrust Robinson Humphrey, Inc.
Total

The underwriters are offering the shares of our common stock subject to a number of conditions, including receipt and acceptance of the common stock by the underwriters. The obligations of the underwriters to pay for and accept delivery of the shares offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions, including the listing of our common stock on the NASDAQ Global Market.

Commission and Discounts

Shares of our common stock sold by the underwriters to the public will be offered at the initial public offering price set forth on the cover of this prospectus. Any shares of our common stock sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any of these securities dealers may resell any shares of our common stock purchased from the underwriters to other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all of the shares of our common stock are not sold at the initial public offering price, the representative may change the offering price and the other selling terms. Sales of shares of our common stock made outside of the United States may be made by affiliates of the underwriters.

The following table shows the initial public offering price, underwriting discount and proceeds before expenses to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option to purchase an additional shares, discussed below:

Per Share

No Exercise

Full Exercise

Public offering price

Underwriting discounts and commissions paid by us

Proceeds to us (before expenses)

We estimate the expenses of this offering, not including the underwriting discounts, to be $ million and are payable by us. We have agreed to reimburse the underwriters up to $ for certain of their out-of-pocket expenses, including, without limitation, legal fees and expenses, marketing, syndication and travel expenses . In accordance with FINRA Rule 5110, these reimbursed expenses and fees are deemed underwriting compensation for this offering.

Option to Purchase Additional Shares

We have granted the underwriters an option to buy up to additional shares of our common stock, at the public offering price less underwriting discounts. The underwriters may exercise this option, in whole or from time to time in part. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, each underwriter will be obligated, subject to the conditions in the underwriting agreement, to purchase a number of additional shares of our common stock proportionate to such underwriter’s initial amount relative to the total amount reflected next to their name in the table above.

157

Lock-Up Agreements

We, our executive officers and directors, certain executive officers and directors of Live Oak Bank and certain other persons have entered into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of the representative, subject to limited exceptions:

•

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of our common stock or any securities convertible into or exchangeable or exercisable for our common stock, whether now owned or hereafter acquired or with respect to which such person has or hereafter acquires the power of disposition, or exercise any right with respect to the registration thereof, or file or cause to be filed any registration statement in connection therewith under the Securities Act; or

•

enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the shares of our common stock or such other securities, whether any such swap or transaction is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise.

These restrictions will be in effect for a period of 180 days after the date of the underwriting agreement. The representatives may, in their sole discretion, waive or release all or some of the securities from these lock-up agreements.

Pricing of the Offering

Prior to this offering, there has been no established public market for our common stock. The initial public offering price will be determined by negotiations among us and the representative of the underwriters. In addition to prevailing market conditions, among the factors to be considered in determining the initial public offering price of our common stock will be our historical performance, estimates of our business potential and our earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. An active trading market for the shares of our common stock may not develop. It is also possible that the shares will not trade in the public market at or above the initial public offering price following the closing of this offering.

Exchange Quotation

We have applied to have our common stock approved for listing on the NASDAQ Global Market under the symbol “LOB.”

Indemnification and Contribution

We have agreed to indemnify the underwriters and their affiliates, selling agents and controlling persons against certain liabilities, including certain liabilities under the Securities Act. If we are unable to provide this indemnification, we will contribute to the payments the underwriters and their affiliates, selling agents and controlling persons may be required to make in respect of those liabilities.

Price Stabilization, Short Positions and Penalty Bids

To facilitate this offering, the underwriters may, but are not obligated to, engage in transactions that stabilize, maintain or otherwise affect the price of our common stock, including:

•

stabilizing transactions;

•

short sales; and

158

•

purchases to cover positions created by short sales.

Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. These transactions may also include making short sales of our common stock, which involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering. Short sales may be “covered short sales,” which are short positions in an amount not greater than the underwriters’ over-allotment option referred to above, or may be “naked short sales,” which are short positions in excess of that amount.

The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which they may purchase shares through the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchased in this offering.

As an additional means of facilitating our initial public offering, the underwriters may bid for, and purchase, shares of our common stock in the open market. The underwriting syndicate also may reclaim selling concessions allowed to an underwriter or a dealer for distributing shares of our common stock in this offering, if the syndicate repurchases previously distributed shares of our common stock to cover syndicate short positions or to stabilize the price of our common stock.

As a result of these activities, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time without notice. The underwriters may carry out these transactions on NASDAQ, in the over-the-counter market or otherwise.

Passive Market Making

In connection with this offering, the underwriters and selling group members may engage in passive market making transactions in our common stock on NASDAQ in accordance with Rule 103 of Regulation M under the Exchange Act during a period before the commencement of offers or sales of our common stock and extending through the completion of the distribution of this offering. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, the bid must then be lowered when specified purchase limits are exceeded. Passive market making may cause the price of our common stock to be higher than the price that otherwise would exist in the open market in the absence of those transactions. The underwriters and dealers are not required to engage in a passive market making and may end passive market making activities at any time.

Electronic Distribution

A prospectus in electronic format may be made available by e-mail or on the websites or through online services maintained by one or more of the underwriters or their affiliates. In those cases, prospective investors may view offering terms online and may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters’ websites and any information contained on any other website maintained by any of the underwriters is not part of this prospectus, has not been approved and/or endorsed by the underwriters or us and should not be relied upon by investors.

159

Our Relationship with the Underwriters

From time to time, certain of the underwriters and their respective affiliates provide investment banking services to us in the ordinary course of their respective businesses. These underwriters and their affiliates may receive customary compensation and expense reimbursement for such services.

160

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1, which includes exhibits, schedules and amendments, under the Securities Act with respect to this offering of our common stock. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities, and this offering. The registration statement and its exhibits, as well as any other documents that we have filed with the SEC, may be inspected and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549-1004. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at http://www.sec.gov that contains the registration statement and its exhibits, schedules, and amendments.

After we have completed this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934 and will file annual, quarterly, and current reports, proxy statements, and other information with the SEC. We intend to make these filings available on our website once the offering is completed. You may read and copy any reports, statements, or other information on file at the public reference rooms. You can also request copies of these documents, for a copying fee, by writing to the SEC, or you can review these documents on the SEC’s website, as described above or via our website at www.liveoakbank.com . In addition, we will provide electronic or paper copies of our filings free of charge upon request. We intend to furnish to our shareholders our annual reports containing our audited consolidated financial statements certified by an independent registered public accounting firm.

LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will be passed upon for us by Wyrick Robbins Yates & Ponton LLP, Raleigh, North Carolina. Todd H. Eveson, a partner in the law firm of Wyrick Robbins Yates & Ponton LLP, beneficially owns 10,000 shares of Live Oak Bancshares, Inc. common stock.

Covington & Burling LLP, Washington, D.C., is acting as counsel for the underwriters in this offering.

EXPERTS

Our consolidated financial statements for the years ended December 31, 2014, 2013 and 2012 have been included in this prospectus and in the registration statement in reliance upon the report of Dixon Hughes Goodman LLP, independent registered public accounting firm, given upon the authority of said firm as experts in accounting and auditing.

161

INDEX TO FINANCIAL STATEMENTS

Live Oak Bancshares, Inc.

Table of Contents


Interim Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2015 (unaudited) and December 31, 2014			F-2
Consolidated Statements of Income for the three months ended March 31, 2015 and 2014 (unaudited)			F-3
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited)			F-4
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and 2014 (unaudited)			F-5
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)			F-6
Notes to Interim Consolidated Financial Statements			F-7

Audited Financial Statements for the years ended December 31, 2014, 2013, and 2012
Report of Independent Registered Public Accounting Firm			F-38
Consolidated Balance Sheets			F-39
Consolidated Statements of Income			F-40
Consolidated Statements of Comprehensive Income			F-41
Consolidated Statements of Changes in Shareholders’ Equity			F-42
Consolidated Statements of Cash Flows			F-43
Notes to Audited Consolidated Financial Statements			F-44

F-1

Live Oak Bancshares, Inc.

Consolidated Balance Sheets

As of March 31, 2015 (unaudited) and December 31, 2014*

(Dollars in thousands)


	March 31, 2015			December 31, 2014*
Assets
Cash and due from banks	$	47,564		$	29,902
Certificates of deposit with other banks		10,000			10,000
Investment securities available-for-sale		50,777			49,318
Loans held for sale		305,079			295,180
Loans held for investment		220,444			203,936
Allowance for loan losses		(5,234	)		(4,407	)

Net loans		215,210			199,529
Premises and equipment, net		38,124			35,279
Foreclosed assets		34			371
Servicing assets		38,457			34,999
Investments in non-consolidated affiliates		—			6,345
Other assets		17,787			12,392

Total assets	$	723,032		$	673,315

Liabilities and Shareholders’’ Equity
*Liabilities*
Deposits:
Noninterest-bearing	$	4,390		$	14,728
Interest-bearing		551,693			507,352

Total deposits		556,083			522,080
Short term borrowings		—			6,100
Long term borrowings		50,210			41,849
Other liabilities		16,571			11,472

Total liabilities		622,864			581,501

*Shareholders’ equity*
Non-cumulative perpetual preferred stock (Series A), 6,800 shares authorized, issued and outstanding		—			—
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding		—			—
Class A common stock, no par value, 100,000,000 shares authorized, 23,900,079 and 23,896,400, shares issued and outstanding, respectively		48,799			48,657
Class B common stock, no par value, 10,000,000 shares authorized, 4,723,530 shares issued and outstanding		50,015			50,015
Retained earnings (accumulated deficit)		1,130			(6,943	)
Accumulated other comprehensive income		209			85

Total shareholders’ equity attributed to Live Oak Bancshares, Inc		100,153			91,814

Noncontrolling interest		15			—

Total equity		100,168			91,814

Total liabilities and shareholders’ equity	$	723,032		$	673,315

*	Derived from audited financial statements.

See Notes to Consolidated Financial Statements

F-2

Live Oak Bancshares, Inc.

Consolidated Statements of Income

For the three months ended March 31, 2015 and 2014 (unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended March 31,
	2015			2014
*Interest income*
Loans and fees on loans	$	6,716		$	4,089
Investment securities, taxable		176			100
Other interest earning assets		66			23

Total interest income		6,958			4,212

*Interest expense*
Deposits		1,476			1,098
Borrowings		441			153

Total interest expense		1,917			1,251

Net interest income		5,041			2,961

*Provision for loan losses*		1,077			424

Net interest income after provision for loan losses		3,964			2,537

*Noninterest income*
Loan servicing revenue and revaluation		4,106			2,700
Net gains on sales of loans		15,461			10,031
Equity in loss of non-consolidated affiliates		(26	)		(994	)
Gain on sale of sale of investment in non-consolidated affiliate		3,782			—
Other noninterest income		732			468

Total noninterest income		24,055			12,205

*Noninterest expense*
Salaries and employee benefits		8,355			9,701
Travel expense		1,460			750
Professional services expense		908			935
Advertising and marketing expense		1,008			798
Occupancy expense		457			437
Data processing expense		893			429
Equipment expense		404			253
Other expense		1,203			1,141

Total noninterest expense		14,688			14,444

Income before taxes		13,331			298
Income tax expense		5,278			—

Net income		8,053			298
Net loss attributable to noncontrolling interest		20			—

Net income attributable to Live Oak Bancshares, Inc.	$	8,073		$	298

Basic earnings per share	$	0.28		$	0.01

Diluted earnings per share	$	0.27		$	0.01

See Notes to Consolidated Financial Statements

F-3

Live Oak Bancshares, Inc.

Consolidated Statements of Comprehensive Income

For the three Months ended March 31, 2015 and 2014 (unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2015		2014
Net income	$	8,053	$	298
Other comprehensive income (loss) before tax:
Net unrealized gain (loss) on investment securities arising during the period		203		105
Reclassification adjustment for (gain) loss on sale of securities available for sale included in net income		—		—

Other comprehensive income (loss) before tax		203		105
Income tax expense		79		—

Other comprehensive income (loss), net of tax		124		105

Total comprehensive income	$	8,177	$	403

See Notes to Consolidated Financial Statements

F-4

Live Oak Bancshares, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2015 and 2015 (unaudited)

(Dollars in thousands, except per share data)


	Common stock						Retained earnings			Accumulated other comprehensive income (loss)			Non- controlling interest			Total equity
	Shares				Amount
	Class A		Class B		Amount
Balance at December 31, 2013		20,318,330		—	$	18,319	$	30,262		$	(191	)	$	—		$	48,390
Net income		—		—		—		298			—			—			298
Other comprehensive income		—		—		—		—			105			—			105
Sales of common stock		22,720		—		100		—			—			—			100
Stock option exercise		108,330		—		50		—			—			—			50
Issuance of common stock grants		685,700		—		2,992		—			—			—			2,992
Stock option based compensation expense		—		—		37		—			—			—			37
Restricted stock expense		—		—		143		—			—			—			143
Dividends (distributions to shareholders)		—		—		—		(5,685	)		—			—			(5,685	)

Balance at March 31, 2014		21,135,080		—	$	21,641	$	24,875		$	(86	)	$	—		$	46,430

Balance at December 31, 2014		23,896,400		4,723,530	$	98,672	$	(6,943	)	$	85		$	—		$	91,814
Net income (loss)		—		—		—		8,073			—			(20	)		8,053
Other comprehensive income		—		—		—		—			124			—			124
Consolidation of investment with non-controlling interest		—		—		—		—			—			35			35
Stock option exercise		3,679		—		16		—			—			—			16
Stock option based compensation expense		—		—		118		—			—			—			118
Restricted stock expense		—		—		8		—			—			—			8

Balance at March 31, 2015		23,900,079		4,723,530	$	98,814	$	1,130		$	209		$	15		$	100,168

See Notes to Consolidated Financial Statements

F-5

Live Oak Bancshares, Inc.

Consolidated Statements of Cash Flows

For the three months ended March 31, 2015 and 2014 (unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2015			2014
*Cash flows from operating activities*
Net income	$	8,053		$	298
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		433			468
Provision for loan losses		1,077			424
Amortization of premium on securities, net of accretion		15			22
Amortization of discount on unguaranteed loans		319			34
Deferred tax expense		226			—
Originations of loans held for sale		(223,905	)		(121,768	)
Proceeds from sales of loans held for sale		180,991			103,140
Net gains (loss) on sale of foreclosed assets		7			—
Net increase in servicing assets		(3,458	)		(1,465	)
Net gains on sale of loans held for sale		(15,461	)		(10,031	)
Gain on sale of investment in non-consolidated affiliate		(3,782	)		—
Net loss on disposal of premises and equipment		3			—
Stock option based compensation expense		118			37
Stock grants		—			2,992
Restricted stock expense		8			143
Equity in loss of non-consolidated affiliates		26			994
Changes in assets and liabilities:
Accounts receivable and other assets		92			372
Accrued expenses and other liabilities		5,265			(2,865	)

Net cash used by operating activities		(49,973	)		(27,205	)

*Cash flows from investing activities*
Purchases of securities available-for-sale		(1,900	)		—
Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale		629			514
Proceeds from sale of foreclosed assets		330			—
Proceeds from sale of investment in non-consolidated affiliate		9,896			—
Net cash acquired in consolidation of equity method investment		319			—
Loan originations and principal collections, net		26,725			(21,145	)
Purchases of premises and equipment		(3,281	)		(428	)

Net cash used by investing activities		32,718			(21,059	)

*Cash flows from financing activities*
Net increase in deposits		34,003			59,380
Proceeds from long term borrowings		8,468			—
Repayment of long term borrowings		(107	)		(55	)
Proceeds from short term borrowings		—			4,000
Repayment of short term borrowings		(6,100	)		—
Stock option exercise		16			50
Sale of common stock, net		—			100
Shareholder dividend distributions		(1,363	)		(4,887	)

Net cash provided by financing activities		34,917			58,588

Net increase in cash and cash equivalents		17,662			10,324
*Cash and cash equivalents, beginning*		29,902			37,244

*Cash and cash equivalents, ending*	$	47,564		$	47,568

*Supplemental disclosure of cash flow information*
Interest paid	$	1,915		$	1,254
Income tax		1,974			—
*Supplemental disclosures of noncash operating, investing, and financing activities*
Unrealized holding gains (losses) on available-for-sale securities, net of taxes	$	203		$	105
Transfers of loans accounted for as secured borrowing collateral to other assets		4,674			—
Dividends declared but not paid		169			3,638
Transfer of Loans held for sale to Loans held for Investment		2,294			5,279
Transfer of Loans held for Investment to Loans held for Sale		1,370			339
Contingent Consideration in Acquisition of Controlling Interest in Equity Method of Investment		170			—

See Notes to Consolidated Financial Statements

F-6

Live Oak Bancshares, Inc.

Notes to 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 our commercial bank subsidiary, Live Oak Banking Company (“the Bank”). The Bank was established in May 2008 as a North Carolina-chartered commercial bank. 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) program. 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 Independence Aviation, LLC which was formed for the purpose of purchasing and operating aircraft used for business purposes of the Company, Government Loan Solutions (“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 programs and USDA-guaranteed loans, and 504 Fund Advisors, LLC (“504 FA”), formed to serve as the investment advisor 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. With 8.7% of ownership remaining with a third party investor, amounts of earnings and equity in 504FA are now disclosed in the Company’s financial statements as related to a noncontrolling interest.

The Company earns revenue primarily from the sale of SBA-guaranteed loans. This income is comprised of loan servicing revenue and revaluation and net gains on sales of loans. Net interest income is a secondary contributor to our earnings. Offsetting these revenues are the cost of funding sources, provision for loan 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 three months ended March 31, 2015 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2015. The consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated financial statements contained in the Company’s registration statement on Form S-1. A description of the significant accounting policies followed by the Company are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s registration statement on Form S-1.

The preparation of financial statements in conformity with U.S. 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.

All information in the Notes to Consolidated Financial Statements has been presented in thousands, except percentage, time period, stock option, share and per share data.

F-7

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 1. Basis of Presentation (Continued)

Stock Split

On September 23, 2014, the Board of Directors declared a ten-for-one stock split of the Company’s Class A and Class B common shares, which was effected in the form of a common stock dividend distributed on October 10, 2014. Except for the amount of authorized shares, all references to share and per share amounts in the consolidated financial statements and accompanying notes to the consolidated financial statements have been retroactively restated to reflect the stock split.

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 regularly evaluates relative to resource allocation and performance assessment.

Reclassifications

Certain reclassifications have been made to the prior period’s 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 January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). ASU 2015-01 eliminated from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both unusual in nature and infrequently occurring. The guidance will be effective for the Company for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect this guidance to have a material effect on its financial statements.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 amended the consolidation requirements in Accounting Standards Codification (“ASC”) 810 Consolidation . The amendments change the consolidation analysis required under U.S. GAAP, and modify how variable interests held by a reporting entity’s related parties affect its consolidation conclusions. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

F-8

Live Oak Bancshares, Inc.

Notes to 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 if convertible debt, stock options or restricted stock grants were exercised, resulting in the issuance of common stock that then shared in the net income of the Company.


	Three Months Ended March 31,
	2015		2014
Basic earnings per share:
Net income available to common shareholders	$	8,073	$	298

Weighted-average basic shares outstanding		28,620,120		20,373,983

Basic earnings per share	$	.28	$	.01

Diluted earnings per share:
Net income available to common shareholders, for diluted EPS	$	8,073	$	298

Total weighted-average basic shares outstanding		28,620,120		20,373,983
Add effect of dilutive stock options and restricted grants		741,721		211,423

Total weighted-average diluted shares outstanding		29,361,841		20,585,406

Diluted earnings per share	$	.27	$	.01

Anti-dilutive securities		720,447		1,550,000

Pro forma earnings per share

Because the Company was not a taxable entity prior to August 3, 2014, pro forma amounts for income tax expense and basic and diluted earnings per share have been presented below assuming the Company’s effective tax rate of 38.5% for the three months ended March 31, 2014.


	Three Months Ended March 31, 2014
Pro forma net income available to common shareholders, after tax	$	183

Pro forma basic earnings per share	$	.01

Pro forma diluted earnings per share	$	.01

F-9

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 4. Securities

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


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2015
US government agencies	$	35,218	$	285	$	5	$	35,498
Residential mortgage-backed securities		13,318		104		43		13,379
Mutual fund		1,900		—		—		1,900

	$	50,436	$	389	$	48	$	50,777

December 31, 2014
US government agencies	$	35,207	$	127	$	25	$	35,309
Residential mortgage-backed securities		13,973		92		56		14,009

	$	49,180	$	219	$	81	$	49,318

There were no calls, sales or maturities of securities during the quarters ended March 31, 2015 and March 31, 2014. On March 31, 2015, the Company invested $1.9 million in The 504 Fund mutual fund. This is a closed end mutual fund comprised of SBA 504 loans and is managed by a subsidiary, 504 Fund Advisors. The mutual fund was purchased at current market value; 190,380.762 shares at $9.98 per share.

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
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2015
US government agencies	$	—	$	—	$	1,243	$	5	$	1,243	$	5
Residential mortgage-backed securities		761		6		5,000		37		5,761		43

Total	$	761	$	6	$	6,243	$	42	$	7,004	$	48


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2014
US government agencies	$	—	$	—	$	1,224	$	25	$	1,224	$	25
Residential mortgage-backed securities		2,234		4		5,158		52		7,392		56

Total	$	2,234	$	4	$	6,382	$	77	$	8,616	$	81

At March 31, 2015, there were six securities, consisting of one US agency security and five mortgage-backed securities, in unrealized loss positions for greater than 12 months; and one mortgage-backed security in an unrealized loss position for less than 12 months. Unrealized losses at December 31, 2014, were comprised of six securities, consisting of one US agency security and five mortgage-backed securities, in unrealized loss positions for greater than 12 months; and one mortgage-backed security in an unrealized loss position for less than 12 months.

F-10

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 4. Securities (Continued)

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, none of the securities are deemed to be other than temporarily impaired.

All residential mortgage-backed securities in the Company’s portfolio at March 31, 2015 and December 31, 2014 were backed by U.S. government sponsored enterprises (“GSEs”).

The following is a summary of investment securities by maturity:


	March 31, 2015 Available for sale
	Amortized cost		Fair value
One to five years	$	35,218	$	35,498
Five to ten years		1,316		1,349
After 10 years		12,002		12,030

	$	48,536	$	48,877

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 mutual fund investments.

At March 31, 2015 and December 31, 2014 investment securities with a fair market value of $1.3 million and $1.3 million, respectively, were pledged to secure a line of credit with the Company’s correspondent bank.

Note 5. Loans and Allowance for Loan Losses

Loan Portfolio Segments

The following describe the risk characteristics relevant to each of the portfolio segments. Each loan 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

F-11

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

completion of the project, if the loan is converted to permanent financing or if scheduled loan amortization begins, it is then reclassified to the Owner Occupied 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.

Owner Occupied Commercial Real Estate

Owner occupied commercial real estate loans are extensions of credit secured by 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 owner-occupied 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 relative to agricultural endeavors which may include construction of new specialized facilities. These loans are usually paid off through the conversion to permanent financing, or if scheduled loan 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 — Death Care, Healthcare (medical, dental, ophthalmic), Pharmacy, Investment Advisors, Veterinary, Family Entertainment, Agriculture, Wine & Craft Beverages and Self-Storage. Wine & Craft Beverages and Self-Storage are new areas of emphasis for which there is no loan activity as of March 31, 2015. The Bank chooses to finance businesses operating in these 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 and practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines requiring compensating strengths when considering a proposed loan.

F-12

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

Loans consist of the following:


	March 31, 2015			December 31, 2014
Commercial & Industrial	$	86,151		$	81,057
Death Care Management		3,880			3,603
Family Entertainment Centers		340			333
Healthcare		12,946			12,319
Independent Pharmacies		35,114			34,079
Registered Investment Advisors		12,135			9,660
Veterinary Industry		21,580			20,902
Other Industries		156			161
Construction & Development		14,533			9,526
Agriculture		5,460			3,910
Death Care Management		483			92
Family Entertainment Centers		152			—
Healthcare		5,150			2,957
Independent Pharmacies		456			215
Veterinary Industry		2,676			2,207
Other Industries		156			145
Owner Occupied Commercial Real Estate		115,200			111,620
Agriculture		283			259
Death Care Management		19,269			18,879
Family Entertainment Centers		761			872
Healthcare		27,634			26,173
Independent Pharmacies		4,579			4,750
Registered Investment Advisors		2,481			2,161
Veterinary Industry		59,615			57,934
Other Industries		578			592
Commercial Land		4,136			1,248
Agriculture		4,136			1,248
Total Loans ²		220,020			203,451
Net Deferred Costs		2,208			2,060
Discount on SBA 7(a) Unguaranteed ¹		(1,784	)		(1,575	)

Loans, Net of Unearned	$	220,444		$	203,936

¹	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.

²	Total loans include $21.5 million and $21.3 million of U.S. Government Guaranteed loans as of March 31, 2015 and December 31, 2014, respectively.

F-13

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

Credit Risk Profile

The Bank uses internal loan reviews to assess the performance of individual loans by industry segment. Annually, an independent review of the loan portfolio is performed by an external firm. The Bank’s annual review of each borrower’s financial performance validates adequacy of the risk grade assigned.

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

Exceptional Loans (1 Rated): These loans 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 Loans (2 Rated): These loans 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 Loans (3 rated): These loans 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 Loans (4 rated): These loans are considered very weak pass. These loans are riskier than a 3-rated credit, but due to various mitigates is not considered a Special Mention or worse. The mitigating factors must clearly be identified to offset further downgrade. Examples of loans that may be put in this category include start-up loans, loans with Sub 1:1 cash flow coverage with other sources of repayment.

Special mention (5 rated): These loans are to be considered as emerging problems, with potentially unsatisfactory characteristics. These loans require greater management attention. A loan 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 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 graded Doubtful have inherent weaknesses that make collection or liquidation in full questionable. Loans graded Doubtful must be placed on non-accrual status.

Loss (8 rated): Loss rated loans 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.

F-14

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

The following tables summarize the risk grades of each category:


	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total ¹
March 31, 2015
Commercial & Industrial	$	68,832	$	4,027	$	13,292	$	86,151
Death Care Management		3,880		—		—		3,880
Family Entertainment Centers		340		—		—		340
Healthcare		7,511		544		4,891		12,946
Independent Pharmacies		29,177		2,039		3,898		35,114
Registered Investment Advisors		12,135		—		—		12,135
Veterinary Industry		15,789		1,288		4,503		21,580
Other Industries		—		156		—		156
Construction & Development		14,533		—		—		14,533
Agriculture		5,460		—		—		5,460
Death Care Management		483		—		—		483
Family Entertainment Centers		152		—		—		152
Healthcare		5,150		—		—		5,150
Independent Pharmacies		456		—		—		456
Veterinary Industry		2,676		—		—		2,676
Other Industries		156		—		—		156
Owner Occupied Commercial Real Estate		91,223		4,957		19,020		115,200
Agriculture		283		—		—		283
Death Care Management		16,944		627		1,698		19,269
Family Entertainment Centers		761		—		—		761
Healthcare		23,875		1,308		2,451		27,634
Independent Pharmacies		4,539		40		—		4,579
Registered Investment Advisors		2,481		—		—		2,481
Veterinary Industry		42,038		2,982		14,595		59,615
Other Industries		302		—		276		578
Commercial Land		4,136		—		—		4,136
Agriculture		4,136		—		—		4,136

Total	$	178,724	$	8,984	$	32,312	$	220,020

F-15

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)


	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total ¹
December 31, 2014
Commercial & Industrial	$	63,777	$	4,546	$	12,734	$	81,057
Death Care Management		3,603		—		—		3,603
Family Entertainment Centers		333		—		—		333
Healthcare		6,995		538		4,786		12,319
Independent Pharmacies		27,673		2,726		3,680		34,079
Registered Investment Advisors		9,660		—		—		9,660
Veterinary Industry		15,513		1,121		4,268		20,902
Other Industries		—		161		—		161
Construction & Development		9,526		—		—		9,526
Agriculture		3,910		—		—		3,910
Death Care Management		92		—		—		92
Healthcare		2,957		—		—		2,957
Independent Pharmacies		215		—		—		215
Veterinary Industry		2,207		—		—		2,207
Other Industries		145		—		—		145
Owner Occupied Commercial Real Estate		87,883		5,219		18,518		111,620
Agriculture		259		—		—		259
Death Care Management		16,519		639		1,721		18,879
Family Entertainment Centers		872		—		—		872
Healthcare		22,778		938		2,457		26,173
Independent Pharmacies		4,709		41		—		4,750
Registered Investment Advisors		2,161		—		—		2,161
Veterinary Industry		40,281		3,601		14,052		57,934
Other Industries		304		—		288		592
Commercial Land		1,248		—		—		1,248
Agriculture		1,248		—		—		1,248

Total	$	162,434	$	9,765	$	31,252	$	203,451

Total loans include $21.5 million of U.S. Government Guaranteed loans as of March 31, 2015, segregated by risk grade as follows: Risk Grades 1 – 4 = $0, Risk Grade 5 = $500 thousand, Risk Grades 6 – 8 = $21.0 million. As of December 31, 2014 total loans include $21.3 million of U.S. Government Guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $0, Risk Grade 5 = $1.1 million, Risk Grades 6 – 8 = $20.2 million.

F-16

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Also, loans less than 30 days past due and accruing are included within current loans shown below. The following tables shows an age analysis of past due loans as of March 31, 2015 and December 31, 2014.


	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 Loans Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
March 31, 2015
Commercial & Industrial	$	1,030	$	1,087	$	—	$	5,750	$	7,867	$	78,284	$	86,151	$	—
Death Care Management		—		—		—		—		—		3,880		3,880		—
Family Entertainment Centers		—		—		—		—		—		340		340		—
Healthcare		225		36		—		2,312		2,573		10,373		12,946		—
Independent Pharmacies		—		738		—		1,219		1,957		33,157		35,114		—
Registered Investment Advisors		—		—		—		—		—		12,135		12,135		—
Veterinary Industry		805		313		—		2,219		3,337		18,243		21,580		—
Other Industries		—		—		—		—		—		156		156		—
Construction & Development		—		—		—		—		—		14,533		14,533		—
Agriculture		—		—		—		—		—		5,460		5,460		—
Death Care Management		—		—		—		—		—		483		483		—
Family Entertainment Centers		—		—		—		—		—		152		152		—
Healthcare		—		—		—		—		—		5,150		5,150		—
Independent Pharmacies		—		—		—		—		—		456		456		—
Veterinary Industry		—		—		—		—		—		2,676		2,676		—
Other Industries		—		—		—		—		—		156		156		—
Owner Occupied Commercial Real Estate		2,540		4,714		1,855		7,723		16,832		98,368		115,200		—
Agriculture		—		—		—		—		—		283		283		—
Death Care Management		—		—		—		1,699		1,699		17,570		19,269		—
Family Entertainment Centers		—		—		—		—		—		761		761		—
Healthcare		225		144		—		2,082		2,451		25,183		27,634		—
Independent Pharmacies		—		—		—		—		—		4,579		4,579		—
Registered Investment Advisors		—		—		—		—		—		2,481		2,481		—
Veterinary Industry		2,315		4,570		1,855		3,667		12,407		47,208		59,615		—
Other Industries		—		—		—		275		275		303		578		—
Commercial Land		—		—		—		—		—		4,136		4,136		—
Agriculture		—		—		—		—		—		4,136		4,136		—

Total ¹	$	3,570	$	5,801	$	1,855	$	13,473	$	24,699	$	195,321	$	220,020	$	—

F-17

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)


	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 Loans Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
December 31, 2014
Commercial & Industrial	$	1,025	$	1,433	$	236	$	5,872	$	8,566	$	72,491	$	81,057	$	—
Death Care Management		—		—		—		—		—		3,603		3,603		—
Family Entertainment Centers		—		—		—		—		—		333		333		—
Healthcare		—		1,059		232		2,420		3,711		8,608		12,319		—
Independent Pharmacies		—		98		—		1,224		1,322		32,757		34,079		—
Registered Investment Advisors		—		—		—		—		—		9,660		9,660		—
Veterinary Industry		1,025		276		4		2,228		3,533		17,369		20,902		—
Other Industries		—		—		—		—		—		161		161		—
Construction & Development		—		—		—		—		—		9,526		9,526		—
Agriculture		—		—		—		—		—		3,910		3,910		—
Death Care Management		—		—		—		—		—		92		92		—
Healthcare		—		—		—		—		—		2,957		2,957		—
Independent Pharmacies		—		—		—		—		—		215		215		—
Veterinary Industry		—		—		—		—		—		2,207		2,207		—
Other Industries		—		—		—		—		—		145		145		—
Owner Occupied Commercial Real Estate		2,464		5,246		2,181		6,914		16,805		94,815		111,620		—
Agriculture		—		—		—		—		—		259		259		—
Death Care Management		—		—		—		1,721		1,721		17,158		18,879		—
Family Entertainment Centers		—		—		—		—		—		872		872		—
Healthcare		—		145		230		2,082		2,457		23,716		26,173		—
Independent Pharmacies		—		—		—		—		—		4,750		4,750		—
Registered Investment Advisors		—		—		—		—		—		2,161		2,161		—
Veterinary Industry		2,464		5,101		1,951		2,836		12,352		45,582		57,934		—
Other Industries		—		—		—		275		275		317		592		—
Commercial Land		—		—		—		—		—		1,248		1,248		—
Agriculture		—		—		—		—		—		1,248		1,248		—

Total ¹	$	3,489	$	6,679	$	2,417	$	12,786	$	25,371	$	178,080	$	203,451	$	—

Total loans include $21.5 million of U.S. Government Guaranteed loans as of March 31, 2015, of which $12.3 million is greater than 90 days past due, $3.9 million is 30-89 days past due and $5.3 million is included in current loans as presented above. As of December 31, 2014, total loans include $21.3 million of U.S. Government Guaranteed loans, of which $11.7 million is greater than 90 days past due, $3.5 million is 30-89 days past due and $6.1 million is included in current loans as presented above.

Nonaccrual Loans

Loans that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans had been accrued in accordance with the original terms, interest income would have increased by approximately $77 and $443 thousand, for the three months ended March 31, 2015 and the year ended December 31, 2014, respectively. All nonaccrual loans are included in the held for investment portfolio.

F-18

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

Nonaccrual loans as of March 31, 2015 and December 31, 2014 are as follows:


March 31, 2015	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial	$	6,780	$	6,358	$	422
Healthcare		2,537		2,306		231
Independent Pharmacies		1,219		1,135		84
Veterinary Industry		3,024		2,917		107
Owner Occupied Commercial Real Estate		12,118		9,606		2,512
Death Care Management		1,699		1,487		212
Healthcare		2,307		1,918		389
Veterinary Industry		7,837		5,926		1,911
Other Industries		275		275		—

Total	$	18,898	$	15,964	$	2,934


December 31, 2014	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial	$	7,133	$	6,620	$	513
Healthcare		2,652		2,368		284
Independent Pharmacies		1,224		1,139		85
Veterinary Industry		3,257		3,113		144
Owner Occupied Commercial Real Estate		11,559		8,935		2,624
Death Care Management		1,721		1,505		216
Healthcare		2,312		1,919		393
Veterinary Industry		7,251		5,236		2,015
Other Industries		275		275		—

Total	$	18,692	$	15,555	$	3,137

Allowance for Loan Loss Methodology

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

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

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

F-19

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

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

•

All commercial loans classified substandard or worse.

•

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

•

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

Any loan determined to be impaired is subjected to an impairment analysis, which is a calculation of the portion of the loan which is probable not to be repaid. This portion is the loan’s “impairment”, and is established as a specific reserve against the loan, or charged against the ALL.

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

For loans that have a low probability of being repaid in full, impaired loans, the reserve amount is calculated on a loan-specific basis. The Company utilizes two methods of analyzing impaired loans not guaranteed by the SBA:

•

The Fair Market Value of Collateral utilizes the value at which the collateral could be sold considering the appraised value, appraisal discount rate, prior liens and selling costs. The amount of the reserve is the Loan Balance less the Valuation Amount.

•

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

The allowance and the portion that relates to loans individually and collectively evaluated for impairment for three months ended March 31, 2015 and 2014 is summarized in the following tables:


	Construction & Development		Owner Occupied Commercial Real Estate			Commercial & Industrial			Commercial Land		Total
March 31, 2015
Allowance for Loan Losses:
Beginning Balance	$	586	$	2,291		$	1,369		$	161	$	4,407
Charge offs		—		(79	)		(172	)		—		(251	)
Recoveries		—		1			—			—		1
Provision		169		(151	)		866			193		1,077

Ending Balance	$	755	$	2,062		$	2,063		$	354	$	5,234

F-20

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)


	Construction & Development		Owner Occupied Commercial Real Estate		Commercial & Industrial			Total
March 31, 2014
Allowance for Loan Losses:
Beginning Balance	$	350	$	1,511	$	862		$	2,723
Charge offs		—		—		—			—
Recoveries		—		63		4			67
Provision		130		347		(54	)		423

Ending Balance	$	480	$	1,921	$	812		$	3,213

The following tables detail the recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of impairment evaluation methodology at March 31, 2015, December 31, 2014 and March 31, 2014:


	Construction & Development		Owner Occupied Commercial Real Estate		Commercial & Industrial		Commercial Land		Total
March 31, 2015
Allowance for Loan Losses:
Loans individually evaluated for impairment	$	—	$	1,044	$	1,166	$	—	$	2,210
Loans collectively evaluated for impairment		755		1,018		897		354		3,024

Total allowance for loan losses	$	755	$	2,062	$	2,063	$	354	$	5,234

Loans receivable ¹ :
Loans individually evaluated for impairment	$	—	$	15,605	$	9,983	$	—	$	25,588
Loans collectively evaluated for impairment		14,533		99,595		76,168		4,136		194,432

Total loans receivable	$	14,533	$	115,200	$	86,151	$	4,136	$	220,020


	Construction & Development		Owner Occupied Commercial Real Estate		Commercial & Industrial		Commercial Land		Total
December 31, 2014
Allowance for Loan Losses:
Loans individually evaluated for impairment	$	—	$	1,051	$	676	$	—	$	1,727
Loans collectively evaluated for impairment		586		1,240		693		161		2,680

Total allowance for loan losses	$	586	$	2,291	$	1,369	$	161	$	4,407

Loans Receivable ¹ :
Loans individually evaluated for impairment	$	—	$	16,551	$	10,226	$	—	$	26,777
Loans collectively evaluated for impairment		9,526		95,069		70,831		1,248		176,674

Total loans receivable	$	9,526	$	111,620	$	81,057	$	1,248	$	203,451

F-21

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)


	Construction & Development		Owner Occupied Commercial Real Estate		Commercial & Industrial		Total
March 31, 2014
Allowance for Loan Losses:
Loans individually evaluated for impairment	$	17	$	192	$	116	$	325
Loans collectively evaluated for impairment		463		1,729		696		2,888

Total allowance for loan losses	$	480	$	1,921	$	812	$	3,213

Loans Receivable ¹ :
Ending balance:
Loans individually evaluated for impairment	$	2,000	$	10,026	$	6,305	$	18,331
Loans collectively evaluated for impairment		11,526		69,136		58,943		139,605

Total loans receivable	$	13,526	$	79,162	$	65,248	$	157,936

Loans receivable includes $21.5 million of U.S. Government Guaranteed loans as of March 31, 2015, of which $19.6 million are included in loans individually evaluated for impairment and $1.9 million are included in loans collectively evaluated for impairment, as presented above. As of December 31, 2014, loans receivable includes $21.3 million of U.S. Government Guaranteed loans, of which $19.5 million are included in loans individually evaluated for impairment and $2.0 million are included in loans collectively evaluated for impairment, as presented above. Also, as of March 31, 2014, loans receivable includes $16.4 million of U.S. Government Guaranteed loans, of which $13.4 million are included in loans individually evaluated for impairment and $3.0 million are included in loans collectively evaluated for impairment, as presented above Loans individually evaluated for impairment as of March 31, 2015 and December 31, 2014 are summarized in the following tables.


March 31, 2015	Unpaid Principal Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial	$	9,983	$	8,194	$	1,789
Healthcare		4,093		3,470		623
Independent Pharmacies		2,185		1,484		701
Veterinary Industry		3,705		3,240		465
Owner Occupied Commercial Real Estate		15,605		11,815		3,790
Death Care Management		1,699		1,487		212
Healthcare		2,307		1,919		388
Veterinary Industry		11,324		8,134		3,190
Other Industries		275		275		—

Total	$	25,588	$	20,010	$	5,579

F-22

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)


December 31, 2014	Unpaid Principal Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial	$	10,226	$	8,341	$	1,885
Healthcare		4,217		3,540		677
Independent Pharmacies		2,203		1,492		711
Veterinary Industry		3,806		3,309		497
Owner Occupied Commercial Real Estate		16,551		11,155		5,396
Death Care Management		1,721		1,505		216
Healthcare		2,312		1,919		393
Veterinary Industry		12,243		7,456		4,787
Other Industries		275		275		—

Total	$	26,777	$	19,496	$	7,281

The following table presents evaluated balances of loans classified as impaired at March 31, 2015, December 31, 2014 and March 31, 2014 that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest, net deferred loan fees or costs and any non-accreted loan discount.


March 31, 2015	Unpaid Principal Balance		Recorded Investment		Total Reserve		Average Recorded Investment		Income Recognized
Loans with no allowance	$	1,097	$	1,082	$	—	$	2,004	$	5

Commercial & Industrial		236		233		—		378		3
Healthcare		3		3		—		96		—
Independent Pharmacies		192		192		—		86		3
Veterinary Industry		41		38		—		196		—

Owner Occupied Commercial Real Estate		861		849		—		1,626		2
Healthcare		40		40		—		149		—
Veterinary Industry		821		809		—		1,477		2

Loans with an allowance		24,491		24,476		2,210		23,122		72

Commercial & Industrial		9,748		9,765		1,166		8,991		35
Healthcare		4,090		4,089		821		3,652		23
Independent Pharmacies		1,993		1,991		210		1,731		9
Veterinary Industry		3,665		3,685		135		3,608		3

Owner Occupied Commercial Real Estate		14,743		14,711		1,044		14,131		37
Death Care Management		1,699		1,697		11		1,532		—
Healthcare		2,267		2,263		79		1,987		—
Veterinary Industry		10,502		10,477		952		10,329		37
Other Industries		275		274		2		283		—

Total	$	25,588	$	25,558	$	2,210	$	25,126	$	77

F-23

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)


December 31, 2014	Unpaid Principal Balance		Recorded Investment		Total Reserve		Average Recorded Investment		Interest Income Recognized
Loans with no allowance	$	1,213	$	1,197	$	—	$	1,998	$	113

Commercial & Industrial		239		237		—		363		64
Healthcare		3		3		—		88		2
Independent Pharmacies		194		194		—		86		57
Veterinary Industry		42		40		—		189		5
Owner Occupied Commercial Real Estate		974		960		—		1,635		49
Death Care Management		—		—		—		66		—
Healthcare		41		41		—		147		—
Veterinary Industry		933		919		—		1,422		49
Loans with an allowance		25,564		23,805		1,727		20,076		361
Commercial & Industrial		9,987		9,747		676		6,583		97
Healthcare		4,214		4,202		361		3,333		38
Independent Pharmacies		2,009		2,005		206		621		17
Veterinary Industry		3,764		3,540		109		2,629		42
Owner Occupied Commercial Real Estate		15,577		14,058		1,051		13,493		264
Death Care Management		1,721		1,720		20		414		—
Healthcare		2,271		2,268		82		1,967		—
Veterinary Industry		11,310		9,796		947		11,036		264
Other Industries		275		274		2		76		—

Total	$	26,777	$	25,002	$	1,727	$	22,074	$	474


March 31, 2014	Unpaid Principal Balance		Recorded Investment		Total Reserve		Average Recorded Investment		Income Recognized
Loans with no allowance	$	1,158	$	1,073	$	—	$	1,140	$	34
Commercial & Industrial		222		219		—		148		3
Healthcare		92		90		—		41		—
Veterinary Industry		130		129		—		107		3
Owner Occupied Commercial Real Estate		936		854		—		992		31
Veterinary Industry		936		854		—		992		31
Loans with an allowance		17,173		16,497		325		16,066		82
Commercial & Industrial		6,083		5,644		116		5,362		14
Healthcare		2,150		1,633		7		1,589		—
Veterinary Industry		3,933		4,011		109		3,773		14
Owner Occupied Commercial Real Estate		11,090		10,853		209		10,704		68
Dental Industry		1,127		1,152		2		1,054		—
Veterinary Industry		9,963		9,701		207		9,650		68
Total	$	18,331	$	17,571	$	325	$	17,207	$	116

F-24

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

The following tables represent the types of troubled debt restructurings (“TDR”) that were made during the three months ended:


March 31, 2015	Number of Loans		Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial		3	$	225	$	—	$	225
Healthcare		3		225		—		225
Interest Only		3		225		—		225
Owner Occupied Commercial Real Estate		1		40		—		40
Healthcare		1		40		—		40
Interest Only		1		40		—		40

Total Loans		4	$	265	$	—	$	265


March 31, 2014	Number of Loans		Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial		3	$	218	$	—	$	218
Veterinary Industry		3		218		—		218
Payment Deferral		3		218		—		218

Total Loans		3	$	218	$	—	$	218

The following tables represent the recorded investment in TDR loans entered into during the three months ended:


March 31, 2015	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial & Industrial		3	$	229	$	225
Healthcare		3		229		225
Interest Only		3		229		225
Owner Occupied Commercial Real Estate		1		41		40
Healthcare		1		41		40
Interest Only		1		41		40

Total Loans		4	$	270	$	265


March 31, 2014	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Owner Occupied Commercial Real Estate		3	$	219	$	218
Veterinary Industry		3		219		218
Payment Deferral		3		219		218

Total Loans		3	$	219	$	218

F-25

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses (Continued)

Concessions made to improve a loan’s performance have varying degrees of success. The following tables present loans that were modified as TDRs within the twelve months ending March 31, 2015 and 2014, for which there was a payment default:


March 31, 2015	Post-modification
	Number of Loans		Recorded Investment
Default (Charge-Off)
Owner Occupied Commercial Real Estate		2	$	1,771
Death Care Management		1		1,697
Payment Deferral		1		1,697
Veterinary Industry		1		74
Interest Only		1		74
Default (NonAccrual)
Commercial & Industrial		3		223
Healthcare		3		223
Interest Only		3		223
Owner Occupied Commercial Real Estate		1		40
Healthcare		1		40
Interest Only		1		40
No Defaults (paying as restructured)
Commercial & Industrial		2		308
Independent Pharmacies		2		308
Extend Amortization		1		167
Interest Only		1		140
Total Loans		8		2,341
Total TDRs paying as restructured		2		308

Total TDRs		8	$	2,341


March 31, 2014	Post-modification
	Number of Loans		Recorded Investment
Default (Charge-Off)		1	$	61
Owner Occupied Commercial Real Estate		1		61
Veterinary Industry		1		61
Extend Amortization, Interest Only		1		61
Default (NonAccrual)
Owner Occupied Commercial Real Estate		3		218
Veterinary Industry		3		218
Payment Deferral		3		218
Total Loans		4		279
Total TDRs paying as restructured		—		—

Total TDRs		4	$	279

F-26

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 6. Servicing Assets

Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others were $1.4 billion and $1.3 billion at March 31, 2015 and December 31, 2014, respectively.

The following summarizes the activity pertaining to servicing rights:


	Three Months Ended March 31,
	2015		2014
Balance at January 1	$	34,999	$	29,053
Additions, net		3,336		1,674
Changes in fair value		122		(620	)

Balance at end of period	$	38,457	$	30,518

The fair value of servicing rights was determined using discount rates ranging from 7.29% to 12.0% on March 31, 2015, and 8.1% to 14.2% on March 31, 2014. The fair value of servicing rights was determined using prepayment speeds ranging from 1.8% to 9.55% on March 31, 2015 and 4.0% to 8.67% on March 31, 2014, depending on the stratification of the specific right. Changes to fair value are reported in net gains on sales of loans.

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

F-27

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 7. Borrowings

As of March 31, 2015 and December 31, 2014 total outstanding short and long-term borrowings consisted of the following:


	March 31, 2015		December 31, 2014
Short term borrowings
On September 18, 2014, the Company entered into a line of credit of $6.1 million with an unaffiliated commercial bank, secured by 1,900,000 shares of nCino common stock. At December 31, 2014 there was $6.1 million advanced on the line of credit. Interest accrues at 30 day LIBOR (.16% at December 31, 2014) plus 3.50% for a term of 12 months. Payments are interest only with all principal and accrued interest due on September 18, 2015. This loan was paid in full on February 23, 2015.	$	—	$	6,100

Total short term borrowings	$	—	$	6,100

Long term borrowings
In April 2011, the Company elected to participate in the U.S. Treasury’s Small Business Lending Fund program (“SBLF”) whereby the U.S. Treasury agreed to purchase $6.8 million in senior securities. During the initial interest period the applicable interest rate is set at 1.5%. For all remaining interest periods, which commenced on January 1, 2012, the interest rate is determined based on a formula which encompasses the percentage change in qualified lending as well as a non-qualifying portion percentage. This rate can range from 1.5% to 10.8%. At March 31, 2015 the interest rate was 1.50%. Interest is payable quarterly in arrears. With the approval of the Bank’s regulator, the Bank may exit the Small Business Lending Fund at any time simply by repaying the funding provided along with any accrued but unpaid interest. If the institution wishes to repay its SBLF funding in partial payments, each partial payment must be at least 25% of the original funding amount. All senior securities will mature on September 13, 2021 at which time all principal and accrued interest will be due.	$	6,800	$	6,800

On May 12, 2014, Independence Aviation financed the purchase of an airplane by entering into a promissory note with the same aforementioned unaffiliated commercial bank in the amount of $6 million which carries a fixed rate of 4.97% for a term of 59 months. Monthly payments are set at $48 thousand with all principal and accrued interest due on May 12, 2019.		5,771		5,842

On September 11, 2014, The Company financed the construction of an additional building located on the Company’s Tiburon Drive main campus for a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at its Tiburon Drive main facility location. Payments are interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments beginning in October 2016 will be $146 thousand with all principal and accrued interest due on September 11, 2021. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. There is $4.5 million of remaining available credit on this construction line at March 31, 2015.		19,507		16,914

F-28

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 7. Borrowings (Continued)


	March 31, 2015		December 31, 2014
On September 18, 2014, the Company entered into a note payable line of credit of $8.1 million with an unaffiliated commercial bank, with the first advance of $5 million on December 14, 2014. The note is unsecured and accrues interest at LIBOR plus 3.50% for a term of 36 months. Payments are interest only with all principal and accrued interest due on September 18, 2017. There is $3.1 million of remaining available credit on this note at March 31, 2015.		5,000		5,000

On August 1, 2014, the Company entered into a note payable line of credit of $15 million with an unaffiliated commercial bank, secured by 100% of Live Oak Banking Company’s outstanding common stock. Interest accrues at LIBOR plus 4.00% for a term of 36 months. Payments are interest only with all principal and accrued interest due on August 1, 2017. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. There is $7.8 million of remaining available credit on this line of credit at March 31, 2015.		7,210		7,210

On March 10, 2015, Independence Aviation refinanced an existing loan with Live Oak Banking Company and entered into a new loan with an unaffiliated commercial bank in the amount of $1.2 million which carries a fixed rate of 4.96% for a term of 51 months. Monthly payments are set at $9 thousand with all principal and accrued interest due on June 10, 2019.		1,195		—

On February 23, 2015 the Company transferred two related party loans to an unrelated third party financial institution in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the third party institution identified the transaction as a secured borrowing for accounting purposes. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. Maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $4.6 million at March 31, 2015. Underlying loans carry a risk grade of 3 and are current with no delinquencies. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios.		4,675		—
With the acquisition of GLS on September 1, 2013, the Company assumed the obligation to pay a former GLS partner $250 thousand at $10 thousand a month over a 24 month period.		52		83

Total long term borrowings	$	50,210	$	41,849

Note 8. Fair Value of Financial Instruments

Fair Value Hierarchy

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

F-29

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 8. Fair Value of Financial Instruments (Continued)

Financial Instruments Measured at Fair Value

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

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

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

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

Foreclosed Assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records foreclosed real estate as nonrecurring Level 3. Foreclosed assets classified as Level 3 are based on management’s judgment and estimation.

F-30

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 8. Fair Value of Financial Instruments (Continued)

Recurring Fair Value

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


March 31, 2015	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	35,498	$	—	$	35,498	$	—
Residential mortgage backed securities		13,379		—		13,379		—
Mutual fund		1,900		1,900		—		—
Servicing assets ¹		38,457		—		—		38,457

Total assets at fair value	$	89,234	$	1,900	$	48,877	$	38,457


December 31, 2014	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	35,309	$	—	$	35,309	$	—
Residential mortgage backed securities		14,009		—		14,009		—
Servicing assets ¹		34,999		—		—		34,999

Total assets at fair value	$	84,317	$	—	$	49,318	$	34,999

¹	See Note 6 for a rollforward of recurring Level 3 fair values for servicing assets.

Non-recurring Fair Value

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


March 31, 2015	Total		Level 1		Level 2		Level 3
Impaired loans	$	22,351	$	—	$	—	$	22,351
Foreclosed assets		34		—		—		34

Total assets at fair value	$	22,385	$	—	$	—	$	22,385


December 31, 2014	Total		Level 1		Level 2		Level 3
Impaired loans	$	24,016	$	—	$	—	$	24,016
Foreclosed assets		371		—		—		371

Total assets at fair value	$	24,387	$	—	$	—	$	24,387

F-31

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 8. Fair Value of Financial Instruments (Continued)

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2015 and December 31, 2014 the significant unobservable inputs used in the fair value measurements were as follows:


March 31, 2015	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range

Impaired Loans	$	22,351	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10% to 20%
			Discounted expected cash flows	Interest rate & repayment term	Weighted Average discount rate 4.88%

Foreclosed Assets	$	34	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10% to 20%

December 31, 2014	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range
Level 3 Assets with Significant Unobservable Inputs	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range

Impaired Loans	$	24,016	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10% to 20%
			Discounted expected cash flows	Interest rate & repayment term	Weighted Average discount rate 4.88%

Foreclosed Assets	$	371	Discounted appraisals	Appraisal adjustments ⁽¹⁾	10% to 20%

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

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of fair value information about financial instruments carried at book value in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments not measured at fair value on the balance sheets:

Cash and due from banks : The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.

Certificates of Deposit with Other Banks : The fair value of certificates of deposit with other banks is estimated based on discounting cash flows using the rates currently offered for instruments of similar remaining maturities.

F-32

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 8. Fair Value of Financial Instruments (Continued)

Loans : For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

Loans held for sale: The fair values of loans held for sale are based on quoted market prices, where available, and determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans adjusted to reflect the inherent credit risk.

Accrued Interest: The carrying amounts of accrued interest approximate fair value.

Servicing assets: The fair values of servicing assets are based upon discounted cash flows using market-based assumptions.

Deposits : The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short and long term borrowings: The fair values of the Company’s borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental debt rates for similar types of debt arrangements.

F-33

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 8. Fair Value of Financial Instruments (Continued)

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


March 31, 2015	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Ending Balance
*Financial assets*
Cash and due from banks	$	47,564	$	47,564	$	—	$	—	$	47,564
Certificates of deposit with other banks		10,000		10,104		—		—		10,104
Investment securities, available for sale		50,777		1,900		48,877		—		50,777
Loans held for sale		305,079		—		—		315,965		315,965
Loans, net of allowance for loan losses		215,210		—		—		204,364		204,364
Servicing assets		38,457		—		—		38,457		38,457
Accrued interest receivable		3,625		3,625		—		—		3,625

*Financial liabilities*
Deposits		556,083		—		558,276		—		558,276
Accrued interest payable		192		192		—		—		192
Long term borrowings		50,210		—		—		50,581		50,581

December 31, 2014	Carrying Amount		Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Ending Balance
*Financial assets*
Cash and due from banks	$	29,902	$	29,902	$	—	$	—	$	29,902
Certificates of deposit with other banks		10,000		9,861		—		—		9,861
Investment securities, available for sale		49,318		—		49,318		—		49,318
Loans held for sale		295,180		—		—		304,504		304,504
Loans, net of allowance for loan losses		199,529		—		—		194,007		194,007
Servicing assets		34,999		—		—		34,999		34,999
Accrued interest receivable		3,059		3,059		—		—		3,059

*Financial liabilities*
Deposits		522,080		—		522,058		—		522,058
Accrued interest payable		190		190		—		—		190
Short term borrowings		6,100		—		—		6,100		6,100
Long term borrowings		41,849		—		—		44,738		44,738

Note 9. Commitments and Contingencies

Litigation

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

F-34

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 9. Commitments and Contingencies (Continued)

Financial Instruments with Off-balance-sheet Risk

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

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments at March 31, 2015 and December 31, 2014 is as follows:


	March 31, 2015		December 31, 2014
Commitments to extend credit	$	584,698	$	537,951
Plexus Capital—Fund II Investment Commitment		100		100
Plexus Capital—Fund III Investment Commitment		350		350

Total unfunded off-balance sheet credit risk	$	585,148	$	538,401

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. There were no standby letters of credit for the periods presented.

Concentrations of Credit Risk

Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans and commitments to extend credit have been granted to customers in the independent pharmacy and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained exposure exceeds $2.0 million.

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

F-35

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 10. Stock Plans

On March 20, 2015, the Company adopted the 2015 Omnibus Plan which replaced the previously existing Incentive Stock Option (ISO) Plan and Non-Qualified Stock Option (NQSO) Plan. The 2015 Omnibus Plan authorized a maximum of 4,300,000 common voting shares with an expiration date of March 20, 2025. Options or restricted shares granted under this plan expire no more than 10 years from date of grant. Exercise prices under the plan are set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant.

Stock Options

Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the quarters ended March 31, 2015 and 2014, the Company recognized $118 thousand and $37 thousand in compensation expense for stock options, respectively.

Stock option activity under the plan during the first quarter of 2015 is summarized below.


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2014		1,740,770	$	5.52		—	$	—
Exercised		3,679		4.40		—		—
Forfeited		20,823		5.10		—		—
Granted		394,753		10.63		—		—

Outstanding at March 31, 2015		2,111,021	$	6.48		9.19 years	$	8,759,162

Exercisable at March 31, 2015		180,509	$	3.87		8.54 years	$	1,220,457

The following is a summary of non-vested stock option activity for the Company for the quarter ended March 31, 2015.


	Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2014		1,707,430	$	1.19
Granted		394,753		3.87
Vested		150,848		0.58
Forfeited		20,823		0.95

Non-vested at March 31, 2015		1,930,512	$	1.79

F-36

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

Note 10. Stock Plans (Continued)

Restricted Stock

Restricted stock activity under the plan during the first quarter of 2015 is summarized below.


	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2014		—	$	—
Vested		—		—
Forfeited		—		—
Granted		9,243		10.63

Outstanding at March 31, 2015		9,243	$	10.63

Non-vested at March 31, 2015		9,243	$	10.63

For the quarters ended March 31, 2015 and 2014, the Company recognized $8 thousand and $143 thousand in compensation expense for restricted stock, respectively.

At March 31, 2015, unrecognized compensation costs relating to stock options amounted to $3.3 million which will be expensed over the next 6.08 years. At March 31, 2015, unrecognized compensation costs relating to restricted stock amounted to $90 thousand which will be expensed over the next 3.00 years.

The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Weighted average assumptions used for options granted during 2015 were as follows: risk free rate of 1.64%, dividend yield of 2.35%, volatility of 43.62% and average life of 4-7 years.

Note 11. Subsequent Events

Management has evaluated subsequent events through the date the financial statements were available to be issued and determined that the following events required disclosure:

Dividend Declaration

On April 17, 2015 the Company declared a dividend of $0.03 per voting and non-voting share outstanding to shareholders of record on that date with a payment date of April 30, 2015.

F-37

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors

Live Oak Bancshares, Inc.

Wilmington, North Carolina

We have audited the accompanying consolidated balance sheets of Live Oak Bancshares, Inc. (the “Company”) as of December 31, 2014, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Live Oak Bancshares, Inc. as of December 31, 2014, 2013 and 2012 and the results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

Greenville, North Carolina

March 6, 2015 (Except for the Reclassifications and Corrections described in Note 1, for which the date is May 27, 2015)

F-38

Live Oak Bancshares, Inc.

Consolidated Balance Sheets

December 31, 2014, 2013 and 2012


	December 31,
	2014			2013			2012
	(In thousands)
Assets
Cash and due from banks	$	29,902		$	37,244		$	44,173
Certificates of deposit with other banks		10,000			—			—
Investment securities available-for-sale		49,318			19,446			15,416
Loans held for sale		295,180			159,438			145,183
Loans held for investment		203,936			141,349			92,669
Allowance for loan losses		(4,407	)		(2,723	)		(5,108	)

Net loans		199,529			138,626			87,561
Premises and equipment, net		35,279			25,036			18,951
Foreclosed assets		371			341			232
Servicing assets		34,999			29,053			24,220
Investments in non-consolidated affiliates		6,345			11,467			—
Other assets		12,392			9,704			6,732

Total assets	$	673,315		$	430,355		$	342,468

Liabilities and Shareholders’ Equity
*Liabilities*
Deposits:
Noninterest-bearing	$	14,728		$	13,022		$	2,479
Interest-bearing		507,352			343,598			284,195

Total deposits		522,080			356,620			286,674
Short term borrowings		6,100			—			—
Long term borrowings		41,849			12,325			12,205
Other liabilities		11,472			9,415			10,668

Total liabilities		581,501			378,360			309,547

*Redeemable equity securities*		—			3,605			1,161
*Shareholders’ equity*
Non-cumulative perpetual preferred stock (Series A), 6,800 shares authorized, issued and outstanding		—			—			—
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding		—			—			—
Class A common stock, no par value, 100,000,000 shares authorized, 23,896,400, 20,318,330 and 20,274,950 shares issued and outstanding, respectively		48,657			18,319			20,535
Class B common stock, no par value, 10,000,000 shares authorized, 4,723,530 shares issued and outstanding in 2014		50,015			—			—
Retained earnings (accumulated deficit)		(6,493	)		30,262			11,980
Accumulated other comprehensive income (loss)		85			(191	)		542

Total shareholders’ equity, attributed to Live Oak Bancshares, Inc.		91,814			48,390			33,057

Noncontrolling interest		—			—			(1,297	)

Total equity		91,814			48,390			31,760

Total liabilities and shareholders’ equity	$	673,315		$	430,355		$	342,468

See Notes to Consolidated Financial Statements

F-39

Live Oak Bancshares, Inc.

Consolidated Statements of Income

For the years ended December 31, 2014, 2013 and 2012


	December 31,
	2014			2013			2012
	(In thousands, except per share data)
*Interest income*
Loans and fees on loans	$	19,891		$	14,481		$	11,178
Investment securities, taxable		455			391			467
Other interest earning assets		163			430			80

Total interest income		20,509			15,302			11,725

*Interest expense*
Deposits		4,731			3,947			2,975
Borrowings		1,121			574			653

Total interest expense		5,852			4,521			3,628

Net interest income		14,657			10,781			8,097
*Provision for (recovery of) loan losses*		2,793			(858	)		2,110

Net interest income after provision for loan losses		11,864			11,639			5,987

*Noninterest income*
Loan servicing revenue and revaluation		10,622			7,926			8,346
Net gains on sales of loans		49,977			38,225			33,535
Gain on deconsolidation of subsidiary		—			12,212			—
Equity in loss of non-consolidated affiliates		(2,221	)		(2,756	)		—
Gain (loss) on sale of sale of securities available for sale		(74	)		11			—
Other noninterest income		1,738			849			549

Total noninterest income		60,042			56,467			42,430

*Noninterest expense*
Salaries and employee benefits		29,165			20,766			17,968
Travel expense		5,392			4,458			3,115
Professional services expense		4,100			2,237			2,580
Advertising and marketing expense		3,316			2,316			2,181
Occupancy expense		1,771			1,678			679
Data processing expense		2,660			1,749			1,420
Equipment expense		1,422			1,042			738
Other expense		6,644			5,918			4,938

Total noninterest expense		54,470			40,164			33,619

Income before taxes		17,436			27,942			—
Income tax expense		7,388			—			—

Net income		10,048			27,942			14,798

Net loss attributable to noncontrolling interest		—			120			1,297

Net income attributable to Live Oak Bancshares, Inc.	$	10,048		$	28,062		$	16,095

Basic earnings per share	$	.42		$	1.38		$	.83

Diluted earnings per share	$	.41		$	1.37		$	.80

See Notes to Consolidated Financial Statements

F-40

Live Oak Bancshares, Inc.

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2014, 2013 and 2012


	December 31,
	2014		2013			2012
	(In thousands)
Net income	$	10,048	$	27,942		$	14,798
Other comprehensive income (loss) before tax:
Net unrealized gain (loss) on investment securities arising during the period		255		(722	)		39
Reclassification adjustment for (gain) loss on sale of securities available for sale included in net income		74		(11	)		—

Other comprehensive income (loss) before tax		329		(733	)		39
Income tax expense		53		—			—

Other comprehensive income (loss), net of tax		276		(733	)		39

Total comprehensive income	$	10,324	$	27,209		$	14,837

See Notes to Consolidated Financial Statements

F-41

Live Oak Bancshares, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, 2014, 2013 and 2012


	Common stock									Retained earnings			Accumulated other comprehensive income (loss)			Non- controlling interest			Total equity
	Shares
	Class A			Class B			Amount
	(In thousands)
Balance at December 31, 2011		1,711,830			17,123,580		$	19,696		$	7,384		$	503		$	—		$	27,583

Net income (loss)		—			—			—			16,095			—			(1,297	)		14,798
Other comprehensive income		—			—			—			—			39			—			39
Sales of common stock		23,790			238,180			588			—			—			—			588
Stock option exercise		94,500			945,500			792			—			—			—			792
Employee stock purchase program		12,270			125,300			289			—			—			—			289
Reclass to redeemable equity securities		—			—			(1,161	)		—			—			—			(1,161	)
Stock option based compensation expense		—			—			81			—			—			—			81
Restricted stock expense		—			250			—			—			—			250
Dividends (distributions to shareholders)		—			—			—			(11,499	)		—			—			(11,499	)

Balance at December 31, 2012		1,842,390			18,432,560			20,535			11,980			542			(1,297	)		31,760

Net income (loss)		—			—			—			28,062			—			(120	)		27,942
Other comprehensive loss		—			—			—			—			(733	)		—			(733	)
Repurchase of common stock		(13,480	)		(134,860	)		(444	)		—			—			—			(444	)
Stock option exercise		4,560			45,440			100			—			—			—			100
Issuance of common stock on acquisition		4,540			45,460			150			—			—			—			150
Employee stock purchase program		8,100			83,620			234			—			—			—			234
Reclass to redeemable equity securities		—			—			(2,444	)		—			—			—			(2,444	)
Reclassification of all stock to single class		18,472,220			(18,472,220	)		—			—			—			—			—
Deconsolidation of subsidiary		—			—			—			—			—			1,417			1,417
Stock option based compensation expense		—			—			38			—			—			—			38
Restricted stock expense		—			150			—			—			—			150
Dividends (distributions to shareholders)		—			—			—			(9,780	)		—			—			(9,780	)

Balance at December 31, 2013		20,318,330			—			18,319			30,262			(191	)		—			48,390

Net income		—			—			—			10,048			—			—			10,048
Other comprehensive income		—			—			—			—			276			—			276
Reclass from redeemable equity securities		—			—			3,605			—			—			—			3,605
Sales of common stock		65,914			—			273			—			—			—			273
Stock option exercise		191,660			—			177			—			—			—			177
Employee stock purchase program		23,006			—			331			—			—			—			331
Issuance of common stock grants		685,700			—			2,992			—			—			—			2,992
Common stock issued in private placement, net of offering cost		2,324,770			4,723,530			74,631			—			—			—			74,631
Debt conversion to common stock		287,020			—			3,052			—			—			—			3,052
Stock option based compensation expense		—			—			272			—			—			—			272
Reclassification adjustment for change in taxable status		—			—			(5,123	)		5,123			—			—			—
Restricted stock expense		—			—			143			—			—			—			143
Dividends (distributions to shareholders)		—			—			—			(52,376	)		—			—			(52,376	)

Balance at December 31, 2014		23,896,400			4,723,530		$	98,672		$	(6,943	)	$	85		$	—		$	91,814

See Notes to Consolidated Financial Statements

F-42

Live Oak Bancshares, Inc.

Consolidated Statements of Cash Flows

For the years ended December 31, 2014, 2013 and 2012


	December 31,
	2014			2013			2012
	(In thousands)
*Cash flows from operating activities*
Net income	$	10,048		$	27,942		$	14,798
Adjustments to reconcile net income to net cash provided (used) by operations:
Depreciation and amortization		2,159			1,459			673
Provision for (recovery of) loan losses		2,793			(858	)		2,110
Amortization of premium on securities, net of accretion		87			120			99
Amortization (accretion) of discount on unguaranteed loans		(701	)		1,410			(136	)
Deferred tax expense		4,092			—			—
Originations of loans held for sale		(765,123	)		(449,569	)		(372,694	)
Proceeds from sales of loans held for sale		539,122			420,499			362,785
Net gains (loss) on sale of foreclosed assets		—			(37	)		1
Net increase in servicing assets		(5,946	)		(4,833	)		(5,489	)
Net gains on sale of loans held for sale		(49,977	)		(38,225	)		(33,535	)
Loss (gain) on sale of securities available-for-sale		74			(11	)		—
Net (gain) loss on sale of premises and equipment		(256	)		152			31
Stock option based compensation expense		272			38			81
Stock grants		2,992			—			—
Restricted stock expense		143			150			250
Gain on deconsolidation of subsidiary		—			(12,212	)		—
Equity in loss of non-consolidated affiliates		2,221			2,756			—
Non-cash basis recovery in deconsolidation of subsidiary		—			3,976			—
Changes in assets and liabilities:
Accounts receivable and other assets		(2,407	)		2,243			(843	)
Accrued expenses and other liabilities		(1,101	)		825			3,611

Net cash used by operating activities		(261,508	)		(44,175	)		(28,258	)

*Cash flows from investing activities*
Purchases of securities available-for-sale		(34,721	)		(11,858	)		(1,773	)
Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale		5,017			6,986			3,139
Proceeds from sale of foreclosed assets		—			622			1,010
Investment in certificates of deposit		(10,000	)		—			—
Capital investments in non-consolidated affiliates		(6,613	)		(8,890	)		—
Loan originations and principal collections, net		76,930			297			(822	)
Proceeds from sale of premises and equipment		2,200			30			—
Purchases of premises and equipment		(14,346	)		(7,726	)		(14,191	)

Net cash provided (used) in investing activities		18,467			(20,539	)		(12,637	)

*Cash flows from financing activities*
Net increase in deposits		165,460			69,946			64,511
Proceeds from long term borrowings		34,966			—			3,623
Repayment of long term borrowings		(2,390	)		(130	)		(77	)
Proceeds from short term borrowings		6,100			—			—
Stock option exercise		177			100			792
Sale of common stock, net		75,235			234			877
Repurchase of common stock		—			(444	)		—
Shareholder dividend distributions		(43,849	)		(11,921	)		(12,194	)

Net cash provided by financing activities		235,699			57,785			57,532

Net increase (decrease) in cash and cash equivalents		(7,342	)		(6,929	)		16,637
*Cash and cash equivalents, beginning*		37,244			44,173			27,536

*Cash and cash equivalents, ending*	$	29,902		$	37,244		$	44,173

*Supplemental disclosure of cash flow information*
Interest paid	$	5,769		$	4,525		$	3,630
Income tax		3,820			—			—
*Supplemental disclosures of noncash operating, investing, and financing activities*
Unrealized holding gains (losses) on available-for-sale securities	$	329		$	(733	)	$	39
Conversion of convertible subordinated debt into common stock		3,052			—			—
Transfers from loans to foreclosed real estate and other repossessions		311			1,273			2,529
Transfers from foreclosed real estate to SBA receivable		281			432			1,286
Loans to facilitate the sale of foreclosed assets		—			147			—
Conversion of receivable to equity investment in nCino		—			4,320			—
Issuance of common stock on acquisition		—			150			—
Dividends declared but not paid		1,532			2,841			4,982
Non-cash dividend		9,514			—			—
Transfer of loans held for sale to loans held for investment		13,611			22,039			14,763
Transfer of loans held for investment to loans held for sale		4,548			7,934			35,100

See Notes to Consolidated Financial Statements

F-43

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Live Oak Banking Company (the “Bank”) was organized and incorporated under the laws of the State of North Carolina and commenced operations on May 12, 2008. In the first quarter of 2009, Live Oak Bancshares (the “Company”) was formed to acquire all the outstanding shares of Live Oak Banking Company. The Bank is headquartered in the city of Wilmington, North Carolina and has a sales office in Atlanta, Georgia. 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. The guaranteed portion of the loan is available for sale in the secondary market. The Bank routinely engages in the sale of participating interests of the unguaranteed portion. As a state chartered bank, the Bank is subject to regulation by the North Carolina Commissioner of Banks and the Federal Deposit Insurance Corporation.

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

During 2011, the Company formed Independence Aviation, LLC, a wholly-owned subsidiary, for the purpose of purchasing an aircraft to be used for business purposes by the Company.

In January 2012, the Company formed nCino, LLC (“nCino”) to further develop and sell cloud-based banking software that was built off of the Force.com platform and transformed into a bank operating system used to streamline the lending process of financial institutions. In 2012 nCino was a majority-owned subsidiary of the Company. In 2013 the Company’s ownership changed such that nCino became a minority-owned subsidiary of the Company. In December 2013 the legal structure of nCino converted from an LLC to a corporation. At year-end 2013, the Company owned 45.94% of nCino. In June of 2014 the Company divested its ownership in nCino to shareholders in the form of a dividend with a subsequent investment of $6.1 million later in 2014. At December 31, 2014, the Company owned 9.02% of nCino.

In September 2013, the Company acquired Government Loan Solutions (“GLS”) as a wholly-owned subsidiary. GLS is a management and technology consulting firm that advises, and offers solutions and services to participants in the government guaranteed lending sector. GLS, which was founded in 2006, primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Company accounted for the transaction as a business combination under the acquisition method of accounting, and as such the assets acquired and liabilities assumed in the transaction were recorded at their respective fair values as of the acquisition date. The purchase price was $150 thousand comprised of common stock of the Company. The allocation of the purchase price resulted in tangible assets of $35 thousand, a book of business and business model valued at $155 thousand, goodwill of $272 thousand and liabilities of $314 thousand. Goodwill associated with GLS was written off in 2014.

In December 2013, the Company jointly formed 504 Fund Advisors, LLC (“504 Fund”) with Pennant Management, Inc. (“Pennant Management”). As of December 31, 2014, 504 Fund was a 50% owned investment established for the purpose of underwriting and managing SBA 504 loans held by The Pennant 504 Fund (“Pennant 504”). The portfolio managers of Pennant 504 are employees of GLS and an outside owner/manager of the 504 Fund. The Company’s wholly owned subsidiaries, Live Oak Bank and GLS, provide various advisory

F-44

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

and human resource services to Pennant 504, for which both are reimbursed. The services provided to Pennant 504 do not result in either the Bank or GLS having the ability to directly influence management operations or decisions that directly impact the financial standing of the Company or its subsidiaries. Pennant Management serves as 504 Fund’s investment advisor and has voting authority with respect to 100% of the value of its outstanding interests. Accordingly, the Company’s investment in the 504 Fund is accounted for under the equity method. The Company’s cumulative investment in the 504 Fund was $750 thousand and $250 thousand in 2014 and 2013, respectively. Under the equity method, the carrying amount of this investment was $231 thousand at December 31, 2014.

Basis of Presentation

All information in the Notes to Consolidated Financial Statements has been presented in thousands, except percentage, time period, stock option, share and per share data. The accounting and reporting policies of the Company and the Bank follow generally accepted accounting principles and general practices within the financial services industry. The following is a description of the significant accounting and reporting policies the Company follows in preparing and presenting its consolidated financial statements.

Consolidation Policy

The consolidated financial statements include the financial statements of the Company and wholly-owned subsidiaries of Live Oak Banking Company, Live Oak Number One, Independence Aviation and GLS. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements. If an entity is not a variable interest entity, the Company also evaluates arrangements in which there is a general partner or managing member to determine whether consolidation is appropriate.

Investments in unconsolidated subsidiaries representing ownership of at least 20% but less than or equal to 50%, are accounted for under the equity method. For these investments, the Company records its investment in non-consolidated affiliates and the portion of income or loss in equity in income of non-consolidated affiliates. The Company periodically evaluates these investments for impairment.

On January 28, 2013, the Company’s ownership in nCino declined by 21.54%, from 64.36% to 42.82%. This decrease in ownership and related influence occurred as a result of nCino selling additional equity to outside investors for $7.5 million. As a result, the Company deconsolidated nCino, accounting for its remaining 42.82% investment using the equity method. The gain on the deconsolidation of nCino holdings was $12.2 million, which arose from the combination of a gain of $9.7 million related to the remeasurement of the retained investment in nCino at fair value and $2.5 million related to the recovery of negative net assets in the investee at the date of transfer. The fair value of the investment is a Level 3 measurement (see Note 9) based upon the consideration paid by outside investors for a 33.5% ownership interest in nCino. The Company’s investment in nCino was accounted for as an equity method investment at December 31, 2013. As previously indicated, the Company divested its ownership in nCino via a dividend to shareholders in June 2014. In August 2014 the Company again invested $6.1 million in nCino for 9.02% ownership. The Company’s carrying value of its investment in nCino was $6.1 million and $11.3 million as of December 31, 2014 and 2013, respectively. Due to the decreased level of influence, the Company’s investment in nCino at December 31, 2014 was accounted for as a cost method investment.

F-45

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

The Company will continue to be one of nCino’s customers; however, the power to direct the joint venture’s most significant activities is now controlled by outside investors.

Business Segments

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has 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 regularly evaluates relative to resource allocation and performance assessment.

Private Placement

The Company issued and sold 7,048,300 shares of common stock in a private placement on August 5, 2014 consisting of 2,323,770 voting shares and 4,723,530 non-voting shares in exchange for total proceeds of $74.6 million, net of offering costs.

The Company also terminated its S-Corporation status and became a taxable corporate entity (C-Corporation) on August 3, 2014. The consolidated statement of shareholders’ equity presents a contribution to the capital of the corporate entity followed by a constructive distribution to the owners .

Stock Split

On September 23, 2014, the board of directors declared a ten-for-one stock split of the Company’s Class A and Class B common shares, which was effected in the form of a common stock dividend distributed on October 10, 2014. Except for the amount of authorized shares, all references to share and per share amounts in the consolidated financial statements and accompanying notes to the consolidated financial statements have been retroactively adjusted to reflect the stock split.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and, valuations of servicing assets.

Cash and Cash Equivalents

For the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “cash and due from banks”.

F-46

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

To comply with banking regulations, the Company is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was approximately $17.2 million, $11.9 million and $9.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Certificates of Deposit with other Banks

Certificates of deposit with other banks have maturities ranging from March 2016 through December 2018 and bear interest at rates ranging from 0.55% to 1.85%. None of the certificates of deposit had maturities of three months or less at the time of origination. All investments in certificates of deposit are with FDIC insured financial institutions and none exceed the maximum insurable amount of $250 thousand.

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held-to-maturity or trading, are classified as “available-for-sale” and recorded at fair value. Unrealized gains and losses are excluded from earnings and reported in other comprehensive income. The Company’s entire portfolio for the periods presented is available-for-sale.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. At each reporting date, the Company evaluates each investment security in a loss position for other than temporary impairment (“OTTI”). The Company evaluates declines in market value below cost for debt securities by assessing the likelihood of selling the security prior to recovering its cost basis. If the Company intends to sell the debt security or it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its cost basis, the Company will write down the security to fair value with the full charge recorded in earnings. If the Company does not intend to sell the debt security and it is not more-likely-than-not that the Company will be required to sell the debt security prior to recovery, the security will not be considered other-than-temporarily impaired unless there are credit losses associated with the security. In that case: (1) where credit losses exist, the portion of the impairment related to those credit losses should be recognized in earnings; (2) any remaining difference between the fair value and the cost basis should be recognized as part of other comprehensive income. For equity securities, any other-than-temporary impairment is recognized with the full charge recorded in earnings. To determine whether an impairment of equity securities is OTTI, the Company considers whether it has the ability and intent to hold the investment until there is a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.

In determining whether OTTI exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sales of securities are recorded on the trade date and are determined using the specific identification method.

F-47

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Loans Held For Sale

Management designates loans as held for sale based on its intent to sell guaranteed portions in the SBA Secondary Market and unguaranteed portions to participant banks and credit unions. Salability requirements of the guaranteed portion include, but are not limited to, full disbursement of the loan commitment amount. Loans originated and intended for sale are carried at the lower of cost or estimated fair value. The cost basis of loans held for sale includes the deferral of loan origination fees and costs. Deferred fees and costs are accreted and amortized for loans classified held for sale until the sale occurs. At loan settlement, the pro-rata portion, based on the percent of the total loan sold, of the remaining deferred fees and costs are recognized as an adjustment to the gain on sale.

As part of our management of the loans held in our portfolio, we will occasionally transfer loans from held for investment to held for sale. Upon transfer, any associated allowance for loan and lease loss is charged off and the carrying value of the loans is adjusted to the estimated fair value. The loans are subsequently accounted for at the lower of cost or fair value, with valuation changes recorded in other non-interest income. Gains or losses on the sale of these loans are also recorded in non-interest income. In certain circumstances, loans designated as held for sale may later be transferred back to the loan portfolio based upon our intent and ability to hold the loans for the foreseeable future. We transfer these loans to loans held for investment at the lower of cost or fair value.

In accordance with SBA regulation, the Bank is required to retain 10% of the principal balance of any SBA 7(a) loan comprised of unguaranteed dollars. With written consent from the SBA, the Bank may sell down to a 5% exposure comprised of unguaranteed dollars. During 2012, the SBA approved the Bank to sell to the 5% retention level participating interests of the unguaranteed portion of loans originated on or before June 30, 2012 that have been fully funded for a period of eighteen months. This approval expired on June 30, 2014. Loans held for sale generally consists of guaranteed dollars and the unguaranteed portion up to the SBA retention minimums discussed above. The gain on sale recognized in income is the sum of the premium on the guaranteed loan, the fair value of the servicing assets recognized, less the discount recorded on the unguaranteed portion of the loan retained.

Generally, all guaranteed portions and unguaranteed portions that meet the required retention balances prescribed by the Small Business Administration and meet salability requirements were classified as held for sale. A negative change in the credit quality of a loan results in the loan classification changing from held for sale to held for investment.

The following summarizes the activity pertaining to loans held for sale for the years ended December 31, 2014, 2013 and 2012:


	2014			2013			2012
Balance at beginning of year	$	159,438		$	145,183		$	111,877
Originations		519,677			315,372			276,447
Proceeds from sales		(433,912	)		(339,342	)		(276,676	)
Gain on sale of loans		49,977			38,225			33,535

Balance at end of period	$	295,180		$	159,438		$	145,183

F-48

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Loans Held for Investment

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal amount adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premium or discount on purchased loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. For sold loans, loan origination fees, net of certain direct origination costs, are recognized as a gain on sale of loans once the loan has sold. Discounts and premiums on any purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Loans designated as held for investment, include the required retention amount defined by the SBA comprised of unguaranteed dollars and loans designated as troubled debt restructurings, nonaccrual, greater than thirty days past due, and risk grade at a 5 or worse as defined by internal risk rating metrics.

