|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 30 Days Past Due & Not Accruing | | 30-89 Days Past Due & Accruing | | 30-89 Days Past Due & Not Accruing | | Greater Than 90 Days Past Due | | Total Not Accruing & Past Due | | Current | | Total Loans and Leases | | 90 Days or More Past Due & Still Accruing |
December 31, 2016 | | | | | | | | | | | | | | | |
Commercial & Industrial | | | | | | | | | | | | | | | |
Agriculture | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,714 |
| | $ | 1,714 |
| | $ | — |
|
Death Care Management | — |
| | — |
| | — |
| | — |
| | — |
| | 9,684 |
| | 9,684 |
| | — |
|
Healthcare | — |
| | 272 |
| | 496 |
| | 5,920 |
| | 6,688 |
| | 30,582 |
| | 37,270 |
| | — |
|
Independent Pharmacies | 42 |
| | 293 |
| | 408 |
| | 2,349 |
| | 3,092 |
| | 80,585 |
| | 83,677 |
| | — |
|
Registered Investment Advisors | — |
| | — |
| | — |
| | — |
| | — |
| | 68,335 |
| | 68,335 |
| | — |
|
Veterinary Industry | 32 |
| | 151 |
| | 646 |
| | 1,441 |
| | 2,270 |
| | 36,660 |
| | 38,930 |
| | — |
|
Other Industries | — |
| | — |
| | — |
| | — |
| | — |
| | 94,836 |
| | 94,836 |
| | — |
|
Total | 74 |
| | 716 |
| | 1,550 |
| | 9,710 |
| | 12,050 |
| | 322,396 |
| | 334,446 |
| | — |
|
Construction & Development | | | | | | | | | | | | | | | |
Agriculture | 231 |
| | 80 |
| | — |
| | — |
| | 311 |
| | 32,061 |
| | 32,372 |
| | — |
|
Death Care Management | — |
| | — |
| | — |
| | — |
| | — |
| | 3,956 |
| | 3,956 |
| | — |
|
Healthcare | — |
| | — |
| | — |
| | — |
| | — |
| | 30,467 |
| | 30,467 |
| | — |
|
Independent Pharmacies | — |
| | — |
| | — |
| | — |
| | — |
| | 2,013 |
| | 2,013 |
| | — |
|
Registered Investment Advisors | — |
| | — |
| | — |
| | — |
| | — |
| | 294 |
| | 294 |
| | — |
|
Veterinary Industry | — |
| | — |
| | — |
| | — |
| | — |
| | 11,514 |
| | 11,514 |
| | — |
|
Other Industries | — |
| | — |
| | — |
| | — |
| | — |
| | 31,715 |
| | 31,715 |
| | — |
|
Total | 231 |
| | 80 |
| | — |
| | — |
| | 311 |
| | 112,020 |
| | 112,331 |
| | — |
|
Commercial Real Estate | | | | | | | | | | | | | | | |
Agriculture | — |
| | — |
| | — |
| | — |
| | — |
| | 5,591 |
| | 5,591 |
| | — |
|
Death Care Management | — |
| | — |
| | 188 |
| | 1,423 |
| | 1,611 |
| | 50,899 |
| | 52,510 |
| | — |
|
Healthcare | — |
| | — |
| | 3,180 |
| | 45 |
| | 3,225 |
| | 111,056 |
| | 114,281 |
| | — |
|
Independent Pharmacies | — |
| | — |
| | — |
| | 529 |
| | 529 |
| | 14,622 |
| | 15,151 |
| | — |
|
Registered Investment Advisors | — |
| | — |
| | — |
| | — |
| | — |
| | 11,462 |
| | 11,462 |
| | — |
|
Veterinary Industry | 898 |
| | 3,981 |
| | 737 |
| | 5,158 |
| | 10,774 |
| | 92,132 |
| | 102,906 |
| | — |
|
Other Industries | — |
| | — |
| | — |
| | — |
| | — |
| | 46,245 |
| | 46,245 |
| | — |
|
Total | 898 |
| | 3,981 |
| | 4,105 |
| | 7,155 |
| | 16,139 |
| | 332,007 |
| | 348,146 |
| | — |
|
Commercial Land | | | | | | | | | | | | | | | |
Agriculture | 58 |
| | 40 |
| | — |
| | — |
| | 98 |
| | 113,471 |
| | 113,569 |
| | — |
|
Total | 58 |
| | 40 |
| | — |
| | — |
| | 98 |
| | 113,471 |
| | 113,569 |
| | — |
|
Total1 | $ | 1,261 |
| | $ | 4,817 |
| | $ | 5,655 |
| | $ | 16,865 |
| | $ | 28,598 |
| | $ | 879,894 |
| | $ | 908,492 |
| | $ | — |
|
| |
1 | Total loans and leases include $40.4 million of U.S. government guaranteed loans as of September 30, 2017, of which $14.3 million is greater than 90 days past due, $5.0 million is 30-89 days past due and $21.1 million is included in current loans and leases as presented above. As of December 31, 2016, total loans and leases include $37.7 million of U.S. government guaranteed loans, of which $13.7 million is greater than 90 days past due, $6.8 million is 30-89 days past due and $17.2 million is included in current loans and leases as presented above. |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Credit Quality Indicators
NonaccrualThe following tables present asset quality indicators by portfolio class and origination year. See Note 3. Loans and Leases
Loans Held for Investment and leases that become 90 days delinquent, orCredit Quality in cases where there is evidencethe Company’s 2022 Form 10-K for additional discussion around the asset quality indicators that the borrower’s abilityCompany uses to make the required payments is impaired, are placed in nonaccrual statusmanage and interest accrual is discontinued. If interest on nonaccrual loans and leases had been accrued in accordance with the original terms, interest income would have increased by approximately $302 thousand and $165 thousand for the three months ended September 30, 2017 and 2016, respectively, and for the nine months ended September 30, 2017 and 2016 interest income would have increased approximately $831 thousand and $451 thousand, respectively. All nonaccrual loans and leases are included in the held for investment portfolio.monitor credit risk.
Nonaccrual loans and leases as of September 30, 2017 and December 31, 2016 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans and Leases Amortized Cost Basis by Origination Year | | | | | | |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total(1) |
June 30, 2023 | | | | | | | | | | | | | | | | | | |
Small Business Banking | | | | | | | | | | | | | | | | | | |
Risk Grades 1 - 4 | | $ | 440,780 | | | $ | 1,453,858 | | | $ | 1,301,691 | | | $ | 734,205 | | | $ | 387,068 | | | $ | 341,376 | | | $ | 68,046 | | | $ | 4,361 | | | $ | 4,731,385 | |
Risk Grade 5 | | 1,573 | | | 41,286 | | | 27,317 | | | 39,763 | | | 36,410 | | | 50,466 | | | 15,666 | | | 1,055 | | | 213,536 | |
Risk Grades 6 - 8 | | — | | | 7,790 | | | 13,165 | | | 14,139 | | | 24,268 | | | 38,225 | | | 1,108 | | | — | | | 98,695 | |
Total | | 442,353 | | | 1,502,934 | | | 1,342,173 | | | 788,107 | | | 447,746 | | | 430,067 | | | 84,820 | | | 5,416 | | | 5,043,616 | |
Specialty Lending | | | | | | | | | | | | | | | | | | |
Risk Grades 1 - 4 | | 352,528 | | | 548,744 | | | 332,847 | | | 112,710 | | | 17,730 | | | 5,930 | | | 160,775 | | | 9,965 | | | 1,541,229 | |
Risk Grade 5 | | — | | | 43,148 | | | 45,208 | | | 16,882 | | | 12,439 | | | 4,042 | | | 23,930 | | | 7,500 | | | 153,149 | |
Risk Grades 6 - 8 | | — | | | — | | | 20,088 | | | 1,328 | | | 5,002 | | | 166 | | | 8,598 | | | — | | | 35,182 | |
Total | | 352,528 | | | 591,892 | | | 398,143 | | | 130,920 | | | 35,171 | | | 10,138 | | | 193,303 | | | 17,465 | | | 1,729,560 | |
Energy & Infrastructure | | | | | | | | | | | | | | | | | | |
Risk Grades 1-4 | | 113,399 | | | 176,727 | | | 152,760 | | | 39,360 | | | 50,716 | | | 28,752 | | | 12,822 | | | — | | | 574,536 | |
Risk Grade 5 | | — | | | 4,024 | | | 2,634 | | | 13,517 | | | 7,104 | | | 10,358 | | | — | | | — | | | 37,637 | |
Risk Grades 6 - 8 | | — | | | — | | | 6,436 | | | 3,572 | | | — | | | 8,416 | | | — | | | — | | | 18,424 | |
Total | | 113,399 | | | 180,751 | | | 161,830 | | | 56,449 | | | 57,820 | | | 47,526 | | | 12,822 | | | — | | | 630,597 | |
Paycheck Protection Program | | | | | | | | | | | | | | | | | | |
Risk Grades 1 - 4 | | — | | | — | | | 4,151 | | | 3,917 | | | — | | | — | | | — | | | — | | | 8,068 | |
Total | | — | | | — | | | 4,151 | | | 3,917 | | | — | | | — | | | — | | | — | | | 8,068 | |
Total | | $ | 908,280 | | | $ | 2,275,577 | | | $ | 1,906,297 | | | $ | 979,393 | | | $ | 540,737 | | | $ | 487,731 | | | $ | 290,945 | | | $ | 22,881 | | | $ | 7,411,841 | |
| | | | | | | | | | | | | | | | | | |
Year-To-Date Gross Charge-offs | | | | | | | | | | | | | | | | | | |
Small Business Banking | | $ | — | | | $ | 1,426 | | | $ | 621 | | | $ | 255 | | | $ | 586 | | | $ | 513 | | | $ | 50 | | | $ | — | | | $ | 3,451 | |
Specialty Lending | | — | | | — | | | 4,315 | | | 514 | | | — | | | — | | | 888 | | | — | | | 5,717 | |
Total | | $ | — | | | $ | 1,426 | | | $ | 4,936 | | | $ | 769 | | | $ | 586 | | | $ | 513 | | | $ | 938 | | | $ | — | | | $ | 9,168 | |
|
| | | | | | | | | | | |
September 30, 2017 | Loan and Lease Balance | | Guaranteed Balance | | Unguaranteed Exposure |
Commercial & Industrial | | | | | |
Healthcare | $ | 6,703 |
| | $ | 5,712 |
| | $ | 991 |
|
Independent Pharmacies | 2,605 |
| | 2,253 |
| | 352 |
|
Registered Investment Advisors | — |
| | — |
| | — |
|
Veterinary Industry | 1,556 |
| | 1,517 |
| | 39 |
|
Total | 10,864 |
| | 9,482 |
| | 1,382 |
|
Commercial Real Estate |
| | | | |
Death Care Management | 1,576 |
| | 1,246 |
| | 330 |
|
Healthcare | 3,548 |
| | 2,749 |
| | 799 |
|
Independent Pharmacies | 1,622 |
| | 1,622 |
| | — |
|
Veterinary Industry | 4,787 |
| | 3,999 |
| | 788 |
|
Total | 11,533 |
| | 9,616 |
| | 1,917 |
|
Commercial Land |
|
| | | | |
Agriculture | 23 |
| | 23 |
| | — |
|
Total | 23 |
| | 23 |
| | — |
|
Total | $ | 22,420 |
| | $ | 19,121 |
| | $ | 3,299 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans and Leases Amortized Cost Basis by Origination Year | | | | | | |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total(1) |
December 31, 2022 | | | | | | | | | | | | | | | | | | |
Small Business Banking | | | | | | | | | | | | | | | | | | |
Risk Grades 1 - 4 | | $ | 1,427,182 | | | $ | 1,400,726 | | | $ | 795,647 | | | $ | 426,401 | | | $ | 217,893 | | | $ | 204,933 | | | $ | 65,455 | | | $ | 1,738 | | | $ | 4,539,975 | |
Risk Grade 5 | | 15,942 | | | 17,745 | | | 40,202 | | | 45,712 | | | 26,124 | | | 27,212 | | | 13,210 | | | 204 | | | 186,351 | |
Risk Grades 6 - 8 | | 1,806 | | | 4,277 | | | 17,845 | | | 23,470 | | | 14,094 | | | 27,215 | | | 1,638 | | | 522 | | | 90,867 | |
Total | | 1,444,930 | | | 1,422,748 | | | 853,694 | | | 495,583 | | | 258,111 | | | 259,360 | | | 80,303 | | | 2,464 | | | 4,817,193 | |
Specialty Lending | | | | | | | | | | | | | | | | | | |
Risk Grades 1 - 4 | | 635,079 | | | 355,785 | | | 144,545 | | | 25,849 | | | 6,574 | | | 788 | | | 153,062 | | | 31,504 | | | 1,353,186 | |
Risk Grade 5 | | 7,341 | | | 33,272 | | | 12,329 | | | 10,201 | | | 4,399 | | | — | | | 6,619 | | | 248 | | | 74,409 | |
Risk Grades 6 - 8 | | — | | | 11,433 | | | 416 | | | 5,577 | | | 166 | | | — | | | 1,343 | | | 237 | | | 19,172 | |
Total | | 642,420 | | | 400,490 | | | 157,290 | | | 41,627 | | | 11,139 | | | 788 | | | 161,024 | | | 31,989 | | | 1,446,767 | |
Energy & Infrastructure | | | | | | | | | | | | | | | | | | |
Risk Grades 1 - 4 | | 199,338 | | | 176,855 | | | 39,600 | | | 51,190 | | | 23,374 | | | 19,694 | | | 12,751 | | | 351 | | | 523,153 | |
Risk Grade 5 | | 4,024 | | | 4,409 | | | 500 | | | 6,976 | | | 4,706 | | | 5,142 | | | — | | | — | | | 25,757 | |
Risk Grades 6 - 8 | | — | | | 3,082 | | | 16,589 | | | — | | | 8,479 | | | — | | | — | | | — | | | 28,150 | |
Total | | 203,362 | | | 184,346 | | | 56,689 | | | 58,166 | | | 36,559 | | | 24,836 | | | 12,751 | | | 351 | | | 577,060 | |
Paycheck Protection Program | | | | | | | | | | | | | | | | | | |
Risk Grades 1 - 4 | | — | | | 7,421 | | | 5,713 | | | — | | | — | | | — | | | — | | | — | | | 13,134 | |
Total | | — | | | 7,421 | | | 5,713 | | | — | | | — | | | — | | | — | | | — | | | 13,134 | |
Total | | $ | 2,290,712 | | | $ | 2,015,005 | | | $ | 1,073,386 | | | $ | 595,376 | | | $ | 305,809 | | | $ | 284,984 | | | $ | 254,078 | | | $ | 34,804 | | | $ | 6,854,154 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
(1) | Excludes $441.8 million and $494.5 million of loans accounted for under the fair value option as of June 30, 2023 and December 31, 2022, respectively. |
The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2023 | | Loan and Lease Balance(1) | | Guaranteed Balance | | Unguaranteed Balance | | % Guaranteed |
Risk Grades 1 - 4 | | $ | 6,855,218 | | | $ | 2,487,302 | | | $ | 4,367,916 | | | 36.3 | % |
Risk Grade 5 | | 404,322 | | | 133,822 | | | 270,500 | | | 33.1 | |
Risk Grades 6 - 8 | | 152,301 | | | 93,313 | | | 58,988 | | | 61.3 | |
Total | | $ | 7,411,841 | | | $ | 2,714,437 | | | $ | 4,697,404 | | | 36.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Loan and Lease Balance(1) | | Guaranteed Balance | | Unguaranteed Balance | | % Guaranteed |
Risk Grades 1 - 4 | | $ | 6,429,448 | | | $ | 2,508,229 | | | $ | 3,921,219 | | | 39.0 | % |
Risk Grade 5 | | 286,517 | | | 115,573 | | | 170,944 | | | 40.3 | |
Risk Grades 6 - 8 | | 138,189 | | | 80,193 | | | 57,996 | | | 58.0 | |
Total | | $ | 6,854,154 | | | $ | 2,703,995 | | | $ | 4,150,159 | | | 39.5 | % |
| | | | | |
(1) | Excludes $441.8 million and $494.5 million of loans accounted for under the fair value option as of June 30, 2023 and December 31, 2022, respectively. |
|
| | | | | | | | | | | |
December 31, 2016 | Loan and Lease Balance | | Guaranteed Balance | | Unguaranteed Exposure |
Commercial & Industrial | | | | | |
Healthcare | $ | 6,416 |
| | $ | 5,152 |
| | $ | 1,264 |
|
Independent Pharmacies | 2,799 |
| | 2,204 |
| | 595 |
|
Veterinary Industry | 2,119 |
| | 2,079 |
| | 40 |
|
Total | 11,334 |
| | 9,435 |
| | 1,899 |
|
Construction & Development | | | | | |
Agriculture | 231 |
| | 173 |
| | 58 |
|
Total | 231 |
| | 173 |
| | 58 |
|
Commercial Real Estate | | | | | |
Death Care Management | 1,611 |
| | 1,263 |
| | 348 |
|
Healthcare | 3,225 |
| | 2,731 |
| | 494 |
|
Independent Pharmacies | 529 |
| | — |
| | 529 |
|
Veterinary Industry | 6,793 |
| | 5,395 |
| | 1,398 |
|
Total | 12,158 |
| | 9,389 |
| | 2,769 |
|
Commercial Land | | | | | |
Agriculture | 58 |
| | — |
| | 58 |
|
Total | 58 |
| | — |
| | 58 |
|
Total | $ | 23,781 |
| | $ | 18,997 |
| | $ | 4,784 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Nonaccrual Loans and Leases
Allowance for LoanAs of June 30, 2023 and Lease Loss Methodology
The methodologyDecember 31, 2022 there were no loans greater than 90 days past due and the estimation process for calculating the Allowance for Loan and Lease Losses (“ALLL”) is described below:
Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in GAAP. The Company’s methodology for determining the ALLL is basedstill accruing. There was no interest income recognized on the requirements of GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan and lease component, which addresses specific reserves for impaired loans and leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impairednonaccrual loans and leases are mutually exclusive; any loan or lease thatduring the three and six months ended June 30, 2023 and 2022. Accrued interest receivable on loans totaled $51.8 million and $46.5 million at June 30, 2023 and December 31, 2022, respectively, and is impaired is excluded from its homogenous pool for purposes of that pool’s reserve calculation, regardless ofincluded in other assets in the level of impairment.accompanying Unaudited Condensed Consolidated Balance Sheets.
The ALLL policy for pooledNonaccrual loans and leases is governed in accordance with banking regulatory guidanceheld for homogenous poolsinvestment as of non-impairedJune 30, 2023 and December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2023 | | Loan and Lease Balance(1) | | Guaranteed Balance | | Unguaranteed Balance | | Unguaranteed Exposure with No ACL |
Commercial & Industrial | | | | | | | | |
Small Business Banking | | $ | 31,105 | | | $ | 27,185 | | | $ | 3,920 | | | $ | 407 | |
Specialty Lending | | 15,824 | | | 4,619 | | | 11,205 | | | — | |
Energy & Infrastructure | | 6,936 | | | 2,794 | | | 4,142 | | | 2,629 | |
Total | | 53,865 | | | 34,598 | | | 19,267 | | | 3,036 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Commercial Real Estate | | | | | | | | |
Small Business Banking | | 35,410 | | | 23,529 | | | 11,881 | | | 5,651 | |
Specialty Lending | | 12,232 | | | — | | | 12,232 | | | — | |
Energy & Infrastructure | | 3,072 | | | 2,799 | | | 273 | | | — | |
Total | | 50,714 | | | 26,328 | | | 24,386 | | | 5,651 | |
Commercial Land | | | | | | | | |
Small Business Banking | | 6,642 | | | 5,396 | | | 1,246 | | | 196 | |
Total | | 6,642 | | | 5,396 | | | 1,246 | | | 196 | |
Total | | $ | 111,221 | | | $ | 66,322 | | | $ | 44,899 | | | $ | 8,883 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Loan and Lease Balance(1) | | Guaranteed Balance | | Unguaranteed Balance | | Unguaranteed Exposure with No ACL |
Commercial & Industrial | | | | | | | | |
Small Business Banking | | $ | 22,321 | | | $ | 19,302 | | | $ | 3,019 | | | $ | 407 | |
Specialty Lending | | 3,647 | | | 384 | | | 3,263 | | | — | |
Energy & Infrastructure | | 3,082 | | | 2,794 | | | 288 | | | 288 | |
Total | | 29,050 | | | 22,480 | | | 6,570 | | | 695 | |
Commercial Real Estate | | | | | | | | |
Small Business Banking | | 34,520 | | | 23,830 | | | 10,690 | | | 3,611 | |
Energy & Infrastructure | | 3,072 | | | 2,799 | | | 273 | | | — | |
Total | | 37,592 | | | 26,629 | | | 10,963 | | | 3,611 | |
Commercial Land | | | | | | | | |
Small Business Banking | | 6,750 | | | 5,499 | | | 1,251 | | | 196 | |
Total | | 6,750 | | | 5,499 | | | 1,251 | | | 196 | |
Total | | $ | 73,392 | | | $ | 54,608 | | | $ | 18,784 | | | $ | 4,502 | |
(1)Excludes nonaccrual loans and leases that have similar risk characteristics. The Company follows a consistent and structured approachaccounted for assessingunder the need for reserves within each individual loan and lease pool.
Loans and leases 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 or lease agreement. The Company has determined that loans and leases that meet the criteria defined below must be reviewed quarterly to determine if they are impaired.
All commercial loans and leases classified substandard or worse.
Any other delinquent loan or lease that is in a nonaccrual status, or any loan or lease that is delinquent more than 89 days and still accruing interest.
Any loan or lease which has been modified such that it meets the definition of a Troubled Debt Restructuring (TDR).
The Company’s policy for impaired loan and lease accounting subjects all loans and leases to impairment recognition; however, loan and lease relationships with unguaranteed credit exposure of less than $100,000 are generally not evaluated on an individual basis for impairment and instead are evaluated collectively using a methodology based on historical specific reserves on similar sized loans and leases. Any loan or lease not meeting the above criteria and determined to be impaired is subjected to an impairment analysis, which is a calculation of the probable loss on the loan or lease. This portion is the loan's or lease’s “impairment,” and is established as a specific reserve against the loan or lease, or charged against the ALLL.
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 ALLL, 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 a confirmed loss, then the confirmed loss portion should be charged off against the ALLL and the individual specific reserve reduced by a corresponding amount.
For impaired loans or leases, the reserve amount is calculated on a loan or lease-specific basis. The Company utilizes two methods of analyzing impaired loans and leases not guaranteed by the SBA:
Thefair value option. See Note 9. Fair Market Value of Collateral method 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 deficit of the estimated collateral value compared to the loan or lease balance.Financial Instruments for additional information.
The Present Value of Future Cash Flows method takes into account the amount and timing of cash flows and the effective interest rate used to discount the cash flows.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
When a loan or lease is placed on nonaccrual status, any accrued interest is reversed from loan interest income. The following table summarizes the amount of accrued interest reversed during the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Commercial & Industrial | | $ | 963 | | | $ | 141 | | | $ | 1,342 | | | $ | 310 | |
Commercial Real Estate | | 294 | | | 4 | | | 467 | | | 182 | |
Commercial Land | | — | | | — | | | — | | | 105 | |
| | | | | | | | |
Total | | $ | 1,257 | | | $ | 145 | | | $ | 1,809 | | | $ | 597 | |
The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of June 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Collateral Dependent Loans | | Unguaranteed Portion |
June 30, 2023 | | Real Estate | | Business Assets | | Other | | Real Estate | | Business Assets | | Other | | Allowance for Credit Losses |
Commercial & Industrial | | | | | | | | | | | | | | |
Small Business Banking | | $ | 5,549 | | | $ | — | | | $ | — | | | $ | 1,085 | | | $ | — | | | $ | — | | | $ | 490 | |
Specialty Lending | | — | | | 7,964 | | | — | | | — | | | 7,964 | | | — | | | 5,858 | |
Energy & Infrastructure | | 3,022 | | | — | | | — | | | 227 | | | — | | | — | | | — | |
Total | | 8,571 | | | 7,964 | | | — | | | 1,312 | | | 7,964 | | | — | | | 6,348 | |
Commercial Real Estate | | | | | | | | | | | | | | |
Small Business Banking | | 16,963 | | | — | | | — | | | 8,093 | | | — | | | — | | | 420 | |
Total | | 16,963 | | | — | | | — | | | 8,093 | | | — | | | — | | | 420 | |
Commercial Land | | | | | | | | | | | | | | |
Small Business Banking | | 4,917 | | | — | | | — | | | 999 | | | — | | | — | | | 16 | |
Total | | 4,917 | | | — | | | — | | | 999 | | | — | | | — | | | 16 | |
Total | | $ | 30,451 | | | $ | 7,964 | | | $ | — | | | $ | 10,404 | | | $ | 7,964 | | | $ | — | | | $ | 6,784 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Collateral Dependent Loans | | Unguaranteed Portion |
December 31, 2022 | | Real Estate | | Business Assets | | Other | | Real Estate | | Business Assets | | Other | | Allowance for Credit Losses |
Commercial & Industrial | | | | | | | | | | | | | | |
Small Business Banking | | $ | 2,730 | | | $ | — | | | $ | — | | | $ | 414 | | | $ | — | | | $ | — | | | $ | — | |
Specialty Lending | | — | | | 371 | | | — | | | — | | | 371 | | | — | | | 291 | |
Energy & Infrastructure | | 16,378 | | | — | | | — | | | 13,583 | | | — | | | — | | | — | |
Total | | 19,108 | | | 371 | | | — | | | 13,997 | | | 371 | | | — | | | 291 | |
Commercial Real Estate | | | | | | | | | | | | | | |
Small Business Banking | | 15,286 | | | — | | | — | | | 6,440 | | | — | | | — | | | 152 | |
Total | | 15,286 | | | — | | | — | | | 6,440 | | | — | | | — | | | 152 | |
Commercial Land | | | | | | | | | | | | | | |
Small Business Banking | | 1,743 | | | — | | | — | | | 202 | | | — | | | — | | | — | |
Total | | 1,743 | | | — | | | — | | | 202 | | | — | | | — | | | — | |
Total | | $ | 36,137 | | | $ | 371 | | | $ | — | | | $ | 20,639 | | | $ | 371 | | | $ | — | | | $ | 443 | |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Allowance for Credit Losses - Loans and Leases
See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 2022 Form 10-K for a description of the methodologies used to estimate the ACL.
The following table details activity in the allowance for loan and lease lossesACL by portfolio segment allowance for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended | | Commercial & Industrial | | Construction & Development | | Commercial Real Estate | | Commercial Land | | Total |
June 30, 2023 | | | | | | | | | | |
Beginning Balance | | $ | 72,058 | | | $ | 6,954 | | | $ | 25,062 | | | $ | 4,168 | | | $ | 108,242 | |
Charge offs | | (2,198) | | | — | | | (278) | | | — | | | (2,476) | |
Recoveries | | 558 | | | — | | | 764 | | | — | | | 1,322 | |
Provision | | 8,989 | | | (526) | | | 4,360 | | | 205 | | | 13,028 | |
Ending Balance | | $ | 79,407 | | | $ | 6,428 | | | $ | 29,908 | | | $ | 4,373 | | | $ | 120,116 | |
June 30, 2022 | | | | | | | | | | |
Beginning Balance | | $ | 34,162 | | | $ | 4,102 | | | $ | 21,614 | | | $ | 3,180 | | | $ | 63,058 | |
Charge offs | | (1,812) | | | — | | | (433) | | | (318) | | | (2,563) | |
Recoveries | | 35 | | | — | | | 66 | | | — | | | 101 | |
Provision | | 8,793 | | | (598) | | | (3,407) | | | 479 | | | 5,267 | |
Ending Balance | | $ | 41,178 | | | $ | 3,504 | | | $ | 17,840 | | | $ | 3,341 | | | $ | 65,863 | |
| | Three months ended | Construction & Development | | Commercial Real Estate | | Commercial & Industrial | | Commercial Land | | Total | |
September 30, 2017 | | | | | | | | | | |
Six Months Ended | | Six Months Ended | | Commercial & Industrial | | Construction & Development | | Commercial Real Estate | | Commercial Land | | Total |
June 30, 2023 | | June 30, 2023 | | | | | | | | | | |
Beginning Balance | | Beginning Balance | | $ | 64,995 | | | $ | 5,101 | | | $ | 22,901 | | | $ | 3,569 | | | $ | 96,566 | |
Adoption of ASU 2022-02 | | Adoption of ASU 2022-02 | | (25) | | | (166) | | | (83) | | | (402) | | | (676) | |
Charge offs | | Charge offs | | (8,476) | | | — | | | (692) | | | — | | | (9,168) | |
Recoveries | | Recoveries | | 581 | | | — | | | 764 | | | — | | | 1,345 | |
Provision | | Provision | | 22,332 | | | 1,493 | | | 7,018 | | | 1,206 | | | 32,049 | |
Ending Balance | | Ending Balance | | $ | 79,407 | | | $ | 6,428 | | | $ | 29,908 | | | $ | 4,373 | | | $ | 120,116 | |
June 30, 2022 | | June 30, 2022 | | | | | | | | | | |
Beginning Balance | $ | 1,603 |
| | $ | 7,494 |
| | $ | 8,351 |
| | $ | 2,112 |
| | $ | 19,560 |
| Beginning Balance | | $ | 37,770 | | | $ | 3,435 | | | $ | 19,068 | | | $ | 3,311 | | | $ | 63,584 | |
Charge offs | — |
| | (665 | ) | | (343 | ) | | — |
| | (1,008 | ) | Charge offs | | (4,635) | | | — | | | (433) | | | (652) | | | (5,720) | |
Recoveries | — |
| | 4 |
| | 39 |
| | 6 |
| | 49 |
| Recoveries | | 180 | | | — | | | 716 | | | — | | | 896 | |
Provision | 36 |
| | 1,565 |
| | 827 |
| | (2 | ) | | 2,426 |
| Provision | | 7,863 | | | 69 | | | (1,511) | | | 682 | | | 7,103 | |
Ending Balance | $ | 1,639 |
| | $ | 8,398 |
| | $ | 8,874 |
| | $ | 2,116 |
| | $ | 21,027 |
| Ending Balance | | $ | 41,178 | | | $ | 3,504 | | | $ | 17,840 | | | $ | 3,341 | | | $ | 65,863 | |
September 30, 2016 | | | | | | | | | | |
Beginning Balance | $ | 1,208 |
| | $ | 4,079 |
| | $ | 5,601 |
| | $ | 1,421 |
| | $ | 12,309 |
| |
Charge offs | — |
| | — |
| | (939 | ) | | — |
| | (939 | ) | |
Recoveries | — |
| | 1 |
| | 1 |
| | — |
| | 2 |
| |
Provision | 225 |
| | 261 |
| | 2,907 |
| | 413 |
| | 3,806 |
| |
Ending Balance | $ | 1,433 |
| | $ | 4,341 |
| | $ | 7,570 |
| | $ | 1,834 |
| | $ | 15,178 |
| |
During the three and six months ended June 30, 2023, the ACL increased as a result of continued loan growth, combined with portfolio trends and changes in the macroeconomic outlook. Additionally, during the first quarter of 2023, certain assumptions were refined, drawing more heavily on internal data, in the calculations of PD, LGD, and prepayment rates. These refinements increased the ACL by $1.5 million during the six months ended June 30, 2023. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.
During the three and six month periods ended June 30, 2022, the ACL increased primarily as a result of the charge-offs that contributed to increased loss given default rates. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.
|
| | | | | | | | | | | | | | | | | | | |
Nine months ended | Construction & Development | | Commercial Real Estate | | Commercial & Industrial | | Commercial Land | | Total |
September 30, 2017 | | | | | | | | | |
Beginning Balance | $ | 1,693 |
| | $ | 5,897 |
| | $ | 8,413 |
| | $ | 2,206 |
| | $ | 18,209 |
|
Charge offs | — |
| | (952 | ) | | (1,754 | ) | | (35 | ) | | (2,741 | ) |
Recoveries | — |
| | 17 |
| | 55 |
| | 6 |
| | 78 |
|
Provision | (54 | ) | | 3,436 |
| | 2,160 |
| | (61 | ) | | 5,481 |
|
Ending Balance | $ | 1,639 |
| | $ | 8,398 |
| | $ | 8,874 |
| | $ | 2,116 |
| | $ | 21,027 |
|
September 30, 2016 | | | | | | | | | |
Beginning Balance | $ | 1,064 |
| | $ | 2,486 |
| | $ | 2,766 |
| | $ | 1,099 |
| | $ | 7,415 |
|
Charge offs | — |
| | (7 | ) | | (1,307 | ) | | (63 | ) | | (1,377 | ) |
Recoveries | — |
| | 4 |
| | 444 |
| | — |
| | 448 |
|
Provision | 369 |
| | 1,858 |
| | 5,667 |
| | 798 |
| | 8,692 |
|
Ending Balance | $ | 1,433 |
| | $ | 4,341 |
| | $ | 7,570 |
| | $ | 1,834 |
| | $ | 15,178 |
|
The following tables detail the recorded allowance for loan and lease losses and the investment in loans and leases related to each portfolio segment, disaggregated on the basis of impairment evaluation methodology:
|
| | | | | | | | | | | | | | | | | | | |
September 30, 2017 | Construction & Development | | Commercial Real Estate | | Commercial & Industrial | | Commercial Land | | Total |
Allowance for Loan and Lease Losses: | | | | | | | | | |
Loans and leases individually evaluated for impairment | $ | 53 |
| | $ | 1,610 |
| | $ | 1,290 |
| | $ | — |
| | $ | 2,953 |
|
Loans and leases collectively evaluated for impairment2 | 1,586 |
| | 6,788 |
| | 7,584 |
| | 2,116 |
| | 18,074 |
|
Total allowance for loan and lease losses | $ | 1,639 |
| | $ | 8,398 |
| | $ | 8,874 |
| | $ | 2,116 |
| | $ | 21,027 |
|
Loans and leases receivable1: | | | | | | | | | |
Loans and leases individually evaluated for impairment | $ | 1,151 |
| | $ | 16,231 |
| | $ | 7,321 |
| | $ | — |
| | $ | 24,703 |
|
Loans and leases collectively evaluated for impairment2 | 145,385 |
| | 429,755 |
| | 425,029 |
| | 146,814 |
| | 1,146,983 |
|
Total loans and leases receivable | $ | 146,536 |
| | $ | 445,986 |
| | $ | 432,350 |
| | $ | 146,814 |
| | $ | 1,171,686 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Loan Modifications for Borrowers Experiencing Financial Difficulty
The Company may agree to modify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications may result in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof. The Company typically does not offer principal forgiveness. |
| | | | | | | | | | | | | | | | | | | |
December 31, 2016 | Construction & Development | | Commercial Real Estate | | Commercial & Industrial | | Commercial Land | | Total |
Allowance for Loan and Lease Losses: | | | | | | | | | |
Loans and leases individually evaluated for impairment | $ | — |
| | $ | 1,496 |
| | $ | 1,458 |
| | $ | — |
| | $ | 2,954 |
|
Loans and leases collectively evaluated for impairment2 | 1,693 |
| | 4,401 |
| | 6,955 |
| | 2,206 |
| | 15,255 |
|
Total allowance for loan and lease losses | $ | 1,693 |
| | $ | 5,897 |
| | $ | 8,413 |
| | $ | 2,206 |
| | $ | 18,209 |
|
Loans and leases receivable1: | | | | | | | | | |
Loans and leases individually evaluated for impairment | $ | — |
| | $ | 16,359 |
| | $ | 6,884 |
| | $ | — |
| | $ | 23,243 |
|
Loans and leases collectively evaluated for impairment2 | 112,331 |
| | 331,787 |
| | 327,562 |
| | 113,569 |
| | 885,249 |
|
Total loans and leases receivable | $ | 112,331 |
| | $ | 348,146 |
| | $ | 334,446 |
| | $ | 113,569 |
| | $ | 908,492 |
|
The following tables summarize the amortized cost basis of loans that were modified during the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2023 | | Other-Than-Insignificant Payment Delay | | Term Extension | | Interest Rate Reduction | | Combination - Term Extension & Payment Delay | | % of Total Class of Financing Receivable |
Small Business Banking | | $ | — | | | $ | — | | | $ | — | | | $ | 361 | | | 0.01 | % |
Specialty Lending | | — | | | 4,427 | | | — | | | — | | | 0.26 | |
| | | | | | | | | | |
Total | | $ | — | | | $ | 4,427 | | | $ | — | | | $ | 361 | | | 0.27 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2023 | | Other-Than-Insignificant Payment Delay | | Term Extension | | Interest Rate Reduction | | Combination - Term Extension & Payment Delay | | % of Total Class of Financing Receivable |
Small Business Banking | | $ | — | | | $ | — | | | $ | 3,436 | | | $ | 361 | | | 0.08 | % |
Specialty Lending | | — | | | 244 | | | — | | | 4,183 | | | 0.26 | |
Energy & Infrastructure | | — | | | 13,517 | | | — | | | — | | | 2.14 | |
Total | | $ | — | | | $ | 13,761 | | | $ | 3,436 | | | $ | 4,544 | | | 2.48 | % |
As of June 30, 2023, the Company had commitments to lend additional funds to these borrowers totaling $5.4 million.
The following table presents an aging analysis of loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through June 30, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
1 | Loans and leases receivable includes $40.4 million of U.S. government guaranteed loans as of September 30, 2017, of which $24.7 million are impaired. As of December 31, 2016, loans and leases receivable includes $37.7 million of U.S. government guaranteed loans, of which $22.1 million are considered impaired. | Current | | 30-89 Days Past Due | | 90 Days or More Past Due | | Total Past Due |
Small Business Banking | | $ | 3,797 | | | $ | — | | | $ | — | | | $ | — | |
Specialty Lending | | 4,427 | | | — | | | — | | | — | |
Energy & Infrastructure | | 13,517 | | | — | | | — | | | — | |
Total | | $ | 21,741 | | | $ | — | | | $ | — | | | $ | — | |
The following tables summarize the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the periods presented.
| | | | | | | | | | | |
2 | Included in loans and leases collectively evaluated for impairment are impaired loans and leases with individual unguaranteed exposure of less than $100 thousand. As of SeptemberThree Months Ended June 30, 2017, these balances totaled $13.4 million, of which $12 million are guaranteed by the U.S. government and $1.4 million are unguaranteed. As of December 31, 2016, these balances totaled $12.3 million, of which $10.0 million are guaranteed by the U.S. government and $2.3 million are unguaranteed.The allowance for loan and lease losses associated with these loans and leases totaled $417 thousand and $438 thousand as of September 30, 2017 and December 31, 2016, respectively. 2023 |
| Weighted Average Interest Rate Reduction | | Weighted Average Term Extension (in Months) |
Small Business Banking | — | % | | 161 |
Specialty Lending | — | | | 72 |
| | | |
| | | |
| | | | | | | | | | | |
| Six Months Ended June 30, 2023 |
| Weighted Average Interest Rate Reduction | | Weighted Average Term Extension (in Months) |
Small Business Banking | 1.45 | % | | 161 |
Specialty Lending | — | | | 72 |
Energy & Infrastructure | — | | | 12 |
| | | |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
There were no loans that were modified on or after January 1, 2023, the date the Company adopted ASU 2022-02, through June 30, 2023 that subsequently defaulted during the periods presented.
Loans
The Company’s ACL is estimated using lifetime historical loan performance adjusted to reflect current conditions and leases classified as impaired asreasonable and supportable forecasts. Upon determination that a modified loan, or portion of a modified loan, has subsequently been deemed uncollectible, the dates presented are summarizeduncollectible portion is written off. The amortized cost basis is reduced by the uncollectible amount and the ACL is adjusted by the same amount. As a result, the impact of loss mitigation strategies is captured in the estimates of PD and LGD.
Troubled Debt Restructurings
The following tables.tables present the types of loans modified as troubled debt restructurings (“TDRs”):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Interest Only | | Payment Deferral | | Extend Amortization | | Other | | Total TDRs(1) |
| Number of Loans | | Recorded investment at period end | | Number of Loans | | Recorded investment at period end | | Number of Loans | | Recorded investment at period end | | Number of Loans | | Recorded investment at period end | | Number of Loans | | Recorded investment at period end |
Commercial & Industrial | | | | | | | | | | | | | | | | | | | |
Specialty Lending | — | | $ | — | | | 1 | | $ | 734 | | | — | | $ | — | | | — | | $ | — | | | 1 | | $ | 734 | |
Total | — | | — | | | 1 | | 734 | | | — | | — | | | — | | — | | | 1 | | 734 | |
Total | — | | $ | — | | | 1 | | $ | 734 | | | — | | $ | — | | | — | | $ | — | | | 1 | | $ | 734 | |
(1)Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Interest Only | | Payment Deferral | | Extend Amortization | | Other(1) | | Total TDRs(2) |
| Number of Loans | | Recorded investment at period end | | Number of Loans | | Recorded investment at period end | | Number of Loans | | Recorded investment at period end | | Number of Loans | | Recorded investment at period end | | Number of Loans | | Recorded investment at period end |
Commercial & Industrial | | | | | | | | | | | | | | | | | | | |
Small Business Banking | — | | $ | — | | | 3 | | $ | 3,119 | | | 2 | | $ | 1,528 | | | 1 | | $ | 527 | | | 6 | | $ | 5,174 | |
Specialty Lending | — | | — | | | 1 | | 734 | | | — | | — | | | — | | — | | | 1 | | 734 | |
Total | — | | — | | | 4 | | 3,853 | | | 2 | | 1,528 | | | 1 | | 527 | | | 7 | | 5,908 | |
Commercial Real Estate | | | | | | | | | | | | | | | | | | | |
Small Business Banking | — | | — | | | — | | — | | | 1 | | 4,847 | | | — | | — | | | 1 | | 4,847 | |
Total | — | | — | | | — | | — | | | 1 | | 4,847 | | | — | | — | | | 1 | | 4,847 | |
Total | — | | $ | — | | | 4 | | $ | 3,853 | | | 3 | | $ | 6,375 | | | 1 | | $ | 527 | | | 8 | | $ | 10,755 | |
(1)Includes one small business banking loan with extend amortization and a rate concession TDR.
(2)Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.
|
| | | | | | | | | | | |
September 30, 2017 | Recorded Investment | | Guaranteed Balance | | Unguaranteed Exposure |
Commercial & Industrial | | | | | |
Death Care Management | $ | 8 |
| | $ | — |
| | $ | 8 |
|
Healthcare | 7,384 |
| | 5,712 |
| | 1,672 |
|
Independent Pharmacies | 4,282 |
| | 2,514 |
| | 1,768 |
|
Registered Investment Advisors | 743 |
| | — |
| | 743 |
|
Veterinary Industry | 2,407 |
| | 1,605 |
| | 802 |
|
Total | 14,824 |
| | 9,831 |
| | 4,993 |
|
Construction & Development | | | | | |
Healthcare | 1,151 |
| | 880 |
| | 271 |
|
Total | 1,151 |
| | 880 |
| | 271 |
|
Commercial Real Estate | | | | | |
Death Care Management | 2,486 |
| | 1,246 |
| | 1,240 |
|
Healthcare | 4,334 |
| | 2,999 |
| | 1,335 |
|
Independent Pharmacies | 1,622 |
| | 1,622 |
| | — |
|
Veterinary Industry | 13,700 |
| | 8,051 |
| | 5,649 |
|
Total | 22,142 |
| | 13,918 |
| | 8,224 |
|
Commercial Land | | | | | |
Agriculture | 23 |
| | 23 |
| | — |
|
Total | 23 |
| | 23 |
| | — |
|
Total | $ | 38,140 |
| | $ | 24,652 |
| | $ | 13,488 |
|
|
| | | | | | | | | | | |
December 31, 2016 | Recorded Investment | | Guaranteed Balance | | Unguaranteed Exposure |
Commercial & Industrial | | | | | |
Death Care Management | $ | 111 |
| | $ | — |
| | $ | 111 |
|
Healthcare | 7,923 |
| | 5,453 |
| | 2,470 |
|
Independent Pharmacies | 3,514 |
| | 2,495 |
| | 1,019 |
|
Registered Investment Advisors | 796 |
| | — |
| | 796 |
|
Veterinary Industry | 2,882 |
| | 2,199 |
| | 683 |
|
Total | 15,226 |
| | 10,147 |
| | 5,079 |
|
Construction & Development | | | | | |
Agriculture | 300 |
| | 233 |
| | 67 |
|
Total | 300 |
| | 233 |
| | 67 |
|
Commercial Real Estate | | | | | |
Death Care Management | 1,768 |
| | 1,264 |
| | 504 |
|
Healthcare | 4,044 |
| | 2,985 |
| | 1,059 |
|
Independent Pharmacies | 528 |
| | — |
| | 528 |
|
Veterinary Industry | 13,561 |
| | 7,518 |
| | 6,043 |
|
Total | 19,901 |
| | 11,767 |
| | 8,134 |
|
Commercial Land | | | | | |
Agriculture | 91 |
| | — |
| | 91 |
|
Total | 91 |
| | — |
| | 91 |
|
Total | $ | 35,518 |
| | $ | 22,147 |
| | $ | 13,371 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table presents evaluated balances of loans and leases classified as impaired at the dates presented that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest and net deferred loan and lease fees or costs.