Interest income on loans is recognized as earned on a daily accrual basis. The accrual of interest on loans is discontinued when principal or interest is past due 90 days or the loan is determined to be impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectable.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the un-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan loss is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and other circumstances impacting the probability of collecting scheduled principal and interest payments when due.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loans classified as troubled debt restructured (“TDR”) loans are considered impaired. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

A TDR is a restructuring of a loan in which a concession is granted to a borrower experiencing financial difficulty. A loan is accounted for as a TDR if the Company, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise grant. A TDR typically involves a

F-49

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

modification of terms such as a reduction of the interest rate below the current market rate for a loan with similar risk characteristics or the waiving of certain financial loan covenants without corresponding offsetting compensation or additional support. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans.

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when the loan becomes ninety days past due. When interest accrual is discontinued, all unpaid accrued interest for the current year is reversed. Interest income is subsequently recognized on the cash-basis or cost-recovery method, as appropriate. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past due status of loans is determined based on contractual terms. Cash payments of interest on nonaccrual loans will be applied to the principal balance of the loan. Interest accruals are resumed on nonaccrual loans only when the loan is brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. Management’s judgment is based on an assessment of the borrower’s financial condition and a recent history of payment performance.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans were the subject of a restructuring agreement.

Foreclosed Assets

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure, establishing a new cost basis. Any write down at the time of transfer to foreclosed assets is charged to the allowance for loan losses. Subsequent write downs are charged to other expense. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of carrying amount or fair value, less cost to sell. Costs relating to improvement of the property are capitalized while holding costs of the property are charged to expense in the period incurred.

Premises and Equipment

Premises, furniture and equipment, land improvements and leasehold improvements are carried at cost, less accumulated depreciation. Land is carried at cost. Additions and major replacements or improvements which extend useful lives of property or equipment are capitalized. Maintenance, repairs, and minor improvements are expensed as incurred. Upon retirement or other disposition of the assets, the cost and related depreciation are removed and any resulting gain or loss is reflected in income. Depreciation is computed by the straight-line method over the following estimated useful lives:


		Years
Building		39
Transportation		4-20
Land Improvements		7-15
Furniture and equipment		3-7
Computers and software		3-7
Leasehold improvements		1-3

F-50

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Servicing Assets

All sales of the guaranteed portion of loans are executed on a servicing retained basis. The standard SBA loan sale agreement is structured to provide the Company with a “servicing spread” paid from a portion of the interest cash flow of the loan. SBA regulations require the Bank to retain a portion of the cash flow from the interest payments received for a sold loan. This retention requirement is at least 100 basis points in servicing spread with the sale of a guaranteed loan. The portion of the servicing spread that exceeds adequate compensation for the servicing function is recognized as a servicing asset. Industry practice recognizes adequate compensation for servicing SBA loans as 40 basis points. The fair value of the servicing asset is measured at the discounted present value of the excess servicing spread over the expected life of the related loan using appropriate discount rates and assumptions based on industry statistics for prepayment speeds.

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets and are carried at fair value. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of loans, a portion of the cost of originating the loan is allocated to the servicing right based on fair value. Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are carried at fair value as of the reporting date. Changes to fair value are reported in net gains on sales of loans.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

The Company’s investment in a loan is allocated between the retained portion of the loan, the servicing asset, and the sold portion of the loan on the date the loan is sold.

When only a portion of a loan is sold, GAAP requires the Company to reallocate the carrying basis between the portion of the loan sold and the portion of the loan retained based on the relative fair value of the respective portions as of the date of sale. The maximum gain on sale that can be recognized is the difference between the fair value of the guaranteed portion sold and the reallocated basis of the portion of the loan sold. The Company measures the fair value of the guaranteed portion of the loan by the cash premium at which the sale was consummated. The limitation on the maximum gain allowed to be recognized results in a discount recorded on the unguaranteed dollars retained. The carrying value of the retained portion of the loan is discounted based in part on the estimates derived from the Company’s comparable nonguaranteed loan sales.

Common Stock

On November 26, 2013, The Company amended its Articles of Incorporation to combine its Class A Voting Common Stock and its Class B Non-Voting Common Stock into a single class of Voting Common Stock with no par value. The combination of the two classes of stock had no effect on the total number of shares outstanding or total equity. Previously the Company had Class A and Class B Common Stock with no par value issued at a 1:10 ratio. The rights, preferences and privileges of Class A and Class B Common Stock were identical in all respects, except that Class A Common Stock entitled the holder to one vote per share, whereas Class B Common Stock was non-voting, except to the extent otherwise required by law.

F-51

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

On June 11, 2014 the Company amended its Articles of Incorporation to create two classes of common stock. These two classes are identified as Class A and Class B for Voting Common Stock and Non-Voting Common Stock, respectively, in the accompanying 2014 consolidated balance sheet and statement of shareholders’ equity. Voting and Non-Voting Common Stock holders have identical rights and privileges, with the exception that Non-Voting shares have no voting power unless circumstances arise where instances creating the Non-Voting Common Shares are modified in any way that negatively impact rights of holder. Stock splits or dividends of Voting and Non-Voting Common Shares shall be in like stock (voting for voting and non-voting for non-voting). Any number of Non-Voting Common Stock may be converted to an equal number of Voting Common Stock at the option of the holder; provided that holder is not the initial transferee or an affiliate of initial transferee.

Advertising Expense

Due to the Company’s presence at annual trade shows and the significant discounts received for prepaid print advertising, the Company has a high volume of prepaid marketing expenses, totaling $816 thousand, $396 thousand and $605 thousand at December 31, 2014, 2013 and 2012, respectively. Marketing costs are recognized in the month the event or advertisement takes place. These costs are included in marketing and advertising expense as presented in the statement of operations.

Income Taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to business combinations or components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The effect of a change in tax rates on deferred assets and liabilities is recognized in income taxes during the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount more likely than not to be realized. Realization of deferred tax assets is dependent upon the level of historical income, prudent and feasible tax planning strategies, reversals of deferred tax liabilities and estimates of future taxable income.

The Company evaluates uncertain tax positions at the end of each reporting period. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit recognized in the financial statements from any such position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Any interest and/or penalties related to income taxes are reported as a component of income tax expense.

The Company has determined that it does not have any material unrecognized tax benefits or obligations as of December 31, 2014. Fiscal years ending on or after December 31, 2010 remain subject to examination by federal and state tax authorities.

Comprehensive Income

Annual comprehensive income reflects the change in the Company’s equity during the year arising from transactions and events other than investment by and distributions to shareholders. The only components of other comprehensive income consist of realized and unrealized gains and losses related to investment securities. Due the Company being a pass through entity prior to July 31, 2014, adjustments to 2013 and 2012 comprehensive income are not tax effected.

F-52

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

Stock Compensation Plans

The Company recognizes compensation cost relating to share-based payment transactions in the financial statements in accordance with GAAP. The cost is measured based on the fair value of the equity or liability instruments issued. The expense measures the cost of employee services received in exchange for stock options and restricted stock based on the grant-date fair value of the award, and recognizes the cost over the vesting period as indicated in the option agreement.

Fair Value of Financial Instruments

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy established per GAAP which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Investment securities available-for-sale and servicing assets are recorded at fair value on a recurring basis. Loans held for sale, certain impaired loans and foreclosed assets are carried at fair value on a non-recurring basis.

nCino Revenue Recognition

After formation in 2012, the investment in nCino was consolidated until deconsolidation occurred in January 2013. Accordingly, the following disclosure applies to the year ended December 31, 2012. nCino enters into arrangements to deliver multiple products or services (multiple-elements). nCino applies software revenue recognition rules and allocates the total revenues among elements based on vendor-specific objective evidence (“VSOE”) of fair value of each element.

Revenues are derived from three sources:

(i)

Seat License fees, related to term (or time-based) software license revenue;

(ii)

Customer Support and Maintenance fees, related to email and phone support, bug fixes and unspecified software updates and upgrades released when, and if available during the maintenance term; and

(iii)

Professional Services fees, related to professional services related to implementation of the Company’s software, reimbursable travel and training.

Revenues are recognized when all of the following criteria are met:

•

Persuasive evidence of an arrangement exists. Evidence of an arrangement consists of a written contract signed by both the customer and management prior to the end of the period.

•

Delivery or performance has occurred . nCino’s software is delivered to the customer. Delivery is considered to have occurred when all of a customer’s users (number as defined in the MSA contract) have been granted access by the Company to the system and are using it to process Loans.

•

Fees are fixed or determinable. Arrangements where a significant portion of the fee is due beyond 90 days from delivery are not considered to be fixed or determinable. Revenues from such arrangements is recognized as payments become due, assuming all other revenue recognition criteria have been met. Fees from seat licenses are generally due in monthly installments or, in certain cases, in advance via annual installments over the term of the agreement beginning on the effective date of the license. Accordingly, fees from seat licenses are not considered to be fixed or determinable until they become due.

F-53

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

•

Collectability is probable. Collectability is assessed on a customer-by-customer basis, based primarily on creditworthiness as determined by credit checks and analysis, as well as customer payment history. Payment terms generally range from 30 to 90 days from invoice date. If it is determined prior to revenue recognition that collection of an arrangement fee is not probable, revenues are deferred until collection becomes probable or cash is collected, assuming all other revenue recognition criteria are satisfied.

Professional services related to the implementation of nCino’s software products are generally performed on a fixed fee basis. Professional services revenue is recognized as the terms of the professional services contracts are completed and culminated with acceptance by the customer.

nCino Unearned Revenue

Unearned revenue represents revenues collected from sales of the nCino’s professional service fees, seat licenses, and customer support and annual maintenance services fees that have not been earned as of the balance sheet date. The unearned revenue balance does not represent the total contract value of all noncancelable license agreements in effect. See above nCino Revenue Recognition narrative regarding periods to which this policy applies.

Earnings per share


			December 31,
	2014		2013		2012
Basic earnings per share:
Net income available to common shareholders	$	10,048	$	28,062	$	16,095

Weighted-average basic shares outstanding		23,973,398		20,347,660		19,467,300

Basic earnings per share	$	.42	$	1.38	$	.83

Diluted earnings per share:
Net income available to common shareholders, for diluted EPS	$	10,048	$	28,062	$	16,095

Total weighted-average basic shares outstanding		23,973,398		20,347,660		19,467,300
Add effect of dilutive stock options and restricted grants		450,783		91,470		671,060

Total weighted-average diluted shares outstanding		24,424,181		20,439,130		20,138,360

Diluted earnings per share	$	.41	$	1.37	$	.80

Anti-dilutive securities		328,020		—		—

Pro forma earnings per share

F-54

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

C Corporation during those periods. In addition, the pro forma results for the year ended December 31, 2014 excludes the initial deferred tax liability recorded as a result of the change in tax status as discussed in Note 8.


	December 31,
	2014		2013		2012
Pro forma net income available to common shareholders, after tax	$	10,723	$	17,258	$	9,899

Pro forma basic earnings per share	$	.45	$	.85	$	.51

Pro forma diluted earnings per share	$	.44	$	.84	$	.49

Reclassifications and Corrections

F-55

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

During May 2015, the Company determined that certain amounts as presented within the consolidated financial statements as of and for the years ended December 31, 2014, 2013 and 2012, which were previously issued on March 6, 2015 contained immaterial errors. More specifically, the consolidated statements of cash flows failed to identify non-cash transfers of held for sale loan balances to/from loans held for investment and incorrectly presented proceeds from the sale of unguaranteed loans, originations and the amortization of discount on unguaranteed loans during 2014. Additionally, the previously issued consolidated statement of cash flows and the Parent Company Only Financial Statements, Statement of Cash Flows as shown in Note 14, failed to exclude a non-cash conversion of a receivable to an equity interest in nCino during 2013. The effect of correcting these errors within the consolidated statement of cash flows increased net cash used by operating activities by $144 million, $49 million and $10 million, for each of the years ended December 31, 2014, 2013 and 2012, respectively. An offsetting effect of the same amount in the opposite direction was reflected in cash flows from investing activities for each period presented. The effect of these corrections on each line item in the consolidated statements of cash flows for each period presented is shown below:


Consolidated Statement of Cash Flows Year ended December 31, 2014	As Reported			Change			As Restated
*Cash flows from operating activities*
Amortization of discount on unguaranteed loans	$	2,575		$	(3,276	)	$	(701	)
Originations of loans held for sale		(519,677	)		(245,446	)		(765,123	)
Proceeds from sales of loans held for sale		433,912			105,210			539,122
Net cash (used) provided by operating activities		(117,996	)		(143,512	)		(261,508	)

*Cash flows from investing activities*
Loan originations and principal collections, net		(66,582	)		143,512			76,930
Net cash used by investing activities		(125,045	)		143,512			18,467

*Supplemental disclosures of noncash operating, investing and financing activities*
Transfer of loans held for sale to loans held for investment	$	—		$	13,611		$	13,611
Transfer of loans held for investment to loans held for sale		—			4,548			4,548

Consolidated Statement of Cash Flows Year ended December 31, 2013
*Cash flows from operating activities*
Originations of loans held for sale	$	(315,372	)	$	(134,197	)	$	(449,569	)
Proceeds from sales of loans held for sale		339,342			81,157			420,499
Other assets		(2,077	)		4,320			2,243
Net cash (used) provided by operating activities		4,545			(48,720	)		(44,175	)

*Cash flows from investing activities*
Investments in non-consolidated affiliates		(4,570	)		(4,320	)		(8,890	)
Loan originations and principal collections, net		(52,743	)		53,040			297
Net cash used by investing activities		(69,259	)		48,720			(20,539	)

F-56

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)


	As Reported			Change			As Restated

*Supplemental disclosures of noncash operating, investing and financing activities*
Conversion of receivable to equity investment in nCino	$	—		$	4,320		$	4,320
Transfer of loans held for sale to loans held for investment		—			22,039			22,039
Transfer of loans held for investment to loans held for sale		—			7,934			7,934

Parent Company Only Statement of Cash Flows (see Note 14) Year ended December 31, 2013
*Cash flows from operating activities*
Net change in other assets	$	(73	)	$	4,320		$	4,247
Net cash provided by (used in) operating activities		9,463			4,320			13,783

*Cash flows from investing activities*
Capital investment in non-consolidated affiliates		(4,570	)		(4,320	)		(8,890	)
Net cash used in investing activities		(946	)		(4,320	)		(5,266	)

Consolidated Statement of Cash Flows Year ended December 31, 2012
*Cash flows from operating activities*
Originations of loans held for sale	$	(276,447	)	$	(96,247	)	$	(372,694	)
Proceeds from sales of loans held for sale		276,676			86,109			362,785
Net cash (used) provided by operating activities		(18,120	)		(10,138	)		(28,258	)

*Cash flows from investing activities*
Loan originations and principal collections, net		(10,960	)		10,138			(822	)
Net cash used by investing activities		(22,775	)		10,138			(12,637	)

*Supplemental disclosures of noncash operating, investing and financing activities*
Transfer of loans held for sale to loans held for investment	$	—		$	14,763		$	14,763
Transfer of loans held for investment to loans held for sale		—			35,100			35,100

Additionally, the Company determined that changes in discounts on loans held for investment had erroneously been included within the loan servicing revaluation line item in Note 4 of these consolidated financial statements. A revision has been made to reclassify adjustments related to these discounts from the Note 4 line item titled “Changes in fair value” to “Additions, net” to better reflect valuation adjustments related specifically to the servicing asset. As a result, Note 4 has been revised to reflect the corrected roll forward of the servicing asset. The impact of this correction increased the Additions, net and further reduced Changes in fair value by $2,776, $1,262 and $958 for the years ended December 31, 2014, 2013 and 2012, respectively.

Lastly, the Company determined that in conjunction with the termination of our S-Corporation status to become a C Corporation on August 3, 2014, the consolidated statement of shareholders’ equity should have been adjusted to reclassify the accumulated deficit at the time of conversion, totaling $5.1 million, to common stock. The effect of this reclassification is reflected in the line identified as “reclassification adjustment for change in taxable status” in the accompanying consolidated statements of changes in shareholders’ equity. The impact of this reclassification decreased total Class A common stock from $53,780 thousand to $48,657 thousand and

F-57

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

increased the retained earnings (accumulated deficit) from $(12,066) thousand to $(6,943) thousand at December 31, 2014.

None of these restatements had an effect on the Company’s consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity or consolidated statements of cash flows, other than reclassifications within shareholders’ equity of the consolidated balance sheet and the related statement of changes in shareholders’ equity and line items within the statements of cash flows as presented above. Total equity remained unchanged from the aforementioned reclassification and net increase (decrease) in cash and cash equivalents remained unchanged. Due to the nature of these corrections the Company is presenting the corrected balances prospectively in these restated consolidated financial statements as of December 31, 2014 and for the years ended December 31, 2014, 2013 and 2012.

Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

In June 2014, the FASB issued ASU 2014-12, Compensation — Stock Compensation (Topic 718) — Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. ASU 2014-12 is intended to clarify the accounting for the timing of expense recognition related to employee share-based payments in which a performance target that effects vesting could be achieved after the requisite service period. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

F-58

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 2. Securities

The carrying amount of securities and their approximate fair values at December 31, 2014, 2013 and 2012 is:


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
2014
US government agencies	$	35,207	$	127	$	25	$	35,309
Residential mortgage-backed securities		13,973		92		56		14,009

	$	49,180	$	219	$	81	$	49,318

2013
US government agencies	$	5,315	$	56	$	109	$	5,262
Residential mortgage-backed securities		14,322		109		247		14,184

	$	19,637	$	165	$	356	$	19,446

2012
US government agencies	$	3,425	$	96	$	4	$	3,517
Residential mortgage-backed securities		11,449		451		1		11,899

	$	14,874	$	547	$	5	$	15,416

There were no calls or maturities of securities during 2014. Three securities were sold for $2.6 million resulting in a net loss on sale of securities of $74 thousand during the year ended December 31, 2014. A total of nine securities totaling $34.7 million were purchased during the year ended December 31, 2014. Securities purchases consisted of five US government agency securities for $30 million, two mortgage-backed securities for $3.7 million and two municipal securities for $1 million. The US agency securities purchases and $10 million in certificate of deposit investments reflected on the balance sheet were part of a strategic investment plan with maturities ranging from 2-4 year terms, utilizing excess cash from the $74.6 million private placement capital raise that took place in August 2014. There was one security called for $1.7 million during 2013. Four securities were sold for $1.6 million resulting in a net gain on sale of securities of $11 thousand during the year ending December 31, 2013. There were no investments sold during the year ended December 31, 2012.

The following table shows 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, for the investment securities with unrealized losses at December 31, 2014.


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
US government agencies	$	—	$	—	$	1,224	$	25	$	1,224	$	25
Residential mortgage-backed securities		2,234		4		5,158		52		7,392		56

Total	$	2,234	$	4	$	6,382	$	77	$	8,616	$	81

At December 31, 2014, there were six securities, consisting of one US agency security and five mortgage-backed securities, in unrealized loss positions for greater than 12 months; and one mortgage-backed security 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

F-59

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 2. Securities (Continued)

the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired. Investments in an unrealized loss position as of December 31, 2013 and 2012 were all in a continuous loss position for less than 12 months.

All residential mortgage-backed securities in the Company’s portfolio at December 31, 2014, 2013 and 2012 were backed by U.S. government sponsored enterprises (“GSEs”).

The following is a summary of investment securities by maturity at December 31, 2014:


	Available for sale
	Amortized cost		Fair value
One to five years	$	33,958	$	34,085
Five to ten years		2,674		2,674
After 10 years		12,548		12,559

	$	49,180	$	49,318

The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled.

At December 31, 2014, 2013 and 2012 investment securities with a fair market value of $1.3 million, $1.3 million and $1.4 million, respectively, were pledged to secure a line of credit with the Company’s correspondent bank.

Note 3. Loans and Allowance for Loan Losses

Loan Portfolio Segments

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

F-60

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

begins, it is then reclassified to the Owner Occupied 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.

Owner Occupied Commercial Real Estate

Commercial Land

Each of the loan types referenced in the sections above is further segmented into verticals in which the Bank chooses to operate — Death Care Management, Healthcare Services (medical, dental, ophthalmic), Independent Pharmacies, Investment Advisors, Veterinary Practices, Family Entertainment Centers, Poultry Agriculture and Wine & Craft Beverages. Wine & Craft Beverages is a new area of emphasis for which there is no loan activity as of December 31, 2014. The Bank chooses to finance businesses operating in these 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 and practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines requiring compensating strengths when considering a proposed loan.

F-61

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

Loans consist of the following:


	2014			2013			2012
Commercial & Industrial	$	81,057		$	57,359		$	34,200
Death Care Management		3,603			1,782			283
Family Entertainment Centers		333			—			—
Healthcare Services		12,319			8,739			4,996
Independent Pharmacies		34,079			24,026			12,192
Investment Advisors		9,660			2,817			—
Veterinary Practices		20,902			19,978			15,719
Other Industries		161			17			1,010
Construction & Development		9,526			10,286			8,503
Poultry Agriculture		3,910			—			—
Death Care Management		92			989			315
Healthcare Services		2,957			4,997			3,136
Independent Pharmacies		215			101			637
Veterinary Practices		2,207			4,199			4,163
Other Industries		145			—			252
Owner Occupied Commercial Real Estate		111,620			74,461			50,577
Poultry Agriculture		259			—			—
Death Care Management		18,879			11,668			3,703
Family Entertainment Centers		872			—			—
Healthcare Services		26,173			11,129			6,207
Independent Pharmacies		4,750			3,490			3,008
Investment Advisors		2,161			171			—
Veterinary Practices		57,934			47,896			35,554
Other Industries		592			107			2,105
Commercial Land		1,248			—			—
Poultry Agriculture		1,248			—			—
Total Loans ²		203,451			142,106			93,280
Net Deferred Costs		2,060			1,212			592
Discount on SBA 7(a) Unguaranteed ¹		(1,575	)		(1,969	)		(1,203	)

Loans, Net of Unearned	$	203,936		$	141,349		$	92,669

¹	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.

²	Total loans include $21.3 million, $12.4 and $12.0 million of U.S. Government Guaranteed loans as of December 31, 2014, 2013 and 2012, respectively.

Credit Risk Profile

F-62

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

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

F-63

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

The following tables summarize the risk grades of each category as of December 31, 2014, 2013 and 2012.


	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total
2014
Commercial & Industrial	$	63,777	$	4,546	$	12,734	$	81,057
Death Care Management		3,603		—		—		3,603
Family Entertainment Centers		333		—		—		333
Healthcare Services		6,995		538		4,786		12,319
Independent Pharmacies		27,673		2,726		3,680		34,079
Investment Advisors		9,660		—		—		9,660
Veterinary Practices		15,513		1,121		4,268		20,902
Other Industries		—		161		—		161
Construction & Development		9,526		—		—		9,526
Poultry Agriculture		3,910		—		—		3,910
Death Care Management		92		—		—		92
Healthcare Services		2,957		—		—		2,957
Independent Pharmacies		215		—		—		215
Veterinary Practices		2,207		—		—		2,207
Other Industries		145		—		—		145
Owner Occupied Commercial Real Estate		87,883		5,219		18,518		111,620
Poultry Agriculture		259		—		—		259
Death Care Management		16,519		639		1,721		18,879
Family Entertainment Centers		872		—		—		872
Healthcare Services		22,778		938		2,457		26,173
Independent Pharmacies		4,709		41		—		4,750
Investment Advisors		2,161		—		—		2,161
Veterinary Practices		40,281		3,601		14,052		57,934
Other Industries		304		—		288		592
Commercial Land		1,248		—		—		1,248
Poultry Agriculture		1,248		—		—		1,248

Total	$	162,434	$	9,765	$	31,252	$	203,451

F-64

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)


	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total
2013
Commercial & Industrial	$	44,786	$	4,769	$	7,804	$	57,359
Death Care Management		1,782		—		—		1,782
Healthcare Services		5,538		941		2,260		8,739
Independent Pharmacies		20,969		2,353		704		24,026
Investment Advisors		2,817		—		—		2,817
Veterinary Practices		13,663		1,475		4,840		19,978
Other Industries		17		—		—		17
Construction & Development		8,981		1,305		—		10,286
Death Care Management		989		—		—		989
Healthcare Services		4,934		63		—		4,997
Independent Pharmacies		101		—		—		101
Veterinary Practices		2,957		1,242		—		4,199
Owner Occupied Commercial Real Estate		57,120		3,797		13,544		74,461
Death Care Management		11,312		—		356		11,668
Healthcare Services		9,218		423		1,488		11,129
Independent Pharmacies		3,189		—		301		3,490
Investment Advisors		171		—		—		171
Veterinary Practices		33,226		3,374		11,296		47,896
Other Industries		4		—		103		107

Total	$	110,887	$	9,871	$	21,348	$	142,106


	Risk Grades 1 - 4		Risk Grade 5		Risk Grades 6 - 8		Total
2012
Commercial & Industrial	$	26,266	$	2,639	$	5,295	$	34,200
Death Care Management		283		—		—		283
Healthcare Services		4,183		53		805		4,996
Independent Pharmacies		11,185		1,007		—		12,192
Veterinary Practices		9,650		1,579		4,490		15,719
Other Industries		1,110		—		—		1,010
Construction & Development		7,644		—		859		8,503
Death Care Management		315		—		—		315
Healthcare Services		2,277		—		859		3,136
Independent Pharmacies		637		—		—		637
Veterinary Practices		4,163		—		—		4,163
Other Industries		252		—		—		252
Owner Occupied Commercial Real Estate		31,333		5,689		13,555		50,577
Death Care Management		3,703		—		—		3,703
Healthcare Services		4,068		—		2,139		6,207
Independent Pharmacies		1,315		—		1,693		3,008
Veterinary Practices		20,964		5,689		8,901		35,554
Other Industries		1,283		—		822		2,105

Total	$	65,243	$	8,328	$	19,709	$	93,280

F-65

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

Total loans include $21.3 million of U.S. Government Guaranteed loans as of December 31, 2014, segregated by risk grade as follows: Risk Grades 1 – 4 = $0, Risk Grade 5 = $1.1 million, Risk Grades 6 –8 = $20.2 million. As of December 31, 2013 total loans include $12.4 million of U.S. Government Guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $0, Risk Grade 5 = $1.1 million, Risk Grades 6 – 8 = $11.3 million. As of December 31, 2012, total loans include $12.0 million of U.S. Government Guaranteed loans segregated by risk grade as follows: Risk Grades 1 – 4 = $0, Risk Grade 5 = $1.3 million, Risk Grades 6 – 8 = $10.7 million.

Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Also, loans less than 30 days past due and accruing are included within current loans shown below. The following table shows an age analysis of past due loans as of December 31, 2014, 2013 and 2012.


	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 Loans Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
2014
Commercial & Industrial	$	1,025	$	1,433	$	236	$	5,872	$	8,566	$	72,491	$	81,057	$	—
Death Care Management		—		—		—		—		—		3,603		3,603		—
Family Entertainment Centers		—		—		—		—		—		333		333		—
Healthcare Services		—		1,059		232		2,420		3,711		8,608		12,319		—
Independent Pharmacies		—		98		—		1,224		1,322		32,757		34,079		—
Investment Advisors		—		—		—		—		—		9,660		9,660		—
Veterinary Practices		1,025		276		4		2,228		3,533		17,369		20,902		—
Other Industries		—		—		—		—		—		161		161		—
Construction & Development		—		—		—		—		—		9,526		9,526		—
Poultry Agriculture		—		—		—		—		—		3,910		3,910		—
Death Care Management		—		—		—		—		—		92		92		—
Healthcare Services		—		—		—		—		—		2,957		2,957		—
Independent Pharmacies		—		—		—		—		—		215		215		—
Veterinary Practices		—		—		—		—		—		2,207		2,207		—
Other Industries		—		—		—		—		—		145		145		—
Owner Occupied Commercial Real Estate		2,464		5,246		2,181		6,914		16,805		94,815		111,620		—
Poultry Agriculture		—		—		—		—		—		259		259		—
Death Care Management		—		—		—		1,721		1,721		17,158		18,879		—
Family Entertainment Centers		—		—		—		—		—		872		872		—
Healthcare Services		—		145		230		2,082		2,457		23,716		26,173		—
Independent Pharmacies		—		—		—		—		—		4,750		4,750		—
Investment Advisors		—		—		—		—		—		2,161		2,161		—
Veterinary Practices		2,464		5,101		1,951		2,836		12,352		45,582		57,934		—
Other Industries		—		—		—		275		275		317		592		—
Commercial Land		—		—		—		—		—		1,248		1,248		—
Poultry Agriculture		—		—		—		—		—		1,248		1,248		—

Total ¹	$	3,489	$	6,679	$	2,417	$	12,786	$	25,371	$	178,080	$	203,451	$	—

F-66

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)


	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 Loans Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
2013
Commercial & Industrial	$	891	$	219	$	388	$	2,820	$	4,318	$	53,041	$	57,359	$	—
Death Care Management		—		—		—		—		—		1,782		1,782		—
Healthcare Services		122		—		—		650		772		7,967		8,739		—
Independent Pharmacies		—		—		—		—		—		24,026		24,026		—
Investment Advisors		—		—		—		—		—		2,817		2,817		—
Veterinary Practices		769		219		388		2,170		3,546		16,432		19,978		—
Other Industries		—		—		—		—		—		17		17		—
Construction & Development		—		—		—		—		—		10,286		10,286		—
Death Care Management		—		—		—		—		—		989		989		—
Healthcare Services		—		—		—		—		—		4,997		4,997		—
Independent Pharmacies		—		—		—		—		—		101		101		—
Veterinary Practices		—		—		—		—		—		4,199		4,199		—
Other Industries
Owner Occupied Commercial Real Estate		2,620		3,601		438		1,540		8,199		66,262		74,461		—
Death Care Management		—		—		—		—		—		11,668		11,668		—
Healthcare Services		—		—		—		58		58		11,071		11,129		—
Independent Pharmacies		—		—		—		—		—		3,490		3,490		—
Investment Advisors		—		—		—		—		—		171		171		—
Veterinary Practices		2,620		3,498		438		1,482		8,038		39,858		47,896		—
Other Industries		—		103		—		—		103		4		107		—

Total ¹	$	3,511	$	3,820	$	826	$	4,360	$	12,517	$	129,589	$	142,106	$	—


	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 Loans Past Due		Current Loans		Total Loans		Loans 90 Days or More Past Due & Still Accruing
2012
Commercial & Industrial	$	129	$	73	$	209	$	2,617	$	3,028	$	31,172	$	34,200	$
Death Care Management		—		—		—		—		—		283		283		—
Healthcare Services		—		73		72		509		654		4,342		4,996		—
Independent Pharmacies		—		—		—		—		—		12,192		12,192		—
Veterinary Practices		129		—		137		2,108		2,374		13,345		15,719		—
Other Industries		—		—		—		—		—		1,010		1,010		—
Construction & Development		—		—		—		—		—		8,503		8,503		—
Death Care Management		—		—		—		—		—		315		315		—
Healthcare Services		—		—		—		—		—		3,136		3,136		—
Independent Pharmacies		—		—		—		—		—		637		637		—
Veterinary Practices		—		—		—		—		—		4,163		4,163		—
Other Industries		252		252
Owner Occupied Commercial Real Estate		2,048		412		—		3,590		6,050		44,527		50,577		—
Death Care Management		—		—		—		—		—		3,703		3,703		—
Healthcare Services		—		—		—		—		—		6,207		6,207		—
Independent Pharmacies		—		—		—		—		—		3,008		3,008		—
Veterinary Practices		2,048		412		—		2,887		5,347		30,207		35,554		—
Other Industries		—		—		—		703		703		1,402		2,105		—

Total ¹	$	2,177	$	485	$	209	$	6,207	$	9,078	$	84,202	$	93,280	$	—

F-67

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

Total loans include $21.3 million of U.S. Government Guaranteed loans as of December 31, 2014, of which $11.7 million is greater than 90 days past due, $3.5 million is 30-89 days past due and $6.1 million is included in current loans as presented above. As of December 31, 2013, total loans include $12.4 million of U.S. Government Guaranteed loans, of which $4.1 million is greater than 90 days past due, $2.6 million is 30-89 days past due and $5.8 million is included in current loans as presented above. As of December 31, 2012, total loans include $12.0 million of U.S. Government Guaranteed loans of which $4.7 million is greater than 90 days past due and $7.3 million is included in current loans as presented above.

Nonaccrual Loans

Loans that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans had been accrued in accordance with the original terms, interest income would have increased by approximately $443 thousand, $247 thousand and $119 thousand for the years ended December 31, 2014, 2013 and 2012, respectively.

Nonaccrual loans as of December 31, 2014, 2013 and 2012 are as follows:


2014	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial	$	7,133	$	6,620	$	513
Healthcare Services		2,652		2,368		284
Independent Pharmacies		1,224		1,139		85
Veterinary Practices		3,257		3,113		144
Owner Occupied Commercial Real Estate		11,559		8,935		2,624
Death Care Management		1,721		1,505		216
Healthcare Services		2,312		1,919		393
Veterinary Practices		7,251		5,236		2,015
Other Industries		275		275		—

Total	$	18,692	$	15,555	$	3,137


2013	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial	$	4,099	$	3,849	$	250
Healthcare Services		772		660		112
Veterinary Practices		3,327		3,189		138
Owner Occupied Commercial Real Estate		4,598		3,134		1,464
Healthcare Services		58		—		58
Veterinary Practices		4,540		3,134		1,406

Total	$	8,697	$	6,983	$	1,714

F-68

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)


2012	Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial	$	2,955	$	2,386	$	569
Healthcare Services		581		432		149
Veterinary Practices		2,374		1,954		420
Owner Occupied Commercial Real Estate		5,638		2,676		2,962
Veterinary Practices		4,935		2,676		2,259
Other		703		—		703

Total	$	8,593	$	5,062	$	3,531

¹	As of December 31, 2014, 2013 and 2012, U.S. Government Guaranteed loans on nonaccrual status are included in our held for investment portfolio.

Allowance for Loan Loss Methodology

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

•

All commercial loans classified substandard or worse.

•

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

•

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

F-69

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

For loans that have a low probability of being repaid in full, impaired loans, the reserve amount is calculated on a loan-specific basis. There are three methods of analyzing impaired loans:

•

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

•

Loan Pricing uses observable market price. The amount, source and date of the observable market price is documented. The Bank does not use this method as of December 31, 2014.

The allowance and the portion that relates to loans individually and collectively evaluated for impairment for year-end 2014, 2013 and 2012 is summarized in the following tables:


	Construction & Development		Owner Occupied Commercial Real Estate			Commercial & Industrial			Commercial Land		Total
December 31, 2014
Allowance for Loan Losses:
Beginning Balance	$	350	$	1,511		$	862		$	—	$	2,723
Charge offs		—		(515	)		(698	)		—		(1,213	)
Recoveries		—		72			32			—		104
Provision		236		1,223			1,173			161		2,793

Ending Balance	$	586	$	2,291		$	1,369		$	161	$	4,407

Ending Balance Allocated to:
Loans individually evaluated for impairment	$	—	$	1,051		$	676		$	—	$	1,727
Loans collectively evaluated for impairment		586		1,240			693			161		2,680

Ending Balance	$	586	$	2,291		$	1,369		$	161	$	4,407

Loans Receivables ¹ :
Ending balance:
Loans individually evaluated for impairment	$	—	$	16,551		$	10,226		$	—	$	26,777
Loans collectively evaluated for impairment		9,526		95,069			70,831			1,248		176,674

Ending Balance	$	9,526	$	111,620		$	81,057		$	1,248	$	203,451

F-70

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)


	Construction & Development			Owner Occupied Commercial Real Estate			Commercial & Industrial			Total
December 31, 2013
Allowance for Loan Losses:
Beginning Balance	$	166		$	2,667		$	2,275		$	5,108
Charge offs		—			(1,260	)		(688	)		(1,948	)
Recoveries		—			33			27			60
Provision		198			(847	)		(209	)		(858	)
Net transfer from (to) loans held for sale		(14	)		918			(543	)		361

Ending Balance	$	350		$	1,511		$	862		$	2,723

Ending Balance Allocated to:
Loans individually evaluated for impairment	$	—		$	400		$	254		$	654
Loans collectively evaluated for impairment		350			1,111			608			2,069

Ending Balance	$	350		$	1,511		$	862		$	2,723

Loans Receivables ¹ :
Ending balance:
Loans individually evaluated for impairment	$	—		$	10,013		$	4,677		$	14,690
Loans collectively evaluated for impairment		10,286			64,448			52,682			127,416

Ending Balance	$	10,286		$	74,461		$	57,359		$	142,106


	Construction & Development		Owner Occupied Commercial Real Estate			Commercial & Industrial			Total
December 31, 2012
Allowance for Loan Losses:
Beginning Balance	$	46	$	3,299		$	1,272		$	4,617
Charge offs		—		(1,532	)		(454	)		(1,986	)
Recoveries		—		6			120			126
Provision		106		862			1,142			2,110
Net transfer from (to) loans held for sale		14		32			195			241

Ending Balance	$	166	$	2,667		$	2,275		$	5,108

Ending Balance Allocated to:
Loans individually evaluated for impairment	$	—	$	1,733		$	1,054		$	2,787
Loans collectively evaluated for impairment		166		934			1,221			2,321

Ending Balance	$	166	$	2,667		$	2,275		$	5,108

Loans Receivables ¹ :
Ending balance:
Loans individually evaluated for impairment	$	—	$	8,945		$	4,064		$	13,009
Loans collectively evaluated for impairment		8,503		41,632			30,136			80,271

Ending Balance	$	8,503	$	50,577		$	34,200		$	93,280

F-71

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

Loans receivable includes $21.3 million of U.S. Government Guaranteed loans as of December 31, 2014, of which $19.5 million are included in loans individually evaluated for impairment and $2.0 million are included in loans collectively evaluated for impairment, as presented above. As of December 31, 2013, loans receivable includes $12.4 million of U.S. Government Guaranteed loans, of which $9.8 million are included in loans individually evaluated for impairment and $2.6 million are included in loans collectively evaluated for impairment, as presented above. As of December 31, 2012, loans receivable includes $12.0 million of U.S. Government Guaranteed loans of which $7.0 million are included in loans individually evaluated for impairment and $5.0 million are included in Loans collectively evaluated for impairment, as presented above.

Loans individually evaluated for impairment as of December 31, 2014, 2013 and 2012 are summarized in the following tables.


2014	Unpaid Principal Balance		Guaranteed Balance ¹		Unguaranteed Exposure
Commercial & Industrial	$	10,226	$	8,341	$	1,885
Healthcare Services		4,217		3,540		677
Veterinary Practices		3,806		3,309		497
Independent Pharmacies		2,203		1,492		711
Owner Occupied Commercial Real Estate		16,551		11,155		5,396
Healthcare Services		2,312		1,919		393
Veterinary Practices		12,243		7,456		4,787
Death Care Management		1,721		1,505		216
Other Industries		275		275		—

Total	$	26,777	$	19,496	$	7,281


2013	Unpaid Principal Balance		Guaranteed Balance ¹		Unguaranteed Exposure
Commercial & Industrial	$	4,677	$	4,100	$	577
Healthcare Services		772		660		112
Veterinary Practices		3,905		3,440		465
Owner Occupied Commercial Real Estate		10,013		5,740		4,273
Healthcare Services		58		—		58
Veterinary Practices		9,955		5,740		4,215

Total	$	14,690	$	9,840	$	4,850


2012	Unpaid Principal Balance		Guaranteed Balance ¹		Unguaranteed Exposure
Commercial & Industrial	$	4,064	$	3,031	$	1,033
Healthcare Services		714		432		282
Veterinary Practices		3,350		2,599		751
Owner Occupied Commercial Real Estate		8,945		3,932		5,013
Healthcare Services		703		—		703
Veterinary Practices		8,242		3,932		4,310

Total	$	13,009	$	6,963	$	6,046

¹	Loans individually evaluated for impairment as of December 31, 2014, 2013 and 2012 are included in the held for investment portfolio.

F-72

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

The following table presents evaluated balances of loans classified as impaired at December 31, 2014, 2013 and 2012 that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest, net deferred loan fees or costs and any non-accreted loan discount.


2014	Unpaid Principal Balance		Recorded Investment		Total Reserve		Average Recorded Investment		Interest Income Recognized
Loans with no allowance	$	1,213	$	1,197	$	—	$	1,998	$	113
Commercial & Industrial		239		237		—		363		64
Healthcare Services		3		3		—		88		2
Independent Pharmacies		194		194		—		86		57
Veterinary Practices		42		40		—		189		5
Owner Occupied Commercial Real Estate		974		960		—		1,635		49
Death Care Management		—		—		—		66		—
Healthcare Services		41		41		—		147		—
Veterinary Practices		933		919		—		1,422		49
Loans with an allowance		25,564		23,805		1,727		20,076		361
Commercial & Industrial		9,987		9,747		676		6,583		97
Healthcare Services		4,214		4,202		361		3,333		38
Independent Pharmacies		2,009		2,005		206		621		17
Veterinary Practices		3,764		3,540		109		2,629		42
Owner Occupied Commercial Real Estate		15,577		14,058		1,051		13,493		264
Death Care Management		1,721		1,720		20		414		—
Healthcare Services		2,271		2,268		82		1,967		—
Veterinary Practices		11,310		9,796		947		11,036		264
Other Industries		275		274		2		76		—

Total	$	26,777	$	25,002	$	1,727	$	22,074	$	474


2013	Unpaid Principal Balance		Recorded Investment		Total Reserve		Average Recorded Investment		Interest Income Recognized
Loans with no allowance	$	241	$	334	$	—	$	598	$	8
Commercial & Industrial		—		24		—		2		—
Healthcare Services		—		24		—		2		—
Owner Occupied Commercial Real Estate		241		310		—		596		8
Healthcare Services		58		58		—		38		2
Veterinary Practices		183		252		—		558		6
Loans with an allowance		14,449		14,912		654		13,041		389
Commercial & Industrial		4,677		4,910		254		4,486		86
Healthcare Services		772		812		35		644		6
Veterinary Practices		3,905		4,098		219		3,842		80
Owner Occupied Commercial Real Estate		9,772		10,002		400		8,555		303
Veterinary Practices		9,772		10,002		400		8,555		303

Total	$	14,690	$	15,246	$	654	$	13,639	$	397

F-73

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)


2012	Unpaid Principal Balance		Recorded Investment		Total Reserve		Average Recorded Investment		Interest Income Recognized
Loans with no allowance	$	133	$	137	$	—	$	284	$	—
Owner Occupied		133		137		—		284		—
Other		—		—		—		—		—
Veterinary Practices		133		137		—		284		—
Loans with an allowance		12,876		13,513		2,787		10,911		199
Commercial & Industrial		4,064		4,414		1,054		3,571		65
Healthcare Services		714		778		330		525		7
Veterinary Practices		3,350		3,636		724		3,046		58
Owner Occupied Commercial Real Estate		8,812		9,099		1,733		7,340		134
Other		703		730		73		125		—
Veterinary Practices		8,109		8,369		1,660		7,215		134

Total	$	13,009	$	13,650	$	2,787	$	11,195	$	199

¹	Loans individually evaluated for impairment as of December 31, 2014, 2013 and 2012 are included in the held for investment portfolio.

The following tables represent the types of troubled debt restructurings (“TDR”) that were made during the twelve months ended

December 31, 2014:


	Number of Loans		Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial		6	$	2,066	$	1,513	$	553
Veterinary Practices		3		1,559		1,513		46
Payment Deferral		3		1,559		1,513		46
Independent Pharmacies		3		507		—		507
Extend Amortization		2		363		—		363
Interest Only		1		144		—		144
Owner Occupied Commercial Real Estate		2		1,725		1,505		220
Veterinary Practices		1		4		—		4
Interest Only		1		4		—		4
Death Care Management		1		1,721		1,505		216
Payment Deferral		1		1,721		1,505		216

Total Loans		8	$	3,791	$	3,018	$	773

F-74

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

December 31, 2013:


	Number of Loans		Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Owner Occupied Commercial Real Estate		3	$	161	$	—	$	161
Veterinary Practices		3		161		—		161
Extend Amortization		1		30		—		30
Extend Amortization, Interest Only		1		65		—		65
Payment Deferral		1		66		—		66

Total Loans		3	$	161	$	—	$	161

December 31, 2012:


	Number of Loans		Loan Balance		Guaranteed Balance		Unguaranteed Exposure
Commercial & Industrial		8	$	1,508	$	1,015	$	493
Healthcare Services		2		142		—		142
Extend Amortization		2		142		—		142
Veterinary Practices		6		1,366		1,015		351
Extend Amortization		2		845		776		69
Extend Amortization, Interest Only		2		137		—		137
Payment Deferral		2		384		239		145
Owner Occupied Commercial Real Estate		7		3,615		1,043		2,572
Veterinary Practices		7		3,615		1,043		2,572
Interest Only		1		430		—		430
Payment Deferral		6		3,185		1,043		2,142

Total Loans		15	$	5,123	$	2,058	$	3,065

The following tables represent the recorded investment in TDR loans entered into during the twelve months ended:

December 31, 2014:


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial & Industrial		6	$	2,064	$	2,064
Veterinary Practices		3		1,558		1,558
Payment Deferral		3		1,558		1,558
Independent Pharmacies		3		506		506
Extend Amortization		2		363		363
Interest Only		1		143		143
Owner Occupied Commercial Real Estate		2		1,723		1,723
Veterinary Practices		1		4		4
Interest Only		1		4		4
Death Care Management		1		1,719		1,719
Payment Deferral		1		1,719		1,719

Total Loans		8	$	3,787	$	3,787

F-75

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

December 31, 2013:


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Owner Occupied Commercial Real Estate		3	$	255	$	232
Veterinary Practices		3		255		232
Extend Amortization		1		59		51
Extend Amortization, Interest Only		1		74		90
Payment Deferral		1		122		91

Total Loans		3	$	255	$	232

December 31, 2012:


	Number of Loans		Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial & Industrial	$	8	$	1,469	$	1,628
Healthcare Services		2		145		176
Extend Amortization		2		145		176
Veterinary Practices		6		1,324		1,452
Extend Amortization		2		785		876
Extend Amortization		2		145		165
Payment Deferral		2		394		411
Owner Occupied Commercial Real Estate		7		3,639		3,750
Veterinary Practices		7		3,639		3,750
Interest Only		1		438		455
Payment Deferral		6		3,201		3,295

Total Loans	$	15	$	5,108	$	5,378

F-76

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

Concessions made to improve a loan’s performance have varying degrees of success. The following tables present loans that were modified as TDRs within the previous twelve months ending December 31, 2014, 2013 and 2012, for which there was a payment default:

December 31, 2014:


	Number of Loans		Post-modification Recorded Investment
Default (Charge-off)
Commercial & Industrial		2	$	1,558
Veterinary Practices		2		1,558
Payment Deferral		2		1,558
Owner Occupied Commercial Real Estate		2		1,723
Death Care Management		1		1,719
Payment Deferral		1		1,719
Veterinary Practices		1		4
Interest Only		1		4
Default (NonAccrual)		1		—
Commercial & Industrial		1		—
Veterinary Practices		1		—
Payment Deferral		1		—

Total TDRs in default		5		3,281

No Defaults (paying as restructured)		3		506
Commercial & Industrial		3		506
Independent Pharmacies		3		506
Extend Amortization		2		363
Interest Only		1		143

Total TDRs paying as restructured		3		506

Total TDRs		8	$	3,787

December 31, 2013:


	Number of Loans		Post-modification Recorded Investment
Default (Charge-off)
Commercial & Industrial		1	$	51
Veterinary Practices		1		51
Extend Amortization		1		51
Default (NonAccrual)
Owner Occupied Commercial Real Estate		2		181
Veterinary Practices		2		181
Extend Amortization, Interest Only		1		90
Payment Deferral		1		91

Total TDRs in default		3		232

Total TDRs paying as restructured		—		—

Total TDRs		3	$	232

F-77

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 3. Loans and Allowance for Loan Losses (Continued)

December 31, 2012:


	Number of Loans		Post-modification Recorded Investment
Default (Charge-off)
Commercial & Industrial		2	$	876
Veterinary Practices		2		876
Extend Amortization		2		876
Default (NonAccrual)
Commercial & Industrial		4		341
Healthcare Services		2		176
Extend Amortization		2		176
Veterinary Practices		2		165
Extend Amortization, Interest Only		2		165
Owner Occupied Commercial Real Estate		5		2,361
Veterinary Practices		5		2,361
Interest Only		1		455
Payment Deferral		4		1,906

Total TDRs in default		11		3,578

No Defaults (paying as restructured)
Commercial & Industrial		2		411
Veterinary Practices		2		411
Payment Deferral		2		411
Owner Occupied Commercial Real Estate		2		1,389
Veterinary Practices		2		1,389
Payment Deferral		2		1,389

Total TDRs paying as restructured		4		1,800

Total TDRs		15	$	5,378

¹	Loan is interest only, interest rate reduction and extended amortization.

Note 4. Servicing Assets

Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others were $1.3 billion, $1.0 billion and $766.2 million at December 31, 2014, 2013, and 2012, respectively.

The following summarizes the activity pertaining to servicing rights:


	2014			2013			2012
Balance at beginning of year	$	29,053		$	24,220		$	18,731
Additions, net		10,923			8,442			6,411
Changes in fair value		(4,977	)		(3,609	)		(922	)

Balance at end of period	$	34,999		$	29,053		$	24,220

F-78

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 4. Servicing Assets (Continued)

The fair value of servicing rights was determined using discount rates ranging from 8.5% to 13.4% on December 31, 2014, 9.1% to 16.3% on December 31, 2013 and 8.9% to 15.0% on December 31, 2012. The fair value of servicing rights was determined using prepayment speeds ranging from 4.4% to 8.5% on December 31, 2014, 0% to 11.88% on December 31, 2013 and 0% to 9.60% on December 31, 2012, depending on the stratification of the specific right.

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

Note 5. Premises, Equipment and Leases

Components of Premises and Equipment

Components of premises and equipment and total accumulated depreciation at December 31, 2014, 2013 and 2012 are as follows:


	2014			2013			2012
Buildings	$	8,000		$	8,285		$	—
Land improvements		1,487			1,575			—
Furniture and equipment		3,077			3,064			521
Computers and software		630			557			281
Leasehold improvements		239			237			277
Land		3,623			3,623			1,750
Transportation		14,047			9,383			9,383
Deposits on fixed assets		7,323			709			8,120

Premises and equipment, total		38,426			27,433			20,332
Less accumulated depreciation		(3,147	)		(2,397	)		(1,381	)

Premises and equipment, net of depreciation	$	35,279		$	25,036		$	18,951

Deposits on fixed assets consist of construction in process on a newly leased off-site facility and the Company’s second building at is headquarters campus. Depreciation expense for the years ended December 31, 2014, 2013 and 2012 amounted to $2.2 million, $1.5 million and $673 thousand, respectively.

F-79

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 5. Premises, Equipment and Leases (Continued)

Lease Obligations

Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2014 pertaining to Company premises and equipment, future minimum rent commitments under various operating leases are as follows:


Year	Amount
2015	$	340
2016		242
2017		213
2018		198

Total	$	993

The Company’s total rent expense related to the aforementioned leases for 2014, 2013, and 2012 was $373 thousand, $286 thousand and $459 thousand, respectively.

Note 6. Deposits

The aggregate amount of time deposits in denominations of $250 thousand or more at December 31, 2014 was approximately $177 million. The aggregate amount of time deposits in denominations of $100 thousand or more at December 31, 2013 and 2012 was approximately $112 million and $118 million, respectively. At December 31, 2014, the scheduled maturities of time deposits are as follows:


	Amount
2015	$	186,642
2016		39,246
2017		45,741
2018		9,274
2019		14,767

	$	295,670

Note 7. Borrowings

As of December 31, 2014, 2013 and 2012 total outstanding long-term borrowings consisted of the following:


	December 31,
	2014		2013		2012
Short term borrowings
On September 18, 2014, the Company entered into a line of credit of $6.1 million with an unaffiliated commercial bank, secured by 1,900,000 shares of nCino common stock. At December 31, 2014 there was $6.1 million advanced on the line of credit. Interest accrues at 30 day LIBOR (.16% at December 31, 2014) plus 3.50% for a term of 12 months. Payments are interest only with all principal and accrued interest due on September 18, 2015. There was no remaining available credit on this line of credit at December 31, 2014	$	6,100	$	—	$	—

Total short term borrowings	$	6,100	$	—	$	—

F-80

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 7. Borrowings (Continued)


Long term borrowings	2014		2013		2012
In April 2011, the Company elected to participate in the U.S. Treasury’s Small Business Lending Fund program (“SBLF”) whereby the U.S. Treasury agreed to purchase $6.8 million in senior securities. During the initial interest period the applicable interest rate is set at 1.5%. For all remaining interest periods, which commenced on January 1, 2012, the interest rate is determined based on a formula which encompasses the percentage change in qualified lending as well as a non-qualifying portion percentage. This rate can range from 1.5% to 10.8%. At December 31, 2014 the interest rate was 1.50%. Interest is payable quarterly in arrears. With the approval of the Bank’s primary regulator, the Federal Reserve, the Bank may exit the Small Business Lending Fund at any time simply by repaying the funding provided along with any accrued but unpaid interest. If the institution wishes to repay its SBLF funding in partial payments, each partial payment must be at least 25% of the original funding amount. All senior securities will mature on September 13, 2021 at which time all principal and accrued interest will be due.	$	6,800	$	6,800	$	6,800
Effective January 1, 2012, the Company issued $3.6 million in five-year 10% fixed rate Senior Notes payable to outside investors and existing shareholders maturing on December 31, 2016. Interest payments are made quarterly beginning March 31, 2012, with principal repayment due at maturity. On August 22, 2014 the terms of Senior Notes were amended to allow conversion to equity. On September 30, 2014, the Senior Notes payable to investors were converted to equity in the Company at $10.63 per share, with cash paid in lieu of fractional shares at a rate of $10.63 per share.		—		3,623		3,623
On June 29, 2011, the Bank financed the purchase of an airplane by entering into a promissory note with an unaffiliated commercial bank in the amount of $1.9 million which carried a fixed rate of 5.75% for a term of 59 months. Monthly payments were set at $16 thousand with all principal and accrued interest due on June 29, 2016. The airplane securing this note was sold during 2014 and the note payable was paid in full on September 19, 2014.		—		1,693		1,782
On May 12, 2014, Independence Aviation financed the purchase of an airplane by entering into a promissory note with the same aforementioned unaffiliated commercial bank in the amount of $6 million which carries a fixed rate of 4.97% for a term of 59 months. Monthly payments are set at $48 thousand with all principal and accrued interest due on May 12, 2019.		5,842		—		—
On September 11, 2014, The Company financed the construction of an additional building located on the Company’s Tiburon Drive main campus for a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at its Tiburon Drive main facility location. As of December 31, 2014, $16.9 million had been advanced on the construction line of credit. Payments are interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments beginning in October 2016 will be $146 thousand with all principal and accrued interest due on September 11, 2021. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. There is $7.1 million of remaining available credit on this construction line at December 31, 2014.		16,914		—		—

F-81

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 7. Borrowings (Continued)


Long term borrowings	2014		2013		2012
On September 18, 2014, the Company entered into a note payable line of credit of $8.1 million with an unaffiliated commercial bank, with the first advance of $5 million on December 14, 2014. The note is unsecured and accrues interest at LIBOR plus 3.50% for a term of 36 months. Payments are interest only with all principal and accrued interest due on September 18, 2017. There were no interest payments made for the year ended December 31, 2014. There is $3.1 million of remaining available credit on this note at December 31, 2014.	$	5,000	$	—	$	—
On August 1, 2014, the Company entered into a note payable line of credit of $15 million with an unaffiliated commercial bank, secured by 100% of Live Oak Banking Company’s outstanding common stock. At December 31, 2014 there was $7.2 million advanced on this line of credit. Interest accrues at LIBOR plus 4.00% for a term of 36 months. Payments are interest only with all principal and accrued interest due on August 1, 2017. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. There is $7.8 million of remaining available credit on this line of credit at December 31, 2014.		7,210		—		—
With the acquisition of GLS on September 1, 2013, the Company assumed the obligation to pay a former GLS partner $250 thousand at $10 thousand a month over a 24 month period.		83		209		—

Total long term borrowings	$	41,849	$	12,325	$	12,205

Principal amounts due for the next five years on all long-term debt at December 31, 2014 are as follows: 2015 — $367 thousand; 2016 — $437 thousand; 2017 — $13.1 million; 2018 — $922 thousand; 2019 — $5.2 million; thereafter — $21.8 million.

Note 8. Income Taxes

Income tax expense was as follows:


	Year Ended December 31 2014
Current income tax expense	$	3,296
Deferred income tax expense		4,092

Income tax expense, as reported	$	7,388

In connection with the private placement discussed in Note 1, the Company terminated its S-Corporation status and became a taxable entity (C Corporation) on August 3, 2014. As such, periods prior to August 3, 2014 will not reflect income tax expense. The reported income tax expense for the year ended December 31, 2014 reflects the initial recording of the deferred tax net liability of $3.2 million, which is the result of timing differences in the recognition of income/deductions for generally accepted accounting principles (GAAP) and tax purposes. Note 1 of the notes to consolidated financial statements present pro forma results of operations as if the Company were a C corporation for all periods.

F-82

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 8. Income Taxes (Continued)

Reported income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate of 35% to income before income taxes for the five months ended December 31, 2014 (the period the Company was a taxable entity) as follows:


	Year Ended December 31 2014
Income tax expense computed at the statutory rate	$	3,391
Initial recording of deferred tax liability		3,252
State income tax, net of federal benefit		339
Increase in taxes due to nondeductible expenses		406

	$	7,388

Components of deferred tax assets and liabilities are as follows:


	December 31 2014
Deferred tax assets:
Allowance for loan losses	$	1,697
SBA guaranty reserve		273
Other		412

		2,382

Deferred tax liabilities:
Unguaranteed loan discount		3,144
Premises and equipment		2,461
Deferred loan fees and costs, net		869

		6,474

Net deferred tax liability	$	4,092

The Company does not have any uncertain tax positions and does not have any interest and penalties recorded in the income statement for the year ended December 31, 2014. The Company files a consolidated income tax return in the US federal tax jurisdiction.

Note 9. Fair Value of Financial Instruments

Fair Value Hierarchy

F-83

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 9. Fair Value of Financial Instruments (Continued)

Financial Instruments Measured at Fair Value

Recurring Fair Value

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


December 31, 2014	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	35,309	$	—	$	35,309	$	—
Residential mortgage backed securities		14,009		—		14,009		—
Servicing assets		34,999		—		—		34,999

Total assets at fair value	$	84,317	$	—	$	49,318	$	34,999

F-84

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 9. Fair Value of Financial Instruments (Continued)


December 31, 2013	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	5,262	$	—	$	5,262	$	—
Residential mortgage backed securities		14,184		—		14,184		—
Servicing assets		29,053		—		—		29,053

Total assets at fair value	$	48,499	$	—	$	19,446	$	29,053


December 31, 2012	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
US government agencies	$	3,517	$	—	$	3,517	$	—
Residential mortgage backed securities		11,899		—		11,899		—
Servicing assets		24,220		—		—		24,220

Total assets at fair value	$	39,636	$	—	$	15,416	$	24,220

See Note 5 for a rollforward of recurring Level 3 fair values for servicing assets.

Non-recurring Fair Value

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


December 31, 2014	Total		Level 1		Level 2		Level 3
Impaired loans	$	24,016	$	—	$	—	$	24,016
Foreclosed assets		371		—		—		371

Total assets at fair value	$	24,387	$	—	$	—	$	24,387


December 31, 2013	Total		Level 1		Level 2		Level 3
Impaired loans	$	13,907	$	—	$	—	$	13,907
Foreclosed assets		341		—		—		341

Total assets at fair value	$	14,248	$	—	$	—	$	14,248


December 31, 2012	Total		Level 1		Level 2		Level 3
Impaired loans	$	10,089	$	—	$	—	$	10,089
Foreclosed assets		232		—		—		232

Total assets at fair value	$	10,321	$	—	$	—	$	10,321

F-85

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 9. Fair Value of Financial Instruments (Continued)

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2014, 2013 and 2012, the significant unobservable inputs used in the fair value measurements were as follows:

December 31, 2014

Level 3 Assets with Significant Unobservable
Inputs

Fair
Value

Valuation Technique

Significant
Unobservable
Inputs

Range

Impaired Loans

$24,016

Discounted appraisals

Appraisal adjustments(1)

10% to 20%

Discounted expected
cash flows

Interest rate &
repayment term

Weighted Average
discount rate
4.88%

Foreclosed Assets

$371

Discounted appraisals

Appraisal adjustments

(1)

10% to 20%

December 31, 2013

Level 3 Assets with Significant Unobservable
Inputs

Fair
Value

Valuation Technique

Significant
Unobservable
Inputs

Range

Impaired Loans

$13,907

Discounted appraisals

Appraisal adjustments(1)

6% to 10%

Discounted expected
cash flows

Interest rate &
repayment term

Weighted Average
discount rate
4.42%

Foreclosed Assets

$341

Discounted appraisals

Appraisal adjustments

(1)

6% to 10%


December 31, 2012
Level 3 Assets with Significant Unobservable Inputs	Fair Value	Valuation Technique	Significant Unobservable Inputs	Range
Impaired Loans	$10,089	Discounted appraisals	Appraisal adjustments(1)	6% to 10%
Foreclosed Assets	$232	Discounted appraisals	Appraisal adjustments(1)	6% to 10%

(1)

Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments. Prior to 2014 appraisal adjustments included a $25 thousand reduction on each impaired loan reflecting costs the Company anticipated to incur as part of the SBA’s required collection process.

Impaired loans and foreclosed assets classified as Level 3 are based on management’s judgment and estimation.

Estimated Fair Value of Other Financial Instruments

F-86

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 9. Fair Value of Financial Instruments (Continued)

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments not measured at fair value on the balance sheets:

Cash and due from banks : The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.

Accrued Interest: The carrying amounts of accrued interest approximate fair value.

Servicing assets: The fair values of servicing assets are based upon discounted cash flows using market-based assumptions.

F-87

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 9. Fair Value of Financial Instruments (Continued)

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


December 31, 2014	Carrying Amount		Quoted Price In Active Markets for Identical Assets/ Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Ending Balance
*Financial assets*
Cash and due from banks	$	29,902	$	29,902	$	—	$	—	$	29,902
Certificates of deposit with other banks		10,000		9,861		—		—		9,861
Investment securities, available for sale		49,318		—		49,318		—		49,318
Loans held for sale		295,180		—		—		304,504		304,504
Loans, net of allowance for loan losses		199,529		—		—		194,007		194,007
Servicing assets		34,999		—		—		34,999		34,999
Accrued interest receivable		3,059		3,059		—		—		3,059
*Financial liabilities*
Deposits		522,080		—		522,058		—		522,058
Accrued interest payable		190		190		—		—		190
Short term borrowings		6,100		—		—		6,100		6,100
Long term borrowings		41,849		—		—		44,738		44,738
December 31, 2013
*Financial assets*
Cash and due from banks	$	37,244	$	37,244	$	—	$	—	$	37,244
Investment securities, available for sale		19,446		—		19,446		—		19,446
Loans held for sale		159,438		—		—		172,169		172,169
Loans, net of allowance for loan losses		138,626		—		—		142,444		142,444
Servicing assets		29,053		—		—		29,053		29,053
Accrued interest receivable		1,842		1,842		—		—		1,842
*Financial liabilities*
Deposits		356,620		—		354,611		—		354,611
Accrued interest payable		107		107		—		—		107
Long term borrowings		12,325		—		—		14,334		14,334
December 31, 2012
*Financial assets*
Cash and due from banks	$	44,173	$	44,173	$	—	$	—	$	44,173
Investment securities, available for sale		15,416		—		15,416		—		15,416
Loans held for sale		145,183		—		—		155,851		155,851
Loans, net of allowance for loan losses		87,561		—		—		88,937		88,937
Servicing assets		24,220		—		—		24,220		24,220
Accrued interest receivable		1,457		1,457		—		—		1,457
*Financial liabilities*
Deposits		286,674		—		286,046		—		286,046
Accrued interest payable		81		81		—		—		81
Long term borrowings		12,205		—		—		14,560		14,560

F-88

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 10. Benefit Plans

Defined Contribution Plan

The Company maintains an employee benefit plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who are at least 21 years of age and have completed one month of service. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code. In addition, the Company makes certain matching contributions and may make additional contributions at the discretion of the board of directors. Company expense relating to the plan for the years ended December 31, 2014, 2013, and 2012 amounted to $867 thousand, $602 thousand and $397 thousand, respectively.

Flexible Benefits Plan

The Company maintains a Flexible Benefits Plan which covers substantially all employees. Participants may set aside pre-tax dollars to provide for future expenses such as health care.

Employee Stock Purchase Plan

In 2010, the Company adopted an Employee Stock Purchase Plan (2010 ESPP). Under this plan, eligible employees were able to withhold post-tax dollars from their monthly payroll to be placed in a money market account for bi-annual purchases of the Company’s Class A and Class B stock. In order for employees to be eligible to contribute to this program, they must have completed one year of service with the Company. Eligible employees’ money market accounts were swept on March 15 ^th and September 15 ^th each year, up to the amount that would purchase whole shares of stock, not to exceed $25 thousand per employee per calendar year. In order to preserve the S-Corporation election, the Company discontinued the 2010 ESPP in October 2013.

Subsequent to conversion to a C corporation in 2014, the Company again adopted an Employee Stock Purchase Plan (ESPP) on October 8, 2014, within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under this plan eligible employees were able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in this plan they must be employed or on an authorized leave of absence from the Company or any subsidiary immediately prior to the grant date. ESPP stock purchases cannot exceed $25 thousand per employee per calendar year. Options to purchase shares under the ESPP in 2014 were granted at a 15% discount to fair market value. Expense recognized in relation to the ESPP was $58 thousand in fiscal 2014.

Restricted Stock Plan

In 2010, the Company adopted a Restricted Stock Plan. Under this plan, a total of 1,350,000 shares of Common Stock are available for issuance to eligible employees. Restricted stock grants vest in equal installments over a two to four year period from the date of the grant. In 2010, a total of 500,010 restricted shares were issued at $1.50 per share and these shares fully vested in 2013. In 2013, 100,000 restricted shares were granted at $3.00 per share to an eligible employee and 50,000 restricted shares were granted at $2.99 per share in connection with the GLS acquisition.

F-89

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 10. Benefit Plans (Continued)

The following is a summary of non-vested stock restricted stock activity for the Company for the year ended December 31, 2014.


	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2013		120,834		$	3.00
Granted		—			—
Vested		(47,917	)		3.00
Forfeited		(72,917	)		3.00

Non-vested at December 31, 2014		—		$	—

Total recognized restricted stock expense was $143 thousand, $150 thousand and $250 thousand for the years ended December 31, 2014, 2013, and 2012, respectively. At December 31, 2014, there was no unrecognized restricted stock expense or unvested shares, to be recognized in the future.

Employee Profit Sharing Plan

The Employee Profit Sharing Plan allows eligible employees to participate in a profit sharing bonus pool based on the profitability of the Company. The plan awards each participating employee a quarterly and annual bonus based on the ratio of the employee’s salary at the end of the period to the aggregate salaries of all participating employees. The employees profit sharing plan terminated in 2013, accordingly there were no expenses related to this plan in 2014. Total expenses related to this plan were $4.0 million and $4.5 million for the years ended December 31, 2013 and 2012, respectively.

Employee/Outside Director Bonus Plan

In 2014, the Company adopted a Bonus Plan whereby eligible employees and outside directors are qualified to receive quarterly and annual bonus payments based on each individual’s base pay/annual director fees and the profitability of the Company. Total expenses related to the bonus plan for employees were $2.2 million and $12 thousand for the outside directors for the year ended December 31, 2014.

Outside Director Profit Sharing Plan

Effective January 1, 2013, the Company adopted the Outside Director Profit Sharing Plan. Eligible directors participate in a discretionary award based on their annual director fees in the same quarterly percentage payout awarded under the Company’s Former Employee Profit Sharing Plan. The Outside Director Profit Sharing Plan was terminated in 2013. The outside directors received a final payout of $36 thousand under this plan paid in 2014.

Stock Option Plans

In 2008 the Company adopted both an Incentive Stock Option (ISO) Plan and a Non-Qualified Stock Option (NQSO) Plan. Options granted under both plans expire no more than 10 years from date of grant. Exercise prices under both plans are set by the board of directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Options vest over three to seven year periods from the date of the grant for both plans.

F-90

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 10. Benefit Plans (Continued)

Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the years ended December 31, 2014, 2013, and 2012, the Company recognized $272 thousand, $38 thousand and $81 thousand in compensation expense for stock options, respectively.

Activity under the stock option plan during the year ended December 31, 2014 is summarized below.


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2013		225,000	$	1.68		—		—
Exercised		191,660		.92		—		—
Forfeited		170,590		4.40		—		—
Granted		1,878,020		5.49		—		—

Outstanding at December 31, 2014		1,740,770	$	5.52		9.29 years	$	8,897,318

Exercisable at December 31, 2014		33,340	$	1.52		6.79 years	$	303,594

The following is a summary of non-vested stock option activity for the Company.


	Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2011		621,660	$	0.33
Granted		—		—
Vested		421,660		0.27
Forfeited		—		—

Non-vested at December 31, 2012		200,000		0.45
Granted		—		—
Vested		108,250		0.45
Forfeited		—		—

Non-vested at December 31, 2013		91,750		0.45
Granted		1,878,020		1.13
Vested		91,750		0.44
Forfeited		170,590		0.58

Non-vested at December 31, 2014		1,707,430	$	1.19

At December 31, 2014, unrecognized compensation costs relating to stock options amounted to $2 million which will be expensed over the next 6.01 years.

F-91

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 10. Benefit Plans (Continued)

based on the Company’s history and expectation of dividend payouts, exclusive of dividends commensurate with shareholders tax burdens as a pass through entity through July 31, 2014. Weighted average assumptions used for options granted during 2014 were as follows: risk free rate of 2.27%, dividend yield of 5.18%, volatility of 29.70% and average life of 4-7 years. There were no grants under the plans during 2013 or 2012.

Redeemable Equity Securities

In 2013 the Company entered into an agreement with a third party financial institution which provides personal loans to the Company’s employees. In this arrangement the Company was obligated to repurchase its shares collateralizing personal employee loans only in the event of default. The repurchase of Company stock in under this arrangement is at the greater of $3.00 per share or the price per share required to pay and satisfy in full each loan, including without limitation the entire principal balance and any accrued unpaid interest and any applicable fees and costs owed with respect to the applicable loan until paid in full. Due to this arrangement containing provisions allowing for a cash settlement, the intrinsic value was reflected as mezzanine equity. During 2014, the obligation for the Company to repurchase stock under the above arrangement was terminated.

Note 11. Commitments and Contingencies

Litigation

Financial Instruments with Off-balance-sheet Risk


	2014		2013		2012
Commitments to extend credit	$	537,951	$	221,487	$	216,010
Plexus Capital — Fund II Investment Commitment		100		100		—
Plexus Capital — Fund III Investment Commitment		350		413		138

Total unfunded off-balance sheet credit risk	$	538,401	$	222,000	$	216,148

F-92

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 11. Commitments and Contingencies (Continued)

Concentrations of Credit Risk

Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans and commitments to extend credit have been granted to customers in the independent pharmacies and veterinary practices verticals. The concentrations of credit by type of loan are set forth in Note 2. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained exposure exceeds $2.0 million.

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

Note 12. Regulatory Matters

Dividends

The Bank, as a North Carolina banking corporation, may pay dividends to shareholders provided the bank does not make distributions that reduce its capital below its applicable required capital, pursuant to North Carolina General Statutes Section 53C-4-7. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank.

Capital Requirements

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting principles. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

F-93

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 12. Regulatory Matters (Continued)

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2014, 2013 and 2012, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2014, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category.

Capital amounts and ratios as of December 31, 2014, 2013 and 2012, are presented in the table below.


	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
*Consolidated-December 31, 2014*
Total Capital
(to Risk-Weighted Assets)	$	99,340		19.63	%	$	40,490		8.00	%	$	50,612		10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	88,132		17.41	%	$	20,245		4.00	%	$	30,367		6.00	%
Tier I Capital
(to Average Assets)	$	88,132		13.38	%	$	26,349		4.00	%	$	32,936		5.00	%
*Bank-December 31, 2014*
Total Capital
(to Risk-Weighted Assets)	$	63,243		13.36	%	$	37,857		8.00	%	$	47,321		10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	58,836		12.43	%	$	18,928		4.00	%	$	28,392		6.00	%
Tier I Capital
(to Average Assets)	$	58,836		9.34	%	$	25,200		4.00	%	$	31,500		5.00	%
*Bank-December 31, 2013*
Total Capital
(to Risk-Weighted Assets)	$	50,812		15.95	%	$	25,486		8.00	%	$	31,857		10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	48,089		15.09	%	$	12,747		4.00	%	$	19,121		6.00	%
Tier I Capital
(to Average Assets)	$	48,089		10.39	%	$	18,514		4.00	%	$	23,142		5.00	%
*Bank - December 31, 2012*
Total Capital
(to Risk-Weighted Assets)	$	41,438		17.91	%	$	18,505		8.00	%	$	22,593		10.00	%
Tier I Capital
(to Risk-Weighted Assets)	$	38,514		16.65	%	$	13,900		4.00	%	$	17,529		6.00	%
Tier I Capital
(to Average Assets)	$	38,514		10.63	%	$	17,990		4.00	%	$	20,889		5.00	%

F-94

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 12. Regulatory Matters (Continued)

The Company’s most significant asset in 2013 and 2012 was its investment in the Bank. Consequently, the information concerning capital ratios is substantially the same for the Company and the Bank for those years.

Note 13. Transactions with Related Parties

The Company has entered into transactions with its directors, employees, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal risk or present other unfavorable features.

At December 31, 2013 there were no related party loans. During 2014 the Company disbursed $2.0 million in principal additions and transferred $5.1 million due to changes in related-party status, with total principal curtailments received of $419 thousand. At December 31, 2014 total related party loans were $6.7 million.

Deposits from related parties held by the Company at December 31, 2014, 2013, and 2012 amounted to $89.0 million, $33.3 million, and $25.8 million, respectively.

During the years ended December 31, 2014, 2013 and 2012, the Company invested $63 thousand, $125 thousand and $138 thousand, respectively, in Plexus Funds II and III, L.P. which is included in other assets at December 31, 2014, 2013 and 2012 with a balance of $1 million, $1 million and $363 thousand, respectively. A member of the Company’s board of directors is also a member of Plexus Capital, the administrator of Plexus Fund II, L.P.

During the years ended December 31, 2014 and 2013, the Company leased office space from related parties. The Company’s total lease payments to related parties for 2014, 2013, and 2012 was $100 thousand, $119, and $218 thousand, respectively.

In January 2012, the Company formed nCino to further develop and sell cloud-based banking software that was initially built off of the Force.com platform and transformed into a bank operating system used to streamline the lending process at the Bank. nCino was a majority-owned subsidiary of the Company during the year ended December 31, 2012. In January 2013, the investment in nCino was deconsolidated and subsequently accounted for under the equity method. In June 2014, the Company divested its investment in nCino in the form of a dividend to shareholders with a subsequent investment of $6.1 million later in 2014. The investment in nCino is included in investments in non-consolidated affiliates December 31, 2014. In 2014 and 2013 (subsequent to deconsolidation) the Company had business transactions with nCino amounting to $1.6 million and $1 million, respectively, for services purchased related to the Bank’s loan technology-based platform.

F-95

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 14. Parent Company Only Financial Statements

The following balance sheets, statements of income and statements of cash flows for Live Oak Bancshares, Inc. should be read in conjunction with the consolidated financial statements and the notes thereto.

Balance Sheets


	December 31,
	2014			2013			2012
*Assets*
Cash and cash equivalents	$	38,911		$	52		$	3,566
Investment in subsidiaries		61,957			51,036			37,886
Equity method investments in non-consolidated affiliates		231			11,467			—
Note receivable from subsidiary					—			3,624
Premises and equipment, net		20,662			—			—
Other assets		13,013			435			362

Total assets	$	134,774		$	62,990		$	45,438

*Liabilities and Shareholders’ Equity*
Short term borrowings	$	6,100		$	—		$	—
Long term borrowings		35,924			10,423			10,423
Dividends payable		—			—			2,027
Other liabilities		936			572			67

Total liabilities		42,960			10,995			12,517

Redeemable equity securities		—			3,605			1,161
Shareholders’ equity:
Common stock		103,795			18,319			20,535
Retained earnings (deficit)		(12,066	)		30,262			11,980
Accumulated other comprehensive income (loss)		85			(191	)		542

Total shareholders’ equity attributed to Live Oak Bancshares, Inc.		91,814			48,390			33,057
Noncontrolling interest		—			—			(1,297	)

Total equity		91,814			48,390			31,760

Total liabilities and shareholders’ equity	$	134,774		$	62,990		$	45,438

F-96

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 14. Parent Company Only Financial Statements (Continued)

Statements of Income


	Years Ended December 31,
	2014			2013			2012
Interest income	$	49		$	334		$	365
Interest expense		864			470			553

Net interest loss		(815	)		(136	)		(188	)

Noninterest income:
Dividends from banking subsidiary		10,368			9,780			11,499
Gain on deconsolidation of subsidiary		—			12,212			—
Equity in income (loss) of non-consolidated affiliates		(2,221	)		(2,756	)		—
Other		260			—			—

Total noninterest income		8,407			19,236			11,499

Noninterest expense:
Salaries and employee benefits		5,028			232			343
Professional fees		2,323			284			243
Other		643			89			1

Total noninterest expense		7,994			605			587

Net income (loss) before equity in undistributed income of subsidiaries		(402	)		18,495			10,724
Equity in undistributed income of subsidiaries in excess of dividends from subsidiaries		9,695			9,447			4,074

Net income before tax		9,293			27,942			14,798
Income tax benefit		(755	)		—			—

Net income		10,048			27,942			14,798

Net loss attributable to noncontrolling interest		—			120			1,297

Net income attributable to Live Oak Bancshares, Inc.	$	10,048		$	28,062		$	16,095

F-97

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 14. Parent Company Only Financial Statements (Continued)

Statements of Cash Flows


	Years Ended December 31,
	2014			2013			2012
*Cash flows from operating activities*
Net income	$	10,048		$	27,942		$	14,798
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed net loss (income) of subsidiaries in excess of dividends of subsidiaries		(9,695	)		(9,757	)		(4,074	)
Equity in loss of non-consolidated affiliates		2,221			2,756			—
Gain on deconsolidation of subsidiary		—			(12,212	)		—
Stock option based compensation expense		272			38			81
Restricted stock expense		143			150			250
Stock grants		2,992			—			—
Net change in other assets		(6,899	)		4,247			(362	)
Net change in other liabilities		1,351			619			(80	)

Net cash provided by (used in) operating activities		433			13,783			10,613

*Cash flows from investing activities*
Capital investment in subsidiaries		(950	)		—			(194	)
Capital investment in non-consolidated affiliates		(6,614	)		(8,890	)		—
Net change in advances to subsidiaries		—			3,624			(3,624	)
Purchases of premises and equipment		(20,227	)		—			—

Net cash used in investing activities		(27,791	)		(5,266	)		(3,818	)

*Cash flows from financing activities*
Proceeds from borrowings		35,224			—			3,623
Repayments of borrowings		(571	)		—			(3,165	)
Repurchase of common stock		—			(444	)		—
Stock options exercised		177			100			792
Proceeds from sale of common stock, net		75,235			234			877
Shareholder dividend distributions		(43,848	)		(11,921	)		(9,356	)

Net cash provided by (used in) financing activities		66,217			(12,031	)		(7,229	)

Net change in cash and cash equivalents		38,859			(3,514	)		(434	)
Cash and cash equivalents at beginning of year		52			3,566			4,000

Cash and cash equivalents at end of year	$	38,911		$	52		$	3,566

F-98

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 15. Subsequent Events

Management has evaluated subsequent events through the date the financial statements were available to be issued and determined that the following events required disclosure:

Change to Self Insured Health Plan

On January 1, 2015 the Company switched from a fully insured health, pharmacy, dental, vision and short-term disability plan (“health plan”) to a self-insured health plan managed by a third party administrator. Both medical and pharmacy claims are backed by a stop-loss contract that limits maximum out of pocket expenses to 25% of total expected claims paid.

Proposed Acquisition of Independence Trust Company

On January 13, 2015 the Company entered into an Agreement and Plan of Merger with Independence Holding Corporation and its wholly-owned subsidiary, Independence Trust Company, a federally charted savings bank (together referred to as “ITC” hereafter). Under this agreement, the Company will acquire control of ITC in a purchase of 100% of the outstanding shares of ITC for an all cash price of $8,350,000. As of December 31, 2014, ITC had total unaudited assets of $4.7 million and equity of $4.5 million. The acquisition of ITC is subject to regulatory approval.

ITC currently acts as a trustee of preneed funeral, preneed cemetery, merchandise and services and perpetual care cemetery trust assets in 32 states.

Option Grants

Effective January 30 and February 20, 2015, the Company issued an aggregate of 394,753 options vesting over seven years. Exercise price is $10.63 per share and weighted average date of grant fair value using the Black-Scholes option-pricing model is $3.83 per share. Vesting is to occur at 10% per year for the first five years and then 25% in years six and seven. Unrecognized compensation expense associated with these grants is $1.5 million to be recognized over the next seven years.

Change in Control of 504 Fund Advisors, LLC

On February 2, 2015 the Company acquired control of 504 Fund Advisors, LLC (“504 Fund”) by increasing its ownership from 50% to 91.3%. The acquisition of an additional 41.3% of ownership occurred in exchange for future net income of 504 Fund. Total contingent consideration is $620 thousand. Total unaudited assets as of January 31, 2015 were $1.1 million and capital was $410 thousand. The Company has invested $750 thousand in 504 Fund since inception in May 2007. Under the equity method, the carrying amount of this investment was $231 thousand at December 31, 2014.

nCino sale and Repayment of Short Term Borrowing

On February 12, 2015 the Company sold 100% of its 9.02% ownership in nCino to third party investors for an after tax gain of $2.3 million. This investment was accounted for under the cost method. On February 23, 2015, gross proceeds from this sale were used to repay in full the $6.1 million in short term borrowings disclosed in Note 7.

F-99

Live Oak Bancshares, Inc.

Notes to Consolidated Financial Statements

For the years ended December 31, 2014, 2013 and 2012

Note 15. Subsequent Events (Continued)

Secured Borrowing

On February 23, 2015 the Company transferred two related party loans to an unrelated third party financial institution in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the third party institution identified the transaction as a secured borrowing for accounting purposes. As such, upon receipt of funds from the third party institution the Company recorded a secured borrowing for $4.7 million.

F-100

Shares

LOGO

Common Stock

PROSPECTUS

Prospectus dated , 2015

S ANDLER O’N EILL + PARTNERS , L . P .

LOGO

Through and including , 2015 (the 25 ^th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.

Other Expenses of Issuance and Distribution .

The following table sets forth the fees and expenses, other than underwriting discounts and commissions, payable by us in connection with the issuance and distribution of the common stock being registered hereunder, all of which will be borne by us. All amounts shown are estimates except the SEC registration fee, the NASDAQ listing fee, and the FINRA filing fee.


	Amount To Be Paid
SEC registration fee	$	10,022
FINRA filing fee	$	13,438
NASDAQ listing fee	$	150,000
Accounting fees and expenses	$		*
Legal fees and expenses	$	750,000
Printing fees	$		*
Miscellaneous expenses	$		*

Total Expenses	$

*	To be provided by amendment.

Item 14.

Indemnification of Directors and Officers .

Sections 55-8-50 through 55-8-58 of the North Carolina General Statutes permit a corporation to indemnify its directors, officers, employees or agents under either or both a statutory or nonstatutory scheme of indemnification. Under the statutory scheme, a corporation may, with certain exceptions, indemnify a director, officer, employee or agent of the corporation who was, is, or is threatened to be made, a party to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative, or investigative, because of the fact that such person was a director, officer, agent or employee of the corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. This indemnity may include the obligation to pay any judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan) and reasonable expenses incurred in connection with a proceeding (including counsel fees), but no such indemnification may be granted unless such director, officer, agent or employee (i) conducted himself in good faith, (ii) reasonably believed (a) that any action taken in his official capacity with the corporation was in the best interest of the corporation or (b) that in all other cases his conduct at least was not opposed to the corporation’s best interest, and (iii) in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Whether a director has met the requisite standard of conduct for the type of indemnification set forth above is determined by the board of directors, a committee of directors, special legal counsel or the shareholders in accordance with Section 55-8-55. A corporation may not indemnify a director under the statutory scheme in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation or in connection with a proceeding in which a director was adjudged liable on the basis of having received an improper personal benefit.

In addition to, and separate and apart from the indemnification described above under the statutory scheme, Section 55-8-57 of the North Carolina General Statutes permits a corporation to indemnify or agree to indemnify any of its directors, officers, employees or agents against liability and expenses (including attorney’s fees) in any proceeding (including proceedings brought by or on behalf of the corporation) arising out of their status as such or their activities in such capacities, except for any liabilities or expenses incurred on account of activities that were, at the time taken, known or believed by the person to be clearly in conflict with the best interests of the

II-1

corporation. The bylaws of the Company provide for indemnification to the fullest extent permitted by law for persons who serve as a director, officer, agent or employee of the Company or at the request of the Company serve as a director, officer, agent or employee for any other corporation, partnership, joint venture, trust or other enterprise, or as a trustee or administrator under an employee benefit plan. Accordingly, the Company may indemnify its directors, officers, agents or employees in accordance with either the statutory or nonstatutory standards.

Sections 55-8-52 and 55-8-56 of the North Carolina General Statutes require a corporation, unless its articles of incorporation provide otherwise, to indemnify a director or officer who has been wholly successful, on the merits or otherwise, in the defense of any proceeding to which such director or officer was a party. Unless prohibited by the articles of incorporation, a director or officer also may make application and obtain court-ordered indemnification if the court determines that such director or officer is fairly and reasonably entitled to such indemnification as provided in Sections 55-8-54 and 55-8-56.

Finally, Section 55-8-57 of the North Carolina General Statutes provides that a corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee or agent of the corporation against certain liabilities incurred by such persons, whether or not the corporation is otherwise authorized by the North Carolina Business Corporation Act to indemnify such party. The Company has purchased a standard directors’ and officers’ liability policy which will, subject to certain limitations, indemnify the Company and its officers and directors for damages they become legally obligated to pay as a result of any negligent act, error, or omission committed by directors or officers while acting in their capacity as such.

As permitted by North Carolina law, Article VI of the Articles of Incorporation of the Company limits the personal liability of directors for monetary damages for breaches of duty as a director arising out of any legal action whether by or in the right of the Company or otherwise, provided that such limitation will not apply to (i) acts or omissions that the director at the time of such breach knew or believed were clearly in conflict with the best interests of the Company, (ii) any liability under Section 55-8-33 of the General Statutes of North Carolina, or (iii) any transaction from which the director derived an improper personal benefit (which does not include a director’s reasonable compensation or other reasonable incidental benefit for or on account of his service as a director, officer, employee, independent contractor, attorney, or consultant of the Company).

Item 15.

Recent Sales of Unregistered Securities .

On August 4, 2014, we sold 7,048,300 shares of common stock at a purchase price per share of $10.63, for an aggregate purchase price of $74.9 million in a private placement to accredited institutional investors in a transaction exempt from registration pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. No underwriters were used for this transaction and there were no underwriting discounts or commissions on this sale.

On September 30, 2014, we issued a total of 287,020 shares of common stock to 39 accredited investors in connection with the conversion of outstanding senior notes owned by such investors. This conversion was effected at a conversion price of $10.63 per share. No underwriters were used for this transaction and there were no underwriting discounts or commissions on this sale.

During the fourth quarter of 2014, we sold 36,662 shares of our common stock at a price of $9.04 to our employees pursuant to an Employee Stock Purchase Plan, generating gross proceeds of approximately $331,424. Also during the fourth quarter of 2014, we sold 6,818 shares of common stock at a price of $10.63 per share to a total of 17 investors pursuant to a private placement memorandum. No underwriters were used for these transactions and there were no underwriting discounts or commissions on these sales.

In addition to the sales described above, between March 31, 2012 and March 31, 2015, we issued a total of 270,430 shares of common stock at prices ranging from $2.00 per share to $4.40 pre share to eight of our

II-2

employees. During this period, we also issued a total of 1,061,660 shares of common stock upon the exercise of stock options previously granted to our employees and members of our board of directors and 685,700 shares of common stock in connection with restricted stock awards to our employees.

The issuances of securities described above were made in reliance upon exemptions from federal securities registration under Section 4(a)(2) of the Securities Act, and Rule 506 thereunder, as transactions not constituting a public offering of securities because the shares were issued privately without general solicitation.

Item 16.

Exhibits and Financial Statement Schedules .

(a) Exhibits


Exhibit No.		Description

1.1		Form of Underwriting Agreement*

3.1		Amended and Restated Articles of Incorporation of Live Oak Bancshares, Inc.

3.2		Amended Bylaws of Live Oak Bancshares, Inc.

4.1		Form of Common Stock Certificate

4.2		Registration and Other Rights Agreement between Live Oak Bancshares, Inc. and Wellington purchasers

5.1		Opinion of Wyrick Robbins Yates & Ponton LLP*

10.1		2008 Incentive Stock Option Plan, as amended**

10.2		2008 Nonstatutory Stock Option Plan**

10.3		2014 Employee Stock Purchase Plan**

10.4		2015 Omnibus Stock Incentive Plan**

10.5		SBLF Letter Agreement, dated September 13, 2011, by and among Live Oak Bancshares, Inc. and the Secretary of the United States Treasury

10.6		Tax Sharing Agreement, effective as of February 6, 2012, between Live Oak Bancshares, Inc. and Live Oak Banking Company

10.7		Securities Purchase Agreement, dated May 28, 2015 between Live Oak Bancshares, Inc. and Wellington purchasers

10.8		First Amendment to Securities Purchase Agreement, dated July 31, 2014 between Live Oak Bancshares, Inc. and Wellington purchasers

10.9		Second Amendment to Securities Purchase Agreement, dated August 1, 2014 between Live Oak Bancshares, Inc. and Wellington purchasers

10.10		Software Service Agreement between Live Oak Bancshares, Inc. and nCino, Inc

21.1		List of Subsidiaries

23.1		Consent of Dixon Hughes Goodman LLP

23.2		Consent of Wyrick Robbins Yates & Ponton LLP (Included in its opinion filed as Exhibit 5.1)*

24.1		Power of Attorney

*	To be filed by amendment

**	Management contract or compensatory plan

II-3

Item 17.

Undertakings .

The undersigned registrant hereby undertakes to provide the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

The undersigned registrant hereby undertakes that:

(1) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective;

(2) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wilmington, State of North Carolina on June 19, 2015.


LIVE OAK BANCSHARES, INC. (Registrant)

By:		/s/ James S. Mahan III
		James S. Mahan III
		Chairman and Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated.


				Date

		/s/ James S. Mahan III James S. Mahan III Chairman and Chief Executive Officer (Principal Executive Officer)		June 19, 2015
		/s/ S. Brett Caines S. Brett Caines Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)		June 19, 2015
		/s/ William L. Williams III* William L. Williams III Vice Chairman of the Board of Directors		June 19, 2015
		/s/ David G. Lucht* David G. Lucht Chief Risk Officer and Director		June 19, 2015
		/s/ Neil L. Underwood* Neil L. Underwood President and Director		June 19, 2015
		/s/ Milton E. Petty* Miltom E. Petty Director		June 19, 2015
		/s/ William H. Cameron* William H. Cameron Director		June 19, 2015
		/s/ Diane B. Glossman* Diane B. Glossman Director		June 19, 2015

II-5


	/s/ Howard K. Landis III* Howard K. Landis III Director	June 19, 2015
	/s/ Jerald L. Pullins* Jerald L. Pullins Director	June 19, 2015
	/s/ Glen F. Hoffsis* Glen F. Hoffsis Director	June 19, 2015

*	/s/ James S. Mahan III
	James S. Mahan III Attorney-in-fact

II-6

EXHIBIT INDEX


Exhibit No.		Description

1.1		Form of Underwriting Agreement*

3.1		Amended and Restated Articles of Incorporation of Live Oak Bancshares, Inc.

3.2		Amended Bylaws of Live Oak Bancshares, Inc.

4.1		Form of Common Stock Certificate

4.2		Registration and Other Rights Agreement between Live Oak Bancshares, Inc. and Wellington purchasers

5.1		Form of Opinion of Wyrick Robbins Yates & Ponton LLP*

10.1		2008 Incentive Stock Option Plan, as amended**

10.2		2008 Nonstatutory Stock Option Plan**

10.3		2014 Employee Stock Purchase Plan**

10.4		2015 Omnibus Stock Incentive Plan**

10.5		SBLF Letter Agreement, dated September 13, 2011, by and among Live Oak Bancshares, Inc. and the Secretary of the United States Treasury

10.6		Tax Sharing Agreement, effective as of February 6, 2012, between Live Oak Bancshares, Inc. and Live Oak Banking Company

10.7		Securities Purchase Agreement, dated May 28, 2015 between Live Oak Bancshares, Inc. and Wellington purchasers

10.8		First Amendment to Securities Purchase Agreement, dated July 31, 2014 between Live Oak Bancshares, Inc. and Wellington purchasers

10.9		Second Amendment to Securities Purchase Agreement, dated August 1, 2014 between Live Oak Bancshares, Inc. and Wellington purchasers

10.10		Software Service Agreement between Live Oak Bancshares, Inc. and nCino, Inc

21.1		List of Subsidiaries

23.1		Consent of Dixon Hughes Goodman LLP

23.2		Consent of Wyrick Robbins Yates & Ponton LLP (Included in its opinion filed as Exhibit 5.1)*

24.1		Power of Attorney

*	To be filed by amendment

**	Management contract or compensatory plan

II-7

Exhibit 3.1

SOSID: 1076268

Date Filed: 8/1/2014 4:21:00 PM

Elaine F. Marshall

North Carolina Secretary of State

C2014 212 00569

State of North Carolina

Department of the Secretary of State

ARTICLES OF RESTATEMENT

FOR BUSINESS CORPORATION

Pursuant to §55-10-07 of the General Statutes of North Carolina, the undersigned corporation hereby submits the following for the purpose of restating its Articles of Incorporation.

The name of the corporation is: Live Oak Bancshares, Inc.

1.	The text of the Restated Articles of Incorporation is attached.

2.	(Check a, b, or c, as applicable.)

These Restated Articles of Incorporation contain a new amendment or amendments:

a.XX

Not requiring shareholder approval. (Set forth a brief explanation of why shareholder approval was not required for such Amendment.)

These Restated Articles do not contain an amendment that requires shareholder approval.

Requiring shareholder approval. The amendments were adopted by the board of directors, and shareholder approval was obtained as required by Chapter 55 of the North Carolina General Statutes.

These Restated Articles of Incorporation do not include a new amendment.

4.	The text of each amendment adopted is as follows: (State below or attach): See attached.

5.	If an amendment provides for an exchange, reclassification, or cancellation of issued shares, provisions for implementing the amendment, if not contained in the amendment itself are as follows:

6.	The date of adoption of each amendment was as follows: June 12, 2014.


CORPORATIONS DIVISION		P.O. BOX 29622		RALEIGH, NC 27626-0622

ARTICLES OF RESTATEMENT

FOR BUSINESS CORPORATION

Page 2

7.	(Optional) The name and address of the current Registered Agent and Registered Office of the surviving business entity is:

Name of Registered Agent

Number and Street

City, State, Zip Code County

The mailing address if different from the street address of the above listed Registered Office is

8.	These Restated Articles of Incorporation consolidate all amendments into a single document.

9.	These articles will be effective upon filing, unless a delayed date and/or time is specified; .

This the 1st day of August, 2014

Live Oak Bancshares, Inc.

Name of Corporation

LOGO

Signature

David G. Lucht

Executive Vice President

Type or Print Name and Title

NOTES:

1.	Filing fee is $10, to Restate Articles of Incorporation without an amendment.

2.	Filing fee is $50, to Restate Articles of Incorporation with an amendment

3.	This document must be filed with the Secretary of State.

(Revised September 2003)

CORPORATIONS DIVISION

P.O. BOX 29622

(Form B-03)

RALEIGH, NC 27626-0622

AMENDED AND RESTATED ARTICLES OF INCORPORATION

LIVE OAK BANCSHARES, INC.

The undersigned hereby makes and acknowledges these Articles of Incorporation for the purpose of forming a business corporation under and by virtue of the laws of the State of North Carolina as contained in Chapter 55 of the General Statutes of North Carolina, entitled “North Carolina Business Corporation Act,” and the several amendments thereto, and to that end hereby sets forth the following:

ARTICLE I

The name of the corporation is Live Oak Bancshares, Inc. (herein referred to as the “Corporation”).

ARTICLE II

The Corporation shall have authority to issue a total of 111,000,000 shares of capital stock. The capital stock shall consist of 110,000,000 shares of common stock, no par value per share, and 1,000,000 shares of preferred stock, no par value per share.

Common Stock. The authorized common stock shall consist of two separate classes, of which 100,000,000 shares shall be designated as voting common stock (“Voting Common Stock”) and 10,000,000 shares shall be designated as non-voting common stock (“Non-Voting Common Stock”, and together with Voting Common Stock, “Common Stock”).

Each holder of Voting Common Stock, as such, shall be entitled to one vote for each share of Voting Common Stock held of record by such holder on all matters on which shareholders generally are entitled to vote; provided, however, that except as otherwise required by law, holders of Voting Common Stock, as such, shall not be entitled to vote on any amendment to these Articles of Incorporation (including any amendment to designate the terms of any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to these Articles of Incorporation (including any amendment to designate the terms of any series of Preferred Stock) or pursuant to the North Carolina Business Corporation Act (“NCBCA”). The holders of Non-Voting Common Stock, as such, shall have no voting power and shall not be entitled to vote on any matter except as otherwise required by law or as otherwise expressly provided for herein.

Except as otherwise provided herein, Non-Voting Common Stock shall in all other respects carry the same rights and privileges as Voting Common Stock (including in respect of dividends and in respect of distributions upon any dissolution, liquidation or winding up of the Corporation) and be treated the same as Voting Common Stock (including in any merger, consolidation, share exchange, reclassification or other similar transaction, as described in more detail below); provided that, if the Corporation shall in any manner split, subdivide or combine (including by way of a dividend payable in shares of Voting Common Stock or Non-Voting Common Stock) the outstanding shares of Voting Common Stock or Non-Voting Common Stock, the outstanding shares of the other such class of stock shall likewise be split, subdivided or combined in the same manner proportionately and on the same basis per share, and provided further , no dividend payable in Voting Common Stock shall be declared on the Non-Voting Common Stock and no dividend payable in Non-Voting Common Stock shall be declared on the Voting Common Stock, but instead, in the case of a stock dividend, each class of Common Stock shall receive such dividend in the

like stock. Notwithstanding the foregoing, and in addition to any other vote required by law, the affirmative vote of at least two-thirds of the outstanding shares of Non-Voting Common Stock, voting separately as a class, shall be required (i) to amend, alter or repeal (including by merger, consolidation or otherwise) any provision of these Articles of Incorporation that significantly and adversely affects the rights, preference or terms of the Non-Voting Common Stock contained herein in a manner that is different from the effect of such amendment, alteration or repeal on the Voting Common Stock and (ii) to liquidate, dissolve or wind-up the business and affairs of the Corporation.

Conversion of Common Stock. Any holder of Non-Voting Common Stock may convert any number of shares of Non-Voting Common Stock into an equal number of shares of Voting Common Stock at the option of the holder; provided, however, that each share of Non-Voting Common Stock will not be convertible in the hands of or at the election of the initial holder or any affiliate of such initial holder and will only be convertible by a transferee after a transfer to a third party unaffiliated with such initial holder and that complies with the transfer restrictions described in the next sentence. The Non-Voting Common Stock may only be transferred through one or more of the following alternatives (each, a “Permitted Transfer”): (i) to an affiliate of the holder or to the Corporation, (ii) in a widespread public distribution (including a transfer to an underwriter for the purpose of conducting a widespread public distribution), (iii) in transfers in which no transferee (or group of associated transferees) would receive 2% or more of any class of the voting securities of the Corporation, or (iv) to a transferee that would control more than 50% of the voting securities of the Corporation without any transfer from the transferor. The term “Permitted Transferee” means a holder of Non-Voting Common Stock, other than the initial holder of such Non-Voting Common Stock or an affiliate thereof, who acquires one or more shares of Non-Voting Common Stock in a Permitted Transfer.

Following a Permitted Transfer, a Permitted Transferee may elect to convert any number of shares of Non-Voting Common Stock into an equal number of shares of Voting Common Stock at the option of such holder upon written notice delivered to the Corporation (at the principal office of the Corporation). In connection with such conversion, such Permitted Transferee shall be required to surrender to the Corporation a certificate representing the shares of Non-Voting Common Stock being converted. Until presented and surrendered for cancellation following such conversion, each certificate representing shares of Non-Voting Common Stock in respect of which a conversion election has been made in accordance herewith shall be deemed to represent the number of shares of Voting Common Stock into which such shares have been converted, and upon presentation and surrender of such certificate the holder thereof shall be entitled to receive a certificate for the appropriate number of shares of Voting Common Stock. Upon conversion pursuant to this Article II, each converted share of Non-Voting Common Stock shall be retired. The Corporation shall from time to time reserve for issuance the number of shares of Voting Common Stock into which all outstanding shares of Non-Voting Common Stock may be converted.

In the event of any merger, consolidation, share exchange, reclassification or other similar transaction in which the shares of Voting Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, each share of Non-Voting Common Stock will at the same time be similarly exchanged or changed in an amount per whole share equal to the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, that each share of Voting Common Stock would be entitled to receive as a result of such transaction, provided that at the election of such holder, any securities issued with respect to the Non-Voting Common Stock shall be non-voting securities under the resulting corporation’s organizational documents and the Corporation shall make appropriate provisions (in form and substance reasonably satisfactory to the holders of at least two-thirds of the Non-Voting Common Stock then outstanding) and take such actions necessary to ensure that holders of the Non-Voting Common Stock shall retain securities with substantially the same privileges, limitations and relative rights as the Non-Voting Common Stock. Subject to the foregoing, in the event the holders of Voting Common Stock are provided the right to convert or exchange Voting Common

Stock for stock or securities, cash and/or any other property, then the holders of the Non-Voting Common Stock shall be provided the same right based upon the number of shares of Voting Common Stock such holders would be entitled to receive if such shares of Non-Voting Common Stock were converted into shares of Voting Common Stock immediately prior to such transaction. In the event that the Corporation offers to repurchase shares of Voting Common Stock from its shareholders generally, the Corporation shall offer to repurchase Non-Voting Common Stock pro rata based upon the number of shares of Voting Common Stock such holders would be entitled to receive if such shares were converted into shares of Voting Common Stock immediately prior to such repurchase. In the event of any pro rata subscription offer, rights offer or similar offer to holders of Voting Common Stock, the Corporation shall provide the holders of the Non-Voting Common Stock the right to participate based upon the number of shares of Voting Common Stock such holders would be entitled to receive if such shares were converted into shares of Voting Common Stock immediately prior to such offering; provided that at the election of such holder, any shares issued with respect to the Non-Voting Common Stock shall be issued in the form of Non-Voting Common Stock rather than Voting Common Stock.

Preferred Stock. The shares of preferred stock may be issued from time to time by the Corporation, and the Board of Directors may create and divide such shares into one or more series within that class, and such shares and the shares of each series shall have such voting powers, full or limited, or no voting powers, and such designations, preferences, limitations and relative rights (or qualifications, conditions or restrictions thereon) as the Board of Directors may and hereby is authorized to determine.

ARTICLE III

The street address of the registered office of the Corporation is 1741 Tiburon Drive, Wilmington, New Hanover County, North Carolina 28403-6244; the mailing address of the registered office of the Corporation is 1741 Tiburon Drive, Wilmington, New Hanover County, North Carolina 28403-6244; and, the name of the registered agent at such address is David G. Lucht.

ARTICLE IV

To the fullest extent permitted by the North Carolina Business Corporation Act as it exists or may hereafter be amended, no person who is serving or who has served as a director of the Corporation shall be personally liable to the Corporation or any of its shareholders or otherwise for monetary damages for breach of any duty as a director. No amendment or repeal of this article, nor the adoption of any provision to these Articles of Incorporation inconsistent with this article, shall eliminate or reduce the protection granted herein with respect to any matter that occurred prior to such amendment, repeal, or adoption.

ARTICLE V

Any agreement, plan or arrangement providing for the merger, consolidation or exchange of shares of the Corporation with any other corporation, foreign or domestic, or the sale, lease or exchange of all or substantially all of the assets of the Corporation which requires prior shareholder approval under North Carolina law shall only be effected after the prior approval of the holders of at least two-thirds of the outstanding shares of all classes of capital stock of the Corporation, voting together as a single class, unless class voting rights are specifically permitted for any class of capital stock of the Corporation. Notwithstanding the foregoing, the requirement of approval of at least two-thirds of the outstanding shares as set forth above shall not be applicable and only such affirmative vote as is required by North Carolina law shall be required, if any such transaction shall have been approved by a majority of the members of the Board of Directors unaffiliated with any other party to the proposed transaction.

ARTICLE VI

Any person as a director of this Corporation may only be removed for “cause” by the shareholders represented by a majority of all shares entitled to vote at an annual or special meeting of this Corporation. The term “cause” for the purposes of this paragraph shall mean (i) the criminal prosecution and conviction during the course of the director’s service as a director of this Corporation of an act of fraud, embezzlement, theft or personal dishonesty (excepting minor traffic and similar violations in the nature of a misdemeanor under North Carolina law), (ii) the prosecution and conviction of any criminal offense involving dishonesty or breach of trust, or (iii) the occurrence of any event resulting in a director being excluded from coverage, or having coverage limited as to the director when compared to other covered directors, under any of the Corporation’s fidelity bonds or insurance policies covering its directors, officers or employees,

This the 12 ^th day of June, 2014.

James S. Mahan III

Chairman of the Board of Directors and

Chief Executive Officer

Exhibit 3.2

BYLAWS

LIVE OAK BANCSHARES, INC.

BYLAWS

LIVE OAK BANCSHARES, INC.

Index


ARTICLE I

Offices

Section 1.	Principal Office	1
Section 2.	Registered Office	1
Section 3.	Other Offices	1

ARTICLE II

Meetings of Shareholders

Section 1.	Place of Meetings	1
Section 2.	Annual Meetings	1
Section 3.	Substitute Annual Meeting	1
Section 4.	Special Meetings	1
Section 5.	Notice of Meetings	1
Section 6.	Voting Lists	2
Section 7.	Voting Group	2
Section 8.	Quorum	2
Section 9.	Proxies	3
Section 10.	Voting of Shares	3
Section 11.	Fixing Record Date	3
Section 12.	Action of Shareholders Without Meeting	3

ARTICLE III

Directors

Section 1.	General Powers	4
Section 2.	Number, Term and Qualifications	4
Section 3.	Nominations	4
Section 4.	Election of Directors	4
Section 5.	Removal	4
Section 6.	Vacancies	5
Section 7.	Chairman of the Board	5
Section 8.	Vice Chairman of the Board	5
Section 9.	Compensation	5
Section 10.	Appointment of Committees	5


ARTICLE IV

Meetings of Directors

Section 1.	Regular Meetings	5
Section 2.	Special Meetings	6
Section 3.	Notice of Meetings	6
Section 4.	Waiver of Notice	6
Section 5.	Quorum	6
Section 6.	Manner of Acting	6
Section 7.	Presumption of Assent	6
Section 8.	Informal Action by Directors	6
Section 9.	Minutes	7

ARTICLE V

Officers

Section 1.	Number	7
Section 2.	Election and Term	7
Section 3.	Removal and Resignation	7
Section 4.	Compensation	7
Section 5.	Chief Executive Officer and President	8
Section 6.	Vice Presidents	8
Section 7.	Assistant Vice Presidents	8
Section 8.	Secretary	8
Section 9.	Assistant Secretaries	8
Section 10.	Treasurer	9
Section 11.	Assistant Treasurers	9

ARTICLE VI

Contracts, Loans, Checks and Deposits

Section 1.	Contracts	10
Section 2.	Loans	10
Section 3.	Checks and Drafts	10
Section 4.	Deposits	10


ARTICLE VII

Certificates for Shares and Their Transfer

Section 1.	Certificates for Shares	10
Section 2.	Transfer of Shares	10
Section 3.	Lost Certificates	10
Section 4.	Holder of Record	11
Section 5.	Reacquired Shares	11

ARTICLE VIII

General Provisions

Section 1.	Distributions	11
Section 2.	Seal	11
Section 3.	Amendments	11
Section 4.	Fiscal Year	11
Section 5.	Indemnification	11

BYLAWS

LIVE OAK BANCSHARES, INC.

ARTICLE I

Offices

Section 1. Principal Office : The principal office of the Corporation shall be located in Wilmington, North Carolina.

Section 2. Registered Office : The registered office of the Corporation required by law to be maintained in the State of North Carolina may be, but need not be, identical with the principal office.

Section 3. Other Offices : The Corporation may have offices at such other places, either within or without the State of North Carolina, as the Board of Directors from time to time may determine, or as the affairs of the Corporation from time to time may require.

ARTICLE II

Meetings of Shareholders

Section 1. Place of Meetings : All meetings of shareholders shall be held at the principal office of the Corporation or at such other place, either within or without the State of North Carolina, as shall be designated in the notice of the meeting or agreed upon by a majority of the shareholders entitled to vote thereat.

Section 2. Annual Meetings : The annual meeting of shareholders of the Corporation, for the purpose of electing directors of the Corporation and for the transaction of such other business as properly may be brought before the meeting, shall be held within 180 days of the end of the fiscal year on any day, except Saturday, Sunday or a legal or banking holiday, as may be determined by the Board of Directors.

Section 3. Substitute Annual Meeting : If the annual meeting shall not be held as provided in Section 2 of this Article, a substitute annual meeting may be called in accordance with the provisions of Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting.

Section 4. Special Meetings : Special meetings of the shareholders may be called at any time by (a) the Chairman of the Board, (b) the President of the Corporation, or (c) the Secretary of the Corporation at the request of the Board of Directors of the Corporation or shareholders holding fifteen (15%) or more of the voting shares of the Corporation.

Section 5. Notice of Meetings : Written or printed notice stating the time, place and date of the meeting shall be delivered not less than ten (10) nor more than sixty (60) days before the date thereof, either in person or by mail, by or at the direction of the President or other qualified person calling the meeting to each shareholder of record entitled to vote at such meeting unless

applicable law or the Corporation’s articles of incorporation require that such notice shall be given to all shareholders with respect to such meeting. If mailed, such notice shall be deemed to be effective when deposited in the United States mail, correctly addressed to the shareholder at the shareholder’s address as it appears on the current record of shareholders of the Corporation, with postage thereon prepaid.

In the case of an annual or substitute annual meeting, the notice of meeting need not specifically state the business to be transacted thereat unless such a statement expressly is required by the provisions of the North Carolina Business Corporation Act. In the case of a special meeting, the notice of meeting specifically shall state the purpose or purposes for which the meeting is called.

If any meeting of shareholders is adjourned to a different date, time, or place, notice need not be given of the new date, time, or place if the new date, time, or place is announced at the meeting before adjournment and if a new record date is not fixed for the adjourned meeting. If a new record date for the adjourned meeting is or must be fixed pursuant to North Carolina law, notice of the adjourned meeting must be given as provided in this Section to persons who are shareholders as of the new record date.

Section 6. Voting Lists : Before each meeting of shareholders, an alphabetical list of the shareholders entitled to notice of such meeting shall be prepared by the Secretary of the Corporation. The list shall be arranged by voting group and within each voting group by class or series of shares and show the address of and the number of shares held by each shareholder. The list shall be kept on file at the principal office of the Corporation for the period beginning two (2) business days after notice of the meeting is given and continuing through the meeting, and shall be available for inspection by any shareholder or the agent or attorney of any shareholder at any time prior to the meeting during regular business hours and at any time during the meeting or any adjournment thereof. The list shall be prima facie evidence as to who are the shareholders entitled to examine the list and the shareholders of record entitled to vote at any meeting of the shareholders.

Section 7. Voting Group : All shares of one or more classes or series that under the Corporation’s articles of incorporation or the North Carolina Business Corporation Act are entitled to vote and be counted together collectively on a matter at a meeting of shareholders constitute a voting group. All shares entitled by the Corporation’s articles of incorporation or the North Carolina Business Corporation Act to vote generally on a matter are for that purpose a single voting group. Classes or series of shares shall not be entitled to vote separately by voting group unless expressly authorized by the Corporation’s articles of incorporation or specifically required by law.

Section 8. Quorum : Shares entitled to vote as a separate voting group may take action on a matter at a meeting of shareholders only if a quorum of those shares is present at the meeting. A majority of the votes entitled to be cast on the matter by the voting group shall constitute a quorum of that voting group for action on that matter.

Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting.

In the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by a vote of the majority of the votes cast on the motion to adjourn; and at any adjourned meeting any business may be transacted which might have been transacted at the original meeting if a quorum exists with respect to the matter proposed.

Section 9. Proxies : Shares may be voted either in person or by one or more agents authorized by a written proxy executed by the shareholder or by the shareholder’s duly authorized attorney-in-fact. A proxy is not valid after the expiration of eleven (11) months from the date of its execution unless the person executing it specifies therein the length of time for which it is to continue in force, or limits its use to a particular meeting.

Section 10. Voting of Shares : Subject to the provisions of the Corporation’s articles of incorporation, each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders.

Except in the election of directors as provided in Section 4 of Article III, if a quorum exists, action on a matter by a voting group at a meeting of shareholders is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless a greater vote is required by law or by the Corporation’s articles of incorporation or these Bylaws.

Absent special circumstances, shares of the Corporation are not entitled to vote if they are owned, directly or indirectly, by another corporation in which the Corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation; provided that this provision does not limit the power of the Corporation to vote its own shares held by it in a fiduciary capacity.

Section 11. Fixing Record Date : The Board of Directors of the Corporation may fix a future date as the record date for one or more voting groups in order to determine (a) the shareholders entitled to notice of a meeting of shareholders, (b) the shareholders entitled to demand a special meeting, (c) the shareholders entitled to vote, or (d) the shareholders entitled to take any other action. A record date fixed under this Section may not be more than seventy (70) days before the meeting or action requiring a determination of shareholders.

A determination of shareholders entitled to notice of or to vote at a meeting of shareholders is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, which it must do if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting.

If no record date is fixed by the Board of Directors for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, the close of business on the day before the first notice of the meeting is delivered to shareholders shall be the record date for such determination of shareholders.

Section 12. Action of Shareholders Without Meeting . Any action which may be taken at a meeting of the shareholders may be taken without a meeting if the action is taken by all the shareholders entitled to vote on the action. The action must be evidenced by one or more written

consents signed by all the shareholders before or after such action, describing the action taken and delivered to the Corporation for inclusion in the minutes or filing with the corporate records. A consent signed under this Section has the effect of a meeting vote and may be described as such in any document.

ARTICLE III

Directors

Section 1. General Powers : The business and affairs of the Corporation shall be directed by the Board of Directors or by such Executive Committee or other committees as the Board may establish pursuant to these Bylaws.

Section 2. Number , Term and Qualifications : The number of directors constituting the Board of Directors of the Corporation shall not be less than five (5) or more than fourteen (14) as from time to time may be fixed or changed within said minimum and maximum by the shareholders or by a majority of the full Board of Directors subject to any applicable contractual obligations of the Corporation. In the event of the death, resignation, retirement, removal or disqualification of a director, a successor shall be elected (subject to any applicable contractual obligations of the Corporation) to serve until the next meeting of shareholders at which directors are elected.

Section 3. Nominations : Subject to any applicable contractual obligations of the Corporation, nominations for election to the Board of Directors may be made by the Board of Directors or a committee thereof, and, subject to the conditions described below, any shareholder of common stock entitled to vote at that meeting for the election of directors. Subject to any applicable contractual obligations of the Corporation, to be eligible for consideration at the meeting of shareholders, all nominations for election to the Board of Directors, other than those made by the Board of Directors or its committee, shall be in writing and must be delivered to the Secretary of the Corporation not less than one hundred and twenty (120) days prior to the meeting of shareholders at which time nominees will be considered for election to the Board of Directors. Only shareholders may make recommendations for nominations. The shareholder making such nomination shall submit a detailed resume of the nominee, stating the reasons why such person would be qualified to serve on the Board of Directors and the written consent of the nominee that if elected, such nominee would serve as a member of the Board of Directors.

Section 4. Election of Directors : Except as provided in Section 5 of this Article, the directors shall be elected at the annual meeting of the shareholders; and those persons who receive the highest number of votes at a meeting at which a quorum is present shall be deemed to have been elected.

Section 5. Removal : Subject to any applicable contractual obligations of the Corporation, a director may be removed from office by a vote of shareholders whenever the number of votes cast in favor of removal of the director exceeds the number of votes cast against such removal. If a director is elected by a voting group of shareholders (including pursuant to any applicable contractual obligations of the Corporation), only the shareholders of that voting group may participate in the vote to remove such director. A director may not be removed by the shareholders at a meeting unless the notice of the meeting states that the purpose, or one of the purposes, of the meeting is removal of the director. If any directors are so removed, new directors may be elected at the same meeting.

Section 6. Vacancies : If a vacancy occurs in the Board of Directors, including without limitation a vacancy resulting from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors, subject to any applicable contractual obligations of the corporation, the shareholders may fill the vacancy or the Board of Directors may fill the vacancy. If the directors remaining in office do not constitute a quorum of the Board, the directors may fill the vacancy by the affirmative vote of a majority of the remaining directors, or by the sole remaining director, as the case may be. If the vacant directorship was held by a director elected by a voting group, (including pursuant to the applicable contractual obligations of the Corporation), only the remaining directors or director elected by that voting group or the holders of shares of that voting group are entitled to fill the vacancy. The term of a director elected to fill a vacancy expires at the next meeting of shareholders at which directors are elected.

Section 7. Chairman of the Board : There shall be a Chairman of the Board of Directors elected by the directors from their number at any meeting of the Board. The Chairman shall preside at all meetings of the Board of Directors and perform such other duties as may be directed by the Board.

Section 8. Vice Chairman of the Board : There may be a Vice Chairman of the Board of Directors elected by the directors from their number at any meeting of the Board. The Vice Chairman shall perform the duties of Chairman of the Board in the event that the Chairman is absent or unable to carry out the functions of that position.

Section 9. Compensation : The Board of Directors may compensate directors for their services as such and may provide for the payment or reimbursement of all expenses incurred by directors in attending regular and special meetings of the Board.

Section 10. Appointment of Committees : The Board of Directors, by resolution of a majority of the number of directors in office, may designate three or more directors to constitute an Executive Committee. The Executive Committee shall be empowered and authorized to exercise the full authority of the Board of Directors at any time that the Board of Directors is not in session. All actions so taken by the Executive Committee shall be reported to the Board of Directors at its next regular meeting. The Board of Directors also may designate such other committees as the Board shall deem advisable, each of which, to the extent authorized by law and provided in such resolution, shall have and may exercise such authority of the Board of Directors in the management of the Corporation as the Board shall determine. The designation of any committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility or liability imposed upon the Board of Directors, or any member thereof, by law.

ARTICLE IV

Meetings of Directors

Section 1. Regular Meetings : A regular meeting of the Board of Directors shall be held immediately after, and at the same place as, the annual meeting of shareholders. In addition, the Board of Directors may provide, by resolution, the time and place, either within or without the State of North Carolina, for the holding of additional regular meetings, provided that at least one meeting shall be held each quarter.

Section 2. Special Meetings : Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the President or a majority of the directors. Such meetings may be held either within or without the State of North Carolina.

Section 3. Notice of Meetings : Regular meetings of the Board of Directors may be held without notice. The person or persons calling a special meeting of the Board of Directors, at least twenty-four (24) hours before the meeting, shall give notice thereof by any usual means of communication. Such notice need not specify the purpose for which the meeting is called. Any duly convened regular or special meeting may be adjourned by the directors to a later time without further notice.

Section 4. Waiver of Notice : Any director may waive notice of any meeting before or after the meeting. The waiver must be in writing, signed by the director entitled to the notice, and delivered to the Corporation for inclusion in the minutes or filing with the corporate records. The attendance by a director at, or the participation of a director in, a meeting shall constitute a waiver of any required notice of such meeting, unless the director, at the beginning of the meeting (or promptly upon the director’s arrival thereat), objects to holding the meeting or to transacting any business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

Section 5. Quorum : Unless the Corporation’s articles of incorporation provide otherwise, a majority of the number of directors fixed by or pursuant to these Bylaws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors.

Section 6. Manner of Acting : Except as otherwise provided in the Corporation’s articles of incorporation or these Bylaws or by applicable law, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. A director may not vote at a directors’ meeting by proxy or otherwise act by proxy at a meeting of the Board of Directors.

Section 7. Presumption of Assent : A director of the Corporation who is present at a meeting of the Board of Directors or at a meeting of any committee of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (a) such director objects at the beginning of the meeting (or promptly upon the director’s arrival thereat) to holding the meeting or to transacting any business at the meeting, or (b) such director’s contrary vote is recorded or such director’s dissent or abstention from the action taken otherwise is entered in the minutes of the meeting, or (c) such director files written notice of dissent or abstention to such action with the person presiding at the meeting before the adjournment thereof or forwards such notice by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right of dissent or abstention is not available to a director who voted in favor of the action taken.

Section 8. Informal Action by Directors : Action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if the action is taken by all members of the Board and evidenced by one or more written consents signed by each director before or after such action, describing the action taken, and delivered to the Secretary of the Corporation for inclusion in the minutes or filing with the corporate records.

Section 9. Minutes : Minutes shall be kept of all meetings of the Board of Directors and any committee or committees as the Board may establish from time to time. Such minutes shall show a record of all action taken by the Board of Directors and any committee or committees. Minutes shall be recorded in a book or books and kept on file at the Corporation. Additionally, minutes of any committee or committees, since the last meeting of the Board of Directors, shall be submitted to the Board of Directors at each meeting of the Board.

ARTICLE V

Officers

Section 1. Number : The officers of the Corporation shall consist of a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer and such Assistant Vice Presidents, Secretaries, Treasurers and other officers. The Board of Directors shall elect the Chief Executive Officer and the President and the Chief Executive Officer or the President may appoint, or the Board of Directors may elect, from time to time, such other officers as he or it shall deem appropriate. Any two (2) or more offices may be held by the same person, except that no officer may act in more than one capacity where action of two (2) or more officers is required.

Section 2. Election and Term : The Chief Executive Officer and the President of the Corporation shall each be elected by the Board of Directors. The remaining officers of the Corporation shall be appointed or elected as set forth in Section 1 of this Article V. Any elections by the Board of Directors may be held at any regular or special meeting of the Board. Each officer shall hold office until such officer’s death, resignation, retirement, removal or disqualification, or until the election and qualification of such officer’s successor. If required by the Board of Directors or otherwise required by law, each officer and employee of the Corporation shall give bond of suitable amount with security to be approved by the Board of Directors. Each bond shall be issued upon such form as may be approved by the Commissioner of Banks of North Carolina by a bonding company authorized to do business in North Carolina with the premium to be paid by the Corporation.

Section 3. Removal and Resignation : Any officer or agent elected or appointed by the Board of Directors may be removed by the Board with or without cause; but such removal shall be without prejudice to the contract rights, if any, of the person so removed.

An officer may resign at any time by notifying the Corporation, orally or in writing, of such resignation. A resignation shall be effective upon receipt by the Corporation unless it specifies in writing a later effective date. In the event a resignation so specifies a later effective date, the Board of Directors may fill the pending vacancy prior to such date; however, the successor to the resigning officer may not take office until the effective date. An officer’s resignation does not affect the Corporation’s contract rights, if any, with such officer.

Section 4. Compensation : The compensation of the Chief Executive Officer and President of the Corporation shall be fixed by the Board of Directors. The Chief Executive Officer or the President shall have the authority to fix the compensation of all other officers and shall report such compensation of any officer to the Board of Directors on a timely basis at its next regular or special meeting. The election of an officer does not of itself create any contract rights.

Section 5. Chief Executive Officer and President : The office of the Chief Executive Officer and of the President may, but need not, be held by the same individual. Subject to the control of the Board of Directors, the Chief Executive Officer and the President shall supervise and control the management of the Corporation in accordance with these Bylaws.

The Chief Executive Officer, President or the Chairman, when present, shall preside at all meetings of shareholders. The Chief Executive Officer or the President, with any other proper officer, may sign certificates for shares of the Corporation and any deeds, leases, mortgages, bonds, contracts or other instruments which lawfully may be executed on behalf of the Corporation, except where required or permitted by law otherwise to be signed and executed and except where the signing and execution thereof shall be delegated by the Board of Directors to some other officer or agent. In general, the Chief Executive Officer and the President shall perform all duties incident to their respective offices and such other duties as from time to time may be assigned by the Board of Directors.

Section 6. Vice Presidents : In the absence of the Chief Executive Officer and the President or in the event of the death, inability or refusal to act of the Chief Executive Officer and the President, the Vice President designated by the Chairman of the Board, unless otherwise determined by the Board of Directors, shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President, with any other proper officer, may sign certificates for shares of the Corporation and shall perform such other duties as from time to time may be assigned by the President or by the Board of Directors.

Section 7. Assistant Vice Presidents : The Assistant Vice Presidents shall, in the absence or disability of their superior officers, perform the duties and exercise the powers of those offices, and they shall, in general, perform such other duties as shall be assigned to them by the President or their superior officers.

Section 8. Secretary : The Secretary shall keep accurate records of the acts and proceedings of all meetings of shareholders and directors. The Secretary shall give all notices required by law and by these Bylaws. The Secretary shall have general charge of the corporate books and records and of the corporate seal, and shall affix the corporate seal to any lawfully executed instrument requiring it. The Secretary shall keep all records required by law at the principal office of the Corporation. The Secretary shall have general charge of the stock transfer books of the Corporation and shall keep, at the registered or principal office of the Corporation, a record of shareholders showing the name and address of each shareholder and the number and class of the shares held by each. The Secretary, with any other proper officer, may sign certificates for shares of the Corporation and shall sign such instruments as may require the Secretary’s signature. In general, the Secretary shall perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned by the President or by the Board of Directors.

Section 9. Assistant Secretaries : In the absence of the Secretary or in the event of the Secretary’s death, inability or refusal to act, the Assistant Secretaries in the order of their length

of service as Assistant Secretaries, unless otherwise determined by the Board of Directors, shall perform the duties of the Secretary, and when so acting shall have all the powers of and be subject to all the restrictions upon the Secretary. They shall perform such other duties as from time to time may be assigned by the Secretary, by the President, or by the Board of Directors. Any Assistant Secretary, with any other proper officer, may sign certificates for shares of the Corporation.

Section 10. Treasurer : The Treasurer shall have custody of all funds and securities belonging to the Corporation and shall receive, deposit or disburse the same under the direction of the Board of Directors. The Treasurer shall maintain appropriate accounting records as required by law and shall prepare, or cause to be prepared, annual financial statements of the Corporation that include a balance sheet as of the end of the fiscal year and an income and cash flow statement for that year, which statements, or a written notice of their availability, shall be mailed to each shareholder within one hundred twenty (120) days after the end of such fiscal year. The Treasurer, with any other proper officer, may sign certificates for shares of the Corporation. In general, the Treasurer shall perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the President or by the Board of Directors.

Section 11. Assistant Treasurers : In the absence of the Treasurer or in the event of the Treasurer’s death, inability or refusal to act, the Assistant Treasurers in the order of their length of service as Assistant Treasurers, unless otherwise determined by the Board of Directors, shall perform the duties of the Treasurer, and when so acting shall have all the powers of and be subject to all the restrictions upon the Treasurer. Any Assistant Treasurer, with any other proper officer, may sign certificates for shares of the Corporation. They shall perform such other duties as from time to time may be assigned by the Treasurer, by the President, or by the Board of Directors.

ARTICLE VI

Contracts, Loans, Checks and Deposits

Section 1. Contracts : The Board of Directors may authorize any officer or officers or any agent or agents, to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. The Board of Directors may enter into employment contracts for any length of time it deems wise.

Section 2. Loans : No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution adopted by the Board of Directors. Such authority may be general or specific in nature and scope.

Section 3. Checks and Drafts : All checks, drafts or other orders for the payment of money issued in the name of the Corporation shall be signed by such officer or officers or such agent or agents of the Corporation and in such manner as from time to time shall be determined by resolution of the Board of Directors.

Section 4. Deposits : All funds of the Corporation not otherwise employed from time to time shall be deposited to the credit of the Corporation in such depositories as the Board of Directors shall direct.

ARTICLE VII

Certificates for Shares and Their Transfer

Section 1. Certificates for Shares : Certificates representing shares of the Corporation may be issued in such form as the Board of Directors shall determine to every shareholder for the fully paid shares owned thereby and shall indicate thereon or reference any and all restrictive conditions of said shares. The certificates shall be in such form as required by law and as determined by the Board of Directors and shall be signed by the Chief Executive Officer, the President or any Vice President and either the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer. All certificates for shares shall be numbered consecutively or otherwise identified; and the name and address of the persons to whom they are issued, with the number of shares and the date of issue, shall be entered on the stock transfer books of the Corporation.

Section 2. Transfer of Shares : Transfer of shares shall be made on the stock transfer books of the Corporation only upon surrender of the certificates for the shares sought to be transferred by the record holder thereof or by such shareholder’s duly authorized agent, transferee or legal representative. All certificates surrendered for transfer shall be canceled before new certificates for the transferred shares shall be issued. Transfer of shares may be restricted by an agreement of the shareholder(s).

Section 3. Lost Certificates : The Board of Directors may authorize the issuance of a new share certificate in place of a certificate theretofore issued by the Corporation claimed to have

been lost or destroyed, upon receipt of an affidavit to such fact from the person claiming the loss or destruction. When authorizing such issuance of a new certificate, the Board shall require the claimant to give the Corporation a bond in such sum as the Board may direct to indemnify the Corporation against loss from any claim with respect to the certificate claimed to have been lost or destroyed; provided, however, that the Board, by resolution reciting the circumstances justifying such action, may authorize the issuance of the new certificate without requiring such a bond.

Section 4. Holder of Record : Except as otherwise required by law, the Corporation may treat as absolute owner of shares and as the person exclusively entitled to receive notification and distributions, to vote and otherwise to exercise the rights, powers and privileges of ownership of such shares, the person in whose name the shares stand of record on its books.

Section 5. Reacquired Shares : Shares of the Corporation that have been issued and thereafter reacquired by the Corporation shall constitute authorized but unissued shares.

ARTICLE VIII

General Provisions

Section 1. Distributions : The Board of Directors from time to time may authorize, and the Corporation may pay, distributions and share dividends on the Corporation’s outstanding shares in the manner and upon the terms and conditions provided by law and by the Corporation’s articles of incorporation.

Section 2. Seal : The corporate seal of the Corporation shall consist of two concentric circles between which is the name of the Corporation and in the center of which is inscribed SEAL; and such seal, in the form approved and adopted by the Board of Directors, shall be the corporate seal of the Corporation.

Section 3. Amendments : Except to the extent otherwise provided in the Corporation’s articles of incorporation or by law, these Bylaws may be amended or repealed and new bylaws may be adopted by a vote of the Board of Directors. No bylaw adopted, amended or repealed by the shareholders shall be readopted, amended or repealed by the Board of Directors unless the Corporation’s articles of incorporation or a bylaw adopted by the shareholders authorizes the Board of Directors to adopt, amend or repeal that particular bylaw or the Bylaws generally.

The shareholders may amend or repeal these Bylaws even though these Bylaws also may be amended or repealed by the Board of Directors.

Section 4. Fiscal Year : The fiscal year of the Corporation shall be the calendar year ending December 31 of each year.

Section 5. Indemnification : The Corporation shall indemnify any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (and any appeal therein), whether civil, criminal, administrative, arbitrative or investigative and whether or not brought by or on behalf of the Corporation, by reason of the fact that such party is or was a director, officer, employee or agent of the Corporation, or is or was

serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan, or arising out of such party’s activities in any of the foregoing capacities, against all liability and litigation expense, including reasonable attorneys’ fees; PROVIDED, however, that the Corporation shall not indemnify any such person against liability or expense incurred on account of such person’s activities which were at the time taken known or believed by such person to be clearly in conflict with the best interests of the Corporation. The Corporation likewise shall indemnify any such person for all reasonable costs and expenses (including attorneys’ fees) incurred by such person in connection with the enforcement of such person’s right to indemnification granted herein. The Corporation shall pay all expenses incurred by any director, officer, employee or agent in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director, officer, employee or agent to repay such amount unless it ultimately shall be determined that such party is entitled to be indemnified by the Corporation against such expenses.

The Board of Directors of the Corporation shall take all such action as may be necessary and appropriate to authorize the Corporation to pay the indemnification required by this bylaw, including without limitation a determination by a majority vote of disinterested directors that the activities giving rise to the liability or expense for which indemnification is requested were not, at the time taken, known or believed by the person requesting indemnification to be clearly in conflict with the best interests of the Corporation.

Any person who at any time after the adoption of this bylaw serves or has served in any of the aforesaid capacities for or on behalf of the Corporation shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein. Such right shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of, but shall be in addition to, any rights to which such person may be entitled apart from the provision of this bylaw.

EXHIBIT 4.1

SPECIMEN COMMON STOCK CERTIFICATE

[specimen common stock certificate]

Incorporated under the Laws of the State of North Carolina

Number of Shares of Common Stock: of Live Oak Bancshares, Inc. no par value per share.

This Common Stock of Live Oak Bancshares, Inc. is transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed.

IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this day of , 2014.


President						Secretary

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Certificate Number: for Shares of Common Stock

For Value Received, hereby sell, assign, and transfer unto Shares of the Common Stock represented by the within Certificate, said Common Stock on the books of the within named Corporation with full power of substitution in the premises.

Dated: , 2014.

Exhibit 4.2

REGISTRATION AND OTHER RIGHTS AGREEMENT

TABLE OF CONTENTS


			Page

1.	Definitions			1

2.	Registration Rights			5
	2.1	SEC Reporting Company; Demand Registration		5
	2.2	Company Registration		7
	2.3	Underwriting Requirements		7
	2.4	Obligations of the Company		8
	2.5	Furnish Information		10
	2.6	Expenses of Registration		10
	2.7	Delay of Registration		10
	2.8	Indemnification		10
	2.9	Reports Under Exchange Act		13
	2.10	Limitations on Subsequent Registration Rights		13
	2.11	“Market Stand-off” Agreement		14
	2.12	Restrictions on Transfer		14
	2.13	Termination of Registration Rights		16

3.	Information and Observer Rights			16
	3.1	Delivery of Financial Statements		16
	3.2	Inspection		17
	3.3	Observer Rights		18
	3.4	Termination of Information and Observer Rights		18
	3.5	Confidentiality		18

4.	Rights to Future Stock Issuances			19
	4.1	Right of Participation		19
	4.2	Termination		20

5.	Additional Covenants			21
	5.1	Insurance		21
	5.2	Employee Agreements		21
	5.3	Matters Requiring Approval of the Independent Directors		21
	5.4	Board Matters		21
	5.5	Successor Indemnification		22
	5.6	FCPA		22
	5.7	Termination of Covenants		22

6.	Miscellaneous			23
	6.1	Successors and Assigns		23
	6.2	Governing Law		23
	6.3	Counterparts		24
	6.4	Titles and Subtitles		24


	6.5	Notices	24
	6.6	Amendments and Waivers	24
	6.7	Severability	25
	6.8	Aggregation of Stock	25
	6.9	Entire Agreement	25
	6.10	Dispute Resolution	25
	6.11	Delays or Omissions	26
	6.12	Acknowledgment	26

Schedule A - Schedule of Investors

REGISTRATION AND OTHER RIGHTS AGREEMENT

THIS REGISTRATION AND OTHER RIGHTS AGREEMENT (this “Agreement” ), is made as of the 5th day of August, 2014, by and among Live Oak Bancshares, Inc., a North Carolina corporation (the “Company” ), and each of the investors listed on Schedule A hereto, each of which is referred to in this Agreement as an “Investor” .

RECITALS

WHEREAS, the Company and the Investors are parties to the Securities Purchase Agreement, dated as of May 28, 2014 (the “ Purchase Agreement ”); and

WHEREAS, in order to induce the Company to enter into the Purchase Agreement and to induce the Investors to invest funds in the Company pursuant to the Purchase Agreement, the Investors and the Company hereby agree that this Agreement shall govern the rights of the Investors to cause the Company to register shares of Common Stock issuable to the Investors, to receive certain information from the Company, and to participate in future equity offerings by the Company, and shall govern certain other matters as set forth in this Agreement;

NOW, THEREFORE, the parties hereby agree as follows:

1. Definitions . For purposes of this Agreement:

1.1 “Affiliate” means, with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including without limitation any general partner, managing member, officer or director of such Person or any venture capital fund or other entity now or hereafter existing that is controlled by one or more general partners or managing members of, or shares the same management company or investment adviser with, such Person.

1.2 “Bank” means Live Oak Banking Company, a North Carolina state nonmember bank and a wholly-owned subsidiary of the Company.

1.3 “Common Stock” means the Voting Common Stock and the Non-Voting Common Stock.

1.4 “Competitor” means a Person engaged, directly or indirectly (including through any partnership, limited liability company, corporation, joint venture or similar arrangement (whether now existing or formed hereafter)), in a business that competes with any business of the Company and/or its subsidiaries as reasonably determined in good faith by the Board of Directors; provided, however, that any venture capital firm, institutional investor, financial investment firm or collective investment vehicle that is in the business of investing in entities (or any employee, partner or member of such an entity) shall under no circumstances be deemed a “Competitor” solely as a result of such entity’s investments in such a business.

1.5 “Damage” means any loss, damage, claim or liability (joint or several) to which a party hereto may become subject under the Securities Act, the

Exchange Act, or other federal or state law, insofar as such loss, damage, claim or liability (or any action in respect thereof) arises out of or is based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement of the Company, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the indemnifying party (or any of its agents or Affiliates) of the Securities Act, the Exchange Act, any state securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law.

1.6 “Derivative Securities” means any securities or rights convertible into, or exercisable or exchangeable for (in each case, directly or indirectly), Common Stock, including options and warrants.

1.7 “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

1.8 “Excluded Registration” means (i) a registration relating to the sale of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase, or similar plan; (ii) a registration relating to an SEC Rule 145 transaction; (iii) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities; or (iv) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered.

1.9 “Exempted Securities” means the following: (i) shares of Common Stock or Derivative Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock; (ii) shares of Common Stock or options to purchase Common Stock issued to employees or directors of, or consultants or advisors to, the Company or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors of the Company, subject to Subsection 5.4 ; (iii) shares of Common Stock or Derivative Securities actually issued upon the exercise, conversion or exchange of Derivative Securities, in each case provided such issuance is pursuant to the terms of such Derivative Security; and (iv) shares of Common Stock issued by the Company as consideration for the acquisition of another entity.

1.10 “Form S-1” means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.

1.11 “Form S-3” means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits incorporation of substantial information by reference to other documents filed by the Company with the SEC.

1.12 “GAAP” means generally accepted accounting principles in the United States.

1.13 “Holder” means any holder of Registrable Securities who is a party to this Agreement.

1.14 “Immediate Family Member” means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including, adoptive relationships, of a natural person referred to herein.

1.15 “Initiating Holders” means, collectively, Holders who properly initiate a registration request under this Agreement.

1.16 “IPO” means the Company’s first underwritten public offering of its Voting Common Stock under the Securities Act.

1.17 “National Stock Exchange” means The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ Capital Market, the New York Stock Exchange or the NYSE MKT.

1.18 “New Securities” means, collectively, equity securities of the Company, whether or not currently authorized, as well as rights, options, or warrants to purchase such equity securities, or securities of any type whatsoever that are, or may become, convertible or exchangeable into or exercisable for such equity securities.

1.19 “Non-Management Directors” shall have the meaning set forth in the Significant Shareholders Agreement.

1.20 “Non-Voting Common Stock” means shares of the Company’s non-voting common stock, no par value per share, and also includes any securities into which the Non-Voting Common Stock may hereinafter be converted, reclassified or changed.

1.21 “Person” means any individual, corporation, partnership, trust, limited liability company, association or other entity.

1.22 “Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

1.23 “Registrable Securities” means (i) any Common Stock held by the Investors or their permitted transferees; and (ii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referenced in clause ( i ) above; excluding in all cases, however, any Registrable Securities sold by a Person in a transaction in which the applicable rights

under this Agreement are not assigned pursuant to Subsection 6.1 , and excluding for purposes of Section 2 any shares for which registration rights have terminated pursuant to Subsection 2.13 of this Agreement.

1.24 “Registrable Securities then outstanding” means the number of shares determined by adding the number of shares of outstanding Common Stock that are Registrable Securities and the number of shares of Common Stock issuable (directly or indirectly) pursuant to then exercisable and/or convertible securities that are Registrable Securities.

1.25 “Restricted Securities” means the securities of the Company required to be notated with the legend set forth in Subsection 2.12(b) hereof.

1.26 “Sale of the Company” shall mean either: (i) a transaction or series of related transactions in which a Person, or a group of related Persons, acquires from shareholders of the Company shares representing more than fifty percent (50%) of the outstanding voting power of the Company or more than fifty percent (50%) of the total equity of the Company; (ii) a merger or consolidation in which (A) the Company is a constituent party or (B) a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or (iii) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger, consolidation or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company.

1.27 “SEC” means the Securities and Exchange Commission.

1.28 “SEC Rule 144” means Rule 144 promulgated by the SEC under the Securities Act.

1.29 “SEC Rule 145” means Rule 145 promulgated by the SEC under the Securities Act.

1.30 “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

1.31 “Selling Expenses” means all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities, and fees and disbursements of counsel for any Holder, except for the fees and disbursements of the Selling Holder Counsel borne and paid by the Company as provided in Subsection 2.6 .

1 .32 “Significant Shareholders Agreement” means that certain Significant Shareholders Agreement, dated as of the date hereof, by and among the Company, the Investors, and certain other shareholders of the Company, as amended from time to time.

1.33 “Voting Common Stock” means shares of the Company’s voting common stock, no par value per share, and also includes any securities into which the Voting Common Stock may hereinafter be converted, reclassified or changed.

2. Registration Rights . The Company covenants and agrees as follows:

2.1 SEC Reporting Company; Demand Registration.

(a) SEC Reporting Company . By no later than the fifth anniversary of the Closing (as defined in the Purchase Agreement), the Company shall cause itself (i) to be subject to the periodic reporting requirements of Section 13 (by having its Voting Common Stock registered under Section 12 of the Exchange Act) or Section 15(d) of the Exchange Act and (ii) to have its Voting Common Stock listed on a National Stock Exchange.

(b) Form S-1 Demand . If at any time after the earlier of (i) one hundred eighty (180) days after the effective date of the registration statement for the IPO or (ii) the date the Company becomes subject to the periodic reporting requirements of Section 13 or Section 15(d) of the Exchange Act, the Company receives a request from Holders of at least a majority of the Registrable Securities then outstanding that the Company file a Form S-1 registration statement covering the registration of Registrable Securities with an anticipated aggregate offering price of at least $5.0 million, then the Company shall (x) within ten (10) days after the date such request is given, give notice thereof (the “Demand Notice”) to all Holders other than the Initiating Holders; and (y) as soon as practicable, and in any event within ninety (90) days after the date such request is given by the Initiating Holders, file a Form S-1 registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Subsections 2.1(d) and 2.3 .

(c) Form S-3 Demand . If at any time when it is eligible to use a Form S-3 registration statement, the Company receives a request from Holders of at least a majority of the Registrable Securities then outstanding that the Company file a Form S-3 registration statement with respect to outstanding Registrable Securities of such Holders having an anticipated aggregate offering price of at least $1.0 million, then the Company shall (i) within ten (10) days after the date such request is given, give a Demand Notice to all Holders other than the

Initiating Holders; and (ii) as soon as practicable, and in any event within sixty (60) days after the date such request is given by the Initiating Holders, file a Form S-3 registration statement under the Securities Act covering all Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Subsections 2.1(d) and 2.3 .

(d) Notwithstanding the foregoing obligations, if the Company furnishes to Holders requesting a registration pursuant to Subsection 2.l(b) or Subsection 2.l(c) a certificate signed by the Company’s chief executive officer stating that in the good faith judgment of the Company’s Board of Directors it would be materially detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore necessary to defer the filing of such registration statement, then the Company shall have the right to defer taking action with respect to such filing for a period of not more than sixty (60) days after the request of the Initiating Holders is given; provided, however , that the Company may not invoke this right more than once in any twelve (12) month period; and provided further that the Company shall not register any securities for its own account or that of any other shareholder during such sixty (60) day period other than pursuant to (A) a registration relating to the sale of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase, or similar plan; (B) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities; or (C) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered.

(e) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Subsection 2.1(b) during the period that is sixty (60) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is one hundred eighty (180) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) after the Company has effected two registrations pursuant to Subsection 2.1(b) ; or (iii) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Subsection 2.1(c) . The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Subsection 2.1(c) (i) during the period that is thirty (30) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; or (ii) if the Company has effected two registrations pursuant to Subsection 2.l(c) within the twelve (12) month period immediately preceding the date of such request. A registration shall not be counted as “effected” for purposes of this Subsection 2.1(e) . until such time as the applicable registration statement has been declared effective by the SEC, unless the Initiating Holders withdraw their request for such registration, elect not to pay the registration expenses therefor, and forfeit their right to one demand registration statement pursuant to Subsection 2.6 , in which case such withdrawn registration statement shall be counted as “ effected” for this Subsection 2.1(e) .

2.2 Company Registration . If the Company proposes to register (including, for this purpose, a registration effected by the Company for shareholders other than the Holders) any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than in an Excluded Registration), including, without limitation, pursuant to the Company’s obligations under Subsection 2.1(a) , the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within twenty (20) days after such notice is given by the Company, the Company shall, subject to the provisions of Subsection 2.3 , cause to be registered all of the Registrable Securities that each such Holder has requested to be included in such registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Subsection 2.2 before the effective date of such registration, whether or not any Holder has elected to include Registrable Securities in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Subsection 2.6 .

2.3 Underwriting Requirements.

(a) If, pursuant to Subsection 2.1 , the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Subsection 2.1 , and the Company shall include such information in the Demand Notice. The underwriter(s) will be selected by the Initiating Holders holding at least a majority of the Registrable Securities covered by the request made pursuant to Subsection 2.1 , subject to approval of the Company. In such event, the right of any Holder to include such Holder’s Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Subsection 2.4(e)) enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Subsection 2.3 , if the managing underwriter(s) advise(s) the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities that otherwise would be underwritten pursuant hereto, and the number of Registrable Securities and any other securities that may be included in the underwriting shall be allocated among such Holders of Registrable Securities, including the Initiating Holders, and any other selling shareholders, in proportion (as nearly as practicable) to the sum of (i) the number of Registrable Securities owned by each Holder and (ii) the number of other securities owned by each other selling shareholder, or in such other proportion as shall mutually be agreed to by all such selling Holders and such other selling shareholders.

(b) In connection with any offering involving an underwriting of shares of the Company’s capital stock pursuant to Subsection 2.1(a) or Subsection 2.2 , the Company shall not be required to include any of the Holders’ Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of the offering by the Company. If the total

number of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the number of securities to be sold (other than by the Company) that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters and the Company in their sole discretion determine will not jeopardize the success of the offering. If the underwriters determine that less than all of the Registrable Securities requested to be registered can be included in such offering, then the Registrable Securities and any other securities that are included in such offering shall be allocated among the selling Holders and any other selling shareholders in proportion (as nearly as practicable) to the sum of (i) the number of Registrable Securities owned by each selling Holder and (ii) the number of other securities owned by each other selling shareholder, or in such other proportions as shall mutually be agreed to by all such selling Holders and such other selling shareholders. Notwithstanding the foregoing, in no event shall the number of Registrable Securities included in the offering be reduced below thirty percent (30%) of the total number of securities included in such offering, unless such offering is the IPO, in which case the selling Holders may be excluded further (on a pro rata basis with any other selling shareholders, consistent with the immediately preceding sentence) if the underwriters make the determination described above. For purposes of the provision in this Subsection 2.3(b) concerning apportionment, for any selling Holder that is a partnership, limited liability company, or corporation, the partners, members, retired partners, retired members, shareholders, and Affiliates of such Holder, or the estates and Immediate Family Members of any such partners, retired partners, members, and retired members and any trusts for the benefit of any of the foregoing Persons, shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate number of Registrable Securities owned by all Persons included in such “selling Holder,” as defined in this sentence.

(c) For purposes of Subsection 2.1 , a registration shall not be counted as “effected” if, as a result of an exercise of the underwriter’s cutback provisions in Subsection 2.3(a) , fewer than fifty percent (50%) of the total number of Registrable Securities that Holders have requested to be included in such registration statement are actually included.

2.4 Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided , however , that (i) such one hundred twenty (120) day period shall be extended for a period of time equal to the period the Holder refrains, at the request of an underwriter of Common Stock (or other securities) of the Company, from selling any securities included in such registration, and (ii) in the case of any registration of Registrable Securities on Form S-3 that are intended to be offered on a continuous or delayed

basis, subject to compliance with applicable SEC rules, such one hundred twenty (120) day period shall be extended for up to 60 days, if necessary, to keep the registration statement effective until all such Registrable Securities are sold;

(b) prepare and file with the SEC such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all securities covered by such registration statement;

(c) furnish to the selling Holders such numbers of copies of a prospectus, including a preliminary prospectus, as required by the Securities Act, and such other documents as the Holders may reasonably request in order to facilitate their disposition of their Registrable Securities;

(d) use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the selling Holders; provided that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

(e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering;

(f) use its commercially reasonable efforts to cause all such Registrable Securities covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;

(g) provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Agreement and provide a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;

(h) promptly make available for inspection by the selling Holders, any underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Holders, all customary financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company’s officers, directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith;

(i) notify each selling Holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed; and

(j) after such registration statement becomes effective, notify each selling Holder of any request by the SEC that the Company amend or supplement such registration statement or prospectus.

In addition, the Company shall ensure that, at all times after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, its insider trading policy shall provide that the Company’s directors may implement a trading program under Rule 10b5-1 of the Exchange Act.

2.5 Furnish Information . It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as is reasonably required to effect the registration of such Holder’s Registrable Securities.

2.6 Expenses of Registration . All expenses (other than Selling Expenses) incurred in connection with registrations, filings, or qualifications pursuant to Section 2 , including all registration, filing, and qualification fees; printers’ and accounting fees; fees and disbursements of counsel for the Company; and the reasonable fees and disbursements, not to exceed $20,000, of one counsel for the selling Holders (“Selling Holder Counsel”), shall be borne and paid by the Company; provided , however , that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Subsection 2.1 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all selling Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one registration pursuant to Subsections 2.l(b) or 2.l(c) , as the case may be; provided further that if, at the time of such withdrawal, the Holders shall have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness after learning of such information then the Holders shall not be required to pay any of such expenses and shall not forfeit their right to one registration pursuant to Subsections 2.1(b) or 2.1(c) . All Selling Expenses relating to Registrable Securities registered pursuant to this Section 2 shall be borne and paid by the Holders pro rata on the basis of the number of Registrable Securities registered on their behalf.

2.7 Delay of Registration . No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration pursuant to this Agreement as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.

2.8 Indemnification . If any Registrable Securities are included in a registration statement under this Section 2:

(a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, and the partners, members, officers, directors, and shareholders of each such Holder; legal counsel, investment advisers and accountants for each such Holder; any underwriter (as defined in the Securities Act) for each such Holder; and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any Damages, and the Company will pay to each such Holder, underwriter, controlling Person, or other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any Proceeding from which Damages may result, as such expenses are incurred; provided , however , that the indemnity agreement contained in this Subsection 2.8(a) shall not apply to amounts paid in settlement of any such Proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such Holder, underwriter, controlling Person, or other aforementioned Person expressly for use in connection with such registration.

(b) To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other Holder selling securities in such registration statement, and any controlling Person of any such underwriter or other Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling Holder expressly for use in connection with such registration; and each such selling Holder will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any Proceeding from which Damages may result, as such expenses are incurred; provided , however , that the indemnity agreement contained in this Subsection 2.8(b) shall not apply to amounts paid in settlement of any such Proceeding if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further that in no event shall the aggregate amounts payable by any Holder by way of indemnity or contribution under Subsections 2.8(b) and 2.8(d) exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of fraud or willful misconduct by such Holder.

(c) Promptly after receipt by an indemnified party under this Subsection 2.8 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Subsection 2.8 , give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided , however , that an indemnified party (together with all other indemnified

parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action. The failure to give notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Subsection 2.8 , to the extent that such failure materially prejudices the indemnifying party’s ability to defend such action. The failure to give notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Subsection 2.8 .

(d) To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either: (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Subsection 2.8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Subsection 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Subsection 2.8 , then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided , however , that, in any such case (x) no Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement, and (y) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Holder’s liability pursuant to this Subsection 2.8(d) , when combined with the amounts paid or payable by such Holder pursuant to Subsection 2.8(b) , exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of willful misconduct or fraud by such Holder.

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

(f) Unless otherwise superseded by an underwriting agreement entered into in connection with the underwritten public offering, the obligations of the Company and Holders under this Subsection 2.8 shall survive the completion of any offering of Registrable Securities in a registration under this Section 2 , and otherwise shall survive the termination of this Agreement.

2.9 Reports Under Exchange Act . With a view to making available to the Holders the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company shall:

(a) Until such time as SEC Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares of Common Stock without limitation during a three month period without registration and without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144(c)(l), make and keep available adequate current public information, as those terms are understood and defined in SEC Rule 144, at all times after the earlier of (i) the effective date of the registration statement filed by the Company for the IPO and (ii) the date the Company becomes subject to the periodic reporting requirements of Section 13 or Section 15(d) of the Exchange Act;

(b) Until such time as SEC Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares of Common Stock without limitation during a three month period without registration and without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144(c)(1), use commercially reasonable efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after the Company has become subject to such reporting requirements); and

(c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) to the extent accurate, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the registration statement filed by the Company for the IPO), the Securities Act, and the Exchange Act (at any time after the Company has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after the Company so qualifies); and (ii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration (at any time after the Company has become subject to the reporting requirements under the Exchange Act) or pursuant to Form S-3 (at any time after the Company so qualifies to use such form).

2.10 Limitations on Subsequent Registration Rights . From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would provide to such holder the right to include securities in any registration statement on other than either a pro rata basis

with respect to the Registrable Securities or on a subordinate basis after all Holders have had the opportunity to include in the registration statement and offering all shares of Registrable Securities that they wish to include.

2.11 “Market Stand-off” Agreement . Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the IPO, and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days), (i) lend; offer; pledge; sell; contract to sell; sell any option or contract to purchase; purchase any option or contract to sell; grant any option, right, or warrant to purchase; or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable (directly or indirectly) for Common Stock, in each case, held immediately before the effective date of the registration statement for such offering or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash, or otherwise. The foregoing provisions of this Subsection 2.11 shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, or the transfer of any shares to any trust for the direct or indirect benefit of the Holder or the immediate family of the Holder, provided that the trustee of the trust agrees to be bound in writing by the restrictions set forth herein, and provided further that any such transfer shall not involve a disposition for value, and shall be applicable to the Holders only if all officers and directors and all shareholders individually owning five percent (5%) or more of the Company’s outstanding Common Stock are subject to the same restrictions. The underwriters in connection with such registration are intended third-party beneficiaries of this Subsection 2.11 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in connection with such registration that are consistent with this Subsection 2.11 or that are necessary to give further effect thereto. Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters shall apply pro rata to all Holders subject to such agreements, based on the number of shares subject to such agreements. In addition, in the event that any percentage of the Common Stock or any security convertible into or exercisable or exchangeable for Common Stock held by any officer, director or shareholder owning five percent (5%) or more of the Company’s outstanding Common Stock is released from any similar restrictions, the same percentage of the Common Stock or any security convertible into or exercisable or exchangeable for Common Stock held by each Holder shall be immediately and fully released from any restrictions on transfer set forth herein concurrently therewith.

2.12 Restrictions on Transfer.

(a) The Registrable Securities shall not be sold, pledged, or otherwise transferred, and the Company shall not recognize and shall issue stop-transfer instructions to its transfer agent with respect to any such sale, pledge, or transfer, except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. A transferring Holder, other than with respect to a sale pursuant

to an effective registration statement or SEC Rule 144, will cause any proposed purchaser, pledgee, or transferee of the Registrable Securities held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement.

(b) Each certificate, instrument, or book entry representing (i) the Registrable Securities and (ii) any other securities issued in respect of the securities referenced in clause (i), upon any stock split, stock dividend, recapitalization, merger, consolidation, or similar event, shall (unless otherwise permitted by the provisions of Subsection 2.12(c) ) be notated with a legend substantially in the following form:

THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR A VALID EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.

THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

The Holders consent to the Company making a notation in its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer set forth in this Subsection 2.12 .

(c) The holder of such Restricted Securities, by acceptance of ownership thereof, agrees to comply in all respects with the provisions of this Section 2 . Before any proposed sale, pledge, or transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transaction or the Registrable Securities are being sold pursuant to SEC Rule 144, the Holder thereof shall give notice to the Company of such Holder’s intention to effect such sale, pledge, or transfer. Each such notice shall describe the manner and circumstances of the proposed sale, pledge, or transfer in sufficient detail and, if reasonably requested by the Company, shall be accompanied at such Holder’s expense by either (i) a written opinion of legal counsel who shall, and whose legal opinion shall, be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transaction may be effected without registration under the Securities Act; (ii) a “no action” letter from the SEC to the effect that the proposed sale, pledge, or transfer of such Restricted Securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto; or (iii) any other evidence reasonably satisfactory to counsel to the Company to the effect that the proposed sale, pledge, or transfer of the Restricted Securities may be effected without registration under the Securities Act, whereupon the Holder of such Restricted Securities shall be entitled to sell, pledge, or transfer such Restricted Securities in accordance with the terms of the notice given by the Holder to the Company. The Company will not require such a legal opinion or “no action” letter (x) in any transaction in compliance with SEC Rule 144 (provided that the transferor provides the

Company with reasonable assurances (in the form of a seller representation letter and, if applicable, a broker representation letter) that such securities may be sold pursuant to such rule); or (y) in any transaction in which such Holder distributes Restricted Securities to an Affiliate of such Holder for no consideration; provided that, with respect to transfers under this clause (y), each transferee agrees in writing to be subject to the terms of this Subsection 2.12. Each certificate, instrument, or book entry representing the Restricted Securities transferred as above provided shall be notated with, except if such transfer is made pursuant to an effective registration statement or pursuant to SEC Rule 144, the appropriate restrictive legend set forth in Subsection 2.12(b) , except that such certificate instrument, or book entry shall not be notated with such restrictive legend if, in the opinion of counsel for such Holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act.

2.13 Termination of Registration Rights . The right of any Holder to request registration or inclusion of Registrable Securities in any registration pursuant to Subsections 2.1 or 2.2 shall terminate, with respect to any Voting Common Stock only, upon the earlier of (i) the fifth anniversary of the IPO and (ii) such time as SEC Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares of Common Stock without limitation during a three month period without registration and without the requirement for the Company to be in compliance with the current public information required under SEC Rule 144(c)(1).

3. Information and Observer Rights.

3.1 Delivery of Financial Statements. For so long as an Investor continues to hold any Common Stock, the Company shall deliver to such Investor, provided that the Board of Directors has not reasonably determined that such Investor is a Competitor:

(a) as soon as practicable, but in any event within one hundred twenty (120) days after the end of each fiscal year of the Company (i) a balance sheet as of the end of such year, (ii) statements of income and of cash flows for such year, and a comparison between (x) the actual amounts for such fiscal year and (y) the comparable amounts for the prior year, and (iii) a statement of shareholders’ equity as of the end of such year, all such financial statements audited and certified by independent public accountants of nationally recognized standing selected by the Company and prepared in accordance with GAAP;

(b) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, unaudited statements of income and cash flows for such fiscal quarter, and an unaudited balance sheet and a statement of shareholders’ equity as of the end of such fiscal quarter, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments; and (ii) not contain all notes thereto that may be required in accordance with GAAP);

(c) as soon as practicable, but in any event within thirty (30) days of the end of each month, an unaudited income statement and statement of cash flows for such month, and an unaudited balance sheet and statement of shareholders’ equity as of the end of

such month, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments and (ii) not contain all notes thereto that may be required in accordance with GAAP);

(d) as soon as practicable, but in any event thirty (30) days before the end of each fiscal year, a budget for the next fiscal year (the “Budget”), approved by the Board of Directors and forecasting the Company’s revenues, expenses and cash position on a monthly basis;

(e) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, a statement showing the number of shares of each class and series of capital stock of the Company and securities convertible into or exercisable for shares of capital stock of the Company outstanding at the end of the period and the number of stock options not yet issued but reserved for issuance, if any, all in sufficient detail as to permit the Investors to calculate their respective percentage equity ownership in the Company; and

(f) such other information relating to the financial condition, business, prospects, or corporate affairs of the Company as any Investor may from time to time reasonably request; provided , however , that the Company shall not be obligated under this Subsection 3.1 to provide information (i) that the Company reasonably determines in good faith to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in a form acceptable to the Company); (ii) the disclosure of which would adversely affect the attorney-client privilege between the Company (or the Bank) and its counsel; or (iii) that would involve the unauthorized disclosure of confidential supervisory information.

If, for any period, the Company has any subsidiary whose accounts are consolidated with those of the Company, then in respect of such period the financial statements delivered pursuant to the foregoing sections shall be the consolidated and consolidating financial statements of the Company and all such consolidated subsidiaries.

Notwithstanding anything else in this Subsection 3.1 to the contrary, the Company may cease providing the information set forth in this Subsection 3.1 during the period starting with the date sixty (60) days before the Company’s good-faith estimate of the date of filing of a registration statement if it reasonably concludes it must do so to comply with the SEC rules applicable to such registration statement and related offering; provided that the Company’s covenants under this Subsection 3.1 shall be reinstated at such time as the Company is no longer actively employing its commercially reasonable efforts to cause such registration statement to become effective.

3.2 Inspection. The Company shall permit each Investor ( provided that the Board of Directors has not reasonably determined that such Investor is a Competitor), at such Investor’s expense, to visit and inspect the Company’s properties; examine its books of account and records; and discuss the Company’s affairs, finances, and accounts with its officers, during normal business hours of the Company as may be reasonably requested by the Investor and upon reasonable advance notice; provided , however , that the Company shall not be obligated

pursuant to this Subsection 3.2 to provide access to any information that it reasonably and in good faith considers to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company), which would involve the unauthorized disclosure of confidential supervisory information, or the disclosure of which would adversely affect the attorney-client privilege between the Company (or the Bank) and its counsel; provided further , that the Company shall not be required to permit Investor inspection pursuant to this Section 3.2 more frequently than once per quarter.

3.3 Observer Rights . The Company shall invite a representative (who shall initially be Robert Patten) of Wellington Management Company, LLP, on behalf of the Investors, to attend all meetings of the Board of Directors of each of the Company and the Bank and the committees thereof in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that the Company and the Bank provide to their respective directors at the same time and in the same manner as provided to such directors; provided , however , that such representative shall agree to hold in confidence and trust all information so provided; and provided further , that the Company (on its behalf and on behalf of the Bank) reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting would (i) adversely affect the attorney-client privilege between the Company (or the Bank) and its counsel, (ii) result in disclosure of trade secrets or a conflict of interest, or if such Investor or its representative is a Competitor of the Company (or the Bank) or (iii) involve the unauthorized disclosure of confidential supervisory information.

3.4 Termination of Information and Observer Rights. The covenants set forth in Subsection 3.1 , Subsection 3.2 , and Subsection 3.3 shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO, or (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act.

3.5 Confidentiality . Each Investor agrees that such Investor will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor its investment in the Company) any confidential information obtained from the Company pursuant to the terms of this Agreement (including notice of the Company’s intention to file a registration statement), unless such confidential information (a) is known or becomes known to the public in general (other than as a result of a breach of this Subsection 3.5 by such Investor), (b) is or has been independently developed or conceived by the Investor without use of the Company’s confidential information, or (c) is or has been made known or disclosed to the Investor by a third party without a breach of any obligation of confidentiality such third party may have to the Company; provided , however , that an Investor may disclose confidential information (i) to its attorneys, accountants, consultants, investment advisers, custodians and other professionals to the extent necessary to obtain their services in connection with monitoring its investment in the Company so long as such Person agrees to keep such information confidential or is bound by professional duties obligating such Person to hold such information in confidence; (ii) to any prospective purchaser of any Registrable Securities from such Investor, if such prospective purchaser agrees to be bound by the provisions of this Subsection 3.5 ; (iii) to any equityholder of such Investor in the ordinary course of business, provided that such Investor informs such Person

that such information is confidential and directs such Person to maintain the confidentiality of such information; or (iv) as may otherwise be required by, or requested under, law, regulation, the rules of any court, or governmental organization or agency, or the requirements of any stock exchange or other regulatory organization, with whose rules Investor are required to comply, or by legal process, provided, in the case of clauses (i) through (iii), that the Investor shall be responsible for any disclosure of such confidential information by any such Person as though such inappropriate disclosure were made by such Investor in violation of this Subsection 3.5 and, in the case of clause (iv), that the Investor promptly notifies the Company of such disclosure, to the extent permissible, and takes reasonable steps to minimize the extent of any such disclosure. Furthermore, the provisions of this Subsection 3.5 shall supersede and replace that certain Confidentiality Agreement, by and between the Company and Wellington Management Company, LLP, dated February 19, 2014 (the “Confidentiality Agreement”), and the Confidentiality Agreement shall be deemed terminated upon the effectiveness hereof.

4. Rights to Future Stock Issuances.

4.1 Right of Participation. Subject to the terms and conditions of this Subsection 4.1 and applicable securities laws, if the Company proposes to offer or sell any New Securities, the Company shall allow each Investor to purchase a portion of such New Securities to the extent set forth in Subsection 4.1 (b) . An Investor shall be entitled to apportion the right of first offer hereby granted to it in such proportions as it deems appropriate, among (i) itself, (ii) its Affiliates and (iii) its beneficial interest holders, such as limited partners, members or any other Person having “beneficial ownership,” as such term is defined in Rule 13d-3 promulgated under the Exchange Act, of such Investor (“Investor Beneficial Owners”); provided that each such Affiliate or Investor Beneficial Owner (x) is not a Competitor, unless such party’s purchase of New Securities is otherwise consented to by the Board of Directors, and (y) agrees to enter into, at the time any New Securities are acquired by such Person, this Agreement and the Right of Co-Sale and Voting Agreement of even date herewith among the Company, the Investors and the other parties named therein (the “Co-Sale Agreement”) as an “Investor” and “Holder” under each such agreement ( provided that any Competitor shall not be entitled to any rights as an Investor under Subsections 3.1 , 3.2 and 4.1 hereof).

(a) In the event the Company proposes to issue any New Securities, the Company shall give notice (the “Offer Notice”) to each Investor, stating (i) its bona fide intention to offer such New Securities, (ii) the number of such New Securities to be offered, and (iii) the price and material terms, if any, upon which it proposes to offer such New Securities.