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| Recorded Investment | | | | |
| With a Recorded Allowance | | With No Recorded Allowance | | Total | | Unpaid Principal Balance | | Related Allowance Recorded |
Commercial & Industrial | | | | | | | | | |
Death Care Management | $ | — |
| | $ | 8 |
| | $ | 8 |
| | $ | 7 |
| | $ | — |
|
Healthcare | 6,675 |
| | 709 |
| | 7,384 |
| | 8,034 |
| | 681 |
|
Independent Pharmacies | 2,622 |
| | 1,660 |
| | 4,282 |
| | 4,697 |
| | 76 |
|
Registered Investment Advisors | 668 |
| | 75 |
| | 743 |
| | 735 |
| | 521 |
|
Veterinary Industry | 2,033 |
| | 374 |
| | 2,407 |
| | 2,800 |
| | 173 |
|
Total | 11,998 |
| | 2,826 |
| | 14,824 |
| | 16,273 |
| | 1,451 |
|
Construction & Development | | | | | | | | | |
Healthcare | 1,151 |
| | — |
| | 1,151 |
| | 1,173 |
| | 53 |
|
Total | 1,151 |
| | — |
| | 1,151 |
| | 1,173 |
| | 53 |
|
Commercial Real Estate | | | | | | | | | |
Death Care Management | 1,867 |
| | 619 |
| | 2,486 |
| | 2,625 |
| | 187 |
|
Healthcare | 3,759 |
| | 575 |
| | 4,334 |
| | 4,352 |
| | 261 |
|
Independent Pharmacies | 1,622 |
| | — |
| | 1,622 |
| | 2,163 |
| | 9 |
|
Veterinary Industry | 11,506 |
| | 2,194 |
| | 13,700 |
| | 14,787 |
| | 1,408 |
|
Total | 18,754 |
| | 3,388 |
| | 22,142 |
| | 23,927 |
| | 1,865 |
|
Commercial Land | | | | | | | | | |
Agriculture | 23 |
| | — |
| | 23 |
| | 58 |
| | — |
|
Total | 23 |
| | — |
| | 23 |
| | 58 |
| | — |
|
Total Impaired Loans and Leases | $ | 31,926 |
| | $ | 6,214 |
| | $ | 38,140 |
| | $ | 41,431 |
| | $ | 3,369 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Recorded Investment | | | | |
| With a Recorded Allowance | | With No Recorded Allowance | | Total | | Unpaid Principal Balance | | Related Allowance Recorded |
Commercial & Industrial | | | | | | | | | |
Death Care Management | $ | 8 |
| | $ | 103 |
| | $ | 111 |
| | $ | 111 |
| | $ | 1 |
|
Healthcare | 7,259 |
| | 664 |
| | 7,923 |
| | 8,120 |
| | 778 |
|
Independent Pharmacies | 3,184 |
| | 330 |
| | 3,514 |
| | 3,610 |
| | 327 |
|
Registered Investment Advisors | 796 |
| | — |
| | 796 |
| | 792 |
| | 514 |
|
Veterinary Industry | 2,754 |
| | 128 |
| | 2,882 |
| | 3,369 |
| | 106 |
|
Total | 14,001 |
| | 1,225 |
| | 15,226 |
| | 16,002 |
| | 1,726 |
|
Construction & Development | | | | | | | | | |
Agriculture | 300 |
| | — |
| | 300 |
| | 311 |
| | 13 |
|
Total | 300 |
| | — |
| | 300 |
| | 311 |
| | 13 |
|
Commercial Real Estate | | | | | | | | | |
Death Care Management | 1,580 |
| | 188 |
| | 1,768 |
| | 1,904 |
| | 34 |
|
Healthcare | 3,514 |
| | 530 |
| | 4,044 |
| | 4,042 |
| | 47 |
|
Independent Pharmacies | 528 |
| | — |
| | 528 |
| | 529 |
| | 284 |
|
Veterinary Industry | 11,193 |
| | 2,368 |
| | 13,561 |
| | 14,283 |
| | 1,273 |
|
Total | 16,815 |
| | 3,086 |
| | 19,901 |
| | 20,758 |
| | 1,638 |
|
Commercial Land | | | | | | | | | |
Agriculture | 91 |
| | — |
| | 91 |
| | 161 |
| | 15 |
|
Total | 91 |
| | — |
| | 91 |
| | 161 |
| | 15 |
|
Total Impaired Loans and Leases | $ | 31,207 |
| | $ | 4,311 |
| | $ | 35,518 |
| | $ | 37,232 |
| | $ | 3,392 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following table presents the average recorded investment of impaired loans and leases for each period presented and interest income recognized during the period in which the loans and leases were considered impaired.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, 2017 | | Three months ended September 30, 2016 |
| Average Balance | | Interest Income Recognized | | Average Balance | | Interest Income Recognized |
Commercial & Industrial | | | | | | | |
Death Care Management | $ | 42 |
| | $ | 1 |
| | $ | 9 |
| | $ | — |
|
Healthcare | 7,076 |
| | 11 |
| | 6,345 |
| | 38 |
|
Independent Pharmacies | 4,266 |
| | 26 |
| | 1,946 |
| | 18 |
|
Registered Investment Advisors | 894 |
| | 14 |
| | 742 |
| | 7 |
|
Veterinary Industry | 2,511 |
| | 11 |
| | 2,501 |
| | 13 |
|
Total | 14,789 |
| | 63 |
| | 11,543 |
| | 76 |
|
Construction & Development | | | | | | | |
Healthcare | 602 |
| | 2 |
| | — |
| | — |
|
Total | 602 |
| | 2 |
| | — |
| | — |
|
Commercial Real Estate | | | | | | | |
Death Care Management | 2,512 |
| | 13 |
| | 1,801 |
| | 2 |
|
Healthcare | 3,079 |
| | 11 |
| | 1,012 |
| | 12 |
|
Independent Pharmacies | 1,985 |
| | — |
| | 551 |
| | 2 |
|
Veterinary Industry | 13,950 |
| | 132 |
| | 12,218 |
| | 87 |
|
Total | 21,526 |
| | 156 |
| | 15,582 |
| | 103 |
|
Commercial Land | | | | | | | |
Agriculture | 23 |
| | — |
| | 156 |
| | — |
|
Total | 23 |
| | — |
| | 156 |
| | — |
|
Total | $ | 36,940 |
| | $ | 221 |
| | $ | 27,281 |
| | $ | 179 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
| | | | | | | | | | | | | | | |
| Nine months ended September 30, 2017 | | Nine months ended September 30, 2016 |
| Average Balance | | Interest Income Recognized | | Average Balance | | Interest Income Recognized |
Commercial & Industrial | | | | | | | |
Death Care Management | $ | 313 |
| | $ | 3 |
| | $ | 9 |
| | $ | — |
|
Healthcare | 4,996 |
| | 25 |
| | 5,777 |
| | 60 |
|
Independent Pharmacies | 7,998 |
| | 52 |
| | 1,927 |
| | 51 |
|
Registered Investment Advisors | 1,438 |
| | 28 |
| | 588 |
| | 13 |
|
Veterinary Industry | 4,329 |
| | 24 |
| | 2,715 |
| | 29 |
|
Total | 19,074 |
| | 132 |
| | 11,016 |
| | 153 |
|
Construction & Development | | | | | | | |
Healthcare | 120 |
| | 2 |
| | — |
| | — |
|
Total | 120 |
| | 2 |
| | — |
| | — |
|
Commercial Real Estate | | | | | | | |
Death Care Management | 2,030 |
| | 30 |
| | 1,811 |
| | 5 |
|
Healthcare | 2,940 |
| | 24 |
| | 1,013 |
| | 27 |
|
Independent Pharmacies | 149 |
| | — |
| | 551 |
| | 2 |
|
Veterinary Industry | 13,069 |
| | 278 |
| | 12,266 |
| | 249 |
|
Total | 18,188 |
| | 332 |
| | 15,641 |
| | 283 |
|
Commercial Land | | | | | | | |
Agriculture | 199 |
| | — |
| | 355 |
| | — |
|
Total | 199 |
| | — |
| | 355 |
| | — |
|
Total | $ | 37,581 |
| | $ | 466 |
| | $ | 27,012 |
| | $ | 436 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following tables present the types of TDRs that were made during the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2017 |
| Three months ended September 30, 2016 |
| All Restructurings |
| All Restructurings |
| Number of Loans |
| Pre- modification Recorded Investment |
| Post- modification Recorded Investment |
| Number of Loans |
| Pre- modification Recorded Investment |
| Post- modification Recorded Investment |
Payment Deferral and Extended Amortization |
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
Independent Pharmacies | — |
|
| $ | — |
|
| $ | — |
|
| — |
|
| $ | — |
|
| $ | — |
|
Total Payment Deferral and Extended Amortization | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Payment Deferral |
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
Healthcare | — |
|
| — |
|
| — |
|
| 1 |
|
| 440 |
|
| 440 |
|
Veterinary Industry | 2 |
|
| 559 |
|
| 559 |
|
| — |
|
| — |
|
| — |
|
Total Payment Deferral | 2 |
|
| 559 |
|
| 559 |
|
| 1 |
|
| 440 |
|
| 440 |
|
Total | 2 |
|
| $ | 559 |
|
| $ | 559 |
|
| 1 |
|
| $ | 440 |
|
| $ | 440 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2017 |
| Nine months ended September 30, 2016 |
| All Restructurings |
| All Restructurings |
| Number of Loans |
| Pre- modification Recorded Investment |
| Post- modification Recorded Investment |
| Number of Loans |
| Pre- modification Recorded Investment |
| Post- modification Recorded Investment |
Payment Deferral and Extended Amortization |
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
Independent Pharmacies | 1 |
|
| 262 |
|
| 262 |
|
| — |
|
| — |
|
| — |
|
Total Payment Deferral and Extended Amortization | 1 |
|
| 262 |
|
| 262 |
|
| — |
|
| — |
|
| — |
|
Payment Deferral |
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
Healthcare | — |
|
| — |
|
| — |
|
| 1 |
|
| 440 |
|
| 440 |
|
Veterinary Industry | 2 |
|
| 559 |
|
| 559 |
|
| 1 |
|
| 420 |
|
| 420 |
|
Total Payment Deferral | 2 |
|
| 559 |
|
| 559 |
|
| 2 |
|
| 860 |
|
| 860 |
|
Total | 3 |
|
| $ | 821 |
|
| $ | 821 |
|
| 2 |
|
| $ | 860 |
|
| $ | 860 |
|
Concessions made to improve a loan and lease’sloan’s performance have varying degrees of success. No TDRSTwo TDRs that were modified within the twelve months ended SeptemberJune 30, 20172022 subsequently defaulted during the three or nine months ended SeptemberJune 30, 2017.
Live Oak Bancshares, Inc.
Notesthe defaults had previously been modified to Unaudited Consolidated Financial Statements
Asextend amortization and had a recorded investment of September$349 thousand at June 30, 2016,2022. The second default had previously been modified for a payment deferral and had a recorded investment of $2.1 million at June 30, 2022. There was one TDR that was modified within the twelve months ended SeptemberJune 30, 20162022 that subsequently defaulted during the ninesix months ended SeptemberJune 30, 2016. This2022. The TDR was a commercial and industrial veterinary loan that washad previously been modified for a payment deferral. Thedefault and had a recorded investment of $633 thousand at June 30, 2022.
Note 6. Leases
Lessor Equipment Leasing
The Company may purchase new equipment for this TDRthe purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Direct Financing Leases
Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3 to 7 years which is consistent with the useful life of the equipment with no residual value. The net investment in direct finance leases included in loans and leases held for investment are as follows:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
Gross direct finance lease payments receivable | $ | 3,196 | | | $ | 4,284 | |
Less – unearned interest | (336) | | | (479) | |
Net investment in direct financing leases | $ | 2,860 | | | $ | 3,805 | |
Future minimum lease payments under finance leases are as follows:
| | | | | | | | |
As of June 30, 2023 | | Amount |
2023 | | $ | 811 | |
2024 | | 1,288 | |
2025 | | 980 | |
2026 | | 117 | |
Total | | $ | 3,196 | |
Interest income of $66 thousand and $93 thousand was recognized in the three months ended June 30, 2023 and 2022, respectively. Interest income of $139 thousand and $208 thousand was recognized in the six months ended June 30, 2023 and 2022, respectively.
Operating Leases
The term of each operating lease is generally 10 to 15 years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at September 30, 2016 was $311 thousand.the then-current fair market value.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20% to 50%, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.
If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to equipment expense at the time the costs are incurred.
As of June 30, 2023 and December 31, 2022, the Company had a net investment of $109.4 million and $114.2 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $163.4 million as of June 30, 2023 and December 31, 2022 and accumulated depreciation was $54.0 million and $49.2 million as of June 30, 2023 and December 31, 2022, respectively. Depreciation expense recognized on these assets was $2.4 million for the three months ended June 30, 2023 and 2022. Depreciation expense recognized on these assets was $4.8 million for the six months ended June 30, 2023 and 2022.
Lease income of $2.4 million was recognized in the three months ended June 30, 2023 and 2022. Lease income of $4.8 million and $4.7 million was recognized in the six months ended June 30, 2023 and 2022, respectively.
A maturity analysis of future minimum lease payments to be received under non-cancelable operating leases is as follows:
| | | | | | | | |
As of June 30, 2023 | | Amount |
2023 | | $ | 3,918 | |
2024 | | 8,808 | |
2025 | | 8,935 | |
2026 | | 8,923 | |
2027 | | 8,690 | |
Thereafter | | 13,562 | |
Total | | $ | 52,836 | |
Note 7. Servicing Assets
Loans serviced for others are not included in the accompanying balance sheet.Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balancesbalance of loans serviced for others requiring recognition of a servicing asset were $2.36was $2.38 billion and $2.22$2.67 billion at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. The unpaid principal balance for all loans serviced for others was $3.81 billion and $3.48 billion at June 30, 2023 and December 31, 2022, respectively.
The following summarizes the activity pertaining to servicing rights:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Balance at beginning of period | $ | 29,357 | | | $ | 36,286 | | | $ | 26,323 | | | $ | 33,574 | |
Additions, net | 4,516 | | | 1,043 | | | 7,194 | | | 5,324 | |
Fair value changes: | | | | | | | |
Due to changes in valuation inputs or assumptions | (501) | | | (5,436) | | | 2,123 | | | (4,048) | |
Decay due to increases in principal paydowns or runoff | (2,330) | | | (3,232) | | | (4,598) | | | (6,189) | |
Balance at end of period | $ | 31,042 | | | $ | 28,661 | | | $ | 31,042 | | | $ | 28,661 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Balance at beginning of period | $ | 53,675 |
| | $ | 48,454 |
| | $ | 51,994 |
| | $ | 44,230 |
|
Additions, net | 3,527 |
| | 4,964 |
| | 9,412 |
| | 11,923 |
|
Fair value changes: | | | | | | | |
Due to changes in valuation inputs or assumptions | (789 | ) | | (1,452 | ) | | 342 |
| | (821 | ) |
Decay due to increases in principal paydowns or runoff | (3,021 | ) | | (2,237 | ) | | (8,356 | ) | | (5,603 | ) |
Balance at end of period | $ | 53,392 |
| | $ | 49,729 |
| | $ | 53,392 |
| | $ | 49,729 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The fair value of servicing rights was determined using a weighted average discount rates ranging from 10.1% to 14.5%rate of 17.3% on SeptemberJune 30, 20172023 and 8.1% to 14.1%16.2% on SeptemberJune 30, 2016.2022. The fair value of servicing rights was determined using a weighted average prepayment speeds ranging from 3.1% to 10.0%speed of 15.8% on SeptemberJune 30, 20172023 and 2.9% to 9.8%15.9% on SeptemberJune 30, 2016,2022, with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statementsUnaudited Condensed Consolidated Statements of income.Income.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions typically have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets.assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 8. Borrowings
Total outstanding long term borrowings consisted of the following:
| | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
Borrowings | | | | |
In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026. The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan. | | $ | 28,317 | | | $ | 33,203 | |
On December 30, 2022, the Company made an advance of $50.0 million on an overnight Fed Funds line of credit that is unsecured with a variable interest rate of 4.65%. The Company paid down the balance in full on January 3, 2023 and there is $100.0 million of available credit remaining at June 30, 2023. | | — | | | 50,000 | |
Total borrowings | | $ | 28,317 | | | $ | 83,203 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Long term borrowings | | | |
On September 11, 2014, the Company financed the construction of an additional building located on the Company’s Tiburon Drive main campus with a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at its Tiburon Drive main facility location. Payments were interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments of $146 thousand began in October 2016 with all principal and accrued interest due on September 11, 2021. The construction line is fully disbursed and there was no remaining available credit on this construction line at September 30, 2017. | $ | 23,195 |
| | $ | 23,864 |
|
On February 23, 2015, the Company transferred two related party loans to an unaffiliated commercial bank 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 unaffiliated commercial bank 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. The interest rate at September 30, 2017 is 5.25%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $3.7 million at September 30, 2017. Underlying loans carry a risk grade of 3 and are current with no delinquencies. | 3,677 |
| | 3,979 |
|
Total long term borrowings | $ | 26,872 |
| | $ | 27,843 |
|
The Company may purchase federal fundsAs of June 30, 2023 the Company’s unused borrowing capacity was $3.77 billion, remaining consistent with March 31, 2023. Unused borrowing capacity consists of access through unsecured federal fundsthe Federal Reserve Bank's discount window, available lines of credit with variousthe Federal Home Loan Bank and other correspondent banks which totaled $47.5 million and $26.5 million as well as access to a repurchase agreement. As of September 30, 2017 and December 31, 2016, respectively. These lines are intended for short-term borrowings and are subject to restrictions limiting2022 the frequency and terms of advances. These lines of credit are payable on demand and bear interestCompany's unused borrowing capacity was $3.55 billion based upon securities and loans identified as available for collateral and $4.88 billion based principally upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of September 30, 2017 and December 31, 2016.
The Company has $25 millionstated available in an unsecured line of credit with a correspondent bank as of September 30, 2017. The line was increasedlimits from $8.1 million to $25 million on April 18, 2017. At December 31, 2016, there was $8.1 million available on this unsecured line of credit. The term is 24 months, maturing April 30, 2019, and interest accrues at Prime minus 0.50%. Payments are interest only with all principal and accrued interest due on April 30, 2019. The terms of the loan require the Company to maintain minimum capital, liquidity and Texas ratios. There was no outstanding balance on this line of credit as of September 30, 2017 and December 31, 2016.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The Company has entered into a repurchase agreement with a third party for $5 million as of September 30, 2017 and December 31, 2016. At the time the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received. The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had no outstanding balance on the repurchase agreement as of September 30, 2017 and December 31, 2016.
The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $321.0 million and $281.3 million as of September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, the Company had approximately $175.0 million and $142.7 million, respectively, insources mentioned above. New borrowing capacity available under these arrangements with no outstanding balance as of September 30, 2017 and December 31, 2016.
Note 9. Income Taxes
The Company's effective tax rate is lower than the U.S. statutory rate primarily because of the anticipated effect of investment tax credits during 2017. The Company's effective tax rateadded in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.
In the first quarter of 2017, share based compensation expense excess tax benefits2023 was from the Bank Term Funding Program (“BTFP”). Under the BTFP, advances must be secured by pledging eligible securities owned by the Company on March 12, 2023. BTFP advances can be requested for a term of $874 thousand were reflected inup to one year at a fixed market rate until the consolidated statements of income as a component of the provision for income taxes as a result of the adoption of ASU 2016-09. Please refer to Note 2 for more details regarding the adoption of ASU 2016-09.program ends March 11, 2024.
Note 10.9. Fair Value of Financial Instruments
Fair Value Hierarchy
There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
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:
Investment 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, discounted cash flow or at net asset value per share. Level 2 securities would include US government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund 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 a 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. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Recurring Fair Value
Contingent consideration liability: Contingent consideration associated withThe table below provides a rollforward of the acquisition of Reltco will be adjusted to fair value quarterly until settled. The assumptions used to measure fair value are based on internal metrics that are unobservable and therefore the contingent consideration liability is classified within Level 3 of the valuation hierarchy.equity warrant asset fair values.