(b) By written notification to the Company within fifteen (15) days after the Offer Notice is given, each Investor may elect to purchase, at the price and on the terms specified in the Offer Notice, up to that portion of such New Securities that equals the proportion that the Common Stock then held by such Investor (including all shares of Common Stock then issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of any Derivative Securities then held by such Investor) bears to the total Common Stock of the Company then outstanding (assuming full conversion and/or exercise, as applicable, of all Derivative Securities). Any Investor that does not provide written notice of election within such fifteen (15) day period shall have no further rights with respect to such issuance of New Securities, At the

expiration of such fifteen (15) day period, the Company shall promptly notify each Investor that elected to purchase all the shares available to it (each, a “Fully Exercising Investor”) of any other Investor’s failure to do likewise. During the five (5) day period commencing after the Company has given such notice, each Fully Exercising Investor may, by giving notice to the Company, elect to purchase or acquire, in addition to the number of shares specified above, up to that portion of the New Securities for which Investors were entitled to subscribe but that were not subscribed for by the Investors which is equal to the proportion that the Common Stock issued and held, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of any Derivative Securities then held, by such Fully Exercising Investor bears to the Common Stock issued and held, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of any Derivative Securities then held, by all Fully Exercising Investors who wish to purchase such unsubscribed shares. The closing of any sale pursuant to this Subsection 4.1(b) shall occur within the later of ninety (90) days of the date that the Offer Notice is given and the date of initial sale of New Securities pursuant to Subsection 4.1(c) . Notwithstanding anything to the contrary set forth herein, in lieu of New Securities which are voting securities of the Company; an Investor may elect to acquire non-voting securities of the Company with the same rights, preference and terms as such New Securities (other than with respect to voting).

(c) If all New Securities referred to in the Offer Notice are not elected to be purchased or acquired as provided in Subsection 4.1(b) , the Company may, during the ninety (90) day period following the expiration of the periods provided in Subsection 4.1(b) , offer and sell the remaining unsubscribed portion of such New Securities to any Person or Persons at a price not less than, and upon terms no more favorable to the offeree than, those specified in the Offer Notice. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within thirty (30) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such New Securities shall not be offered unless first reoffered to the Investors in accordance with this Subsection 4.1 .

(d) The right of first offer in this Subsection 4.1 shall not be applicable to (i) Exempted Securities; (ii) shares of Common Stock issued in the IPO; and (iii) in connection with any expedited issuance of New Securities undertaken at the written direction of an applicable bank regulatory authority (an “Expedited Issuance”); provided that following consummation of such Expedited Issuance, the Company shall then comply with the provisions of this Section 4.1 and allow each Investor to purchase up to that number of additional New Securities to enable such Investor to maintain its percentage interest in the Company (calculated as of immediately prior to such Expedited Issuance), and the sale of any such additional New Securities to the Investors shall be consummated as promptly as is practicable but in any event no later than ninety (90) days subsequent to the date on which the Company consummates the Expedited Issuance.

4.2 Termination. The covenants set forth in Subsection 4.1 shall terminate and be of no further force or effect immediately before the consummation of the IPO.

5. Additional Covenants .

5.1 Insurance . The Company shall use its commercially reasonable efforts to maintain following the date hereof, from financially sound and reputable insurers (i) Directors and Officers liability insurance (for both the Company and the Bank) in an amount and on terms and conditions satisfactory to the Board of Directors of the Company and (ii) term “key-person” insurance on each of James S. Mahan III and Neil L. Underwood in an amount of at least $18 million and $4 million, respectively, provided that the Company shall use commercially reasonable efforts to increase such amounts, within sixty (60) days of the date hereof, to $30 million and $10 million, respectively. The Company will use commercially reasonable efforts to cause such Directors and Officers liability insurance policy to be maintained until such time as the Board of Directors determines that such insurance should be discontinued. The Company will use commercially reasonable efforts to cause such “key person” insurance policy to be maintained until such time as the holders of a majority of the Registrable Securities determine that such insurance should be discontinued. The key-person policy shall name the Company as loss payee.

5.2 Employee Agreements . The Company will cause each person now or hereafter employed by it or by any of its subsidiaries (or engaged by the Company or any of its subsidiaries as a consultant/independent contractor) with access to confidential information and/or trade secrets of the Company or any of its subsidiaries to enter into a nondisclosure and proprietary rights assignment agreement.

5.3 Employee Stock . Unless otherwise approved by the Board of Directors, all future employees and consultants of the Company who purchase, receive options to purchase, or receive awards of shares of the Company’s capital stock after the date hereof shall be required to execute restricted stock or option agreements, as applicable, providing for (i) vesting of shares over a seven (7) year period, with 10% vesting on each of the first five anniversaries of the date of grant and 25% vesting on each of the sixth and seventh anniversaries of the date of grant, and (ii) a market stand-off provision substantially similar to that in Subsection 2.11 . In addition, unless otherwise approved by the Board of Directors, the Company shall retain a “right of first refusal” on employee transfers until the Company’s IPO and shall have the right to repurchase unvested shares at cost upon termination of employment of a holder of restricted stock.

5.4 Board Approval of Significant Corporate Matters . The Company hereby covenants and agrees with each of the Investors that it shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without approval of the Board of Directors of the Company, which approval must include the affirmative vote of at least a majority of the Non-Management Directors:

(a) (i) liquidate, dissolve or wind-up the business and affairs of the Company or the Bank, (ii) or effect any merger, consolidation, sale or any other change of control transaction of the Company or the Bank (including, without limitation, a Sale of the Company), or (iii) consent to any of the foregoing;

(b) amend, alter or repeal any provision of the charter or bylaws of the Company or the Bank;

(c) create, or authorize the creation of, or issue or obligate itself to issue shares of, any additional class or series of capital stock unless the same ranks on parity with, or junior to, the Common Stock, including, without limitation, with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company and the payment of dividends, or increase the authorized number of shares of any additional class or series of capital stock unless the same ranks on parity with, or junior to, the Common Stock, including, without limitation, with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption;

(d) purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on any shares of capital stock of the Company other than (i) dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock, (ii) repurchases of stock from former employees, officers, directors, consultants or other persons who performed services for the Company or any subsidiary in connection with the cessation of such employment or service at the lower of the original purchase price or the then-current fair market value thereof and (iii) purchases made pursuant to that certain Amended and Restated Shareholders Agreement, by and among the Company and the shareholders of the Company party thereto, dated as of the date hereof, as amended from time to time; or

(e) establish any new equity incentive plan or allow for more than 192,667 shares (including 166,667 shares underlying outstanding stock options), in the aggregate, to be issued under the Company’s existing equity incentive plans.

5.5 Board Matters . Unless otherwise determined by the vote of a majority of the directors then in office, the Board of Directors of each of the Company and the Bank shall meet at least quarterly in accordance with an agreed-upon schedule. The Company and the Bank, as applicable, shall reimburse the Non-Management Directors for all reasonable out-of-pocket travel expenses incurred (consistent with their respective travel policies) in connection with attending meetings of their respective Board of Directors.

5.6 Successor Indemnification . If the Company or any of its successors or assignees consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger, then to the extent necessary, proper provision shall be made so that the successors and assignees of the Company assume the obligations of the Company with respect to indemnification of members of the Board of Directors as in effect immediately before such transaction, whether such obligations are contained in the Company’s Bylaws, its Articles of Incorporation, or elsewhere, as the case may be.

5.7 FCPA . The Company shall not (and shall not knowingly permit any of its subsidiaries or affiliates or any of its or their respective directors, officers, managers, employees, independent contractors, representatives or agents to) promise, authorize or make any

payment to, or otherwise contribute any item of value to, directly or indirectly, any third party, including any Non-U.S. Official (as such term is defined in the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “ FCPA ”)), in each case in violation of the FCPA, the U.K. Bribery Act, or any other applicable anti-bribery or anti-corruption law. The Company shall (and shall cause each of its subsidiaries and affiliates to) cease all of its or their respective activities, as well as remediate any actions known to have been taken by the Company, its subsidiaries or affiliates, or any of their respective directors, officers, managers, employees, independent contractors, representatives or agents in violation of the FCPA, the U.K. Bribery Act, or any other applicable anti-bribery or anti-corruption law. The Company shall (and shall cause each of its subsidiaries and affiliates to) maintain systems of internal controls (including, but not limited to, accounting systems, purchasing systems and billing systems) to ensure compliance with the FCPA, the U.K. Bribery Act, or any other applicable anti-bribery or anti-corruption law.

5.8 Termination of Covenants . The covenants set forth in this Section 5, except for Subsection 5.6 , shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO or (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act.

6. Miscellaneous .

6.1 Successors and Assigns . The rights under this Agreement may be assigned (but only with all related obligations) by a Holder to a transferee of Registrable Securities that (i) is an Affiliate of a Holder and not a Competitor or (ii) after such transfer, holds at least 25,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations); provided , however , that (x) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee and the Registrable Securities with respect to which such rights are being transferred; and (y) such transferee agrees in a written instrument delivered to the Company at the time of such transfer to be bound by and subject to the terms and conditions of this Agreement, including the provisions of Subsection 2.11 . For the purposes of determining the number of shares of Registrable Securities held by a transferee, the holdings of a transferee that is an Affiliate of a Holder shall be aggregated together with those of the transferring Holder; provided further that all transferees who would not qualify individually for assignment of rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices, or taking any action under this Agreement. The terms and conditions of this Agreement inure to the benefit of and are binding upon the respective successors and permitted assignees of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.

6.2 Governing Law . This Agreement shall be governed by the internal law of the State of New York.

6.3 Counterparts . This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute

one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g. , www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

6.4 Titles and Subtitles . The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.

6.5 Notices . All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or (i) personal delivery to the party to be notified; (ii) when sent, if sent by electronic mail or facsimile during the recipient’s normal business hours, and if not sent during normal business hours, then on the recipient’s next business day; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) business day after the business day of deposit with a nationally recognized overnight courier, freight prepaid, specifying next-day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their addresses as set forth on Schedule A hereto, or to the principal office of the Company and to the attention of the Chief Executive Officer, in the case of the Company, or to such email address, facsimile number, or address as subsequently modified by written notice given in accordance with this Subsection 6.5 . If notice is given to the Company, a copy (which shall not constitute notice) shall also be sent to Wyrick Robbins Yates & Ponton LLP, 4101 Lake Boone Trail, Suite 300, Raleigh, NC 27607, Attn: Todd H. Eveson, telephone: (919) 781-4000, fax: (919) 781-4865, email: teveson@wyrick.com , and if notice is given to the Investors, a copy (which shall not constitute notice) shall also be given to Greenberg Traurig, LLP, One International Place, Boston, MA 02110, Attn: Bradley A. Jacobson, telephone: (617) 310-6000, fax: (617) 279-8402, e-mail: jacobsonb@gt1aw.com .

6.6 Amendments and Waivers . Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding; provided that the Company may in its sole discretion waive compliance with Subsection 2.12(c) ; provided further that any provision hereof may be waived by any waiving party on such party’s own behalf, without the consent of any other party. Notwithstanding the foregoing, this Agreement may not be amended or terminated and the observance of any term hereof may not be waived with respect to any Investor without the written consent of such Investor, unless such amendment, termination, or waiver applies to all Investors in the same fashion (it being agreed that a waiver of the provisions of Section 4 with respect to a particular transaction shall be deemed to apply to all Investors in the same fashion if such waiver does so by its terms, notwithstanding the fact that certain Investors may nonetheless, by agreement with the Company, purchase securities in such transaction). The Company shall give prompt notice of any amendment or termination hereof to any party hereto that did not consent in writing to such amendment or termination. Any amendment, termination, or waiver effected in accordance with this Subsection 6.6 shall be binding on all parties hereto, regardless of whether any such party has consented thereto. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision.

6.7 Severability . In case any one or more of the provisions contained in this Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement, and such invalid, illegal, or unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

6.8 Entire Agreement . This Agreement (including any Schedules and Exhibits hereto) constitutes the full and entire understanding and agreement among the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties is expressly canceled.

6.9 Dispute Resolution . Each party agrees that all Proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (as defined in the Purchase Agreement) (whether brought against a party hereto or its respective Affiliates, employees or agents) may be commenced on a non-exclusive basis in the New York Courts (as defined in the Purchase Agreement). Each party hereto hereby irrevocably submits to the non-exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such New York Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

6.10 Delays or Omissions . No delay or omission to exercise any right, power, or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power, or remedy of such nonbreaching or nondefaulting party, nor shall it be construed to be a waiver of or acquiescence to any such breach or default, or to any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, whether under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

6.11 Acknowledgment . The Company acknowledges that the Investors and/or such Investors’ investment advisers are in the business of making, selecting and/or managing venture capital and other investments and therefore review the business plans and related proprietary information of many enterprises, including enterprises which may have products or services which compete directly or indirectly with those of the Company. Nothing in this Agreement shall preclude or in any way restrict the Investors and/or such Investors’ investment advisers from investing or participating in any particular enterprise whether or not such enterprise has products or services which compete with those of the Company.

6.12 No Association . Each of the parties acknowledges, represents, warrants and agrees that this Agreement (i) relates only to the shares of capital stock of the Company, (ii) will terminate no later than the twentieth (20th) anniversary of the date of this Agreement, and (iii) does not create an association among the parties to engage in activities other than through the Company.

[ Remainder of Page Intentionally Left Blank ]

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.


LIVE OAK BANCSHARES, INC.

By:

Name:				James S. Mahan, III
Title:				Chairman & Chief Executive Officer

INVESTORS:

For and on behalf of each of the entities listed on Schedule A hereto, individually and not jointly and severally

By:				Wellington Management Company, LLP, as investment adviser

By:

Name:				Steven M. Hoffman
Title:				Vice President and Counsel

SCHEDULE A

Investors

Legal Entity Name and Address

Bay Pond Investors USB, LLC

c/o Wellington Management Company LLP

Attention: Steven M. Hoffman

280 Congress Street

Boston, Massachusetts 02210

Facsimile Number: 617-289-5699

Email address: seclaw@wellington.com

Bay Pond Partners, L.P.

c/o Wellington Management Company LLP

Attention: Steven M. Hoffman

280 Congress Street

Boston, Massachusetts 02210

Facsimile Number: 617-289-5699

Email address: seclaw@wellington.com

Ithan Creek Investors USB, LLC

c/o Wellington Management Company LLP

Attention: Steven M. Hoffman

280 Congress Street

Boston, Massachusetts 02210

Facsimile Number: 617-289-5699

Email address: seclaw@wellington.com

Wolf Creek Investors USB, LLC

c/o Wellington Management Company LLP

Attention: Steven M. Hoffman

280 Congress Street

Boston, Massachusetts 02210

Telephone Number: 617-790-7770

Facsimile Number: 617-289-5699

Email address: seclaw@wellington.com

Wolf Creek Partners, L.P.

c/o Wellington Management Company LLP

Attention: Steven M, Hoffman

280 Congress Street

Boston, Massachusetts 02210

Facsimile Number: 617-289-5699

Email address: seclaw@wellington.com

Exhibit 10.1

LIVE OAK BANCSHARES, INC.

AMENDED INCENTIVE STOCK OPTION PLAN

Live Oak Bancshares, Inc., a North Carolina business corporation (hereinafter referred to as the “Company”), does herein set forth the terms of the Live Oak Bancshares, Inc. Amended Incentive Stock Option Plan (hereinafter referred to as this “Plan”) which was adopted by the Company’s Board of Directors (hereinafter referred to as the “Board”) and approved by the shareholders.

1. Purpose of the Plan . The purpose of this Plan is to provide for the grant of Incentive Stock Options (hereinafter referred to as “Option” or “Options”) qualifying for the tax treatment afforded by Section 422 of the Internal Revenue Code of 1986, as amended, to eligible officers and employees (hereinafter referred to as “Eligible Employees”) of the Company and its wholly-owned subsidiary, Live Oak Bank (hereinafter referred to as the “Bank”), who wish to invest in the Company’s common stock (hereinafter referred to as “Common Stock”). The Company believes that participation in the ownership of the Company by Eligible Employees will be to the mutual benefit of the Company and Eligible Employees. The existence of this Plan will enhance the Company’s ability to attract capable individuals to employment in key employee positions.

2. Administration of the Plan .

(a) This Plan shall be administered by the Compensation Committee of the Board (hereinafter referred to as the “Committee”). The Committee shall consist of at least three (3) members of the Board. The members of the Committee shall be appointed by the Board and shall serve at the pleasure of the Board, which may remove members from, add members to, or fill vacancies in the Committee.

(b) The Committee shall decide to whom Options shall be granted under this Plan, the number of shares as to which Options shall be granted subject to the limitations set forth in Paragraph 11 of this Plan, the Option Price (as hereinafter defined) for such shares and such additional terms and conditions for such Options as the Committee deems appropriate.

(c) A majority of the Committee shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved unanimously in writing by the Committee, shall be considered as valid actions by the Committee.

(d) The Committee may designate any officers or employees of the Company to assist in the administration of this Plan. The Committee may authorize such individuals to execute documents on its behalf and may delegate to them such other ministerial and limited discretionary duties as the Committee may deem fit.

3. Shares of Common Stock Subject to the Plan . The maximum number of shares of Common Stock that shall be available initially for Options under this Plan is THREE

HUNDRED TWENTY-FIVE THOUSAND (325,000) shares, subject to adjustment as provided in Paragraph 15 hereof. Shares subject to Options which expire or terminate prior to the issuance of the shares of Common Stock shall again be available for future grants of Options under this Plan.

4. Eligibility . Options under this Plan may be granted to any Eligible Employee as determined by the Committee. An individual may hold more than one Option under this or other plans adopted by the Company or the Bank.

5. Grant of Options .

(a) The Committee shall authorize that Options for shares of Common Stock shall be granted to certain Eligible Employees which Options shall be granted based upon the past service and the continued participation of those individuals in the operations of the Company and/or the Bank. The allocation of said Options shall be as determined by a majority vote of the Committee at one or more meetings called for such purpose.

(b) Upon the forfeiture of an Option for whatever reason prior to the expiration of the Option Period (as defined in Paragraph 10 hereof) the shares of Common Stock covered by a forfeited Option shall be available for the granting of additional Options to Eligible Employees during the remaining term of this Plan upon such terms and conditions as may be determined by the Committee. The number of additional Options to be granted to specific Eligible Employees during the term of this Plan shall be determined by the Committee as provided in Subparagraph 2(b) hereof.

6. Vesting of Options .

(a) Options granted under this Plan shall vest and the right of an Optionee to exercise an Option shall be nonforfeitable in accordance with, or otherwise no earlier than, as set forth in the following schedule:


Date When Such Options Become Vested	Percentage of Such Options Vested

Date of grant		0	%
First Anniversary of the date of grant		33 1/3	%
Second Anniversary of the date of grant		33 1/3	%
Third Anniversary of the date of grant		33 1/3	%

(b) In determining the number of shares of Common Stock under each Option vested under the above vesting schedule, an Optionee shall not be entitled to exercise an Option to purchase a fractional number of shares of the Common Stock. If the product resulting from multiplying the vested percentage times the Option results in a fractional number of shares of Common Stock, then an Optionee’s vested right shall be to the whole number of shares of Common Stock disregarding any fractional shares of Common Stock.

(c) In the event that the employment of an Optionee terminates for any reason, other than the Optionee’s disability, death, retirement, or following a “change in control” of the Company, the Optionee’s Options under this Plan shall be forfeited and shall be available again for grant to Eligible Employees as may be determined by the Committee. Such forfeiture shall apply whether or not any such Options have been vested.

(d) In the event that the employment of an Optionee should terminate because of such Optionee’s disability, death, or retirement, or following a “change in control” of the Company prior to the date when all Options allocated to the Optionee would be 100% vested in accordance with the applicable schedule in subparagraph 6(a) above, then, notwithstanding the foregoing schedule in subparagraph 6(a) above, all Options allocated to such Optionee shall immediately become fully vested and nonforfeitable. For purposes of this Plan, the term disability shall be defined in the same manner as such term is defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. When used in this Plan, the phrase “change in control” refers to (i) the acquisition by any person, group of persons or entity of the beneficial ownership or power to vote more than twenty-five (25%) percent of the Company’s outstanding stock, (ii) during any period of two (2) consecutive years, a change in the majority of the Board unless the election of each new Director was approved by at least two-thirds of the Directors then still in office who were Directors at the beginning of such two (2) year period, or (iii) a reorganization, merger, or consolidation of the Company with one or more other entities in which the Company is not the surviving entity, or the transfer of all or substantially all of the assets or shares of the Company to another person or entity. Notwithstanding anything else herein contained, a transaction or event shall not be considered a change in control if, prior to the consummation or occurrence of such transaction or event, the Optionee and the Company agree in writing that the same shall not be treated as a change in control for purposes of this Plan.

7. Option Price .

(a) The price per share of each Option granted under this Plan (hereinafter called the “Option Price”) shall be determined by the Committee as of the effective date of grant of such Option, but in no event shall the Option Price be less than 100% of the fair market value of Common Stock on the date of grant. If an Optionee (as hereinafter defined) at the time that an Option is granted owns stock possessing more than ten (10%) percent of the total combined voting power of all classes of stock of the Company, then the Option Price per share of each Option granted under this Plan shall be no less than 110% of the fair market value of Common Stock on the date of grant and such Option shall not be exercisable more than five (5) years from the date of grant. An Option shall be considered as granted on the date that the Committee acts to grant such Option or such later date as the Committee shall specify in an Option Agreement (as hereinafter defined).

as reported on the date as of which such determination is made; provided , however , that, if a closing sale price is not reported for such date, then the fair market value shall be equal to the closing sale price on the most recent trading day for which a closing sale price is available, or (ii) if on the date as of which such determination is made, no such closing sale prices are reported, but quotations for Common Stock are regularly listed on the National Association of Securities Dealers Automated Quotation System or another comparable system, the fair market value of a share of Common Stock shall be deemed to be equal to the arithmetic mean of the bid and asked prices for such Common Stock quoted on such system as reported for the date as of which such determination is made, but if bid and asked prices are not available for such date, then the fair market value shall be equal to the arithmetic mean of the bid and asked prices on the most recent trading day for which such prices are available, or (iii) if no such quotations are available, the fair market value of a share of Common Stock shall be deemed to be the average of the bid and asked prices furnished by a professional securities dealer making a market in such shares, as selected by the Committee, for the most recent trading date practicable. In the event that none of the foregoing methods can be applied to establish the fair market value of the Common Stock, the Board shall adopt a reasonable valuation method, which valuation method shall be documented in writing and shall take into consideration all available information material to the valuation of the Common Stock, and shall apply such valuation method in a reasonable manner to fix the fair market value of the Common Stock for the purposes of this Plan.

8. Payment of Option Price . Payment for shares subject to an Option may be made in cash or in issued and outstanding shares of Common Stock.

9. Terms and Conditions of Grant of Options . Each Option granted pursuant to this Plan shall be evidenced by a written Incentive Stock Option Agreement (hereinafter referred to as “Option Agreement”) with each Eligible Employee (hereinafter referred to as “Optionee”) to whom an Option is granted; such agreement shall be substantially in the form attached hereto as “Exhibit A,” unless the Committee shall adopt a different form and, in each case, may contain such other, different, or additional terms and conditions as the Committee may determine. The Option shall terminate as provided in paragraph 13 hereof. In addition to any further conditions provided herein and in the Option Agreement, the right of an Optionee to exercise the Option to purchase the Option Shares, either in whole or in part, shall be conditioned upon the completion by the Optionee of one (1) full year of service in the employment of the Company and/or the Bank following the date of grant of the Option.

10. Option Period . Each Option Agreement shall set forth a period during which such Option may be exercised (hereinafter referred to as the “Option Period”); provided , however , that the Option Period shall not exceed ten (10) years after the date of grant of such Option as specified in an Option Agreement.

11. Limitation on Grant of Incentive Stock Options . No one Optionee shall be granted more than 40% of the shares reserved for issuance under this Plan pursuant to the provisions of Paragraph 3 hereof. Moreover, notwithstanding any other provision of this Plan, if any person shall be granted an Option under this Plan which would cause such person’s “annual vesting amount” to exceed $100,000.00, then such Options as shall be found to exceed

$100,000.00 in “annual vesting amount” shall be treated as Options which are not qualified incentive stock options pursuant to section 422(d) of the Internal Revenue Code. With respect to any calendar year, a person’s “annual vesting amount” is the aggregate fair market value of stock subject to incentive stock options with respect to which such options are first exercisable during such calendar year. For purposes of the foregoing, the aggregate fair market value of stock with respect to which incentive stock options are first exercisable during any calendar year shall be determined by taking into account all such options granted to such person under all incentive stock option plans of the Company or those of the Bank.

12. Exercise of Incentive Stock Options . An Option shall be exercised by written notice to the Committee signed by an Optionee or by such other person as may be entitled to exercise such Option. In the exercise of an Option, the aggregate Option Price for the shares being purchased may be paid in cash or in issued and outstanding shares of Common Stock and must be accompanied by a notice of exercise. The written notice shall state the number of shares with respect to which an Option is being exercised and, shall either be accompanied by the payment of the aggregate Option Price for such shares or shall fix a date (not more than ten (10) business days from the date of such notice) by which the payment of the aggregate Option Price will be made. An Optionee shall not exercise an Option to purchase less than 100 shares, unless the Committee otherwise approves or unless the partial exercise is for the remaining shares available under such Option. A certificate or certificates for the shares of Common Stock purchased by the exercise of an Option shall be issued in the regular course of business subsequent to the exercise of such Option and the payment therefor. During the Option Period, no person entitled to exercise any Option granted under this Plan shall have any of the rights or privileges of a shareholder with respect to any shares of Common Stock issuable upon exercise of such Option, until certificates representing such shares shall have been issued and delivered and the individual’s name entered as a shareholder of record on the books of the Company for such shares.

13. Effect of Termination of Employment, Retirement, Disability or Death .

(a) In the event of the termination of employment of an Optionee either by reason of (i) being discharged for cause or (ii) termination of employment for a reason other than the Optionee’s death, retirement, disability, or following a “change in control” of the Company (as defined in Paragraph 6(d)), any Option or Options granted to the Optionee under this Plan, to the extent not previously exercised or expired, and regardless of any vesting pursuant to Paragraph 6 hereof, shall immediately terminate. The phrase “discharged for cause” shall include termination at the sole discretion of the Board because of such Optionee’s personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses), a final cease and desist order, or material breach of any provision of any employment agreement that such Optionee may have with the Company or the Bank.

(b) In the event of the termination of employment of an Optionee as a result of such Optionee’s retirement, all Options granted such Optionee shall vest and such

Optionee shall have the right to exercise an Option granted under this Plan, to the extent that it has not previously been exercised or expired, for a period of three (3) months after the date of retirement, but in no event may any Option be exercised later than the end of the Option Period provided in such Option Agreement in accordance with Paragraph 10 hereof. For purposes of this Plan, the term “retirement” shall mean, subject to Board approval in each instance, (i) termination of an Optionee’s employment under conditions which would constitute retirement under any tax qualified retirement plan maintained by the Company or any of its subsidiaries or (ii) attaining age 65.

(c) In the event of the termination of employment of an Optionee by reason of such Optionee’s disability, all Options granted such Optionee shall vest and such Optionee shall have the right to exercise an Option granted under this Plan, to the extent that it has not previously been exercised or expired, at any time within twelve (12) months after the last date on which such Optionee provides services as an officer or an employee of the Company or the Bank before being disabled, but in no event may any Option be exercised later than the end of the Option Period provided in such Option Agreement in accordance with Paragraph 10 hereof. For purposes of this Plan, the term “disability” shall be defined in the same manner as such term is defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended.

(d) Notwithstanding anything else herein, in the event that an Optionee should die (i) while employed by the Company or any of its subsidiaries, (ii) within three (3) months after retirement, (iii) within three (3) months after Optionee’s termination following a change in control, or (iv) within twelve (12) months after Optionee’s termination by reason of Optionee’s disability, any Option or Options granted to the Optionee under this Plan and not previously exercised or expired shall vest and shall be exercisable, according to their respective terms, by the personal representative of such Optionee or by any person or persons who acquired such Options by bequest or inheritance from such Optionee, notwithstanding any limitations placed on the exercise of such Options by this Plan or an Option Agreement, immediately in full and at any time within twelve (12) months after the date of death of such Optionee, but in no event may any Option be exercised later than the end of the Option Period provided in such Option Agreement in accordance with Paragraph 10 hereof. Any references herein to an Optionee shall be deemed to include any person entitled to exercise an Option under the terms of this Plan after the death of such Optionee under the terms of this Plan.

(e) In the event of the termination of employment of an Optionee following a “change in control” of the Company (as defined in Paragraph 6(d)), all Options granted such Optionee shall vest and such Optionee shall have the right to exercise any Option or Options granted to the Optionee under this Plan, to the extent they have not previously been exercised or expired, for a period of three (3) months after the date of termination, but in no event may any Option be exercised later than the end of the Option Period provided in such Option Agreement in accordance with Paragraph 10 hereof.

14. Effect of Plan on Employment Status . The fact that the Committee has granted an Option to an Optionee under this Plan shall not confer on such Optionee any right to employment with the Company or the Bank or to a position as an officer or an employee of the Company or the Bank, nor shall it limit the right of the Company or the Bank to remove such Optionee from any position held by the Optionee or to terminate the Optionee’s employment at any time.

15. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation .

(a) In the event of a change in the number of shares of Common Stock outstanding by reason of a stock dividend, stock split, recapitalization, reorganization, merger, exchange of shares, or other similar capital adjustment, prior to the termination of an Optionee’s rights under this Plan, equitable proportionate adjustments shall be made by the Committee in (i) the number and kind of shares which remain available under this Plan and (ii) the number, kind, and the Option Price of shares subject to unexercised Options under this Plan. The adjustments to be made shall be determined by the Committee and shall be consistent with such change or changes in the Company’s total number of outstanding shares; provided , however , that no adjustment shall change the aggregate Option Price for the exercise of Options granted under this Plan.

(b) The grant of Options under this Plan shall not affect in any way the right or power of the Company or its shareholders to make or authorize any adjustment, recapitalization, reorganization, or other change in the Company’s capital structure or its business, or any merger or consolidation of the Company, or to issue bonds, debentures, preferred or other preference stock ahead of or affecting Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of the Company’s assets or business.

(c) Except upon a “change in control” as defined in Paragraph 6(d) hereof, upon the effective date of the dissolution or liquidation of the Company, this Plan and any Options granted hereunder, shall terminate.

16. Non-Transferability . Any Option granted under this Plan shall not be assignable or transferable except, in the case of the death of an Optionee, by will or by the laws of descent and distribution. In the event of the death of an Optionee, the personal representative, the executor or the administrator of such Optionee’s estate, or the person or persons who acquired by bequest or inheritance the rights to exercise such Option, may exercise any Option or portion thereof to the extent not previously exercised by an Optionee or expired, in accordance with its terms and Subparagraph 13(d) hereof.

17. Tax Withholding . The employer of a person granted an Option under this Plan shall have the right to deduct or otherwise effect a withholding of any amount required by federal or state laws to be withheld with respect to the grant, exercise or the sale of stock acquired upon the exercise of an Option in order for the employer to obtain a tax deduction otherwise available as a consequence of such grant, exercise or sale, as the case may be.

18. Listing and Registration of Option Shares . Any Option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine, in its discretion, that the listing, registration, or qualification of the shares covered thereby upon

any securities exchange or under any state or federal law or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of shares thereunder, such Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Committee.

19. Exculpation and Indemnification . In connection with this Plan, no member of the Committee shall be personally liable for any act or omission to act in such person’s capacity as a member of the Committee, nor for any mistake in judgment made in good faith, unless arising out of, or resulting from, such person’s own bad faith, gross negligence, willful misconduct, or criminal acts. To the extent permitted by applicable law and regulation, the Company shall indemnify and hold harmless the members of the Committee, and each other officer or employee of the Company or of any subsidiary thereof to whom any duty or power relating to the administration or interpretation of this Plan may be assigned or delegated, from and against any and all liabilities (including any amount paid in settlement of a claim with the approval of the Board) and any costs or expenses (including counsel fees) incurred by such persons arising out of, or as a result of, any act or omission to act in connection with the performance of such person’s duties, responsibilities, and obligations under this Plan, other than such liabilities, costs, and expenses as may arise out of, or result from, the bad faith, gross negligence, willful misconduct, or criminal acts of such persons.

20. Amendment and Modification of the Plan . The Board may at any time and from time to time amend or modify this Plan (including the form of Option Agreement) in any respect consistent with applicable regulations; provided , however , that no amendment or modification shall be made that increases the total number of shares of Common Stock covered by this Plan or effects any change in the categories of persons who may receive Options under this Plan or materially increases the benefits accruing to Optionees under this Plan unless such change is approved by the requisite number of shareholders and otherwise in accordance with law. Any amendment or modification of this Plan shall not materially reduce the benefits under any Option theretofore granted to an Optionee under this Plan without the consent of such Optionee or the transferee thereof in the event of the death of such Optionee.

21. Termination and Expiration of the Plan . This Plan may be abandoned, suspended, or terminated at any time by the Board; provided , however , that abandonment, suspension, or termination of this Plan shall not affect any Options then outstanding under this Plan. No Option shall be granted pursuant to this Plan after ten (10) years from the effective date of this Plan as provided in Paragraph 22 hereof.

22. Effective Date; Shareholder Approval . This Plan shall not be effective until approved by the requisite number of shareholders at an annual or special meeting (the “Effective Date”) and otherwise in accordance with law.

23. Captions and Headings; Gender and Number . Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part hereof, and shall not serve as a basis for interpretation or in construction of this Plan. As used herein, the masculine gender shall include the feminine and neuter, the singular number the plural, and vice versa, whenever such meanings are appropriate.

24. Expenses of Administration of Plan . All costs and expenses incurred in the operation and administration of this Plan shall be borne by the Company or one or more of its subsidiaries.

25. Governing Law . Without regard to the principles of conflicts of laws, the laws of the State of North Carolina shall govern and control the validity, interpretation, performance, and enforcement of this Plan.

26. Inspection of Plan . A copy of this Plan, and any amendments thereto or modification thereof, shall be maintained by the Secretary of the Company and shall be shown to any proper person making inquiry about it.

STATE OF NORTH CAROLINA

COUNTY OF NEW HANOVER

EXHIBIT A

INCENTIVE STOCK OPTION AGREEMENT

THIS INCENTIVE STOCK OPTION AGREEMENT (hereinafter referred to as this “Agreement”) is made and entered into as of this day of , , between LIVE OAK BANCSHARES, INC., a North Carolina business corporation (hereinafter referred to as the “Company”), and a resident of County, North Carolina (hereinafter referred to as the “Optionee”).

WHEREAS, the Board of Directors of the Company (hereinafter referred to as the “Board”) has adopted the Live Oak Bancshares, Inc. Incentive Stock Option Plan (hereinafter referred to as the “Plan”) subject to approval by the Company’s shareholders; and

WHEREAS, the shareholders of the Company at an annual meeting duly called and held on , 2009, approved the Plan (the “Effective Date”); and

WHEREAS, the Plan provides that the Compensation Committee (hereinafter referred to as the “Committee”) of the Board will make available to certain officers and employees of the Company and its subsidiaries (the “Employer”) the right to purchase shares of the Company’s common stock (hereinafter referred to as “Common Stock”); and

WHEREAS, the Committee has determined that the Optionee should be granted an option to purchase shares of Common Stock under the Plan;

NOW, THEREFORE, the Company and the Optionee agree as follows:

1. Date of Grant of Option . The date of grant of the option granted under this Agreement is the day of , .

2. Grant of Option . Pursuant to the Plan, the Company grants to the Optionee the right (hereinafter referred to as the “Option”) to purchase from the Company all or any part of an aggregate of ( ) shares of Common Stock (hereinafter referred to as the “Option Shares”) which shall be authorized but unissued shares.

3. Vesting of Options .

(a) Periodic Vesting . Subject to subparagraphs 3(b) and 3(c) below, the Option shall vest and become exercisable in accordance with the following schedule:


Date When Such Options Become Vested	Percentage of Such Vested Options

Date of grant		0	%
First Anniversary of the date of grant		33 1/3	%
Second Anniversary of the date of grant		33 1/3	%
Third Anniversary of the date of grant		33 1/3	%

(b) Fractional Option Shares . In determining the number of Option Shares vested under the above vesting schedule, an Optionee shall not be entitled to exercise an Option for a fractional number of Option Shares. If the product resulting from multiplying the vested percentage times the allocated Option results in a fractional number of Option Shares, then the Optionee’s vested right shall be to the whole number of Option Shares, disregarding any fractional number.

(c) Accelerated Vesting . Notwithstanding paragraph 3(a) above, all Options previously not vested and subject to forfeiture shall become 100% vested and the right of the Optionee to exercise such Options shall become nonforfeitable upon the death, disability or retirement of the Optionee, or upon a “change in control” of the Company. For purposes of this Agreement, the term “disability” shall be defined in the same manner as such term is defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “Code”).

(d) Other Terminations of Employment . In the event any Optionee’s employment with the Company and/or the Bank terminates for any reason, other than the Optionee’s death, disability, retirement, or following a change in control of the Company, then the Optionee’s Options, to the extent unexercised, shall be forfeited and shall be available again for grant to other officers and employees as may be determined by the Committee. Such forfeiture shall apply whether or not any such options have vested.

4. Option Price . The price to be paid for the Option Shares shall be and /100 Dollars ($ ) per share (hereinafter referred to as the “Option Price”) which is the fair market value of the Option Shares as determined by the Committee as of the date of grant of this Option.

5. When and Extent to which Options may be Exercised . Subject to any further restrictions in this Agreement, the right of the Optionee to exercise the Option to purchase the Option Shares, either in whole or in part, shall be conditioned upon the completion by the Optionee of one (1) full year of service in the employment of the employer following the date of grant of the Option set forth in paragraph 1 hereof. At such time as the Option shall become exercisable in accordance with this Agreement, the Optionee, in his discretion, may exercise all or any portion of the Option, subject to paragraphs 3 and 7 hereof. The Option shall terminate as provided in paragraph 8 hereof.

6. Change in Control . When used herein, the phrase “change in control” refers to (i) the acquisition by any person, group of persons or entity of the beneficial ownership or power to vote more than twenty-five (25%) percent of the Company’s outstanding stock, (ii) during any period of two (2) consecutive years, a change in the majority of the Board unless the election of each new Director was approved by at least two-thirds of the Directors then still in office who were Directors at the beginning of such two (2) year period or (iii) a reorganization, merger, or consolidation of the Company with one or more other entities in which the Company is not the surviving entity, or the transfer of all or substantially all of the assets or shares of the Company to another person or entity. Notwithstanding anything else herein, a transaction or event shall not be considered a change in control if, prior to the consummation or occurrence of such transaction or event, the Optionee and the Company agree in writing that the same shall not be treated as a change in control for purposes of this Agreement.

7. Method of Exercise . The Option shall be exercised by written notice to the Committee signed by the Optionee or by such other person as may be entitled to exercise the Option. In the exercise of the Option, the aggregate Option Price for the shares being purchased may be paid in cash or in issued and outstanding shares of Common Stock and must be accompanied by a notice of exercise. The written notice shall state the number of shares with respect to which the Option is being exercised and, shall either be accompanied by the payment of the aggregate Option Price for such shares or shall fix a date (not more than ten (10) business days from the date of such notice) by which the payment of the aggregate Option Price will be made. The Optionee shall not exercise the Option to purchase less than one hundred (100) shares, unless the Committee otherwise approves or unless the partial exercise is for the remaining shares available under the Option. A certificate or certificates for the shares of Common Stock purchased by the exercise of the Option shall be issued in the regular course of business subsequent to the exercise of the Option and the payment therefor. During the Option Period, no person entitled to exercise the Option granted under this Agreement shall have any of the rights or privileges of a shareholder with respect to any shares of Common Stock issuable upon exercise of the Option, until certificates representing such shares shall have been issued and delivered and the individual’s name entered as a shareholder of record on the books of the Company for such shares.

8. Termination of Option . The Option shall terminate as follows:

(a) Except as provided in subparagraphs (b), (c), (d) and (e) below, the Option granted under this Agreement, to the extent that it has not been exercised or expired, and regardless of any vesting pursuant to paragraph 3 hereof, shall terminate on the earlier of (i) the date that the Optionee is discharged for cause, (ii) the date the Optionee gives notice that the Optionee terminates his or her employment with the employer for a reason other than retirement or disability or following a “change in control” of the Company or (iii) the date which is ten (10) years from the date of grant of the Option set forth in paragraph 1 hereof. Options which terminate within ten (10) years from the date of grant set forth in paragraph 1 shall be available again for grant to certain officers and employees as may be determined by the Committee. The phrase “discharged for cause” shall include termination at the sole discretion of the Board of Directors of the Employer of the Optionee because of the Optionee’s personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or a final cease and desist order, or material breach of any provision of any employment agreement that the Optionee may have with the Employer.

(b) In the event the Optionee retires prior to the date which is ten (10) years after the date of grant of the Option, the Optionee shall have the right to exercise the Option, to the extent that it has not been exercised by the Optionee or expired, immediately in full and at any time within three (3) months after the date of retirement, but in no event may the Option be exercised later than ten (10) years after the date of grant of the Option set forth in paragraph 1 hereof. For purposes of this Agreement, the term “retirement” shall mean, subject to Board approval in each instance, (i) termination of the Optionee’s employment under conditions which would constitute retirement under any tax qualified retirement plan maintained by the Employer or (ii) attaining age 65.

(c) In the event the Optionee becomes disabled prior to the date which is ten (10) years after the date of grant of the Option, the Optionee shall have the right to exercise the Option, to the extent that it has not been exercised by the Optionee or expired, notwithstanding any limitation placed on the exercise of the Option by the Plan or by this Agreement, immediately in full and at any time within twelve (12) months after the last date on which the Optionee provided services as an officer or an employee of the Employer before being disabled, but in no event may the Option be exercised later than ten (10) years after the date of grant of the Option set forth in paragraph 1 hereof. For purposes of this Agreement, the term “disability” shall be defined in the same manner as such term is defined in Section 22(e)(3) of the Code.

the executor or administrator of the Optionee’s estate, or any person or persons who acquired the Option by bequest or inheritance from the Optionee, notwithstanding any limitation placed on the exercise of the Option by the Plan or by this Agreement, immediately in full and at any time within twelve (12) months after the date of death of the Optionee, but in no event may the Option be exercised later than ten (10) years from the date of grant of the Option as set forth in paragraph 1 hereof.

(e) In the event the Optionee’s employment with the employer is terminated following a “change in control” of the Company, the Optionee shall have the right to exercise the Option, to the extent that it has not been exercised by the Optionee or expired, immediately in full and at any time within three (3) months after the date of termination, but in no event may the Option be exercised later than ten (10) years after the date of grant of the Options set forth in paragraph 1 hereof.

9. Effect of Agreement on Employment Status of Optionee . The fact that the Committee has granted the Option to the Optionee under this Agreement shall not confer on the Optionee any right to employment with the employer or to a position as an officer or an employee of the employer, nor shall it limit the right of the employer to remove the Optionee from any position held by the Optionee or to terminate his or her employment at any time.

10. Listing and Registration of Option Shares .

(a) The Company’s obligation to issue shares of Common Stock upon exercise of the Option is expressly conditioned upon (i) the completion by the Company of any registration or other qualification of such shares under any state or federal law or regulations or rulings of any government regulatory body or (ii) the making of such investment representations or other representations and agreements by the Optionee or any person entitled to exercise the Option in order to comply with the requirements of any exemption from any such registration or other qualification of the Option Shares which the Committee shall, in its sole discretion, deem necessary or advisable. Notwithstanding the foregoing, the Company shall be under no obligation to register or qualify the Option Shares under any state or federal law. The required representations and agreements referenced above may include representations and agreements that the Optionee, or any other person entitled to exercise the Option, (i) is purchasing such shares on his or her own behalf as an investment and not with a present intention of distribution or re-sale and (ii) agrees to have placed upon any certificates representing the Option Shares a legend setting forth any representations and agreements which have been given to the Committee or a reference thereto and stating that such shares may not be transferred except in accordance with all applicable state and federal securities laws and regulations, and further representing that, prior to making any sale or other disposition of the Option Shares, the Optionee, or any other person entitled to exercise the Option, will give the Company notice of the intention to sell or dispose of such shares not less than five (5) days prior to such sale or disposition.

11. Adjustment Upon Change in Capitalization; Dissolution or Liquidation .

(a) In the event of a change in the number of shares of Common Stock outstanding by reason of a stock dividend, stock split, recapitalization, reorganization, merger, exchange of shares, or other similar capital adjustment, prior to the termination of the Optionee’s rights under this Agreement, equitable proportionate adjustments shall be made by the Committee in the number, kind, and the Option Price of shares subject to the unexercised portion of the Option granted under this Agreement. The adjustments to be made shall be determined by the Committee and shall be consistent with such change or changes in the Company’s total number of outstanding shares; provided , however , that no adjustment shall change the aggregate Option Price for the exercise of the Option granted under this Agreement.

(b) The grant of the Option under this Agreement shall not affect in any way the right or power of the Company or its shareholders to make or authorize any adjustment, recapitalization, reorganization, or other change in the Company’s capital structure or its business, or any merger or consolidation of the Company, or to issue bonds, debentures, preferred or other preference stock ahead of or affecting Common Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of the Company’s assets or business.

(c) Except upon a change in control as set forth in paragraph 6 hereof, upon the effective date of the dissolution or liquidation of the Company, the Option granted under this Agreement shall terminate.

12. Nontransferability . The Option granted under this Agreement shall not be assignable or transferable except, in the event of the death of the Optionee, by will or by the laws of descent and distribution. In the event of the death of the Optionee, the personal representative, the executor or the administrator of the Optionee’s estate, or the person or persons who acquired by bequest or inheritance the right to exercise the Option may exercise the unexercised Option or a portion thereof, in accordance with the terms of this Agreement, prior to the date which is ten (10) years after the date of grant of Option as set forth in paragraph 1 hereof.

13. Notices . Any notice or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been sufficiently given when delivered personally or when deposited in the United States mail as Certified Mail, return receipt requested, properly addressed with postage prepaid, if to the Company at its principal office at 2605 Iron Gate Drive, Suite 104, Wilmington, North Carolina 28412; and, if to the Optionee to his or her last address appearing on the books of the Employer. The Employer and the Optionee may change their address or addresses by giving written notice of such change as provided herein. Any notice or other communication hereunder shall be deemed to have been given on the date actually delivered or as of the third (3rd) business day following the date mailed, as the case may be.

14. Construction Controlled by Plan . This Agreement shall be construed so as to be consistent with the Plan; and the provisions of the Plan shall be deemed to be controlling in the event that any provision hereof should appear to be inconsistent therewith. The Optionee hereby acknowledges receipt of a copy of the Plan from the Company.

15. Severability . Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be valid and enforceable under applicable law, but if any provision of this Agreement is determined to be unenforceable, invalid or illegal, the validity of any other provisions or part thereof, shall not be affected thereby and this Agreement shall continue to be binding on the parties hereto as if such unenforceable, invalid or illegal provision or part thereof had not been included herein.

16. Modification of Agreement; Waiver . This Agreement may be modified, amended, suspended, or terminated, and any terms, representations or conditions may be waived, but only by written instrument signed by each of the parties hereto. No waiver hereunder shall constitute a waiver with respect to any subsequent occurrence or other transaction hereunder or of any other provision hereof.

17. Captions and Headings; Gender and Number . Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part hereof, and shall not serve as a basis for interpretation or in construction of this Agreement. As used herein, the masculine gender shall include the feminine and neuter, the singular number the plural, and vice versa, whenever such meanings are appropriate.

18. Governing Law; Venue and Jurisdiction . Without regard to the principles of conflicts of laws, the laws of the State of North Carolina shall govern and control the validity, interpretation, performance, and enforcement of this Agreement. The parties hereto agree that any suit or action relating to this Agreement shall be instituted and prosecuted in the courts of the County of New Hanover, State of North Carolina, and each party hereby does waive any right or defense relating to such jurisdiction and venue.

19. Binding Effect . This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon and inure to the benefit of the Optionee, his heirs, legatees, personal representatives, executors, and administrators.

20. Entire Agreement . This Agreement constitutes and embodies the entire understanding and agreement of the parties hereto and, except as otherwise provided hereunder, there are no other agreements or understandings, written or oral, in effect between the parties hereto relating to the matters addressed herein.

21. Counterparts . This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed an original, but all of which taken together shall constitute one and the same instrument.

IN WITNESS WHEREOF , the Company, has caused this instrument to be executed in its corporate name by its President, or one of its Vice Presidents, and attested by its Secretary or one of its Assistant Secretaries, and its corporate seal to be hereto affixed, all by authority of its Board of Directors first duly given, and the Optionee has hereunto set his or her hand and adopted as his or her seal the typewritten word “SEAL” appearing beside his or her name, all done this the day and year first above written.


LIVE OAK BANCSHARES, INC.

By:

ATTEST:




, Corporate Secretary

[CORPORATE SEAL]


OPTIONEE

By:				(SEAL)

EXHIBIT A

NOTICE OF EXERCISE OF

INCENTIVE STOCK OPTION

To:

The Compensation Committee of the Board of Directors of

Live Oak Bancshares, Inc.

The undersigned hereby elects to purchase whole shares of Common Stock of Live Oak Bancshares, Inc. (the “Company”) pursuant to the Incentive Stock Option granted to the undersigned in that certain Incentive Stock Option Agreement between the Company and the undersigned dated the day of , . The aggregate purchase price for such Shares is $ , which amount is (i) being tendered herewith, (ii) will be tendered on or before , (cross out provision which does not apply) in cash. The effective date of this election shall be , , or the date of receipt of this Notice by the Company if later.

Executed this day of , , at .

(Social Security Number)

Exhibit 10.2

LIVE OAK BANCSHARES, INC .

NONSTATUTORY STOCK OPTION PLAN

Live Oak Bancshares, Inc., a North Carolina business corporation (hereinafter referred to as the “Company”), does herein set forth the terms of the Live Oak Bancshares, Inc. Nonstatutory Stock Option Plan (hereinafter referred to as this “Plan”), which was adopted by the Board of Directors (hereinafter referred to as the “Board”) of the Company subject to shareholder approval as provided in paragraph 21 hereof.

1. Purpose of this Plan . The purpose of this Plan is to provide for the grant of Nonstatutory Stock Options (hereinafter referred to as “Options” or singularly, “Option”) to Eligible Directors (as hereinafter defined) of the Company who wish to invest in the Company’s common stock (hereinafter referred to as “Common Stock”). The Board believes that participation in the ownership of the Company by the Eligible Directors will be to the mutual benefit of the Company and the Eligible Directors. In addition, the existence of this Plan will make it possible for the Company to attract capable individuals to serve on the Board. As used herein, the term “Eligible Directors” or singularly, “Eligible Director,” shall mean members of the Board of Directors of the Company serving at the time of adoption of this Plan or who may serve thereon from time to time and those individuals holding the title “Director Emeritus” as conferred at the election of the board.

2. Administration of this Plan.

(a) This Plan shall be administered by the Board. The Board shall have full power and authority to construe, interpret and administer this Plan. All actions, decisions, determinations, or interpretations of the Board shall be final, conclusive, and binding upon all parties.

(b) The Board may designate any officers or employees of the Bank or of any of its subsidiaries to assist in the administration of this Plan. The Board may authorize such individuals to execute documents on its behalf and may delegate to them such other ministerial and limited discretionary duties as the Board may see fit.

3. Shares of Common Stock Subject to this Plan . The maximum number of shares of Common Stock that shall be offered under this Plan is ONE HUNDRED TWENTY-FIVE THOUSAND (125,000) shares, subject to adjustment as provided in paragraph 14. Shares subject to Options which expire or terminate prior to the issuance of the shares of Common Stock shall lapse and the shares of Common Stock originally subject to such Options shall again be available for future grants of Options under this Plan.

4. Eligibility; Grant of Options . Each Eligible Director serving on the Board shall receive an Option to purchase shares of Common Stock in the amount as shall be determined by the Board of Directors by a majority vote. Any Options not granted hereby may be reserved for future issuance by a majority vote of the entire Board.

5. Vesting of Options .

(a) Options granted under this Plan shall vest and the right of an Eligible Director to exercise an Option shall be nonforfeitable in accordance with the following schedule:


Date When Such Options Become Vested	Percentage of Such Options Vested

Date of grant		0	%
First Anniversary of the date of grant		33 1/3	%
Second Anniversary of the date of grant		33 1/3	%
Third Anniversary of the date of grant		33 1/3	%

(b) In determining the number of shares of Common Stock under each Option vested under the above vesting schedule, an Eligible Director shall not be entitled to exercise an Option to purchase a fractional number of shares of the Common Stock. If the product resulting from multiplying the vested percentage times the Option results in a fractional number of shares of Common Stock, then an Eligible Director’s vested right shall be to the whole number of shares of Common Stock disregarding any fractional shares of Common Stock.

(c) In the event that the directorship of an Eligible Director is terminated for “cause,” such Eligible Director’s Options under this Plan shall be forfeited and shall be available again for grant to Eligible Directors as may be determined by the Committee. Such forfeiture shall apply whether or not any such Options have been vested.

(d) In the event that the directorship of an Eligible Director should terminate for any reason other than for “cause,” retirement (including retirement and designation as “director emeritus”), disability, death or following a “change in control” of the Company prior to the date when all Options allocated to the Eligible Director would be 100% vested in accordance with the applicable schedule in Paragraph 3(a) hereof, the Eligible Director may exercise any vested Options and all Options not already vested shall be forfeited and shall be available again for grant to Eligible Directors as may be determined by the Board.

(e) In the event that the directorship of an Eligible Director with the Company should terminate because of such Eligible Director’s disability, death, or retirement, or following a “change in control” of the Company, as such terms are defined in paragraph 12 hereof, prior to the date when all Options allocated to the Eligible Director would be 100% vested in accordance with the applicable schedule in paragraph 5(a) above, then, notwithstanding the foregoing schedule in paragraph 5(a) above, all Options allocated to such Eligible Director shall immediately become fully vested and nonforfeitable.

6. Option Price .

(a) The price per share of each Option granted under this Plan (hereinafter called the “Option Price”) shall be determined by the Board as of the effective date of grant of such Option, but in no event shall such Option Price be less than 100% of the fair market value

of Common Stock on the date of grant. An Option shall be considered as granted on the later of (i) the date that the Board acts to grant such Option, or (ii) such later date as the Board shall specify in an Option Agreement (as hereinafter defined).

(b) The fair market value of a share of Common Stock shall be determined as follows: (i) if on the date as of which such determination is being made, Common Stock being valued is admitted to trading on a securities exchange or exchanges for which actual sale prices are regularly reported, or actual sale prices are otherwise regularly published, the fair market value of a share of Common Stock shall be deemed to be equal to the closing sale price as reported on the date as of which such determination is made; provided , however , that, if a closing sale price is not reported for such date, then the fair market value shall be equal to the closing sale price on the most recent trading day for which a closing sale price is available, or (ii) if on the date as of which such determination is made, no such closing sale prices are reported, but quotations for Common Stock are regularly listed on the National Association of Securities Dealers Automated Quotation System or another comparable system, the fair market value of a share of Common Stock shall be deemed to be equal to the arithmetic mean of the bid and asked prices for such Common Stock quoted on such system as reported for the date as of which such determination is made, but if bid and asked prices are not available for such date, then the fair market value shall be equal to the arithmetic mean of the bid and asked prices on the most recent trading day for which such prices are available, or (iii) if no such quotations are available, the fair market value of a share of Common Stock shall be deemed to be the average of the bid and asked prices furnished by a professional securities dealer making a market in such shares, as selected by the Board, for the most recent trading date practicable. In the event that none of the foregoing methods can be applied to establish the fair market value of the Common Stock, the Board shall adopt a reasonable valuation method, which valuation method shall be documented in writing and shall take into consideration all available information material to the valuation of the Common Stock, and shall apply such valuation method in a reasonable manner to fix the fair market value of the Common Stock for the purposes of this Plan.

7. Payment of Option Price . Payment for shares subject to an Option may only be made in cash or in issued and outstanding shares of Common Stock.

8. Terms and Conditions of Grant of Options . Each Option granted pursuant to this Plan shall be evidenced by a written Nonstatutory Stock Option Agreement (hereinafter referred to as “Option Agreement”) with each Eligible Director (hereinafter referred to as “Eligible Director”) to whom an Option is granted; such agreement shall be substantially in the form attached hereto as “Exhibit A,” unless the Board shall adopt a different form and, in each case, may contain such other, different, or additional terms and conditions as the Board may determine. The Option shall terminate as provided in paragraph 12 hereof.

9. Option Period . Each Option Agreement shall set forth a period during which such Option may be exercised (hereinafter referred to as the “Option Period”); provided , however , that the Option Period shall not exceed ten (10) years after the date of grant of such Option as specified in an Option Agreement.

10. Limitation on Grant of Stock Options .

(a)

No one individual shall be granted Options under this Plan in excess of 40% of the shares reserved for issuance pursuant to Paragraph 3 hereof.

(b)

No one individual shall be granted Options under this Plan in excess of the number of shares subscribed by such Eligible Director during the organization of the Company.

11. Exercise of Options . An Option shall be exercised by written notice to the Board signed by an Eligible Director or by such other person as may be entitled to exercise such Option. In the case of the exercise of an Option, the aggregate Option Price for the shares being purchased may be paid in cash or in issued and outstanding shares of Common Stock and must be accompanied by a notice of exercise. The written notice shall state the number of shares with respect to which an Option is being exercised and shall either be accompanied by the payment of the aggregate Option Price for such shares or shall fix a date (not more than ten (10) business days after the date of such notice) by which the payment of the aggregate Option Price will be made. An Eligible Director shall not exercise an Option to purchase less than 100 shares, unless the Board otherwise approves or unless the partial exercise is for the remaining shares available under such Option. A certificate or certificates for the shares of Common Stock purchased by the exercise of an Option shall be issued in the regular course of business subsequent to the exercise of such Option and the payment therefor. During the Option Period, no person entitled to exercise any Option granted under this Plan shall have any of the rights or privileges of a shareholder with respect to any shares of Common Stock issuable upon exercise of such Option, until certificates representing such shares shall have been issued and delivered and the individual’s name entered as a shareholder of record on the books of the Company for such shares.

12. Effect of Leaving the Board .

(a) In the event that an Eligible Director is removed from the Board for “cause” (as defined in the Company’s Articles of Incorporation) any Option granted to the Eligible Director under this Plan, to the extent not previously exercised by the Eligible Director or expired, and regardless of any vesting pursuant to Paragraph 5 hereof, shall immediately terminate and shall be available again for the granting of additional options to Eligible Directors during the remaining term of this Plan upon such terms and conditions as may be determined by the Board.

(b) In the event that an Eligible Director should leave the Board for any reason other than for “cause,” retirement, disability, death or following a “change in control” of the Company (as defined in Paragraph 12(f) hereof), such Eligible Director shall have the right to exercise any vested Option granted to the Eligible Director under this Plan, to the extent such Options have not been previously exercised by the Eligible Director or expired, for a period of not more than ninety (90) days following the effective date that the Eligible Director leaves the Board but in no event may any option be exercised later than the end of the Option Period provided in the Option Agreement in accordance with Paragraph 9 hereof.

(c) In the event that an Eligible Director should leave the Board as a result of such Eligible Director’s retirement, such Eligible Director shall have the right to exercise all Options granted to the Eligible Director under this Plan, to the extent such Options have not been previously exercised by the Eligible Director or expired, for a period of not more than ninety (90) days following the effective date that the Eligible Director leaves the Board but in no event may any option be exercised later than the end of the Option Period provided in the Option Agreement in accordance with Paragraph 9 hereof. For purposes of this Plan, the term “retirement” shall mean termination of an Eligible Director’s membership on the Board (i) at any time after attaining age 65 with the approval of the Board; or (ii) at the election of the Eligible Director, at any time after not less than three (3) years service as a member of the Board, such service shall be computed cumulatively for purposes of this clause (ii).

(d) In the event that an Eligible Director should leave the Board as a result of such Eligible Director’s retirement and designation by the Board as a “director emeritus,” all Options granted such Eligible Director shall vest and such Eligible Director shall have the right to exercise any Option granted under this Plan, to the extent that it has not previously been exercised by the Eligible Director or expired, at any time after such Eligible Director’s retirement but in no event may any option be exercised later than the end of the Option Period provided in the Option Agreement in accordance with Paragraph 9 hereof. For purposes of this Plan, an Eligible Director shall be designated a “director emeritus” without further action from the Board if such Eligible Director retires and has both (i) attained the age of 65 and (ii) served as a member of the Board for not less than three (3) years, such service being computed cumulatively for purposes of this clause (ii).

(e) In the event that an Eligible Director should leave the Board by reason of such Eligible Director’s disability, such Eligible Director shall have the right to exercise an Option granted under this Plan, to the extent that it has not previously been exercised or expired, for such period of time as may be determined by the Board and specified in an Option Agreement, but in no event may any Option be exercised later than the end of the Option Period provided in the Option Agreement in accordance with Paragraph 9 hereof. For purposes of this Plan, the term “disability” shall be defined as may be determined by the Board, from time to time, or as determined at any time with respect to any individual Eligible Director.

(f) In the event that an Eligible Director should die while serving on the Board or after leaving by reason of disability or retirement or following a “change in control” during the Option Period provided in an Option Agreement in accordance with Paragraph 9 hereof, an Option granted under this Plan, to the extent that it has not previously been exercised or expired, shall be exercisable, in accordance with its terms, by the personal representative of such Eligible Director, the executor or administrator of such Eligible Director’s estate, or by any person or persons who acquired such Option by bequest or inheritance from such Eligible Director, notwithstanding any limitations placed on the exercise of such Option by this Plan or an Option Agreement, at any time within twelve (12) months after the date of death of such Eligible Director, but in no event may an Option be exercised later than the end of the Option Period provided in an Option Agreement in accordance with Paragraph 9 hereof. Any references herein to an Eligible Director shall be deemed to include any person entitled to exercise an Option after the death of such Eligible Director under the terms of this Plan.

(g) In the event an Eligible Director shall leave the Board as a result of a “change in control” of the Company, such Eligible Director shall have the right to exercise the Option granted under this Plan, to the extent that it has not previously been exercised by the Eligible Director or expired, for such period of time as may be determined by the Board as specified in an Option Agreement, but in no event may any Option be exercised later than the end of the Option Period provided in the Option Agreement in accordance with Paragraph 9 hereof. For purposes of this Plan, the phrase “change in control” refers to (i) the acquisition by any person, group of persons or entity of the beneficial ownership or power to vote more than twenty-five percent (25%) of the Company’s outstanding stock, (ii) during any period of two (2) consecutive years, a change in the majority of the Board unless the election of each new Director was approved by at least two-thirds of the Directors then still in office who were Directors at the beginning of such two (2) year period, or (iii) a reorganization, merger, or consolidation of the Company with one or more other entities in which the Company is not the surviving entity, or the transfer of all or substantially all of the assets or shares of the Company to another person or entity.

Notwithstanding anything else herein, for purposes of this Plan the term “change in control” shall not include a transaction approved by the Board which results in the Company merging with, transferring its assets to or becoming the subsidiary of a corporation newly formed at the direction of the Board for the purpose of such transaction or serving as a bank holding company for the Company, and in connection with which transaction the Company’s shareholders (other than those who exercise statutory rights of dissent and appraisal) become the holders of substantially all of the voting stock of such corporation. Further, notwithstanding anything else herein, a transaction or event shall not be considered a change in control if, prior to the consummation or occurrence of such transaction or event, the Eligible Director and the Company agree in writing that the same shall not be treated as a change in control for purposes of this Plan.

13. Effect of Plan on Status as Member of a Board . The fact that an Eligible Director has been granted an Option under this Plan shall not confer on such Eligible Director any right to continued service on the Board, nor shall it limit the right of the Company to remove such Eligible Director from the Board at any time in accordance with applicable federal and/or state law.

14. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation .

(a) In the event of a change in the number of shares of Common Stock outstanding by reason of a stock dividend, stock split, recapitalization, reorganization, merger, exchange of shares, or other similar capital adjustment prior to the termination of an Eligible Director’s rights under this Plan, equitable proportionate adjustments shall be made by the Board in (i) the number and kind of shares which remain available under this Plan, and (ii) the number, kind, and the Option Price of shares subject to the unexercised portion of an Option under this Plan. The adjustments to be made shall be determined by the Board and shall be consistent with

such change or changes in the Company’s total number of outstanding shares; provided , however , that no adjustment shall change the aggregate Option Price for the exercise of Options granted under this Plan.

(c) Except upon a “change in control”, upon the effective date of the dissolution or liquidation of the Company, this Plan and any Options granted hereunder, shall terminate.

15. Non-Transferability . An Option granted under this Plan shall not be assignable or transferable except, in the event of the death of an Eligible Director, by will or by the laws of descent and distribution. In the event of the death of an Eligible Director, his personal representative, the executor or the administrator of such Eligible Director’s estate, or the person or persons who acquired by bequest or inheritance the rights to exercise such Options, may exercise any Option or portion thereof to the extent not previously exercisable or surrendered by an Eligible Director or expired, in accordance with its terms, prior to the expiration of the exercise period as specified in subparagraph 12(e) hereof.

16. Tax Withholding . The Company or any of its subsidiaries shall have the right to deduct or otherwise effect a withholding of any amount required by federal or state laws to be withheld with respect to the grant, exercise or the sale of stock acquired upon the exercise of an Option in order for the Company or any of its subsidiaries to obtain a tax deduction otherwise available as a consequence of such grant, exercise or sale, as the case may be.

17. Listing and Registration of Option Shares . Any Option granted under this Plan shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that the listing, registration, or qualification of the shares covered thereby upon any securities exchange or under any state or federal law or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of shares thereunder, such Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Board.

18. Exculpation and Indemnification . In connection with this Plan, no member of the Board shall be personally liable for any act or omission to act in such person’s capacity as a member of the Board, nor for any mistake in judgment made in good faith, unless arising out of, or resulting from, such person’s own bad faith, gross negligence, willful misconduct, or criminal acts. To the extent permitted by applicable law and regulation, the Company shall indemnify and hold harmless the members of the Board, and each other officer or employee of the

Company or of any of its subsidiaries to whom any duty or power relating to the administration or interpretation of this Plan may be assigned or delegated, from and against any and all liabilities (including any amount paid in settlement of a claim with the approval of the Board) and any costs or expenses (including counsel fees) incurred by such persons arising out of or as a result of, any act or omission to act in connection with the performance of such person’s duties, responsibilities, and obligations under this Plan, other than such liabilities, costs, and expenses as may arise out of, or result from, the bad faith, gross negligence, willful misconduct, or criminal acts of such persons.

19. Amendment and Modification of this Plan . The Board may at any time, and from time to time, amend or modify this Plan (including the form of Option Agreement) in any respect consistent with applicable regulations; provided , however , that no amendment or modification shall be made that increases the total number of shares covered by this Plan or effects any change in the category of persons who may receive Options under this Plan or materially increases the benefits accruing to Eligible Directors under this Plan unless such change is approved by the requisite number of shareholders and otherwise in accordance with law. Any amendment or modification of this Plan shall not materially reduce the benefits under any Option theretofore granted to an Eligible Director under this Plan without the consent of such Eligible Director or the transferee in the event of the death of such Eligible Director.

20. Termination and Expiration of this Plan . This Plan may be abandoned, suspended, or terminated at any time by the Board; provided , however , that abandonment, suspension, or termination of this Plan shall not affect any Options then outstanding under this Plan. No Option shall be granted pursuant to this Plan after ten (10) years from the effective date of this Plan as provided in paragraph 21 hereof.

21. Effective Date; Shareholder Approval; Regulatory Approval . This Plan shall not be effective until approved by the requisite number of shareholders at an annual or special shareholders’ meeting (the “Effective Date”) and otherwise in accordance with law.

22. Captions and Headings; Gender and Number . Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part hereof, and shall not serve as a basis for interpretation or in construction of this Plan. As used herein, the masculine gender shall include the feminine and neuter, the singular number, the plural, and vice versa, whenever such meanings are appropriate.

23. Expenses of Administration of Plan . All costs and expenses incurred in the operation and administration of this Plan shall be borne by the Company or by one of its subsidiaries.

24. Governing Law . Without regard to the principles of conflicts of laws, the laws of the State of North Carolina shall govern and control the validity, interpretation, performance, and enforcement of this Plan.

25. Inspection of Plan . A copy of this Plan, and any amendments thereto or modifications thereof, shall be maintained by the Secretary of the Company and shall be shown to any proper person making inquiry about it.


STATE OF NORTH CAROLINA		EXHIBIT A

COUNTY OF NEW HANOVER

NONSTATUTORY STOCK OPTION AGREEMENT

THIS NONSTATUTORY STOCK OPTION AGREEMENT (hereinafter referred to as this “Agreement”) is made and entered into as of this day of , , between LIVE OAK BANCSHARES, INC., a North Carolina business corporation (hereinafter referred to as the “Company”), and , a resident of County, North Carolina (hereinafter referred to as the “Eligible Director”).

WHEREAS, the Board of Directors of the Company (hereinafter referred to as the “Board”) has adopted the Live Oak Bancshares, Inc. Nonstatutory Stock Option Plan (hereinafter referred to as the “Plan”) subject to approval by the Company’s shareholders as provided in the Plan; and

WHEREAS, the shareholders of the Company at an annual meeting duly called and held on , 2009, approved the Plan (the “Effective Date”); and

WHEREAS, the Plan provides that the Compensation Committee (hereinafter referred to as the “Committee”) will make available to the Eligible Directors (as defined in the Plan) of the Company, the right to purchase shares of the Company’s common stock (hereinafter referred to as “Common Stock”); and

WHEREAS, the Board has determined that the Eligible Director is entitled to purchase shares of Common Stock under the Plan;

NOW, THEREFORE, the Company and the Eligible Director agree as follows:

1. Date of Grant of Option . The date of grant of the option granted under this Agreement is the day of , .

2. Grant of Option . Pursuant to the Plan, the Company grants to the Eligible Director the right (hereinafter referred to as the “Option”) to purchase from the Company all or a portion of an aggregate number of ( ) shares of Common Stock (hereinafter referred to as the “Option Shares”) which shall be authorized but unissued shares.

3. Vesting of Options .

(a) Options granted under this Plan shall vest and the right of an Eligible Director to exercise an Option shall be nonforfeitable, except as otherwise provided in this Agreement or the Plan, in accordance with the following schedule:


Date When Such Options Become Vested	Percentage of Such Options Vested

Date of grant		0	%
First Anniversary of the date of grant		33 1/3	%
Second Anniversary of the date of grant		33 1/3	%
Third Anniversary of the date of grant		33 1/3	%

(c) In the event that the directorship of an Eligible Director is terminated for “cause,” such Eligible Director’s Options under this Plan shall be forfeited and shall be available again for grant to Eligible Employees as may be determined by the Committee. Such forfeiture shall apply whether or not any such Options have been vested.

(d) In the event that the directorship of an Eligible Director with the Company should terminate for any reason other than for “cause,” retirement (including retirement and designation as “director emeritus”), disability, death or following a “change in control” of the Company prior to the date when all Options allocated to the Eligible Director would be 100% vested in accordance with the applicable schedule in Paragraph 3(a) hereof, the Eligible Director may exercise any vested Options and all Options not already vested shall be forfeited and shall be available again for grant to Eligible Directors as may be determined by the Board.

(e) In the event that the directorship of an Eligible Director with the Company should terminate because of such Eligible Director’s disability, death, or retirement, or following a “change in control” of the Company prior to the date when all Options allocated to the Eligible Director would be 100% vested in accordance with the applicable schedule in Paragraph 3(a) above, then, notwithstanding the foregoing schedule in Paragraph 3(a) above, all Options allocated to such Eligible Director shall immediately become fully vested and nonforfeitable. For purposes of this Agreement, the terms “disability,” “retirement,” “director emeritus” and “change in control” have the same meanings as they have in the Plan. Notwithstanding anything else contained in this Agreement and in the Plan, a transaction or event shall not be considered a “change in control” if, prior to the consummation or occurrence of such transaction or event, the Eligible Director and the Company agree in writing that the same shall not be treated as a change in control for purposes of this Agreement and the Plan.

4. Option Price . The price to be paid for the Option Shares shall be Dollars ($ ) per share (hereinafter referred to as the “Option Price”) which is the fair market value of the Option Shares as determined by the Board as of the date of grant of this Option.

5. When and Extent to Which Options may be Exercised . At such time as the Option shall become exercisable in accordance with this Agreement, the Eligible Director, in his discretion, may exercise all or any portion of the Option, subject to paragraph 6 hereof. The Option shall terminate as provided in paragraph 7 hereof. Furthermore, Options granted pursuant to this Plan shall be subject to the right of the North Carolina Commissioner of Banks (the “Commissioner”) and the Federal Deposit Insurance Corporation (the “FDIC”) to direct the Company to require an Eligible Director to exercise or forfeit his or her stock rights if the Company’s capital falls below the minimum requirements, as determined by the Commissioner or the FDIC.

6. Method of Exercise . The Option shall be exercised by written notice to the Board signed by the Eligible Director or by such other person as may be entitled to exercise the Option. In the exercise of the Option, the aggregate Option Price for the shares being purchased may only be paid in cash and must be accompanied by a notice of exercise. The written notice shall state the number of shares with respect to which the Option is being exercised and, shall either be accompanied by the payment of the aggregate Option Price for such shares or shall fix a date (not more than ten (10) business days after the date of such notice) by which the payment of the aggregate Option Price will be made. The Eligible Director shall not exercise the Option to purchase less than 100 shares, unless the Board otherwise approves or unless the partial exercise is for the remaining shares available under the Option. A certificate or certificates for the shares of Common Stock purchased by the exercise of the Option shall be issued in the regular course of business subsequent to the exercise of the Option and the payment therefor. Neither the Eligible Director, nor any other person who may be entitled to exercise the Option, shall have any of the rights or privileges of a shareholder with respect to any shares of Common Stock issuable upon exercise of the Option, until certificates representing such shares shall have been issued and delivered and the individual’s name entered as a shareholder of record on the books of the Company for such shares.

7. Termination of Option . The Option shall terminate, and shall thereupon be available again for grant to Eligible Directors as may be determined by the Board, as follows:

(a) Except as provided in subparagraphs (b), (c), (d), (e) and (f) below, the Option, to the extent that it has not been exercised or expired, shall terminate on the earlier of (i) the date the Eligible Director is removed from the Board for “cause” or (ii) the date which is ten (10) years after the date of grant of the Option as set forth in paragraph 1 hereof.

(b) In the event that an Eligible Director should leave the Board for any reason other than for “cause,” retirement, disability, death or following a “change in control” of the Company, such Eligible Director shall have the right to exercise any vested Option granted to the Eligible Director under this Plan, to the extent such Options have not been previously exercised by the Eligible Director or expired, for a period of not more than ninety (90) days following the effective date that the Eligible Director leaves the Board but in no event may any option be exercised later than the date which is ten (10) years after the date of grant of the Option as set forth in paragraph 1 hereof.

(c) In the event the Eligible Director retires prior to the date which is ten (10) years after the date of grant of the Option as set forth in paragraph 1 hereof, the Eligible Director shall have the right to exercise all Options, to the extent not exercised or expired, for a period of ninety (90) days from the effective date of retirement.

(d) In the event the Eligible Director retires and is designated a “director emeritus” prior to the date which is ten (10) years after the date of grant of the option as set forth in paragraph 1 hereof, the Eligible Director shall have the right to exercise all Options, to the extent not exercised or expired, for the remainder of such ten (10) year period.

(e) In the event the Eligible Director leaves the Board by reason of such Eligible Director’s disability prior to the date which is ten (10) years after the date of grant of the Option as set forth in paragraph 1 hereof, the Eligible Director shall have the right to exercise all Options, to the extent not exercised by him or expired, for the remainder of such ten (10) year period.

(f) In the event the Eligible Director dies while serving on the Board or after his or her retirement or after his or her leaving by reason of disability or following a change in control and prior to the date which is ten (10) years after the date of grant of the Option as set forth in paragraph 1 hereof, all Options, to the extent not exercised by the Eligible Director or expired, shall be exercisable, according to its terms, by the personal representative, the executor or the administrator of the Eligible Director’s estate, or the person or persons who acquired the Option by bequest or inheritance from the Eligible Director, at any time within twelve (12) months after the date of death of the Eligible Director, but in no event may the Option be exercised later than ten (10) years after the date of grant of the Option as set forth in paragraph 1 hereof.

(g) In the event the Eligible Director leaves the Board following a change in control of the Company, prior to the date which is ten (10) years after the date of grant of Options as set forth in paragraph 1 hereof, the Eligible Director shall have the right to exercise the Option, to the extent that it has not been exercised by him or her or expired, for the remainder of such ten (10) year period.

8. Effect of Agreement on Status of Eligible Director . The fact that the Eligible Director has been granted the Option under the Plan shall not confer on the Eligible Director any right to continued service on the Board, nor shall it limit the right of the Company to remove the Eligible Director from the Board at any time.

9. Listing and Registration of Option Shares . The Company’s obligation to issue shares of Common Stock upon exercise of the Option is expressly conditioned upon the completion by the Company of any registration or other qualification of such shares under any state or federal law or regulations or rulings of any governmental regulatory body or the making of such investment representations or other representations and agreements by the Eligible Director or any person entitled to exercise the Option in order to comply with the requirements

of any exemption from any such registration or other qualification of the Option Shares which the Board shall, in its discretion, deem necessary or advisable. Notwithstanding the foregoing, the Company shall be under no obligation to register or qualify the Option Shares under any state or federal law. The required representations and agreements referenced above may include representations and agreements that the Eligible Director, or any other person entitled to exercise the Option, (i) is purchasing such shares on his or her own behalf as an investment and not with a present intention of distribution or re-sale and (ii) agrees to have placed upon any certificates representing the Option Shares a legend setting forth any representations and agreements which have been given to the Board or a reference thereto and stating that such shares may not be transferred except in accordance with all applicable state and federal securities laws and regulations, and further representing that, prior to making any sale or other disposition of the Option Shares, the Eligible Director, or any other person entitled to exercise the Option, will give the Company notice of the intention to sell or dispose of such shares not less than five (5) days prior to such sale or disposition.

10. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation .

(a) In the event of a change in the number of shares of Common Stock outstanding by reason of a stock dividend, stock split, recapitalization, reorganization, merger, exchange of shares, or other similar capital adjustment, prior to the termination of the Eligible Director’s rights under this Agreement, equitable proportionate adjustments shall be made by the Board in the number, kind, and the Option Price of shares subject to the unexercised portion of the Option. The adjustments to be made shall be determined by the Board and shall be consistent with such changes or changes in the Company’s total number of outstanding shares; provided , however , that no adjustment shall change the aggregate Option Price for the exercise of the Option granted.

11. Non-Transferability . The Option granted under this Agreement shall not be assignable or transferable except, in the event of the death of the Eligible Director, by will or by the laws of descent and distribution. In the event of the death of the Eligible Director, the personal representative, the executor or the administrator of the Eligible Director’s estate, or the person or persons who acquired by bequest or inheritance the right to exercise the Option may exercise the unexercised Option or portion thereof, in accordance with its terms and paragraph 7(e) hereof, prior to the date which is ten (10) years after the date of grant of the Option as set forth in paragraph 1 hereof.

12. Tax Withholding . The grant of the Option and Option Shares delivered pursuant to this Agreement, and any amounts distributed with respect thereto, may be subject to applicable federal, state and local withholding for taxes. The Eligible Director expressly acknowledges and agrees to such withholding, where applicable, without regard to whether the Option Shares may then be sold or otherwise transferred by the Eligible Director.

13. Notices . Any notices or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered personally or when deposited in the United States mail as Certified Mail, return receipt requested, properly addressed and postage prepaid, if to the Company, at its principal office at 2605 Iron Gate Drive, Suite 104, Wilmington, North Carolina 28412; and, if to the Eligible Director, at his or her last address appearing on the books of the Company. The Company and the Eligible Director may change their address or addresses by giving written notice of such change as provided herein. Any notice or other communication hereunder shall be deemed to have been given on the date actually delivered or as of the third (3rd) business day following the date mailed, as the case may be.

14. Construction Controlled by Plan . This Agreement shall be construed so as to be consistent with the Plan; and the provisions of the Plan shall be deemed to be controlling in the event that any provision hereof should appear to be inconsistent therewith. The Eligible Director hereby acknowledges receipt of a copy of the Plan from the Company.

15. Severability . Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be valid and enforceable under applicable law, but if any provision of this Agreement is determined to be unenforceable, invalid or illegal, the validity of any other provision or part thereof, shall not be affected thereby and this Agreement shall continue to be binding on the parties hereto as if such unenforceable, invalid or illegal provision or part thereof had not been included herein.

16. Modification of Agreement; Waiver . This Agreement may be modified, amended, suspended or terminated, and any terms, representations or conditions may be waived, but only by a written instrument signed by each of the parties hereto. No waiver hereunder shall constitute a waiver with respect to any subsequent occurrence or other transaction hereunder or of any other provision hereof.

17. Captions and Hearings; Gender and Number . Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part hereof, and shall not serve as a basis for interpretation or in construction of this Agreement. As used herein, the masculine gender shall include the feminine and neuter, the singular number, the plural, and vice versa, whenever such meanings are appropriate.

19. Binding Effect . This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns, and shall be binding upon and inure to the benefit of the Eligible Director, his heirs, legatees, personal representatives, executors, and administrators.

IN WITNESS WHEREOF , the Company has caused this instrument to be executed in its corporate name by its President, or one of its Vice Presidents, and attested by its Secretary or one of its Assistant Secretaries, and its corporate seal to be hereto affixed, all by authority of its Board of Directors first duly given, and the Eligible Director has hereunto set his or her hand and adopted as his or her seal the typewritten word “SEAL” appearing beside his or her name, all done this the day and year first above written.


LIVE OAK BANCSHARES, INC.

By:


ATTEST:


, Corporate Secretary

[CORPORATE SEAL]


				(SEAL)
		,		Eligible Director

EXHIBIT A

NOTICE OF EXERCISE OF

NONSTATUTORY STOCK OPTION

To:	The Board of Directors of Live Oak Bancshares, Inc.

The undersigned hereby elects to purchase whole shares of Common Stock of Live Oak Bancshares, Inc. (the “Company”) pursuant to the Nonstatutory Stock Option granted to the undersigned in that certain Nonstatutory Stock Option Agreement between the Company and the undersigned dated the day of , . The aggregate purchase price for such shares is $ , which amount is (i) being tendered herewith, (ii) will be tendered on or before , , (cross out provision which does not apply) in cash. The effective date of this election shall be , , or the date of receipt of this Notice by the Company if later.

Executed this day of , , at .

(Social Security Number)

Exhibit 10.3

LIVE OAK BANCSHARES, INC.

2014 EMPLOYEE STOCK PURCHASE PLAN

Live Oak Bancshares, Inc. (the “Company”) hereby adopts this 2014 EMPLOYEE STOCK PURCHASE PLAN (the “Plan”) as further described herein.

ARTICLE I

PURPOSE AND SCOPE OF PLAN

1.1

Purpose .

The purpose of the Plan is to encourage employees of Live Oak Bancshares, Inc. (the “Company”) and companies which are, or during the term of the Plan become, subsidiaries of the Company or subsidiaries of its subsidiaries (the “Subsidiaries” and each a “Subsidiary”) to acquire equity interests in the Company and to encourage their continued employment by giving them options to purchase shares of the Company’s capital stock and, thereby, the opportunity to share the benefit of increases in the value of the Company’s capital stock.

1.2

Stock to be Issued under Plan; Aggregate Limitation .

Pursuant to and in accordance with the terms of the Plan, options (“Options”) may be granted from time to time to purchase shares of the Company’s voting common stock, no par value per share (“Common Stock”). The Options are intended to constitute options issued pursuant to an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”).

The aggregate number of shares of Common Stock which may be sold upon the exercise of Options granted under the Plan is 280,000 shares, which maximum is subject to adjustment as provided in Paragraph 6.1 hereof. Shares of Common Stock sold by the Company upon the exercise of Options granted hereunder, at the sole discretion of the Company, may be issued from the Company’s authorized but unissued shares, or be issued and outstanding shares purchased by the Company on the open market or in private transactions. Upon the expiration or termination of an Option granted pursuant to the Plan, any shares of Common Stock which have not been issued and purchased pursuant to the exercise of that Option shall again become available for the grant of new Options under the Plan.

1.3

Effective Date; Termination Date .

The Plan shall be subject to approval by a vote of the holders of a majority of the shares of the Company’s Common Stock present or represented, in person or by proxy, and entitled to vote at a meeting of the Company’s shareholders held in accordance with North Carolina law. Subject to such approval, the Plan shall become effective as of October 8, 2014 (the “Effective Date”), which is the date of adoption of the Plan by the Company’s Board of Directors) and,

unless sooner terminated as provided herein, shall terminate at 5:00 P.M. on October 5, 2024 (the “Termination Date”), the tenth anniversary of the Effective Date. Following the Termination Date, no further Options may be granted under the Plan, but such termination shall not effect any Option granted prior to the Termination Date.

ARTICLE II

PLAN ADMINISTRATION

2.1

General .

The Plan shall be administered by a committee (the “Committee”) of, and appointed by, the Board of Directors of the Company, and which shall be composed of not less than three members of the Board of Directors. Members of the Committee shall serve at the pleasure of the Board, and the Board of Directors, from time to time and at its discretion, may remove members from (with or without cause) or add members to the Committee or fill any vacancies on the Committee, however created.

2.2

Duties .

In its administration of the Plan, the Committee shall have the following authority, powers and duties:

(a)

to determine the persons who are eligible to receive Options under the Plan;

(b)

to construe and interpret the terms and provisions of the Plan and any Options granted pursuant to the Plan;

(c)

to make, adopt, amend, rescind, and interpret such rules and regulations not inconsistent with the Plan or law as it from time to time deems reasonable and necessary for the interpretation and administration of the Plan;

(d)

to prescribe the form or forms of the instruments evidencing any Options granted under the Plan and of any other instruments required under the Plan and to change such forms from time to time;

(e)

subject to the provisions of Articles III and IV below, to make any and all determinations in connection with each grant of Options pursuant to the Plan (including without limitation the timing of each grant of Options and the Offering Factor, Fair Market Value, Applicable Percentage, Option Price and Option Term) and otherwise in the administration of the Plan;

(f)

to take all other actions provided for herein or deemed by it, in its discretion, to be necessary or advisable to administer the Plan in a proper and effective manner.

2.3

Meetings and Voting .

The Committee shall select one of its members as Chairman and shall hold meetings at such times and places as it shall deem necessary or desirable. A majority of the members of the Committee shall constitute a quorum for all matters with respect to administration of the Plan, and acts of a majority of the members of the Committee present at meetings at which a quorum is present, or acts reduced to and approved in writing by all of the members of the Committee without a meeting, shall be valid acts of the Committee.

2.4

Effect of Committee Action .

All actions, decisions and determinations of the Committee in connection with the administration of the Plan, and in connection with the interpretation and construction of, or questions or other matters concerning, the Plan or any Options granted, shall (i) be made consistent and in accordance with the terms of the Plan and shall be designed to cause the Plan to continue to comply with Section 423 of the Code, and (ii) shall be final, conclusive and binding on all persons, including the Company, its shareholders, Eligible Employees and any other person claiming any interest in any Option; provided, however, that any action, decision, interpretation or determination, other than those respecting the actual grant of Options, shall be subject to review by the Board of Directors, either on its own initiative, at the request of the Committee or on application of any aggrieved party. In such a case, the determination of the Board of Directors on such review shall be final and binding on all affected parties.

2.5

Indemnification .

To the extent permitted by applicable law, and in addition to such other rights of indemnification members of the Committee may have as Directors of the Company, the members of the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal thereof, to which they or any of them may be a party by reason of any action taken or omitted in good faith under or in connection with administration of the Plan or any Option granted hereunder and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that any such Committee member is liable for gross negligence or misconduct in the performance of his or her duties; provided, however, that within sixty (60) days after institution of any such action, suit or proceeding, such Committee member(s) shall in writing offer the Company the opportunity, at its own expense, to handle and defend same.

ARTICLE III

ELIGIBILITY

3.1

Eligible Employees .

Except as provided in this Article, each employee of the Company and/or any Subsidiary who is actively employed by the Company and/or any Subsidiary or is on paid or authorized but unpaid leave of absence on a date immediately preceding a date of Grant (an “Eligible Employee”) shall be eligible to receive an Option under the Plan in connection with that grant of Options. The Committee may approve separate offerings for employees of the Parent and employees of a Subsidiary, which offerings may be restricted to employees of the Parent or Subsidiary for whom the offering is made. Further, the Committee in establishing the terms of the Grant for an offering may exclude one or more of the following categories of Eligible Employees from the offering:

(i)

any individual who has a period of employment with the Company and/or a Subsidiary of less than 2 years (or some shorter period of employment as may be established by the Committee),

(ii)

any individual whose customary employment with the Company and/or a Subsidiary is less than 20 hours (or at the discretion of the Committee fewer than 20 hours) per week,

(iii)

any individual whose customary employment is less than 5 months (or at the discretion of the Committee fewer than 5 months) with the Company and/or a Subsidiary in any calendar year,

(iv)

any individual who is a “highly compensated employee” as defined in Section 414(q) of the Code of the Company or a Subsidiary, or

(v)

any individual who is a “highly compensated employee as defined in Section 414(q) of the Code of the Company or a Subsidiary and whose compensation is an amount established by the Committee for a particular offering that is greater than the amount of compensation set forth in Section 414(q)(1)(B).

For purposes of subparagraph (v) of this Paragraph 3.1, “compensation” shall have the meaning set forth in Code Section 414(q). For purposes of determining an employee’s eligibility to receive an Option, the Committee may, at its sole discretion, give credit for the employee’s past service with any financial institution or other entity that shall have been acquired by the Company or any Subsidiary; provided, however, that all employees of the Company and/or any Subsidiary who were employees of any such acquired entity shall be treated alike for purposes of past service credit under the Plan. Any exclusion from an offering of a category of Eligible Employee will be applied in an identical manner to all Eligible Employees in the excluded category of every corporation (that is, the Company or a Subsidiary) that participates in the offering.

3.2

Exclusion of Certain Shareholders .

Notwithstanding Paragraph 3.1 above, an Option shall not be granted in an offering to an Eligible Employee who, immediately after the date the Option would otherwise be granted, would own stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or its parent or subsidiary corporation (as the terms “parent corporation” and “subsidiary corporation” are defined in Sections 424(e) and (f) of the Code). For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and shares of the Company’s stock which an Eligible Employee may purchase under outstanding options of any type shall be treated as shares owned by such employee.

ARTICLE IV

GRANT OF OPTIONS

4.1

Authorization to Grant Options .

Pursuant to the Plan, from time to time prior to the Termination Date the Company may make an offering granting Options to Eligible Employees to purchase shares of Common Stock. Each such offering and the grant of Options must be specifically approved by the Committee and, in connection with each such offering, Options will be granted in accordance with the terms of the Plan to all persons who are Eligible Employees, other than Eligible Employees who may be excluded under the provisions of Section 3.1 or 3.2, as of the Date of Grant of such Options. However, notwithstanding anything contained herein to the contrary, in no event may the Committee approve a grant of Options under the Plan while any Option previously granted hereunder shall remain outstanding.

4.2

Number of Shares .

At the time an offering for a grant of Options hereunder is approved by the Committee, the Committee also shall specify a dollar amount of annual compensation for the offering (the “Offering Factor”) on the basis of which the number of shares of Common Stock to be covered by the Option granted to each Eligible Employee will be determined. Each such Option will entitle the Eligible Employee to whom it is granted to purchase a number of whole shares of Common Stock equal to the lesser of (i) such employee’s annual rate of compensation as of the day prior to the Date of Grant of that Option (as determined by the payroll records of the corporation that employs such employee) divided by the Offering Factor set by the Committee for that grant of Options, or (ii) a fixed maximum quantity, at the Committee’s discretion. The Offering Factor may be different for each offering of Options under the Plan; however, in connection with each separate offering of Options the Offering Factor shall be the same for all Eligible Employees.

The term “compensation” as used herein is defined as an Eligible Employee’s annualized regular, fixed base salary or wages based on the Eligible Employee’s salary or wage rate (and number of hours per week) in effect at the time of grant. Compensation does not include any bonus, overtime payment, payment of deferred compensation or equity compensation, commission, contribution by an employer corporation to an employee benefit plan or other similar payment or contribution.

4.3

Option Price .

The option or purchase price of each share of Common Stock covered by Options included in each offering of Options under the Plan (the “Option Price”) shall be a percentage (the “Applicable Percentage”) of the fair market value of one share of the Common Stock (the “Fair Market Value”). For the purpose of determining Fair Market Value, the fair market value of the Common Stock shall be determined as of the date of Grant, except that the Committee may establish in an offering that the Fair Market Value shall be determined as of the date of exercise if the fair market value of the Common Stock on the date of exercise is less than the fair market value of the Common Stock on the date of Grant. The Applicable Percentage for the Grants under each offering shall be determined by the Committee, but (i) in no event may be less than 85% nor more than 100% of the Fair Market Value, and (ii ) may be different for each offering of Options, but in connection with each separate offering of Options shall be the same for all Eligible Employees.

The Fair Market Value of a share of the Company’s outstanding Common Stock on any particular date shall be, (i) if the Common Stock is not then listed on the Nasdaq Stock Market, the fair market value of a share of the Common Stock as determined by the Committee in its sole discretion in such manner as it shall deem to be reasonable and appropriate, or, (ii) if the Common Stock is listed on the Nasdaq Stock Market, the average of the bid and asked prices for a share of the Common Stock as quoted by Nasdaq on such date.

4.4

Option Notices .

Each Option granted pursuant to the Plan shall be evidenced by a written notice (an “Option Notice”) delivered to the Eligible Employee to whom such Option is granted and which shall specify (i) the Date of Grant of the Option, (ii) the number of shares covered by the Option, and (iii) the Option Price of the covered shares. Each Option Notice shall be in such form as the Committee shall determine and shall incorporate by reference the terms and provisions of the Plan. No Eligible Employee shall have any rights hereunder to purchase any shares of Common Stock until an Option has been granted to him and such Option is evidenced by an Option Notice delivered to him, all as provided herein.

4.5

Limitation on Purchases .

Notwithstanding the foregoing provisions of the Plan or the terms of any Option granted hereunder, no Eligible Employee may purchase shares of the Company’s stock in any calendar year under all employee stock purchase plans (including this Plan) of his or her employer corporation and its related corporations that have a fair market value (determined at the time the Option is granted) in an amount greater than an amount calculated as follows:

(i)

Determine the number of calendar years that the Option has been granted at the calendar year of determination,

(ii)

Multiply (i) by $25,000, and

(iii)

Subtract from the product of (i) and (ii) the fair market value of the shares of Company stock purchased under the Option before the potential purchase for which the limitation is calculated.

This limitation applies only to options granted under “employee stock purchase plans” as defined by Section 423 of the Code and does not limit the amount of the Company’s stock which an Eligible Employee may purchase under any other stock or bonus plan then in effect.

ARTICLE V

TERMS AND CONDITION OF OPTIONS; PURCHASE OF SHARES

5.1

Term of Options; Expiration or Termination .

Except as otherwise provided below, the term of each Option (the “Option Term”) for an offering shall extend for a period commencing on the Date of Grant and ending on the date established by the Committee for the offering, which ending date shall be no later than the 15 ^th day of the twenty-fourth calendar month (including the month in which the Option is granted) following the Date of Grant of such Option (the “Expiration Date”). Notwithstanding anything contained herein or in any Option Agreement to the contrary, to the extent that an Option shall not previously have been exercised in the manner required by the Plan, it shall expire and terminate at 5:00 P.M. on its Expiration Date.

In addition to the termination provisions set forth above, Options granted pursuant to the Plan shall terminate or may be terminated as provided in Paragraphs 5.6 and 6.1 below. Upon the expiration or termination of all or any portion of an Option, such Option or portion thereof shall, without any further act by the Company, expire and no longer be exercisable or confer any rights to any person to purchase shares of Common Stock under the Plan.

5.2

Election by Eligible Employee .

Each Option granted to an Eligible Employee shall entitle the Eligible Employee to purchase up to the total number of shares of Common Stock specified in the Option Notice relating to that Option, and to purchase all or any portion of such shares at the times and in the manner specified below.

For each offering the Committee shall establish the period during which an Eligible Employee may elect to purchase shares pursuant to his or her or her Option. The election period shall not extend beyond the Expiration Date. In order to make such election, the Eligible Employee must give written notice (an “Election Notice”) to the Company as to the number of shares he or she wishes to purchase (the “Elected Shares”). Such notices must be made on a form supplied by the Company for that purpose and must be accompanied by full payment of the Option Price of all Elected Shares or, if the Eligible Employee intends that payment for any of the Elected Shares be made from funds held for him under the payroll deduction plan described in Paragraph 5.4 below, such notice must indicate that payment of the Option Price for those shares will be made by transfer of funds under that plan. Purchases of Elected Shares shall be made on the Company’s last business day of each such month (the “Purchase Dates”). An Eligible Employee’s Election Notice as to any number of Elected Shares shall be irrevocable as to that number of shares and may not be altered or changed by such Eligible Employee following receipt of such notice by the Company.

The failure of an Eligible Employee to deliver an Election Notice to the Company in a timely manner to purchase all shares covered by an Option before the Expiration Date of that Option will be conclusively deemed to be an election by the Eligible Employee not to purchase, and a forfeiture of his or her rights to purchase, any and all such remaining shares covered by that Option; and, on the Expiration Date that Option shall immediately terminate and be of no further force or effect.

At its sole discretion and upon written notice to Eligible Employees, the Committee may (i) provide for Election Periods during other months during the Option Term of Options granted under the Plan, or, (ii) at the time any Options are granted, place other restrictions or limitations on the exercise of those Options.

Shares of Common Stock issued upon the exercise of Options granted under the Plan will be subject to the Company’s Amended and Restated Shareholders Agreement and Eligible Employees will be required to execute the Company’s Amended and Restated Shareholders Agreement as a condition of the valid exercise of any Option granted hereunder.

5.3

Payment of Option Price .

Payment of the aggregate Option Price of Elected Shares must be delivered to the Company (in the form of certified or other collected U.S. funds) with the Election Notice pertaining to those Elected Shares required by Paragraph 5.2 above, or, in the case of any Eligible Employee participating in the payroll deduction plan, such payment must be transferred to the Company as described in Paragraph 5.4 below. If during any Election Period an Eligible Employee elects to purchase a number of shares greater than the number which could be purchased with funds credited to him under the payroll deduction plan, then payment of the aggregate Option Price of such excess Elected Shares must accompany the employee’s Election Notice with respect to those shares.

If payment of the Option Price of any Elected Shares is not made as required herein, then the Eligible Employee’s Election Notice will not be effective as to those shares and he or she will not be allowed to purchase those shares on the Purchase Date for that Election Period, but those shares may be reelected during a later Election Period (subject to final forfeiture as described in Paragraph 5.1 above)

5.4

Payroll Deduction Plan .

At its discretion the Committee may establish for an offering a payroll deduction agreement that would be available to all Eligible Employees covered by the offering under which, at the Eligible Employee’s written instruction, a specified amount will be deducted from each payment of his or her salary or wages received on or before the Expiration Date of the Eligible Employee’s Option (or, in the case of an Eligible Employee whose salary or wages are paid other than monthly, from the second payment of wages each month), and will be applied in the manner described below

toward the purchase of Elected Shares pursuant to his or her Option. Such instruction may be given only on a form of written authorization supplied by the Company for that purpose, and shall specify a dollar amount to be withheld from each salary or wage payment. The amount of such deduction shall not exceed the aggregate Option Price of all shares covered by the Eligible Employee’s Option which have not yet been purchased, divided by the number of the Eligible Employee’s salary or wage payments (or, in the case of an Eligible Employee whose salary or wages are paid other than monthly, the number of wage payments from which deductions will be made as described above) remaining prior to the Expiration Date of the Option. Once a payroll deduction authorization is given by an Eligible Employee, he or she may change the amount of the deduction, or terminate the deduction authorization, only upon prior written notice to the Company. Any such change in amount or termination shall be effective only on the last day of the month next following receipt of the Eligible Employee’s written notice thereof, or as soon as practicable thereafter. Once an Eligible Employee has terminated a payroll deduction authorization, he or she may not give a new authorization or participate further in the payroll deduction plan until the Committee authorizes a new offering in which a payroll deduction agreement will be available.

All amounts deducted from the salaries or wages of all Eligible Employees pursuant to their payroll deduction authorizations shall be delivered to the Company’s subsidiary bank, Live Oak Banking Company (the “Bank”) which will hold such funds as custodian for each Eligible Employee in an interest-bearing deposit account.

Upon receipt by the Company of an Election Notice from an Eligible Employee with respect to the purchase of Elected Shares for which payment will be made with funds held by the Bank, the Company will so notify the Bank and the Bank will transfer to the Company from funds credited to the Eligible Employee on the Bank’s books and records the aggregate Option Price of those Elected Shares (but not more than the aggregate amount then credited to that Eligible Employee).

An Eligible Employee who has terminated a payroll deduction authorization as provided above, or whose Option has expired or been terminated, may request in writing that funds then credited to him on the Bank’s books and records be paid to him, and, following receipt of such a request by the Bank, all such funds which previously have not been transferred to the Company for the purchase of stock promptly will be paid to the Eligible Employee. Following the expiration or termination of an Eligible Employee’s Option, any remaining funds credited to him on the Bank’s books and records which previously have not been transferred to the Company for the purchase of stock shall be paid to the Eligible Employee.

5.5

Assignment .

Options granted to an Eligible Employee hereunder shall not be assignable or transferable except by will or by the laws of descent and distribution, and, during the lifetime of the Eligible Employee, may be exercised only by him. More particularly, but without limiting the generality of the foregoing, an Option may not be sold, assigned, transferred (except as noted herein), pledged or hypothecated in any way and shall not be subject to execution, attachment or similar process. Shares of Common Stock issued upon the exercise of Options granted under the Plan will be subject to the Company’s Amended and Restated Shareholders Agreement and Eligible Employees or their assignees will be required to execute the Company’s Amended and Restated Shareholders Agreement as a condition of the valid exercise of any Option granted hereunder.

5.6

Termination of Options; Effect .

(a) Termination of Employment: In the event an Eligible Employee’s employment with the Company or any Subsidiary shall terminate or be terminated during an Option Term for any reason other than his or her or her death, “Disability” (as defined below) or “Retirement” (as defined below), then the Eligible Employee’s Option shall terminate at the times specified below as to any unpurchased shares, including any Elected Shares to be purchased pursuant to an Option on a Purchase Date occurring after the date of his or her termination of employment.

Authorized leaves of absence and transfers of employment by an Eligible Employee between the Company and a Subsidiary, or between two Subsidiaries, without a break in service, shall not constitute terminations of employment for purposes of the Plan. The Committee shall determine whether any other absence for military or government service or for any other reasons shall constitute a termination of employment for purposes of the Plan, and the Committee’s determination shall be final.

(i) If, prior to the Expiration Date of his or her or her Option, an Eligible Employee voluntarily terminates his or her or her employment with the Company or any of its Subsidiaries (other than as a result of “Retirement” as defined below), then, to the extent it shall not previously have been exercised in the manner required by the Plan, any Option previously granted to the Eligible Employee which remains outstanding and in effect immediately shall terminate and be of no further force or effect on the effective date of such termination of employment.

(ii) If, prior to the Expiration Date of his or her or her Option, an Eligible Employee’s employment with the Company or any of its Subsidiaries is terminated as a result of “Retirement” (as defined below) with the consent of the Company, the Eligible Employee shall have the right to exercise his or her rights pursuant to his or her Option within ninety (90) days following the date of such Retirement, but not later than the Expiration Date of the Option, in accordance with the terms of the Plan.

The termination of an Eligible Employee’s employment with the Company or any of its Subsidiaries which is treated as a “retirement” under the terms of a qualified retirement plan of the Company, or the termination of an Optionee’s employment at such earlier time or under such other circumstances as the Committee shall agree in writing to treat as “Retirement” for purposes of the Plan, shall be deemed to be a “Retirement” with the consent of the Company. The Committee shall determine whether any termination of employment is to be considered Retirement with the consent of the Company, and the Committee’s determination shall be final.

(iii) If, prior to the Expiration Date of his or her or her Option, an Eligible Employee’s employment is terminated by the Company or any of its Subsidiaries other than for Cause (as defined below), then, to the extent it shall not previously have been exercised in the manner required by the Plan, any Option previously granted to the Eligible Employee which remains outstanding and in effect shall terminate and be of no further force or effect on the effective date of such termination of employment.

(iv) If, prior to the Expiration Date of his or her or her Option, an Eligible Employee’s employment is terminated by the Company or any of its Subsidiaries for Cause, then, to the extent it shall not previously have been exercised in the manner required by the Plan, any Option previously granted to the Eligible Employee which remains outstanding and in effect immediately shall terminate and be of no further force or effect on the earlier of the effective date of such termination of employment or the date of a determination by the Company or any of its Subsidiaries to terminate the Eligible Employee’s employment for Cause.

Within thirty (30) days after receipt by the Company of a written request therefor from an Eligible Employee whose employment has been terminated (voluntarily or by the Company or its Subsidiary), the Company shall pay to the Eligible Employee any funds paid prior to the date of such termination for the purchase of shares on a Purchase Date occurring after the date of termination and for which such Elected Shares have not been issued.

For purposes of this Paragraph 5.6(a), the Company or its Subsidiary shall have “Cause” to terminate an Eligible Employee’s employment upon:

(i) a determination by the Company or its Subsidiary, in good faith, that the Eligible Employee (A) has failed in any material respect to perform or discharge his or her duties or responsibilities of employment, or (B) is engaging or has engaged in willful misconduct or conduct which is detrimental to the business prospects of the Company or its Subsidiary or which has had or likely will have a material adverse effect on the Company’s or its Subsidiary’s business or reputation;

(ii) the violation by the Eligible Employee of any applicable federal or state law, or any applicable rule, regulation, order or statement of policy promulgated by any governmental agency or authority having jurisdiction over the Company or its Subsidiaries (a “Regulatory Authority”), including but not limited to the Federal Deposit Insurance Corporation, the North Carolina Commissioner of Banks, the North Carolina State Banking Commission, the Federal Reserve Board or any other regulator, which results from the Eligible Employee’s gross negligence, willful misconduct or intentional disregard of such law, rule, regulation, order or policy statement and results in any substantial damage, monetary or otherwise, to Company or any of its Subsidiaries or to its reputation;

(iii) the commission in the course of the Eligible Employee’s employment of an act of fraud, embezzlement, theft or proven personal dishonesty, or the Eligible Employee’s being charged with any felony or other crime involving moral turpitude (whether or not such act or charge involves the Company or its assets or results in criminal indictment, charges, prosecution or conviction)

(iv) the conviction of the Eligible Employee of any felony or any criminal offense involving dishonesty or breach of trust, or the occurrence of any event described in Section 19 of the Federal Deposit Insurance Act or any other event or circumstance which disqualifies the

Eligible Employee from serving as an employee or executive officer of, or a party affiliated with, the Company or any of its Subsidiaries; or, in the event the Eligible Employee becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Company’s or any of its Subsidiaries’ affairs (or if proceedings for that purpose are commenced), by any Regulatory Authority;

(v) the exclusion of the Eligible Employee by the carrier or underwriter from coverage under the Company’s then current “blanket bond” or other fidelity bond or insurance policy covering its or its Subsidiaries’ directors, officers or employees, or the occurrence of any event which the Company or any of its Subsidiaries believes, in good faith, will result in the Eligible Employee being excluded from such coverage, or having coverage limited as to the Eligible Employee as compared to other covered officers or employees, pursuant to the terms and conditions of such “blanket bond” or other fidelity bond or insurance policy; or,

(vi) the Eligible Employee’s excessive use of any addictive drug or use of any controlled substance, as defined at 21 U.S.C. § 802 and listed on Schedules I through V of 21 U.S.C. § 812, as revised from time to time, and as defined by other federal laws and regulations, his or her use of legal drugs that have not been obtained legally or are not being taken as prescribed by a licensed physician, or his or her use of alcohol in a manner that adversely affects the performance of his or her or her employment duties, prevents him or her from performing his or her or her employment duties safely or creates a risk to the safety of others at the workplace.

For purposes of this Plan, the determination of whether any termination of an Optionee’s employee was for Cause shall be within the sole discretion of the Committee.

(b) Disability of Eligible Employee: If, prior to the Expiration Date of his or her or her Option, an Eligible Employee becomes “Disabled” (as defined below) and his or her or her employment with the Company or any of its Subsidiaries is terminated as a result, then, to the extent it shall not previously have been exercised in the manner required by the Plan, any Option previously granted to the Eligible Employee which remains outstanding and in effect shall terminate and be of no further force or effect on the date ninety (90) days following the effective date of such termination of employment. For purposes of this Paragraph 5.6(b), an Eligible Employee shall be considered “Disabled” at such time as he or she or she is determined to be permanently disabled such as would qualify the Eligible Employee for benefits under the Company’s long term disability insurance plan which is applicable to the Eligible Employee.

(c) Death of Eligible Employee: If an Eligible Employee shall die while employed by the Company or a Subsidiary during an Option Term, his or her designated beneficiary (determined either by will or other writing delivered to the Committee in advance), or if no designated beneficiary, the personal representative of his or her estate, shall have the right to exercise such Eligible Employee’s rights pursuant to his or her Option following the date of his or her death, but not later than the Expiration Date of the Option, in accordance with the terms of the Plan.

ARTICLE VI

GENERAL PROVISIONS

6.1

Allotment of Options .

(a)

Changes in Capitalization; Stock Splits and Dividends. In the event of (i) any dividend payable by the Company in shares of Common Stock, or (ii) any recapitalization, reclassification, split, consolidation or combination of, or other change in or offering of rights to the holders of, Common Stock, or (iii) an exchange of the outstanding shares of Common Stock for a different number or class of shares of stock or other securities of the Company in connection with a merger, consolidation or other reorganization of or involving the Company (provided the Company shall be the surviving or resulting corporation in any such merger or consolidation) then the Committee may, in such a manner as it shall determine in its sole discretion, appropriately adjust the number and class or kind of shares or of the securities which shall be subject to outstanding Options and/or the Option Price per share which must be paid thereafter upon exercise of any Option. However, in no event shall any such adjustment change the aggregate Option Price for all shares that could be purchased pursuant to any Option.

Subject to review by the Board of Directors of the Company, any such adjustments made by the Committee shall be consistent with changes in the Company’s outstanding Common Stock resulting from the above events and, when made, shall be final, conclusive and binding upon all persons, including, without limitation, the Company, its shareholders and each Eligible Employee or other person having any interest in any Option so adjusted. Any fractional shares resulting from any such adjustment shall be eliminated. However, notwithstanding anything contained herein to the contrary, Options granted pursuant to the Plan shall not be adjusted in a manner that causes the Options to fail to continue to qualify as options issued pursuant to an “employee stock purchase plan” within the meaning of Section 423 of the Code.

(b)

Dissolution; Merger or Consolidation; Sale of Assets . In the event of a dissolution or liquidation of the Company, the sale of substantially all the assets of the Company, or a merger or consolidation of the Company with or into any other corporation or entity (or any other such reorganization or similar transaction) in which the Company is not the surviving or resulting corporation (and if a provision is not made in such transaction for the continuance of this Plan or the assumption of Options by any successor to the Company or for the substitution for Options of new options covering shares of any successor corporation or a parent or subsidiary thereof) then, in such event, all rights of Eligible Employees pursuant to all outstanding Options shall terminate and be of no further effect to the extent such Options are not exercised during an Election Period preceding the effective date of such dissolution, liquidation, sale, merger, consolidation or other reorganization (or at such other time and pursuant to such rules and regulations as the Committee shall determine and promulgate to the Eligible Employees).

(c)

Miscellaneous. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to (i) make adjustments, recapitalizations, reclassifications, reorganizations or any other changes in its capital or business structure or its business, (ii) to merge or consolidate, or to dissolve, liquidate, sell or transfer all or any part of its business or assets, or (iii) to issue bonds, debentures, preferred or other preference stock ahead of or affecting the Common Stock or the rights thereof.

6.2

Rights as a Shareholder .

No Eligible Employee shall have any rights as a shareholder of the Company with respect to any Common Stock subject to an Option until such Option has been validly exercised in the manner described herein, and until full payment of the Option Price has been made for such shares hereunder and a stock certificate therefor has actually been issued to and registered in such Eligible Employee’s name on the Company’s stock records. Except for adjustments as provided in Paragraph 6.1 above, no adjustment will be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) distributions or other rights as to which the record date for determining shareholders entitled to receive the same is prior to the date of the issuance of such certificate.

6.3

No Right to Employment .

Nothing in the Plan or in any Option Notice is intended or shall be deemed or interpreted to constitute an employment agreement or to confer upon an Optionee any right of employment with the Company or a Subsidiary, including without limitation any right to continue in the employ of the Company or a Subsidiary, or to interfere with or otherwise restrict in any way the right of the Company or a Subsidiary to discharge or terminate the employment of an Eligible Employee at any time for any reason whatsoever, with or without cause.

6.4

Legal Restrictions .

If in the opinion of legal counsel for the Company the issuance or sale of any shares of Common Stock pursuant to the exercise of an Option would not be lawful without registration under the Securities Act of 1933 (the “Act”) or without some other action being taken or for any other reason, or would require the Company to obtain approval from any governmental authority or regulatory body having jurisdiction deemed by such counsel to be necessary to such issuance or sale, then the Company shall not be obligated to issue or sell any Common Stock pursuant to the exercise of any Option to its Eligible Employee or any other authorized person unless a registration statement that complies with the provisions of the Act in respect of such shares is in effect at the time thereof, or all other required or appropriate action has been taken under and pursuant to the terms and provisions of the Act or other applicable law, or the Company receives evidence satisfactory to such counsel that the issuance and sale of such shares, in the absence of an effective registration statement or other required or appropriate action, would not constitute a violation of the Act or other applicable law, or unless any such required approval shall have been obtained. The Company is in no event obligated to register any such shares, to comply with any exemption from registration requirements or to take any other action which may be required in order to permit, or to remedy or remove any prohibition or limitation on, the issuance or sale of such shares to any Eligible Employee or other authorized person.

The Committee, as a condition of the grant of an Option and/or the exercise thereof, may require that the Eligible Employee execute one or more undertakings in such form as the Committee shall prescribe to the effect that such shares are being acquired for investment purposes only and not with a view to the distribution or resale thereof.

Notwithstanding anything contained herein to the contrary, it is understood and agreed that neither the Company nor any of its Subsidiaries (or any of their successors in interest) shall be required to take any action under this Plan or any Option granted hereunder if:

(a)

the Company is declared by any Regulatory Authority to be insolvent, in default or operating in an unsafe or unsound manner; or,

(b)

in the opinion of counsel to the Company, such payment or action:

(i)

would be prohibited by or would violate any provision of state or federal law applicable to the Company or any of its Subsidiaries, including without limitation the Federal Deposit Insurance Act as now in effect or hereafter amended;

(ii)

would be prohibited by or would violate any applicable rules, regulations, orders or statements of policy, whether now existing or hereafter promulgated, of any Regulatory Authority; or,

(iii)

otherwise would be prohibited by any Regulatory Authority.

6.5

No Obligation to Purchase Shares .

The granting of an Option pursuant to the Plan shall impose no obligation on the Eligible Employee to purchase any shares covered by such Option.

6.6

Payment of Taxes .

Each Eligible Employee shall be responsible for all federal, state, local or other taxes of any nature as shall be imposed pursuant to any law or governmental regulation or ruling on any Option or the exercise thereof or on any income which an Eligible Employee is deemed to recognize in connection with an Option. If the Committee shall determine to its reasonable satisfaction that the Corporation or any Subsidiary is required to pay or withhold the whole or any part of any estate, inheritance, income, or other tax with respect to or in connection with any Option, the exercise thereof or the Eligible Employee’s resale of any Elected Shares, then the Company or such Subsidiary shall have the full power and authority to withhold and pay such tax out of any Elected Shares purchased by the Eligible Employee or from the Eligible Employee’s salary or any other funds otherwise payable to the Eligible Employee, or, prior to and as a condition of exercising such Option, the Company may require that the Eligible Employee pay to it in cash the amount of any such tax which the Company, in good faith, deems itself required to withhold.

6.7

Choice of Law .

The validity, interpretation and administration of the Plan and of any rules, regulations, determinations or decisions made thereunder, and the rights of any and all persons having or claiming to have any interest therein or thereunder, shall be determined exclusively in accordance with the laws of the State of North Carolina. Without limiting the generality of the foregoing, the period within which any action in connection with the Plan must be commenced shall be governed by the laws of the State of North Carolina, without regard to the place where the act or omission complained of took place, the residence of any party to such action, or the place where the action may be brought or maintained.

6.8

Amendment of Plan .

The Board of Directors, upon recommendation of the Committee, may, from time to time, amend, modify, suspend or discontinue the Plan at any time without notice, provided that no Eligible Employee’s existing rights are adversely affected thereby; and, provided further that, except with the approval of shareholders of the Company and no more frequently than once each six months, or otherwise as provided in Paragraph 6.1 hereof or to comport with changes in the Code, no such amendment of the Plan shall: (a) increase the aggregate number of shares which may be sold upon the exercise of Options granted under the Plan; (b) change the formula by which the Option Price is determined; (c) change the formula by which the number of shares which any Optionee may purchase is determined; or, (d) change the provisions of the Plan with respect to the determination of Eligible Employees and the timing of grants of Options. In the event the Board shall terminate or discontinue the Plan, such action shall not operate to deprive any Eligible Employee of any rights theretofore acquired by him or her under the Plan, and any Options outstanding as of the date of any such termination shall remain in full force and effect according to their terms as though the Plan had not been terminated.

6.9

Application of Funds .

The proceeds received by the Company from the sale of Common Stock pursuant to Options granted under the Plan will be used for general corporate purposes.

6.10

Notices .

Except as otherwise provided herein, any notice which the Company or an Eligible Employee may be required or permitted to give to the other shall be in writing and shall be deemed duly given when delivered personally or deposited in the United States mail, first class postage prepaid, and properly addressed. Notice, if to the Company, shall be sent to the Secretary of the Company at the following address:

Live Oak Bancshares, Inc.

1741 Tiburon Drive

Wilmington, North Carolina 28403

Phone: (877) 890-5867

Any notice sent by mail by the Company to an Optionee shall be sent to the most current address of the Optionee as reflected on the records of the Company or its Subsidiaries as of the time said notice is required. In the case of a deceased Optionee, any notice shall be given to the Optionee’s personal representative if such representative has delivered to the Company evidence satisfactory to the Company of such representative’s status as such and has informed the Company of the address of such representative by notice pursuant to this Paragraph 6.10.

6.11

Conformity With Applicable Laws and Regulations .

With respect to persons who are subject to Section 16 of the Securities Exchange Act of 1934, the Plan and each Option granted and other transaction under it are intended to satisfy applicable conditions of Rule 16b-3 of the Securities and Exchange Commission (as such Rule may be modified, amended or superseded from time to time). To the extent any provision of the Plan or any Option, or any action by the Committee or the Board of Directors, shall fail to so comply, then, to the extent permitted by law and deemed advisable by the Committee, such provision or action shall be deemed null and void.

6.12

Successors and Assigns .

Subject to Paragraph 5.5 above, this Plan shall bind and inure to the benefit of the Company, any Optionee, and their respective successors, assigns, personal or legal representatives and heirs.

6.13

Severability .

It is intended that each provision of this Plan shall be viewed as separate and divisible, and in the event that any provision hereof shall be held to be invalid or unenforceable, the remaining provisions shall continue to be in full force and effect.

6.14

Titles .

Titles of Articles and Paragraphs are provided herein for convenience only, do not modify or affect the meaning of any provision herein, and shall not serve as a basis for interpretation or construction of this Plan.

6.15

Gender and Number .

As used herein, the masculine gender shall include the feminine and neuter, the singular number the plural, and vice versa, whenever such meanings are appropriate.

IN WITNESS WHEREOF , the Company has caused this Plan to be executed in its corporate name by its President, attested by its Secretary and its corporate seal to be hereto affixed, all by authority duly given by the Board, as of this the 16 ^th day of May, 2006.


LIVE OAK BANCSHARES, INC.

By:		/s/ James S. Mahan III
		Chairman and Chief Executive Officer

ATTEST:

/s/ Lynn M. Burney

Secretary

CERTIFICATE OF SECRETARY

The undersigned Secretary of Live Oak Bancshares, Inc. (the “Company”) hereby certifies that the foregoing 2014 EMPLOYEE STOCK PURCHASE PLAN was duly adopted by the Company’s Board of Directors on October 8, 2014, and was approved by the Company’s shareholders at the annual meeting of shareholders held on March 20, 2015, by a vote of a majority of the shares of the Company’s common stock present or represented, in person and by proxy, at such meeting.

This the 20 ^th day of March, 2015.

/s/ Lynn M. Burney

Secretary

Exhibit 10.4

LIVE OAK BANCSHARES, INC.

2015 OMNIBUS STOCK INCENTIVE PLAN

MARCH 20, 2015

1. Purposes of the Plan . The purposes of this Plan are to attract and retain the best available personnel; to provide additional incentives to Employees, Directors and Consultants to contribute to the successful performance of the Company and any Subsidiary of the Company; to promote the growth of the market value of the Company’s Common Stock; to align the interests of Grantees with those of the Company’s shareholders; and to promote the success of the Company’s business.

2. Definitions . The following definitions shall apply as used herein and in all individual Award Agreements except as a term may be otherwise defined in an individual Award Agreement. In the event a term is separately defined in an individual Award Agreement, such definition shall supersede the definition contained in this Section 2.

(a) “ Administrator ” means the Board or any Committee.

(b) “ Applicable Laws ” means the legal requirements relating to the Plan and the Awards under applicable provisions of federal and state securities laws, the corporate laws of North Carolina, and, to the extent other than North Carolina, the corporate law of the state of the Company’s incorporation, the Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to Awards granted to residents therein.

(c) “ Assumed ” means that pursuant to a Corporate Transaction either (i) the Award is expressly affirmed by the Company or (ii) the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the successor entity or its Parent in connection with the Corporate Transaction with appropriate adjustments to the number and type of securities of the successor entity or its Parent subject to the Award and the exercise or purchase price thereof which at least preserves the compensation element of the Award existing at the time of the Corporate Transaction as determined in accordance with the instruments evidencing the agreement to assume the Award.

(d) “ Award ” means the grant of an Option, SAR, Dividend Equivalent Right, Restricted Stock, Restricted Stock Unit, or other right or benefit under the Plan.

(e) “ Award Agreement ” means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto.

(f) “ Board ” means the Board of Directors of the Company.

(g) “ Cause ” means, with respect to the termination by the Company or a Related Entity of the Grantee’s Continuous Service, that such termination is for “Cause” as such

term (or word of like import) is expressly defined in a then-effective written agreement between the Grantee and the Company or such Related Entity, or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Administrator: (i) the Grantee’s performance of any act, or failure to perform any act, in bad faith and to the detriment of the Company or a Related Entity; (ii) the Grantee’s dishonesty, intentional misconduct or material breach of any agreement with the Company or a Related Entity; (iii) the removal of the Grantee from office or permanent prohibition of the Grantee from participating in the affairs of the Company or any Related Entity by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. 1818(e)(4) or (g)(1); (iv) the occurrence of any event that results in the Grantee being excluded from coverage, or having coverage limited for the Grantee, under the Company’s blanket bond or other fidelity or insurance policy covering its directors, officers, or employees; or (v) the Grantee’s commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person; provided, however, that with regard to any agreement that defines “Cause” on the occurrence of or in connection with a Corporate Transaction, such definition of “Cause” shall not apply until a Corporate Transaction actually occurs.

(h) “ Code ” means the Internal Revenue Code of 1986, as amended, or any successor statute.

(i) “ Committee ” means any committee composed of members of the Board appointed by the Board to administer the Plan.

(j) “ Common Stock ” means the Company’s voting common stock, no par value per share.

(k) “ Company ” means Live Oak Bancshares, Inc., a North Carolina corporation, or any successor entity that adopts the Plan in connection with a Corporate Transaction.

(l) “ Consultant ” means any person (other than an Employee or a Director, solely with respect to rendering services in such person’s capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity.

(m) “ Continuous Service ” means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant is not interrupted or terminated. In jurisdictions requiring notice in advance of an effective termination as an Employee, Director or Consultant, Continuous Service shall be deemed terminated upon the actual cessation of providing services to the Company or a Related Entity notwithstanding any required notice period that must be fulfilled before a termination as an Employee, Director or Consultant can be effective under Applicable Laws. A Grantee’s Continuous Service shall be deemed to have terminated either upon an actual termination of Continuous Service or upon the entity for which the Grantee provides services ceasing to be a Related Entity. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains

in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement). An approved leave of absence for purposes of this Plan shall include sick leave, military leave, or any other authorized personal leave, so long as the Company or Related Entity has a reasonable expectation that the individual will return to provide services for the Company or Related Entity, and provided further that the leave does not exceed six (6) months, unless the individual has a statutory or contractual right to re-employment following a longer leave. For purposes of each Incentive Stock Option granted under the Plan, if such leave exceeds three (3) months, and reemployment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Non-Qualified Stock Option beginning on the day three (3) months and one (1) day following the expiration of such three (3) month period.

(n) “ Corporate Transaction ” means any of the following transactions, provided, however, that the Administrator shall determine under parts (iv) and (v) whether multiple transactions are related, and its determination shall be final, binding and conclusive:

(i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

(ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company;

(iii) the complete liquidation or dissolution of the Company;

(iv) any reverse merger or series of related transactions culminating in a reverse merger (including, but not limited to, a tender offer followed by a reverse merger) in which the Company is the surviving entity but (A) the Shares outstanding immediately prior to such merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (B) in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger or the initial transaction culminating in such merger; or

(v) acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities.

(o) “ Covered Employee ” means an Employee who is a “covered employee” under Section 162(m)(3) of the Code.

(p) “ Data ” has the meaning set forth in Section 23 of this Plan.

(q) “ Director ” means a member of the Board or the board of directors of any Related Entity.

(r) “ Disability ” means a “disability” (or word of like import) as defined under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy. If the Company or the Related Entity to which the Grantee provides service does not have a long-term disability plan in place, “Disability” means that a Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment for a period of not less than ninety (90) consecutive days. A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion.

(s) “ Disqualifying Disposition ” means any disposition (including any sale) of Common Stock received upon exercise of an Incentive Stock Option before either (i) two years after the date the Employee was granted the Incentive Stock Option, or (ii) one year after the date the Employee acquired Common Stock by exercising the Incentive Stock Option. If the Employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter.

(t) “ Dividend Equivalent Right ” means a right entitling the Grantee to compensation measured by dividends paid with respect to Common Stock.

(u) “ Employee ” means any person, including an Officer or Director, who is in the employ of the Company or any Related Entity, subject to the control and direction of the Company or any Related Entity as to both the work to be performed and the manner and method of performance. The payment of a director’s fee by the Company or a Related Entity shall not be sufficient to make such person an “Employee” of the Company or a Related Entity.

(v) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(w) “ Fair Market Value ” means, as of any date, the value of the Common Stock determined as follows.

(i) If the Common Stock is listed on one or more established stock exchanges or national market systems, including without limitation The NASDAQ Global Select Market, The NASDAQ Global Market, or The NASDAQ Capital Market of The NASDAQ Stock Market LLC, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on the principal exchange or system on which the Common Stock is listed (as determined by the Administrator) on the date of determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, its Fair Market Value shall be the closing sales price for such stock as quoted on such system or by such securities dealer on the date of determination, but if selling prices are not reported, the Fair Market Value of a Share shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii) In the absence of an established market for the Common Stock of the type described in (i) and (ii), above, the Fair Market Value thereof shall be determined by the Administrator in good faith by application of a reasonable valuation method consistently applied and taking into consideration all available information material to the value of the Company in a manner in compliance with Section 409A of the Code, or in the case of an Incentive Stock Option, in a manner in compliance with Section 422 of the Code.

(x) “ Grantee ” means an Employee, Director or Consultant who receives an Award under the Plan.

(y) “ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(z) “ Non-Qualified Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.

(aa) “ Officer ” means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(bb) “ Option ” means an option to purchase Shares pursuant to an Award Agreement granted under the Plan.

(cc) “ Parent ” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.

(dd) “ Performance-Based Compensation ” means compensation qualifying as “performance-based compensation” under Section 162(m) of the Code.

(ee) “ Performance Period ” means the time period during which specified performance criteria and/or continued status as an Employee, Director, or Consultant must be met as determined by the Administrator in its sole discretion.

(ff) “ Plan ” means this Live Oak Bancshares 2015 Omnibus Stock Incentive Plan.

(gg) “ Post-Termination Exercise Period ” means the period specified in the Award Agreement of not less than thirty (30) days commencing on the date of termination (other than termination by the Company or any Related Entity for Cause) of the Grantee’s Continuous Service, or such longer period as may be applicable upon death or Disability.

(hh) “ Related Entity ” means any Parent or Subsidiary of the Company .

(ii) “ Restricted Stock ” means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator.

(jj) “ Restricted Stock Units ” means an Award which may be earned in whole or in part upon the passage of time or the attainment of performance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Administrator.

(kk) “ Rule 16b-3 ” means Rule 16b-3 promulgated under the Exchange Act or any successor thereto.

(ll) “ SAR ” means a stock appreciation right entitling the Grantee to Shares or cash compensation, as established by the Administrator, measured by appreciation in the value of Common Stock.

(mm) “ Share ” means a share of the Common Stock.

(nn) “ Subsidiary ” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

(oo) “ Tax Obligations ” means all income tax, social insurance, payroll tax, fringe benefits tax, or other tax-related liabilities related to a Grantee’s participation in the Plan and the receipt of any benefits hereunder, as determined under the Applicable Laws.

3. Stock Subject to the Plan .

(a) Subject to adjustment as described in Section 13 below, the maximum aggregate number of Shares which may be issued pursuant to all Awards (including Incentive Stock Options) is Four Million Three Hundred Thousand (4,300,000) Shares. The Shares may be authorized, but unissued, or reacquired Common Stock.

(b) Any Shares covered by an Award (or portion of an Award) which is forfeited, canceled or expires (whether voluntarily or involuntarily) shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan, except that the maximum aggregate number of Shares which may be issued pursuant to the exercise of Incentive Stock Options shall not exceed the number specified in Section 3(a). Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited or repurchased by the Company, such Shares shall become available for future grant under the Plan. In the event any Option or other Award granted under the Plan is exercised through the tendering of Shares (either actually or through attestation), or in the event tax withholding obligations are satisfied by tendering or withholding Shares, any Shares so tendered or withheld shall not again be available for awards under the Plan. To the extent that cash in lieu of Shares is delivered upon the exercise of an SAR pursuant to Section 6(m), the Company shall be deemed, for purposes of applying the limitation on the number of shares, to have issued the greater of the number of Shares which it was entitled to issue upon such exercise or on the exercise of any related Option. Shares reacquired by the Company on the open market or otherwise using cash proceeds from the exercise of Options shall not be available for awards under the Plan.

4. Administration of the Plan .

(a) Plan Administrator .

(i) Administration with Respect to Directors and Officers . With respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

(ii) Administration With Respect to Consultants and Other Employees . With respect to grants of Awards to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

(iii) Administration With Respect to Covered Employees . Notwithstanding the foregoing, grants of Awards to any Covered Employee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation. In the case of such Awards granted to Covered Employees, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee or subcommittee.

(b) Multiple Administrative Bodies . The Plan may be administered by different bodies with respect to Directors, Officers, Consultants, and Employees who are neither Directors nor Officers.

(c) Powers of the Administrator . Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion:

(i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder;

(ii) to determine whether and to what extent Awards are granted hereunder;

(iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder;

(iv) to approve forms of Award Agreements for use under the Plan;

(v) to determine the type, terms and conditions of any Award granted hereunder;

(vi) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable non-U.S. jurisdictions and to afford Grantees favorable treatment under such rules or laws; provided, however, that no Award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the Plan;

(vii) to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that would adversely affect the Grantee’s rights under an outstanding Award shall not be made without the Grantee’s written consent; provided, however, that an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option shall not be treated as adversely affecting the rights of the Grantee;

(viii) to construe and interpret the terms of the Plan and Awards, including without limitation, any notice of award or Award Agreement, granted pursuant to the Plan;

(ix) to institute an option exchange program; and

(x) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate.

The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator; provided that the Administrator may not exercise any right or power reserved to the Board. Any decision made, or action taken, by the Administrator or in connection with the administration of this Plan shall be final, conclusive and binding on all persons having an interest in the Plan.

(d) Indemnification . In addition to such other rights of indemnification as they may have as members of the Board or as Officers or Employees of the Company or a Related Entity, members of the Board and any Officers or Employees of the Company or a Related Entity to whom authority to act for the Board, the Administrator or the Company is delegated shall be defended and indemnified by the Company to the extent permitted by law on an after-tax basis against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any claim, investigation, action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any Award granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by the Company) or paid by them in satisfaction of a judgment in any such claim, investigation, action, suit or proceeding, except in relation to such liabilities, costs, and expenses as may arise out of, or result from, the bad faith, gross negligence, willful misconduct, or criminal acts of such persons; provided, however, that within thirty (30) days after the institution of such claim, investigation, action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at the Company’s expense to defend the same.

5. Eligibility . Awards other than Incentive Stock Options may be granted to Employees, Directors, and Consultants of the Company and any Related Entity. Incentive Stock Options may be granted only to Employees of the Company or a Related Entity. An Employee, Director, or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors, or Consultants who are residing in non-U.S. jurisdictions as the Administrator may determine from time to time.

6. Terms and Conditions of Awards .

(a) Types of Awards . The Administrator is authorized under the Plan to award any type of arrangement to an Employee, Director or Consultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) cash or (iii) an Option, an SAR, or similar right with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions. Such awards include, without limitation, Options, SARs, sales or bonuses of Restricted Stock, Restricted Stock Units, and Dividend Equivalent Rights. An Award may consist of one such security or benefit, or two (2) or more of them in any combination or alternative.

(b) Designation of Award . Each Award shall be evidenced by an Award Agreement in form and substance satisfactory to the Administrator in its discretion. The type of each Award shall be designated in the Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, an Option will qualify as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. The $100,000 limitation of Section 422(d) of the Code is calculated based on the aggregate Fair Market Value of the Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Related Entity). For purposes of this calculation, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the grant date of the relevant Option. Any Option granted which fails to satisfy the requirements of the Applicable Laws for treatment as an Incentive Stock Option shall become a Non-Qualified Stock Option.

(c) Conditions of Award . Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria that may be established by the Administrator.

(d) Performance-Based Awards . If the Administrator, in its discretion, determines to grant one or more Awards intended to quality as Performance-Based Compensation, then the following provisions will apply.

(i) The granting and/or vesting of Awards under the Plan may, in the discretion of the Administrator, be made subject to the achievement of certain performance criteria as the Administrator may determine. The performance criteria established by the Administrator may be based on any one of, or combination of, the following criteria: increase in share price, earnings per share, total shareholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measure of performance selected by the Administrator.

(ii) With respect to Awards intended to qualify as Performance-Based Compensation, before the 90th day of the applicable Performance Period (or, if the Performance Period is less than one year, no later than the number of days which is equal to 25% of such Performance Period), the Administrator will determine the duration of the Performance Period, the performance criteria on which performance will be measured, and the amount and terms of payment/vesting upon achievement of the such criteria.

(iii) Following the completion of each Performance Period, the Administrator will certify in writing whether the applicable performance criteria have been achieved for such Performance Period. A Grantee will be eligible to receive payment pursuant to an Award intended to qualify as Performance-Based Compensation for a Performance Period only if the performance criteria for such Performance Period are achieved. In determining the amounts earned by a Grantee pursuant to an Award intended to qualified as Performance-Based Compensation, the Administrator will have the right to (A) reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Administrator may deem relevant to the assessment of individual or corporate performance for the Performance Period, (B) determine what actual Award, if any, will be paid in the event of a Corporate Transaction or in the event of a termination of employment following a Corporate Transaction prior to the end of the Performance Period, and (C) determine what actual Award, if any, will be paid in the event of a termination of employment other than as the result of a Grantee’s death or Disability prior to a Corporate Transaction and prior to the end of the Performance Period to the extent an actual Award would have otherwise been achieved had the Grantee remained employed through the end of the Performance Period.

(iv) To the extent that the Administrator determines as of the date of grant of an Award that (A) the Award is intended to qualify as Performance-Based Compensation, and (B) the Award is not exempt from the application of Section 162(m) of the Code, such Award shall not be effective until any shareholder approval required under Section 162(m) of the Code has been obtained.

(e) Acquisitions and Other Transactions . The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction.

(f) Deferral of Award Payment . The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other

event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program.

(g) Separate Programs . The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time.

(h) Individual Option and SAR Limit . The maximum number of Shares with respect to which Options and SARs may be granted to any Grantee in any calendar year shall be Fifty Thousand (50,000) Shares. The foregoing limitation shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 13 below. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitations with respect to a Grantee, if any Option or SAR is canceled, the canceled Option or SAR shall continue to count against the maximum number of Shares with respect to which Options and SARs may be granted to the Grantee. For this purpose, the repricing of an Option (or in the case of an SAR, the base amount on which the stock appreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Common Stock) shall be treated as the cancellation of the existing Option or SAR and the grant of a new Option or SAR.

(i) Early Exercise . An Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate.

(j) Term of Award . The term of each Award shall be the term stated in the Award Agreement, provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Related Entity, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. Notwithstanding the foregoing, the specified term of any Award shall not include any period for which the Grantee has elected to defer the receipt of the Shares or cash issuable pursuant to the Award.

(k) Transferability of Awards . Unless the Administrator provides otherwise, in its sole discretion, no award may be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee. Notwithstanding the foregoing, the Grantee may designate one or more beneficiaries of the Grantee’s Award in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator.

(l) Time of Granting Awards . The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other later date as is determined by the Administrator.

(m) Stock Appreciation Rights . An SAR may be granted (i) with respect to any Option granted under this Plan, either concurrently with the grant of such Option or at such later time as determined by the Administrator (as to all or any portion of the Shares subject to the Option), or (ii) alone, without reference to any related Option. Each SAR granted by the Administrator under this Plan shall be subject to the following terms and conditions. Each SAR granted to any participant shall relate to such number of Shares as shall be determined by the Administrator, subject to adjustment as provided in Section 13. In the case of an SAR granted with respect to an Option, the number of Shares to which the SAR pertains shall be reduced in the same proportion that the holder of the Option exercises the related Option. The exercise price of an SAR will be determined by the Administrator, in its discretion, at the date of grant but may not be less than 100% of the Fair Market Value of the Shares subject thereto on the date of grant. Subject to the right of the Administrator to deliver cash in lieu of Shares (which, as it pertains to Officers and Directors of the Company, shall comply with all requirements of the Exchange Act), the number of Shares which shall be issuable upon the exercise of an SAR shall be determined by dividing:

(i) the number of Shares as to which the SAR is exercised multiplied by the amount of the appreciation in such Shares (for this purpose, the “appreciation” shall be the amount by which the Fair Market Value of the Shares subject to the SAR on the exercise date exceeds (1) in the case of an SAR related to an Option, the exercise price of the Shares under the Option or (2) in the case of an SAR granted alone, without reference to a related Option, an amount which shall be determined by the Administrator at the time of grant, subject to adjustment under Section 13); by

(ii) the Fair Market Value of a Share on the exercise date.

In lieu of issuing Shares upon the exercise of an SAR, the Administrator may elect to pay the holder of the SAR cash equal to the Fair Market Value on the exercise date of any or all of the Shares which would otherwise be issuable. No fractional Shares shall be issued upon the exercise of an SAR; instead, the holder of the SAR shall be entitled to receive a cash adjustment equal to the same fraction of the Fair Market Value of a Share on the exercise date or to purchase the portion necessary to make a whole share at its Fair Market Value on the date of exercise. The exercise of an SAR related to an Option shall be permitted only to the extent that the Option is exercisable under Section 11 on the date of surrender. Any Incentive Stock Option surrendered pursuant to the provisions of this Section 6(m) shall be deemed to have been converted into a Non-Qualified Stock Option immediately prior to such surrender.

(n) Compliance with Section 409A of the Code . Notwithstanding anything to the contrary set forth herein, any Award that is not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Award will comply with the requirements of Section 409A of the Code. Such restrictions, if any, shall be determined by the Administrator and contained in the Award Agreement evidencing such Award.

7. Award Exercise or Purchase Price, Consideration and Taxes .

(a) Exercise or Purchase Price . The exercise or purchase price, if any, for an Award shall be as follows.

(i) In the case of an Incentive Stock Option:

(1) granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Related Entity, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or

(2) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Non-Qualified Stock Option, the per Share exercise price shall be not less than one-hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iii) In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any, shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iv) In the case of other Awards, such price as is determined by the Administrator.

(v) Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(e), above, the exercise or purchase price for the Award shall be determined in accordance with the provisions of the relevant instrument evidencing the agreement to issue such Award.

(b) Consideration . Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award, including the method of payment, shall be determined by the Administrator. In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following:

(i) cash;

(ii) check;

(iii) delivery of Grantee’s promissory note with such recourse, interest, security, and redemption provisions as the Administrator determines as appropriate (but only to the extent that the acceptance or terms of the promissory note would not violate an Applicable Law); provided, however, that interest shall compound at least annually and shall be charged at the minimum rate of interest necessary to avoid (A) the imputation of interest income to the Company and compensation income to the Grantee under any applicable provisions of the Code, and (B) the classification of the Award as a liability for financial accounting purposes;

(iv) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised;

(v) with respect to Options, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates (or other evidence satisfactory to the Company to the extent that the Shares are uncertificated) for the purchased Shares directly to such brokerage firm in order to complete the sale transaction;

(vi) with respect to Options, payment through a “net exercise” such that, without the payment of any funds, the Grantee may exercise the Option and receive the net number of Shares equal to (i) the number of Shares as to which the Option is being exercised, multiplied by (ii) a fraction, the numerator of which is the Fair Market Value per Share (on such date as is determined by the Administrator) less the Exercise Price per Share, and the denominator of which is such Fair Market Value per Share;

(vii) past or future services actually or to be rendered to the Company or a Related Entity; or

(viii) any combination of the foregoing methods of payment.

The Administrator may at any time or from time to time, by adoption of or by amendment to the standard forms of Award Agreement described in Section 4(c)(iv), or by other means, grant Awards which do not permit all of the foregoing forms of consideration to be used in payment for the Shares or which otherwise restrict one or more forms of consideration.

8. Notice to Company of Disqualifying Disposition . Each Employee who receives an Incentive Stock Option must agree to notify the Company in writing immediately after the Employee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an Incentive Stock Option.

9. Tax Withholding .

(a) Prior to the delivery of any Shares or cash pursuant to an Award (or the exercise thereof), or at such other time as the Tax Obligations are due, the Company, in accordance with the Code and any Applicable Laws, shall have the power and the right to deduct or withhold, or require a Grantee to remit to the Company, an amount sufficient to satisfy all Tax Obligations. The Administrator may, in its discretion, condition such delivery, payment, or other event pursuant to an Award on the payment by the Grantee of any such Tax Obligations.

(b) The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may designate the method or methods by which a Grantee may satisfy the Tax Obligations. As determined by the Administrator in its discretion from time to time, these methods may include one or more of the following:

(i) paying cash;

(ii) electing to have the Company withhold otherwise cash or Shares having a Fair Market Value equal to the amount required to be withheld;

(iii) delivering to the Company already-owned Shares having a Fair Market Value equal to the minimum amount required to be withheld or remitted, provided the delivery of such Shares will not result in any adverse accounting consequences as the Administrator determines in its sole discretion;

(iv) selling a sufficient number of Shares otherwise deliverable to the Grantee through such means as the Administrator may determine in its sole discretion (whether through a broker or otherwise) equal to the Tax Obligations required to be withheld;

(v) retaining from salary or other amounts payable to the Grantee cash having a sufficient value to satisfy the Tax Obligations; or

any other means which the Administrator, in its sole discretion, determines to both comply with Applicable Laws, and to be consistent with the purposes of the Plan.

The amount of Tax Obligations will be deemed to include any amount that the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state, local and foreign marginal income tax rates applicable to the Grantee or the Company, as applicable, with respect to the Award on the date that the amount of tax or social insurance liability to be withheld or remitted is to be determined. The Fair Market Value of the Shares to be withheld or delivered shall be determined as of the date that the Tax Obligations are required to be withheld.

10. Rights As a Shareholder .

(a) Restricted Stock . Except as otherwise provided in any Award Agreement, a Grantee will not have any rights of a shareholder with respect any of the Shares granted to the Grantee under an Award of Restricted Stock (including the right to vote or receive dividends and other distributions paid or made with respect thereto) nor shall cash dividends or dividend equivalents accrue or be paid in respect of any unvested Award of Restricted Stock, unless and until such Shares vest.

(b) Other Awards . In the case of Awards other than Restricted Stock, except as otherwise provided in any Award Agreement, a Grantee will not have any rights of a shareholder, nor will dividends or dividend equivalents accrue or be paid, with respect any of the Shares granted pursuant to such Award until the Award is exercised or settled and the Shares are delivered (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company).

11. Exercise of Award .

(a) Procedure for Exercise .

(i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and as specified in the Award Agreement.

(ii) An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised has been made, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v).

(b) Exercise of Award Following Termination of Continuous Service . In the event of termination of a Grantee’s Continuous Service for any reason other than Disability or death (but not in the event of a Grantee’s change of status from Employee to Consultant or from Consultant to Employee), such Grantee may, but only during the Post-Termination Exercise Period (but in no event later than the expiration date of the term of such Award as set forth in the Award Agreement), exercise the portion of the Grantee’s Award that was vested at the date of such termination or such other portion of the Grantee’s Award as may be determined by the Administrator. The Grantee’s Award Agreement may provide that upon the termination of the Grantee’s Continuous Service for Cause, the Grantee’s right to exercise the Award shall terminate concurrently with the termination of Grantee’s Continuous Service. In the event of a Grantee’s change of status from Employee to Consultant, an Employee’s Incentive Stock Option shall convert automatically to a Non-Qualified Stock Option on the day three (3) months and one day following such change of status. To the extent that the Grantee’s Award was unvested at the date of termination, or if the Grantee does not exercise the vested portion of the Grantee’s Award within the Post-Termination Exercise Period, the Award shall terminate.

(c) Disability of Grantee . In the event of termination of a Grantee’s Continuous Service as a result of his or her Disability, such Grantee may, but only within twelve (12) months from the date of such termination (or such longer period as specified in the Award Agreement but in no event later than the expiration date of the term of such Award as set forth in the Award Agreement), exercise the portion of the Grantee’s Award that was vested at the date of such termination; provided, however, that if such Disability is not a “disability” as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically convert to a Non-Qualified Stock Option on the day three (3) months and one day following such termination. To the extent that the Grantee’s Award was unvested at the date of termination, or if Grantee does not exercise the vested portion of the Grantee’s Award within the time specified herein, the Award shall terminate.

(d) Death of Grantee . In the event of a termination of the Grantee’s Continuous Service as a result of his or her death, or in the event of the death of the Grantee

during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee’s termination of Continuous Service as a result of his or her Disability, the Grantee’s estate or a person who acquired the right to exercise the Award by bequest or inheritance may exercise the portion of the Grantee’s Award that was vested as of the date of termination, within twelve (12) months from the date of death (or such longer period as specified in the Award Agreement but in no event later than the expiration of the term of such Award as set forth in the Award Agreement). To the extent that, at the time of death, the Grantee’s Award was unvested, or if the Grantee’s estate or a person who acquired the right to exercise the Award by bequest or inheritance does not exercise the vested portion of the Grantee’s Award within the time specified herein, the Award shall terminate.

(e) Extension if Exercise Prevented by Law . Notwithstanding the foregoing, if the exercise of an Award within the applicable time periods set forth in this Section 11 is prevented by the provisions of Section 12 below, the Award shall remain exercisable until one (1) month after the date the Grantee is notified by the Company that the Award is exercisable, but in any event no later than the expiration of the term of such Award as set forth in the Award Agreement.

12. Conditions Upon Issuance of Shares; Manner of Issuance of Shares .

(a) If at any time the Administrator determines that the delivery of Shares pursuant to the exercise, vesting or any other provision of an Award is or may be unlawful under Applicable Laws, the vesting or right to exercise an Award or to otherwise receive Shares pursuant to the terms of an Award shall be suspended until the Administrator determines that such delivery is lawful and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company shall have no obligation to effect any registration or qualification of the Shares under any Applicable Law.

(b) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws.

(c) Subject to the Applicable Laws and any governing rules or regulations, the Company shall issue or cause to be issued the Shares acquired pursuant to an Award and shall deliver such Shares to or for the benefit of the Grantee by means of one or more of the following as determined by the Administrator: (i) by delivering to the Grantee evidence of book entry Shares credited to the account of the Grantee, (ii) by depositing such Shares for the benefit of the Grantee with any broker with which the Grantee has an account relationship, or (iii) by delivering such Shares to the Grantee in certificate form.

(d) No fractional Shares shall be issued pursuant to any Award under the Plan; any Grantee who would otherwise be entitled to receive a fraction of a Share upon exercise or vesting of an Award will receive from the Company cash in lieu of such fractional Shares in an amount equal to the Fair Market Value of such fractional Shares, as determined in the sole discretion of the Administrator.

13. Adjustments . Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued and outstanding Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Shares, or similar transaction affecting the Shares, (ii) any other increase or decrease in the number of issued and outstanding Shares effected without receipt of consideration by the Company, or (iii) any other transaction with respect to the Company’s Common Stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or property), reorganization, liquidation (whether partial or complete) or any similar transaction; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Administrator and its determination shall be final, binding and conclusive. Except as the Administrator determines, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award. No adjustments shall be made for dividends paid in cash or in property other than Common Stock of the Company, nor shall cash dividends or dividend equivalents accrue or be paid in respect of unexercised Options or unvested Awards hereunder.

14. Corporate Transactions .

(a) Termination of Award to Extent Not Assumed in Corporate Transaction . Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate. However, all such Awards shall not terminate to the extent they are Assumed in connection with the Corporate Transaction.

(b) Acceleration of Award Upon Corporate Transaction . The Administrator shall have the authority, exercisable either in advance of any actual or anticipated Corporate Transaction or at the time of an actual Corporate Transaction, and exercisable at the time of the grant of an Award under the Plan or any time while an Award remains outstanding, to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested Awards under the Plan and the release from restrictions on transfer and repurchase or forfeiture rights of such Awards in connection with a Corporate Transaction on such terms and conditions as the Administrator may specify. The Administrator also shall have the authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the Continuous Service of the Grantee within a specified period following the effective date of the Corporate Transaction. The Administrator may provide that any Awards so vested or released from such limitations in connection with a Corporate Transaction shall remain fully exercisable until the expiration or sooner termination of the Award.

(c) Effect of Acceleration on Incentive Stock Options . Any Incentive Stock Option accelerated under this Section 14 in connection with a Corporate Transaction shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded.

15. Effective Date and Term of Plan . The Plan shall become effective at such time as it has been (a) approved by the Company’s shareholders and (b) adopted by the Board. Shareholder approval shall be obtained in the degree and manner required under Applicable Laws. The Plan shall continue in effect for a term of ten (10) years unless sooner terminated. Any Award exercised before shareholder approval is obtained will be rescinded if shareholder approval is not obtained within the time prescribed, and Shares issued on the exercise of any such Award shall not be counted in determining whether shareholder approval is obtained. Subject to the preceding sentence and the Applicable Laws, Awards may be granted under the Plan upon its becoming effective.

16. Amendment, Suspension or Termination of the Plan .

(a) The Board may at any time amend, suspend or terminate the Plan in any respect, except that it may not, without the approval of the shareholders obtained within twelve (12) months before or after the Board adopts a resolution authorizing any of the following actions, do any of the following:

(i) increase the total number of shares that may be issued under the Plan (except by adjustment pursuant to Section 13);

(ii) modify the provisions of Section 6 regarding eligibility for grants of Incentive Stock Options;

(iii) modify the provisions of Section 7(a) regarding the exercise price at which shares may be offered pursuant to Options (except by adjustment pursuant to Section 13);

(iv) extend the expiration date of the Plan; and

(v) except as provided in Section 13 (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares), the Company may not amend an Award granted under the Plan to reduce its exercise price per share, cancel and regrant new Awards with lower prices per share than the original prices per share of the cancelled Awards, or cancel any Awards in exchange for cash or the grant of replacement Awards with an exercise price that is less than the exercise price of the original Awards, essentially having the effect of a repricing, without approval by the Company’s shareholders.

(b) No Award may be granted during any suspension of the Plan or after termination of the Plan.

(c) No suspension or termination of the Plan (including termination of the Plan under Section 14, above) shall adversely affect any rights under Awards already granted to a Grantee without his or her consent.

17. Reservation of Shares .

(a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

(b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

18. No Effect on Terms of Employment/Consulting Relationship . The Plan shall not confer upon any Grantee any right with respect to the Grantee’s Continuous Service, nor shall it interfere in any way with his or her right or the right of the Company or a Related Entity to terminate the Grantee’s Continuous Service at any time, with or without Cause, and with or without notice. The ability of the Company or any Related Entity to terminate the employment of a Grantee who is employed at will is in no way affected by its determination that the Grantee’s Continuous Service has been terminated for Cause for the purposes of this Plan.

19. No Effect on Retirement and Other Benefit Plans . Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a “Retirement Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.

20. Information to Grantees . The Company shall provide to each Grantee, during the period for which such Grantee has one or more Awards outstanding, such information as required by Applicable Laws.

21. Effect of Section 162(m) of the Code . To the extent that the Administrator determines as of the date of grant of an Award that (a) the Award is intended to qualify as Performance-Based Compensation and (b) the Award is not exempt from the application of Section 162(m) of the Code, such Award shall not be effective until any shareholder approval required under Section 162(m) of the Code has been obtained.

22. Electronic Delivery . The Administrator may, in its sole discretion, decide to deliver any documents related to any Award granted under the Plan through an online or electronic system established and maintained by the Company or another third party designated by the Company or to request a Grantee’s consent to participate in the Plan by electronic means. By accepting an Award, each Grantee consents to receive such documents by electronic delivery and agrees to participate in the Plan through an online or electronic system established and maintained by the Company or another third party designated by the Company, and such consent shall remain in effect throughout Grantee’s Continuous Service with the Company and any Related Entity and thereafter until withdrawn in writing by Grantee.

23. Data Privacy . The Administrator may, in its sole discretion, decide to collect, use and transfer, in electronic or other form, personal data as described in this Plan or any Award for the exclusive purpose of implementing, administering and managing participation in the Plan. By accepting an Award, each Grantee acknowledges that the Company holds certain personal information about Grantee, including, but not limited to, name, home address and telephone number, date of birth, social security number or other identification number, salary, nationality, job title, details of all Awards awarded, cancelled, exercised, vested or unvested, for the purpose of implementing, administering and managing the Plan (the “ Data ”). Each Grantee further acknowledges that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan and that these third parties may be located in jurisdictions that may have different data privacy laws and protections, and Grantee authorizes such third parties to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the recipient or the Company may elect to deposit any Shares acquired upon any Award.

24. Compliance with Section 409A . To the extent that the Administrator determines that any Award granted hereunder is subject to Section 409A of the Code, the Award Agreement evidencing such Award shall incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code. To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued or amended after the effective date of the Plan. Notwithstanding any provision of the Plan to the contrary, in the event that following the effective date of the Plan the Administrator determines that any Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the effective date of the Plan), the Administrator may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Administrator determines are necessary or appropriate to (1) exempt the Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (2) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance.

25. Unfunded Obligation . Grantees shall have the status of general unsecured creditors of the Company. Any amounts payable to Grantees pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974, as amended. Neither the Company nor any Related Entity shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Grantee account shall not create or constitute a trust or fiduciary relationship between the Administrator, the Company or any Related Entity and a Grantee, or otherwise create any vested or beneficial interest in any Grantee or the Grantee’s creditors in any assets of the Company or a Related Entity. The Grantees shall have no claim against the Company or any Related Entity for any changes in the value of any assets that may be invested or reinvested by the Company with respect to the Plan.

26. Construction . Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

Exhibit 10.5

(Subchapter S Corporation)

[Execution Copy]

SMALL BUSINESS LENDING FUND – SECURITIES PURCHASE AGREEMENT


Live Oak Bancshares, Inc.				0710
Name of Company				SBLF No.

2605 Iron Gate Dr., Suite 100

Corporation

Street Address for Notices

Organizational Form (e.g., corporation, national bank)

Wilmington

North Carolina

City

State

Zip Code

Jurisdiction of Organization

Brett Caines

Federal Reserve

Name of Contact Person to Receive Notices

Appropriate Federal Banking Agency

(910) 790-5868

(919) 790-5867

September 13, 2011

Fax Number for Notices

Phone Number for Notices

Effective Date

THIS SECURITIES PURCHASE AGREEMENT (the “ Agreement ”) is made as of the Effective Date set forth above (the “ Signing Date ”) between the Secretary of the Treasury (“ Treasury ”) and the Company named above (the “ Company ”), an entity existing under the laws of the Jurisdiction of Organization stated above in the Organizational Form stated above. The Company has elected to participate in Treasury’s Small Business Lending Fund program (“ SBLF ”). This Agreement contains the terms and conditions on which the Company intends to issue subordinated debentures to Treasury, which Treasury will purchase using funds appropriated under SBLF.

This Agreement consists of the following attached parts, all of which together constitute the entire agreement of Treasury and the Company (the “ Parties ”) with respect to the subject matter hereof, superseding all prior written and oral agreements and understandings between the Parties with respect to such subject matter:


Annex A:	Information Specific to the Company and the Investment	Annex G:	Form of Officer’s Certificate
	Information Specific to the Company and the Investment	Annex H:	Form of Supplemental Reports
Annex B:	Definitions	Annex I:	Form of Annual Certification
Annex C:	General Terms and Conditions	Annex J:	Form of Opinion
Annex D:	Disclosure Schedule	Annex K:	Form of Repayment Document
Annex E:	Registration Rights
Annex F:	Form of Senior Security

This Agreement may be executed in any number of counterparts, each being deemed to be an original instrument, and all of which will together constitute the same agreement. Executed signature pages to this Agreement may be delivered by facsimile or electronic mail attachment.

[ Signatures follow ]

Securities Purchase Agreement – Live Oak Bancshares, Inc. (SBLF – 0710)

(Subchapter S Corporation)

[Execution Copy]

IN WITNESS WHEREOF , this Agreement has been duly executed and delivered by the duly authorized representatives of the parties hereto as of the Effective Date.


THE SECRETARY OF THE TREASURY		LIVE OAK BANCSHARES, INC.

By:	/s/ Don Graves	By:	/s/ James S. Mahan, III
Name:	Don Graves	Name:	James S. Mahan, III
Title:	Deputy Assistant Secretary	Title:	Chairman and Chief Executive Officer

Securities Purchase Agreement – Live Oak Bancshares, Inc. (SBLF – 0710)

(Subchapter S Corporation)

[Execution Copy]

ANNEX A

INFORMATION SPECIFIC TO THE COMPANY AND THE INVESTMENT

Purchase Information

Terms of the Purchase:


Original Aggregate Principal Amount of Senior Securities in the form of Annex F purchased:		$6,800,000

Interest Payment Dates:		Payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year.

Purchase Price:		$6,800,000

Closing:


Location of Closing:		Virtual

Time of Closing:		10:00 a.m. (EST)

Date of Closing:		September 13, 2011

Redemption Information

( Only complete if the Company was a CPP or CDCI participant; leave blank otherwise. )


Prior Program:		¨ CPP

		¨ CDCI

Original Aggregate Principal Amount of Previously Acquired Securities:

Repayment Amount:

Residual Amount:


Annex A (Information Specific to the Company and the Investment)		Page 1

(Subchapter S Corporation)

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Matching Private Investment Information


Treasury investment is contingent on the Company raising Matching Private Investment (check one):		¨ Yes
		x No

If Yes, complete the following (leave blank otherwise) :

Aggregate Dollar Amount of Matching Private Investment Required:

Aggregate Dollar Amount of Matching Private Investment Received:

Class of securities representing Matching Private Investment:

Date of issuance of Matching Private Investment:


Annex A (Information Specific to the Company and the Investment)		Page 2

(Subchapter S Corporation)

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ANNEX B

DEFINITIONS

1. Definitions . Except as otherwise specified herein or as the context may otherwise require, the following terms have the respective meanings set forth below for all purposes of this Agreement.

“ Acquiror ,” in any Holding Company Transaction, means the surviving or resulting entity or its ultimate parent in the case of a merger or consolidation or the transferee in the case of a sale, lease or other transfer in one transaction or a series of related transactions of all or substantially all of the consolidated assets of the Company and its subsidiaries, taken as a whole.

“ Affiliate ” means, with respect to any person, any person directly or indirectly controlling, controlled by or under common control with, such other person. For purposes of this definition, “ control ” (including, with correlative meanings, the terms “ controlled by ” and “ under common control with ”) when used with respect to any person, means the possession, directly or indirectly through one or more intermediaries, of the power to cause the direction of management and/or policies of such person, whether through the ownership of voting securities by contract or otherwise.

“ Application Date ” means the date of the Company’s completed application to participate in SBLF.

“ Appropriate Federal Banking Agency ” means the “appropriate Federal banking agency” with respect to the Company or such Company Subsidiaries, as applicable, as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)). The Appropriate Federal Banking Agency is identified on the cover page of this Agreement.

“ Appropriate State Banking Agency ” means, if the Company is a State-chartered bank, the Company’s State bank supervisor (as defined in Section 3(r) of the Federal Deposit Insurance Act, 12 U.S.C. § 1813(q)).

“ Bank Holding Company ” means a company registered as such with the Federal Reserve pursuant to 12 U.S.C. §1842 and the regulations of the Federal Reserve promulgated thereunder.

“ Bylaws ” means the bylaws of the Company, as they may be amended from time to time.

“ Call Report ” has the meaning assigned thereto in Section 4102(4) of the SBJA. If the Company is a Bank Holding Company or a Savings and Loan Holding Company, unless the context clearly indicates otherwise: (a) the term “Call Report” shall mean the Call Report(s) (as defined in Section 4102(4) of the SBJA) of the IDI Subsidiary(ies); and (b) if there are multiple IDI Subsidiaries, all references herein or in any document executed or delivered in


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connection herewith (including the Senior Securities, the Initial Supplemental Report and all Quarterly Supplemental Reports) to any data reported in a Call Report shall refer to the aggregate of such data across the Call Reports for all such IDI Subsidiaries.

“ CDCI ” means the Community Development Capital Initiative, as authorized under the Emergency Economic Stabilization Act of 2008.

“ Charter ” means the Company’s certificate or articles of incorporation, articles of association, or similar organizational document.

“ Company Material Adverse Effect ” means a material adverse effect on (i) the business, results of operation or condition (financial or otherwise) of the Company and its consolidated subsidiaries taken as a whole; provided , however , that Company Material Adverse Effect shall not be deemed to include the effects of (A) changes after the Signing Date in general business, economic or market conditions (including changes generally in prevailing interest rates, credit availability and liquidity, currency exchange rates and price levels or trading volumes in the United States or foreign securities or credit markets), or any outbreak or escalation of hostilities, declared or undeclared acts of war or terrorism, in each case generally affecting the industries in which the Company and its subsidiaries operate, (B) changes or proposed changes after the Signing Date in GAAP, or authoritative interpretations thereof, or (C) changes or proposed changes after the Signing Date in securities, banking and other laws of general applicability or related policies or interpretations of Governmental Entities (in the case of each of these clauses (A), (B) and (C), other than changes or occurrences to the extent that such changes or occurrences have or would reasonably be expected to have a materially disproportionate adverse effect on the Company and its consolidated subsidiaries taken as a whole relative to comparable U.S. banking or financial services organizations); or (ii) the ability of the Company to consummate the Purchase and other transactions contemplated by this Agreement and perform its obligations hereunder and under the Senior Securities on a timely basis and declare and pay interest on the Interest Payment Dates set forth in the Senior Securities.

“ CPP ” means the Capital Purchase Program, as authorized under the Emergency Economic Stabilization Act of 2008.

“ Disclosure Schedule ” means that certain schedule to this Agreement delivered to Treasury on or prior to the Signing Date, setting forth, among other things, items the disclosure of which is necessary or appropriate in response to an express disclosure requirement contained in a provision hereof. The Disclosure Schedule is contained in Annex D of this Agreement.

“ Executive Officers ” means the Company’s “executive officers” as defined in 12 C.F.R. § 215.2(e)(1) (regardless of whether or not such regulation is applicable to the Company).

“ Federal Reserve ” means the Board of Governors of the Federal Reserve System.

“ GAAP ” means generally accepted accounting principles in the United States.


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“ General Terms and Conditions ” and “ General T&C ” each mean Annex C of this Agreement.

“ Holder ” means a holder of the Senior Securities.

“ Holding Company Transaction ” means the occurrence of (a) any transaction (including, without limitation, any acquisition, merger or consolidation) the result of which is that a “person” or “group” within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, (i) becomes the direct or indirect ultimate “beneficial owner,” as defined in Rule 13d-3 under that Act, of common equity of the Company representing more than 50% of the voting power of the outstanding Common Stock or (ii) is otherwise required to consolidate the Company for purposes of generally accepted accounting principles in the United States, or (b) any consolidation or merger of the Company or similar transaction or any sale, lease or other transfer in one transaction or a series of related transactions of all or substantially all of the consolidated assets of the Company and its subsidiaries, taken as a whole, to any Person other than one of the Company’s subsidiaries; provided that, in the case of either clause (a) or (b), the Company or the Acquiror is or becomes a Bank Holding Company or Savings and Loan Holding Company.

“ IDI Subsidiary ” means any Company Subsidiary that is an insured depository institution.

“ Indebtedness ” shall mean, whether or not recourse is to all or a portion of the assets of the Company and whether or not contingent, (i) the claims of the Company’s secured and general creditors; (ii) every obligation of the Company for money borrowed; (iii) every obligation of the Company evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iv) every reimbursement obligation of the Company, contingent or otherwise, with respect to letters of credit, bankers’ acceptances, security purchase facilities or similar facilities issued for the account of the Company; (v) every obligation of the Company issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (vi) every capital lease obligation of the Company; (vii) all indebtedness of the Company for claims in respect of derivative products, including interest rate, foreign exchange rate and commodity forward contracts, options and swaps and similar arrangements; (viii) every obligation of the type referred to in clauses (i) through (vii) of another person and all dividends of another person the payment of which, in either case, the Company has guaranteed or is responsible or liable for directly or indirectly, as obligor or otherwise, and (ix) every obligation of the type referred to in clauses (i) through (vii) of another person and all dividends of another person the payment of which, in either case, is secured by a lien on any property or assets of the Company.

“ knowledge of the Company ” or “ Company’s knowledge ” means the actual knowledge after reasonable and due inquiry of the “ officers ” (as such term is defined in Rule 3b-2 under the Exchange Act) of the Company.