Recurring Fair Value | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Equity Warrant Assets | | 2023 | | 2022 | | 2023 | | 2022 |
Balance at beginning of period | | $ | 2,187 | | | $ | 2,328 | | | $ | 2,210 | | | $ | 1,672 | |
New equity warrant assets | | 91 | | | 48 | | | 244 | | | 704 | |
Changes in fair value, net | | 194 | | | 46 | | | 18 | | | 46 | |
Settlements | | (221) | | | — | | | (221) | | | — | |
Balance at end of period | | $ | 2,251 | | | $ | 2,422 | | | $ | 2,251 | | | $ | 2,422 | |
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2023 | | Total | | Level 1 | | Level 2 | | Level 3 |
Investment securities available-for-sale | | | | | | | | |
US government agencies | | $ | 30,496 | | | $ | — | | | $ | 30,496 | | | $ | — | |
Mortgage-backed securities | | 1,099,137 | | | — | | | 1,099,137 | | | — | |
Municipal bonds(1) | | 3,035 | | | — | | | 2,951 | | | 84 | |
Other debt securities(2) | | 478 | | | — | | | — | | | 478 | |
Loans held for investment | | 441,781 | | | — | | | — | | | 441,781 | |
Servicing assets(3) | | 31,042 | | | — | | | — | | | 31,042 | |
Mutual fund | | 1,652 | | | — | | | 1,652 | | | — | |
Equity warrant assets | | 2,251 | | | — | | | — | | | 2,251 | |
Total assets at fair value | | $ | 1,609,872 | | | $ | — | | | $ | 1,134,236 | | | $ | 475,636 | |
|
| | | | | | | | | | | | | | | |
September 30, 2017 | Total | | Level 1 | | Level 2 | | Level 3 |
Investment securities available-for-sale | | | | | | | |
US government agencies | $ | 17,804 |
| | $ | — |
| | $ | 17,804 |
| | $ | — |
|
Residential mortgage-backed securities | 56,750 |
| | — |
| | 56,750 |
| | — |
|
Mutual fund | 2,021 |
| | — |
| | 2,021 |
| | — |
|
Servicing assets1 | 53,392 |
| | — |
| | — |
| | 53,392 |
|
Total assets at fair value | $ | 129,967 |
| | $ | — |
| | $ | 76,575 |
| | $ | 53,392 |
|
| | | | | | | |
Contingent consideration liability2 | $ | 4,650 |
| | $ | — |
| | $ | — |
| | $ | 4,650 |
|
Total liabilities at fair value | $ | 4,650 |
| | $ | — |
| | $ | — |
| | $ | 4,650 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Total | | Level 1 | | Level 2 | | Level 3 |
Investment securities available-for-sale | | | | | | | | |
US government agencies | | $ | 15,668 | | | $ | — | | | $ | 15,668 | | | $ | — | |
Mortgage-backed securities | | 995,574 | | | — | | | 995,574 | | | — | |
Municipal bonds(1) | | 2,977 | | | — | | | 2,884 | | | 93 | |
Other debt securities | | 500 | | | — | | | 500 | | | — | |
| | | | | | | | |
Loans held for investment | | 494,458 | | | — | | | — | | | 494,458 | |
Servicing assets(3) | | 26,323 | | | — | | | — | | | 26,323 | |
Mutual fund | | 1,656 | | | — | | | 1,656 | | | — | |
Equity warrant assets | | 2,210 | | | — | | | — | | | 2,210 | |
Total assets at fair value | | $ | 1,539,366 | | | $ | — | | | $ | 1,016,282 | | | $ | 523,084 | |
|
| | | | | | | | | | | | | | | |
December 31, 2016 | Total | | Level 1 | | Level 2 | | Level 3 |
Investment securities available-for-sale | | | | | | | |
US government agencies | $ | 17,823 |
| | $ | — |
| | $ | 17,823 |
| | $ | — |
|
Residential mortgage-backed securities | 51,273 |
| | — |
| | 51,273 |
| | — |
|
Mutual fund | 1,960 |
| | — |
| | 1,960 |
| | — |
|
Servicing assets1 | 51,994 |
| | — |
| | — |
| | 51,994 |
|
Total assets at fair value | $ | 123,050 |
| | $ | — |
| | $ | 71,056 |
| | $ | 51,994 |
|
| | | | | |
1(1) | During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment gain of $1 thousand and loss of $9 thousand, respectively. During the three and six months ended June 30, 2022, the Company recorded a level 3 fair value adjustment loss of $1 thousand and $3 thousand, respectively. |
| | | | | |
(2) | During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment loss of $2 thousand and $22 thousand, respectively. During the three and six months ended June 30, 2022, the Company recorded a level 3 fair value adjustment loss of $10 thousand. |
| | | | | |
(3) | See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets and various assumptions used in the fair value measurement.assets. |
| |
2 | See Note 4 for activity related to the recurring Level 3 fair value for the contingent consideration liability and various assumptions used in the fair value measurement. |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2022 Form 10-K.
Fair Value Option
Until the first quarter of 2021, the Company had historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected continue to be measured as such.
There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at June 30, 2023 or December 31, 2022. The unpaid principal balance of unguaranteed exposure for nonaccruals was $10.7 million and $7.2 million at June 30, 2023 and December 31, 2022, respectively.
The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at June 30, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| Total Loans | | Nonaccruals | | 90 Days or More Past Due |
| Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference |
Fair Value Option Elections | | | | | | | | | | | | | | | | | |
Loans held for investment | $ | 441,781 | | | $ | 462,827 | | | $ | (21,046) | | | $ | 53,716 | | | $ | 57,561 | | | $ | (3,845) | | | $ | 35,070 | | | $ | 37,099 | | | $ | (2,030) | |
| $ | 441,781 | | | $ | 462,827 | | | $ | (21,046) | | | $ | 53,716 | | | $ | 57,561 | | | $ | (3,845) | | | $ | 35,070 | | | $ | 37,099 | | | $ | (2,030) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Total Loans | | Nonaccruals | | 90 Days or More Past Due |
| Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference |
Fair Value Option Elections | | | | | | | | | | | | | | | | | |
Loans held for investment | $ | 494,458 | | | $ | 513,219 | | | $ | (18,761) | | | $ | 44,890 | | | $ | 46,993 | | | $ | (2,103) | | | $ | 24,663 | | | $ | 26,321 | | | $ | (1,658) | |
| $ | 494,458 | | | $ | 513,219 | | | $ | (18,761) | | | $ | 44,890 | | | $ | 46,993 | | | $ | (2,103) | | | $ | 24,663 | | | $ | 26,321 | | | $ | (1,658) | |
The following table presents the net gains (losses) from changes in fair value.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Gains (Losses) on Loans Accounted for under the Fair Value Option | 2023 | | 2022 | | 2023 | | 2022 |
Loans held for sale | $ | — | | | $ | (56) | | | $ | — | | | $ | (226) | |
Loans held for investment | 1,728 | | | (4,405) | | | (2,801) | | | (3,719) | |
| $ | 1,728 | | | $ | (4,461) | | | $ | (2,801) | | | $ | (3,945) | |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Losses related to borrower-specific credit risk were $291 thousand and $3.5 million for the three and six months ended June 30, 2023, respectively, and $711 thousand and $2.8 million for the three and six months ended June 30, 2022, respectively.
The following tables summarize the activity pertaining to loans accounted for under the fair value option.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Loans held for sale | 2023 | | 2022 | | 2023 | | 2022 |
Balance at beginning of period | $ | — | | | $ | 25,056 | | | $ | — | | | $ | 25,310 | |
Repurchases | — | | | — | | | — | | | 65 | |
Fair value changes | — | | | (56) | | | — | | | (226) | |
| | | | | | | |
| | | | | | | |
Settlements | — | | | (1,548) | | | — | | | (1,697) | |
Balance at end of period | $ | — | | | $ | 23,452 | | | $ | — | | | $ | 23,452 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Loans held for investment | 2023 | | 2022 | | 2023 | | 2022 |
Balance at beginning of period | $ | 466,950 | | | $ | 600,571 | | | $ | 494,458 | | | $ | 645,201 | |
Repurchases | 4,063 | | | 1,380 | | | 15,897 | | | 2,905 | |
Fair value changes | 1,728 | | | (4,405) | | | (2,801) | | | (3,719) | |
| | | | | | | |
Settlements | (30,960) | | | (66,902) | | | (65,773) | | | (113,743) | |
Balance at end of period | $ | 441,781 | | | $ | 530,644 | | | $ | 441,781 | | | $ | 530,644 | |
Non-Recurring Fair Value
The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis. The Company has no liabilities recorded at fair value on a non-recurring basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2023 | | Total | | Level 1 | | Level 2 | | Level 3 |
Collateral-dependent loans | | $ | 7,085 | | | $ | — | | | $ | — | | | $ | 7,085 | |
| | | | | | | | |
Total assets at fair value | | $ | 7,085 | | | $ | — | | | $ | — | | | $ | 7,085 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Total | | Level 1 | | Level 2 | | Level 3 |
Collateral-dependent loans | | $ | 4,840 | | | $ | — | | | $ | — | | | $ | 4,840 | |
Total assets at fair value | | $ | 4,840 | | | $ | — | | | $ | — | | | $ | 4,840 | |
For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2022 Form 10-K.
|
| | | | | | | | | | | | | | | |
September 30, 2017 | Total | | Level 1 | | Level 2 | | Level 3 |
Impaired loans and leases | $ | 28,557 |
| | $ | — |
| | $ | — |
| | $ | 28,557 |
|
Foreclosed assets | 2,231 |
| | — |
| | — |
| | 2,231 |
|
Total assets at fair value | $ | 30,788 |
| | $ | — |
| | $ | — |
| | $ | 30,788 |
|
|
| | | | | | | | | | | | | | | |
December 31, 2016 | Total | | Level 1 | | Level 2 | | Level 3 |
Impaired loans and leases | $ | 27,815 |
| | $ | — |
| | $ | — |
| | $ | 27,815 |
|
Foreclosed assets | 1,648 |
| | — |
| | — |
| | 1,648 |
|
Total assets at fair value | $ | 29,463 |
| | $ | — |
| | $ | — |
| | $ | 29,463 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Level 3 Analysis
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 20172023 and December 31, 20162022, the significant unobservable inputs used in the fair value measurements were as follows:
September 30, 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2023 | | | | | | | | | | |
Level 3 Assets with Significant Unobservable Inputs | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range | | Weighted Average(1) |
Recurring fair value | | | | | | | | | | |
Municipal bond | | $ | 84 | | | Discounted expected cash flows | | Discount rate | | 6.7 | % | | N/A |
| | | Prepayment speed | | 5.0 | % | | N/A |
Other debt security | | $ | 478 | | | Discounted expected cash flows | | Discount rate | | 7.1 | % | | N/A |
| | | | | | | | | | |
| | | | | | | |
Loans held for investment | | $ | 441,781 | | | Discounted expected cash flows | | Loss rate | | 0.0 % - 65.8 % | | 2.1 | % |
| | | Discount rate | | 6.3 % - 10.2 % | | 8.9 | % |
| | | Prepayment speed | | 12.6 | % | | 12.6 | % |
| | | | | | | | |
Equity warrant assets | | $ | 2,251 | | | Black-Scholes option pricing model | | Volatility | | 26.8 % - 90.0 % | | 36.3 | % |
| | | Risk-free interest rate | | 3.7 % - 3.9 % | | 3.7 | % |
| | | Marketability discount | | 20.0 | % | | 20.0 | % |
| | | Remaining life | | 3 - 10 years | | 6.8 years |
Non-recurring fair value | | | | | | | | | | |
Collateral-dependent loans | | $ | 7,085 | | | Discounted appraisals | | Appraisal adjustments (2) | | 10.0 % - 100.0 % | | 37.7 | % |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | |
Level 3 Assets with Significant Unobservable Inputs | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range | | Weighted Average(1) |
Recurring fair value | | | | | | | | | | |
Municipal bond | | $ | 93 | | | Discounted expected cash flows | | Discount rate | | 6.0 | % | | N/A |
| | | Prepayment speed | | 5.0 | % | | N/A |
Loans held for investment | | $ | 494,458 | | | Discounted expected cash flows | | Loss rate | | 0.0 % - 79.3 % | | 1.9 | % |
| | | Discount rate | | 7.5 % - 11.2 % | | 10.0 | % |
| | | Prepayment speed | | 16.5 | % | | 16.5 | % |
| | Discounted appraisals | | Appraisal adjustments | | 0.0 % - 77.3 % | | 28.6 | % |
Equity warrant assets | | $ | 2,210 | | | Black-Scholes option pricing model | | Volatility | | 26.5 % - 90.0 % | | 34.2 | % |
| | | Risk-free interest rate | | 3.9 % - 4.0 % | | 3.9 | % |
| | | Marketability discount | | 20.0 | % | | 20.0 | % |
| | | Remaining life | | 3 - 10 years | | 7.7 years |
Non-recurring fair value | | | | | | | | | | |
Collateral-dependent loans | | $ | 4,840 | | | Discounted appraisals | | Appraisal adjustments (2) | | 10.0 % - 66.5 % | | 34.2 | % |
(1)Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value.
(2)Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments.
|
| | | | | | | | | | |
Level 3 Assets with Significant Unobservable Inputs | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range |
Impaired Loans and Leases | | $ | 28,557 |
| | Discounted appraisals Discounted expected cash flows | | Appraisal adjustments (1) Interest rate & repayment term | | 0% to 25% Weighted average discount rate 6.01% |
Foreclosed Assets | | $ | 2,231 |
| | Discounted appraisals | | Appraisal adjustments (1) | | 10% to 35% |
December 31, 2016Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| | | | | | | | | | |
Level 3 Assets with Significant Unobservable Inputs | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range |
Impaired Loans and Leases | | $ | 27,815 |
| | Discounted appraisals Discounted expected cash flows | | Appraisal adjustments (1) Interest rate & repayment term | | 0% to 25% Weighted average discount rate 5.28% |
Foreclosed Assets | | $ | 1,648 |
| | Discounted appraisals | | Appraisal adjustments (1) | | 10% to 35% |
| |
(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 the fair value information aboutof financial instruments carried at book value on 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 consolidated 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.
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.
Loans and leases held for investment: 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 and leases are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans and leases with similar terms to borrowers of similar credit quality. Loan and lease 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.
Accrued interest: The carrying amounts of accrued interest approximate fair value.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 short term borrowings approximate fair value while long term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental debt rates for similar types of debt arrangements.Balance Sheets.
The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2023 | | Carrying Amount | | Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Financial assets | | | | | | | | | | |
Cash and due from banks | | $ | 808,131 | | | $ | 808,131 | | | $ | — | | | $ | — | | | $ | 808,131 | |
| | | | | | | | | | |
Certificates of deposit with other banks | | 4,000 | | | 4,000 | | | — | | | — | | | 4,000 | |
Loans held for sale | | 523,776 | | | — | | | — | | | 546,912 | | | 546,912 | |
Loans and leases held for investment, net of allowance for credit losses on loans and leases | | 7,274,501 | | | — | | | — | | | 7,572,899 | | | 7,572,899 | |
Financial liabilities | | | | | | | | | | |
Deposits | | 9,879,111 | | | — | | | 9,625,941 | | | — | | | 9,625,941 | |
Borrowings | | 28,317 | | | — | | | — | | | 27,684 | | | 27,684 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | Carrying Amount | | Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Financial assets | | | | | | | | | | |
Cash and due from banks | | $ | 280,239 | | | $ | 280,239 | | | $ | — | | | $ | — | | | $ | 280,239 | |
Federal funds sold | | 136,397 | | | 136,397 | | | — | | | — | | | 136,397 | |
Certificates of deposit with other banks | | 4,000 | | | 4,000 | | | — | | | — | | | 4,000 | |
Loans held for sale | | 554,610 | | | — | | | — | | | 577,254 | | | 577,254 | |
Loans and leases held for investment, net of allowance for credit losses on loans and leases | | 6,753,154 | | | — | | | — | | | 6,652,936 | | | 6,652,936 | |
Financial liabilities | | | | | | | | | | |
Deposits | | 8,884,928 | | | — | | | 8,532,615 | | | — | | | 8,532,615 | |
Borrowings | | 83,203 | | | — | | | — | | | 82,258 | | | 82,258 | |
|
| | | | | | | | | | | | | | | | | | | |
September 30, 2017 | Carrying Amount | | Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Financial assets | | | | | | | | | |
Cash and due from banks | $ | 260,907 |
| | $ | 260,907 |
| | $ | — |
| | $ | — |
| | $ | 260,907 |
|
Certificates of deposit with other banks | 3,250 |
| | 3,251 |
| | — |
| | — |
| | 3,251 |
|
Investment securities, available-for-sale | 76,575 |
| | — |
| | 76,575 |
| | — |
| | 76,575 |
|
Loans held for sale | 692,586 |
| | — |
| | — |
| | 770,923 |
| | 770,923 |
|
Loans and leases, net of allowance for loan and lease losses | 1,148,860 |
| | — |
| | — |
| | 1,151,601 |
| | 1,151,601 |
|
Servicing assets | 53,392 |
| | — |
| | — |
| | 53,392 |
| | 53,392 |
|
Accrued interest receivable | 9,669 |
| | 9,669 |
| | — |
| | — |
| | 9,669 |
|
Financial liabilities | | | | | | | | | |
Deposits | 2,012,891 |
| | — |
| | 1,996,493 |
| | — |
| | 1,996,493 |
|
Accrued interest payable | 270 |
| | 270 |
| | — |
| | — |
| | 270 |
|
Long term borrowings | 26,872 |
| | — |
| | — |
| | 27,904 |
| | 27,904 |
|
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2016 | Carrying Amount | | Quoted Price In Active Markets for Identical Assets /Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Fair Value |
Financial assets | | | | | | | | | |
Cash and due from banks | $ | 238,008 |
| | $ | 238,008 |
| | $ | — |
| | $ | — |
| | $ | 238,008 |
|
Certificates of deposit with other banks | 7,250 |
| | 7,236 |
| | — |
| | — |
| | 7,236 |
|
Investment securities, available-for-sale | 71,056 |
| | — |
| | 71,056 |
| | — |
| | 71,056 |
|
Loans held for sale | 394,278 |
| | — |
| | — |
| | 426,220 |
| | 426,220 |
|
Loans and leases, net of allowance for loan and lease losses | 889,357 |
| | — |
| | — |
| | 873,158 |
| | 873,158 |
|
Servicing assets | 51,994 |
| | — |
| | — |
| | 51,994 |
| | 51,994 |
|
Accrued interest receivable | 7,520 |
| | 7,520 |
| | — |
| | — |
| | 7,520 |
|
Financial liabilities | | | | | | | | | |
Deposits | 1,485,076 |
| | — |
| | 1,469,173 |
| | — |
| | 1,469,173 |
|
Accrued interest payable | 319 |
| | 319 |
| | — |
| | — |
| | 319 |
|
Long term borrowings | 27,843 |
| | — |
| | — |
| | 29,559 |
| | 29,559 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 11.10. Commitments and Contingencies
Litigation
In the normal course of business, the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Financial Instruments with Off-balance-sheetOff-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows:
| | | September 30, 2017 | | December 31, 2016 | | June 30, 2023 | | December 31, 2022 |
Commitments to extend credit | $ | 1,563,688 |
| | $ | 1,342,271 |
| Commitments to extend credit | $ | 3,120,016 | | | $ | 2,731,866 | |
Standby letters of credit | 1,861 |
| | 343 |
| Standby letters of credit | 24,474 | | | 26,454 | |
Solar purchase commitments | 182,610 |
| | — |
| |
Airplane purchase agreement commitments | — |
| | 21,500 |
| Airplane purchase agreement commitments | 18,000 | | | 24,000 | |
Total unfunded off-balance-sheet credit risk | $ | 1,748,159 |
| | $ | 1,364,114 |
| Total unfunded off-balance-sheet credit risk | $ | 3,162,490 | | | $ | 2,782,320 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. In 2012, the Company began issuing commitmentCommitment letters are issued after approval of the loan by the Credit Department. Commitment lettersDepartment and generally expire ninety days after 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.
As of SeptemberThe allowance for off-balance-sheet credit exposures was $4.8 million and $1.5 million at June 30, 20172023 and December 31, 2016,2022, respectively.
The Company is in the early phase of constructing a new facility to accommodate expansion of its main campus. The total estimated cost to complete the construction program is approximately $33.6 million. At June 30, 2023, the Company hadhas paid and was committed to approximately $7.0 million of the total estimated amount.
As of June 30, 2023 and December 31, 2022, the Company recorded unfunded commitments to provide capital contributions for on-balance sheeton-balance-sheet investments in the amount of $4.4$31.0 million and $4.9$26.1 million, respectively.
Concentrations of Credit Risk
Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 6. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $5.0$20.0 million, except for seventeentwenty-eight relationships that have a retained unguaranteed exposure of $144.6$932.0 million of which $90.8$578.3 million of the unguaranteed exposure has been disbursed.
Additionally, the Company has future minimum lease payments duereceivable under non-cancelable operating leases totaling $33.0$52.8 million, of which $28.0 million is due from two relationships.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
no relationships exceed $20.0 million.
The Company from time-to-time may have cash and cash equivalents on deposit with other financial institutions that exceed federally-insured limits.
Note 12. Stock Plans
On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 7,000,000 common voting shares and has an expiration date of March 20, 2025. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the "Plan") expire no more than 10 years from the 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. Options or restricted shares vest over a minimum of three years from 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 three months ended September 30, 2017 and 2016, the Company recognized $536 thousand and $580 thousand in compensation expense for stock options, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $1.4 million and $1.8 million in compensation expense for stock options, respectively.