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“ Matching Private Investment-Supported, ” when used to describe the Company (if applicable), means the Company’s eligibility for participation in the SBLF program is conditioned upon the Company or an Affiliate of the Company acceptable to Treasury receiving Matching Private Investment, as contemplated by Section 4103(d)(3)(B) of the SBJA.

“ Original Letter Agreement ” means, if applicable, the Letter Agreement (and all terms incorporated therein) pursuant to which Treasury purchased from the Company, and the Company issued to Treasury, the Previously Acquired Securities or the securities exchanged for the Previously Acquired Securities).

“ Oversight Officials ” means, interchangeably and collectively as context requires, the Special Deputy Inspector General for SBLF Program Oversight, the Inspector General of the Department of the Treasury, and the Comptroller General of the United States.

“ Person ” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint-stock company, limited liability company or trust.

“ Previously Acquired Securities ” means, if the Company participated in CPP or CDCI, the securities identified in the “Redemption Information” section of Annex A .

“ Previously Disclosed ” means information set forth on the Disclosure Schedule or the Disclosure Update, as applicable; provided , however , that disclosure in any section of such Disclosure Schedule or Disclosure Update, as applicable, shall apply only to the indicated section of this Agreement; provided , further , that the existence of Previously Disclosed information, pursuant to a Disclosure Update, shall neither obligate Treasury to consummate the Purchase nor limit or affect any rights of or remedies available to Treasury.

“ Prior Program ” means (a) CPP, if the Company is a participant in CPP immediately prior to the Closing, or (b) CDCI, if the Company is a participant in CDCI immediately prior to the Closing.

“ Publicly-traded ” means a company that (i) has a class of securities that is traded on a national securities exchange and (ii) is required to file periodic reports with either the Securities and Exchange Commission or its primary federal bank regulator.

“ Purchase ” means the purchase of the Senior Securities by Treasury from the Company pursuant to this Agreement.

“Repayment ” means the repurchase set forth in the Repayment Document.

“ Repayment Amount ” means, if the Company participated in CPP or CDCI, the aggregate amount payable by the Company as of the Closing Date to redeem the Previously Acquired Securities in accordance with their terms, which amount is set forth in the “Redemption Information” section of Annex A .


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“ Savings and Loan Holding Company ” means a company registered as such with the Office of Thrift Supervision or any successor thereto pursuant to 12 U.S.C. §1467(a) and the regulations of the Office of Thrift Supervision promulgated thereunder.

“ SBJA ” means the Small Business Jobs Act of 2010, as it may be amended from time to time.

“ Senior Indebtedness ” means, with respect to the Senior Securities, (i) all deposit liabilities of the Company, (ii) the principal of (and premium, if any) and interest, if any (including interest accruing on or after the appointment of a receiver or conservator, or the filing of any petition in bankruptcy or for reorganization, relating to the Company, whether or not such claim for post appointment or post petition interest is allowed in such proceedings), on all Indebtedness, whether outstanding on the date of execution of this Agreement, or hereafter created, assumed or incurred, and any deferrals, renewals or extensions of such Indebtedness, provided , however , that Senior Indebtedness shall not include (A) any other subordinated debt of the Company that by its terms ranks pari passu or junior to the Senior Securities issued hereunder or (B) any obligation to holders of shares of equity in the Company arising as a result of their status as holders of such Capital Interests or shares of equity.

“ Senior Securities ” mean the unsecured subordinated debentures issued pursuant to this Agreement that do not constitute a class of stock or represent any equity ownership in the Company. Each debenture representing a Senior Security shall be expressed in a principal amount that is a multiple of $1,000.

“ Signing Date Total Risk-Based Capital Amount ” means $24,761,518.50.

“ Subsidiary ” means any corporation, partnership, joint venture, limited liability company or other entity (A) of which such person or a subsidiary of such person is a general partner or (B) of which a majority of the voting securities or other voting interests, or a majority of the securities or other interests of which having by their terms ordinary voting power to elect a majority of the board of directors or persons performing similar functions with respect to such entity, is directly or indirectly owned by such person and/or one or more subsidiaries thereof.

“ Tax ” or “ Taxes ” means any federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem , transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, penalty or addition imposed by any Governmental Entity.

“ Total Assets ” means, with respect to an insured depository institution, the total assets of such insured depository institution.

“ Total Risk Based Capital Dividend Threshold ” means, as of any particular date, the result of the following formula:

( ( A + B – C – D ) * 0.9 ) – E


Annex B (Definitions)		Page 5

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where:


A =		Signing Date Total Risk-Based Capital Amount;

B =		the Original Aggregate Principal Amount of the Senior Securities issued to Treasury;

C =		the aggregate amount of Charge-Offs since the Signing Date;

D =		the aggregate dollar amount of other instruments included in the Tier 2 capital of the Company or any IDI Subsidiary that have been redeemed at maturity since the Signing Date; and

E =		(i) beginning on the first day of the eleventh (11th) Interest Period, the amount equal to ten percent (10%) of the Original Aggregate Principal Amount of the Senior Securities issued to Treasury as of the Effective Date (without regard to any redemptions of Senior Securities that may have occurred thereafter) for every one percent (1%) of positive Percentage Change in Qualified Small Business Lending between the ninth (9th) Interest Period and the Baseline; and (ii) zero (0) at all other times.

“ Total Risk-Based Capital ” means, with respect to an insured depository institution, the total risk-based capital of such insured depository institution.

“ Total Risk-Weighted Assets ” means, with respect to an insured depository institution, the risk-weighted assets of such insured depository institution.

“ Transaction Documents ” means this Agreement, the Senior Securities, and all other instruments, documents and agreements executed by or on behalf of the Company and delivered concurrently herewith or at any time hereafter to or for the benefit of any holder of any Senior Security in connection with the transactions contemplated by this Agreement, all as amended, supplemented or modified from time to time.

2. Index of Definitions . The following table, which is provided solely for convenience of reference and shall not affect the interpretation of this Agreement, identifies the location where capitalized terms are defined in this Agreement:


Term		Location of Definition
Affiliate		Annex B, §1
Agreement		Cover Page
Appropriate Federal Banking Agency		Annex B, §1
Appropriate State Banking Agency		Annex B, §1
Bank Holding Company		Annex B, §1


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Bankruptcy Exceptions		General T&C, §2.5(a)
Board of Directors		General T&C, §2.6
Business Combination		General T&C, §5.8
business day		General T&C, §7.12
Call Report		Annex B, §1
Capitalization Date		General T&C, §2.2
CDCI		Annex B, §1
Closing		General T&C, §1.2(a)
Closing Date		General T&C, §1.2(a)
Closing Deadline		General T&C, §5.1(a)(i)
Code		General T&C, §2.14
Common Stock		General T&C, §2.2
Company		Cover Page
Company Financial Statements		General T&C, §1.3(h)
Company Material Adverse Effect		Annex B, §1
Company Reports		General T&C, §2.9
Company Subsidiary; Company Subsidiaries		General T&C, §2.5(b)
control; controlled by; under common control with		Annex B, §1
CPP		Annex B, §1
Disclosure Schedule		Annex B, §1
Disclosure Update		General T&C, §1.3(g)
ERISA		General T&C, §2.14
Exchange Act		General T&C, §4.3
Federal Reserve		Annex B, §1
GAAP		Annex B, §1
Governmental Entities		General T&C, §1.3(a)
Holder		Annex B, §1
Holding Company Senior Security		General T&C, §5.12(f)
IDI Subsidiary		Annex B, §1
Indemnitee		General T&C, §4.4(b)
Indebtedness		Annex B, §1
Information		General T&C, §3.1(c)(iii)
Initial Supplemental Report		General T&C, §1.3(i)
knowledge of the Company; Company’s knowledge		Annex B, §1
Majority Holders		General T&C, §4.3
Matching Private Investment		General T&C, §1.3(k)
Matching Private Investment-Supported		Annex B, § 1
Matching Private Investors		General T&C, §1.3(k)
officers		Annex B, §1
Oversight Officials		Annex B, §1
Parties		Cover Page
Plan		General T&C, §2.14
Previously Acquired Securities		Annex B, §1
Previously Disclosed		Annex B, §1
Prior Program		General T&C, §1.2(c)


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Proprietary Rights		General T&C, §2.21
Purchase		Annex B, §1
Purchase Price		General T&C, §1.1(a)
Regulatory Agreement		General T&C, §2.19
Related Party		General T&C, §2.25
Repayment Document		General T&C, §1.2(b)(ii)(E)
Residual Amount		General T&C, §1.2(b)(ii)(B)
S-Corp		General T&C, §2.28(a)
Savings and Loan Holding Company		Annex B, §1
SBJA		Annex B, §1
SBLF		Cover Page
SEC		General T&C, §2.11
Securities Act		General T&C, §2.1
Senior Indebtedness		Annex B, §1
Senior Securities Director(s)		General T&C, §5.12(e)
Signing Date		Cover Page
Subsidiary		Annex B, §1
Quarterly Supplemental Report		General T&C, §3.1(d)(i)
Tax; Taxes		Annex B, §1
Transaction Documents		Annex B, §1
Transfer		General T&C, §4.3
Treasury		Cover Page

3. Defined Terms in Annex K . Except for defined terms in Annex K that are expressly cross-referenced in another part of this Agreement, terms defined in Annex K are defined therein solely for purposes of Annex K and are not applicable to other parts of this Agreement.


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ANNEX C

GENERAL TERMS AND CONDITIONS

CONTENTS OF GENERAL TERMS AND CONDITIONS


		Page

ARTICLE I	PURCHASE; CLOSING		4

1.1	Purchase		4
1.2	Closing		4
1.3	Closing Conditions		5

ARTICLE II	REPRESENTATIONS AND WARRANTIES		7

2.1	Organization, Authority and Significant Subsidiaries		7
2.2	Capitalization		7
2.3	Senior Securities		8
2.4	Compliance With Identity Verification Requirements		8
2.5	Authorization; Enforceability		8
2.6	Anti-takeover Provisions and Rights Plan		9
2.7	No Company Material Adverse Effect		9
2.8	Company Financial Statements		10
2.9	Reports		10
2.10	No Undisclosed Liabilities		10
2.11	Offering of Securities		11
2.12	Litigation and Other Proceedings		11
2.13	Compliance with Laws		11
2.14	Employee Benefit Matters		11
2.15	Taxes		12
2.16	Properties and Leases		12
2.17	Environmental Liability		13
2.18	Risk Management Instruments		13
2.19	Agreements with Regulatory Agencies		13
2.20	Insurance		14
2.21	Intellectual Property		14
2.22	Brokers and Finders		14
2.23	Disclosure Schedule		14
2.24	Previously Acquired Securities		15
2.25	Related Party Transactions		15
2.26	Ability to Pay Interest		15
2.27	Amendment to Charter and Other Documents to Effect Section 5.12(e)		15
2.28	Subchapter S Election		15

ARTICLE III	COVENANTS		16

3.1	Affirmative Covenants		16
3.2	Negative Covenants		21


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ARTICLE IV	REMEDIES OF THE HOLDERS UPON EVENT OF DEFAULT	22

4.1	Event of Default	22
4.2	Acceleration and Other Remedies	22
4.3	Suits for Enforcement	23
4.4	Holders May File Proofs of Claim	23
4.5	Waiver of Past Defaults	23

ARTICLE V	ADDITIONAL AGREEMENTS	24

5.1	Purchase for Investment	24
5.2	Form of Senior Security	24
5.3	Execution of Senior Securities	24
5.4	Computation of Interest	24
5.5	Legends	25
5.6	Transfer of Senior Securities	27
5.7	Replacement of Senior Securities	28
5.8	Cancellation	28
5.9	Rule 144; Rule 144A; 4(1 ¹ ⁄ ₂ ) Transactions	29
5.10	Depository Senior Securities	30
5.11	Redemption	30
5.12	Provisions for Nonpayment of Interest and Voting Rights	32
5.13	Right to Pay Dividends; Restrictions on Dividends and Repurchases	35
5.14	No Preemptive Rights	35
5.15	References to Line Items of Supplemental Reports	36
5.16	Record Holders	36
5.17	Notices	36
5.18	Expenses and Further Assurances	36
5.19	Communications to Holders	36
5.20	Other Rights	36

ARTICLE VI	SUBORDINATION OF THE SENIOR SECURITIES	37

6.1	Agreement to Subordinate	37
6.2	Default on Senior Indebtedness	37
6.3	Liquidation; Dissolution	38
6.4	Merger, Consolidation and Sale of Assets Is Not Liquidation	39
6.5	Subrogation	39
6.6	Notice by the Company	40
6.7	Subordination May Not Be Impaired	41

ARTICLE VII	MISCELLANEOUS	41

7.1	Termination	41
7.2	Survival	42
7.3	Amendment	42


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7.4	Waiver of Conditions	42
7.5	Governing Law; Submission to Jurisdiction; etc.	42
7.6	No Relationship to TARP	43
7.7	Notices	43
7.8	Assignment	43
7.9	Severability	44
7.10	No Third Party Beneficiaries	44
7.11	Specific Performance	44
7.12	Interpretation	44


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ARTICLE I

PURCHASE; CLOSING

1.1 Purchase . On the terms and subject to the conditions set forth in this Agreement, the Company agrees to sell to Treasury, and Treasury agrees to purchase from the Company, at the Closing, the Senior Securities for the aggregate price set forth on Annex A (the “ Purchase Price ”).

1.2 Closing . (a) On the terms and subject to the conditions set forth in this Agreement, the closing of the Purchase (the “ Closing ”) will take place at the location specified in Annex A , at the time and on the date set forth in Annex A or as soon as practicable thereafter, or at such other place, time and date as shall be agreed between the Company and Treasury. The time and date on which the Closing occurs is referred to in this Agreement as the “ Closing Date ”.

(b) Subject to the fulfillment or waiver of the conditions to the Closing in Section 1.3, at the Closing:

(i) if Treasury holds Previously Acquired Securities:

(A) the Purchase Price shall first be applied to pay the Repayment Amount;

(B) if the Purchase Price is less than the Repayment Amount, the Company shall pay the positive difference (if any) between the Repayment Amount and the Purchase Price (a “ Residual Amount ”) to Treasury’s Office of Financial Stability by wire transfer of immediately available United States funds to an account designated in writing by Treasury; and

(C) upon receipt of the full Repayment Amount (by application of the Purchase Price and, if applicable, the Company’s payment of the Residual Amount), Treasury and the Company will consummate the Repayment;

(D) if the Company issued a Warrant to Treasury in connection with the issuance of the Previously Acquired Securities, the Company will deliver to Treasury a statement of adjustment as contemplated by Section 12 of the Warrant; and

(E) the Company and Treasury will execute and deliver a properly completed repurchase document in the form attached hereto as Annex K , (the “ Repayment Document ”).

(ii) the Company will deliver the Senior Securities as evidenced by one or more certificates dated the Closing Date and bearing appropriate legends as hereinafter provided for, in exchange for payment in full of the Purchase Price by application of the Purchase Price to the Repayment and by wire transfer of immediately available United States funds to a bank account designated by the Company in the Initial Supplemental Report.


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1.3 Closing Conditions . The obligation of Treasury to consummate the Purchase is subject to the fulfillment (or waiver by Treasury) at or prior to the Closing of each of the following conditions:

(a) (i) any approvals or authorizations of all United States federal, state, local, foreign and other governmental, regulatory or judicial authorities (collectively, “ Governmental Entities ”) required for the consummation of the Purchase shall have been obtained or made in form and substance reasonably satisfactory to each party and shall be in full force and effect and all waiting periods required by United States and other applicable law, if any, shall have expired and (ii) no provision of any applicable United States or other law and no judgment, injunction, order or decree of any Governmental Entity shall prohibit the purchase and sale of the Senior Securities as contemplated by this Agreement;

(b) (i) the representations and warranties of the Company set forth in (A) Sections 2.7, 2.26, 2.27 and 2.28 shall be true and correct in all respects as though made on and as of the Closing Date; (B) Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.19, 2.22, 2.23, 2.24 and 2.25 shall be true and correct in all material respects as though made on and as of the Closing Date (other than representations and warranties that by their terms speak as of another date, which representations and warranties shall be true and correct in all respects as of such other date); and (C) Sections 2.8 through 2.18 and Sections 2.20 through 2.21 (disregarding all qualifications or limitations set forth in such representations and warranties as to “materiality”, “Company Material Adverse Effect” and words of similar import) shall be true and correct as though made on and as of the Closing Date (other than representations and warranties that by their terms speak as of another date, which representations and warranties shall be true and correct as of such other date), except to the extent that the failure of such representations and warranties referred to in this Section 1.3(b)(i)(C) to be so true and correct, individually or in the aggregate, does not have and would not reasonably be expected to have a Company Material Adverse Effect; and (ii) the Company shall have performed in all respects all obligations required to be performed by it under this Agreement at or prior to the Closing;

(c) the Company shall have delivered to Treasury a certificate signed on behalf of the Company by an Executive Officer certifying to the effect that the conditions set forth in Section 1.3(b) have been satisfied, in substantially the form of Annex G ;

(d) the Company shall have delivered to Treasury true, complete and correct certified copies of the Charter and Bylaws;

(e) the Company shall have delivered to Treasury a written opinion from counsel to the Company (which may be internal counsel), addressed to Treasury and dated as of the Closing Date, in substantially the form of Annex J ;

(f) the Company shall have delivered physical certificated debentures in proper form evidencing the Senior Securities to Treasury or its designee(s);


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(g) the Company shall have delivered to Treasury a copy of the Disclosure Schedule on or prior to the Signing Date and, to the extent that any information set forth on the Disclosure Schedule needs to be updated or supplemented to make it true, complete and correct as of the Closing Date, (i) the Company shall have delivered to Treasury an update to the Disclosure Schedule (the “ Disclosure Update ”), setting forth any information necessary to make the Disclosure Schedule true, correct and complete as of the Closing Date and (ii) Treasury, in its sole discretion, shall have approved the Disclosure Update, provided , however , that the delivery and acceptance of the Disclosure Update shall not limit or affect any rights of or remedies available to Treasury;

(h) the Company shall have delivered to Treasury on or prior to the Signing Date each of the consolidated financial statements of the Company and its consolidated subsidiaries for each of the last three completed fiscal years of the Company (which shall be audited to the extent audited financial statements are available prior to the Signing Date) (together with the Call Reports filed by the Company or the IDI Subsidiary(ies) for each completed quarterly period since the last completed fiscal year, the “ Company Financial Statements ”);

(i) the Company shall have delivered to Treasury, not later than five (5) business days prior to the Closing Date, a certificate (the “ Initial Supplemental Report ”) in substantially the form attached hereto as Annex H setting forth a complete and accurate statement of loans held by the Company (or if the Company is a Bank Holding Company or a Savings and Loan Holding Company, by the IDI Subsidiary(ies)) in each of the categories described therein, for the time periods specified therein, (A) including a signed certification of the Chief Executive Officer, the Chief Financial Officer and all directors or trustees of the Company or the IDI Subsidiary(ies) who attested to the Call Reports for the quarters covered by such certificate, that such certificate (x) has been prepared in conformance with the instructions issued by Treasury and (y) is true and correct to the best of their knowledge and belief; and (B) completed for March 31, 2011 and the four (4) quarters ended September 30, 2009, December 31, 2009, March 31, 2010 and June 30, 2010;

(j) prior to the Signing Date, the Company shall have delivered to Treasury, the Appropriate Federal Banking Agency and, if the Company is a State-chartered bank, the Appropriate State Banking Agency, a small business lending plan describing how the Company’s business strategy and operating goals will allow it to address the needs of small businesses in the area it serves, as well as a plan to provide linguistically and culturally appropriate outreach, where appropriate; and

(k) if the Company is Matching Private Investment-Supported, on or after September 27, 2010 the Company or an Affiliate of the Company acceptable to Treasury shall (i) have received equity capital (“ Matching Private Investment ”) from one or more non-governmental investors (“ Matching Private Investors ”) (A) in an amount equal to or greater than the Aggregate Dollar Amount of Matching Private Investment Required set forth on Annex A (net of all dividends and interest paid with respect to, and all repurchases and redemptions of, the Company’s capital stock or debt obligations expressly made pari passu or subordinate to the Senior Securities), (B) that is subordinate in right of payment of dividends, principal and interest,


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liquidation preference and redemption rights to the Senior Securities and (C) that is acceptable in form and substance to Treasury, in its sole discretion and (ii) have satisfied the following requirements reasonably in advance of the Closing Date: (A) delivery of copies of the definitive documentation for the Matching Private Investment to Treasury, (B) delivery of the organizational charts of such non-governmental investors to Treasury, each certified by the applicable non-governmental investor and demonstrating that such non-governmental investor is not an Affiliate of the Company, (C) delivery of any other documents or information as Treasury may reasonably request, in its sole discretion and (D) any other terms and conditions imposed by Treasury or the Appropriate Federal Banking Agency, in their sole discretion.

ARTICLE II

REPRESENTATIONS AND WARRANTIES

The Company represents and warrants to Treasury that as of the Signing Date and as of the Closing Date (or such other date specified herein):

2.1 Organization, Authority and Significant Subsidiaries . The Company has been duly incorporated and is validly existing and in good standing under the laws of its jurisdiction of organization, with the necessary power and authority to own, operate and lease its properties and conduct its business as it is being currently conducted, and except as has not, individually or in the aggregate, had and would not reasonably be expected to have a Company Material Adverse Effect, has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties or conducts any business so as to require such qualification; each subsidiary of the Company that would be considered a “significant subsidiary” within the meaning of Rule 1-02(w) of Regulation S-X under the Securities Act of 1933 (the “ Securities Act ”), has been duly organized and is validly existing in good standing under the laws of its jurisdiction of organization. The Charter and Bylaws, copies of which have been provided to Treasury prior to the Signing Date, are true, complete and correct copies of such documents as in full force and effect as of the Signing Date and as of the Closing Date.

2.2 Capitalization . The Company maintains only one class of equity security. The outstanding shares of capital stock of the Company have been duly authorized and are validly issued and outstanding, fully paid and nonassessable, and subject to no preemptive or similar rights (and were not issued in violation of any preemptive rights). As of the Signing Date, the Company does not have outstanding any securities or other obligations providing the holder the right to acquire its common stock (“ Common Stock ”) that are not reserved for issuance as specified in Part 2.2 of the Disclosure Schedule, and the Company has not made any other commitment to authorize, issue or sell any Common Stock or other capital stock. Since the last day of the fiscal period covered by the last Call Report filed by the Company or the IDI Subsidiary(ies) prior to the Application Date (the “ Capitalization Date ”), the Company has not (a) declared, and has no present intention of declaring, any dividends on its Common Stock in a per-share amount greater than the per-share amount of declared dividends that are reflected in such Call Report; or (b) issued any shares of Common Stock, other than (i) shares issued upon the exercise of stock options or delivered under other equity-based awards or other convertible


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securities or warrants which were issued and outstanding on the Capitalization Date and disclosed in Part 2.2 of the Disclosure Schedule, (ii) shares disclosed in Part 2.2 of the Disclosure Schedule, and (iii) if the Company is Matching Private Investment-Supported, shares representing Matching Private Investment disclosed in the “Matching Private Investment” section of Annex A . Each holder of 5% or more of the Company and such holder’s primary address are set forth in Part 2.2 of the Disclosure Schedule. The Company has received a representation from each Matching Private Investor that such Matching Private Investor has not received or applied for any investment from the SBLF, and the Company has no reason to believe that any such representation is inaccurate. If the Company is a Bank Holding Company or a Savings and Loan Holding Company, (x) the percentage of each IDI Subsidiary’s issued and outstanding capital stock that is owned by the Company is set forth on Part 2.2 of the Disclosure Schedule; and (y) all shares of issued and outstanding capital stock of the IDI Subsidiary(ies) owned by the Company are free and clear of all liens, security interests, charges or encumbrances. Since the Application Date, there has been no change in the organizational hierarchy information regarding the Company that was available on the Application Date from the National Information Center of the Federal Reserve System. Part 2.2 of the Disclosure Schedule contains a list of all equity and debt securities issued by the Company, indicating in each case whether, upon issuance of the Senior Securities to Treasury in accordance herewith, such security will rank senior to, pari passu with, or junior to the Senior Securities with respect to the payment of interest, dividends and other distributions and the distribution of assets in the event of any dissolution, liquidation or winding up of the Company.

2.3 Senior Securities . The Senior Securities have been duly and validly authorized, and, when executed and delivered pursuant to this Agreement, such Senior Securities will be duly and validly issued, will not be issued in violation of any preemptive rights, and will rank senior to the Common Stock and all other series or classes of capital stock, whether or not designated, issued or outstanding, with respect to the payment of interest, dividends and other distributions and the distribution of assets in the event of any dissolution, liquidation or winding up of the Company.

2.4 Compliance With Identity Verification Requirements . The Company and the Company Subsidiaries (to the extent such regulations are applicable to the Company Subsidiaries) are in compliance with the requirements of Section 103.121 of title 31, Code of Federal Regulations.

2.5 Authorization, Enforceability .

(a) The Company has the corporate power and authority to execute and deliver this Agreement and to carry out its obligations hereunder (which includes the issuance of the Senior Securities). The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and its stockholders, and no further approval or authorization is required on the part of the Company. This Agreement is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to any limitations of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether such enforceability is considered in a proceeding at law or in equity (“ Bankruptcy Exceptions ”).


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(b) The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby and compliance by the Company with the provisions hereof, will not (i) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any subsidiary of the Company (each subsidiary, a “ Company Subsidiary ” and, collectively, the “ Company Subsidiaries ”) under any of the terms, conditions or provisions of (A) its organizational documents or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or any Company Subsidiary is a party or by which it or any Company Subsidiary may be bound, or to which the Company or any Company Subsidiary or any of the properties or assets of the Company or any Company Subsidiary may be subject, or (ii) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any statute, rule or regulation or any judgment, ruling, order, writ, injunction or decree applicable to the Company or any Company Subsidiary or any of their respective properties or assets except, in the case of clauses (i)(B) and (ii), for those occurrences that, individually or in the aggregate, have not had and would not reasonably be expected to have a Company Material Adverse Effect.

(c) All filings and approvals as are required to be made or obtained under any state “blue sky” laws and such as have been made or obtained, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Company in connection with the consummation by the Company of the Purchase except for any such notices, filings, exemptions, reviews, authorizations, consents and approvals the failure of which to make or obtain would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

2.6 Anti-takeover Provisions and Rights Plan . The Board of Directors of the Company (the “ Board of Directors ”) has taken all necessary action to ensure that the transactions contemplated by this Agreement and the consummation of the transactions contemplated hereby will be exempt from any anti-takeover or similar provisions of the Charter and Bylaws, and any other provisions of any applicable “moratorium”, “control share”, “fair price”, “interested stockholder” or other anti-takeover laws and regulations of any jurisdiction.

2.7 No Company Material Adverse Effect . Since the last day of the fiscal period covered by the last Call Report filed by the Company or the IDI Subsidiary(ies) prior to the Application Date, no fact, circumstance, event, change, occurrence, condition or development has occurred that, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect.


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2.8 Company Financial Statements . The Company Financial Statements present fairly in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of the dates indicated therein and the consolidated results of their operations for the periods specified therein; and except as stated therein, such financial statements (a) were prepared in conformity with GAAP applied on a consistent basis (except as may be noted therein) and (b) have been prepared from, and are in accordance with, the books and records of the Company and the Company Subsidiaries.

2.9 Reports .

(a) Since December 31, 2007, the Company and each Company Subsidiary has filed all reports, registrations, documents, filings, statements and submissions, together with any amendments thereto, that it was required to file with any Governmental Entity (the foregoing, collectively, the “ Company Reports ”) and has paid all fees and assessments due and payable in connection therewith, except, in each case, as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. As of their respective dates of filing, the Company Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable Governmental Entities.

(b) The records, systems, controls, data and information of the Company and the Company Subsidiaries are recorded, stored, maintained and operated under means (including any electronic, mechanical or photographic process, whether computerized or not) that are under the exclusive ownership and direct control of the Company or the Company Subsidiaries or their accountants (including all means of access thereto and therefrom), except for any non-exclusive ownership and non-direct control that would not reasonably be expected to have a material adverse effect on the system of internal accounting controls described below in this Section 2.9(b). The Company (i) has implemented and maintains adequate disclosure controls and procedures to ensure that material information relating to the Company, including the consolidated Company Subsidiaries, is made known to the chief executive officer and the chief financial officer of the Company by others within those entities, and (ii) has disclosed, based on its most recent evaluation prior to the Signing Date, to the Company’s outside auditors and the audit committee of the Board of Directors (A) any significant deficiencies and material weaknesses in the design or operation of internal controls that are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information and (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

2.10 No Undisclosed Liabilities . Neither the Company nor any of the Company Subsidiaries has any liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which are not properly reflected in the Company Financial Statements to the extent required to be so reflected and, if applicable, reserved against in accordance with GAAP applied on a consistent basis, except for (a) liabilities that have arisen since the last fiscal year end in the ordinary and usual course of business and consistent with past practice and (b) liabilities that, individually or in the aggregate, have not had and would not reasonably be expected to have a Company Material Adverse Effect.


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2.11 Offering of Securities . Neither the Company nor any person acting on its behalf has taken any action (including any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of any of the Senior Securities under the Securities Act, and the rules and regulations of the Securities and Exchange Commission (the “ SEC ”) promulgated thereunder), which might subject the offering, issuance or sale of any of the Senior Securities to Treasury pursuant to this Agreement to the registration requirements of the Securities Act.

2.12 Litigation and Other Proceedings . Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, there is no (a) pending or, to the knowledge of the Company, threatened, claim, action, suit, investigation or proceeding, against the Company or any Company Subsidiary or to which any of their assets are subject nor is the Company or any Company Subsidiary subject to any order, judgment or decree or (b) unresolved violation, criticism or exception by any Governmental Entity with respect to any report or relating to any examinations or inspections of the Company or any Company Subsidiaries. There is no claim, action, suit, investigation or proceeding pending or, to the Company’s knowledge, threatened against any institution-affiliated party (as defined in 12 U.S.C. §1813(u)) of the Company or any of the IDI Subsidiaries that, if determined or resolved in a manner adverse to such institution-affiliated party, could result in such institution-affiliated party being prohibited from participation in the conduct of the affairs of any financial institution or holding company of any financial institution and, to the Company’s knowledge, there are no facts or circumstances could reasonably be expected to provide a basis for any such claim, action, suit, investigation or proceeding.

2.13 Compliance with Laws . Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, the Company and the Company Subsidiaries have all permits, licenses, franchises, authorizations, orders and approvals of, and have made all filings, applications and registrations with, Governmental Entities that are required in order to permit them to own or lease their properties and assets and to carry on their business as presently conducted and that are material to the business of the Company or such Company Subsidiary. Except as set forth in Part 2.13 of the Disclosure Schedule, the Company and the Company Subsidiaries have complied in all respects and are not in default or violation of, and none of them is, to the knowledge of the Company, under investigation with respect to or, to the knowledge of the Company, have been threatened to be charged with or given notice of any violation of, any applicable domestic (federal, state or local) or foreign law, statute, ordinance, license, rule, regulation, policy or guideline, order, demand, writ, injunction, decree or judgment of any Governmental Entity, other than such noncompliance, defaults or violations that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect. Except for statutory or regulatory restrictions of general application, no Governmental Entity has placed any restriction on the business or properties of the Company or any Company Subsidiary that would, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

2.14 Employee Benefit Matters . Except as would not reasonably be expected to have, either individually or in the aggregate, a Company Material Adverse Effect: (a) each “employee benefit plan” (within the meaning of Section 3(3) of the Employee Retirement Income Security


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Act of 1974, as amended (“ ERISA ”)) providing benefits to any current or former employee, officer or director of the Company or any member of its “ Controlled Group ” (defined as any organization which is a member of a controlled group of corporations within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended (the “ Code ”)) that is sponsored, maintained or contributed to by the Company or any member of its Controlled Group and for which the Company or any member of its Controlled Group would have any liability, whether actual or contingent (each, a “ Plan ”) has been maintained in compliance with its terms and with the requirements of all applicable statutes, rules and regulations, including ERISA and the Code; (b) with respect to each Plan subject to Title IV of ERISA (including, for purposes of this clause (b), any plan subject to Title IV of ERISA that the Company or any member of its Controlled Group previously maintained or contributed to in the six years prior to the Signing Date), (1) no “reportable event” (within the meaning of Section 4043(c) of ERISA), other than a reportable event for which the notice period referred to in Section 4043(c) of ERISA has been waived, has occurred in the three years prior to the Signing Date or is reasonably expected to occur, (2) no “accumulated funding deficiency” (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived, has occurred in the three years prior to the Signing Date or is reasonably expected to occur, (3) the fair market value of the assets under each Plan exceeds the present value of all benefits accrued under such Plan (determined based on the assumptions used to fund such Plan) and (4) neither the Company nor any member of its Controlled Group has incurred in the six years prior to the Signing Date, or reasonably expects to incur, any liability under Title IV of ERISA (other than contributions to the Plan or premiums to the Pension Benefit Guaranty Corporation in the ordinary course and without default) in respect of a Plan (including any Plan that is a “multiemployer plan”, within the meaning of Section 4001(c)(3) of ERISA); and (c) each Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service with respect to its qualified status that has not been revoked, or such a determination letter has been timely applied for but not received by the Signing Date, and nothing has occurred, whether by action or by failure to act, which could reasonably be expected to cause the loss, revocation or denial of such qualified status or favorable determination letter.

2.15 Taxes . Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, (a) the Company and the Company Subsidiaries have filed all federal, state, local and foreign income and franchise Tax returns (together with any schedules and attached thereto) required to be filed through the Signing Date, subject to permitted extensions, and have paid all Taxes due thereon, (b) all such Tax returns (together with any schedules and attached thereto) are true, complete and correct in all material respects and were prepared in compliance with all applicable laws and (c) no Tax deficiency has been determined adversely to the Company or any of the Company Subsidiaries, nor does the Company have any knowledge of any Tax deficiencies.

2.16 Properties and Leases . Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, the Company and the Company Subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens (including, without limitation, liens for Taxes), encumbrances, claims and defects that would affect the value thereof or


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interfere with the use made or to be made thereof by them. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, the Company and the Company Subsidiaries hold all leased real or personal property under valid and enforceable leases with no exceptions that would interfere with the use made or to be made thereof by them.

2.17 Environmental Liability . Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect:

(a) there is no legal, administrative, or other proceeding, claim or action of any nature seeking to impose, or that would reasonably be expected to result in the imposition of, on the Company or any Company Subsidiary, any liability relating to the release of hazardous substances as defined under any local, state or federal environmental statute, regulation or ordinance, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, pending or, to the Company’s knowledge, threatened against the Company or any Company Subsidiary;

(b) to the Company’s knowledge, there is no reasonable basis for any such proceeding, claim or action; and

(c) neither the Company nor any Company Subsidiary is subject to any agreement, order, judgment or decree by or with any court, Governmental Entity or third party imposing any such environmental liability.

2.18 Risk Management Instruments . Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, all derivative instruments, including, swaps, caps, floors and option agreements, whether entered into for the Company’s own account, or for the account of one or more of the Company Subsidiaries or its or their customers, were entered into (i) only in the ordinary course of business, (ii) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies and (iii) with counterparties believed to be financially responsible at the time; and each of such instruments constitutes the valid and legally binding obligation of the Company or one of the Company Subsidiaries, enforceable in accordance with its terms, except as may be limited by the Bankruptcy Exceptions. Neither the Company or the Company Subsidiaries, nor, to the knowledge of the Company, any other party thereto, is in breach of any of its obligations under any such agreement or arrangement other than such breaches that would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

2.19 Agreements with Regulatory Agencies . Except as set forth in Part 2.19 of the Disclosure Schedule, neither the Company nor any Company Subsidiary is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2007, has adopted any board resolutions at the request of, any Governmental Entity that currently restricts the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends,


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its credit, risk management or compliance policies or procedures, its internal controls, its management or its operations or business (each item in this sentence, a “ Regulatory Agreement ”), nor has the Company or any Company Subsidiary been advised since December 31, 2007, by any such Governmental Entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement. The Company and each Company Subsidiary is in compliance with each Regulatory Agreement to which it is party or subject, and neither the Company nor any Company Subsidiary has received any notice from any Governmental Entity indicating that either the Company or any Company Subsidiary is not in compliance with any such Regulatory Agreement.

2.20 Insurance . The Company and the Company Subsidiaries are insured with reputable insurers against such risks and in such amounts as the management of the Company reasonably has determined to be prudent and consistent with industry practice. The Company and the Company Subsidiaries are in material compliance with their insurance policies and are not in default under any of the material terms thereof, each such policy is outstanding and in full force and effect, all premiums and other payments due under any material policy have been paid, and all claims thereunder have been filed in due and timely fashion, except, in each case, as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

2.21 Intellectual Property . Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, (i) the Company and each Company Subsidiary owns or otherwise has the right to use, all intellectual property rights, including all trademarks, trade dress, trade names, service marks, domain names, patents, inventions, trade secrets, know-how, works of authorship and copyrights therein, that are used in the conduct of their existing businesses and all rights relating to the plans, design and specifications of any of its branch facilities (“ Proprietary Rights ”) free and clear of all liens and any claims of ownership by current or former employees, contractors, designers or others and (ii) neither the Company nor any of the Company Subsidiaries is materially infringing, diluting, misappropriating or violating, nor has the Company or any of the Company Subsidiaries received any written (or, to the knowledge of the Company, oral) communications alleging that any of them has materially infringed, diluted, misappropriated or violated, any of the Proprietary Rights owned by any other person. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, to the Company’s knowledge, no other person is infringing, diluting, misappropriating or violating, nor has the Company or any or the Company Subsidiaries sent any written communications since December 31, 2007, alleging that any person has infringed, diluted, misappropriated or violated, any of the Proprietary Rights owned by the Company and the Company Subsidiaries.

2.22 Brokers and Finders . Treasury has no liability for any amounts that any broker, finder or investment banker is entitled to for any financial advisory, brokerage, finder’s or other fee or commission in connection with this Agreement or the transactions contemplated hereby based upon arrangements made by or on behalf of the Company or any Company Subsidiary.

2.23 Disclosure Schedule . The Company has delivered the Disclosure Schedule and, if applicable, the Disclosure Update to Treasury and the information contained in the Disclosure Schedule, as modified by the information contained in the Disclosure Update, if applicable, is true, complete and correct.


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2.24 Previously Acquired Securities . If Treasury holds Previously Acquired Securities:

(a) The Company has not breached any representation, warranty or covenant set forth in the Original Letter Agreement or any of the other documents governing the Previously Acquired Securities.

(b) The Company has paid to Treasury all accrued and unpaid interest due on the Previously Acquired Securities for the fiscal quarter prior to the Closing Date plus the accrued and unpaid interest due on the Previously Acquired Securities as of the Closing Date for the fiscal quarter in which the Closing shall occur.

2.25 Related Party Transactions . Neither the Company nor any Company Subsidiary has made any extension of credit to any director or Executive Officer of the Company or any Company Subsidiary, any holder of 5% or more of the Company’s issued and outstanding capital stock, or any of their respective spouses or children or to any Affiliate of any of the foregoing (each, a “ Related Party ”), other than in compliance with 12 C.F.R Part 215 (Regulation O). Except as set forth in Part 2.25 of the Disclosure Schedule, to the Company’s knowledge, no Related Party has any (i) material commercial, industrial, banking, consulting, legal, accounting, charitable or familial relationship with any vendor or material customer of the Company or any Company Subsidiary that is not on arms-length terms, or (ii) direct or indirect ownership interest in any person or entity with which the Company or any Company Subsidiary has a material business relationship that is not on arms-length terms (not including Publicly-traded entities in which such person owns less than two percent (2%) of the outstanding capital stock).

2.26 Ability to Pay Interest . The Company has all permits, licenses, franchises, authorizations, orders and approvals of, and has made all filings, applications and registrations with, Governmental Entities and third parties that are required in order to permit the Company to pay interest on the Senior Securities on the Interest Payment Dates set forth in the Senior Securities.

2.27 Amendment to Charter and Other Documents to Effect Section 5.12(e) . The election, appointment, nomination or designation of Senior Securities Directors by the Holders in accordance with, and upon the conditions set forth in Section 5.12(e) is permitted by the laws of the jurisdiction of organization of the Company. The Company has taken all action necessary to permit the Holders to elect, appoint, nominate or designate the Senior Securities Directors, as applicable, in accordance with, and upon the events set forth in, Section 5.12(e), including amending its Charter and any other applicable organizational documents, agreements or arrangements as necessary.

2.28 Subchapter S Election . The Company (i) is a validly electing S corporation under Sections 1361 and 1362 of the Code (a “ S-Corp ”), and each Company Subsidiary is a “qualified subchapter S subsidiary” within the meaning of Section 1361(b)(3)(B) of the Code, and (ii) has not, and the Company Subsidiaries and the shareholders of the Company have not, taken any action which would invalidate such elections.


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ARTICLE III

COVENANTS

3.1 Affirmative Covenants . The Company hereby covenants and agrees with Treasury that:

(a) Commercially Reasonable Efforts . Subject to the terms and conditions of this Agreement, each of the parties will use its commercially reasonable efforts in good faith to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or desirable, or advisable under applicable laws, so as to permit consummation of the Purchase as promptly as practicable and otherwise to enable consummation of the transactions contemplated hereby and shall use commercially reasonable efforts to cooperate with the other party to that end.

(b) Certain Notifications Until Closing . From the Signing Date until the Closing, the Company shall promptly notify Treasury of (i) any fact, event or circumstance of which it is aware and which would reasonably be expected to cause any representation or warranty of the Company contained in this Agreement to be untrue or inaccurate in any material respect or to cause any covenant or agreement of the Company contained in this Agreement not to be complied with or satisfied in any material respect and (ii) except as Previously Disclosed, any fact, circumstance, event, change, occurrence, condition or development of which the Company is aware and which, individually or in the aggregate, has had or would reasonably be expected to have a Company Material Adverse Effect; provided , however , that delivery of any notice pursuant to this Section 3.1(b) shall not limit or affect any rights of or remedies available to Treasury.

(i) From the Signing Date until the date on which all of the Senior Securities have been redeemed or paid in whole, the Company will permit, and shall cause each of the Company’s Subsidiaries to permit, Treasury, the Oversight Officials and their respective agents, consultants, contractors and advisors to (x) examine any books, papers, records, Tax returns (including all schedules attached thereto), data and other information; (y) make copies thereof; and (z) discuss the affairs, finances and accounts of the Company and the Company Subsidiaries with the personnel of the Company and the Company Subsidiaries, all upon reasonable notice; provided , that:

(A)

any examinations and discussions pursuant to this Section 3.1(c)(i) shall be conducted during normal business hours and in such manner as not to interfere unreasonably with the conduct of the business of the Company;


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(B)

neither the Company nor any Company Subsidiary shall be required by this Section 3.1(c)(i) to disclose any information to the extent (x) prohibited by applicable law or regulation, or (y) that such disclosure would reasonably be expected to cause a violation of any agreement to which the Company or any Company Subsidiary is a party or would cause a risk of a loss of privilege to the Company or any Company Subsidiary ( provided that the Company shall use commercially reasonable efforts to make appropriate substitute disclosure arrangements under circumstances where the restrictions in this clause (B) apply);

(C)

the obligations of the Company and the Company Subsidiaries to disclose information pursuant to this Section 3.1(c)(i) to any Oversight Official or any agent, consultant, contractor and advisor thereof, such Oversight Official shall have agreed, with respect to documents obtained under this Section 3.1(c)(i), to follow applicable law and regulation (and the applicable customary policies and procedures) regarding the dissemination of confidential materials, including redacting confidential information from the public version of its reports and soliciting input from the Company as to information that should be afforded confidentiality, as appropriate; and

(D)

for avoidance of doubt, such examinations and discussions may, at Treasury’s option, be conducted on site at any office of the Company or any Company Subsidiary.

(ii) From the Signing Date until the date on which all of the Senior Securities have been paid or redeemed in whole, the Company will deliver, or will cause to be delivered, to Treasury:

(A)

as soon as available after the end of each fiscal year of the Company, and in any event within 90 days thereafter, a consolidated balance sheet of the Company as of the end of such fiscal year, and consolidated statements of income, retained earnings and cash flows of the Company for such year, in each case prepared in accordance with GAAP applied on a consistent basis and setting forth in each case in comparative form the figures for the previous fiscal year of the Company and which shall be audited to the extent audited financial statements are available;

(B)

as soon as available after the end of the first, second and third quarterly periods in each fiscal year of the Company, a copy of any quarterly reports provided to stockholders of the Company or Company management by the Company;


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(C)

as soon as available after the Company receives any assessment of the Company’s internal controls, a copy of such assessment (other than assessments provided by the Appropriate Federal Banking Agency or the Appropriate State Banking Agency that the Company is prohibited by applicable law or regulation from disclosing to Treasury);

(D)

annually on a date specified by Treasury, a completed survey, in a form specified by Treasury, providing, among other things, a description of how the Company has utilized the funds the Company received hereunder in connection with the sale of the Senior Securities and the effects of such funds on the operations and status of the Company;

(E)

as soon as such items become effective, any amendments to the Charter, Bylaws or other organizational documents of the Company; and

(F)

at the same time as such items are sent to any stockholders of the Company, copies of any information or documents sent by the Company to its stockholders.

(iii) Treasury will use reasonable best efforts to hold, and will use reasonable best efforts to cause its agents, consultants, contractors and advisors and United States executive branch officials and employees, to hold, in confidence all non-public records, books, contracts, instruments, computer data and other data and information (collectively, “ Information ”) concerning the Company furnished or made available to it by the Company or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (A) previously known by such party on a non-confidential basis, (B) in the public domain through no fault of such party or (C) later lawfully acquired from other sources by the party to which it was furnished (and without violation of any other confidentiality obligation)); provided that nothing herein shall prevent Treasury from disclosing any Information to the extent required by applicable laws or regulations or by any subpoena or similar legal process. Treasury understands that the Information may contain commercially sensitive confidential information entitled to an exception from a Freedom of Information Act request.

(iv) Treasury’s information rights pursuant to Section 3.1(c)(ii)(A), (B), (C), (E) and (F) and Treasury’s right to receive certifications from the Company pursuant to Section 3.1(d)(i) may be assigned by Treasury to a transferee or assignee of the Senior Securities with a face value of no less than 2% of the Original Aggregate Principal Amount of the Senior Securities.

(v) Nothing in this Section shall be construed to limit the authority that any Oversight Official or any other applicable regulatory authority has under law.

(vi) The Company shall provide to Treasury all such information as Treasury may request from time to time for the purpose of carrying out the study required by Section 4112 of the SBJA.


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(d) Quarterly Supplemental Reports and Annual Certifications .

(i) Concurrently with the submission of Call Reports by the Company or the IDI Subsidiary(ies) (as the case may be) for each quarter ending after the Closing Date, the Company shall deliver to Treasury a certificate in substantially the form attached hereto as Annex H setting forth a complete and accurate statement of loans held by the Company in each of the categories described therein, for the time periods specified therein, (A) including a signed certification of the Chief Executive Officer, the Chief Financial Officer and all directors or trustees of the Company or the IDI Subsidiary(ies) who attested to the Call Report for the quarter covered by such certificate, that such certificate (x) has been prepared in conformance with the instructions issued by Treasury and (y) is true and correct to the best of their knowledge and belief; (B) completed for such quarter (each, a “ Quarterly Supplemental Report ”).

(ii) Within ninety (90) days after the end of each fiscal year of the Company during which the Initial Supplemental Report is submitted pursuant to Section 1.3(i) or the first ten (10) Quarterly Supplemental Reports are submitted pursuant to Section 3.1(d)(i), the Company shall deliver to Treasury a certification from the Company’s independent auditors that the Initial Supplemental Report and/or Quarterly Supplemental Reports during such fiscal year are complete and accurate with respect to accounting matters, including policies and procedures and controls over such.

(iii) Until the date on which all of the Senior Securities have been paid or redeemed in whole, within ninety (90) days after the end of each fiscal year of the Company, the Company shall deliver to Treasury a certificate in substantially the form attached hereto as Annex I , signed on behalf of the Company by an Executive Officer.

(iv) If any Initial Supplemental Report or Quarterly Supplemental Report is inaccurate, Treasury shall be entitled to recover from the Company, upon demand, the amount of any difference between (x) the amount of the interest payment(s) actually made to Treasury based on such inaccurate report and (y) the correct amount of the interest payment(s) that should have been made, but for such inaccuracy. The Company shall provide Treasury with a written description of any such inaccuracy within three (3) business days after the Company’s discovery thereof.

(v) Treasury shall have the right from time to time to modify Annex H , by posting an amended and restated version of Annex H on Treasury’s web site, to conform Annex H to (A) reflect changes in GAAP, (B) reflect changes in the form or content of, or definitions used in, Call Reports, or (C) to make clarifications and/or technical corrections as Treasury determines to be reasonably necessary. Notwithstanding anything herein to the contrary, upon posting by Treasury on its web site, Annex H shall be deemed to be amended and restated as so posted, without the need for any further act on the part of any person or entity. If any such modification includes a change to the caption or number of any line item of Annex H , any reference herein to such line item shall thereafter be a reference to such re-captioned or re-numbered line item


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(e) Bank and Thrift Holding Company Status . If the Company is a Bank Holding Company or a Savings and Loan Holding Company on the Signing Date, then the Company shall maintain its status as a Bank Holding Company or Savings and Loan Holding Company, as the case may be, for as long as Treasury holds any Senior Securities. The Company shall redeem all Senior Securities held by Treasury prior to terminating its status as a Bank Holding Company or Savings and Loan Holding Company, as applicable.

(f) Predominantly Financial . For as long as Treasury owns any Senior Securities, the Company, to the extent it is not itself an insured depository institution, agrees to remain predominantly engaged in financial activities. A company is predominantly engaged in financial activities if the annual gross revenues derived by the company and all subsidiaries of the company (excluding revenues derived from subsidiary depository institutions), on a consolidated basis, from engaging in activities that are financial in nature or are incidental to a financial activity under subsection (k) of Section 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)) represent at least 85 percent of the consolidated annual gross revenues of the company.

(g) Capital Covenant . From the Signing Date until the date on which all of the Senior Securities have been paid or redeemed in whole, the Company and the Company Subsidiaries shall maintain such capital as may be necessary to meet the minimum capital requirements of the Appropriate Federal Banking Agency, as in effect from time to time.

(h) Reporting Requirements . Prior to the date on which all of the Senior Securities have been paid or redeemed in whole, the Company covenants and agrees that, at all times on or after the Closing Date, (i) to the extent it is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, it shall comply with the terms and conditions set forth in Annex E or (ii) as soon as practicable after the date that the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, it shall comply with the terms and conditions set forth in Annex E .

(i) Transfer of Proceeds to Depository Institutions . If the Company is a Bank Holding Company or a Savings and Loan Holding Company, the Company shall immediately transfer to the IDI Subsidiaries, as equity capital contributions (in a manner that will cause such equity capital contributions to qualify for inclusion in the Tier 1 capital of the IDI Subsidiaries), ninety percent (90%) of the proceeds it receives in connection with the sale of Senior Securities; provided, however , that:

(A) no IDI Subsidiary shall receive any amount pursuant to this Section 3.1(i) in excess of (A) three percent (3%) of the insured depository institution’s Total Risk-Weighted Assets as reported in its Call Report filed immediately prior to the Application Date, if the insured depository institution has Total Assets of more than $1,000,000,000 and less than $10,000,000,000 as of December 31, 2009 or (B) five percent (5%) of the IDI Subsidiary’s Total Risk-Weighted Assets as reported in its Call Report filed immediately prior to the Application Date, if the IDI Subsidiary has Total Assets of $1,000,000,000 or less as of December 31, 2009; and

(B) if Treasury held any Previously Acquired Securities immediately prior to the Closing Date, the amount required to be transferred pursuant this Section 3.1(i) shall be ninety percent (90%) of the difference obtained by subtracting the Repayment Amount from the Purchase Price (unless the Purchase Price is less than the Repayment Amount, in which case no amount shall be required to be transferred pursuant to this Section 3.1(i)).


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(j) Outreach to Minorities, Women and Veterans . The Company shall comply with Section 4103(d)(8) of the SBJA.

(k) Certification Related to Sex Offender Registration and Notification Act . The Company shall obtain from any business to which it makes a loan that is funded in whole or in part using funds from the Purchase Price a written certification that no principal of such business has been convicted of a sex offense against a minor (as such terms are defined in section 111 of the Sex Offender Registration and Notification Act, 42 U.S.C. §16911). The Company shall retain all such certifications in accordance with standard recordkeeping practices established by the Appropriate Federal Banking Agency.

3.2 Negative Covenants . The Company hereby covenants and agrees with Treasury that:

(a) Certain Transactions .

(i) The Company shall not merge or consolidate with, or sell, transfer or lease all or substantially all of its property or assets to, any other party unless the successor, transferee or lessee party (or its ultimate parent entity), as the case may be (if not the Company), expressly assumes the due and punctual performance and observance of each and every covenant, agreement and condition of this Agreement to be performed and observed by the Company.

(ii) Without the prior written consent of Treasury, until such time as Treasury shall cease to own any Senior Securities, the Company shall not permit any of its “significant subsidiaries” (as such term is defined in Rule 12b-2 promulgated under the Exchange Act) to (A) engage in any merger, consolidation, statutory share exchange or similar transaction following the consummation of which such significant subsidiary is not wholly-owned by the Company, (B) dissolve or sell all or substantially all of its assets or property other than in connection with an internal reorganization or consolidation involving wholly-owned subsidiaries of the Company or (C) issue or sell any shares of its capital stock or any securities convertible or exercisable for any such shares, other than issuances or sales in connection with an internal reorganization or consolidation involving wholly-owned subsidiaries of the Company.

(b) Related Party Transactions . Until such time as Treasury ceases to own any debt or equity securities of the Company, including the Senior Securities, the Company and


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the Company Subsidiaries shall not enter into transactions with Affiliates or related persons (within the meaning of Item 404 under the SEC’s Regulation S-K) unless (A) such transactions are on terms no less favorable to the Company and the Company Subsidiaries than could be obtained from an unaffiliated third party, and (B) have been approved by the audit committee of the Board of Directors or comparable body of independent directors of the Company, or if there are no independent directors, the Board of Directors, provided that the Board of Directors shall maintain written documentation which supports its determination that the transaction meets the requirements of clause (A) of this Section 3.2(b).

ARTICLE IV

REMEDIES OF THE HOLDERS UPON EVENT OF DEFAULT

4.1 Event of Default . “ Event of Default ” shall mean the occurrence or existence of any one or more of the following:

(a) Bankruptcy, Receivership or Conservatorship . (i) A court having proper jurisdiction shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of the Company or for any substantial part of its property, or orders the winding-up or liquidation of its affairs and such decree, appointment or order shall remain unstayed and in effect for a period of sixty (60) days; or

(ii) The Company shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Company or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or

(iii) A court or administrative or governmental agency or body shall enter a decree or order for the appointment of a receiver of the Company or an IDI Subsidiary or all or substantially all of its property in any liquidation, insolvency or similar proceeding with respect to the Company or such IDI Subsidiary or all or substantially all of its property; or

(iv) The Company or an IDI Subsidiary shall consent to the appointment of a receiver for it or all or substantially all of its property in any liquidation, insolvency or similar proceeding with respect to it or all or substantially all of its property.

4.2 Acceleration and Other Remedies . When any Event of Default has occurred and is continuing, then the Senior Securities, including both principal and interest, and all fees, charges and other obligations payable hereunder and under the Transaction Documents, shall immediately become due and payable without presentment, demand, protest or notice of any kind. In addition, the Holders may exercise any and all remedies available to them under the Transaction Documents or applicable law.


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4.3 Suits for Enforcement . In case any one or more Events of Default shall have occurred and be continuing, unless such Events of Default shall have been waived in the manner provided in Section 4.5 hereof, the Holders holding more than fifty percent (50%) of the aggregate outstanding principal amount of the Senior Securities (the “ Majority Holders ”), subject to the terms of Article VI hereof, may proceed to protect and enforce their rights under this Article IV by suit in equity or action at law. It is agreed that in the event of such action, or any action between the Holders of the Senior Securities and the Company (including its officers and agents) in connection with a breach or enforcement of this Agreement, the Holders of the Senior Securities shall be entitled to receive all reasonable fees, costs and expenses incurred, including without limitation such reasonable fees and expenses of attorneys (whether or not litigation is commenced) and reasonable fees, costs and expenses of appeals.

4.4 Holders May File Proofs of Claim . In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Senior Securities (other than the Company) under Title 11, United States Code, or any other applicable law, or in case a receiver, conservator or trustee shall have been appointed for the Company or an IDI Subsidiary or such other obligor, or in the case of any other similar judicial proceedings relative to the Company, IDI Subsidiary or other obligor upon the Senior Securities, or to the creditors or property of the Company, IDI Subsidiary or such other obligor, any Holder, irrespective of whether the principal of the Senior Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether any such Holder shall have made any demand pursuant to the provisions of this Section 4.4, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Senior Securities held by any such Holder and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of any such Holder allowed in such judicial proceedings relative to the Company, IDI Subsidiary or any other obligor on the Senior Securities, or to the creditors or property of the Company, IDI Subsidiary or such other obligor, unless prohibited by applicable law and regulations, to vote in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable to any such Holder on any such claims.

4.5 Waiver of Past Defaults . The Holders of not less than a majority in aggregate principal amount of the outstanding Senior Securities may on behalf of the Holders of all the Senior Securities waive any past default hereunder with respect such Senior Securities and its consequences. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Agreement; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.


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ARTICLE V

ADDITIONAL AGREEMENTS

5.1 Purchase for Investment . Treasury acknowledges that the Senior Securities have not been registered under the Securities Act, or under any state securities laws. Treasury acknowledges that the Senior Securities are not being sold pursuant to an indenture (an “ Indenture ”) qualified under the Trust Indenture Act of 1939, as amended (the “ Indenture Act ”). Treasury (a) is acquiring the Senior Securities pursuant to an exemption from registration under the Securities Act and an exemption from qualification of an indenture under the Indenture Act, and is acquiring the Senior Securities solely for investment with no present intention to distribute them to any person in violation of the Securities Act or any applicable U.S. state securities laws, (b) will not sell or otherwise dispose of any of the Senior Securities, except in compliance with the registration requirements or exemption provisions of the Securities Act and any applicable U.S. state securities laws, and (c) has such knowledge and experience in financial and business matters and in investments of this type that it is capable of evaluating the merits and risks of the Purchase and of making an informed investment decision.

5.2 Form of Senior Security . The Senior Security shall be substantially in the form of Annex F hereto, the terms of which are incorporated in and made a part of this Agreement. The Senior Securities shall be issued, and may be transferred, only in denominations having an aggregate principal amount of not less than $1,000 and integral multiples of $1,000 in excess thereof. The Senior Securities shall be in registered form without coupons and shall be numbered, lettered or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine as evidenced by the execution thereof.

5.3 Execution of Senior Securities . The Senior Securities shall be executed in the name and on behalf of the Company by the manual or facsimile signature of its President, Chief Executive Officer, Chief Financial Officer or one of its Executive Vice Presidents under its corporate seal (if legally required) which may be affixed thereto or printed, engraved or otherwise reproduced thereon, by facsimile or otherwise, and which need not be attested, unless otherwise required by the Charter or Bylaws or applicable law. Every Senior Security shall be dated the date of its execution and delivery.

5.4 Computation of Interest . (a) The amount of interest payable for any Interest Period will be computed as provided in the Senior Securities.

(b) Each Senior Security delivered under this Agreement upon registration of transfer of or in exchange for or in lieu of any other Senior Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Senior Security.


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5.5 Legends .

(a) Treasury agrees that all certificates or other instruments representing the Senior Securities will bear a legend substantially to the following effect:

“THIS SENIOR SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM DENOMINATIONS OF $1,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF SUCH SECURITIES IN A DENOMINATION OF LESS THAN $1,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PAYMENTS ON SUCH SECURITIES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES.

THIS SECURITY IS SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THE SECURITIES PURCHASE AGREEMENT BY AND BETWEEN THE COMPANY AND THE SECRETARY OF THE TREASURY (THE “ AGREEMENT ”), WHICH IS INCORPORATED INTO THIS SENIOR SECURITY.

THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM OR ANY OTHER GOVERNMENTAL AGENCY.

THIS OBLIGATION IS SUBORDINATED AND JUNIOR IN RIGHT OF PAYMENT, AS TO PRINCIPAL, INTEREST AND PREMIUM, TO ALL CLAIMS AGAINST THE COMPANY HAVING THE SAME PRIORITY AS SAVINGS ACCOUNT HOLDERS OR OTHER DEPOSITORS, OR ANY HIGHER PRIORITY, INCLUDING GENERAL AND SECURED CREDITORS OF THE COMPANY. THIS OBLIGATION IS NOT SECURED BY THE COMPANY’S ASSETS OR THE ASSETS OF ANY OF ITS AFFILIATES.

THE FOLLOWING NOTICES ARE APPLICABLE IF THE COMPANY IS A DEPOSITORY INSTITUTION: THIS OBLIGATION IS NOT ELIGIBLE AS COLLATERAL FOR ANY LOAN BY THE COMPANY. PURSUANT TO 12 U.S.C. 1831o(h), THE COMPANY MAY NOT MAKE ANY PAYMENT OF PRINCIPAL OR INTEREST ON THIS OBLIGATION BEGINNING 60 DAYS AFTER BECOMING CRITICALLY UNDERCAPITALIZED, UNLESS THE FEDERAL DEPOSIT INSURANCE CORPORATION HAS MADE AN EXCEPTION PURSUANT TO 12 U.S.C. 1831o(h)(2)(B).


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THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR SUCH LAWS. EACH PURCHASER OF THIS SECURITY IS NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER (THE “144A EXEMPTION”). IF ANY TRANSFEREE OF THIS SECURITY IS ADVISED BY THE TRANSFEROR THAT SUCH TRANSFEROR IS RELYING ON THE 144A EXEMPTION, SUCH TRANSFEREE, BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (2) AGREES THAT IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER THE SECURITIES REPRESENTED BY THIS INSTRUMENT EXCEPT (A) PURSUANT TO A REGISTRATION STATEMENT WHICH IS THEN EFFECTIVE UNDER THE SECURITIES ACT, (B) FOR SO LONG AS THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO THE COMPANY OR (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.

THIS INSTRUMENT IS ISSUED SUBJECT TO THE RESTRICTIONS ON TRANSFER AND OTHER PROVISIONS


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OF THE AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE COMPANY. THIS SECURITY MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH SAID AGREEMENT. ANY SALE OR OTHER TRANSFER NOT IN COMPLIANCE WITH SAID AGREEMENT WILL BE VOID.”

(b) In the event that any Senior Securities (A) (i) become registered under the Securities Act or (ii) are eligible to be transferred without restriction in accordance with Rule 144 or another exemption from registration under the Securities Act (other than Rule 144A), or (B) (i) become subject to an Indenture qualified under the Indenture Act or (ii) are exempt from qualification under the Indenture Act, the Company shall issue new certificates or other instruments representing such Senior Securities, which shall not contain the applicable legends in Section 5.5(a) above; provided that the Holder surrenders to the Company the previously issued certificates or other instruments.

5.6 Transfer of Senior Securities .

(a) The Company or its duly appointed agent shall maintain a register (the “ Senior Securities Register ”) for the Senior Securities in which it shall register the issuance and transfer of the Senior Securities. All transfers of the Senior Securities shall be recorded on the Senior Securities Register maintained by the Company or its agent, and the Company shall be entitled to regard the registered Holder of such Senior Security as the actual owner of the Senior Security so registered until the Company or its agent is required to record a transfer of such Senior Security on its Senior Securities Register. The Company or its agent shall, subject to applicable securities laws, be required to record any such transfer when it receives the Senior Security to be transferred duly and properly endorsed by the registered Holder or by its attorney duly authorized in writing.

(b) The Company shall at any time, upon written request of the Holder of a Senior Security and surrender of the Senior Security for such purpose, at the expense of the Company, issue new Senior Securities in exchange therefor in such denominations of at least $1,000, as shall be specified by the Holder of such Senior Security, in an aggregate principal amount equal to the then unpaid principal amount of the Senior Securities surrendered and substantially in the form of Annex F, with appropriate insertions and variations, and bearing interest from the date to which interest has been paid on the Senior Security surrendered. All Senior Securities issued upon any registration of transfer of exchange pursuant to this Section 5.6(b) shall be valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Agreement, as the Senior Securities surrendered upon such registration of transfer or exchange.

(c) All Senior Securities presented for registration of transfer or for exchange or payment shall be duly endorsed by, or be accompanied by, a written instrument or instruments of transfer in a form satisfactory to the Company duly executed by the Holder or such Holder’s attorney duly authorized in writing.


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(d) No service charge shall be incurred for any exchange or registration of transfer of Senior Securities, but the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith.

(e) Prior to due presentment for the registration of a transfer of any Senior Security, the Company and any agent of the Company may deem and treat the person in whose name such Senior Security is registered as the absolute owner and Holder of such Senior Security for the purpose of receiving payment of principal of and interest on such Senior Security and none of the Company or any agents of the Company shall be affected by notice to the contrary.

(f) Subject to compliance with applicable securities laws, the Holder shall be permitted to transfer, sell, assign or otherwise dispose of (“ Transfer ”) all or a portion of the Senior Securities at any time, and the Company shall take all steps as may be reasonably requested by Treasury to facilitate the Transfer of the Senior Securities, including without limitation, as set forth in Section 5.9; provided that Treasury shall not Transfer any Senior Securities if such transfer would require the Company to be subject to the periodic reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “ Exchange Act ”) and the Company was not already subject to such requirements. In furtherance of the foregoing, the Company shall provide reasonable cooperation to facilitate any Transfers of the Senior Securities, including, as is reasonable under the circumstances, by furnishing such information concerning the Company and its business as a proposed transferee may reasonably request (including such information as is required by Section 3.1(c)(iv)) and making management of the Company reasonably available to respond to questions of a proposed transferee in accordance with customary practice, subject in all cases to the proposed transferee agreeing to a customary confidentiality agreement.

5.7 Replacement of Senior Securities . Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Senior Security, and, in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity reasonably satisfactory to the Company ( provided that Treasury or any institutional Holder of a Senior Security may instead deliver to the Company an indemnity agreement in form and substance reasonably satisfactory to the Company), or, in the case of any such mutilation, upon surrender and cancellation of the Senior Security, as the case may be, the Company will issue a new Senior Security of like tenor, in lieu of such lost, stolen, destroyed or mutilated Senior Security.

5.8 Cancellation . All Senior Securities surrendered for the purpose of payment, exchange or registration of transfer, shall be surrendered to the Company and promptly canceled by it, and no Senior Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall destroy all canceled Senior Securities.


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5.9 Rule 144; Rule 144A; 4(1 ¹ ⁄ ₂ ) Transactions .

(a) At all times after the Signing Date, the Company covenants that (1) it will, upon the request of Treasury or any subsequent Holder, use its reasonable best efforts to (x), to the extent any Holder is relying on Rule 144 under the Securities Act to sell any of the Senior Securities, make “current public information” available, as provided in Section (c)(1) of Rule 144 (if the Company is a “Reporting Issuer” within the meaning of Rule 144) or in Section (c)(2) of Rule 144 (if the Company is a “Non-Reporting Issuer” within the meaning of Rule 144), in either case for such time period as necessary to permit sales pursuant to Rule 144, (y), to the extent any Holder is relying on the so-called “Section 4(1 ¹ ⁄ ₂ )” exemption to sell any of its Senior Securities, prepare and provide to such Holder such information, including the preparation of private offering memoranda or circulars or financial information, as the Holder may reasonably request to enable the sale of the Senior Securities pursuant to such exemption, or (z) to the extent any Holder is relying on Rule 144A under the Securities Act to sell any of its Senior Securities, prepare and provide to such Holder the information required pursuant to Rule 144A(d)(4), and (2) it will take such further action as any Holder may reasonably request from time to time to enable such Holder to sell Senior Securities without registration under the Securities Act within the limitations of the exemptions provided by (i) the provisions of the Securities Act or any interpretations thereof or related thereto by the SEC, including transactions based on the so-called “Section 4(1 ¹ ⁄ ₂ )” and other similar transactions, (ii) Rule 144 or 144A under the Securities Act, as such rules may be amended from time to time, or (iii) any similar rule or regulation hereafter adopted by the SEC; provided that the Company shall not be required to take any action described in this Section 5.9(a) that would cause the Company to become subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act if the Company was not subject to such requirements prior to taking such action. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements and, if not, the specifics thereof.

(b) The Company agrees to indemnify Treasury, Treasury’s officials, officers, employees, agents, representatives and Affiliates, and each person, if any, that controls Treasury within the meaning of the Securities Act (each, an “ Indemnitee ”), against any and all losses, claims, damages, actions, liabilities, costs and expenses (including reasonable fees, expenses and disbursements of attorneys and other professionals incurred in connection with investigating, defending, settling, compromising or paying any such losses, claims, damages, actions, liabilities, costs and expenses), joint or several, arising out of or based upon any untrue statement or alleged untrue statement of material fact contained in any document or report provided by the Company pursuant to this Section 5.9 or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

(c) If the indemnification provided for in Section 5.9(b) is unavailable to an Indemnitee with respect to any losses, claims, damages, actions, liabilities, costs or expenses referred to therein or is insufficient to hold the Indemnitee harmless as contemplated therein, then the Company, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or payable by such Indemnitee as a result of such losses, claims, damages, actions, liabilities, costs or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnitee, on the one hand, and the Company, on the other hand, in connection with the


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statements or omissions which resulted in such losses, claims, damages, actions, liabilities, costs or expenses as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnitee, on the other hand, shall be determined by reference to, among other factors, whether the untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company or by the Indemnitee and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; the Company and Treasury agree that it would not be just and equitable if contribution pursuant to this Section 5.9(c) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 5.9(b). No Indemnitee guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from the Company if the Company was not guilty of such fraudulent misrepresentation.

5.10 Depository Senior Securities . Upon request by Treasury at any time following the Closing Date, the Company shall promptly enter into a depositary arrangement, pursuant to customary agreements reasonably satisfactory to Treasury and with a depositary reasonably acceptable to Treasury, pursuant to which the Senior Securities may be deposited.

5.11 Redemption .

(a) The Senior Securities at the time outstanding may be redeemed by the Company at its option, subject to the approval of the Appropriate Federal Banking Agency, in whole or in part and subject to Section 5.11(e), at any time and from time to time, out of funds legally available therefor, upon notice given as provided in Section 5.11(d) below, on any Interest Payment Date (the “ Redemption Date ”) at a redemption price equal to the sum of (i) 100% of the principal amount thereof being called for redemption ( provided that, if less than all of the outstanding Senior Securities are then being redeemed, such amount shall not be less than 25% of the Original Aggregate Principal Amount of the Senior Securities), (ii) any accrued and unpaid interest and CPP Lending Incentive Fees, and (iii) the pro-rata amount of CPP Lending Incentive Fees for the then-current Interest Period.

(b) The redemption price for any Senior Securities shall be payable on the Redemption Date to the Holder of such Senior Securities against surrender thereof to the Company or its agent. Interest shall be paid at the then Applicable Interest Rate from the date of the last Interest Payment Date up to but not including the Redemption Date.

(c) No Sinking Fund . The Senior Securities will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Senior Securities will have no right to require redemption or repurchase of any of the Senior Securities.

(d) Notice of Redemption . Notice of redemption of the Senior Securities shall be given by first class mail, postage prepaid, addressed to the Holders of record of the Senior Securities to be redeemed at their respective last addresses appearing on the Senior Securities Register. Such mailing shall be at least 30 days and not more than 60 days before the Redemption Date. Any notice mailed as provided in this subsection shall be conclusively


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presumed to have been duly given, whether or not the Holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any Holder of Senior Securities designated for redemption shall not affect the validity of the proceedings for the redemption of any other Senior Securities. Notwithstanding the foregoing, if Senior Securities are issued in book-entry form through The Depository Trust Company or any other similar facility, notice of redemption may be given to the Holders of Senior Securities at such time and in any manner permitted by such facility. Each notice of redemption given to a Holder shall state: (1) the Redemption Date; (2) the amount of Senior Securities to be redeemed by such Holder; (3) the redemption price; and (4) the place or places where such Senior Securities are to be surrendered for payment of the redemption price.

(e) Partial Redemption . The Company may redeem less than all of the outstanding Senior Securities, provided that the amount called for redemption at any time is not less than 25% of the amount of the outstanding principal amount of the Senior Securities. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which Senior Securities shall be redeemed from time to time. If less than the full aggregate principal amount of any Senior Security is redeemed, the Company shall issue a new Senior Security in the unredeemed aggregate principal amount thereof without charge to the Holder thereof. Senior Securities may be redeemed in part only on a pro rata basis and only in minimum denominations of $1,000 and integral multiples thereof.

(f) Effectiveness of Redemption . If notice of redemption has been duly given and if on or before the Redemption Date specified in the notice all funds necessary for the redemption have been deposited by the Company, in trust for the pro rata benefit of the Holders of the Senior Securities called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any Senior Security so called for redemption has not been surrendered for cancellation, on and after the Redemption Date interest shall cease to accrue on the aggregate principal amount of such Senior Securities so called for redemption, the aggregate principal amount of such Senior Securities so called for redemption shall no longer be deemed outstanding and shall cease to bear interest from and after the Redemption Date. All rights with respect to such Senior Securities (or the portion thereof so called for redemption) shall forthwith on such Redemption Date cease and terminate, except only the right of the Holders thereof to receive the redemption price payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the Redemption Date shall, to the extent permitted by applicable law, be released to the Company, after which time the Holders of such Senior Securities (or portion thereof so called for redemption) shall look only to the Company for payment of the redemption price of such Senior Securities.

(g) Status of Redeemed Securities . Senior Securities that are redeemed, repurchased or otherwise acquired by the Company shall be cancelled and shall not thereafter be reissued by the Company.

(h) Conversion . Holders of Senior Securities shall have no right to exchange or convert any Senior Securities into any other securities.


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5.12 Provisions for Nonpayment of Interest and Voting Rights .

(a) General . The Holders of Senior Securities shall not have any voting rights except as set forth below or as otherwise from time to time required by law.

(b) Restrictions For Any Missed Payment . The following restrictions will apply whenever interest payable on the Senior Securities has not been paid for any quarterly interest period:

(i)

The Chief Executive Officer and Chief Financial Officer of the Company will be required to provide written notice, in a form reasonably satisfactory to Treasury, which is to include the rationale of the Company’s board of directors for not paying interest;

(ii)

No repurchases may be effected and no dividends may be declared or paid on the Company’s securities except in accordance with Section 5.13(b); and

(iii)

No interest may be paid on any Indebtedness that ranks pari passu with, or junior to, the Senior Securities with respect to the payment of interest.

(c) Obligations of the Board of Directors After Four Missed Payments . Whenever interest on the Senior Securities has not been paid for four quarterly interest periods or more, whether or not consecutive, and during such time the Company was not subject to a regulatory determination that prohibits the payment of interest, the board of directors of the Company must certify, in writing, that the Company used best efforts to pay such quarterly interest in a manner consistent with safe and sound banking practices and the directors’ fiduciary obligations.

(d) Board Observation Rights . Whenever, at any time or times, interest on the Senior Securities has not been paid in full within five (5) business days after each Interest Payment Date for an aggregate of five (5) Interest Periods or more, whether or not consecutive, the Company shall invite a representative selected by the holders of a majority of the outstanding Senior Securities, voting as a single class, to attend all meetings of its Board of Directors in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors in connection with such meetings; provided , that the holders of the Senior Securities shall not be obligated to select such a representative, nor shall such representative, if selected, be obligated to attend any meeting to which he/she is invited. The rights of the holders of the Senior Securities set forth in


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this Section 5.12(d) shall terminate when full dividends have been timely paid on the Senior Securities for at least four consecutive Interest Periods, subject to revesting in the event of each and every subsequent default of the character above mentioned.

(e) Senior Securities Directors . Whenever, at any time or times, (i) interest on the Senior Securities has not been paid in full within five (5) business days after each Interest Payment Date for an aggregate of six (6) Interest Periods or more, whether or not consecutive, and (ii) the aggregate principal amount of the then-outstanding Senior Securities is greater than or equal to $25,000,000, the authorized number of directors of the Company shall automatically be increased by two and the Holders of a majority of the aggregate principal amount of the Senior Securities, voting as a class, shall have the right, but not the obligation, to elect two directors to fill such newly created directorships (such directors, hereinafter the “ Senior Securities Directors ” and each a “ Senior Securities Director ”) at the Company’s next annual meeting of stockholders (or, if the next annual meeting is not yet scheduled or is scheduled to occur more than thirty days later, the President of the Company shall promptly call a special meeting for that purpose) and at each subsequent annual meeting of stockholders until all accrued but unpaid interest for four (4) consecutive Interest Periods on all outstanding Senior Securities has been timely paid in full, at which time such right shall terminate with respect to the Senior Securities, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon any termination of the right of the Holders of Senior Securities (as a class) to vote for directors as provided above, the Senior Securities Directors shall cease to be qualified as directors, the term of office of all Senior Securities Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Senior Securities Directors elected pursuant hereto. Any Senior Securities Director may be removed at any time, with or without cause, and any vacancy created thereby may be filled, only by the affirmative vote of the Holders of a majority of the aggregate principal amount of the Senior Securities at the time outstanding voting separately as a class. If the office of any Senior Securities Director becomes vacant for any reason other than removal from office as aforesaid, the Holders of a majority of the aggregate principal amount of the outstanding Senior Securities, voting as a class, may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred.

(f) Class Voting Rights as to Particular Matters . So long as any Senior Securities are outstanding, in addition to any other vote or consent of stockholders required by law or by the Charter, the written consent of (x) Treasury, if Treasury holds any Senior Securities, or (y) the holders of a majority of the outstanding Senior Securities, voting as a single class, if Treasury does not hold any Senior Securities, shall be necessary for effecting or validating:

(i) Authorization of Senior Stock . Any amendment or alteration of the Charter to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Company ranking senior to Senior Securities with respect to either or both the payment of dividends or interest and/or the distribution of assets on any liquidation, dissolution or winding up of the Company;


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(ii) Amendment of Senior Securities . Any amendment, alteration or repeal of any provision of the Senior Securities or the Charter (including, unless no vote on such merger or consolidation is required by Section 5.12(f)(iii) below, any amendment, alteration or repeal by means of a merger, consolidation or otherwise) so as to adversely affect the rights, preferences, privileges or voting powers of the Senior Securities;

(iii) Share Exchanges, Reclassifications, Mergers and Consolidations . Subject to Section 5.12(f)(v) below, any consummation of a binding share exchange or reclassification involving the Senior Securities, or of a merger or consolidation of the Company with another corporation or other entity, unless in each case (x) the Senior Securities remain outstanding or, in the case of any such merger or consolidation with respect to which the Company is not the surviving or resulting entity, are converted into or exchanged for securities of the surviving or resulting entity or its ultimate parent, and (y) such Senior Securities remaining outstanding or such securities of the surviving or resulting entity or its ultimate parent, as the case may be, have such terms, conditions, rights, preferences, privileges and voting powers, and limitations and restrictions thereof that are the same as the terms, conditions, rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Senior Securities immediately prior to such consummation, taken as a whole; provided , that in all cases, the obligations of the Company are assumed (by operation of law or by express written assumption) by the resulting entity or its ultimate parent;

(iv) Certain Asset Sales . Any sale of all, substantially all, or any material portion of, the assets of the Company, if the Senior Securities will not be redeemed in full contemporaneously with the consummation of such sale; and

(v) Holding Company Transactions . Any consummation of a Holding Company Transaction, unless as a result of the Holding Company Transaction each Senior Security shall be converted into or exchanged for securities having equal face amount, rank and preferences of the Company or the Acquiror (a “ Holding Company Senior Security ”). Any such Holding Company Senior Security shall entitle holders thereof to interest from the date of issuance of such Holding Company Senior Security on terms that are equivalent to the terms set forth herein, and shall have such other rights, preferences, privileges and voting powers, and limitations and restrictions thereof that are the same as the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Senior Securities immediately prior to such conversion or exchange, taken as a whole;

(g) Changes after Provision for Redemption . No vote or consent of the Holders of Senior Securities shall be required pursuant to Section 5.12(f) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding Senior Securities shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been deposited in trust for such redemption, in each case pursuant to Section 5.11 above.

(h) Procedures for Voting and Consents . The rules and procedures for calling and conducting any meeting of the Holders of Senior Securities, the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules of the Board of Directors or any duly authorized committee of the Board of Directors, in its discretion, may adopt from time to time, which rules and/or procedures shall conform to the requirements of the Charter, the Bylaws, and applicable law and the rules of any national securities exchange or other trading facility on which the Senior Securities are listed or traded at the time.


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5.13 Right to Pay Dividends; Restriction on Dividends and Repurchases .

(a) Subject to Sections 5.13(b) and (c) and any restrictions imposed by the Appropriate Federal Banking Agency or, if applicable, the Appropriate State Banking Agency, so long as any Senior Securities are outstanding, the Company may declare and pay dividends on shares of Common Stock, or repurchase or redeem any shares of Common Stock, in each case only if after giving effect to such dividend, repurchase or redemption, the Company’s (or if the Company is a Bank Holding Company or a Savings and Loan Holding Company, its IDI Subsidiaries’) Total Risk-Based Capital would be at least equal to the Total Risk-Based Capital Dividend Threshold.

(b) If interest is not paid on the Senior Securities in respect of any Interest Period, then until all accrued interest on the Senior Securities has been paid in full, neither the Company nor any Company Subsidiary shall, redeem, purchase or acquire, or pay any dividends on, any shares of Common Stock or other capital stock or other equity securities of any kind of the Company or any Company Subsidiary, or any trust preferred securities issued by the Company or any Affiliate of the Company, (other than (i) redemptions, purchases, repurchases or other acquisitions of the Senior Securities (ii) redemptions of securities held by the Company or any wholly-owned Company Subsidiary or (iii) redemptions, purchases or other acquisitions of capital stock or other equity securities of any kind of any Company Subsidiary required pursuant to binding contractual agreements entered into prior to (x) if Treasury held Previously Acquired Securities immediately prior to the Original Issue Date, the original issue date of such Previously Acquired Securities, or (y) otherwise, the Signing Date).

(c) After the tenth (10th) anniversary of the Signing Date, so long as any Senior Securities are outstanding, (i) no Common Stock or other capital stock or other equity securities of any kind of the Company or any Company Subsidiary shall be, directly or indirectly, purchased, redeemed or otherwise acquired for consideration by the Company or any Company Subsidiary; and (ii) neither the Company nor any Company Subsidiary shall pay any dividends on any shares of Common Stock or other capital stock or other equity securities of any kind of the Company or any Company Subsidiary.

5.14 No Preemptive Rights . No Senior Securities shall have any rights of preemption whatsoever as to any securities of the Company, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.


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5.15 References to Line Items of Supplemental Reports . If Treasury modifies the form of Supplemental Report, pursuant to its rights under the Agreement, and any such modification includes a change to the caption or number of any line item on the Supplemental Report, then any reference herein to such line item shall thereafter be a reference to such re-captioned or re-numbered line item

5.16 Record Holders . To the fullest extent permitted by applicable law, the Company and the transfer agent for Senior Securities may deem and treat the record holder of any Senior Securities as the true and lawful owner thereof for all purposes, and neither the Company nor such transfer agent shall be affected by any notice to the contrary.

5.17 Notices . All notices or communications in respect of Senior Securities shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Agreement, in the Charter or Bylaws or by applicable law. Notwithstanding the foregoing, if Senior Securities are issued in book-entry form through The Depository Trust Company or any similar facility, such notices may be given to the holders of such Senior Securities in any manner permitted by such facility.