Stock option activity under the Plan during the nine month periods ended September 30, 2017 and 2016 is summarized below.
|
| | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at December 31, 2016 | 3,478,208 |
| | $ | 11.51 |
| | | | |
Exercised | 76,285 |
| | 7.89 |
| | | | |
Forfeited | 203,671 |
| | 14.12 |
| | | | |
Granted | — |
| | — |
| | | | |
Outstanding at September 30, 2017 | 3,198,252 |
| | $ | 11.43 |
| | 7.31 years | | $ | 38,411,802 |
|
Exercisable at September 30, 2017 | 703,425 |
| | $ | 10.41 |
| | 7.06 years | | $ | 9,171,805 |
|
|
| | | | | | | | | | | | |
| Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at December 31, 2015 | 3,546,992 |
| | $ | 11.17 |
| | | | |
Exercised | 25,406 |
| | 5.79 |
| | | | |
Forfeited | 166,483 |
| | 9.01 |
| | | | |
Granted | 169,987 |
| | 14.02 |
| | | | |
Outstanding at September 30, 2016 | 3,525,090 |
| | $ | 11.44 |
| | 8.30 years | | $ | 14,212,513 |
|
Exercisable at September 30, 2016 | 478,141 |
| | $ | 9.22 |
| | 7.84 years | | $ | 2,887,741 |
|
The following is a summary of non-vested stock option activity for the Company for the nine months ended September 30, 2017 and 2016.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2016 | 3,016,100 |
| | $ | 4.78 |
|
Granted | — |
| | — |
|
Vested | 317,602 |
| | 4.17 |
|
Forfeited | 203,671 |
| | 6.03 |
|
Non-vested at September 30, 2017 | 2,494,827 |
| | $ | 4.75 |
|
|
| | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2015 | 3,393,441 |
| | $ | 4.56 |
|
Granted | 169,987 |
| | 6.58 |
|
Vested | 349,996 |
| | 4.22 |
|
Forfeited | 166,483 |
| | 3.13 |
|
Non-vested at September 30, 2016 | 3,046,949 |
| | $ | 4.79 |
|
Note 11. SegmentsThe total intrinsic valueCompany's management reporting process measures the performance of options exercised at September 30, 2017its operating segments based on internal operating structure, which is subject to change from time-to-time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below:
Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and 2016 was $1.1 milliondeposit-related services to small businesses, consumers and $223 thousand, respectively.other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans.
At September 30, 2017, unrecognized compensation costs relating to stock options amounted to $9.8 million which will be recognized over a weighted average periodFintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of 2.93 years.revenue for this segment are principally gains and losses on equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the investments held by those entities, as well as the Bank's investment in Apiture.
The weighted average fair value of each stock option grant is estimated onfollowing tables provide financial information for the date of grant usingCompany's segments. The information provided under the Black-Scholes option-pricing model. The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual lifecaption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the awards are based onCompany, and includes the U.S. Treasury yield curve in effect atparent company, other non-bank subsidiaries and elimination adjustments to reconcile the timeresults 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. There were no stock options granted during the three and nine months ended September 30, 2017.
Restricted Stock
Restricted stock awards are authorized in the form of restricted stock awards or units ("RSU"s) and restricted stock awards or units with a market price condition ("Market RSU"s).
RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related performance criteria. The fair value of the RSUs is based on the closing price on the date of the grant.
Market RSUs also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria relatedoperating segments to the Company’s share price closing at or above a specified price ranging from $34.00 to $38.00 per share for at least twenty (20) consecutive trading days at any time prior to expiration date. The amount of Market RSUs earned will not exceed 100% of the Market RSUs awarded. The fair value of the Market RSUs and the implied service period is calculated using the Monte Carlo Simulation method.Unaudited Condensed Consolidated Financial Statements prepared in conformity with GAAP.
RSU stock activity under the Plan during the first nine months of 2017 is summarized below. | | | | | | | | | | | | | | | | | | | | | | | |
| Banking | | Fintech | | Other | | Consolidated |
As of and for the three months ended June 30, 2023 | | | | | | | |
Interest income | $ | 169,586 | | | $ | 8 | | | $ | 118 | | | $ | 169,712 | |
Interest expense | 85,103 | | | — | | | 307 | | | 85,410 | |
Net interest income (loss) | 84,483 | | | 8 | | | (189) | | | 84,302 | |
Provision for loan and lease credit losses | 13,028 | | | — | | | — | | | 13,028 | |
Noninterest income | 21,488 | | | 1,998 | | | 670 | | | 24,156 | |
Noninterest expense | 71,916 | | | 2,707 | | | 1,834 | | | 76,457 | |
Income tax expense (benefit) | 1,404 | | | 26 | | | (1) | | | 1,429 | |
Net income (loss) | $ | 19,623 | | | $ | (727) | | | $ | (1,352) | | | $ | 17,544 | |
Total assets | $ | 10,642,872 | | | $ | 124,459 | | | $ | 51,865 | | | $ | 10,819,196 | |
As of and for the three months ended June 30, 2022 | | | | | | | |
Interest income | $ | 99,215 | | | $ | 36 | | | $ | (4) | | | $ | 99,247 | |
Interest expense | 18,850 | | | — | | | 463 | | | 19,313 | |
Net interest income (loss) | 80,365 | | | 36 | | | (467) | | | 79,934 | |
Provision for loan and lease credit losses | 5,267 | | | — | | | — | | | 5,267 | |
Noninterest income | 5,168 | | | 122,661 | | | 700 | | | 128,529 | |
Noninterest expense | 76,779 | | | 2,146 | | | 1,954 | | | 80,879 | |
Income tax expense (benefit) | (268) | | | 25,868 | | | (322) | | | 25,278 | |
Net income (loss) | $ | 3,755 | | | $ | 94,683 | | | $ | (1,399) | | | $ | 97,039 | |
Total assets | $ | 8,963,851 | | | $ | 158,930 | | | $ | (1,884) | | | $ | 9,120,897 | |
|
| | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2016 | 134,969 |
| | $ | 14.96 |
|
Granted | 62,721 |
| | 23.85 |
|
Vested | 38,205 |
| | 15.40 |
|
Forfeited | 7,485 |
| | 13.96 |
|
Non-vested at September 30, 2017 | 152,000 |
| | $ | 18.57 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the three months ended September 30, 2017 and 2016, the Company recognized $191 thousand and $3.1 million in compensation expense for RSUs, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $517 thousand and $5.3 million in compensation expense for RSUs, respectively.
At September 30, 2017, unrecognized compensation costs relating to RSUs amounted to $2.5 million which will be recognized over a weighted average period of 4.55 years. | | | | | | | | | | | | | | | | | | | | | | | |
| Banking | | Fintech | | Other | | Consolidated |
As of and for the six months ended June 30, 2023 | | | | | | | |
Interest income | $ | 320,855 | | | $ | 20 | | | $ | 253 | | | $ | 321,128 | |
Interest expense | 154,180 | | | — | | | 629 | | | 154,809 | |
Net interest income (loss) | 166,675 | | | 20 | | | (376) | | | 166,319 | |
Provision for loan and lease credit losses | 32,049 | | | — | | | — | | | 32,049 | |
Noninterest income | 38,485 | | | 4,037 | | | 1,213 | | | 43,735 | |
Noninterest expense | 146,399 | | | 4,963 | | | 4,057 | | | 155,419 | |
Income tax expense (benefit) | 4,701 | | | 182 | | | (239) | | | 4,644 | |
Net income (loss) | $ | 22,011 | | | $ | (1,088) | | | $ | (2,981) | | | $ | 17,942 | |
Total assets | $ | 10,642,872 | | | $ | 124,459 | | | $ | 51,865 | | | $ | 10,819,196 | |
As of and for the six months ended June 30, 2022 | | | | | | | |
Interest income | $ | 191,961 | | | $ | 72 | | | $ | (4) | | | $ | 192,029 | |
Interest expense | 33,380 | | | — | | | 936 | | | 34,316 | |
Net interest income (loss) | 158,581 | | | 72 | | | (940) | | | 157,713 | |
Provision for loan and lease credit losses | 7,103 | | | — | | | — | | | 7,103 | |
Noninterest income | 37,103 | | | 122,898 | | | 1,196 | | | 161,197 | |
Noninterest expense | 138,178 | | | 4,314 | | | 4,101 | | | 146,593 | |
Income tax expense (benefit) | 8,808 | | | 25,722 | | | (864) | | | 33,666 | |
Net income (loss) | $ | 41,595 | | | $ | 92,934 | | | $ | (2,981) | | | $ | 131,548 | |
Total assets | $ | 8,963,851 | | | $ | 158,930 | | | $ | (1,884) | | | $ | 9,120,897 | |
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Market RSU stock activity under the Plan during the first nine months of 2017 is summarized below.
|
| | | | | | |
| Shares | | Weighted Average Grant Date Fair Value |
Non-vested at December 31, 2016 | 2,364,500 |
| | $ | 8.28 |
|
Granted | 233,791 |
| | — |
|
Vested | — |
| | — |
|
Forfeited | 4,007 |
| | 11.38 |
|
Non-vested at September 30, 2017 | 2,594,284 |
| | $ | 8.79 |
|
The compensation expense for Market RSUs is measured based on their grant date fair value as calculated using the Monte Carlo Simulation and is recognized on a straight-line basis over the average vesting period. The Monte Carlo Simulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.
Related to the 100,733 Market RSUs granted on January 31, 2017 and the 3,058 Market RSUs granted on May 8, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.0 years. The implied term of the restricted stock was 4.1 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.28%, expected volatility of 30.00% and a dividend yield of 0.39%.
Related to the 130,000 Market RSUs granted on August 7, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.0 years. The implied term of the restricted stock was 3.9 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.07%, expected volatility of 30.00% and a dividend yield of 0.33%.
For the three months ended September 30, 2017 and 2016, the Company recognized $1.3 million and $346 thousand in compensation expense for Market RSUs, respectively. For the nine months ended September 30, 2017 and 2016, the Company recognized $3.7 million and $577 thousand in compensation expense for Market RSUs, respectively.
All of the Company's Market RSUs had an effective grant date of May 24, 2016, November 30, 2016, January 31, 2017, May 8, 2017 and August 7, 2017
At September 30, 2017, unrecognized compensation costs relating to Market RSUs amounted to $17.9 million which will be recognized over a weighted average period of 3.27 years.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan on October 8, 2014. On May 24, 2016, the plan was amended and the Amended and Restated Employee Stock Purchase Plan (the "ESPP") became effective within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, eligible employees are able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in the ESPP 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 in fair market value per employee per calendar year. Options to purchase shares under the ESPP are granted at a 15% discount to fair market value. Expense recognized in relation to the ESPP for the nine months ended September 30, 2017 was $79 thousand. There were no ESPP purchases for the nine months ended September 30, 2016. For the three months ended September 30, 2017 and 2016, the Company recognized $36 thousand and $0 expense, respectively.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 13. Subsequent Event
Management has evaluated subsequent events through the date the financial statements were available to be issued and determined that the following event required disclosure:
Unconsolidated Joint Venture
On October 1, 2017, the Company closed the digital banking joint venture between Live Oak Banking Company and First Data Corporation ("First Data"). The new company, named Apiture, combines First Data's and the Bank's digital banking platforms, products, services, and certain human resources used in the creation and delivery of technology solutions for financial institutions. The contributed assets of both the Company and First Data are considered businesses in accordance with relevant accounting standards. At closing both the Bank and First Data received equal voting interests in Apiture in exchange for their respective contributions. As a term of the closing agreements, First Data is entitled to a preference in Apiture's cash earnings for the remainder of calender 2017 and all of 2018, not to exceed $18.0 million and $18.9 million, respectively.
As a result of this transaction, the Company and First Data each have, directly or indirectly, equal voting interests in Apiture. In addition, the Company has analyzed the Contribution Agreement and determined that Apiture is not a variable interest entity. The Company also considered the partners' participating rights under the Contribution Agreement and determined that the joint venture partners have the ability to participate in major decisions, which equates to shared decision making. Accordingly, the Bank has significant influence but does not control the joint venture. Therefore, the joint venture will be accounted for as an equity method investment effective on October 1, 2017 (the date of the transaction). Under the equity method of accounting, the net equity investment of the Bank and the Bank's share of net income or loss from the unconsolidated entity will be reflected in the Company's consolidated balance sheets and the consolidated statements of income.
The preliminary estimated fair value of Apiture at the date of closing was approximately $150 million. Based on the aforementioned cash earnings preference to First Data during 2017 and 2018, the valuation of equity interests received in exchange for contributions by the two initial investors was unequal. As a consequence of this preference the preliminary initial economic interest in Apiture for First Data was equal to 54.7% or $82.0 million, while the Company's preliminary initial economic interest in Apiture was equal to 45.3%, or $68.0 million. As the Company had no carrying amount for its contribution in the formation of Apiture, the preliminary pre-tax results for this transaction as of the date of closing would be a $68.0 million equity method investment on the balance sheet and a one-time gain of the same amount on the income statement.
The Company is undertaking a comprehensive review of the preliminary fair value estimates to ensure they conform to the measurement and reporting requirements set forth in the accounting guidance for equity method investments and joint ventures, business combinations, and fair value measurements guidance. Determining the fair value of the joint venture and the partners' contributions to the joint venture are complex analyses that involve significant judgment regarding estimates and assumptions. Accordingly, the initial accounting for this transaction is still in process.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following presents management’s discussion and analysis of the financial condition and results of operations of Live Oak Bancshares, Inc. (the(individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company” or “LOB”). This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162022 (the "2016 Annual Report"“2022 Form 10-K”). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements generally relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business.business of Live Oak Bancshares, Inc. (the “Company”). They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this quarterly report on Form 10-Q.
Report. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this quarterly report on Form 10-QReport are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:
•deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;
•changes in Small Business Administration ("SBA"(“SBA”) rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of Live Oak Banking Company (the "Bank"“Bank”) as an SBA Preferred Lender;
•changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture;Agriculture (“USDA”);
•changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities;
•the failure of assumptions underlying the establishment of reserves for possible loan and lease losses;
•changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
•recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;
•the impacts of global health crises and pandemics, such as the Coronavirus Disease 2019 (“COVID-19”) pandemic, on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;
•a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model or to develop a next-generation banking platform, including a failure in or a breach of the Company’s operational or security systems or those of its third party service providers;
•changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reductions in rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development and prices, premiums paid in the secondary market for the sale of loans, and valuation of servicing rights;
•changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
•fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;
•the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s 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;
•the Company's ability to attract and retain key personnel;
•changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits;
•a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;
•changes in political and economic conditions;
•the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau;Bureau and various state agencies;
•the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result;
•operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market;
•the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired;
•adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions;
•other risk factors listed from time to time in reports that the Company files with the SEC, including those described under “Risk Factors” in this Report; and
•the Company’s 2016 Annual Report and the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017; and
the success at managing the risks involved in the foregoing.
Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Amounts in all tables in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Nature of Operations
LOBBancshares is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the state of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending and deposit related services to small businesses nationwide in targeted industries. The Bank identifies and grows within selected industry sectors, or verticals, by leveraging expertise within those industries.nationwide. A significant portion of the loans originated by the Bank are guaranteed by the SBA under itsthe 7(a) program. In 2010,Loan Program and the U.S. Department of Agriculture’s (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs. These loans are to small businesses and professionals with what the Bank formedbelieves are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals.
The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.
Effective July 29, 2016, the Company elected to become a “financial holding company” within the meaning of the Bank Holding Company Act. A financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered financial in nature or incidental to financial activities. For the Company to become and remain eligible for financial holding company status, it and the Bank must meet certain criteria, including capital, management and Community Reinvestment Act (“CRA”) requirements. The failure to meet such criteria could, depending on which requirements were not met, result in the Company facing restrictions on new financial activities or acquisitions or being required to discontinue existing activities that are not otherwise permissible for bank holding companies.
In addition to the Bank, the Company owns Live Oak Clean Energy FinancingGrove, LLC formed in November 2016, for the purpose of providing financing to entities for renewable energy applications;(“Grove”), Live Oak Ventures, Inc., formed in August 2016, for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; (“Live Oak Grove,Ventures”) and Canapi Advisors, LLC opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”Canapi Advisors”),. GLS is a management and technology consulting firm that specializesadvises 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 programprograms and U.S. DepartmentUSDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of Agriculture ("USDA"funds (the “Canapi Funds”)-guaranteed loans; focused on providing venture capital to new and 504 Fund Advisors,emerging financial technology companies.
The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“504FA”LOCEF”), whichLive Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth. JAM was previously a wholly owned subsidiary of Live Oak Private Wealth. TLH was formed in the third quarter of 2022 to serve ashold land adjacent to the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.
On February 1, 2017,Bank's headquarters consisting of wetlands and other protected property for the Company completed its acquisitionuse and enjoyment of Reltco Inc.the Bank's employees and National Assurance Title, Inc. (collectively referred to as "Reltco" or "title insurance business"), two nationwide title agencies under common control based in Tampa, Florida.customers.
The Company generates revenue primarily from thenet interest income and secondarily through origination and sale of SBA-guaranteedgovernment guaranteed loans. Income from the retention of loans and USDA guaranteed Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loans andis comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets andalong with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.
On July 23, 2015 the The Company closed onalso has less routinely generated gains and losses arising from its initial public offering with a secondary offering completedfinancial technology investments predominantly in August of 2017.
Business Outlook
Below is a discussion of management’s current expectations regarding company performance over the near-term based on market conditions, the regulatory environment and business strategiesits fintech segment, as of the time the Company filed this Report. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. See “Important Note Regarding Forward-Looking Statements”discussed more fully later in this Report for more information on forward-looking statements.section under the caption “Results of Segment Operations.”
The Company expects to originate approximately $1.90 to 2.00 billion in loans and leases and maintain an effective tax rate of less than 10% for the full year of 2017, excluding the effect of the expected one-time gain arising from the recently announced joint venture with First Data.
Results of Operations
Performance Summary
Three months ended SeptemberJune 30, 20172023 compared with three months ended SeptemberJune 30, 20162022
For the three months ended SeptemberJune 30, 2017,2023, the Company reported net income of $12.9$17.5 million, or $0.33$0.39 per diluted share, as compared to $3.5net income of $97.0 million, or $0.10$2.16 per diluted share, for the three months ended September 30, 2016. This increasesecond quarter of 2022.
The decrease in net income is primarilywas largely due to the following items:
Increased•Decrease in equity method investment income of $121.1 million, largely driven by the second quarter of 2022 gain of $120.5 million related to the Company's sale of its investment in Finxact, Inc. (“Finxact”); and
•Provision for loan and lease credit losses increased by $7.8 million to $13.0 million, compared to $5.3 million for the second quarter of 2022. The level of provision expense in the second quarter of 2023 was primarily the result of continued growth of the loan and lease portfolio combined with portfolio trends largely comprised of specific reserve increases in two impaired loans.
Key factors partially offsetting the decrease in net income for the second quarter of 2023 were:
•Increase in net interest income of $9.4$4.4 million, or 80.8%5.5%, predominately driven by significant growthfrom increases in the loans and leases held for sale and held for investment portfolios combined with a much higher net interest margin;
Decreased provision for loan and lease losses of $1.4 million was driven largely by improvements in the performance of the loan portfolio;
Increased loan servicing revenue of $630 thousand, or 10.8%, as a result of continued growth in the servicing portfolio due to ongoing loan sales;
Revenues of $2.0 million from the title insurance company subsidiary acquired invariable interest-earning assets following the first quarter of 2017;
Increases in other noninterest income of $1.1 million, or 171.4%, related to the growth in the Company’s renewable energy leasing business and trust management services; and
Decreased income tax expense of $7.6 million, or 297.5%, due to the ongoing operation of the renewable energy leasing business yielding investment tax credits.
Partially offsetting the above factors that contributed to2023 Federal Reserve rate increases combined with increased levels of net income wascash, investments and the total loan and lease portfolio, partially mitigated by a $3.7 million decrease in the net gains on sales of loans, $1.6 millioninterest margin arising from an increase in salaries and employee benefits, $1.6interest-bearing liabilities combined with average cost of funds outpacing the average yield on interest-earning assets;
•The net loss on loan servicing asset revaluation decreased $5.8 million, in equipment expense and $1.5or 67.3%, to $2.8 million in other expenses. The increase in salaries and employee benefits and other expenses were influenced by the growth of the overall business, including the addition of the title insurance subsidiary in the first quarter of 2017, compared to the same perioda net loss of 2016. Equipment expense increased principally due to higher levels of depreciation related to aircraft acquired in the first quarter of 2017 and solar panels purchased for the renewable energy leasing initiative.
Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
For the nine months ended September 30, 2017, the Company reported net income of $28.8 million, or $0.78 per diluted share, as compared to $8.3 million, or $0.24 per diluted share, for the nine months ended September 30, 2016. This increase in net income is primarily attributable to the following items:
Increased net interest income of $24.8 million, or 82.0%, predominately driven by significant growth in the loans and leases held for sale and held for investment portfolios combined with a significantly higher net interest margin;
Decreased provision for loan and lease losses of $3.2 million principally driven by the one-time transfer of $318.8$8.7 million in unguaranteed loans from held for sale to held for investment classification during the second quarter of 2016;2022;
Increased loan servicing revenue of $2.9 million, or 18.2%, as a result of continued growth in the servicing portfolio due to ongoing loan sales;
•Increased net gains on sales of loans of $2.5$5.2 million, or 4.7%91.9%, dueprincipally the result of a higher volume of loan sales in the second quarter of 2023;
•The net gain on loans accounted for under the fair value option of $1.7 million, improved by $6.2 million, from a net loss of $4.5 million in the second quarter of 2022;
•Decreased contributions and donations expense of $5.5 million, principally related to a higher year-to-date sale volume partially offset by a decreasespecial 2022 charitable donation of $5.0 million made in connection with the average net gain per loan sold;above discussed Finxact gain; and
Revenues of $5.8 million from the title insurance company subsidiary acquired in the first quarter of 2017; and
•Decreased income tax expense of $10.3$23.8 million, or 159.9%94.3%, principally related to above discussed decrease in net income.
Six months ended June 30, 2023 compared with six months ended June 30, 2022
For the six months ended June 30, 2023, the Company reported net income of $17.9 million, or $0.40 per diluted share, compared to net income of $131.5 million, or $2.92 per diluted share, for the first half of 2022.
The decrease in net income was largely due to the ongoing operationfollowing items:
•Decrease in equity method investment income of $121.9 million, principally a product of the renewable energy leasing business yielding investment tax credits.above discussed Finxact gain of $120.5 million in the second quarter of 2022;
Partially•Provision for loan and lease credit losses increased by $24.9 million, to $32.0 million, compared to $7.1 million for the first half of 2022. The level of provision expense in the first half of 2023 was primarily the result of continued growth of the loan and lease portfolio combined with portfolio trends and changes in the macroeconomic outlook;
•Decreased net gains on sales of loans of $5.6 million, or 21.2%, principally the result of comparatively negative market premiums in the first half of 2023; and
•Increased FDIC insurance expense of $4.3 million, or 104.6%, largely a product of rate increases effective in 2023 combined with the ongoing growth of Live Oak Banking Company.
Key factors partially offsetting the above factors that contributed to increased levels ofdecrease in net income was a $28.1for the first half of 2023 were:
•Increase in net interest income of $8.6 million, increase in noninterest expense, largely comprisedor 5.5%, principally the result of the effectsabove discussed drivers of continued investmentsthe quarter over quarter increase;
•A net loss on loan servicing asset revaluation of $2.5 million compared to support growing levelsa net loss of business$10.2 million in the first half of 2022, resulting in a positive change of $7.8 million, or 75.8%;
•Decreased contributions and business diversification.donations expense of $6.2 million, principally related to a special 2022 charitable donation of $5.0 million discussed above related to the 2022 Finxact gain; and
•Decreased income tax expense of $29.0 million, or 86.2%, principally related to above discussed decrease in net income.
Net Interest Income and Margin
Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them.them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” WithoutAs a bank without a branch network, the Bank generatesgathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.
Three months ended SeptemberJune 30, 20172023 compared with three months ended SeptemberJune 30, 20162022
For the three months ended SeptemberJune 30, 2017,2023, net interest income increased $9.4$4.4 million, or 80.8%5.5%, to $21.0$84.3 million compared to $11.6$79.9 million for the three months ended SeptemberJune 30, 2016.2022. This increase was principally due to the significant growth in average interest earning assetsthe held for investment loan and to a lesser extent higher yields on these assets which outpaced thelease portfolio outpacing growth and change in theinterest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest bearing liabilities.rate less the related interest expense from funding activity, net interest income increased by $5.5 million. Average interest earninginterest-earning assets increased by $746.9 million,$2.03 billion, or 53.8%24.6%, to $2.13$10.27 billion for the three months ended September 30, 2017,second quarter of 2023, compared to $1.39$8.25 billion for the three months ended September 30, 2016,second quarter of 2022, while the yield on average interest earninginterest-earning assets rose sharply by seventy-nineincreased one hundred-eighty basis points to 5.24%6.63%. The cost of funds on interest bearinginterest-bearing liabilities for the three months ended September 30, 2017second quarter of 2023 increased twentytwo hundred-sixty basis points to 1.43%3.59%, and the average balance of interest bearinginterest-bearing liabilities increased by $717.1 million,$1.69 billion, or 56.6%21.6%, over the same period.second quarter of 2022.
The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. This increase was muted by a $95.0 million reduction in average borrowings largely related to Paycheck Protection Program Liquidity Facility, or PPPLF, repayments in 2022. As indicated in the rate/volume table below, the overall increase in interest bearing liabilities and corresponding cost of funds was outpaced by the positive effects of the increased volume of interest earning assets along with much higher yields, resultingdiscussed above is reflected in increased interest income of $12.6$70.5 million and increasedoutpacing growth in interest expense of $3.2$66.1 million for the three months ended September 30, 2017second quarter of 2023 compared to the three months ended September 30, 2016. For the three months ended September 30, 2017 compared to the three months ended September 30, 2016,second quarter of 2022. The net interest margin increased sharplydecreased from 3.32%3.89% for the second quarter of 2022 to 3.91% due to3.29% for the aforementioned effects.second quarter of 2023.
Six months ended SeptemberJune 30, 20172023 compared with ninesix months ended SeptemberJune 30, 20162022
For the ninesix months ended SeptemberJune 30, 2017,2023, net interest income increased $24.8$8.6 million, or 82.0%5.5%, to $55.1$166.3 million compared to $30.3$157.7 million for the ninesix months ended SeptemberJune 30, 2016.2022. This increase was also principally due to the significant growth in average interest earning assetsthe held for investment loan and to a lesser extent higher yields on these assetslease portfolio outpacing the growth and change in theinterest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Excluding PPP loan impacts, comprised of amortization of net deferred fees combined with a 1% annualized interest bearing liabilities.rate less the related interest expense from funding activity, net interest income increased by $13.8 million. Average interest earninginterest-earning assets increased by $702.0 million,$1.94 billion, or 58.4%24.1%, to $1.90$9.99 billion for the nine months ended September 30, 2017first half of 2023, compared to $1.20$8.05 billion for the nine months ended September 30, 2016,first half of 2022, while the yield on average interest earninginterest-earning assets increased by sixty-fourone hundred-sixty-seven basis points to 5.12%6.48%. The cost of funds on interest bearinginterest-bearing liabilities for the nine months ended September 30, 2017first half of 2023 increased by eleventwo hundred-forty-six basis points to 1.34%3.36%, and the average balance of interest bearinginterest-bearing liabilities increased by $688.0$1.61 billion, or 21.0%, over the first half of 2022.
The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. This increase was muted by a $99.4 million reduction in average borrowings largely related to Paycheck Protection Program Liquidity Facility, or 63.13%, during the same period.PPPLF, repayments in 2022. As indicated in the rate/volume table below, the overall increase in interest bearing liabilities and corresponding cost of funds was outpaced by the positive effects of the increased volume of interest earning assets along with much higher yields, resultingdiscussed above is reflected in increased interest income of $32.6$129.1 million and increasedoutpacing growth in interest expense of $7.8$120.5 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2017first half of 2023 compared to the nine months ended September 30, 2016,first half of 2022. The net interest margin decreased from 3.95% for the first half of 2022 to 3.36% for the first half of 2023.
During the first half of 2023, the Federal Reserve increased sharply from 3.36%the federal funds upper target rate by 75 basis points. Subsequently, on July 26, 2023 the Federal Reserve further increased the federal funds upper target rate by 25 basis points, to 3.87% due5.50%. In June 2023, the Federal Reserve released its most current federal funds target rate midpoint projections which implied an increase of the median Federal Funds rate to 5.6% by the aforementioned effects.end of 2023 and a decrease of approximately 100 basis points to 4.6% by the end of 2024. There can be no assurance that any further increases in the Federal Funds rate will occur, and if they do, the amount and timing of actual increases are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.
Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented and annualizing that result. Loan fees are included in interest income on loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2023 | | 2022 |
| Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate |
Interest-earning assets: | | | | | | | | | | | |
Interest-earning balances in other banks | $ | 731,427 | | | $ | 8,847 | | | 4.85 | % | | $ | 328,014 | | | $ | 848 | | | 1.04 | % |
Federal funds sold | — | | | — | | | — | | | 78,216 | | | 196 | | | 1.01 | |
Investment securities | 1,252,320 | | | 8,503 | | | 2.72 | | | 915,106 | | | 4,046 | | | 1.77 | |
Loans held for sale | 516,378 | | | 12,153 | | | 9.44 | | | 1,119,094 | | | 15,969 | | | 5.72 | |
Loans and leases held for investment(1) | 7,773,816 | | | 140,209 | | | 7.23 | | | 5,805,907 | | | 78,188 | | | 5.40 | |
Total interest-earning assets | 10,273,941 | | | 169,712 | | | 6.63 | | | 8,246,337 | | | 99,247 | | | 4.83 | |
Less: Allowance for credit losses on loans and leases | (108,552) | | | | | | | (62,566) | | | | | |
Noninterest-earning assets | 499,661 | | | | | | | 644,495 | | | | | |
Total assets | $ | 10,665,050 | | | | | | | $ | 8,828,266 | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing checking | $ | 300,046 | | | $ | 3,968 | | | 5.30 | % | | $ | — | | | $ | — | | | — | % |
Savings | 4,277,850 | | | 41,930 | | | 3.93 | | | 3,894,177 | | | 7,538 | | | 0.78 | |
Money market accounts | 121,382 | | | 184 | | | 0.61 | | | 93,072 | | | 56 | | | 0.24 | |
Certificates of deposit | 4,792,289 | | | 38,921 | | | 3.26 | | | 3,714,882 | | | 11,183 | | | 1.21 | |
Total deposits | 9,491,567 | | | 85,003 | | | 3.59 | | | 7,702,131 | | | 18,777 | | | 0.98 | |
Borrowings | 37,997 | | | 407 | | | 4.30 | | | 132,969 | | | 536 | | | 1.62 | |
Total interest-bearing liabilities | 9,529,564 | | | 85,410 | | | 3.59 | | | 7,835,100 | | | 19,313 | | | 0.99 | |
Noninterest-bearing deposits | 205,741 | | | | | | | 96,123 | | | | | |
Noninterest-bearing liabilities | 80,427 | | | | | | | 55,725 | | | | | |
Shareholders' equity | 849,318 | | | | | | | 841,318 | | | | | |
Total liabilities and shareholders' equity | $ | 10,665,050 | | | | | | | $ | 8,828,266 | | | | | |
Net interest income and interest rate spread | | | $ | 84,302 | | | 3.04 | % | | | | $ | 79,934 | | | 3.84 | % |
Net interest margin | | | | | 3.29 | % | | | | | | 3.89 | % |
Ratio of average interest-earning assets to average interest-bearing liabilities | | | | | 107.81 | % | | | | | | 105.25 | % |
(1)Average loan and lease balances include non-accruing loans and leases.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| | 2017 | | 2016 |
| | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate |
Interest earning assets: | | | | | | | | | | | | |
Interest earning balances in other banks | | $ | 292,066 |
| | $ | 870 |
| | 1.18 | % | | $ | 231,238 |
| | $ | 264 |
| | 0.45 | % |
Investment securities | | 73,312 |
| | 325 |
| | 1.76 |
| | 69,869 |
| | 337 |
| | 1.91 |
|
Loans held for sale | | 653,342 |
| | 9,922 |
| | 6.03 |
| | 358,867 |
| | 4,996 |
| | 5.52 |
|
Loans and leases held for investment (1) | | 1,116,209 |
| | 17,055 |
| | 6.06 |
| | 728,041 |
| | 9,965 |
| | 5.43 |
|
Total interest earning assets | | 2,134,929 |
| | 28,172 |
| | 5.24 |
| | 1,388,015 |
| | 15,562 |
| | 4.45 |
|
Less: allowance for loan and lease losses | | (19,544 | ) | | | | | | (12,188 | ) | | | | |
Non-interest earning assets | | 242,014 |
| | | | | | 146,159 |
| | | | |
Total assets | | $ | 2,357,399 |
| | | | | | $ | 1,521,986 |
| | | | |
| | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | |
Interest bearing checking | | $ | 35,127 |
| | $ | 51 |
| | 0.58 | % | | $ | — |
| | $ | — |
| | — | % |
Savings | | 196,220 |
| | 682 |
| | 1.38 |
| | — |
| | — |
| | — |
|
Money market accounts | | 453,985 |
| | 1,303 |
| | 1.14 |
| | 471,447 |
| | 866 |
| | 0.73 |
|
Certificates of deposit | | 1,257,072 |
| | 4,722 |
| | 1.49 |
| | 767,887 |
| | 2,823 |
| | 1.46 |
|
Total deposits | | 1,942,404 |
| | 6,758 |
| | 1.38 |
| | 1,239,334 |
| | 3,689 |
| | 1.18 |
|
Other borrowings | | 42,219 |
| | 389 |
| | 3.66 |
| | 28,172 |
| | 242 |
| | 3.41 |
|
Total interest bearing liabilities | | 1,984,623 |
| | 7,147 |
| | 1.43 |
| | 1,267,506 |
| | 3,931 |
| | 1.23 |
|
Non-interest bearing deposits | | 43,652 |
| | | | | | 20,742 |
| | | | |
Non-interest bearing liabilities | | 22,650 |
| | | | | | 20,807 |
| | | | |
Shareholders' equity | | 306,474 |
| | | | | | 212,914 |
| | | | |
Noncontrolling interest | | — |
| | | | | | 17 |
| | | | |
Total liabilities and shareholders' equity | | $ | 2,357,399 |
| | | | | | $ | 1,521,986 |
| | | | |
| | | | | | | | | | | | |
Net interest income and interest rate spread | | | | $ | 21,025 |
| | 3.81 | % | |
| | $ | 11,631 |
| | 3.22 | % |
| | | | | | | | | | | | |
Net interest margin | | | | | | 3.91 |
| | | | | | 3.32 |
|
| | | | | | | | | | | | |
Ratio of average interest-earning assets to average interest-bearing liabilities | | | | | | 107.57 | % | | | | | | 109.51 | % |
| |
(1) | Average loan and lease balances include non-accruing loans. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
| Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate |
Interest-earning assets: | | | | | | | | | | | |
Interest-earning balances in other banks | $ | 530,205 | | | $ | 12,040 | | | 4.58 | % | | $ | 276,114 | | | $ | 1,027 | | | 0.75 | % |
Federal funds sold | 69,629 | | | 1,624 | | | 4.70 | | | 43,897 | | | 202 | | | 0.93 | |
Investment securities | 1,220,028 | | | 16,050 | | | 2.65 | | | 905,403 | | | 7,445 | | | 1.66 | |
Loans held for sale | 538,385 | | | 24,139 | | | 9.04 | | | 1,117,360 | | | 31,152 | | | 5.62 | |
Loans and leases held for investment(1) | 7,636,343 | | | 267,275 | | | 7.06 | | | 5,708,084 | | | 152,203 | | | 5.38 | |
Total interest-earning assets | 9,994,590 | | | 321,128 | | | 6.48 | | | 8,050,858 | | | 192,029 | | | 4.81 | |
Less: Allowance for credit losses on loans and leases | (101,457) | | | | | | | (62,649) | | | | | |
Noninterest-earning assets | 496,925 | | | | | | | 616,486 | | | | | |
Total assets | $ | 10,390,058 | | | | | | | $ | 8,604,695 | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing checking | $ | 161,626 | | | $ | 4,239 | | | 5.29 | % | | $ | — | | | $ | — | | | — | % |
Savings | 4,242,763 | | | 78,181 | | | 3.72 | | | 3,750,838 | | | 12,378 | | | 0.67 | |
Money market accounts | 117,753 | | | 321 | | | 0.55 | | | 92,272 | | | 110 | | | 0.24 | |
Certificates of deposit | 4,664,536 | | | 69,857 | | | 3.02 | | | 3,633,547 | | | 20,637 | | | 1.15 | |
Total deposits | 9,186,678 | | | 152,598 | | | 3.35 | | | 7,476,657 | | | 33,125 | | | 0.89 | |
Borrowings | 97,920 | | | 2,211 | | | 4.55 | | | 197,369 | | | 1,191 | | | 1.22 | |
Total interest-bearing liabilities | 9,284,598 | | | 154,809 | | | 3.36 | | | 7,674,026 | | | 34,316 | | | 0.90 | |
Noninterest-bearing deposits | 191,489 | | | | | | | 91,373 | | | | | |
Noninterest-bearing liabilities | 72,467 | | | | | | | 53,841 | | | | | |
Shareholders' equity | 841,504 | | | | | | | 785,455 | | | | | |
Total liabilities and shareholders' equity | $ | 10,390,058 | | | | | | | $ | 8,604,695 | | | | | |
Net interest income and interest rate spread | | | $ | 166,319 | | | 3.12 | % | | | | $ | 157,713 | | | 3.91 | % |
Net interest margin | | | | | 3.36 | % | | | | | | 3.95 | % |
Ratio of average interest-earning assets to average interest-bearing liabilities | | | | | 107.65 | % | | | | | | 104.91 | % |
(1)Average loan and lease balances include non-accruing loans and leases.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
| | Average Balance | | Interest | | Average Yield/Rate | | Average Balance | | Interest | | Average Yield/Rate |
Interest earning assets: | | | | | | | | | | | | |
Interest earning balances in other banks | | $ | 229,074 |
| | $ | 1,682 |
| | 0.98 | % | | $ | 189,944 |
| | $ | 650 |
| | 0.46 | % |
Investment securities | | 71,319 |
| | 964 |
| | 1.81 |
| | 60,057 |
| | 840 |
| | 1.86 |
|
Loans held for sale | | 561,408 |
| | 24,679 |
| | 5.88 |
| | 428,316 |
| | 17,666 |
| | 5.49 |
|
Loans and leases held for investment(1) | | 1,041,265 |
| | 45,611 |
| | 5.86 |
| | 522,757 |
| | 21,202 |
| | 5.40 |
|
Total interest earning assets | | 1,903,066 |
| | 72,936 |
| | 5.12 |
| | 1,201,074 |
| | 40,358 |
| | 4.48 |
|
Less: allowance for loan and lease losses | | (18,652 | ) | | | | | | (9,463 | ) | | | | |
Non-interest earning assets | | 206,653 |
| | | | | | 143,876 |
| | | | |
Total assets | | $ | 2,091,067 |
| | | | | | $ | 1,335,487 |
| | | | |
| | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | |
Interest bearing checking | | $ | 39,973 |
| | $ | 173 |
| | 0.58 | % | | $ | — |
| | $ | — |
| | — | % |
Savings | | 67,395 |
| | 693 |
| | 1.37 |
| | — |
| | — |
| | — |
|
Money market accounts | | 469,505 |
| | 3,365 |
| | 0.96 |
| | 423,923 |
| | 2,384 |
| | 0.75 |
|
Certificates of deposit | | 1,163,081 |
| | 12,662 |
| | 1.46 |
| | 637,469 |
| | 6,992 |
| | 1.46 |
|
Total deposits | | 1,739,954 |
| | 16,893 |
| | 1.30 |
| | 1,061,392 |
| | 9,376 |
| | 1.18 |
|
Other borrowings | | 37,736 |
| | 985 |
| | 3.49 |
| | 28,345 |
| | 725 |
| | 3.41 |
|
Total interest bearing liabilities | | 1,777,690 |
| | 17,878 |
| | 1.34 |
| | 1,089,737 |
| | 10,101 |
| | 1.23 |
|
Non-interest bearing deposits | | 35,073 |
| | | | | | 19,314 |
| | | | |
Non-interest bearing liabilities | | 22,288 |
| | | | | | 19,444 |
| | | | |
Shareholders’ equity | | 256,016 |
| | | | | | 206,967 |
| | | | |
Noncontrolling interest | | — |
| | | | | | 25 |
| | | | |
Total liabilities and shareholders’ equity | | $ | 2,091,067 |
| | | | | | $ | 1,335,487 |
| | | | |
| | | | | | | | | | | | |
Net interest income and interest rate spread | | | | $ | 55,058 |
| | 3.78 | % | | | | $ | 30,257 |
| | 3.25 | % |
| | | | | | | | | | | | |
Net interest margin | | | | | | 3.87 |
| | | | | | 3.36 |
|
| | | | | | | | | | | | |
Ratio of average interest-earning assets to average interest-bearing liabilities | | | | | | 107.05 | % | | | | | | 110.22 | % |
| |
(1) | Average loan and lease balances include non-accruing loans. |
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 vs. 2022 | | 2023 vs. 2022 |
| Increase (Decrease) Due to | | Increase (Decrease) Due to |
| Rate | | Volume | | Total | | Rate | | Volume | | Total |
Interest income: | | | | | | | | | | | |
Interest-earning balances in other banks | $ | 5,038 | | $ | 2,961 | | $ | 7,999 | | $ | 7,655 | | | $ | 3,358 | | | $ | 11,013 | |
Federal funds sold | — | | (196) | | (196) | | 1,063 | | | 359 | | | 1,422 | |
Investment securities | 2,567 | | 1,890 | | 4,457 | | 5,242 | | | 3,363 | | | 8,605 | |
Loans held for sale | 7,577 | | (11,393) | | (3,816) | | 14,037 | | | (21,050) | | | (7,013) | |
Loans and leases held for investment | 31,023 | | 30,998 | | 62,021 | | 55,619 | | | 59,453 | | | 115,072 | |
Total interest income | 46,205 | | 24,260 | | 70,465 | | 83,616 | | | 45,483 | | | 129,099 | |
Interest expense: | | | | | | | | | | | |
Interest-bearing checking | — | | 3,968 | | 3,968 | | — | | | 4,239 | | | 4,239 | |
Savings | 32,140 | | 2,252 | | 34,392 | | 60,459 | | | 5,344 | | | 65,803 | |
Money market accounts | 98 | | 30 | | 128 | | 161 | | | 50 | | | 211 | |
Certificates of deposit | 21,741 | | 5,997 | | 27,738 | | 38,572 | | | 10,648 | | | 49,220 | |
Borrowings | 571 | | (700) | | (129) | | 2,443 | | | (1,423) | | | 1,020 | |
Total interest expense | 54,550 | | 11,547 | | 66,097 | | 101,635 | | | 18,858 | | | 120,493 | |
Net interest income | $ | (8,345) | | $ | 12,713 | | $ | 4,368 | | $ | (18,019) | | | $ | 26,625 | | | $ | 8,606 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 vs. 2016 | | 2017 vs. 2016 |
| Increase (Decrease) Due to | | Increase (Decrease) Due to |
| Rate | | Volume | | Total | | Rate | | Volume | | Total |
Interest income: | | | | | | | | | | | |
Interest earning balances in other banks | $ | 481 |
| | $ | 125 |
| | $ | 606 |
| | $ | 821 |
| | $ | 211 |
| | $ | 1,032 |
|
Investment securities | (28 | ) | | 16 |
| | (12 | ) | | (31 | ) | | 155 |
| | 124 |
|
Loans held for sale | 640 |
| | 4,286 |
| | 4,926 |
| | 1,343 |
| | 5,670 |
| | 7,013 |
|
Loans and leases held for investment | 1,468 |
| | 5,622 |
| | 7,090 |
| | 2,538 |
| | 21,871 |
| | 24,409 |
|
Total interest income | 2,561 |
| | 10,049 |
| | 12,610 |
| | 4,671 |
| | 27,907 |
| | 32,578 |
|
Interest expense: | | | | | | | | | | | |
Interest bearing checking | — |
| | 51 |
| | 51 |
| | — |
| | 173 |
| | 173 |
|
Savings | — |
| | 682 |
| | 682 |
| | — |
| | 693 |
| | 693 |
|
Money market accounts | 478 |
| | (41 | ) | | 437 |
| | 689 |
| | 292 |
| | 981 |
|
Certificates of deposit | 81 |
| | 1,818 |
| | 1,899 |
| | (74 | ) | | 5,744 |
| | 5,670 |
|
Other borrowings | 22 |
| | 125 |
| | 147 |
| | 26 |
| | 234 |
| | 260 |
|
Total interest expense | 581 |
| | 2,635 |
| | 3,216 |
| | 641 |
| | 7,136 |
| | 7,777 |
|
Net interest income | $ | 1,980 |
| | $ | 7,414 |
| | $ | 9,394 |
| | $ | 4,030 |
| | $ | 20,771 |
| | $ | 24,801 |
|
Provision for Loan and Lease Credit Losses
The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for loancredit losses (“ACL”) on loans and lease lossesleases at a level that the Company believes is appropriate in relation to the estimated losses inherent in the loan and lease portfolio. A number of factors are considered in determining the required level of loan and lease loss reserves and the provision required to achieve the appropriate reserve level, including loan and lease growth, credit risk rating trends, nonperforming loan and lease levels, delinquencies, loan and lease portfolio concentrations and economic and market trends.