5.18 Expenses and Further Assurances .

(a) Unless otherwise provided in this Agreement, each of the parties hereto will bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated under this Agreement, including fees and expenses of its own financial or other consultants, investment bankers, accountants and counsel.

(b) The Company shall, at the Company’s sole cost and expense, (i) furnish to Treasury all instruments, documents and other agreements required to be furnished by the Company pursuant to the terms of this Agreement, including, without limitation, any documents required to be delivered pursuant to Section 5.9 above, or which are reasonably requested by Treasury in connection therewith; (ii) execute and deliver to Treasury such documents, instruments, certificates, assignments and other writings, and do such other acts necessary or desirable, to evidence, preserve and/or protect the Senior Securities purchased by Treasury, as Treasury may reasonably require; and (iii) do and execute all and such further lawful and reasonable acts, conveyances and assurances for the better and more effective carrying out of the intents and purposes of this Agreement, as Treasury shall reasonably require from time to time.

5.19 Communications to Holders . Any Holder shall have the right, upon five (5) business days prior written notice to the Company or its duly appointed agent to obtain a complete list of Holders. In addition, any Holder shall have the right to request that the Company or its duly appointed agent send a notice on behalf of such Holder to all other Holders at the addresses set forth on the Senior Securities Register or, to the extent the Company has entered into a depositary arrangement, by means of any procedures applicable to such depositary arrangement.

5.20 Other Rights . The Senior Securities shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.


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ARTICLE VI

SUBORDINATION OF THE SENIOR SECURITIES

6.1 Agreement to Subordinate .

(a) The Company covenants and agrees, and each Holder of Senior Securities issued hereunder likewise covenants and agrees, that the Senior Securities shall be issued subject to the provisions of this Article VI; and each Holder of a Senior Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions.

(b) The payment by the Company of the principal of and interest on all Senior Securities issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full of all amounts then due and payable in respect of (i) with respect to Senior Securities issued by a bank or savings association, all claims of the Company’s depositors, if applicable, and Senior Indebtedness, whether outstanding at the date of this Agreement or thereafter incurred or (ii) with respect to Senior Securities issued by a Bank Holding Company or Savings and Loan Holding Company, any Senior Indebtedness of the Company in accordance with applicable regulations governing Bank Holding Companies or Savings and Loan Holding Companies.

(c) No provision of this Article VI shall prevent the occurrence of any Event of Default (or any event which, after notice or the lapse of time or both would become, an Event of Default) with respect to the Senior Securities hereunder.

6.2 Default on Senior Indebtedness .

(a) In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness, no payment shall be made by the Company with respect to the principal or interest on the Senior Securities or any other amounts which may be due on the Senior Securities pursuant to the terms hereof or thereof.

(b) In the event of the acceleration of the maturity of the Senior Indebtedness, then no payment shall be made by the Company with respect to the principal or interest on the Senior Securities or any other amounts which may be due on the Senior Securities pursuant to the terms hereof or thereof until the holders of all Senior Indebtedness outstanding at the time of such acceleration shall receive payment, in full, of all amounts due on or in respect of such Senior Indebtedness (including any amounts due upon acceleration).


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(c) In the event that, notwithstanding the foregoing, any payment is received by any Holder of a Senior Security, when such payment is prohibited by the preceding paragraphs of this Section 6.2, such payment shall be held in trust for the benefit of, and shall be paid over or delivered by the Holder of the Senior Securities to the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent of the amounts in respect of such Senior Indebtedness and to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Company in writing within 90 days of such payment of the amounts then due and owing on such Senior Indebtedness, and only the amounts specified in such notice to the Company shall be paid to the holders of such Senior Indebtedness. The Company shall, within ten (10) business days of receipt of such notice, provide Treasury with (i) a copy of such notice delivered to the Company and (ii) a certificate signed on behalf of the Company by an Executive Officer certifying that the information set forth in such notice is true and correct and confirming that the Holder of the Senior Securities should pay or deliver the amounts specified in such notice in the manner specified therein.

6.3 Liquidation; Dissolution .

(a) Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Company, whether voluntary or involuntary or in insolvency, receivership or other proceedings, the holders of all Senior Indebtedness of the Company will first be entitled to receive payment in full of amounts due on or in respect of such Senior Indebtedness, before any payment is made by the Company on account of the principal of or interest on the Senior Securities or any other amounts which may be due on the Senior Securities pursuant to the terms hereof or thereof); and upon any such dissolution, winding-up, liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, which the Holder of the Senior Securities would be entitled to receive from the Company, except for the provisions of this Article VI, shall be paid by the Company or by any receiver, liquidating trustee, agent or other person making such payment or distribution, or by the Holder of the Senior Securities under this Agreement if received by them or it, directly to the holders of Senior Indebtedness of the Company ( pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all such amounts of Senior Indebtedness in full, in money or money’s worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Holder of the Senior Securities.


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(b) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character prohibited by Section 6.3(a), whether in cash, property or securities, shall be received by any Holder of the Senior Securities, before the amounts of all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered by any Holder of a Senior Security, to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all amounts of Senior Indebtedness remaining unpaid to the extent necessary to pay all amounts due on or in respect of such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. In such event, the Company shall provide Treasury with a certificate signed on behalf of the Company by an Executive Officer confirming that the Holder of the Senior Securities should pay or deliver such amounts to the holders of such Senior Indebtedness.

(c) For purposes of this Article VI, the words “ cash, property or securities ” shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article VI with respect to the Senior Securities to the payment of Senior Indebtedness that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another person or the liquidation or dissolution of the Company following the sale, conveyance, transfer or lease of its property as an entirety, or substantially as an entirety, to another person upon the terms and conditions provided for in Section 3.2(a)(i) shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 6.3 if such other person shall, as a part of such consolidation, merger, sale, conveyance, transfer or lease, comply with the conditions stated in Section 3.2(a)(i).

6.4 Merger, Consolidation and Sale of Assets Is Not Liquidation . For purposes of this Article VI, the merger or consolidation of the Company with any other corporation or other entity, including a merger or consolidation in which the holders of Senior Securities receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Company, shall not constitute a liquidation, dissolution or winding up of the Company.

6.5 Subrogation .

(a) Subject to the payment in full of all of Senior Indebtedness, the rights of the Holders of the Senior Securities shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the


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Company, as the case may be, applicable to such Senior Indebtedness until the principal of and interest on the Senior Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Holders of the Senior Securities would be entitled except for the provisions of this Article VI, and no payment pursuant to the provisions of this Article VI to or for the benefit of the holders of such Senior Indebtedness by the Holders of the Senior Securities shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the Holders of the Senior Securities, be deemed to be a payment by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article VI are intended solely for the purposes of defining the relative rights of the Holders of the Senior Securities, on the one hand, and the holders of such Senior Indebtedness on the other hand.

(b) Nothing contained in this Article VI or elsewhere in this Agreement or in the Senior Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the Holders of the Senior Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Senior Securities the principal of and interest on the Senior Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Senior Securities and creditors of the Company, as the case may be, other than the holders of Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Holder of any Senior Securities from exercising all remedies otherwise permitted by applicable law upon default under this Agreement, subject to the rights, if any, under this Article VI of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy.

6.6 Notice by the Company .

(a) The Company shall give prompt written notice to the Holders of the Senior Securities of any fact known to the Company that would prohibit the making of any payment of monies in respect of the Senior Securities pursuant to the provisions of this Article VI.

(b) Upon any payment or distribution of assets of the Company referred to in this Article VI, the Holders of the Senior Securities shall be entitled to conclusively rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding-up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Holders of the Senior Securities, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article VI.


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6.7 Subordination May Not Be Impaired .

(a) No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, as the case may be, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, as the case may be, with the terms, provisions and covenants of this Agreement, regardless of any knowledge thereof that any such holder may have or otherwise be charged with.

(b) Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Holders of the Senior Securities, without incurring responsibility to the Holders of the Senior Securities and without impairing or releasing the subordination provided in this Article VI or the obligations hereunder of the Holders of the Senior Securities to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, as the case may be, and any other person.

ARTICLE VII

MISCELLANEOUS

7.1 Termination . This Agreement shall terminate upon the earliest to occur of:

(a) termination at any time prior to the Closing:

(i) by either Treasury or the Company if the Closing shall not have occurred on or before the 30th calendar day following the date on which Treasury issued its preliminary approval of the Company’s application to participate in SBLF (the “ Closing Deadline ”); provided , however , that in the event the Closing has not occurred by the Closing Deadline, the parties will consult in good faith to determine whether to extend the term of this Agreement, it being understood that the parties shall be required to consult only until the fifth calendar day after the Closing Deadline and not be under any obligation to extend the term of this Agreement thereafter; provided , further , that the right to terminate this Agreement under this Section 5.1(a)(i) shall not be available to any party whose breach of any representation or warranty or failure to perform any obligation under this Agreement shall have caused or resulted in the failure of the Closing to occur on or prior to such date; or

(ii) by either Treasury or the Company in the event that any Governmental Entity shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action shall have become final and nonappealable; or

(iii) by the mutual written consent of Treasury and the Company; or


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(b) the date on which all of the Senior Securities have been paid or redeemed in whole; or

(c) the date on which Treasury has transferred all of the Senior Securities to third parties which are not Affiliates of Treasury.

In the event of termination of this Agreement as provided in this Section 7.1, this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except that nothing herein shall relieve either party from liability for any breach of this Agreement.

7.2 Survival .

(a) This Agreement and all representations, warranties, covenants and agreements made herein shall survive the Closing without limitation.

(b) The covenants set forth in Article III and Annex E and the agreements set forth in Article V shall, to the extent such covenants do not explicitly terminate at such time as Treasury no longer owns any Senior Securities, survive the termination of this Agreement pursuant to Section 7.1(c) without limitation until the date on which all of the Senior Securities have been redeemed in whole.

(c) The rights and remedies of Treasury with respect to the representations, warranties, covenants and obligations of the Company herein shall not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time by Treasury or any of its personnel or agents with respect to the accuracy or inaccuracy of, or compliance with, any such representation, warranty, covenant or obligation.

7.3 Amendment . No amendment of any provision of this Agreement will be effective unless made in writing and signed by an officer or a duly authorized representative of each party, except as set forth in Section 3.1(d)(v). No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative of any rights or remedies provided by law.

7.4 Waiver of Conditions . The conditions to each party’s obligation to consummate the Purchase are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by applicable law. No waiver will be effective unless it is in a writing signed by a duly authorized officer of the waiving party that makes express reference to the provision or provisions subject to such waiver.

7.5 Governing Law; Submission to Jurisdiction, etc . This Agreement and any claim, controversy or dispute arising under or related to this Agreement, the relationship of the parties, and/or the interpretation and enforcement of the rights and duties of the parties shall be enforced,


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governed, and construed in all respects (whether in contract or in tort) in accordance with the federal law of the United States if and to the extent such law is applicable, and otherwise in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State. Each of the parties hereto agrees (a) to submit to the exclusive jurisdiction and venue of the United States District Court for the District of Columbia and the United States Court of Federal Claims for any and all civil actions, suits or proceedings arising out of or relating to this Agreement or the Purchase contemplated hereby and (b) that notice may be served upon (i) the Company at the address and in the manner set forth for notices to the Company in Section 7.7 and (ii) Treasury at the address and in the manner set forth for notices to the Company in Section 7.7, but otherwise in accordance with federal law. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE PARTIES HERETO HEREBY UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY CIVIL LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE PURCHASE CONTEMPLATED HEREBY.

7.6 No Relationship to TARP . The parties acknowledge and agree that (i) the SBLF program is separate and distinct from the Troubled Asset Relief Program established by the Emergency Economic Stabilization Act of 2008; and (ii) the Company shall not, by virtue of the investment contemplated hereby, be considered a recipient under the Troubled Asset Relief Program.

7.7 Notices . Any notice, request, instruction or other document to be given hereunder by any party to the other will be in writing and will be deemed to have been duly given (a) on the date of delivery if delivered personally, or by facsimile, upon confirmation of receipt, or (b) on the second business day following the date of dispatch if delivered by a recognized next day courier service. All notices to the Company shall be delivered as set forth on the cover page of this Agreement, or pursuant to such other instruction as may be designated in writing by the Company to Treasury. All notices to Treasury shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by Treasury to the Company.

If to Treasury:

United States Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220

Attention: Small Business Lending Fund, Office of Domestic Finance

E-mail: SBLFComplSubmissions@treasury.gov

7.8 Assignment . Neither this Agreement nor any right, remedy, obligation nor liability arising hereunder or by reason hereof shall be assignable by any party hereto without the prior written consent of the other party, and any attempt to assign any right, remedy, obligation or liability hereunder without such consent shall be void, except (a) an assignment, in the case of a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Company’s stockholders (a “ Business Combination ”) where such party is not the surviving entity, or a sale of substantially all of its assets, to the entity which is the survivor of such


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Business Combination or the purchaser in such sale, (b) an assignment of certain rights as provided in Sections 3.1(c) or Annex E or (c) an assignment by Treasury of this Agreement to an Affiliate of Treasury; provided that if Treasury assigns this Agreement to an Affiliate, Treasury shall be relieved of its obligations under this Agreement but (i) all rights, remedies and obligations of Treasury hereunder shall continue and be enforceable by such Affiliate, (ii) the Company’s obligations and liabilities hereunder shall continue to be outstanding and (iii) all references to Treasury herein shall be deemed to be references to such Affiliate.

7.9 Severability . If any provision of this Agreement, or the application thereof to any person or circumstance, is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, will remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties.

7.10 No Third Party Beneficiaries . Other than as expressly provided herein, nothing contained in this Agreement, expressed or implied, is intended to confer upon any person or entity other than the Company and Treasury (and any Indemnitee) any benefit, right or remedies.

7.11 Specific Performance . The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled (without the necessity of posting a bond) to specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.

7.12 Interpretation . When a reference is made in this Agreement to “Articles” or “Sections” such reference shall be to an Article or Section of the Annex of this Agreement in which such reference is contained, unless otherwise indicated. When a reference is made in this Agreement to an “Annex”, such reference shall be to an Annex to this Agreement, unless otherwise indicated. The terms defined in the singular have a comparable meaning when used in the plural, and vice versa. References to “herein”, “hereof”, “hereunder” and the like refer to this Agreement as a whole and not to any particular section or provision, unless the context requires otherwise. The table of contents and headings contained in this Agreement are for reference purposes only and are not part of this Agreement. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”. No rule of construction against the draftsperson shall be applied in connection with the interpretation or enforcement of this Agreement, as this Agreement is entered into between sophisticated parties advised by counsel. All references to “ $ ” or “ dollars ” mean the lawful currency of the United States of America. Except as expressly stated in this Agreement, all references to any statute, rule or regulation are to the statute, rule or regulation as amended, modified, supplemented or replaced from time to time (and, in the case of statutes, include any rules and regulations promulgated under the statute) and to any section of any statute, rule or regulation include any successor to the section. References to a “ business day ”


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shall mean any day except Saturday, Sunday and any day on which banking institutions in the State of New York or the District of Columbia generally are authorized or required by law or other governmental actions to close.


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ANNEX D

DISCLOSURE SCHEDULE

Part 2.2

Capitalization


Common Stock reserved for issuance in connection with securities or obligations giving the holder thereof the right to acquire such Common Stock:		The Company has 119,000 shares of common stock reserved for issuance upon the exercise of stock options outstanding or authorized for issuance under the Company’s stock option plans. The Company’s Employee Stock Purchase Plan has a remaining reserved plan pool of 95,849 shares of common stock.

Shares issued since the Capitalization Date upon exercise of options or pursuant to equity-based awards, warrants, or convertible securities:		There have been 23,674 shares of the Company’s class A voting common stock and 236,868 shares of the Company’s class B non-voting common stock issued since the Capitalization Date, all of which shares were issued on May 27, 2011 in connection with the conversion of the Company’s outstanding convertible subordinated debt securities.

All other shares issued since the Capitalization Date:		The Company issued 833 shares of its class A voting common stock and 8,334 shares of its class B non-voting common stock on May 23, 2011 in connection with a subscription offer to purchase newly issued shares.


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Holders of 5% or more of any class of capital stock		Mahan, III James S. Trustee of the James S. Mahan, III Revocable Trust under agreement dated August 22, 2006 1931 S. Live Oak Parkway Wilmington, NC 28403
		Mahan, Marguerite D. Trustee of the Marguerite D. Mahan Revocable Trust under agreement dated August 22, 2006 1931 S. Live Oak Parkway Wilmington, NC 28403 Maurice J. Koury P.O. Box 850 Burlington, NC 27216-0850 Ronald A. Tetenbaum 4619 Traywick Drive Marietta, GA 30062 Bruce B Cameron P.O. Box 3649 Wilmington, NC 28406 W. Lee Williams, III and Elizabeth L. Williams 2114 S. Canterbury Road Wilmington, NC 28403 Neil Lawrence Underwood 2201 Mimosa Place Wilmington, NC 28403

If the Company is a Bank Holding Company or Savings and Loan Holding Company, complete the following (leave blank otherwise):

Name of IDI Subsidiary		Percentage of IDI Subsidiary’s capital stock owned by the Company

Live Oak Banking Company		100%

The Company has voting common stock and non-voting common stock, which, aside from voting rights, are identical in all respects. The Company refers to its voting common stock and non-voting common stock as class A voting common stock and class B non-voting common stock, however, such stock constitutes one class of capital stock for purposes of the Company’s election to be taxed under subchapter S of the Internal Revenue Code of 1986.


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Part 2.13

Compliance With Laws

List any exceptions to the representation and warranty in the second sentence of Section 2.13 of the General Terms and Conditions. If none, please so indicate by checking the box: x .

List any exceptions to the representation and warranty in the last sentence of Section 2.13 of the General Terms and Conditions. If none, please so indicate by checking the box: x .


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Part 2.19

Regulatory Agreements

List any exceptions to the representation and warranty in Section 2.19 of the General Terms and Conditions. If none, please so indicate by checking the box: ¨ .

The Company’s wholly owned subsidiary, Live Oak Banking Company, adopted a board resolution in September, 2010 at the request of the FDIC. The Board Resolution does not impose any current or future restrictions on the payment of dividends or interest by the Company or by Live Oak Banking Company.

The Board Resolution included certain conditions and restrictions on Live Oak Banking Company’s business plan, all of which expired on May 12, 2011.


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Part 2.25

Related Party Transactions

List any exceptions to the representation and warranty in Section 2.25 of the General Terms and Conditions. If none, please so indicate by checking the box: x .


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ANNEX E

REGISTRATION RIGHTS

1. Definitions . Terms not defined in this Annex shall have the meaning ascribed to such terms in the Agreement. As used in this Annex E , the following terms shall have the following respective meanings:

(a) “ Holder ” means Treasury and any other holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 9 of this Annex E .

(b) “ Holders ’ Counsel ” means one counsel for the selling Holders chosen by Holders holding a majority interest in the Registrable Securities being registered.

(c) “ Pending Underwritten Offering ” means, with respect to any Holder forfeiting its rights pursuant to Section 11 of this Annex E , any underwritten offering of Registrable Securities in which such Holder has advised the Company of its intent to register its Registrable Securities either pursuant to Section 2(b) or 2(d) of this Annex E prior to the date of such Holder’s forfeiture.

(d) “ Register ”, “ registered ”, and “ registration ” shall refer to a registration effected by preparing and (A) filing a registration statement or amendment thereto in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of effectiveness of such registration statement or amendment thereto or (B) filing a prospectus and/or prospectus supplement in respect of an appropriate effective registration statement on Form S-3.

(e) “ Registrable Securities ” means (A) all Senior Securities and (B) any securities issued or issuable directly or indirectly with respect to the securities referred to in the foregoing clause (A) by way of conversion, exercise or exchange thereof, or share dividend or share split or in connection with a combination of shares, recapitalization, reclassification, merger, amalgamation, arrangement, consolidation or other reorganization, provided that, once issued, such securities will not be Registrable Securities when (1) they are sold pursuant to an effective registration statement under the Securities Act, (2) they shall have ceased to be outstanding or (3) they have been sold in any transaction in which the transferor’s rights under this Agreement are not assigned to the transferee of the securities. No Registrable Securities may be registered under more than one registration statement at any one time.

(f) “ Registration Expenses ” mean all expenses incurred by the Company in effecting any registration pursuant to this Agreement (whether or not any registration or prospectus becomes effective or final) or otherwise complying with its obligations under this Annex E , including all registration, filing and listing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, expenses incurred in connection with any “road show”, the reasonable fees and disbursements of Holders’ Counsel,


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and expenses of the Company’s independent accountants in connection with any regular or special reviews or audits incident to or required by any such registration, but shall not include Selling Expenses.

(g) “ Rule 144 ”, “ Rule 144A ”, “ Rule 159A ”, “ Rule 405 ” and “ Rule 415 ” mean, in each case, such rule promulgated under the Securities Act (or any successor provision), as the same shall be amended from time to time.

(h) “ Selling Expenses ” mean all discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities and fees and disbursements of counsel for any Holder (other than the fees and disbursements of Holders’ Counsel included in Registration Expenses).

(i) “ Special Registration ” means the registration of (A) equity securities and/or options or other rights in respect thereof solely registered on Form S-4 or Form S-8 (or successor form) or (B) shares of equity securities and/or options or other rights in respect thereof to be offered to directors, members of management, employees, consultants, customers, lenders or vendors of the Company or Company Subsidiaries or in connection with dividend reinvestment plans.

2. Registration .

(a) The Company covenants and agrees that as promptly as practicable after the date that the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act (and in any event no later than 30 days thereafter), the Company shall prepare and file with the SEC a Shelf Registration Statement covering all Registrable Securities (or otherwise designate an existing shelf registration on an appropriate form under Rule 415 under the Securities Act (a “ Shelf Registration Statement ”) filed with the SEC to cover the Registrable Securities), and, to the extent the Shelf Registration Statement has not theretofore been declared effective or is not automatically effective upon such filing, the Company shall use reasonable best efforts to cause such Shelf Registration Statement to be declared or become effective and to keep such Shelf Registration Statement continuously effective and in compliance with the Securities Act and usable for resale of such Registrable Securities for a period from the date of its initial effectiveness until such time as there are no Registrable Securities remaining (including by refiling such Shelf Registration Statement (or a new Shelf Registration Statement) if the initial Shelf Registration Statement expires). Notwithstanding the foregoing, if the Company is not eligible to file a registration statement on Form S-3, then the Company shall not be obligated to file a Shelf Registration Statement unless and until requested to do so in writing by Treasury.

(b) Any registration pursuant to Section 2(a) of this Annex E shall be effected by means of a Shelf Registration Statement on an appropriate form under Rule 415 under the Securities Act (a “ Shelf Registration Statement ”). If any Holder intends to distribute any Registrable Securities by means of an underwritten offering it shall promptly so advise the Company and the Company shall take all reasonable steps to facilitate such distribution, including the actions required pursuant to Section 2(d) of this Annex E ; provided that the Company shall not be required to facilitate an underwritten offering of Registrable Securities


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unless (i) the expected gross proceeds from such offering exceed $200,000 or (ii) such underwritten offering includes all of the outstanding Registrable Securities held by such Holder. The lead underwriters in any such distribution shall be selected by the Holders of a majority of the Registrable Securities to be distributed.

(c) The Company shall not be required to effect a registration (including a resale of Registrable Securities from an effective Shelf Registration Statement) or an underwritten offering pursuant to Section 2 of this Annex E : (A) with respect to securities that are not Registrable Securities; or (B) if the Company has notified all Holders that in the good faith judgment of the Board of Directors, it would be materially detrimental to the Company or its security holders for such registration or underwritten offering to be effected at such time, in which event the Company shall have the right to defer such registration for a period of not more than 45 days after receipt of the request of any Holder; provided that such right to delay a registration or underwritten offering shall be exercised by the Company (1) only if the Company has generally exercised (or is concurrently exercising) similar black-out rights against holders of similar securities that have registration rights and (2) not more than three times in any 12-month period and not more than 90 days in the aggregate in any 12-month period.

(d) If during any period when an effective Shelf Registration Statement is not available, the Company proposes to register any of its equity securities, other than a registration pursuant to Section 2(a) of this Annex E or a Special Registration, and the registration form to be filed may be used for the registration or qualification for distribution of Registrable Securities, the Company will give prompt written notice to all Holders of its intention to effect such a registration (but in no event less than ten days prior to the anticipated filing date) and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within ten business days after the date of the Company’s notice (a “ Piggyback Registration ”). Any such person that has made such a written request may withdraw its Registrable Securities from such Piggyback Registration by giving written notice to the Company and the managing underwriter, if any, on or before the fifth business day prior to the planned effective date of such Piggyback Registration. The Company may terminate or withdraw any registration under this Section 2(d) of this Annex E prior to the effectiveness of such registration, whether or not any Holders have elected to include Registrable Securities in such registration.

(e) If the registration referred to in Section 2(d) of this Annex E is proposed to be underwritten, the Company will so advise all Holders as a part of the written notice given pursuant to Section 2(d) of this Annex E . In such event, the right of all Holders to registration pursuant to Section 2 of this Annex E will be conditioned upon such persons’ participation in such underwriting and the inclusion of such person’s Registrable Securities in the underwriting if such securities are of the same class of securities as the securities to be offered in the underwritten offering, and each such person will (together with the Company and the other persons distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company; provided that Treasury (as opposed to other Holders) shall not be required to indemnify any person in connection with any registration. If any participating person disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the managing underwriters and Treasury (if Treasury is participating in the underwriting).


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(f) If either (x) the Company grants “piggyback” registration rights to one or more third parties to include their securities in an underwritten offering under the Shelf Registration Statement pursuant to Section 2(b) of this Annex E or (y) a Piggyback Registration under Section 2(d) of this Annex E relates to an underwritten offering on behalf of the Company, and in either case the managing underwriters advise the Company that in their reasonable opinion the number of securities requested to be included in such offering exceeds the number which can be sold without adversely affecting the marketability of such offering (including an adverse effect on the per share offering price), the Company will include in such offering only such number of securities that in the reasonable opinion of such managing underwriters can be sold without adversely affecting the marketability of the offering (including an adverse effect on the per share offering price), which securities will be so included in the following order of priority: (A) first, in the case of a Piggyback Registration under Section 2(d) of this Annex E , the securities the Company proposes to sell, (B) then the Registrable Securities of all Holders who have requested inclusion of Registrable Securities pursuant to Section 2(b) or Section 2(d) of this Annex E , as applicable, pro rata on the basis of the aggregate number of such securities or shares owned by each such Holder and (C) lastly, any other securities of the Company that have been requested to be so included, subject to the terms of this Agreement; provided , however , that if the Company has, prior to the Signing Date, entered into an agreement with respect to its securities that is inconsistent with the order of priority contemplated hereby then it shall apply the order of priority in such conflicting agreement to the extent that it would otherwise result in a breach under such agreement.

3. Expenses of Registration . All Registration Expenses incurred in connection with any registration, qualification or compliance hereunder shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder shall be borne by the holders of the securities so registered pro rata on the basis of the aggregate offering or sale price of the securities so registered.

4. Obligations of the Company . Whenever required to effect the registration of any Registrable Securities or facilitate the distribution of Registrable Securities pursuant to an effective Shelf Registration Statement, the Company shall, as expeditiously as reasonably practicable:

(a) Prepare and file with the SEC a prospectus supplement or post-effective amendment with respect to a proposed offering of Registrable Securities pursuant to an effective registration statement, subject to Section 4 of this Annex E , keep such registration statement effective and keep such prospectus supplement current until the securities described therein are no longer Registrable Securities.

(b) Prepare and file with the SEC such amendments and supplements to the applicable registration statement and the prospectus or prospectus supplement used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement.


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(c) Furnish to the Holders and any underwriters such number of copies of the applicable registration statement and each such amendment and supplement thereto (including in each case all exhibits) and of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned or to be distributed by them.

(d) Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders or any managing underwriter(s), to keep such registration or qualification in effect for so long as such registration statement remains in effect, and to take any other action which may be reasonably necessary to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such Holder; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

(e) Notify each Holder of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the applicable prospectus, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing.

(f) Give written notice to the Holders:

(i) when any registration statement or any amendment thereto has been filed with the SEC (except for any amendment effected by the filing of a document with the SEC pursuant to the Exchange Act) and when such registration statement or any post-effective amendment thereto has become effective;

(ii) of any request by the SEC for amendments or supplements to any registration statement or the prospectus included therein or for additional information;

(iii) of the issuance by the SEC of any stop order suspending the effectiveness of any registration statement or the initiation of any proceedings for that purpose;

(iv) of the receipt by the Company or its legal counsel of any notification with respect to the suspension of the qualification of the applicable Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose;

(v) of the happening of any event that requires the Company to make changes in any effective registration statement or the prospectus related to the registration statement in order to make the statements therein not misleading (which notice shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made); and

(vi) if at any time the representations and warranties of the Company contained in any underwriting agreement contemplated by Section 4(j) of this Annex E cease to be true and correct.


Annex E (Registration Rights)		Page 5

(Subchapter S Corporation)

[Execution Copy]

(g) Use its reasonable best efforts to prevent the issuance or obtain the withdrawal of any order suspending the effectiveness of any registration statement referred to in Section 4(f)(iii) of this Annex E at the earliest practicable time.

(h) Upon the occurrence of any event contemplated by Section 4(e) or 4(f)(v) of this Annex E , promptly prepare a post-effective amendment to such registration statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to the Holders and any underwriters, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with Section 4(f)(v) to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Holders and any underwriters shall suspend use of such prospectus and use their reasonable best efforts to return to the Company all copies of such prospectus (at the Company’s expense) other than permanent file copies then in such Holders’ or underwriters’ possession. The total number of days that any such suspension may be in effect in any 12-month period shall not exceed 90 days.

(i) Use reasonable best efforts to procure the cooperation of the Company’s transfer agent in settling any offering or sale of Registrable Securities, including with respect to the transfer of physical stock certificates into book-entry form in accordance with any procedures reasonably requested by the Holders or any managing underwriter(s).

(j) If an underwritten offering is requested pursuant to Section 2(b) of this Annex E , enter into an underwriting agreement in customary form, scope and substance and take all such other actions reasonably requested by the Holders of a majority of the Registrable Securities being sold in connection therewith or by the managing underwriter(s), if any, to expedite or facilitate the underwritten disposition of such Registrable Securities, and in connection therewith in any underwritten offering (including making members of management and executives of the Company available to participate in “road shows”, similar sales events and other marketing activities), (A) make such representations and warranties to the Holders that are selling stockholders and the managing underwriter(s), if any, with respect to the business of the Company and its subsidiaries, and the Shelf Registration Statement, prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in customary form, substance and scope, and, if true, confirm the same if and when requested, (B) use its reasonable best efforts to furnish the underwriters with opinions of counsel to the Company, addressed to the managing underwriter(s), if any, covering the matters customarily covered in such opinions requested in underwritten offerings, (C) use its reasonable best efforts to obtain “cold comfort” letters from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any business


Annex E (Registration Rights)		Page 6

(Subchapter S Corporation)

[Execution Copy]

acquired by the Company for which financial statements and financial data are included in the Shelf Registration Statement) who have certified the financial statements included in such Shelf Registration Statement, addressed to each of the managing underwriter(s), if any, such letters to be in customary form and covering matters of the type customarily covered in “cold comfort” letters, (D) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures customary in underwritten offerings ( provided that Treasury shall not be obligated to provide any indemnity), and (E) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold in connection therewith, their counsel and the managing underwriter(s), if any, to evidence the continued validity of the representations and warranties made pursuant to clause (A) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company.

(k) Make available for inspection by a representative of Holders that are selling stockholders, the managing underwriter(s), if any, and any attorneys or accountants retained by such Holders or managing underwriter(s), at the offices where normally kept, during reasonable business hours, financial and other records, pertinent corporate documents and properties of the Company, and cause the officers, directors and employees of the Company to supply all information in each case reasonably requested (and of the type customarily provided in connection with due diligence conducted in connection with a registered public offering of securities) by any such representative, managing underwriter(s), attorney or accountant in connection with such Shelf Registration Statement.

(l) Use reasonable best efforts to cause all such Registrable Securities to be listed on each national securities exchange on which similar securities issued by the Company are then listed or, if no similar securities issued by the Company are then listed on any national securities exchange, use its reasonable best efforts to cause all such Registrable Securities to be listed on such securities exchange as Treasury may designate.

(m) If requested by Holders of a majority of the Registrable Securities being registered and/or sold in connection therewith, or the managing underwriter(s), if any, promptly include in a prospectus supplement or amendment such information as the Holders of a majority of the Registrable Securities being registered and/or sold in connection therewith or managing underwriter(s), if any, may reasonably request in order to permit the intended method of distribution of such securities and make all required filings of such prospectus supplement or such amendment as soon as practicable after the Company has received such request.

(n) Timely provide to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.

5. Suspension of Sales . Upon receipt of written notice from the Company that a registration statement, prospectus or prospectus supplement contains or may contain an untrue statement of a material fact or omits or may omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that circumstances exist that make inadvisable use of such registration statement, prospectus or prospectus supplement, each Holder of Registrable Securities shall forthwith discontinue disposition of Registrable


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(Subchapter S Corporation)

[Execution Copy]

Securities until such Holder has received copies of a supplemented or amended prospectus or prospectus supplement, or until such Holder is advised in writing by the Company that the use of the prospectus and, if applicable, prospectus supplement may be resumed, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in such Holder’s possession, of the prospectus and, if applicable, prospectus supplement covering such Registrable Securities current at the time of receipt of such notice. The total number of days that any such suspension may be in effect in any 12-month period shall not exceed 90 days.

6. Termination of Registration Rights . A Holder’s registration rights as to any securities held by such Holder (and its Affiliates, partners, members and former members) shall not be available unless such securities are Registrable Securities.

7. Furnishing Information .

(a) No Holder shall use any free writing prospectus (as defined in Rule 405) in connection with the sale of Registrable Securities without the prior written consent of the Company.

(b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 4 of this Annex E that the selling Holders and the underwriters, if any, shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registered offering of their Registrable Securities.

8. Indemnification .

(a) The Company agrees to indemnify each Holder and, if a Holder is a person other than an individual, such Holder’s officers, directors, employees, agents, representatives and Affiliates, and in the case of Treasury, Treasury’s officials, and each person, if any, that controls a Holder within the meaning of the Securities Act (each, an “ Indemnitee ”), against any and all losses, claims, damages, actions, liabilities, costs and expenses (including reasonable fees, expenses and disbursements of attorneys and other professionals incurred in connection with investigating, defending, settling, compromising or paying any such losses, claims, damages, actions, liabilities, costs and expenses), joint or several, arising out of or based upon any untrue statement or alleged untrue statement of material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto or any documents incorporated therein by reference or contained in any free writing prospectus (as such term is defined in Rule 405) prepared by the Company or authorized by it in writing for use by such Holder (or any amendment or supplement thereto); or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided , that the Company shall not be liable to such Indemnitee in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon (A) an untrue statement or omission made in such registration statement, including any such preliminary prospectus or final prospectus contained therein or any


Annex E (Registration Rights)		Page 8

(Subchapter S Corporation)

[Execution Copy]

such amendments or supplements thereto or contained in any free writing prospectus (as such term is defined in Rule 405) prepared by the Company or authorized by it in writing for use by such Holder (or any amendment or supplement thereto), in reliance upon and in conformity with information regarding such Indemnitee or its plan of distribution or ownership interests which was furnished in writing to the Company by such Indemnitee for use in connection with such registration statement, including any such preliminary prospectus or final prospectus contained therein or any such amendments or supplements thereto, or (B) offers or sales effected by or on behalf of such Indemnitee “by means of” (as defined in Rule 159A) a “free writing prospectus” (as defined in Rule 405) that was not authorized in writing by the Company.

(b) If the indemnification provided for in Section 8(a) of this Annex E is unavailable to an Indemnitee with respect to any losses, claims, damages, actions, liabilities, costs or expenses referred to therein or is insufficient to hold the Indemnitee harmless as contemplated therein, then the Company, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or payable by such Indemnitee as a result of such losses, claims, damages, actions, liabilities, costs or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnitee, on the one hand, and the Company, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, actions, liabilities, costs or expenses as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Indemnitee, on the other hand, shall be determined by reference to, among other factors, whether the untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company or by the Indemnitee and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; the Company and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 8(b) of this Annex E were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 8(a) of this Annex E . No Indemnitee guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from the Company if the Company was not guilty of such fraudulent misrepresentation.

9. Assignment of Registration Rights . The rights of Treasury to registration of Registrable Securities pursuant to Section 2 of this Annex E may be assigned by Treasury to a transferee or assignee of Registrable Securities; provided , however , the transferor shall, within ten days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the number and type of Registrable Securities that are being assigned.

10. Clear Market . With respect to any underwritten offering of Registrable Securities by Holders pursuant to this Annex E , the Company agrees not to effect (other than pursuant to such registration or pursuant to a Special Registration) any public sale or distribution, or to file any Shelf Registration Statement (other than such registration or a Special Registration) covering any senior securities of the Company or any securities convertible into or exchangeable or exercisable for senior securities of the Company, during the period not to exceed ten days prior and 60 days following the effective date of such offering or such longer period up to 90 days as may be requested by the managing underwriter for such underwritten offering. The Company


Annex E (Registration Rights)		Page 9

(Subchapter S Corporation)

[Execution Copy]

also agrees to cause such of its directors and senior executive officers to execute and deliver customary lock-up agreements in such form and for such time period up to 90 days as may be requested by the managing underwriter.

11. Forfeiture of Rights . At any time, any holder of Registrable Securities (including any Holder) may elect to forfeit its rights set forth in this Annex E from that date forward; provided , that a Holder forfeiting such rights shall nonetheless be entitled to participate under Section 2(d) – (f) of this Annex E in any Pending Underwritten Offering to the same extent that such Holder would have been entitled to if the Holder had not withdrawn; and provided , further , that no such forfeiture shall terminate a Holder’s rights or obligations under Section 7 of this Annex E with respect to any prior registration or Pending Underwritten Offering.

12. Specific Performance . The parties hereto acknowledge that there would be no adequate remedy at law if the Company fails to perform any of its obligations under this Annex E and that Holders from time to time may be irreparably harmed by any such failure, and accordingly agree that such Holders, in addition to any other remedy to which they may be entitled at law or in equity, to the fullest extent permitted and enforceable under applicable law shall be entitled to compel specific performance of the obligations of the Company under this Annex E in accordance with the terms and conditions of this Annex E .

13. No Inconsistent Agreements . The Company shall not, on or after the Signing Date, enter into any agreement with respect to its securities that may impair the rights granted to Holders under this Annex E or that otherwise conflicts with the provisions hereof in any manner that may impair the rights granted to Holders under this Annex E . In the event the Company has, prior to the Signing Date, entered into any agreement with respect to its securities that is inconsistent with the rights granted to Holders under this Annex E (including agreements that are inconsistent with the order of priority contemplated by Section 2(f) of Annex E ) or that may otherwise conflict with the provisions hereof, the Company shall use its reasonable best efforts to amend such agreements to ensure they are consistent with the provisions of this Annex E .

14. Certain Offerings by Treasury . An “underwritten” offering or other disposition shall include any distribution of such securities on behalf of Treasury by one or more broker-dealers, an “underwriting agreement” shall include any purchase agreement entered into by such broker-dealers, and any “registration statement” or “prospectus” shall include any offering document approved by the Company and used in connection with such distribution.


Annex E (Registration Rights)		Page 10

(Subchapter S Corporation)

[Execution Copy]

ANNEX F

FORM OF SENIOR SECURITY

[SEE ATTACHED]


Annex F (Form of Senior Securities)		Page 1

(Subchapter S Corporation)

[Execution Copy]

ANNEX G

FORM OF OFFICER’S CERTIFICATE

OFFICER’S CERTIFICATE

[COMPANY]

In connection with that certain Securities Purchase Agreement, dated [ ] , 2011 (the “ Agreement ”) by and between [ COMPANY ] (the “ Company ”) and the Secretary of the Treasury, the undersigned does hereby certify as follows:

1. I am a duly elected/appointed [ ] of the Company.

2. Attached as Exhibit A hereto is a true, complete and correct copy of the articles of incorporation, articles of association, or similar organizational document of the Company and any amendments thereto as presently on file with the [Secretary of State] of the State of [State].

3. Attached as Exhibit B hereto is a true, complete and correct copy of the by-laws of the Company as presently in effect.

4. Attached as Exhibit C hereto is a true, complete and correct copy of resolutions adopted [at a duly convened meeting at which a quorum was present and acting /by unanimous written consent] of the Board of Directors of the Company (the “ Board ”). Such resolutions are now in full force and effect and have not been modified, amended or revoked and are the only resolutions of the Board relating to the Agreement.

5. The representations and warranties of the Company set forth in Article II of Annex C of the Agreement are true and correct in all respects as though as of the date hereof (other than representations and warranties that by their terms speak as of another date, which representations and warranties shall be true and correct in all respects as of such other date) and the Company has performed in all material respects all obligations required to be performed by it under the Agreement.

The foregoing certifications are made and delivered as of [ ] pursuant to Section 1.3 of Annex C of the Agreement.

Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Agreement.

[SIGNATURE PAGE FOLLOWS]


Annex G (Form of Officer’s Certificate)		Page 1

(Subchapter S Corporation)

[Execution Copy]

IN WITNESS WHEREOF, this Officer’s Certificate has been duly executed and delivered as of the [ ] day of [ ] , 2011.


[COMPANY]

By:
		Name:
		Title:


Annex G (Form of Officer’s Certificate)		Page 2

(Subchapter S Corporation)

[Execution Copy]

EXHIBIT A


Annex G (Form of Officer’s Certificate)		Page 3

(Subchapter S Corporation)

[Execution Copy]

EXHIBIT B


Annex G (Form of Officer’s Certificate)		Page 4

(Subchapter S Corporation)

[Execution Copy]

EXHIBIT C


Annex G (Form of Officer’s Certificate)		Page 5

(Subchapter S Corporation)

[Execution Copy]

ANNEX H

FORM OF SUPPLEMENTAL REPORTS

[SEE ATTACHED FORM OF INITIAL SUPPLEMENTAL REPORT]


Annex H (Form of Supplemental Reports)		Page 1

(Subchapter S Corporation)

[Execution Copy]

[SEE ATTACHED FORM OF QUARTERLY SUPPLEMENTAL REPORT]


Annex H (Form of Supplemental Reports)		Page 2

(Subchapter S Corporation)

[Execution Copy]

ANNEX I

FORM OF ANNUAL CERTIFICATION

ANNUAL CERTIFICATION

LIVE OAK BANCSHARES, INC.

In connection with that certain Securities Purchase Agreement, dated September 13, 2011, 2011 (the “ Agreement ”) by and between Live Oak Bancshares, Inc. (the “ Company ”) and the Secretary of the Treasury (“ Treasury ”), the undersigned does hereby certify as follows:

1. I am a duly appointed Executive Officer of the Company.

2. For each loan originated by the Company or any of its Affiliates that was funded in whole or in part using funds from the Purchase Price, the Company has obtained from the business to which it made such loan a written certification that no principal of such business has been convicted of a sex offense against a minor (as such terms are defined in section 111 of the Sex Offender Registration and Notification Act, 42 U.S.C. §16911). The Company shall retain all such certifications in accordance with standard recordkeeping practices established by the Appropriate Federal Banking Agency.

3. The Company is in compliance with the requirements of Section 103.121 of title 31, Code of Federal Regulations.

The foregoing certifications are made and delivered as of [ ] pursuant to Section 3.1(d)(iii) of Annex C of the Agreement.

Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Agreement.

[SIGNATURE PAGE FOLLOWS]


Annex I (Form of Annual Certification)		Page 1

(Subchapter S Corporation)

[Execution Copy]

IN WITNESS WHEREOF, this Certificate has been duly executed and delivered as of the [ ] day of [ ] , 20 [ ] .


[COMPANY]

By:
		Name:
		Title:


Annex I (Form of Annual Certification)		Page 2

(Subchapter S Corporation)

[Execution Copy]

ANNEX J

FORM OF OPINION

Secretary of the Treasury

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220

Attention: Small Business Lending Fund, Office of Domestic Finance

Re:	[Institution Name]

[SBLF Identification No.]

Ladies and/or Gentlemen:

We have acted as counsel for [insert Institution Name] (the “Company”) in connection with the sale and issuance of [insert number] unsecured subordinated debentures (the “Senior Securities”) to the Secretary of the Treasury (the “Treasury”) pursuant to and in accordance with the terms of that certain Small Business Lending Fund - Securities Purchase Agreement, dated [ , 2011] (the “Agreement”). This letter is rendered to you pursuant to Section 1.3(e) of the Agreement and Annex J attached thereto. Unless otherwise defined herein, capitalized terms used herein shall have the meaning set forth in the Agreement.

(a) The Company has been duly formed and is validly existing as a corporation and is in good standing under the laws of the jurisdiction of its organization. The Company has all necessary power and authority to own, operate and lease its properties and to carry on its business as it is being conducted.

(b) The Company has been duly qualified as a foreign entity for the transaction of business and is in good standing under the laws of [ ] , [ ] and [ ] .

(c) The Senior Securities have been duly and validly authorized, and, when executed and delivered pursuant to the Agreement, the Senior Securities will be duly and validly issued, will not be issued in violation of any preemptive rights, and will rank senior to the Common Stock and all other series or classes of capital stock whether or not designated, issued or outstanding, with respect to the payment of dividends and other distributions (except to the extent such dividends and distributions are permitted by Section 5.13 of the Securities Purchase Agreement) and the distribution of assets in the event of any dissolution, liquidation or winding up of the Company.

(d) The Company has the corporate power and authority to execute and deliver the Agreement and to carry out its obligations thereunder (which includes the issuance of the Senior Securities).


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(Subchapter S Corporation)

[Execution Copy]

(e) The execution, delivery and performance by the Company of the Agreement and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company and its stockholders, and no further approval or authorization is required on the part of the Company, including, without limitation, by any rule or requirement of any national stock exchange.

(f) The Agreement is a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and general equitable principles, regardless of whether such enforceability is considered in a proceeding at law or in equity.

(g) The execution and delivery by the Company of this Agreement and the performance by the Company of its obligations thereunder (i) do not require any approval by any Governmental Entity to be obtained on the part of the Company, except those that have been obtained, (ii) do not violate or conflict with any provision of the Charter, (iii) do not violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration of, or result in the creation of, any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any Company Subsidiary under any of the terms, conditions or provisions of its organizational documents or under any agreement, contract, indenture, lease, mortgage, power of attorney, evidence of indebtedness, letter of credit, license, instrument, obligation, purchase or sales order, or other commitment, whether oral or written, to which it is a party or by which it or any of its properties is bound or (iv) do not conflict with, breach or result in a violation of, or default under any judgment, decree or order known to us that is applicable to the Company and, pursuant to any applicable laws, is issued by any Governmental Entity having jurisdiction over the Company.

(h) Such filings and approvals as are required to be made or obtained under any state “blue sky” laws and such consents and approvals that have been made or obtained, no notice to, filing with, exemption or review by, or authorization, consent or approval of, any Governmental Entity is required to be made or obtained by the Company in connection with the consummation by the Company of the Purchase.


Annex J (Form of Opinion)		Page 2

(Subchapter S Corporation)

[Execution Copy]

ANNEX K

FORM OF REPAYMENT DOCUMENT

U NITED S TATES D EPARTMENT OF THE T REASURY

1500 Pennsylvania Avenue, NW

Washington, D.C. 20220

, 2011

Ladies and Gentlemen:

Reference is made to that certain Letter Agreement incorporating the Securities Purchase Agreement—Standard Terms (the “ Securities Purchase Agreement ”), dated as of the date set forth on Schedule A hereto, between the United States Department of the Treasury (the “ Investor ”) and the company set forth on Schedule A hereto (the “ Company ”). Capitalized terms used but not defined herein shall have the meanings assigned to them in the Securities Purchase Agreement. Pursuant to the Securities Purchase Agreement, at the Closing, the Company issued to the Investor the amount of senior subordinated debentures set forth on Schedule A hereto (the “ Senior Subordinated Securities ”) and a warrant to purchase an additional amount of senior subordinated debentures set forth on Schedule A hereto (such securities, the “ Warrant Securities ”), which was exercised by the Investor at Closing.

In connection with the consummation of the repurchase (the “ Repurchase ”) by the Company from the Investor, on the date hereof, of the amount of the Senior Subordinated Securities listed on Schedule A hereto (the “ Repurchased Senior Subordinated Securities ”) and the amount of the Warrant Securities listed on Schedule A hereto (the “ Repurchased Warrant Securities ”), as permitted by the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009:

(a) The Company hereby acknowledges receipt from the Investor of the certificated debentures set forth on Schedule A hereto representing the Senior Subordinated Securities; and

(b) The Investor hereby acknowledges receipt from the Company of a wire transfer for the account of the Investor in immediately available funds of the aggregate purchase price set forth on Schedule A hereto, representing payment in full for the Repurchased Senior Subordinated Securities, together with any accrued and unpaid dividends to, but excluding, the date hereof; and

(c) The Company hereby acknowledges receipt from the Investor of the certificated debentures set forth on Schedule A hereto representing the Warrant Securities; and

(d) The Investor hereby acknowledges receipt from the Company of a wire transfer for the account of the Investor in immediately available funds of the aggregate purchase price set forth on Schedule A hereto, representing payment in full for the Repurchased Warrant Securities, together with any accrued and unpaid interest to, but excluding, the date hereof; and


Annex K (Form of Repurchase Document)		Page 1

(Subchapter S Corporation)

[Execution Copy]

This letter agreement will be governed by and construed in accordance with the federal law of the United States if and to the extent such law is applicable, and otherwise in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State.

This letter agreement may be executed in any number of separate counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts will together constitute the same agreement. Executed signature pages to this letter agreement may be delivered by facsimile and such facsimiles will be deemed sufficient as if actual signature pages had been delivered.

[Remainder of this page intentionally left blank]


Annex K (Form of Repurchase Document)		Page 2

(Subchapter S Corporation)

[Execution Copy]

In witness whereof, the parties have duly executed this letter agreement as of the date first written above.


UNITED STATES DEPARTMENT OF THE TREASURY

By:
	Name:	Timothy G. Massad
	Title:	Acting Assistant Secretary for
		Financial Stability

By:
	Name:
	Title:


Annex K (Form of Repurchase Document)		Page 3

(Subchapter S Corporation)

[Execution Copy]

SCHEDULE A


General Information:

Date of Letter Agreement incorporating the Securities Purchase Agreement:

Name of the Company:

Corporate or other organizational form of the Company:

Jurisdiction of organization of the Company:

Amount of securities issued to the Investor at the Closing (Senior Subordinated Securities):

Amount of securities underlying the Warrant issued to the Investor at the Closing (Warrant Securities):

Terms of the Repurchase of the Senior Subordinated Securities:

Amount of Senior Subordinated Securities purchased by the Company:

Accrued and unpaid dividends on Senior Subordinated Securities:

Aggregate purchase price for Repurchased Senior Subordinated Securities:

Terms of the Repurchase of the Warrant Securities:

Amount of Warrant Securities purchased by the Company:

Accrued and unpaid interest on Warrant Securities:

Aggregate purchase price for Repurchased Warrant Securities:

Aggregate purchase price for Repurchased Senior Subordinated Securities and Repurchased Warrant Securities:

Investor wire information for payment of purchase price:		ABA Number:
		Bank:
		Account Name:
		Account Number:


Annex K (Form of Repurchase Document)		Page 4

Exhibit 10.6

TAX SHARING AGREEMENT

THIS TAX SHARING AGREEMENT (hereinafter “Agreement”) is entered into by and between LIVE OAK BANKING COMPANY (hereinafter referred to as the “Bank”) and LIVE OAK BANCSHARES, INC., the parent holding company of the Bank (hereinafter referred to as the “Holding Company”).

WHEREAS, the Bank is a state-chartered commercial bank and a wholly-owned subsidiary of the Holding Company; and

WHEREAS, the Bank and the Holding Company desire to enter into the Agreement in order to set forth the terms and conditions of the tax allocation policy of the Holding Company.

NOW, THEREFORE, for and in consideration of the premises and mutual promises, covenants and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. To the extent that North Carolina or other state income tax payments are required, the Bank will be responsible for monthly expense provisions and quarterly estimated payments of such income taxes. The Holding Company’s tax accountants will prepare the appropriate income tax returns for the Bank on an annual basis. The Holding Company will be responsible for timely filing of the appropriate income tax returns, proper remittances, and appropriate entries on the books of the Bank.

2. To the extent that federal income tax payments are required, the Bank will be responsible for monthly expense provisions and quarterly estimated payments of such income taxes. The Holding Company will be responsible for computing federal income taxes on a consolidated basis and remitting quarterly estimated federal income tax payments. The Holding Company’s tax accountants will prepare a consolidated federal income tax return on an annual basis. The Holding Company’s tax accountants will prepare an allocation of the Bank’s federal income taxes based upon the federal income tax liability of the Bank. Within 30 days after the filing date of the federal income tax return, which is March 15 of the year following the year for which the tax return is prepared, the Bank will either remit its allocated tax payment to the Holding Company or the Holding Company will remit to the Bank any tax benefit the Bank is due under the allocation. In the event that an amended federal income tax return is filed, the Bank will remit its allocated tax or receive its allocated tax benefit within 30 days after the amended return is filed.

3. This Agreement shall be governed in all respects whether as to validity, construction, capacity, performance, or otherwise, by the laws of North Carolina, except to the extent that federal law shall be deemed to apply.

4. If any term or provision of this Agreement shall, by final judicial determination, be held to be invalid, illegal, or unenforceable in any respect under applicable law, then such provision shall be ineffective to the extent so held, but the validity, legality, and

enforceability of the remaining provisions contained herein shall not in any manner be affected or impaired thereby and this Agreement otherwise shall remain in full force and effect.

5. No amendment to this Agreement shall be binding unless in writing and signed by both parties and approved by the Administrator.

6. This Agreement may be signed in counterparts or in duplicate originals, each of which shall be deemed to be an original, and all of which taken together shall constitute a single agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first hereinabove written.


LIVE OAK BANKING COMPANY

BY:		/s/ Neil Underwood
		Neil Underwood
		President

ATTEST:

/s/ Lynn M. Burney

Lynn Burney, Secretary

[CORPORATE SEAL]


LIVE OAK BANCSHARES, INC.

BY:		/s/ Neil Underwood
		Neil Underwood
		President

ATTEST:

/s/ Lynn M. Burney

Lynn Burney, Secretary

[CORPORATE SEAL]

Exhibit 10.7

SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (this “ Agreement ”) is dated as of May 28, 2014, by and among Live Oak Bancshares, Inc., a North Carolina corporation (the “ Company ”), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “ Purchaser ” and collectively, the “ Purchasers ”).

RECITALS

A. The Company and each Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “ Securities Act ”), and Rule 506 of Regulation D (“ Regulation D ”) as promulgated by the United States Securities and Exchange Commission (the “ Commission ”) under the Securities Act.

B. Each Purchaser, severally and not jointly, wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, (i) that number of shares of voting common stock, no par value per share, of the Company (the “ Voting Common Stock ”) set forth below such Purchaser’s name on the signature page of this Agreement and (ii) that number of shares of non-voting common stock, no par value per share, of the Company (the “ Non-Voting Common Stock ” and together with the Voting Common Stock, the “ Common Stock ”) set forth below such Purchaser’s name on the signature page of this Agreement. In the aggregate, 232,477 shares of Voting Common Stock and 472,353 shares of Non-Voting Common Stock (collectively, the “ Common Shares ”) will be issued and sold to the Purchasers pursuant to this Agreement. The Non-Voting Common Stock will be convertible into Voting Common Stock in accordance with the terms of the Company’s Amended and Restated Articles of Incorporation (the “ Articles of Incorporation ”). The shares of Voting Common Stock into which the Non-Voting Common Stock is convertible are referred to herein as the “ Underlying Shares .” The Common Shares and the Underlying Shares are also referred to herein as the “ Securities ”.

NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Purchasers hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 Definitions . In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms shall have the meanings indicated in this Section 1.1:

“ Action ” means any Proceeding, written inquiry or notice of violation pending or, to the Company’s Knowledge, threatened in writing against the Company, any Subsidiary or any of their respective properties or any officer, director or employee of the Company or any Subsidiary acting in his or her capacity as an officer, director or employee before or by any federal, state, county, local or foreign court, arbitrator, governmental or administrative agency, regulatory authority, stock market, stock exchange or trading facility.

“ Affiliate ” means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, Controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act.

“ Agency ” has the meaning set forth in Section 3.1(pp).

“ Agreement ” shall have the meaning ascribed to such term in the Preamble.

“ Articles of Incorporation ” has the meaning set forth in the Recitals.

“ Bank ” means Live Oak Banking Company, a North Carolina banking corporation and wholly-owned Subsidiary of the Company.

“ Bank Regulatory Authorities ” has the meaning set forth in Section 3.1(b)(ii).

“ BHC Act ” has the meaning set forth in Section 3.1(b)(ii).

“ Board ” has the meaning set forth in Section 2.2(a)(iv).

“ Burdensome Condition ” has the meaning set forth in Section 5.1(h).

“ Business Day ” means a day, other than a Saturday or Sunday, on which banks in New York City are open for the general transaction of business.

“ Call Reports ” has the meaning set forth in Section 3.1(h).

“ CIBC Act ” means the Change in Bank Control Act, as amended.

“ Closing ” means the closing of the purchase and sale of the Common Shares pursuant to this Agreement.

“ Closing Date ” means the Business Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all of the conditions set forth in Sections 2.1, 2.2, 5.1 and 5.2 hereof are satisfied or waived, as the case may be, or such other date as the parties may agree.

“ Code ” has the meaning set forth in Section 3.1(rr).

“ Commission ” has the meaning set forth in the Recitals.

“ Common Shares ” has the meaning set forth in the Recitals.

“ Common Stock ” has the meaning set forth in the Recitals, and also includes any securities into which the Common Stock may hereafter be reclassified or changed.

“ Company Counsel ” means Wyrick Robbins Yates & Ponton LLP.

“ Company Deliverables ” has the meaning set forth in Section 2.2(a).

“ Company Reports ” has the meaning set forth in Section 3.1(kk).

“ Company’s Knowledge ” means with respect to any statement made to the knowledge of the Company, that the statement is based upon the actual knowledge of the executive officers of the Company having responsibility for the matter or matters that are the subject of the statement.

“ Control ” (including the terms “controlling”, “controlled by” or “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

“ Disclosure Materials ” has the meaning set forth in Section 3.1(h).

“ Disclosure Schedules ” means the Disclosure Schedules of the Company delivered concurrently herewith.

“ DTC ” means The Depository Trust Company.

“ Environmental Laws ” has the meaning set forth in Section 3.1(l).

“ ERISA ” has the meaning set forth in Section 3.1(rr).

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

“ FDIC ” has the meaning set forth in Section 3.1(b)(ii).

“ Federal Reserve ” has the meaning set forth in Section 3.1(b)(ii).

“ GAAP ” means U.S. generally accepted accounting principles, as applied by the Company.

“ Indemnified Person ” has the meaning set forth in Section 4.8(a).

“ Insurer ” has the meaning set forth in Section 3.1(pp).

“ Intellectual Property ” has the meaning set forth in Section 3.1(r).

“ Lien ” means any lien, charge, claim, encumbrance, security interest, right of first refusal, preemptive right or other restriction of any kind.

“ Loan Investor ” has the meaning set forth in Section 3.1(pp).

“ Material Adverse Effect ” means any of (i) a material and adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material and adverse effect on the results of operations, assets, properties, business, condition (financial or otherwise) or prospects

of the Company and the Subsidiaries, taken as a whole, or (iii) any adverse impairment to the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document; provided, however, that “Material Adverse Effect” shall not include the impact of (A) changes, after the date hereof, in banking and similar laws of general applicability or interpretations thereof by any applicable governmental authority, (B) changes, after the date hereof, in GAAP or regulatory accounting requirements applicable to banks and their holding companies generally, (C) changes, after the date hereof, in general economic conditions, including interest rates, affecting banks generally, or (D) the effects of any action or omission taken by the Company or the Bank with the prior written consent of the Purchasers, except, with respect to clauses (A), (B) and (C), to the extent that the effect of such changes has a disproportionate impact on the Company and the Subsidiaries, taken as a whole, relative to other similarly situated banks and their holding companies generally.

“ Material Contract ” means any contract of the Company or any of its Subsidiaries that would be required to be filed with the Commission pursuant to Item 601 of Regulation S-K if the Company were subject to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange Act.

“ Material Permits ” has the meaning set forth in Section 3.1(p).

“ Money Laundering Laws ” has the meaning set forth in Section 3.1(hh).

“ NCOCB ” has the meaning set forth in Section 3.1(b)(ii).

“ New York Courts ” means the state and federal courts sitting in the State of New York.

“ Non-Voting Common Stock ” has the meaning set forth in the Recitals.

“ OFAC ” has the meaning set forth in Section 3.1(gg).

“ Outside Date ” means July 31, 2014; provided that if such day is not a Business Day, the first day following such day that is a Business Day.

“ Person ” means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically listed herein.

“ Proceeding ” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“ Purchase Price ” means $106.34 per Common Share.

“ Purchaser Deliverables ” has the meaning set forth in Section 2.2(b).

“ Registration and Other Rights Agreement ” means the agreement among the Company and the Purchasers, dated as of the date of the Closing, in the form of Exhibit A attached to this Agreement.

“ Regulation D ” has the meaning set forth in the Recitals.

“ Regulatory Agreement ” has the meaning set forth in Section 3.1(mm).

“ Required Approvals ” has the meaning set forth in Section 3.1(e).

“ Rule 144 ” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

“ Secretary’s Certificate ” has the meaning set forth in Section 2.2(a)(iv).

“ Securities ” has the meaning set forth in the Recitals.

“ Securities Act ” means the Securities Act of 1933, as amended.

“ Shareholders Agreement ” means that certain Amended and Restated Shareholders Agreement, by and among the Company and the pre-Closing shareholders of the Company, dated as of the date of the Closing, in the form of Exhibit C attached to this Agreement.

“ Significant Shareholders Agreement ” means the agreement among the Company, the Purchasers, and certain other shareholders of the Company, dated as of the date of the Closing, in the form of Exhibit B attached to this Agreement.

“ Subscription Amount ” means with respect to each Purchaser, the aggregate amount to be paid for the Common Shares purchased hereunder as indicated on such Purchaser’s signature page to this Agreement next to the heading “Aggregate Purchase Price (Subscription Amount)”.

“ Subsidiary ” means the Bank and any other entity in which the Company, directly or indirectly, owns sufficient capital stock or holds a sufficient equity or similar interest such that it is consolidated with the Company in the financial statements of the Company.

“ Transaction Documents ” means this Agreement, the schedules and exhibits attached hereto, the Registration and Other Rights Agreement, the Significant Shareholders Agreement, the Shareholders Agreement and any other documents or agreements executed or delivered in connection with the transactions contemplated hereunder.

“ Transfer Agent ” means Broadridge Corporate Issuer Solutions, Inc., Brentwood, New York, or any successor transfer agent for the Company.

“ Underlying Shares ” has the meaning set forth in the Recitals.

“ Voting Common Stock ” has the meaning set forth in the Recitals.

ARTICLE II

PURCHASE AND SALE

2.1 Closing .

(a) Purchase of Common Shares . Subject to the terms and conditions set forth in this Agreement, at the Closing the Company shall issue and sell to each Purchaser, and each Purchaser shall, severally and not jointly, purchase from the Company, (i) the number of shares of Voting Common Stock set forth below such Purchaser’s name on the signature page of this Agreement and (ii) the number of shares of Non-Voting Common Stock set forth below such Purchaser’s name on the signature page of this Agreement, in each case, at a per share price equal to the Purchase Price.

(b) Closing . The Closing of the purchase and sale of the Common Shares shall take place on the Closing Date remotely by facsimile transmission or other electronic means as the parties may mutually agree.

(c) Form of Payment . Unless otherwise agreed to by the Company and a Purchaser (as to itself only), on the Closing Date, (1) the Company shall deliver to each Purchaser (A) one or more stock certificates evidencing the number of shares of Voting Common Stock to be purchased by such Purchaser hereunder, and (B) one or more stock certificates evidencing the number of shares of Non-Voting Common Stock to be purchased by such Purchaser hereunder and (2) upon receipt thereof, each Purchaser shall wire its Subscription Amount, in United States dollars and in immediately available funds, in accordance with the Company’s written wire transfer instructions. For purposes of clarity, a Purchaser shall not be required to wire its Subscription Amount until it (or its designated custodian per its delivery instructions) confirms receipt of its Common Shares.

2.2 Closing Deliveries .

(a) On or prior to the Closing, the Company shall issue, deliver or cause to be delivered to each Purchaser the following (the “ Company Deliverables ”):

(i) this Agreement, duly executed by the Company;

(ii) one or more stock certificates, evidencing the Common Shares subscribed for by Purchaser hereunder, registered in the name of such Purchaser or its nominee;

(iii) a legal opinion of Company Counsel, dated as of the Closing Date and in the form attached hereto as Exhibit D , executed by such counsel and addressed to the Purchasers;

(iv) a certificate of the Secretary of the Company, in the form attached hereto as Exhibit E (the “ Secretary’s Certificate ”), dated as of the Closing Date, (a) certifying (I) the resolutions adopted by the Board of Directors of the Company (the “ Board ”) or a duly authorized committee thereof approving the transactions contemplated by this Agreement and the other Transaction Documents and the issuance

of the Securities and (II) the resolutions of the shareholders of the Company in connection with the transactions contemplated by this Agreement and the other Transaction Documents, (b) certifying the current versions of the Articles of Incorporation, as amended, and Bylaws, as amended, of the Company and (c) certifying as to the signatures and authority of persons signing the Transaction Documents and related documents on behalf of the Company;

(v) a certificate of the Chief Executive Officer, President or Chief Financial Officer of the Company, in the form attached hereto as Exhibit F , dated as of the Closing Date, certifying to the fulfillment of the conditions specified in Sections 5.1(a) and 5.1(b); and

(vi) a Certificate of Existence for each of the Company and the Bank from the North Carolina Secretary of State as of a recent date.

(b) On or prior to the Closing, each Purchaser shall deliver or cause to be delivered to the Company the following (the “ Purchaser Deliverables ”):

(i) this Agreement, duly executed by such Purchaser; and

(ii) its Subscription Amount, in U.S. dollars and in immediately available funds, by wire transfer in accordance with the Company’s written instructions.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

3.1 Representations and Warranties of the Company . The Company hereby represents and warrants as of the date hereof and as of the Closing Date, except for the representations and warranties that speak as of a specific date, which shall be made as of such date, and except as set forth in the Disclosure Schedules, which shall be deemed a part hereof and shall qualify any representation or warranty otherwise made herein to the extent of the disclosure contained in the corresponding section of the Disclosure Schedules, to each of the Purchasers that:

(a) Subsidiaries . The Company has no direct or indirect Subsidiaries other than those listed on Schedule 3.1(a). The Company owns, directly or indirectly, all of the capital stock or comparable equity interests of each Subsidiary free and clear of any and all Liens, and all the issued and outstanding shares of capital stock or comparable equity interest of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.

(b) Organization and Qualification; Bank Regulations .

(i) The Company and each of its Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own or lease and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation

of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. The Company and each of its Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not in the reasonable judgment of the Company be expected to have a Material Adverse Effect.

(ii) The Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “ BHC Act ”). The Bank is the Company’s only Subsidiary insured depository institution. The Bank holds the requisite authority from the North Carolina Office of the Commissioner of Banks (the “ NCOCB ”) to do business as a state-chartered banking corporation under the laws of the State of North Carolina. Each of the Company and the Bank is in compliance, in all material respects, with all laws administered by the Board of Governors of the Federal Reserve System (the “ Federal Reserve ”), the Federal Deposit Insurance Corporation (the “ FDIC ”), the NCOCB and any other foreign, federal or state bank regulatory authorities (together with the NCOCB, the Federal Reserve and the FDIC, the “ Bank Regulatory Authorities ”) with jurisdiction over the Company and its Subsidiaries. The deposit accounts of the Bank are insured up to applicable limits by the FDIC, and all premiums and assessments required to be paid in connection therewith have been paid when due.

(c) Authorization; Enforcement; Validity . The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents to which it is a party and otherwise to carry out its obligations hereunder and thereunder, including, without limitation, to issue the Common Shares in accordance with the terms hereof and the Underlying Shares in accordance with the Articles of Incorporation. The Company’s execution and delivery of each of the Transaction Documents and the consummation by it of the transactions contemplated hereby and thereby (including, but not limited to, the sale and delivery of the Common Shares and the Underlying Shares) have been duly authorized by all necessary corporate action on the part of the Company, and no further corporate action is required by the Company, its Board or its shareholders in connection therewith. Each of the Transaction Documents has been (or upon delivery will have been) duly executed by the Company and is, or when delivered in accordance with the terms hereof or thereof, will constitute the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law. Except as disclosed in Schedule 3.2(c), there are no shareholder agreements, voting agreements, voting trust agreements or similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the Company’s Knowledge, between or among any of the Company’s shareholders.

(d) No Conflicts . The execution, delivery and performance by the Company of the Transaction Documents and the consummation by the Company of the transactions contemplated hereby or thereby (including, without limitation, the issuance of the Common Shares and the Underlying Shares) do not and will not (i) conflict with or violate any provisions of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or otherwise result in a violation of the organizational documents of the Company or any Subsidiary, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would result in a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any Material Contract in any material respect, or (iii) subject to the Required Approvals, conflict with or result in a violation of, in any material respect, any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or any of its Subsidiaries is subject (including federal and state securities laws and the rules and regulations thereunder, assuming the correctness of the representations and warranties made by the Purchasers herein, or the rules and regulations of any self-regulatory organization to which the Company or its securities are subject), or by which any property or asset of the Company or any of its Subsidiaries is bound or affected.

(e) Filings, Consents and Approvals . Except as disclosed on Schedule 3.1(e) (collectively, the “ Required Approvals ”), neither the Company nor any of its Subsidiaries is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority, self-regulatory organization or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents (including, without limitation, the issuance of the Common Shares and the Underlying Shares). The Company is unaware of any facts or circumstances relating to the Company or its Subsidiaries which would be likely to prevent the Company from obtaining or effecting any of the Required Approvals.

(f) Issuance of the Common Shares and Underlying Shares . The issuance of the Common Shares has been duly authorized and the Common Shares, when issued and paid for in accordance with the terms of the Transaction Documents, will be duly and validly issued, fully paid and non-assessable and free and clear of all Liens, other than restrictions on transfer imposed by applicable securities laws, and shall not be subject to preemptive or similar rights. The issuance of the Underlying Shares has been duly authorized and the Underlying Shares, when issued in accordance with the terms of the Articles of Incorporation, will be duly and validly issued, fully paid and non-assessable and free and clear of all Liens, other than restrictions on transfer imposed by applicable securities laws, and shall not be subject to preemptive or similar rights. Assuming the accuracy of the representations and warranties of the Purchasers in this Agreement, the Securities will be issued in compliance with all applicable federal and state securities laws.

(g) Capitalization . The number of shares and type of all authorized, issued and outstanding capital stock, options and other securities of the Company (whether or not presently convertible into or exercisable or exchangeable for shares of capital stock of the Company), both pre-Closing and post-Closing, is set forth on Schedule 3.1(g) . All of the outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid

and non-assessable, have been issued in compliance in all material respects with all applicable federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase any capital stock of the Company. Except as specified on Schedule 3.1(g) : (i) no shares of the Company’s outstanding capital stock are subject to preemptive rights or any other similar rights; (ii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of the Company, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of the Company; (iii) there are no material outstanding debt securities, notes, credit agreements, credit facilities or other agreements, documents or instruments evidencing indebtedness of the Company or by which the Company is bound; (iv) there are no agreements or arrangements under which the Company is obligated to register the sale of any of its securities under the Securities Act; (v) there are no outstanding securities or instruments of the Company that contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company is or may become bound to redeem a security of the Company or any of its Subsidiaries; (vi) the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and (vii) neither the Company nor any of its Subsidiaries has any material liabilities or obligations required to be disclosed in the Company Financial Statements and the Call Reports but not so disclosed in the Company Financial Statements and the Call Reports, which, individually or in the aggregate, will have or would reasonably be expected to have a Material Adverse Effect. There are no securities or instruments issued by or to which the Company is a party containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities.

(h) Call Reports; Disclosure Materials . The Company and its Subsidiaries have filed all financial statements and financial information required to be filed by it under the Federal Deposit Insurance Act and the BHC Act for the twelve (12) months preceding the date hereof (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “ Call Reports ” and together with this Agreement and the Disclosure Schedules, the “ Disclosure Materials ”), on a timely basis or have received a valid extension of such time of filing and have filed any such Call Reports prior to the expiration of any such extension. As of their respective filing dates, the Call Reports complied in all material respects with all statutes and applicable rules and regulations of the applicable governmental agency or body, as the case may be, and none of the Call Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

(i) Financial Statements . The Company has delivered to each Purchaser, as Schedule 3.1(i) , its audited consolidated financial statements for the fiscal year ended December 31, 2013 and its unaudited consolidated financial statements (including balance sheet, income statement and statement of cash flows) as of March 31, 2014 and for the three-month period ended March 31, 2014 (the “ Company Financial Statements ”). The financial statements of the

Bank included in the Call Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the applicable government agency with respect thereto as in effect at the time of filing. The Company Financial Statements and all financial statements of the Bank included in the Call Reports have been prepared in accordance with GAAP applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the balance sheet of the Company and its consolidated Subsidiaries taken as a whole, or the Bank, as applicable, as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, year-end audit adjustments, which would not be material, either individually or in the aggregate.

(j) Tax Matters . The Company and each of its Subsidiaries (i) have prepared and filed all foreign, federal and state income and all other material tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) have paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith, with respect to which adequate reserves have been set aside on the books of the Company and (iii) have set aside on the entity’s books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply, except, in the case of clause (i) above, where the failure to so pay or file any such tax, assessment, charge or return would not have or reasonably be expected to have a Material Adverse Effect.

(k) Material Changes . Since March 31, 2014, except as disclosed on Schedule 3.1(k) , (i) there have been no events, occurrences or developments that have had or would reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect, (ii) neither the Company nor any of its Subsidiaries has incurred any material liabilities (contingent or otherwise) other than (A) trade payables, accrued expenses and other liabilities incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP, (iii) neither the Company nor any of its Subsidiaries has altered materially its method of accounting or the manner in which it keeps its accounting books and records, (iv) neither the Company nor any of its Subsidiaries has declared or made any dividend or distribution of cash or other property to its shareholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, (v) neither the Company nor any of its Subsidiaries has issued any equity securities to any officer, director or Affiliate, except Common Stock issued pursuant to existing Company stock option or stock purchase plans or executive and director arrangements disclosed in the Disclosure Schedules, (vi) there has not been any material change or amendment to, or any waiver of any material right by the Company or any of its Subsidiaries under, or any termination of, any Material Contract under which the Company or any of its Subsidiaries is bound or subject and (vii) to the Company’s Knowledge, there has not been a material increase in the aggregate dollar amount of: (A) the Bank’s nonperforming loans (including nonaccrual loans and loans 90 days or more past due and still accruing interest) or (B) the reserves or allowances established on the Company’s or Bank’s financial statements with respect thereto.

(l) Environmental Matters . Neither the Company nor any of its Subsidiaries (i) is in violation of any statute, rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, “ Environmental Laws ”), (ii) owns or operates any real property contaminated with any substance that is in violation of any Environmental Laws, (iii) is liable for any off-site disposal or contamination pursuant to any Environmental Laws, or (iv) is subject to any claim relating to any Environmental Laws; in each case, which violation, contamination, liability or claim has had or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; and, to the Company’s Knowledge, there is no pending or threatened investigation that might lead to such a claim.

(m) Litigation . There is no Action which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the issuance of the Common Shares or the Underlying Shares or (ii) except as disclosed on Schedule 3.1(m) , is reasonably likely to have a Material Adverse Effect, individually or in the aggregate, if there were an unfavorable decision. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the Company’s Knowledge there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Company or any executive officers or directors of the Company in their capacities as such, which individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

(n) Employment Matters . No labor dispute exists or, to the Company’s Knowledge, is imminent with respect to any of the employees of the Company or any Subsidiary which would have or reasonably be expected to have a Material Adverse Effect. None of the Company’s or Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and each Subsidiary believes that its relationship with its employees is good. To the Company’s Knowledge, no executive officer is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of a third party, and to the Company’s Knowledge, the continued employment of each such executive officer does not subject the Company or any Subsidiary to any liability with respect to any of the foregoing matters. The Company is in compliance, in all material respects, with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance would not have or reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

(o) Compliance . Neither the Company nor any of its Subsidiaries (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any of its

Subsidiaries under), nor has the Company or any of its Subsidiaries received written notice of a claim that it is in default under or that it is in violation of, any Material Contract in any material respect (whether or not such default or violation has been waived), (ii) is in violation of, in any material respect, any order of any court, arbitrator or governmental body having jurisdiction over the Company, its Subsidiaries or their respective properties or assets, or (iii) is in violation of, or in receipt of written notice that it is in violation of, in each case, in any material respect, any statute, rule, regulation, policy or guideline or order of any governmental authority, self-regulatory organization applicable to the Company or any of its Subsidiaries, or which would have the effect of revoking or limiting the Bank’s FDIC deposit insurance.

(p) Regulatory Permits . The Company and each of its Subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as currently conducted and as described in the Disclosure Materials (“ Material Permits ”), and (i) neither the Company nor any of its Subsidiaries has received any notice in writing of Proceedings relating to the revocation or material adverse modification of any such Material Permits and (ii) the Company is not aware of any facts or circumstances that would give rise to the revocation or material adverse modification of any Material Permits.

(q) Title to Assets . The Company and its Subsidiaries have good and marketable title to all real property and tangible personal property owned by them which is material to the business of the Company and its Subsidiaries, taken as a whole, in each case free and clear of all Liens except such as do not materially affect the value of such property or do not interfere with the use made and proposed to be made of such property by the Company and any of its Subsidiaries. Any real property and facilities held under lease by the Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and facilities by the Company and its Subsidiaries.

(r) Patents and Trademarks . The Company and its Subsidiaries own, possess, license or have other rights to use all foreign and domestic patents, patent applications, trade and service marks, trade and service mark registrations, trade names, copyrights, inventions, trade secrets, technology, Internet domain names, know-how and other intellectual property (collectively, the “ Intellectual Property ”) necessary for the conduct of their respective businesses as currently conducted or as proposed to be conducted as disclosed in the Disclosure Materials except where the failure to own, possess, license or have such rights would not have or reasonably be expected to have a Material Adverse Effect. Except as set forth in the Disclosure Materials and except where such violations or infringements would not have or reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect, (a) there are no rights of third parties to any such Intellectual Property; (b) there is no infringement by third parties of any such Intellectual Property; (c) there is no pending or threatened Proceeding by others challenging the Company’s and/or its Subsidiaries’ rights in or to any such Intellectual Property; (d) there is no pending or threatened Proceeding by others challenging the validity or scope of any such Intellectual Property; and (e) there is no pending or threatened Proceeding by others that the Company and/or any Subsidiary infringes or otherwise violates any patent, trademark, service mark, trade name, copyright, invention, trade secret, technology, Internet domain name, know-how or other proprietary rights of others.

(s) Insurance . The Company and each of the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as the Company believes to be prudent and customary in the businesses and locations in which and where the Company and the Subsidiaries are engaged. All premiums due and payable under all such policies and bonds have been timely paid, and the Company and its Subsidiaries are in material compliance with the terms of such policies and bonds. Neither the Company nor any of its Subsidiaries has received any notice of cancellation of any such insurance, nor, to the Company’s Knowledge, will it or any Subsidiary be unable to renew their respective existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would be materially higher than their existing insurance coverage.

(t) Transactions With Affiliates and Employees . Except as set forth on Schedule 3.1(t) , none of the officers or directors of the Company or its Subsidiaries and, to the Company’s Knowledge, none of the employees of the Company or its Subsidiaries, is presently a party to any transaction with the Company or any Subsidiary or to a presently contemplated transaction (other than for services as employees, officers and directors) that would be required to be disclosed pursuant to Item 404 of Regulation S-K promulgated under the Securities Act if the Company were subject to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange Act.

(u) Internal Accounting Controls . The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset and liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets and liabilities is compared with the existing assets and liabilities at reasonable intervals and appropriate action is taken with respect to any differences.

(v) Certain Fees . No Person will have, as a result of the transactions contemplated by this Agreement, any valid right, interest or claim against or upon the Company or a Purchaser for any commission, fee or other compensation pursuant to any agreement, arrangement or understanding entered into by or on behalf of the Company. The Company shall indemnify, pay, and hold each Purchaser harmless against, any liability, loss or expense (including, without limitation, attorneys’ fees and out-of-pocket expenses) arising in connection with any such right, interest or claim.

(w) Private Placement . Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2 of this Agreement, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers under the Transaction Documents.

(x) Registration Rights . Other than pursuant to the Registration and Other Rights Agreement, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company.

(y) No Integrated Offering . Assuming the accuracy of the Purchasers’ representations and warranties set forth in Section 3.2, none of the Company, its Subsidiaries nor, to the Company’s Knowledge, any of its Affiliates or any Person acting on its behalf has, directly or indirectly, at any time within the past six months, made any offers or sales of any Company security or solicited any offers to buy any Company security under circumstances that would cause such offers and sales to be integrated for purposes of Regulation D with the offer and sale by the Company of the Common Shares as contemplated hereby or that otherwise would cause the exemption from registration under Regulation D to be unavailable in connection with the offer and sale by the Company of the Common Shares as contemplated hereby.

(z) Investment Company . The Company is not, and immediately after receipt of payment for the Common Shares will not be, an “investment company,” an “affiliated person” of, “promoter” for or “principal underwriter” for, an entity “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

(aa) Unlawful Payments . Neither the Company nor any of its Subsidiaries, nor any directors, officers, nor to the Company’s Knowledge, employees, agents or other Persons acting at the direction of or on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of its Subsidiaries: (a) directly or indirectly, used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to foreign or domestic political activity; (b) made any direct or indirect unlawful payments to any foreign or domestic governmental officials or employees or to any foreign or domestic political parties or campaigns from corporate funds; (c) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (d) made any other unlawful bribe, rebate, payoff, influence payment, kickback or other material unlawful payment to any foreign or domestic government official or employee.

(bb) Application of Takeover Protections; Rights Agreements . The Company has not adopted any shareholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company. The Company and its Board have taken all action necessary to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s articles of incorporation or other organizational documents or the laws of the jurisdiction of its incorporation or otherwise which is or could become applicable to any Purchaser as a direct consequence of the transactions contemplated by this Agreement, including, without limitation, the Company’s issuance of the Securities and any Purchaser’s ownership of the Securities.

(cc) Disclosure . No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. The Company has made available to the Purchasers all the information reasonably available to the Company that the Purchasers have requested for deciding whether to acquire the Common Shares. No representation or warranty of the Company contained in this Agreement, as qualified by the Disclosure Schedules, and no certificate furnished or to be furnished to Purchasers at the Closing contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made.

(dd) Off Balance Sheet Arrangements . There is no transaction, arrangement, or other relationship between the Company (or any Subsidiary) and an unconsolidated or other off balance sheet entity.

(ee) Acknowledgment Regarding Purchasers’ Purchase of Common Shares . The Company acknowledges and agrees that each of the Purchasers is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchasers’ purchase of the Common Shares.

(ff) Absence of Manipulation . The Company has not, and to the Company’s Knowledge no one acting on its behalf has, taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Common Shares.

(gg) OFAC . Neither the Company nor any Subsidiary nor, to the Company’s Knowledge, any director, officer, agent, employee, Affiliate or Person acting on behalf of the Company or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“ OFAC ”); and the Company will not knowingly, directly or indirectly, use the proceeds of the sale of the Common Shares, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other Person or entity, towards any sales or operations in any country sanctioned by OFAC or for the purpose of financing the activities of any Person currently subject to any U.S. sanctions administered by OFAC.

(hh) Money Laundering Laws . The operations of each of the Company and any Subsidiary are and have been conducted at all times in compliance with the money laundering statutes of applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency (collectively, the “ Money Laundering Laws ”) and to the Company’s Knowledge, no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company and/or any Subsidiary with respect to the Money Laundering Laws is pending or threatened.

(ii) Compliance with Certain Banking Regulations . To the Company’s Knowledge, there are no facts or circumstances, and the Company has no reason to believe that any facts or circumstances exist, that would cause the Bank: (i) to be deemed not to be in satisfactory compliance with the Community Reinvestment Act and the regulations promulgated thereunder or to be assigned a CRA rating by federal or state banking regulators of lower than “satisfactory”; (ii) to be deemed to be operating in violation, in any material respect, of the Bank

Secrecy Act of 1970 (or otherwise known as the “Currency and Foreign Transactions Reporting Act”), the USA Patriot Act (or otherwise known as “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001”), any order issued with respect to anti-money laundering by OFAC or any other anti-money laundering statute, rule or regulation; or (iii) to be deemed not to be in satisfactory compliance, in any material respect, with all applicable privacy of customer information requirements contained in any federal and state privacy laws and regulations as well as the provisions of all information security programs adopted by the Bank.

(jj) No Additional Agreements . Except with respect to employee stock options set forth on Schedule 3.1(g) , the Company has no other agreements or understandings (including, without limitation, side letters) with any Purchaser or other Person to purchase shares of Common Stock on terms more favorable to such Person than as set forth herein.

(kk) Reports, Registrations and Statements . Since January 1, 2012, the Company and each Subsidiary have filed all material reports, registrations and statements, together with any required amendments thereto, that it was required to file with the Bank Regulatory Authorities and any other applicable federal or state securities or banking authorities, including, without limitation, all financial statements and financial information required to be filed by it under the Federal Deposit Insurance Act and the BHC Act. All such reports and statements filed with any such regulatory body or authority are collectively referred to herein as the “ Company Reports .” All such Company Reports were filed on a timely basis or the Company or the applicable Subsidiary, as applicable, received a valid extension of such time of filing and has filed any such Company Reports prior to the expiration of any such extension. As of their respective dates, the Company Reports complied in all material respects with all the rules and regulations promulgated by the Bank Regulatory Authorities and any other applicable foreign, federal or state securities or banking authorities, as the case may be.

(ll) Bank Regulatory Capitalization . As of March 31, 2014, the Bank met or exceeded the standards necessary to be considered “well capitalized” under the FDIC’s regulatory framework for prompt corrective action.

(mm) Agreements with Regulatory Agencies; Fiduciary Obligations . Neither the Company nor any Subsidiary is subject to any cease-and-desist or other similar order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any capital directive by, or since December 31, 2011, has adopted any board resolutions at the request of, any governmental entity that currently restricts in any material respect the conduct of its business or that in any material manner relates to its capital adequacy, its liquidity and funding policies and practices, its ability to pay dividends, its credit, risk management or compliance policies, its internal controls, its management or its operations or business (each item in this sentence, a “ Regulatory Agreement ”), nor has the Company or any Subsidiary been advised since December 31, 2011 by any governmental entity that it is considering issuing, initiating, ordering, or requesting any such Regulatory Agreement.

(nn) Fiduciary Accounts . Each of the Company and each Subsidiary has properly administered all accounts for which it acts as a fiduciary, including accounts for which

it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents, applicable federal and state law and regulation and common law. None of the Company, any Subsidiary or any director, officer or employee of the Company or any Subsidiary has committed any breach of trust or fiduciary duty with respect to any such fiduciary account and the accountings for each such fiduciary account are true and correct and accurately reflect the assets of such fiduciary account.

(oo) No General Solicitation or General Advertising . Neither the Company nor any Person acting on its behalf has engaged or will engage in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Common Shares.

(pp) Mortgage Banking Business . Except as has not had and would not reasonably be expected to have a Material Adverse Effect:

(i) The Company and each of its Subsidiaries has complied with, and all documentation in connection with the origination, processing, underwriting and credit approval of any mortgage loan originated, purchased or serviced by the Company or any of its Subsidiaries satisfied, (A) all applicable federal, state and local laws, rules and regulations with respect to the origination, insuring, purchase, sale, pooling, servicing, subservicing, or filing of claims in connection with mortgage loans, including all laws relating to real estate settlement procedures, consumer credit protection, truth in lending laws, usury limitations, fair housing, transfers of servicing, collection practices, equal credit opportunity and adjustable rate mortgages, (B) the responsibilities and obligations relating to mortgage loans set forth in any agreement between the Company or any of its Subsidiaries and any Agency, Loan Investor or Insurer, (C) the applicable rules, regulations, guidelines, handbooks and other requirements of any Agency, Loan Investor or Insurer and (D) the terms and provisions of any mortgage or other collateral documents and other loan documents with respect to each mortgage loan; and

(ii) No Agency, Loan Investor or Insurer has (A) claimed in writing that the Company or any of its Subsidiaries has violated or has not complied with the applicable underwriting standards with respect to mortgage loans sold by the Company or any of its Subsidiaries to a Loan Investor or Agency, or with respect to any sale of mortgage servicing rights to a Loan Investor, (B) imposed in writing restrictions on the activities (including commitment authority) of the Company or any of its Subsidiaries or (C) indicated in writing to the Company or any of its Subsidiaries that it has terminated or intends to terminate its relationship with the Company or any of its Subsidiaries for poor performance, poor loan quality or concern with respect to the Company’s or any of its Subsidiaries’ compliance with laws,

For purposes of this Section 3.1(pp): (A) “ Agency ” means the Federal Housing Administration, the Federal Home Loan Mortgage Corporation, the Farmers Home Administration (now known as Rural Housing and Community Development Services), the Federal National Mortgage Association, the United States Department of Veterans’ Affairs, the Rural Housing Service of the U.S. Department of Agriculture or any other federal or state agency

with authority to (i) determine any investment, origination, lending or servicing requirements with regard to mortgage loans originated, purchased or serviced by the Company or any of its Subsidiaries or (ii) originate, purchase, or service mortgage loans, or otherwise promote mortgage lending, including state and local housing finance authorities; (B) “ Loan Investor ” means any person (including an Agency) having a beneficial interest in any mortgage loan originated, purchased or serviced by the Company or any of its Subsidiaries or a security backed by or representing an interest in any such mortgage loan; and (C) “ Insurer ” means a person who insures or guarantees for the benefit of the mortgagee all or any portion of the risk of loss upon borrower default on any of the mortgage loans originated, purchased or serviced by the Company or any of its Subsidiaries, including the Federal Housing Administration, the United States Department of Veterans’ Affairs, the Rural Housing Service of the U.S. Department of Agriculture and any private mortgage insurer, and providers of hazard, title or other insurance with respect to such mortgage loans or the related collateral.

(qq) Risk Management Instruments . Except as has not had or would not reasonably be expected to have a Material Adverse Effect, since January 1, 2012, all material derivative instruments, including, swaps, caps, floors and option agreements, whether entered into for the Company’s own account, or for the account of one or more of the Company Subsidiaries, were entered into (1) only in the ordinary course of business, (2) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies and (3) with counterparties believed to be financially responsible at the time; and each of them constitutes the valid and legally binding obligation of the Company or one of the Company Subsidiaries, enforceable in accordance with its terms. Neither the Company nor the Company Subsidiaries, nor, to the Company’s Knowledge, any other party thereto, is in breach of any of its material obligations under any such agreement or arrangement.

(rr) ERISA . The Company and each of its Subsidiaries is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (herein called “ ERISA ”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for which the Company or any Subsidiary would have any liability; neither the Company nor any of its Subsidiaries has incurred or expects to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “pension plan”; or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the “ Code ”); and each “Pension Plan” for which the Company or any of its Subsidiaries would have liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

(ss) Shell Company Status . The Company is not, and has never been, an issuer identified in Rule 144(i)(1).

(tt) Nonperforming Assets . To the Company’s Knowledge, since March 31, 2014, the Company believes that the Bank will be able to fully and timely collect substantially all interest, principal or other payments when due under its loans, leases and other assets that are not classified as nonperforming and such belief is reasonable under all the facts and

circumstances known to the Company and Bank, and the Company believes that the amount of reserves and allowances for loan and lease losses and other nonperforming assets established on the Company’s and Bank’s financial statements is adequate and such belief is reasonable under all the facts and circumstances known to the Company and Bank.

(uu) Change in Control . The issuance of the Common Shares or the Underlying Shares to the Purchasers will not trigger any rights under any “change of control” provision in any of the agreements to which the Company or any of its Subsidiaries is a party, including any employment, “change in control,” severance or other compensatory agreements and any benefit plan, which results in payments to the counterparty or the acceleration of vesting of benefits.

(vv) Common Control . The Company is not and, after giving effect to the offering and sale of the Common Shares, will not be under the control (as defined in the BHC Act and the Federal Reserve’s Regulation Y (12 CFR Part 225) (“ BHC Act Control ”) of any company (as defined in the BHC Act and the Federal Reserve’s Regulation Y). The Company is not in BHC Act Control of any federally insured depository institution other than the Bank. The Bank is not under the BHC Act Control of any company (as defined in the BHC Act and the Federal Reserve’s Regulation Y) other than the Company. Neither the Company nor the Bank controls, in the aggregate, more than five percent of the outstanding voting class, directly or indirectly, of any federally insured depository institution other than the Bank. The Bank is not subject to the liability of any commonly controlled depository institution pursuant to Section 5(e) of the Federal Deposit Insurance Act (12 U.S.C. § 1815(e)).

(ww) Material Contracts . Schedule 3.1(ww) sets forth all Material Contracts of the Company and each of its Subsidiaries.

(xx) No “Bad Actor” Disqualification . The Company has exercised reasonable care, in accordance with Commission rules and guidance, and has conducted a factual inquiry including the procurement of relevant questionnaires from each Covered Person (as defined below) or other means, the nature and scope of which reflect reasonable care under the relevant facts and circumstances, to determine whether any Covered Person (as defined below) is subject to any of the “bad actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act (“ Disqualification Events ”). To the Company’s knowledge, after conducting such sufficiently diligent factual inquiries, no Covered Person is subject to a Disqualification Event, except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3) under the Securities Act. The Company has complied, to the extent applicable, with any disclosure obligations under Rule 506(e) under the Securities Act. “ Covered Persons ” are those persons specified in Rule 506(d)(1) under the Securities Act, including the Company; any predecessor or affiliate of the Company; any director, executive officer, other officer participating in the offering, general partner or managing member of the Company; any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power; any promoter (as defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of the sale of the Securities; and any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of the Common Shares (a “ Solicitor ”), any general partner or managing member of any Solicitor, and any director, executive officer or other officer participating in the offering of any Solicitor or general partner or managing member of any Solicitor.

3.2 Representations and Warranties of the Purchasers . Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants as of the date hereof and as of the Closing Date to the Company as follows:

(a) Organization; Authority . Such Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate, partnership, limited liability company or other power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder. The execution and delivery of this Agreement and performance by such Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate, partnership, limited liability company or other applicable like action on the part of such Purchaser. This Agreement has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

(b) No Conflicts . The execution, delivery and performance by such Purchaser of this Agreement and the consummation by such Purchaser of the transactions contemplated hereby will not (i) result in a violation of the organizational documents of such Purchaser (if such Purchaser is an entity), (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Purchaser is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to such Purchaser, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Purchaser to perform its obligations hereunder.

(c) Investment Intent . Such Purchaser understands that the Common Shares are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Common Shares as principal for its own account and not with a view to, or for distributing or reselling such Common Shares or any part thereof in violation of the Securities Act or any applicable state securities laws, provided, however , that by making the representations herein, such Purchaser does not agree to hold any of the Common Shares for any minimum period of time and reserves the right at all times to sell or otherwise dispose of all or any part of such Common Shares pursuant to an effective registration statement under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities laws. Such Purchaser is acquiring the Common Shares hereunder in the ordinary course of its business. Such Purchaser does not presently have any agreement, plan or understanding, directly or indirectly, with any Person to distribute or effect any distribution of any of the Common Shares to or through any Person.

(d) Purchaser Status . At the time such Purchaser was offered the Common Shares, it was, and at the date hereof it is, an “accredited investor” as defined in Rule 501(a) under the Securities Act by reason of Rule 501(a)(3).

(e) General Solicitation . Such Purchaser is not purchasing the Common Shares as a result of any advertisement, article, notice or other communication regarding the Common Shares published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other form of “general solicitation” or “general advertising” (as such terms are used in Regulation D promulgated under the Securities Act and interpreted by the Commission).

(f) Experience of Such Purchaser . Such Purchaser has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Common Shares, and has so evaluated the merits and risks of such investment. Such Purchaser is capable of protecting its own interests in connection with this investment and has experience as an investor in securities of companies like the Company. Such Purchaser is able to hold the Common Shares indefinitely if required, is able to bear the economic risk of an investment in the Common Shares and, at the present time, is able to afford a complete loss of such investment.

(g) Access to Information . The Purchaser is sufficiently aware of the Company’s business affairs and financial condition to reach an informed and knowledgeable decision to acquire the Common Shares. Such Purchaser acknowledges that it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, management and representatives of the Company concerning the terms and conditions of the offering of the Common Shares and the merits and risks of investing in the Common Shares; (ii) access to information about the Company and the Subsidiaries and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment. The Purchaser has received all information it deems appropriate for assessing the risk of an investment in the Common Shares. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives or counsel shall modify, amend or affect such Purchaser’s right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company’s representations and warranties contained in the Transaction Documents. Such Purchaser has sought such accounting, legal and tax advice as it has considered necessary to make an informed decision with respect to its acquisition of the Common Shares. Purchaser acknowledges that the Company has not made any representation, express or implied, with respect to the accuracy, completeness or adequacy of any available information except to the extent such information is covered by the representations and warranties of the Company contained in Section 3.1 of this Agreement.

(h) Brokers and Finders . No Person will have, as a result of the transactions contemplated by this Agreement, any valid right, interest or claim against or upon the Company or any Purchaser for any commission, fee or other compensation pursuant to any agreement, arrangement or understanding entered into by or on behalf of the Purchaser.

(i) Independent Investment Decision . Such Purchaser has independently evaluated the merits of its decision to purchase Common Shares pursuant to the Transaction Documents, and such Purchaser confirms that it has not relied on the advice of any other Purchaser’s business and/or legal counsel in making such decision. Such Purchaser understands that nothing in this Agreement or any other materials presented by or on behalf of the Company to the Purchaser in connection with the purchase of the Common Shares constitutes legal, tax or investment advice. Such Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Common Shares.

(j) Reliance on Exemptions . Such Purchaser understands that the Common Shares are being offered and sold to it in reliance on specific exemptions from the registration requirements of U.S. federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Purchaser’s compliance with, the representations, warranties, agreements, acknowledgements and understandings of such Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of such Purchaser to acquire the Common Shares.

(k) No Governmental Review . Such Purchaser understands that no U.S. federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Common Shares or the fairness or suitability of the investment in the Common Shares nor have such authorities passed upon or endorsed the merits of the offering of the Common Shares.

(l) Residency . Such Purchaser’s residence (if an individual) or office in which its investment decision with respect to the Common Shares was made (if an entity) are located at the address immediately below such Purchaser’s name on its signature page hereto.

(m) Reliance . The Company will be entitled to rely upon this Agreement and is irrevocably authorized to produce this Agreement or a copy hereof to (A) any regulatory authority having jurisdiction over the Company and its Affiliates and (B) any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby, in each case, to the extent required by any court or governmental authority to which the Company is subject, provided that the Company provides the Purchaser with prior written notice of such disclosure.

(n) Antitrust and Other Consents, Filings, Etc . Assuming the accuracy of the representations and warranties of the Company contained herein, no approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any governmental entity or authority or any other person or entity in respect of any law or regulation, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder, is necessary or required to be obtained or made by such Purchase, and no lapse of a waiting period under law applicable to such Purchaser is necessary or required, in each case in connection with the execution, delivery or performance by such Purchaser of this Agreement or the purchase of the Common Shares contemplated hereby, other than as may be required by the Bank Regulatory Authorities.

(o) OFAC and Anti-Money Laundering . The Purchaser understands, acknowledges, represents and agrees that (i) the Purchaser is not the target of any sanction, regulation, or law promulgated by the Office of Foreign Assets Control, the Financial Crimes Enforcement Network or any other U.S. governmental entity (“U.S. Sanctions Laws”); (ii) the Purchaser is not owned by, controlled by, under common control with, or acting on behalf of any person that is the target of U.S. Sanctions Laws; (iii) the Purchaser is not a “foreign shell bank” and is not acting on behalf of a “foreign shell bank” under applicable anti-money laundering laws and regulations; (iv) the Purchaser’s entry into this Agreement or consummation of the transactions contemplated hereby will not contravene U.S. Sanctions Laws or applicable anti-money laundering laws or regulations; (v) to the extent permitted under applicable law, the Purchaser will promptly provide to the Company or any regulatory or law enforcement authority such information or documentation as may be required to comply with U.S. Sanctions Laws or applicable anti-money laundering laws or regulations; and (vi) the Company may provide to any regulatory or law enforcement authority information or documentation regarding, or provided by, the Purchaser for the purposes of complying with U.S. Sanctions Laws or applicable anti-money laundering laws or regulations.

3.3 The Company and each of the Purchasers acknowledge and agree that no party to this Agreement has made or makes any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Article III and the Transaction Documents.

ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

4.1 Transfer Restrictions .

(a) Compliance with Laws . Notwithstanding any other provision of this Article IV, each Purchaser covenants that the Securities may be disposed of only pursuant to an effective registration statement under, and in compliance with the requirements of, the Securities Act, or pursuant to an available exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, and in compliance with any applicable state, federal or foreign securities laws. In connection with any transfer of the Securities other than (i) pursuant to an effective registration statement, (ii) to the Company or (iii) pursuant to Rule 144 (provided that the transferor provides the Company with reasonable assurances (in the form of a seller representation letter and, if applicable, a broker representation letter) that such securities may be sold pursuant to such rule), the Company may require the transferor thereof to provide to the Company and the Transfer Agent, at the transferor’s expense, an opinion of counsel selected by the transferor and reasonably acceptable to the Company and the Transfer Agent, the form and substance of which opinion shall be reasonably satisfactory to the Company and the Transfer Agent, to the effect that such transfer does not require registration of such Securities under the Securities Act. As a condition of transfer of any Securities (other than pursuant to clauses (i), (ii) or (iii) of the preceding sentence), any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement with respect to such transferred Securities.

(b) Legends . Certificates evidencing the Securities shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form, until such time as they are not required to bear such legends under Section 4.1(c) or applicable law:

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR (B) AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY AND ITS TRANSFER AGENT OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT (PROVIDED THAT THE TRANSFEROR PROVIDES THE COMPANY WITH REASONABLE ASSURANCES (IN THE FORM OF A SELLER REPRESENTATION LETTER AND, IF APPLICABLE, A BROKER REPRESENTATION LETTER) THAT THE SECURITIES MAY BE SOLD PURSUANT TO SUCH RULE). NO REPRESENTATION IS MADE BY THE ISSUER AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALES OF THESE SECURITIES.

(c) Removal of Legends . The restrictive legend set forth in Section 4.1(b) above shall be removed and the Company shall issue a certificate without such restrictive legend or any other restrictive legend to the holder of the applicable Securities upon which it is stamped or issue to such holder by electronic delivery at the applicable balance account at DTC, if (i) such Securities are registered for resale under the Securities Act, (ii) such Securities are sold or transferred pursuant to Rule 144, or (iii) such Securities are eligible for sale under Rule 144, without the requirement for the Company to be in compliance with the current public information required under Rule 144(c)(1) (or Rule 144(i)(2), if applicable) as to such securities and without volume or manner-of-sale restrictions. Upon Rule 144 becoming available for the resale of Securities, without the requirement for the Company to be in compliance with the current public information required under Rule 144(c)(1) (or Rule 144(i)(2), if applicable) as to the Securities and without volume or manner-of-sale restrictions, the Company shall instruct the Transfer Agent to remove the legend from the Securities and shall cause its counsel to issue any legend removal opinion required by the Transfer Agent. Any fees (with respect to the Transfer Agent, Company counsel or otherwise) associated with the issuance of such opinion or the removal of such legend shall be borne by the Company. If a legend is no longer required

pursuant to the foregoing, the Company will no later than three (3) Business Days following the delivery by a Purchaser to the Transfer Agent (with notice to the Company) of a legended certificate or instrument representing such Securities (endorsed or with stock powers attached, signatures guaranteed, and otherwise in form necessary to affect the reissuance and/or transfer) and a representation letter to the extent required by Section 4.1(a), deliver or cause to be delivered to such Purchaser a certificate or instrument (as the case may be) representing such Securities that is free from all restrictive legends. The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 4.1(c). Certificates for Securities free from all restrictive legends may be transmitted by the Transfer Agent to the Purchasers by crediting the account of the Purchaser’s prime broker with DTC as directed by such Purchaser.

(d) Acknowledgement . Each Purchaser hereunder acknowledges its primary responsibilities under the Securities Act and accordingly will not sell or otherwise transfer the Securities or any interest therein without complying with the requirements of the Securities Act.

4.2 Acknowledgment of Dilution . The Company acknowledges that the issuance of the Securities may result in dilution of the outstanding shares of Common Stock. The Company further acknowledges that its obligations under the Transaction Documents, including without limitation its obligation to issue the Securities pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the dilutive effect that such issuance may have on the ownership of the other shareholders of the Company.

4.3 Intentionally Omitted .

4.4 Form D and Blue Sky . The Company agrees to timely file a Form D with respect to the Securities as required under Regulation D. Purchaser agrees to timely provide Company with any and all needed information in connection with Company’s preparation and filing of a Form D. The Company, on or before the Closing Date, shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for sale to the Purchasers at the Closing pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from such qualification). The Company shall make all filings and reports relating to the offer and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of the United States following the Closing Date.

4.5 No Integration . The Company shall not, and shall use its commercially reasonable efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that will be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers.

4.6 Publicity . The Company shall not publicly disclose the name of any Purchaser or any Affiliate or investment adviser of any Purchaser, or include the name of any Purchaser or

any Affiliate or investment adviser of any Purchaser in any press release or in any filing with the Commission or any regulatory agency or stock exchange or in any other public manner, without the prior written consent of such Purchaser, except to the extent such disclosure is required by law, at the request of the staff of the Commission or regulatory agency or under stock exchange regulations, in which case the Company shall provide the Purchasers with prior written notice of such permitted disclosure.

4.7 Intentionally Omitted .

4.8 Indemnification .

(a) Indemnification of Purchasers . In addition to the indemnity provided in the Registration and Other Rights Agreement, the Company will indemnify and hold each Purchaser and its directors, officers, shareholders, members, partners, employees, agents and investment advisors (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members, partners, employees, agents or investment advisors (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of such controlling person (each, an “ Indemnified Person ”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Indemnified Person may suffer or incur as a result of (i) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (ii) any action instituted against an Indemnified Person in any capacity, or any of them or their respective Affiliates, by any shareholder of the Company or other third party who is not an Affiliate of such Indemnified Person, with respect to any of the transactions contemplated by this Agreement or the other Transaction Documents. The Company will not be liable to any Indemnified Person under this Agreement to the extent, but only to the extent that a loss, claim, damage or liability is directly attributable to any Indemnified Person’s breach of any of the representations, warranties, covenants or agreements made by such Indemnified Person in this Agreement or in the other Transaction Documents.

(b) Conduct of Indemnification Proceedings . Promptly after receipt by any Indemnified Person of notice of any demand, claim or circumstances which would or might give rise to a claim or the commencement of any Proceeding in respect of which indemnity may be sought pursuant to Section 4.8(a), such Indemnified Person shall promptly notify the Company in writing and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Person, and shall assume the payment of all fees and expenses; provided, however , that the failure of any Indemnified Person so to notify the Company shall not relieve the Company of its obligations hereunder except to the extent that the Company is actually and materially and adversely prejudiced by such failure to notify (as determined by a court of competent jurisdiction, which determination is not subject to appeal or further review). In any such Proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless: (i) the Company and the Indemnified Person shall have mutually

agreed to the retention of such counsel; (ii) the Company shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Person in such Proceeding; or (iii) in the reasonable judgment of counsel to such Indemnified Person, representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Company shall not be liable for any settlement of any Proceeding effected without its written consent, which consent shall not be unreasonably withheld, delayed or conditioned. Without the prior written consent of the Indemnified Person, the Company shall not effect any settlement of any pending or threatened Proceeding in respect of which any Indemnified Person is or could have been a party and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement includes an unconditional release of such Indemnified Person from all liability arising out of such Proceeding.

(i) Deductible. Except as provided otherwise in 4.8(c)(iii), the Company will not be liable for losses that otherwise are indemnifiable under Section 4.8(a) until the total of all losses under Section 4.8(a) incurred by all Purchasers exceeds $25,000.

(ii) Maximum. Except as provided otherwise in Section 4.8(c)(iii), the maximum aggregate liability of the Company for all losses under Section 4.8(a) is the aggregate Subscription Amount by all Purchasers, provided however, that the maximum aggregate liability of the Company for all losses under Section 4.8(a) as to any individual Purchaser is the aggregate Subscription Amount of such individual Purchaser.

(iii) Exceptions. The provisions of Section 4.8(c)(i) and (ii) do not apply to (A) claims due to the inaccuracy of any of the representations or breach of any of the warranties of the Company in Sections 3.1(a), 3.1(b), 3.1(c), 3.1(e), 3.1(f), 3.1(g) or 3.1(i) or (B) indemnification claims involving fraud or knowing and intentional misconduct by the Company

4.9 Use of Proceeds . With respect to the net proceeds from the sale of the Common Shares hereunder, (i) up to $25.0 million in the aggregate may be used to pay a cash dividend to the Company’s pre-Closing shareholders; (ii) up to an additional $6.0 million may be used to pay a cash dividend for tax liability of the Company’s pre-Closing shareholders; and (iii) the remainder shall be used for general corporate purposes.

4.10 Certain Transactions . The Company will not merge or consolidate into, or sell, transfer or lease all or substantially all of its property or assets to, any other party unless the successor, transferee or lessee party, as the case may be (if not the Company), expressly assumes the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company.

4.11 No Change of Control . The Company shall use reasonable best efforts to obtain all necessary irrevocable waivers, adopt any required amendments and make all appropriate determinations so that the issuance of the Common Shares to the Purchasers will not trigger a

“change of control” or other similar provision in any of the agreements to which the Company or any of its Subsidiaries is a party, including without limitation any employment, “change in control,” severance or other agreements and any benefit plan, which results in payments to the counterparty or the acceleration of vesting of benefits.

4.12 Filings; Other Actions . Each Purchaser, with respect to itself only, on the one hand, and the Company, on the other hand, will cooperate and consult with the other and use reasonable best efforts to provide all necessary and customary information and data, to prepare and file all necessary and customary documentation, and to effect all necessary and customary applications, notices, petitions, filings and other documents, and to obtain all necessary and customary permits, consents, orders, approvals and authorizations of, or any exemption by, all third parties and Bank Regulatory Authorities, and the expiration or termination of any applicable waiting period, in each case, (i) necessary or advisable to consummate the transactions contemplated by the Transaction Documents, and to perform the covenants contemplated by the Transaction Documents, in each case required by it and (ii) with respect to each Purchaser, to the extent typically provided by such Purchaser to such third parties or Bank Regulatory Authorities, as applicable, under such Purchaser’s policies consistently applied and subject to such confidentiality requests as such Purchaser may reasonably seek. Each party shall execute and deliver both before and after the Closing such further certificates, agreements, documents and other instruments and take such other actions as the other parties may reasonably request to consummate or implement such transactions or to evidence such events or matters, subject, in each case, to clauses (i) and (ii) of the first sentence of this Section 4.12. Each party will have the right to review in advance, and to the extent practicable each will consult with the other, in each case subject to applicable laws relating to the exchange of information, all the information relating to such other party, and any of their respective Affiliates, which appears in any filing made with, or written materials submitted to, any third party or any Bank Regulatory Authorities in connection with the transactions to which it will be party contemplated by this Agreement; provided, however, that a Purchaser shall not be required to disclose to the Company or any other Person any information that is confidential and proprietary to such Purchaser. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees to keep the other party apprised of the status of matters referred to in this Section 4.12. Each party shall promptly furnish the other parties, to the extent permitted by applicable law, with copies of written communications received by it or its Subsidiaries from, or delivered by any of the foregoing to, any Bank Regulatory Authorities in respect of the transactions contemplated by the Transaction Documents. Notwithstanding anything in this Section 4.12 or elsewhere in this Agreement to the contrary, a Purchaser shall not be required to provide to any Person pursuant to this Agreement any of its, its Affiliates’, its investment advisor’s or its or their control persons’ or equity holders’ nonpublic, proprietary, personal or otherwise confidential information including the identities or financial condition of limited partners, shareholders or non-managing members of such Purchaser or its Affiliates or their investment advisors.

4.13 Conduct of Business . From the date hereof until the earlier of the Closing Date or the termination of this Agreement in accordance with its terms, except as contemplated by this Agreement, neither the Company nor any of its Subsidiaries shall, directly or indirectly, (a) amend its charter or bylaws, (b) split, combine or reclassify any outstanding shares of its capital stock, except to the extent approved by the Purchasers, (c) declare, set aside, make or pay any

dividend or distribution in cash, stock, property or otherwise with respect to its capital stock, (d) default in its obligations under any material debt, contract or commitment which default results in the acceleration of obligations due thereunder, (e) conduct its business other than in the ordinary course on an arms-length basis and in accordance in all material respects with all applicable laws, rules and regulations and the Company’s and Subsidiaries’ past custom and practice, preserve intact the current business organization of the Company, use commercially reasonable efforts to retain the services of their employees, consultants and agents, preserve the current relationships of the Company and its Subsidiaries with material customers and other Persons with whom the Company and its Subsidiaries have and intend to maintain significant relations, maintain all of its operating assets in their current condition (normal wear and tear excepted) and will not take or omit to take any action that would constitute a breach of Section 3.1(k), (f) issue or sell any additional shares of, or options, warrants, conversions, privileges or rights of any kind to acquire any shares of, any of its capital stock, (g) acquire (by merger, exchange, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership, joint venture or other business organization or division or material assets thereof, (h) make or change any material tax elections, settle or compromise any material tax liability or file any amended tax returns or (i) adopt any compensatory plan or hire or materially increase the existing compensation of any employee, consultant, director or other service provider.

4.14 Avoidance of Control . Notwithstanding anything to the contrary in this Agreement, neither the Company nor any Subsidiary shall take any action (including, without limitation, any redemption, repurchase, rescission or recapitalization of Common Stock, or securities or rights, options or warrants to purchase Common Stock, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for Common Stock in each case, where each Purchaser is not given the right to participate in such redemption, repurchase, rescission or recapitalization to the extent of such Purchaser’s pro rata proportion), that would cause (i) such Purchaser’s equity of the Company (together with equity of the Company owned by such Purchaser’s Affiliates (as such term is used under the BHC Act)) to exceed 24.99% of the Company’s total equity (provided there is no ownership or control in excess of 9.99% of any class of voting securities of the Company by such Purchaser, together with such Purchaser’s Affiliates) or (ii) such Purchaser’s ownership of any class of voting securities of the Company (together with the ownership by such Purchaser’s Affiliates (as such term is used under the BHC Act) of voting securities of the Company) to exceed 9.99%, in each case without the prior written consent of such Purchaser, or to increase to an amount that would constitute “control” under the BHC Act, the CIBC Act or any rules or regulations promulgated thereunder (or any successor provisions) or otherwise cause such Purchaser to “control” the Company under and for purposes of the BHC Act, the CIBC Act or any rules or regulations promulgated thereunder (or any successor provisions). Notwithstanding anything to the contrary in this Agreement, no Purchaser (together with its Affiliates (as such term is used under the BHC Act)) shall have the ability to purchase more than 24.99% of the Company’s total equity or to exercise any voting rights of any class of securities in excess of 9.99% of the total outstanding voting securities of the Company. In the event the Company breaches its obligations under this Section 4.14 or believes that it is reasonably likely to breach such an obligation, it shall promptly notify the Purchasers and shall cooperate in good faith with the Purchasers to modify ownership or make other arrangements or take any other action, in each case, as is necessary to cure or avoid such breach.

4.15 Most Favored Nation . During the period from the date of this Agreement through the Closing Date, neither the Company nor its Subsidiaries shall enter into any additional, or modify any existing, agreements with any existing or future investors in the Company or any of its Subsidiaries that have the effect of establishing rights or otherwise benefiting such investor in a manner more favorable in any material respect to such investor than the rights and benefits established in favor of the Purchasers by this Agreement, unless, in any such case, the Purchasers have been provided with such rights and benefits.

4.16 FDIC Final Statement of Policy on Qualifications for Failed Bank Acquisitions . So long as a Purchaser holds any Common Shares, the Company will not, without the consent of such Purchaser, take any action, directly or indirectly, through its subsidiaries or otherwise, that the Board of Directors of the Company believes in good faith would reasonably be expected to cause such Purchaser to be subject to transfer restrictions or other covenants of the FDIC Final Statement of Policy on Qualifications for Failed Bank Acquisitions as in effect at the time of taking such action.

ARTICLE V

CONDITIONS PRECEDENT TO CLOSING

5.1 Conditions Precedent to the Obligations of the Purchasers to Purchase Common Shares . The obligation of each Purchaser to acquire Common Shares at the Closing is subject to the fulfillment to such Purchaser’s satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by such Purchaser (as to itself only):

(a) Representations and Warranties . The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date, as though made on and as of such date, except for such representations and warranties that speak as of a specific date.

(b) Performance . The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing.

(c) No Injunction . No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction, nor shall there have been any regulatory communication, that prohibits the consummation of any of the transactions contemplated by the Transaction Documents.

(d) Consents . The Company shall have obtained in a timely fashion any and all consents, permits, approvals, registrations and waivers necessary for consummation of the purchase and sale of the Common Shares, including, without limitation, (i) all Required Approvals and (ii) any other approvals from Bank Regulatory Authorities, all of which shall be and remain so long as necessary in full force and effect.

(e) Company Deliverables . The Company shall have delivered the Company Deliverables in accordance with Section 2.2(a).

(f) Termination . This Agreement shall not have been terminated as to such Purchaser in accordance with Section 6.16 herein.

(g) Absence of Bank Regulatory Issues . The purchase of Common Shares by such Purchaser shall not (i) cause such Purchaser or any of its affiliates to violate any banking regulation, (ii) require such Purchaser or any of its Affiliates to file a prior notice under the CIBC Act, or otherwise seek prior approval of any banking regulator, (iii) require such Purchaser or any of its Affiliates to become a bank holding company or otherwise serve as a source of strength for the Company or any Subsidiary or (iv) cause such Purchaser, together with any other person whose Company securities would be aggregated with such Purchaser’s Company securities for purposes of any banking regulation or law, (A) to collectively be deemed to own, control or have the power to vote securities which would represent more than 9.99% of any class of voting securities of the Company outstanding at such time or (B) to collectively be deemed to own or control securities which would represent more than 24.99% of the Company’s total equity (voting and non-voting) outstanding at such time. No Bank Regulatory Authority shall have raised any concerns or objections with respect to any of the terms of, or transactions contemplated by, the Transaction Documents that have not been resolved to the Purchasers’ satisfaction. The Federal Reserve shall have accepted passivity commitments from the Purchasers that are usual and customary for the Purchasers, without the imposition of any Burdensome Condition (as defined below) or other unusual conditions.

(h) No Burdensome Condition . Since the date hereof, there shall not be any action taken, or any law, rule or regulation enacted, entered, enforced or deemed applicable to the Company or its Subsidiaries, such Purchaser (or its Affiliates) or the transactions contemplated by this Agreement, by any Bank Regulatory Authority, whether in connection with the Required Approvals or otherwise, which imposes any restriction or condition on the Company or its Subsidiaries or such Purchaser or any of its Affiliates (other than passivity commitments or anti-association commitments, as may be amended from time to time, that are usual and customary for such Purchaser) which such Purchaser determines, in its reasonable good faith judgment, is materially and unreasonably burdensome on the Company’s business following the Closing or on such Purchaser (or any of its Affiliates) or would reduce the economic benefits of the transactions contemplated by this Agreement to such Purchaser to such a degree that such Purchaser would not have entered into this Agreement had such condition or restriction been known to it on the date hereof (any such condition or restriction, a “ Burdensome Condition ”), and, for the avoidance of doubt, any requirements to disclose any of such Purchaser’s, its Affiliates’, its investment advisor’s or its or their control persons’ or equity holders’ nonpublic, proprietary, personal or otherwise confidential information including the identities or financial condition of limited partners, shareholders or non-managing members of such Purchaser or its Affiliates or its investment advisers shall be deemed a Burdensome Condition unless otherwise determined by such Purchaser in its sole discretion.

(i) Tier 1 Capital . The Common Shares shall qualify as unrestricted Tier 1 capital pursuant to the Capital Adequacy Guidelines for Bank Holding Companies, 12 C.F.R. Part 225, Appendix A

(j) Registration and Other Rights Agreement . The Company and each Purchaser (other than any Purchaser relying upon this condition to excuse such Purchaser’s performance hereunder) shall have executed and delivered the Registration and Other Rights Agreement.

(k) Significant Shareholders Agreement . The Company, each Purchaser (other than any Purchaser relying upon this condition to excuse such Purchaser’s performance hereunder), and the other shareholders of the Company named as parties thereto shall have executed and delivered the Significant Shareholders Agreement.

(l) Shareholders Agreement . The Company and the pre-Closing stockholders of the Company shall have executed and delivered the Shareholders Agreement.

(m) Board of Directors . As of the Closing, the authorized size of the Board shall be eleven (11), and the Board shall be comprised of James S. Mahan III, Neil L. Underwood, David G. Lucht, W. Lee Williams III, H. Kel Landis, Miltom Petty, William H. Cameron, Glen F. Hoffsis, Jerald Pullins, Diane B. Glossman and one vacancy.

(n) Organizational Documents . The Company’s Articles of Incorporation, as amended, shall be in the form attached hereto as Exhibit G and shall be effective. The Company’s Bylaws, as amended, shall be in the form attached hereto as Exhibit H and shall be effective.

(o) Stock Option Plan . The Company shall have converted its profit sharing plan into a stock option plan in the form attached hereto as Exhibit I .

(p) Corporate Actions . Prior to, or simultaneous with, Closing, the Company shall have consummated the following corporate actions:

(i) the spin-off the Company’s ownership interests in nCino, Inc. (“nCino”) to its pre-Closing shareholders, which will be structured as follows: (A) a contribution by the Company of such ownership interests in nCino to Klarity II, LLC (the “LLC”); and (B) the distribution of all of the ownership units of the LLC, pro rata, to the record shareholders of the Company as of May 22, 2014;

(ii) the declaration of a cash dividend of no more than $6.0 million to the Company’s pre-Closing shareholders prior to the Company’s conversion from an S-corporation to a C-corporation; and

(iii) the Company’s conversion from an S-corporation to a C-corporation.

(q) Material Adverse Effect . No Material Adverse Effect shall have occurred since the date of this Agreement.

5.2 Conditions Precedent to the Obligations of the Company to sell Common Shares . The Company’s obligation to sell and issue the Common Shares to each Purchaser at the Closing

is subject to the fulfillment to the satisfaction of the Company on or prior to the Closing Date of the following conditions, any of which may be waived by the Company:

(a) Representations and Warranties . The representations and warranties made by such Purchaser in Section 3.2 hereof shall be true and correct in all material respects as of the date when made, and as of the Closing Date as though made on and as of such date, except for representations and warranties that speak as of a specific date.

(b) Performance . Such Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by such Purchaser at or prior to the Closing Date.

(d) Purchasers Deliverables . Such Purchaser shall have delivered its Purchaser Deliverables in accordance with Section 2.2(b).

(e) Termination . This Agreement shall not have been terminated as to such Purchaser in accordance with Section 6.16 herein.

ARTICLE VI

MISCELLANEOUS

6.1 Fees and Expenses . The Company shall pay the reasonable legal fees and expenses of outside counsel to the Purchasers, up to a maximum amount of $100,000, incurred by the Purchasers in connection with the transactions contemplated by the Transaction Documents, which amount shall be paid directly by the Company to such outside counsel at the Closing or paid by the Company to such outside counsel upon termination of this Agreement so long as such termination did not occur as a result of a material breach by such Purchasers of any of their obligations hereunder (as the case may be). Except as set forth above and elsewhere in the Transaction Documents, the parties hereto shall be responsible for the payment of all expenses incurred by them in connection with the preparation and negotiation of the Transaction Documents and the consummation of the transactions contemplated hereby. The Company shall pay all Transfer Agent fees, stamp taxes and other taxes and duties levied in connection with the sale and issuance of the Securities to the Purchasers.

6.2 Entire Agreement . The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, discussions and representations, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. At or after the Closing, and without further consideration, the Company and the Purchasers will execute and deliver to the other such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.

6.3 Notices . Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or e-mail (provided the sender receives a machine-generated confirmation of successful facsimile transmission or e-mail notification or confirmation of receipt of an e-mail transmission) at the facsimile number or e-mail address specified in this Section prior to 5:00 p.m., New York City time, on a Business Day, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Business Day or later than 5:00 p.m., New York City time, on any Business Day, (c) the Business Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service with next day delivery specified, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:


If to the Company:		Live Oak Bancshares, Inc.
		1741 Tiburon Drive
		Wilmington, NC 28403
		Attention: James S. Mahan III
		Telephone: (910) 790-5867
		Fax: (910) 790-5868
		E-Mail: chip.mahan@liveoakbank.com

With a copy to:		Wyrick Robbins Yates & Ponton LLP
		4101 Lake Boone Trail, Suite 300
		Raleigh, NC 27607
		Attention: Todd H. Eveson, Esq.
		Telephone: (919) 781-4000
		Fax: (919) 781-4865
		E-Mail: teveson@wyrick.com

If to a Purchaser:		To the address set forth under such Purchaser’s name on the signature page hereof;

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

6.4 Amendments; Waivers; No Additional Consideration . No amendment or waiver of any provision of this Agreement will be effective with respect to any party unless made in writing and signed by a duly authorized representative of such party. No consideration shall be offered or paid to any Purchaser to amend or consent to a waiver or modification of any provision of any Transaction Document unless the same consideration is also offered to all Purchasers who then hold Shares.

6.5 Construction . The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. This Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement or any of the Transaction Documents.

6.6 Successors and Assigns . The provisions of this Agreement shall inure to the benefit of and be binding upon the parties and their successors and permitted assigns. This Agreement, or any rights or obligations hereunder, may not be assigned by the Company without the prior written consent of the Purchasers. Any Purchaser may assign its rights hereunder in whole or in part to any Person to whom such Purchaser assigns or transfers any Common Shares in compliance with the Transaction Documents and applicable law, provided such transferee shall agree in writing to be bound, with respect to the transferred Common Shares, by the terms and conditions of this Agreement that apply to the “Purchasers”.

6.7 No Third-Party Beneficiaries . This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, other than Indemnified Persons.

6.8 Governing Law . All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective Affiliates, employees or agents) may be commenced on a non-exclusive basis in the New York Courts. Each party hereto hereby irrevocably submits to the non-exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any such New York Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

6.9 Survival . The representations, warranties, agreements and covenants contained herein shall survive for a period of one (1) year following the Closing and the delivery of the Common Shares.

6.10 Execution . This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that the parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

6.11 Severability . If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

6.12 Replacement of Common Shares . If any certificate or instrument evidencing any Common Shares is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company and the Transfer Agent of such loss, theft or destruction and the execution by the holder thereof of a customary lost certificate affidavit of that fact and an agreement to indemnify and hold harmless the Company and the Transfer Agent for any losses in connection therewith or, if required by the Transfer Agent, a bond in such form and amount as is required by the Transfer Agent. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Common Shares. If a replacement certificate or instrument evidencing any Common Shares is requested due to a mutilation thereof, the Company may require delivery of such mutilated certificate or instrument as a condition precedent to any issuance of a replacement.

6.13 Remedies . In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to seek specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agree to waive in any action for specific performance of any such obligation (other than in connection with any action for a temporary restraining order) the defense that a remedy at law would be adequate.

6.14 Payment Set Aside . To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded,

repaid or otherwise restored to the Company, a trustee, receiver or any other Person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

6.15 Independent Nature of Purchasers’ Obligations and Rights . The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document. The decision of each Purchaser to purchase Common Shares pursuant to the Transaction Documents has been made by such Purchaser independently of any other Purchaser and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company or any Subsidiary which may have been made or given by any other Purchaser or by any agent or employee of any other Purchaser, and no Purchaser and none of its agents or employees shall have any liability to any other Purchaser (or any other Person) relating to or arising from any such information, materials, statements or opinions. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Purchaser acknowledges that no other Purchaser has acted as agent for such Purchaser in connection with making its investment hereunder and that no Purchaser will be acting as agent of such Purchaser in connection with monitoring its investment in the Common Shares or enforcing its rights under the Transaction Documents. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any Proceeding for such purpose. It is expressly understood and agreed that each provision contained in this Agreement is between the Company and a Purchaser, solely, and not between the Company and the Purchasers collectively and not between and among the Purchasers.

6.16 Termination . This Agreement may be terminated and the sale and purchase of the Common Shares abandoned at any time prior to the Closing by either the Company or any Purchaser (with respect to itself only) upon written notice to the other, if the Closing has not been consummated on or prior to 5:00 p.m., New York City time, on the Outside Date; provided , however , that the right to terminate this Agreement under this Section 6.16 shall not be available to any Person whose failure to comply with its obligations under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such time. Nothing in this Section 6.16 shall be deemed to release any party from any liability for any breach by such party of the terms and provisions of this Agreement or the other Transaction Documents or to impair the right of any party to compel specific performance by any other party of its obligations under this Agreement or the other Transaction Documents. In the event of a termination pursuant to this Section, the Company shall promptly notify all non-terminating Purchasers. Upon a termination in accordance with this Section, the Company and the terminating Purchaser(s) shall not have any further obligation or liability (including arising from such termination) to the other, and no Purchaser will have any liability to any other Purchaser under the Transaction Documents as a result therefrom.

6.17 Rescission and Withdrawal Right . Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

6.18 Adjustments in Common Stock Numbers and Prices . In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination or other similar recapitalization or event occurring after the date hereof and prior to the Closing, each reference in any Transaction Document to a number of shares or a price per share shall be deemed to be amended to appropriately account for such event.

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[SIGNATURE PAGE FOR COMPANY FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.


LIVE OAK BANCSHARES, INC.

By:
Name: Neil L. Underwood
Title: President, Director

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[SIGNATURE PAGES FOR PURCHASERS FOLLOW]

[ S IGNATURE P AGE TO S ECURITIES P URCHASE A GREEMENT ]


NAME OF PURCHASER:

Bay Pond Investors USB, LLC

By:
Name: Steven M. Hoffman
Title: Vice President and Counsel

Aggregate Purchase Price (Subscription Amount):

$ 22,916,801.70

Number of shares of Voting Common Stock to be Acquired: 71,081

Number of shares of Non-Voting Common Stock to be Acquired: 144,424

Tax ID No.: 98-0218500

Address for Notice:
c/o Wellington Management Company, LLP
280 Congress Street
Boston, Massachusetts 02210
Telephone No.: 617-790-7770
Facsimile No.: 617-289-5699
E-mail Address: seclaw@wellington.com
Attention: Steven M. Hoffman


Delivery Instructions: (if different than above)


c/o See Settlement Spreadsheet


Street:


City/State/Zip:


Attention:


Telephone No.:

[ S IGNATURE P AGE TO S ECURITIES P URCHASE A GREEMENT ]


NAME OF PURCHASER:

Bay Pond Partners, L.P.

By:
Name: Steven M. Hoffman
Title: Vice President and Counsel

Aggregate Purchase Price (Subscription Amount):

$ 31,505,777.16

Number of shares of Voting Common Stock to be Acquired: 97,721

Number of shares of Non-Voting Common Stock to be Acquired: 198,553

Tax ID No.: 04-3217743

Address for Notice:
c/o Wellington Management Company, LLP
280 Congress Street
Boston, Massachusetts 02210
Telephone No.: 617-790-7770
Facsimile No.: 617-289-5699
E-mail Address: seclaw@wellington.com
Attention: Steven M. Hoffman


Delivery Instructions: (if different than above)


c/o See Settlement Spreadsheet


Street:


City/State/Zip:


Attention:


Telephone No.:

[ S IGNATURE P AGE TO S ECURITIES P URCHASE A GREEMENT ]


NAME OF PURCHASER:

Ithan Creek Investors USB, LLC

By:
Name: Steven M. Hoffman
Title: Vice President and Counsel

Aggregate Purchase Price (Subscription Amount):

$ 8,892,150.80

Number of shares of Voting Common Stock to be Acquired: 27,581

Number of shares of Non-Voting Common Stock to be Acquired: 56,039

Tax ID No.: 98-0580385

Address for Notice:
c/o Wellington Management Company, LLP
280 Congress Street
Boston, Massachusetts 02210
Telephone No.: 617-790-7770
Facsimile No.: 617-289-5699
E-mail Address: seclaw@wellington.com
Attention: Steven M. Hoffman


Delivery Instructions: (if different than above)


c/o See Settlement Spreadsheet


Street:


City/State/Zip:


Attention:


Telephone No.:

[ S IGNATURE P AGE TO S ECURITIES P URCHASE A GREEMENT ]


NAME OF PURCHASER:

Wolf Creek Investors USB, LLC

By:
Name: Steven M. Hoffman
Title: Vice President and Counsel

Aggregate Purchase Price (Subscription Amount):

$ 5,890,704.30

Number of shares of Voting Common Stock to be Acquired: 18,271

Number of shares of Non-Voting Common Stock to be Acquired: 37,124

Tax ID No.: 98-0346053

Address for Notice:
c/o Wellington Management Company, LLP
280 Congress Street
Boston, Massachusetts 02210
Telephone No.: 617-790-7770
Facsimile No.: 617-289-5699
E-mail Address: seclaw@wellington.com
Attention: Steven M. Hoffman


Delivery Instructions: (if different than above)


c/o See Settlement Spreadsheet


Street:


City/State/Zip:


Attention:


Telephone No.:

[ S IGNATURE P AGE TO S ECURITIES P URCHASE A GREEMENT ]


NAME OF PURCHASER:

Wolf Creek Partners, L.P.

By:
Name: Steven M. Hoffman
Title: Vice President and Counsel

Aggregate Purchase Price (Subscription Amount):

$ 5,746,188.24

Number of shares of Voting Common Stock to be Acquired: 17,823

Number of shares of Non-Voting Common Stock to be Acquired: 36,213

Tax ID No.: 04-3539573

Address for Notice:
c/o Wellington Management Company, LLP
280 Congress Street
Boston, Massachusetts 02210
Telephone No.: 617-790-7770
Facsimile No.: 617-289-5699
E-mail Address: seclaw@wellington.com
Attention: Steven M. Hoffman


Delivery Instructions: (if different than above)


c/o See Settlement Spreadsheet


Street:


City/State/Zip:


Attention:


Telephone No.:

[ S IGNATURE P AGE TO S ECURITIES P URCHASE A GREEMENT ]

EXHIBITS

A:	Registration and Other Rights Agreement

B:	Significant Shareholders Agreement

C:	Shareholders Agreement

D:	Form of Opinion of Company Counsel

E:	Form of Secretary’s Certificate

F:	Form of Officer’s Certificate

G:	Articles of Incorporation

Bylaws

I:	Stock Option Plan

Exhibit 10.8

AMENDMENT TO SECURITIES PURCHASE AGREEMENT

This Amendment to Securities Purchase Agreement (this “Amendment” ) is dated as of July 31, 2014, by and among Live Oak Bancshares, Inc., a North Carolina corporation (the “Company” ), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers” ).

Recitals :

A. The Company and the Purchasers entered into a certain Securities Purchase Agreement dated as of May 28, 2014 (the “Agreement” ). The Company and the Purchasers desire to extend the term of the Agreement.

NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound hereby, the Company and the Purchasers agree as follows:

1. Amended Definition . Section 1.1 of the Agreement is amended by amending and restating the definition of “Outside Date” to read as follows:

“Outside Date” means September 2, 2014; provided that if such day is not a Business Day, the first day following such day that is a Business Day.

2. Ratify and Affirm . The Company and the Purchasers hereby ratify and affirm all of the other terms of the Agreement.

3. Defined Terms . Capitalized terms used herein without definition shall have the meanings given to such terms in the Agreement.

4. Governing Law . All questions concerning the construction, validity, enforcement and interpretation of this Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.

5. Execution . This Amendment may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that the parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

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[SIGNATURE PAGE FOR COMPANY FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.


LIVE OAK BANCSHARES, INC.
By:
	Name:	S. BRETT CAINES
	Title:	CFO

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[SIGNATURE PAGE FOR PURCHASERS FOLLOWS]

[ Signature Page to Amendment to Securities Purchase Agreement ]


PURCHASERS:

BAY POND INVESTORS USB, LLC

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

BAY POND PARTNERS, L.P.

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

ITHAN CREEK INVESTORS USB, LLC

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

WOLF CREEK INVESTORS USB, LLC

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

WOLF CREEK PARTNERS, L.P.

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

[ Signature Page to Amendment to Securities Purchase Agreement ]

Exhibit 10.9

SECOND AMENDMENT TO SECURITIES PURCHASE AGREEMENT

This Second Amendment to Securities Purchase Agreement (this “Amendment” ) is dated as of August 1, 2014, by and among Live Oak Bancshares, Inc., a North Carolina corporation (the “Company” ), and each purchaser identified on the signature pages hereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers” ).

Recitals :

A. The Company and the Purchasers entered into a certain Securities Purchase Agreement dated as of May 28, 2014 (as amended, the “Agreement” ). The Company and the Purchasers desire to amend the Agreement as described herein.

NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound hereby, the Company and the Purchasers agree as follows:

1. Section 4.9(ii) of the Agreement shall be amended and restated in its entirety by substituting the following therefor:

“(ii) up to an additional $10.0 million may be used to pay a cash dividend for actual tax liability of the Company’s pre-Closing shareholders;”

2. Section 5.1(p)(ii) of the Agreement shall be amended and restated in its entirety by substituting the following therefor:

“(ii) the declaration of a cash dividend for actual tax liability of no more than $10.0 million to the Company’s pre-Closing shareholders prior to the Company’s conversion from an S-corporation to a C-corporation; and”

3. Section 5.1 of the Agreement shall be amended by adding the following additional conditions to Closing:

“(r) Amendment to nCino Common Stock Purchase Agreement . nCino and the other signatories thereto shall have executed and delivered the Amendment to Common Stock Purchase Agreement, in the form attached hereto as Exhibit J .”

“(s)” Amendment to nCino Investors’ Rights Agreement . nCino and the other signatories thereto shall have executed and delivered the Amendment to Investors’ Rights Agreement, in the form attached hereto as Exhibit K .”

“(t) nCino Certificate of lncorporation . nCino’s First Amended and Restated Certificate of Incorporation, in the form attached hereto as Exhibit L , shall have been duly authorized, executed and filed with and accepted by the Secretary of State of the State of Delaware.”

“(u) Waiver . The Waiver, in the form attached hereto as Exhibit M , shall have been executed and delivered by nCino and the Common Holders (as defined in that certain Investor Rights Agreement, dated as of December 18, 2013, by and among nCino and the other parties thereto) holding a majority of the shares of capital stock of nCino then held by the Common Holders.”

“(v) Purchase and Sale Agreement . The Company and the stockholders of nCino listed on Exhibit A thereto shall have executed and delivered the Purchase and Sale Agreement, in the form attached hereto as Exhibit N , and the sale of the nCino shares of voting common stock covered thereby by such stockholders to Live Oak shall be concurrently consummated at the time of the Closing.”

“(w) Exchange Agreement Between nCino and Certain Stockholders of nCino . nCino and the stockholders of nCino listed on Schedule I thereto shall have executed and delivered the Exchange Agreement, in the form attached hereto as Exhibit O , and the exchange of the nCino shares of voting common stock covered thereby for nCino shares of non-voting common stock shall be concurrently consummated at the time of the Closing.”

“(x) Exchange Agreement Between nCino and the Company . nCino and the Company shall have executed and delivered the Exchange Agreement, in the form attached hereto as Exhibit P , and the exchange of the nCino shares of voting common stock covered thereby for nCino shares of non-voting common stock shall be concurrently consummated at the time of the Closing.”

4. Ratify and Affirm . The Company and the Purchasers hereby ratify and affirm all of the other terms of the Agreement.

5. Defined Terms . Capitalized terms used herein without definition shall have the meanings given to such terms in the Agreement.

6. Governing Law . All questions concerning the construction, validity, enforcement and interpretation of this Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.

7. Execution . This Amendment may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that the parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, or by e-mail delivery of a “.pdf’ format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

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[SIGNATURE PAGE FOR COMPANY FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.


LIVE OAK BANCSHARES, INC.
By:
	Name:	David Lucht
	Title:	Chief Risk Officer

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[SIGNATURE PAGE FOR PURCHASERS FOLLOWS]

[ Signature Page to Second Amendment to Securities Purchase Agreement ]


PURCHASERS:

BAY POND INVESTORS USB, LLC

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

BAY POND PARTNERS, L.P.

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

ITHAN CREEK INVESTORS USB, LLC

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

WOLF CREEK INVESTORS USB, LLC

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

WOLF CREEK PARTNERS, L.P.

By: Wellington Management Company, LLP, as investment adviser

By:
Name:		Robert J. Toner
Title:		Vice President and Counsel

[ Signature Page to Second Amendment to Securities Purchase Agreement ]

Exhibit 10.10

Page 1 of 5

NCINO, LLC SOFTWARE SERVICE AGREEMENT

This is a services agreement (the “Service Agreement” or “Agreement”) between Live Oak Bank (hereafter “Subscriber”) and NCINO, LLC (“NCINO”), a North Carolina company with its principal place of business at 2605 Iron Gate Drive, Suite 100, Wilmington, North Carolina 28412. Please read it carefully before subscribing to the services or using the Software.

For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

1.	DEFINITIONS.

The following definitions apply:

a)	“Activation Date” – is the date that NCINO first makes the Service available to the Subscriber and provides online, email, or written notice of such availability to the Subscriber. THE ACTIVATION DATE FOR PURPOSES OF THIS AGREEMENT WILL BE 2012/11/01.

“Authorized Representative” - is an official with the legal authority to give assurances, make commitments, enter into contracts, and execute such documents on behalf of the Subscriber. The signature of the Authorized Representative certifies, on behalf of the Subscriber, that commitments made in this Service Agreement will be honored.

c)	“Malicious Code” – consists of programming (code, scripts, active content, and other software) designed to disrupt or deny operation, gather information that leads to loss of privacy or exploitation, gain unauthorized access to system resources, and other non-Subscription Services related behavior.

“Operator” – is any of the Subscriber’s employees, representatives, consultants, agents, contractors or other persons expressly permitted by the Subscriber in connection with Subscriber’s business affairs who are authorized to use the Service and have been supplied user identifications and passwords by the Subscriber (or by NCINO at Subscriber’s request).

e)	“Professional Services” – are services provided by NCINO related to custom conversions, dashboards, reports, alerts, real time interfaces to third-party products and training for using the same.

f)	“Subscriber” – is the legal entity or individual that enters into this Service Agreement as described online or on the signature page.

g)	“Subscriber Data” – is the data in electronic form input or collected through the Service by or from the Subscriber or any operator of a computing device in the course of using the Service.

h)	“Support Services” – include direct channels to assist Operators with use of NCINO’s online product and as necessary engineering to identify and resolve technical problems with NCINO’s online product.

i)	“Subscription Services” – are NCINO’s online product, operation manual and applicable information as provided at http://www.NClNO.com .”

j)	“Term” – the Service Agreement commences on the Activation Date and continues until all Subscriptions granted in accordance with the Service Agreement as defined in Attachment A have expired or have been terminated.

2.	SERVICES.

2.1 PROVISION OF SUBSCRIPTION SERVICES. NCINO shall make the Subscription Services available to the Subscriber pursuant to this Service Agreement.

2.2 OPERATOR SUBSCRIPTION(S). Subscription Services are purchased as subscription(s) and may be accessed by no more than a single designated Operator. If you wish to have additional Operators use the Subscription Services, you must purchase a separate subscription for each. Additional subscriptions may be added during the subscription term at the same rate as that for pre-existing subscription(s), prorated for the remainder of the subscription term in effect at the time the additional subscription(s) are added. The added subscription(s) shall terminate on the same date as the pre-existing subscription(s). Subscriptions are for designated Operators and cannot be shared or used by more than one Operator at a time. Subscriptions may be reassigned to a new Operator replacing an Operator who no longer requires ongoing use of the Service.

2.3 NCINO RESPONSIBILITIES. NCINO shall: (i) provide to Subscriber the Subscription Services at the rate described in “Attachment A - Subscription Fees” (ii) use commercially reasonable efforts to make the Subscription Services available 24 hours a day, 7 days a week, except for: (a) planned downtime of which NCINO shall provide at least 8 hours notice via the Subscription Services and to the extent practicable schedule during weekend hours from 9:00pm Eastern time Friday to 6:00am Eastern time Monday, or b) unavailability caused by circumstances beyond NCINO’s control, including without limitation, acts of God, acts of government, flood, fire, earthquake, civil unrest, acts of terror, strikes or other labor problems, or Internet service provider failures, and (iii) provide the Subscription Services and protect non-public financial data used therewith in accordance with applicable laws and government regulations. NCINO agrees to use commercially reasonable efforts to provide agreed functionality and performance.

2.4 SUBSCRIBER RESPONSIBILITIES. Subscriber shall: (i) be responsible for Operator compliance with the Service Agreement, (ii) use commercially reasonable efforts to prevent unauthorized access to or use of the Subscription Services, and notify NCINO promptly upon knowledge of any threatened or actual unauthorized access or use, and (iii) use the Subscription Services only in accordance with this Service Agreement and the online operation manual and applicable laws and regulations. The Subscriber shall NOT (a) make the Subscription Services available to anyone other than subscribed Operators, (b) sell,

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resell, rent or lease the Subscription Services, (c) use the Subscription Services to store or transmit material in violation of third-party privacy rights, (d) use the Subscription Services to store or transmit Malicious Code, (e) interfere or disrupt the integrity or performance of the Subscription Services or third-party data contained therein, or (f) attempt to gain unauthorized access to the Subscription Services or their related systems or networks. Subscriber agrees to notify NCINO in writing of any potential failure by NCINO to provide agreed functionality and performance.

2.5 PROFESSIONAL SERVICES . NCINO may provide to Subscriber the Professional Services in accordance with a Statement of Work, Schedule and Fees as described in Attachment B, Professional Services.

2.6 SUPPORT SERVICES. NCINO Support Services are provided to Subscriber in accordance with Attachment C, Support Services.

3.	FEES AND PAYMENT.

3.1 SUBSCRIPTION FEES. The Subscription Fees (i) will be quoted and payable in U.S. dollars as posted in “Attachment A - Subscription Services”, (ii) will be paid for access to the Subscription Services during the Subscription Term set forth in Attachment A and not actual use, and (iii) are non-cancellable. The number of subscriptions purchased cannot be decreased during the Subscription Term and any lack of use of the Subscription Services by the Subscriber shall not excuse the failure to pay the Subscription Fees in whole or in part.

3.2 INVOICING AND PAYMENT. Subscription Fees are electronically invoiced in advance during the Subscription Term set forth in “Attachment A – Subscription Services,” THE TERM OF WHICH BEGINS ON THE ACTIVATION DATE. When payment card or account information is provided in “Attachment A – Subscription Services”, NCINO will use the provided payment card or account information to collect Subscriber Fees on the Anniversary of the Activation Date for the Term of the Agreement. The Subscriber is responsible for maintaining accurate payment card, account/billing information and contact information in the interface provided with the Subscription Services. When invoiced, Subscription Fees are due net 30 days from the invoice date.

3.3 OVERDUE PAYMENTS. If any amounts invoiced are not received by NCINO by the due date, then at NCINO’s discretion, such charges may accrue interest at the rate of 1.5% of the outstanding balance per month, or the maximum rate permitted by law, whichever is lower, from the date such payment was due until the date paid, and/or NCINO may condition future subscription renewals on other payment terms.

3.4 SUSPENSION OF SUBSCRIPTION SERVICES. If any amounts invoiced are 30 days or more overdue, NCINO may, without limiting other rights and remedies, suspend Subscriber access to the Subscription Services until such amounts are paid in full.

3.5 PAYMENT DISPUTES. NCINO will not exercise its rights under 3.3 (Overdue Payments) or 3.4 (Suspension of Subscription Services) if the applicable charges are under reasonable and good-faith dispute and, in NCINO’s judgment, Subscriber is diligently cooperating to resolve the dispute.

3.6 TAXES. Unless otherwise stated in writing, NCINO’s fees do not include any taxes levies, duties or other similar government assessments of any nature, including but not limited to value added, sales and use, or withholding taxes, assessable by any local, state, provincial, federal or foreign jurisdiction (collectively “Taxes”). Subscriber is responsible for paying all Taxes associated with purchases under this Services Agreement. If NCINO has the legal obligation to pay or collect Taxes for which the Subscriber is responsible under this paragraph, the appropriate amount shall be invoiced to and paid by the Subscriber, unless Subscriber provides NCINO with a valid tax exemption certificate authorized by the appropriate taxing authority. NCINO is solely responsible for taxes assessable against NCINO based on income, property and employees of NCINO.

3.7 TERM. This Agreement between Subscriber and NCINO shall be in force upon the date that both parties have executed this Agreement in its entirety, and shall continue for a period of three (3) years from the Activation Date. Thereafter, the Agreement will automatically renew for additional one (1) year terms unless a party has provided the other with at least thirty (30) days’ prior written notice of its intent to terminate.

4.	RIGHTS.

4.1 RESERVATION OF RIGHTS. Subject to the limited access rights expressly granted hereunder, NCINO reserves all rights, title and interest in and to the Subscription Services, including all intellectual property rights. Intellectual property rights include, but are not limited to, copyright, patent, trademark, trade secret, trade dress and all other proprietary rights, in the NCINO software and related written and support materials. No rights are granted to the Subscriber other than those expressly set forth herein.

4.2 RESTRICTIONS. Subscriber shall not (i) permit unauthorized access to the Subscription Services, (ii) create derivative works based on the Subscription Services, (iii) copy, frame or mirror any part or content of the Subscription Services, other than for Subscriber’s own internal business purposes, (iv) reverse engineer the Subscription Services, or (v) access the Subscription Services to (a) build a competitive product or service, or (b) copy any features, functions or graphics of the Subscription Services. Should the Subscriber choose to use the Subscription Services within a terminal server environment, the technical setup and compatibility of that environment is the sole responsibility of the Subscriber.

4.3 DATA. The Subscriber exclusively owns all rights, title and interest in and to all Subscriber Data. Subscriber agrees that NCINO may collect and use technical information gathered as part of the product support provided, if any, related to the Subscription Services. NCINO may use this information solely to improve its products or to provide customized services or technologies and will not disclose this information in a form that

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identifies the Subscriber. NCINO is not responsible for the accuracy, quality, integrity and legality of Subscriber Data and of the means by which NCINO acquired Subscriber Data.

4.4 SUBSCRIBER RECOMMENDATIONS. Unless otherwise agreed to in writing, NCINO shall have a royalty-free, worldwide, transferable, irrevocable and perpetual license to use or incorporate into the Subscription Services any recommendations, enhancements, requests or suggestions provided by the Subscriber, relating to the operation of the Subscription Services.

5.	WARRANTIES

5.1 SUBSCRIBER’S IDENTITY. Subscriber declares: (i) that it has accurately identified itself on the signature page of this Services Agreement and through the Subscription Services and will maintain the accuracy of such identification via the Subscription Services; and (ii) that it is a corporation or other business entity authorized to do business pursuant to applicable law or an individual 18 years or older.

5.2 RIGHT TO DO BUSINESS. NCINO and Subscriber each declares that it has the full right and authority to enter into, execute, and perform its obligations under this Services Agreement and that no pending or threatened claim or litigation known to it would have a material adverse impact on its ability to perform as required by this Services Agreement.

5.3 DISCLAIMERS. Except for the express warranties specified in this section 5, THE SERVICE IS PROVIDED “AS IS” AND AS AVAILABLE, AND NCINO MAKES NO WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

5.4 LIMITATION OF LIABILITY.

(A) IN NO EVENT WILL NCINO BE LIABLE TO SUBSCRIBER FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL, OR INCIDENTAL DAMAGES, INCLUDING LOST PROFITS, EVEN IF NCINO IS ADVISED IN ADVANCE OF THE POSSIBILITY OF THE DAMAGES IN QUESTION OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES.

(B) NCINO’s LIABILITY FOR DIRECT DAMAGES ARISING OUT OF OR RELATED TO THIS SERVICE AGREEMENT WILL NOT EXCEED THE PURCHASE PRICE OF THE SUBSCRIPTION FEE(S) PAID IN THE AGGREGATE BY THE SUBSCRIBER IN THE 12 MONTHS PRECEDING THE CLAIM; THE LIABILITIES LIMITED BY THIS SECTION B APPLY: (i) REGARDLESS OF THE NATURE OF THE ACTION OR CLAIM, (ii) REGARDLESS OF THE FORM OF THE ACTION OR CLAIM, WHETHER IN CONTRACT, TORT, STRICT PRODUCT LIABILITY, OR OTHERWISE; AND (iii) EVEN IF SUBSCRIBER’S REMEDIES FAIL OF THEIR ESSENTIAL PURPOSE.

(C) THE FOREGOING DIRECT DAMAGES LIMITATION LIABILITY CAP DOES NOT APPLY TO A CLAIM BY SUBSCRIBER (i) BASED ON THE GROSS NEGLIGENCE OR

WILLFUL MISCONDUCT BY NCINO, or (ii) BASED ON A CLAIM BY A 3 ^rd PARTY INVOLVING AN INTELLECTUAL PROPERTY RIGHT UNDER THE INDEMNIFICATION OBLIGATIONS OF SECTION 8. If applicable law limits the application of the provisions of this Section 5.4, NCINO’s liability will be limited to the maximum extent permissible.

5.5 SALESFORCE.COM NCINO has secured sufficient rights to utilize Salesforce.com (i.e., the SFDC platform) to provide the Subscription Services. Subscriber responsibilities with regard to the SFDC platform are outlined on Attachment D – SFDC Service Terms.

6.	DATA MANAGEMENT.

6.1 LEGAL COMPULSION. NCINO will not give any third party access to Subscriber Data. Notwithstanding the foregoing, NCINO may disclose Subscriber Data as required by applicable law or by proper legal or governmental authority. NCINO will give Subscriber prompt notice of any such legal or governmental demand (to the extent permissible under the law) and reasonably cooperate with Subscriber in any effort to seek a protective order or otherwise to contest such required disclosure, at Subscriber’s expense.

6.2 RETENTION & DELETION. NCINO will retain Subscriber Data until erased pursuant to the Data Policy posted with the Subscription Services. Upon written request of the Subscriber and at Subscriber’s expense, NCINO will provide a copy of Subscriber Data and cooperate in the transfer of Subscriber Data to Subscriber or substitute vendor identified in writing by Subscriber.

6.3 PRIVACY. NCINO will take commercially reasonable steps (including, without limitation, implementing and monitoring compliance with reasonable and appropriate measures with respect to administrative, technical and physical safeguards) consistent with the objectives of 12 C.F.R. Part 364, Appendix B (Interagency guidelines establishing standards for safeguarding client information) to protect any nonpublic personal information, as defined in 12 C.F.R. § 332.3(n) (“NPI”), in possession of NCINO against loss and against unauthorized access, use, modification, disclosure or other misuse. NCINO shall take appropriate actions to avoid unauthorized access. NCINO will notify Subscriber in the event of a breach of NCINO’S security measures involving NPI as soon as is practical, but in any event within 24 hours of NCINO’S discovery of the breach. Upon request by Subscriber, NCINO will provide to Subscriber reasonable information regarding the administrative, technical and physical safeguards utilized by NCINO for protection of NPI.

6.4 ESCROW . If the escrow option is purchased by Subscriber, the source code used to provide Subscription Services will be maintained by NCINO with a recognized escrow service, and a certificate of escrow will be provided to Subscriber. See Attachment A for annual pricing information.

7.	TERMINATION.

7.1 FOR CAUSE. Either NCINO or Subscriber may terminate this Service Agreement for cause and without judicial

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resolution (i) upon 30 days written notice to the other party of a material breach, unless the other party cures such breach before the end of the 30 days, or (ii) if the other party becomes the subject of a petition in bankruptcy, or any other proceeding related to insolvency, receivership, liquidation or assignment for the benefit of creditors. Should NCINO cease operations, (i) Subscriber may continue to access the Subscription Services in effect at that time via the SFDC platform, and (ii) Subscriber will continue to exclusively own all rights, title and interest to Subscriber Data.

7.2 REFUND OR PAYMENT UPON TERMINATION. Upon termination for cause by the Subscriber, NCINO shall refund Subscriber any prepaid fees covering the remainder of the Term of all subscriptions after the effective date of termination. Upon any termination for cause by NCINO, Subscriber shall pay any unpaid fees covering the remainder of the term of all subscriptions after the effective date of termination. Termination does not relieve the Subscriber of the obligation to pay any fees payable to NCINO for the period prior to the effective date of termination.

7.3 EFFECT OF TERMINATION. The following provisions will survive termination of this Service Agreement: (i) any obligation of Subscriber to pay before termination; (ii) Sections 3 - 8 of this Service Agreement; and (iii) any other provision of this Service Agreement that must survive termination to fulfill its essential purpose.

8.	INDEMNIFICATION.

8.1 INDEMNIFICATION BY NCINO. NCINO shall defend Subscriber against any claim, demand, suit, or proceeding made or brought against the Subscriber by a third party alleging that use of the Subscription Services as permitted hereunder infringes or misappropriates the intellectual property rights of a third party (“Claim”) and shall indemnify Subscriber for any damages finally awarded against, and for reasonable attorney’s fees incurred by Subscriber in connection with any such Claim; provided that the Subscriber (a) promptly provides NCINO written notice of the Claim; (b) gives NCINO sole control of the defense and settlement of the Claim, and (c) provides to NCINO all reasonable assistance, at NCINO’s expense.

8.2 INDEMNIFICATION BY SUBSCRIBER. Subscriber shall defend NCINO against any Claim made or brought against NCINO by a third party alleging that the Subscriber Data, or Subscriber’s use of the Subscription Services in violation of the Service Agreement, causes harm or damages, infringes or misappropriates the intellectual property rights of a third party or violates applicable law, and shall indemnify NCINO for any damages finally awarded against, and for reasonable attorney’s fees incurred by NCINO in connection with any such Claim; provided that NCINO (a) promptly provides Subscriber written notice of the Claim; (b) gives Subscriber sole control of the defense and settlement of the Claim, and (c) provides to Subscriber all reasonable assistance, at Subscriber’s expense.

9.	MISCELLANEOUS PROVISIONS.

9.1 INDEPENDENT CONTRACTORS. NCINO and Subscriber are independent contractors. This Service Agreement

does not create a partnership, franchise, joint venture, agency, fiduciary or employment relationship between the parties.

9.2 WAIVER. Neither party will be deemed to have waived any of its rights under this Service Agreement by lapse of time or by any statement or representation other than (i) by an Authorized Representative and (ii) in an explicit written waiver. No waiver of a breach of this Service Agreement will constitute a waiver of any prior or subsequent breach of this Service Agreement.

9.3 SEVERABILITY. In the event that one or more of the provisions of this Service Agreement is found to be illegal or unenforceable under any valid controlling law, this Service Agreement shall not be rendered inoperative but the remaining provisions shall continue in full force and effect. In the event the legality of any provision is brought into question because of a decision by a court of competent jurisdiction, NCINO, by written notice to Subscriber, may revise the provision in question or may delete the provision entirely so as to comply with the decision of said court.

9.4 NOTICES. Except as otherwise specified in this Service Agreement, all notices, permissions and approvals hereunder shall be in writing and shall be deemed to have been given upon: (i) personal delivery, (ii) the third business day after mailing by certified mail, (iii) the business day after sending by confirmed facsimile, (iv) the next day after overnight delivery service or (v), except for notices of termination or an indemnifiable Claim (“ Legal Notices ”), the first business day after sending by email. Notices to NCINO shall be addressed to Pierre Naude, CEO. All notices to Subscriber shall be addressed to the relevant Service administrator designated by the Subscriber in the Subscription Services. Legal Notices to Subscriber may also be addressed to Subscriber’s signatory of this Service Agreement or any person designated by Subscriber in the Subscription Services.

9.5 ASSIGNMENT. Neither party may assign any of its rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of the other party (not to be unreasonably withheld). Notwithstanding the foregoing, either party may assign this Service Agreement in its entirety, without consent of the other party, in connection with a merger, acquisition, corporate reorganization, or sale of all or substantially all of its assets not involving a direct competitor of the other party. A party’s sole remedy for any purported assignment by the other party in breach of this paragraph shall be, at the non-assigning party’s election, termination of this Service Agreement upon written notice to the assigning party. In the event of such a termination, NCINO shall refund Subscriber any prepaid fees covering the remainder of the term of all subscriptions after the effective date of termination. Subject to the foregoing, this Service Agreement shall bind and inure to the benefit of the parties, their respective successors and permitted assigns.

9.6 CHOICE OF LAW AND JURISDICTION. This Service Agreement shall be governed by the laws of the State of North Carolina, U.S.A. The parties consent to the personal and exclusive jurisdiction of the federal (Eastern District of North Carolina) and state courts of Wilmington, North Carolina.

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9.7 ENTIRE AGREEMENT. This Service Agreement, the Data Policy published with the Subscription Services, and, upon execution by both parties , the Attachments, sets forth the entire agreement of the parties and supersedes all prior or contemporaneous writings, negotiations, and discussions with respect to the subject matter hereof. Neither party has relied upon any such prior or contemporaneous communications.

9.8 COUNTERPARTS. This Service Agreement may be executed electronically, by facsimile, and in counterparts, which taken together shall form one legal instrument.

9.9 PRESS RELEASE, INTERVIEW AND REFERENCE.

Within 45 days of the execution of this Agreement, NCINO shall be permitted to issue an appropriate press release. In addition, Subscriber agrees to coordinate and make available appropriate personnel to conduct up to three interviews with the media regarding Subscriber’s plans/implementation of NCINO service/solutions/information technology. This release does not constitute an endorsement, but rather is a statement of facts about the relationship between Subscriber and NCINO. Subscriber will have the right to review the release prior to distribution. Subscriber also agrees to let NCINO list the company as a customer on the NCINO website and other sales materials.


NCINO, LLC:

By:

Pierre Naude, CEO

Date: 2012-11-01

Subscriber:

By:

Name, Title:

Neil Underwood, President and COO

Date: 2012-11-01

Exhibit 21.1

Subsidiaries of Live Oak Bancshares, Inc.

Live Oak Banking Company, Wilmington, North Carolina

(a North Carolina chartered banking corporation)

Government Loan Solutions, Inc.

(a North Carolina corporation)

504 Fund Advisors, LLC

(an Illinois limited liability company)

Independence Aviation, LLC

(a North Carolina limited liability company)

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Live Oak Bancshares, Inc.

We consent to the incorporation by reference in this Registration Statement on Form S-1 of Live Oak Bancshares, Inc. (the “Company”) of our report dated March 6, 2015 (except for the Reclassifications and Corrections described in Note 1, for which the date is May 27, 2015) with respect to the consolidated financial statements of Live Oak Bancshares, Inc., which report appears in the Company’s 2014 Annual Report.

We also consent to the reference to our firm under the caption “Experts” in the Registration Statement.

/s/ Dixon Hughes Goodman LLP

Greenville, North Carolina

June 19, 2015

Exhibit 24.1

P OWER OF A TTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each of Live Oak Bancshares, Inc. and the several undersigned Officers and Directors thereof whose signatures appear below, hereby makes, constitutes and appoints James S. Mahan III and S. Brett Caines, and each of them acting individually, its, his and her true and lawful attorneys with power to act without any other and with full power of substitution, to execute, deliver and file in its, his and her name and on its, his and her behalf, and in each of the undersigned Officer’s and Director’s capacity or capacities as shown below, (a) a Registration Statement of Live Oak Bancshares, Inc. on Form S-1 (or other appropriate form) with respect to the registration under the Securities Act of 1933, as amended, of shares of common stock of Live Oak Bancshares, Inc. to be issued in an initial public offering, and any and all documents in support thereof or supplemental thereto and any and all amendments, including any and all post-effective amendments, to the foregoing (hereinafter called the “Registration Statement”), and (b) such registration statements, petitions, applications, consents to service of process or other instruments, any and all documents in support thereof or supplemental thereto, and any and all amendments or supplements to the foregoing, as may be necessary or advisable to qualify or register the securities covered by said Registration Statement under such securities laws, regulations or requirements as may be applicable; and each of Live Oak Bancshares, Inc. and said Officers and Directors hereby grants to said attorneys, and to each of them, full power and authority to do and perform each and every act and thing whatsoever as said attorneys or attorney may deem necessary or advisable to carry out fully the intent of this power of attorney to the same extent and with the same effect as Live Oak Bancshares, Inc. might or could do, and as each of said Officers and Directors might or could do personally in his or her capacity or capacities as aforesaid, and each of Live Oak Bancshares, Inc. and said Officers and Directors hereby ratifies and confirms all acts and things which said attorneys or attorney might do or cause to be done by virtue of this power of attorney and its, his or her signature as the same may be signed by said attorneys or attorney, or any of them, to any or all of the following (and/or any and all amendments and supplements to any or all thereof): such Registration Statement under the Securities Act of 1933, as amended, and all such registration statements, petitions, applications, consents to service of process and other instruments, and any and all documents in support thereof or supplemental thereto, under such securities laws, regulations and requirements as may be applicable.

IN WITNESS WHEREOF, Live Oak Bancshares, Inc. has caused this power of attorney to be signed on its behalf, and each of the undersigned Officers and Directors in the capacity or capacities noted has hereunto set his hand as of the date indicated below.


LIVE OAK BANCSHARES, INC.
(Registrant)

By:		/s/ James S. Mahan III
		James S. Mahan III, Chairman and Chief Executive Officer

Dated: March 20, 2015


SIGNATURE				CAPACITY

/s/ James S. Mahan III				Chairman and Chief Executive Officer
James S. Mahan III				(principal executive officer)


SIGNATURE				CAPACITY

/s/ S. Brett Caines				Chief Financial Officer
S. Brett Caines				(principal financial officer)

/s/ William H. Cameron				Director
William H. Cameron

/s/ Diane B. Glossman				Director
Diane B. Glossman

/s/ Glen F. Hoffsis				Director
Glen F. Hoffsis

/s/ Howard K. Landis II				Director
Howard K. Landis II

/s/ David G. Lucht				Chief Risk Officer and Director
David G. Lucht

/s/ Miltom E. Petty				Director
Miltom E. Petty

/s/ Jerald L. Pullins				Director
Jerald L. Pullins

/s/ Wes Sutherland				Chief Accounting Officer
Wes Sutherland				(principal accounting officer)

/s/ Neil L. Underwood				President and Director
Neil L. Underwood

/s/ William L. Williams III				Vice Chairman
William L. Williams III