The provision for loan and lease losses for the third quarter of 2017 was $2.4 million compared to $3.8 million for the same period in 2016, a decrease of $1.4 million, or 36.3%, largely driven by lower levels of specific reserve requirements. For the nine months ended September 30, 2017 the provision was $5.5 million compared to $8.7 million for the same period in 2016, a decrease of $3.2 million, or 36.9%. The decrease in the provision for loan and lease losses for the nine months ended September 30, 2017 was principally driven by the one-time transfer in the second quarter of 2016 of $318.8 million in unguaranteed loans and leases from being classified as held for sale to held for investment. This reclassification resulted in a $4.0 million increase in the provision for loan and lease losses during the second quarter of 2016. Partially offsetting the effects of the 2016 loan reclassification were additional reserves recorded to accommodate robust loan and lease growth in 2017.
Loans and leases held for investment of $1.17 billion as of September 30, 2017 increased by $402.9 million, or 52.5%, compared to September 30, 2016. This growth was fueled by strong loan origination volume of $1.45 billion in the first three quarters of 2017.
Net charge-offs were $959 thousand, or 0.34% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended September 30, 2017, compared to net charge-offs of $937 thousand, or 0.51%, for the three months ended September 30, 2016. Net charge-offs for the first nine months of 2017 and 2016 totaled $2.7 million and $929 thousand, respectively. Year-to-date net charge-offs as a percentage of year-to-date average loans held for investment were 0.26% and 0.18% at September 30, 2017 and 2016, respectively. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for loan and lease losses.
In addition, at September 30, 2017, nonperforming loans and leases not guaranteed by the SBA totaled $3.3 million, which was 0.28% of the held-for-investment loan and lease portfolio compared to $3.4 million, or 0.44%, of loans and leases held for investment at September 30, 2016.
Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typicalTypical SBA 7(a) loan carries a 75% guarantee whileand USDA guarantees range from 60%50% to 80%90% depending on loan size and type, which reducesserve to reduce the risk profile of these loans. The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk.
For the second quarter of 2023, there was a provision for loan and lease credit losses of $13.0 million compared to $5.3 million for the same period in 2022, an increase of $7.8 million. For the first six months of 2023, there was a provision for loan and lease credit losses of $32.0 million compared to $7.1 million for the same period in 2022, an increase of $24.9 million. The increase in provision expense as compared to the second quarter of 2022 and first six months of 2022 was primarily the result of loan growth, combined with portfolio trends and changes in the macroeconomic outlook.
Loans and leases held for investment at historical cost were $7.39 billion as of June 30, 2023, increasing by $2.07 billion, or 38.7%, compared to June 30, 2022.
Net charge-offs for loans and leases carried at historical cost were $1.2 million, or 0.06% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2023, compared to net charge-offs of $2.5 million, or 0.19%, for the three months ended June 30, 2022. For the six months ended June 30, 2023, net charge-offs totaled $7.8 million compared to $4.8 million for the six months ended June 30, 2022, an increase of $3.0 million, or 62.2%. The increase in net charge-offs for the first half of 2023 was primarily isolated to two relationships. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.
In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $8.6 million and $3.6 million accounted for under the fair value option at June 30, 2023 and 2022, respectively, totaled $44.9 million, which was 0.61% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2023, compared to $12.0 million, or 0.22% of loans and leases held for investment carried at historical cost at June 30, 2022. The increase in total nonperforming loans and leases not guaranteed and carried at historical cost was principally isolated to two large relationships.
Noninterest Income
Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and revaluation.related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk. Other less commonconsistent 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 periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | 2023/2022 Increase (Decrease) |
| 2023 | | 2022 | | Amount | | Percent |
Noninterest income | | | | | | | |
Loan servicing revenue | $ | 6,687 | | $ | 6,477 | | $ | 210 | | 3.2 | % |
Loan servicing asset revaluation | (2,831) | | (8,668) | | 5,837 | | 67.3 | |
Net gains on sales of loans | 10,804 | | 5,630 | | 5,174 | | 91.9 | |
Net gain (loss) on loans accounted for under the fair value option | 1,728 | | (4,461) | | 6,189 | | 138.7 | |
Equity method investments (loss) income | (2,055) | | 119,056 | | (121,111) | | (101.7) | |
Equity security investments gains (losses), net | 121 | | 1,655 | | (1,534) | | (92.7) | |
Lease income | 2,535 | | 2,510 | | 25 | | 1.0 | |
Management fee income | 3,266 | | 2,558 | | 708 | | 27.7 | |
Other noninterest income | 3,901 | | 3,772 | | 129 | | 3.4 | |
Total noninterest income | $ | 24,156 | | $ | 128,529 | | $ | (104,373) | | (81.2) | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Increase (Decrease) |
| 2017 | | 2016 | | Amount | | Percent |
Noninterest income | | | | | | | |
Loan servicing revenue | $ | 6,490 |
| | $ | 5,860 |
| | $ | 630 |
| | 10.75 | % |
Loan servicing asset revaluation | (3,691 | ) | | (3,421 | ) | | (270 | ) | | 7.89 |
|
Net gains on sales of loans | 18,148 |
| | 21,833 |
| | (3,685 | ) | | (16.88 | ) |
Gain on sale of securities available-for-sale | — |
| | 1 |
| | (1 | ) | | (100.00 | ) |
Construction supervision fee income | 362 |
| | 502 |
| | (140 | ) | | (27.89 | ) |
Title insurance income | 1,968 |
| | — |
| | 1,968 |
| | 100.00 |
|
Other noninterest income | 1,783 |
| | 657 |
| | 1,126 |
| | 171.39 |
|
Total noninterest income | $ | 25,060 |
| | $ | 25,432 |
| | $ | (372 | ) | | (1.46 | )% |
| | | Nine Months Ended September 30, | | Increase (Decrease) | | Six Months Ended June 30, | | 2023/2022 Increase (Decrease) |
| 2017 | | 2016 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
Noninterest income | | | | | | | | Noninterest income | | | | | | | |
Loan servicing revenue | $ | 18,587 |
| | $ | 15,725 |
| | $ | 2,862 |
| | 18.20 | % | Loan servicing revenue | $ | 13,067 | | | $ | 12,833 | | | $ | 234 | | | 1.8 | % |
Loan servicing asset revaluation | (6,864 | ) | | (5,051 | ) | | (1,813 | ) | | 35.89 |
| Loan servicing asset revaluation | (2,475) | | | (10,237) | | | 7,762 | | | 75.8 | |
Net gains on sales of loans | 55,276 |
| | 52,813 |
| | 2,463 |
| | 4.66 |
| Net gains on sales of loans | 20,979 | | | 26,607 | | | (5,628) | | | (21.2) | |
Gain on sale of investment securities available-for-sale | — |
| | 1 |
| | (1 | ) | | (100.00 | ) | |
Construction supervision fee income | 1,077 |
| | 1,799 |
| | (722 | ) | | (40.13 | ) | |
Title insurance income | 5,803 |
| | — |
| | 5,803 |
| | 100.00 |
| |
Net gain (loss) on loans accounted for under the fair value option | | Net gain (loss) on loans accounted for under the fair value option | (2,801) | | | (3,945) | | | 1,144 | | | 29.0 | |
Equity method investments (loss) income | | Equity method investments (loss) income | (5,007) | | | 116,932 | | | (121,939) | | | (104.3) | |
Equity security investments gains (losses), net | | Equity security investments gains (losses), net | 198 | | | 1,611 | | | (1,413) | | | (87.7) | |
Lease income | | Lease income | 5,070 | | | 5,013 | | | 57 | | | 1.1 | |
Management fee income | | Management fee income | 6,738 | | | 4,046 | | | 2,692 | | | 66.5 | |
Other noninterest income | 3,601 |
| | 1,925 |
| | 1,676 |
| | 87.06 |
| Other noninterest income | 7,966 | | | 8,337 | | | (371) | | | (4.5) | |
Total noninterest income | $ | 77,480 |
| | $ | 67,212 |
| | $ | 10,268 |
| | 15.28 | % | Total noninterest income | $ | 43,735 | | | $ | 161,197 | | | $ | (117,462) | | | (72.9) | % |
For the three months ended SeptemberJune 30, 2017,2023, noninterest income decreased by $372 thousand,$104.4 million, or 1.5%81.2%, compared to the three months ended SeptemberJune 30, 2016.2022. The decline fromdecrease over the prior year is primarily thea result of the $120.5 million Finxact gain included in equity method investment income in the second quarter of 2022. Partially offsetting the decrease over the second quarter of 2022 was lower losses of $5.8 million related to the servicing asset revaluation, an increase in net gains on sales of loans decreasing $3.7of $5.2 million, to $18.1combined with an incremental $6.2 million in the third quarter of 2017 compared to $21.8 million in the third quarter of 2016 as a function of reduced volume of guaranteed loans sales, which was partially offset by an improvement in the average net gain on saleloans accounted for under the fair value option.
For the six months ended June 30, 2023, noninterest income decreased by $117.5 million, or 72.9%, compared to the six months ended June 30, 2022. The decrease over the prior year is primarily a result of guaranteed loans. Partially offsetting the effectsabove mentioned Finxact gain in the second quarter of lower2022 combined with a decrease in net gains on sales of loans were increasedof $5.6 million. Partially offsetting the decrease over the prior year to date period was lower losses of $7.8 million related to the servicing revenue of $630 thousand, title insurance income of $2.0asset revaluation combined with a $2.7 million from the acquisition of a nationwide title insurance business on February 1, 2017 and increased other noninterest income of $1.1 million. The increase in other noninterestmanagement fee income was primarily comprised of $682 thousand of operating lease income from renewable energy assets and trust management income of $236 thousand.
For the nine months ended September 30, 2017, noninterest income increasedgenerated by $10.3 million, or 15.3%, compared to the nine months ended September 30, 2016. Increases in noninterest income were primarily the result of higher year-to-date levelsCanapi Advisors. Canapi Advisors is included in the serviced loan portfolio and the volume of loans sold in the secondary market which generated $2.9 million of increased servicing revenue and $2.5 million of increased net gains on sale of loans. Also driving increased levels of noninterest income was $5.8 million in title insurance revenue from the acquisition of a nationwide title insurance business in early 2017 and increased other
noninterest income of $1.7 million. The increase in other noninterest income was primarily comprised of $691 thousand of operating lease income from renewable energy assets and trust management income of $845 thousand. Partly offsetting the overall increase in noninterest income was a higher negative loan servicing revaluation adjustment of $1.8 million.Company's Fintech segment.
The following table reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold. These components are key drivers of the Company's noninterest income.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Three months ended March 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
Amount of loans and leases originated | $ | 861,033 | | | $ | 959,635 | | | $ | 1,030,882 | | | $ | 865,063 | |
Guaranteed portions of loans sold | 245,074 | | | 68,818 | | | 167,826 | | | 219,703 | |
Outstanding balance of guaranteed loans sold (1) | 2,808,200 | | | 2,681,079 | | | 2,695,757 | | | 2,786,403 | |
| | | Three months ended September 30, | | Three months ended June 30, | | Six Months Ended June 30, | | For years ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2023 | | 2022 | | 2022 | | 2021 | | 2020 | | 2019 |
Amount of loans and leases originated | $ | 395,682 |
| | $ | 381,050 |
| | $ | 586,471 |
| | $ | 356,865 |
| Amount of loans and leases originated | $ | 1,891,915 | | | $ | 1,824,698 | | | $ | 4,007,621 | | | $ | 4,480,725 | | | $ | 4,450,198 | | | $ | 2,001,886 | |
Guaranteed portions of loans sold | 163,843 |
| | 210,610 |
| | 203,714 |
| | 135,555 |
| Guaranteed portions of loans sold | 412,900 | | | 288,521 | | | 580,889 | | | 668,462 | | | 542,596 | | | 340,374 | |
Outstanding balance of guaranteed loans sold (1) | 2,584,163 |
| | 2,102,468 |
| | 2,521,506 |
| | 1,970,908 |
| Outstanding balance of guaranteed loans sold (1) | 2,808,200 | | | 2,681,079 | | | 2,668,110 | | | 2,756,915 | | | 2,819,625 | | | 2,746,480 | |
(1)This represents the outstanding principal balance of guaranteed loans serviced, as of the last day of the applicable period, which have been sold into the secondary market.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, | | For years ended December 31, |
| 2017 | | 2016 | | 2016 | | 2015 | | 2014 | | 2013 |
Amount of loans and leases originated | $ | 1,450,816 |
| | $ | 1,022,445 |
| | $ | 1,537,010 |
| | $ | 1,158,640 |
| | $ | 848,090 |
| | $ | 498,752 |
|
Guaranteed portions of loans sold | 576,272 |
| | 501,808 |
| | 761,933 |
| | 640,886 |
| | 433,912 |
| | 339,342 |
|
Outstanding balance of guaranteed loans sold (1) | 2,584,163 |
| | 2,102,468 |
| | 2,278,618 |
| | 1,779,989 |
| | 1,302,828 |
| | 1,005,764 |
|
| |
(1) | This represents the outstanding principal balance of guaranteed loans serviced, as of the last day of the applicable period, which have been sold into the secondary market. |
Changes in various components of noninterest income are discussed in more detail below.
Loan Servicing Revenue: While portions of the loans that the Bank originates are sold and generate gain on sale revenue, servicing rights for all loans that the Bank originates, including loans sold, 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 balance of SBA loans sold and 0.40% of the outstanding balance of USDA loans sold. In addition, the cost of servicing sold loans is approximately 0.40% of the balance of the loans sold, which is included in the loan servicing revaluation computations. Unrecognized servicing revenue is reflected in a servicing asset recorded on the balance sheet. Revenues associated with the servicing of loans are recognized over the expected life of the loan through the income statement, and the servicing asset is reduced as this revenue is recognized. For three and nine months ended September 30, 2017, loan servicing revenue increased $630 thousand, or 10.8%, and $2.9 million, or 18.2%, respectively, compared to the three and nine months ended September 30, 2016, as a result of an increase in the average outstanding balance of guaranteed loans sold. At September 30, 2017, the outstanding balance of government guaranteed loans sold in the secondary market was $2.58 billion. At September 30, 2016, the outstanding balance of SBA guaranteed loans sold was $2.10 billion.
Loan ServicingAsset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The revaluation considersvaluation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the amortizationdiscount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds.most sensitive assumptions. For the three months ended SeptemberJune 30, 2017,2023, there was a net negativeloss on loan servicing asset revaluation adjustment of $3.7$2.8 million, compared to a net negative revaluation adjustmentloss of $3.4$8.7 million for the three months ended SeptemberJune 30, 2016.2022, resulting in a positive comparative quarter change of $5.8 million, or 67.3%. For the ninesix months ended SeptemberJune 30, 2017,2023, there was a net negativeloss on loan servicing asset revaluation adjustment of $6.9$2.5 million compared to a net negative revaluation adjustment of $5.1$10.2 million for the ninesix months ended SeptemberJune 30, 2016.2022, resulting in a positive change of $7.8 million, or 75.8%. The higher negative loanincrease in the valuation of the servicing revaluation amount for the third quarter of 2017 asasset compared to the thirdsecond quarter and first half of 20162022 was driven by amortizationprincipally the result of negative market trends in 2022 outpacing those experienced in 2023.
Net Gains on Sales of Loans: For the serviced portfolio during that period partially offset by improvements in the secondary market. The higher year-to-date negative loan servicing revaluation amount asthree months ended June 30, 2023, net gains on sales of loans increased $5.2 million, or 91.9%, compared to the same period in 2016 was principally driven by amortizationthree months ended June 30, 2022. The volume of guaranteed loans sold increased $176.3 million, or 256.1%, for the serviced portfolio combined with decreasesthree months ended June 30, 2023 to $245.1 million from $68.8 million in the secondary market for guaranteed portions of 7(a) loans.
Net Gains on Sale of Loans:three months ended June 30, 2022. For the three and ninesix months ended SeptemberJune 30, 2017,2023, net gains on sales of loans decreased $3.7$5.6 million, or 16.9%21.2%, and increased $2.5 million, or 4.7%, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2016.2022. For the threesix months ended SeptemberJune 30, 2017, the volume of guaranteed loans sold decreased $46.8 million, or 22.2%, to $163.8 million from $210.6 million for the three months ended September 30, 2016. This decline in guaranteed sale volume was principally the result of a decrease in the percentage of loans that were fully funded and thereby eligible for sale at closing arising largely from seasonality in our renewable energy vertical. For the nine months ended September 30, 2017,2023, the volume of guaranteed loans sold increased $74.5$124.4 million, or 14.8%43.1%, to $576.3$412.9 million from $501.8$288.5 million for the ninesix months ended SeptemberJune 30, 2016.2022. The volume-driven increases in the year-to-dateaverage net gain on loan sale comparisons were partially offset by lower average premiums paidpremium decreased from 108% to 105% in the secondary market.second quarters of 2022 and 2023, respectively, and decreased from 109% to 106% in the first halves of 2022 and 2023, respectively. The averageincrease in net gains on sales of loans over the second quarter of 2022 was principally the result of higher loan sale volume while the decrease over the first half of 2022 was principally related to the effect of weaker premiums outpacing heightened levels of sales volume.
Net Gain (Loss) on Loans Accounted for Under the Fair Value Option: For the three months ended June 30, 2023, the Company had a net gain on saleloans accounted for under the fair value option of $1.7 million compared to a net loss of $4.5 million for the second quarter of 2022, a positive change of $6.2 million, or 138.7%. For the six months ended June 30, 2023, the Company had a net loss on loans accounted for under the fair value option of $2.8 million compared to a net loss of $3.9 million for the same period of 2022, a positive change of $1.1 million, or 29.0%. The carrying amount of loans accounted for under the threefair value option at June 30, 2023 and nine months ended September 30, 20172022 was $111 thousand$441.8 million (all classified as held for investment) and $97 thousand$554.1 million ($23.5 million classified as held for sale and $530.6 million classified as held for investment), respectively, a decrease of revenue$112.3 million, or 20.3%. The incremental net gain on loans accounted for each $1 million in loans sold, respectively, under the fair value option compared to $104 thousand and $105 thousandboth prior periods was largely the result of revenue for each $1 millionmoderating interest rate impacts in loans sold for2023 combined with a continued decline in the three and nine months ended September 30, 2016. The lower average premiums recorded in 2017 were driven by increased USDA guaranteed loan sales which commonly receive lower premiums than SBA guaranteed loan sales.size of the underlying principal balance of the portfolio.
Noninterest Expense
Noninterest expense comprises all operating costs of the Company, such as employee related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense.
The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | 2023/2022 Increase (Decrease) |
| 2023 | | 2022 | | Amount | | Percent |
Noninterest expense | | | | | | | |
Salaries and employee benefits | $ | 43,066 | | | $ | 46,276 | | | $ | (3,210) | | | (6.9) | % |
Non-employee expenses: | | | | | | | |
Travel expense | 2,770 | | | 2,358 | | | 412 | | | 17.5 | |
Professional services expense | 1,996 | | | 3,988 | | | (1,992) | | | (49.9) | |
Advertising and marketing expense | 3,009 | | | 2,301 | | | 708 | | | 30.8 | |
Occupancy expense | 2,205 | | | 2,773 | | | (568) | | | (20.5) | |
Technology expense | 8,005 | | | 5,762 | | | 2,243 | | | 38.9 | |
Equipment expense | 4,023 | | | 3,784 | | | 239 | | | 6.3 | |
Other loan origination and maintenance expense | 3,442 | | | 3,022 | | | 420 | | | 13.9 | |
Renewable energy tax credit investment impairment | — | | | 50 | | | (50) | | | (100.0) | |
FDIC insurance | 5,061 | | | 2,164 | | | 2,897 | | | 133.9 | |
Contributions and donations | — | | | 5,515 | | | (5,515) | | | (100.0) | |
Other expense | 2,880 | | | 2,886 | | | (6) | | | (0.2) | |
Total non-employee expenses | 33,391 | | | 34,603 | | | (1,212) | | | (3.5) | |
Total noninterest expense | $ | 76,457 | | | $ | 80,879 | | | $ | (4,422) | | | (5.5) | % |
| | | Three Months Ended September 30, | | Increase (Decrease) | | Six Months Ended June 30, | | 2023/2022 Increase (Decrease) |
| 2017 | | 2016 | | Amount | | Percent | | 2023 | | 2022 | | Amount | | Percent |
Noninterest expense | | | | | | | | Noninterest expense | | | | | | | |
Salaries and employee benefits | $ | 19,037 |
| | $ | 17,471 |
| | $ | 1,566 |
| | 8.96 | % | Salaries and employee benefits | $ | 87,831 | | | $ | 84,783 | | | $ | 3,048 | | | 3.6 | % |
Non-staff expenses: | | | | | | | | |
Non-employee expenses: | | Non-employee expenses: | |
Travel expense | 2,289 |
| | 2,218 |
| | 71 |
| | 3.20 |
| Travel expense | 5,181 | | | 4,255 | | | 926 | | | 21.8 | |
Professional services expense | 1,068 |
| | 907 |
| | 161 |
| | 17.75 |
| Professional services expense | 2,923 | | | 6,779 | | | (3,856) | | | (56.9) | |
Advertising and marketing expense | 1,516 |
| | 1,097 |
| | 419 |
| | 38.20 |
| Advertising and marketing expense | 6,612 | | | 4,030 | | | 2,582 | | | 64.1 | |
Occupancy expense | 1,473 |
| | 1,058 |
| | 415 |
| | 39.22 |
| Occupancy expense | 4,130 | | | 5,100 | | | (970) | | | (19.0) | |
Data processing expense | 1,982 |
| | 1,252 |
| | 730 |
| | 58.31 |
| |
Technology expense | | Technology expense | 15,734 | | | 11,815 | | | 3,919 | | | 33.2 | |
Equipment expense | 2,228 |
| | 611 |
| | 1,617 |
| | 264.65 |
| Equipment expense | 7,841 | | | 7,600 | | | 241 | | | 3.2 | |
Other loan origination and maintenance expense | 1,601 |
| | 806 |
| | 795 |
| | 98.64 |
| Other loan origination and maintenance expense | 7,369 | | | 6,135 | | | 1,234 | | | 20.1 | |
Renewable energy tax credit investment impairment | | Renewable energy tax credit investment impairment | 69 | | | 50 | | | 19 | | | 38.0 | |
FDIC insurance | 858 |
| | 210 |
| | 648 |
| | 308.57 |
| FDIC insurance | 8,464 | | | 4,136 | | | 4,328 | | | 104.6 | |
Title insurance closing services expense | 687 |
| | — |
| | 687 |
| | 100.00 |
| |
Contributions and donations | | Contributions and donations | — | | | 6,238 | | | (6,238) | | | (100.0) | |
Other expense | 3,117 |
| | 1,588 |
| | 1,529 |
| | 96.28 |
| Other expense | 9,265 | | | 5,672 | | | 3,593 | | | 63.3 | |
Total non-staff expenses | 16,819 |
| | 9,747 |
| | 7,072 |
| | 72.56 |
| |
Total non-employee expenses | | Total non-employee expenses | 67,588 | | | 61,810 | | | 5,778 | | | 9.3 | |
Total noninterest expense | $ | 35,856 |
| | $ | 27,218 |
| | $ | 8,638 |
| | 31.74 | % | Total noninterest expense | $ | 155,419 | | | $ | 146,593 | | | $ | 8,826 | | | 6.0 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Increase (Decrease) |
| 2017 | | 2016 | | Amount | | Percent |
Noninterest expense | | | | | | | |
Salaries and employee benefits | $ | 55,687 |
| | $ | 45,875 |
| | $ | 9,812 |
| | 21.39 | % |
Non-staff expenses: | | | | | | | |
Travel expense | 6,035 |
| | 6,394 |
| | (359 | ) | | (5.61 | ) |
Professional services expense | 4,228 |
| | 2,345 |
| | 1,883 |
| | 80.30 |
|
Advertising and marketing expense | 4,977 |
| | 3,425 |
| | 1,552 |
| | 45.31 |
|
Occupancy expense | 4,018 |
| | 3,306 |
| | 712 |
| | 21.54 |
|
Data processing expense | 5,536 |
| | 3,864 |
| | 1,672 |
| | 43.27 |
|
Equipment expense | 5,005 |
| | 1,696 |
| | 3,309 |
| | 195.11 |
|
Other loan origination and maintenance expense | 3,587 |
| | 2,001 |
| | 1,586 |
| | 79.26 |
|
FDIC insurance | 2,308 |
| | 507 |
| | 1,801 |
| | 355.23 |
|
Title insurance closing services expense | 1,877 |
| | — |
| | 1,877 |
| | 100.00 |
|
Other expense | 8,883 |
| | 4,648 |
| | 4,235 |
| | 91.11 |
|
Total non-staff expenses | 46,454 |
| | 28,186 |
| | 18,268 |
| | 64.81 |
|
Total noninterest expense | $ | 102,141 |
| | $ | 74,061 |
| | $ | 28,080 |
| | 37.91 | % |
Total noninterest expense for the three and ninesix months ended SeptemberJune 30, 2017 increased $8.62023, decreased $4.4 million, or 31.7%5.5%, and $28.1increased $8.8 million, or 37.9%6.0%, respectively, compared to the same periods in 2016.2022. The increasechanges in noninterest expense for the comparable three and six month period was predominately impacted by increased personnel, equipment expense and other expenses primarilylargely driven by the significant growth of the Company's core business. Changes in various components, of noninterest expense areas discussed below.
Salaries and employee benefits: Total personnel expense for the three and ninesix months ended SeptemberJune 30, 2017 increased2023 decreased by $1.6$3.2 million, or 9.0%6.9%, and $9.8increased $3.0 million, or 21.4%3.6%, respectively, compared to the same periods in 2016. A significant driver for this2022. The decrease in salaries and employee benefits over the second quarter of 2022 was largely the product of lower levels in bonus accruals while the increase wasover the acquisitionfirst half of a nationwide title insurance business on February 1, 2017 with 54 full-time and 5 part-time employees. Also contributing2022 is principally related to the growth in personnel expense was continued investment in human capitalresources to support the growing loanstrategic and lease production from new and existing verticals.growth initiatives. Total full-time equivalent employees increased from 400891 at SeptemberJune 30, 20162022, to 530984 at SeptemberJune 30, 2017.2023. Salaries and employee benefits expense included $2.0$6.3 million and $4.1$12.5 million of stock basedstock-based compensation infor the three and six months ended SeptemberJune 30, 2017 and 2016,2023, respectively, and $6.2compared to $5.1 million and $7.6$10.0 million for the ninethree and six months ended SeptemberJune, 30, 2017 and 2016,2022, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock basedstock-based compensation.
OfProfessional services expense: For the total stock based compensation, $286 thousand forthree and six months ended June 30, 2023, professional services expense decreased $2.0 million, or 49.9%, and $3.9 million, or 56.9%, respectively, compared to the thirdsame periods in 2022. The decrease compared to the prior periods was due to lower levels of legal fees combined with an insurance recovery of $1.3 million in the first quarter of 20172023 related to previously expensed legal fees.
Advertising and $1.0marketing expense: For the six months ended June 30, 2023, advertising and marketing expense increased $2.6 million, foror 64.1%, compared to the same period in 2022. The increase over the first nine monthshalf of 2017 included in salaries and employee benefits is related to restricted stock unit ("RSU") awards with a market price condition of $34 per share for key employee retention with an effective grant date of May 24, 2016. See Note 10 - Stock Plans2022 was largely driven by continued investment in the Notes to the Unaudited Consolidated Financial Statements in our quarterly report on Form 10-Q for the period ended March 31, 2016, for more information.Company’s lending and deposit market growth.
Professional servicesTechnology expense: For the three and ninesix months ended SeptemberJune 30, 2017, total professional services2023, technology expense increased $161 thousand,$2.2 million, or 17.8%38.9%, and $1.9$3.9 million, or 80.3%33.2%, respectively, compared to the same periods in 2016. The primary drivers of the year over year2022. This increase were advisory, consulting, and due diligence expenseswas primarily related to enhanced investments in the February 2017 acquisition of a title insurance business.Company’s technology resources.
Advertising and marketing expense:FDIC insurance: For the three and ninesix months ended SeptemberJune 30, 2017, total advertising and marketing expense2023, FDIC insurance increased $419 thousand,$2.9 million, or 38.2%133.9%, and $1.6$4.3 million, or 45.3%104.6%, respectively, compared to the same periods in 2016. The primary driver2022. This increase is largely the result of rate increases effective in 2023 combined with the increase in advertisingongoing growth of Live Oak Banking Company.
Contributions and marketing expense was the cost of growing brand recognition in new and existing verticals and launching a new deposit platform.
Data processing expense:donations: For the three and ninesix months ended SeptemberJune 30, 2017, total data processing2023, contributions and donations decreased $5.5 million, and $6.2 million, respectively, compared to the same periods in 2022. The decrease is principally related to a special charitable donation during the second quarter of 2022 of $5.0 million made in connection with the earlier discussed Finxact gain.
Other expense:For the six months ended June 30, 2023, other expense increased $730 thousand,$3.6 million, or 58.3%63.3%, compared to the same period in 2022, largely related to $2.9 million in increased levels of reserves on unfunded commitments. This increase in the reserve for unfunded commitments was largely a result of refinements to the estimation assumptions in the first quarter of 2023.
Income Tax Expense
For the three months ended June 30, 2023, income tax expense was $1.4 million compared to $25.3 million for the second quarter of 2022, and the Company’s effective tax rates were 7.5% and 20.7%, respectively. For the six months ended June 30, 2023, income tax expense was $4.6 million compared to $33.7 million for the first half of 2022, and the Company’s effective tax rates were 20.6% and 20.4%, respectively. The lower level of income tax expense for the second quarter and the first half of 2023 as compared to the same periods in 2022 was principally the result of decreased pretax income combined with increased tax credits.
Results of Segment Operations
The Company’s operations are managed along two primary operating segments Banking and Fintech. A description of each segment and the methodologies used to measure financial performance is described in Note 11. Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. Net income (loss) by operating segment is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Banking | $ | 19,623 | | | $ | 3,755 | | | $ | 22,011 | | | $ | 41,595 | |
Fintech | (727) | | | 94,683 | | | (1,088) | | | 92,934 | |
Other | (1,352) | | | (1,399) | | | (2,981) | | | (2,981) | |
Consolidated net income | $ | 17,544 | | | $ | 97,039 | | | $ | 17,942 | | | $ | 131,548 | |
Banking
For the three and six months ended June 30, 2023, net income increased $15.9 million and decreased $19.6 million, respectively, compared to the same periods of 2022. Key factors influencing these changes are discussed below.
For the three and six months ended June 30, 2023, net interest income increased $4.1 million, or 5.1%, and $1.7$8.1 million, or 43.3%5.1%, respectively, compared to the same periods in 2016. of 2022. See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment.
The primary driver of the increase in data processing expense was the growth in ourprovision for loan and deposit portfolios and the development of a new deposit platform.
Equipment expense: Forlease credit losses for the three and ninesix months ended SeptemberJune 30, 2017, the total costs associated with equipment2023, increased $1.6$7.8 million or 264.6%, and $3.3$24.9 million, or 195.1%, respectively, compared to the same period in 2016. A major factor behind
this increase was the higher level of depreciation related to the first quarter addition of two new aircraft combined with useful lives being shortened for existing aircraft as well as for solar panels acquired to meet leasing commitments.
FDIC insurance: For the three and nine months ended September 30, 2017, total Federal Deposit Insurance Corporation (FDIC) insurance expense increased $648 thousand, or 308.6%, and $1.8 million, or 355.2%, respectively, compared to the same periods in 2016. This increase wasof 2022. See the resultanalysis of revised premium requirements of all FDIC-insured financial institutionsprovision for loan and lease credit losses included in the latter part of 2016 along with significantly higher deposit levels.above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.
Title insurance closing services expense: With the first quarter 2017 acquisition of a nationwide title insurance company, this is a new expense category. This category reflects the cost of closing services such as notary and abstracting in the delivery of title insurance agency products. For the three and ninesix months ended SeptemberJune 30, 2017, total title insurance closing services expense was $687 thousand2023, noninterest income increased $16.3 million and $1.9$1.4 million, respectively.
Other expense: For the three and nine months ended September 30, 2017, the total costs associated with other expenses increased $1.5 million, or 96.3%, and $4.2 million, or 91.1%, respectively, compared to the same periods in 2016.of 2022. The quarter-over-quarter increase in other expenses was predominately comprised of costs associated with support expenses and infrastructure driven by business growth and an increase in charitable contributions. The year-over-year increase in other expense was comprised predominately of charitable initiatives, costs associated with the newly acquired title company, and a first quarter 2017 loss incurred upon the trade-in of an existing aircraft.
Income Tax Expense
The effective tax rates for the three month comparative period was principally driven by lower losses related to the loan servicing asset revaluation, increased net gains on sales of loans and ninean incremental gain on loans accounted for under the fair value option. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.
For the three and six months ended SeptemberJune 30, 2017 were (64.8)%2023, noninterest expense decreased $4.9 million, or 6.3%, and (15.5)%increased $8.2 million, or 5.9%, respectively, compared to same periods of 2022. See the effective ratesanalysis of 42.4% and 43.7%these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.
For the three and ninesix months ended SeptemberJune 30, 2016, respectively.2023, income tax expense increased $1.7 million and decreased $4.1 million, respectively, compared to the same periods of 2022. The negative effective ratesdecrease compared to the six months ended June 30, 2022 is principally due to lower levels of (64.8)% and (15.5)% forpretax income.
Fintech
For the three and nine-monthsix months ended June 30, 2023, net income decreased by $95.4 million and $94.0 million, respectively, compared to same periods ended September 30, 2017 principally reflected anof 2022. The primary factor influencing this decrease compared to both prior periods is the $120.5 million Finxact gain included in equity method investment income in the second quarter of 2022. Partially offsetting the decrease over the first half of 2022 was a $2.7 million increase in anticipated investmentmanagement fee income earned by Canapi Advisors combined with lower levels of income tax expense as a result decreased pretax income in renewable energy assets generating investment tax credits. As the lessor2023.
Discussion and Analysis of Financial Condition
SeptemberJune 30, 20172023 vs. December 31, 20162022
Total assets at SeptemberJune 30, 20172023 were $2.43$10.82 billion, an increase of $676.9$963.7 million, or 38.6%9.8%, compared to total assets of $1.76$9.86 billion at December 31, 2016.2022. The growth in total assets was principally driven by the following:
Increased•Cash and cash equivalents, comprised of cash and due from banks dueand federal funds sold, combined with investment securities available-for-sale was $1.94 billion at June 30, 2023, an increase of $509.9 million, or 35.6%, compared to $1.43 billion at December 31, 2022. This increase reflects growing deposit levels combined with strategic maintenance of the successful secondary offering completed in August of 2017 of $113.1 million and growth from deposit gathering campaigns generating $527.8 million in new deposits;Company's liquidity profile.
•Growth in loantotal loans and lease originations combined with longer retention times of loansleases held for investment and held for sale comprised largely of $461.4 million resulting from strong origination activity in the first six months of 2023 and holding loans intentionally heldavailable for sale for longer periods and those in newer verticals which require a period of loan advances to becometime before sale, as discussed more fully funded prior to being sold;
Growth in premises and equipment related primarily to construction of a new aircraft hangar, the addition of two new aircraft in replacement of two older ones and the addition of solar panels to meet leasing commitments;
Increased other assets largely related to:
| |
◦ | goodwill and intangibles generated by the first quarter acquisition of Reltco, and |
| |
◦ | income taxes receivable arising from investment tax credits generated by investment in solar panels classified in premises and equipment in which the Company is the lessor. |
Cash and cash equivalents were $260.9 million at September 30, 2017, an increase of $22.9 million, or 9.6%, compared to $238.0 million at December 31, 2016. This increase primarily reflected the results of a successful deposit gathering campaign combined with the net proceeds from the Company’s secondary capital raise in the third quarter.
below. Total investment securities increased $5.5 millionoriginations during the first nine monthshalf of 2017, from $71.1 million at December 31, 2016, to $76.6 million at September 30, 2017, an increase of 7.8%. The portfolio is comprised of US government agency securities, residential mortgage-backed securities and a mutual fund.
2023 were $1.89 billion.
Loans held for sale increased $298.3decreased $30.8 million, or 75.7%5.6%, during the first ninesix months of 2017,2023, from $394.3$554.6 million at December 31, 2016,2022, to $692.6$523.8 million at SeptemberJune 30, 2017.2023. The increasedecrease in loans held for sale was primarilyprincipally due to the resultimpact of strong growthmarket conditions in a rising rate environment which has influenced management's intent to hold a greater portion of loans as held for investment combined with higher levels of loan origination activities throughout 2017 andsales in the strategy to enhance interest income by increasing the retention timefirst half of guaranteed loans along with growth in certain loans that take time to fully fund.2023.
Loans and leases held for investment increased $262.3$492.2 million, or 28.9%6.7%, during the first ninesix months of 2017,2023, from $907.6 million$7.34 billion at December 31, 2016,2022, to $1.17$7.84 billion at SeptemberJune 30, 2017.2023. The increase was primarily the result of robustthe above-mentioned loan originations in 2023 combined with increased levels of loans retained as held for investment.
Total deposits were $9.88 billion at June 30, 2023, an increase of $994.2 million, or 11.2%, from $8.88 billion at December 31, 2022. The increase in total deposits from the prior period was to support growth in the loan and lease growth from origination activities during the first three quarters of 2017portfolio combined with greater retentionstrong deposit inflows. At June 30, 2023, the Bank’s total uninsured deposits were approximately $1.4 billion, or 14.3%, of loans on the consolidated balance sheet.total deposits.
Premises and equipment, net increased $64.6Borrowings decreased to $28.3 million or 99.9%, during the first nine months of 2017. This increase was primarily driven by construction of a new aircraft hangar and the replacement of two older aircraft with two new ones better suited to service the Company's growing nationwide customer base and the addition of solar panels to meet leasing commitments.
Servicing assets increased $1.4 million, or 2.7%, during the first nine months of 2017,at June 30, 2023, from $52.0$83.2 million at December 31, 2016,2022. This decrease was principally due to $53.4 million at September 30, 2017. The increasepaying off the Company’s Fed Funds line of credit in servicing assets is primarily the result of loan sales outpacing the amortization of the existing serviced portfolio.
Other assets increased $28.1 million, or 76.1%, during the first nine months of 2017, from $37.0 million at December 31, 2016 to $65.2 million at September 30, 2017. The increase in other assets was primarily driven by the recognition of $8.9 million in income taxes receivable arising from investment tax credits generated from the investment in solar panel leasing activities combined with the first quarter 2017 acquisitionof 2023. See Note 8. Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity.
Regulatory Impact of Asset Growth
General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of June 30, 2023, the Company and the Bank each had total assets of $10.82 billion and $10.72 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.
Consumer Financial Laws. Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has near-exclusive supervision authority, including examination authority, to assess compliance with federal consumer financial laws for a bank and its affiliates if the bank has total assets of more than $10 billion. This provision becomes applicable to a bank following the fourth consecutive quarter where the total assets of the nationwide title insurance business. As a resultbank, as reported in its quarterly Call Report, exceed $10 billion and afterwards remains applicable to the bank unless the bank has reported total assets of $10 billion or less in its quarterly Call Report for four consecutive quarters.
Deposit Insurance Assessments. Also under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the titlefederal Deposit Insurance Fund administered by the FDIC was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance acquisition, other assets includes goodwill and intangibleassessments, to offset the effect of the increase on institutions with assets of $7.3 millionless than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments. This large bank method is based on a bank’s ability to withstand asset- and $5.3 million, respectively.funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC.
Total deposits were $2.01Volcker Rule. Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, known as “covered funds” under the rule. There are a number of exclusions from the definition of “covered funds,” including for investments in Small Business Investment Companies, or SBICs, and certain qualifying venture capital funds. The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities.
Limits on Interchange Fees. The Bank also may be affected by the Durbin Amendment to the Dodd-Frank Act regarding limits on debit card interchange fees. The Durbin Amendment gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion at September 30, 2017, an increaseor more, as of $527.8 million, or 35.5%, from $1.49 billion at December 31 2016. The increase in deposits was driven byof the preceding calendar year, and to enforce a new deposit savings productstatutory requirement that such fees be reasonable and success of deposit gathering campaigns to support the growth in loan and lease originations.
Long term borrowings decreased $971 thousand, or 3.5%, during the first nine months of 2017, from $27.8 million at December 31, 2016 to $26.9 million at September 30, 2017. The decrease in long term borrowings was primarily the result of debt reduction following a successful capital raise in the third quarter.
Other liabilities increased $8.3 million, or 42.8%, during the first nine months of 2017, from $19.5 million at December 31, 2016 to $27.8 million at September 30, 2017. The increase in other liabilities was principally driven by a $4.7 million earn-out contingent liability relatedproportional to the acquisitionactual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the title insurance business and an increase in accrued expenses of $5.7 million in support of ongoing business growth. This was partially offset by a decrease in income taxes payable of $2.1 million.transaction, plus up to one cent for fraud prevention costs.
Shareholders’ equity at September 30, 2017 was $364.6 million as compared to $222.8 million at December 31, 2016. The book value per share was $9.15 at September 30, 2017 compared to a book value per share of $6.51 at December 31, 2016. Average equity to average assets was 12.2% for the nine months ended September 30, 2017 compared to 14.6% for the year ended December 31, 2016. The increase in shareholders’ equity was principally the result of the issuance of 5.2 million additional common shares with net proceeds of $113.1 million and net income to common shareholders for the nine months ended September 30, 2017 of $28.8 million combined with stock based compensation expense of $5.7 million and $565 thousand related to the issuance of stock in the title insurance company acquisition, partially offset by cash withheld in lieu of issuing restricted stock upon vesting of $4.8 million and $2.6 million in dividends.
Asset Quality
Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit & Risk Committee of the Board of Directors.
Nonperforming Assets
The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan.loan or lease. In respect to the Company's adoption of ASU No. 2022-02 on January 1, 2023, as described more fully in Note 2 in the accompanying Unaudited Condensed Consolidated Financial Statements, the prior period discussed below has been adjusted to exclude previously disclosed troubled debt restructurings for comparative purposes.
Nonperforming assets, excluding loans measured at fair value, at June 30, 2023 were $111.2 million, which represented a $37.8 million, or 51.5%, increase from December 31, 2022. These nonperforming assets at June 30, 2023 were all nonaccrual loans and leases. At June 30, 2023, there were no foreclosed assets. Of the $111.2 million of nonperforming assets, $66.3 million carried a government guarantee, leaving an unguaranteed exposure of $44.9 million in total nonperforming assets at June 30, 2023. This represents an increase of $26.1 million, or 139.0%, from an unguaranteed exposure of $18.8 million at December 31, 2022.
Troubled debt restructurings occur when, because of economic or legal reasons pertaining to the debtor’s financial difficulties, debtors are granted concessions that would not otherwise be considered. Such concessions would include, but are not limited to, the transfer of assets or the issuance of equity interests by the debtor to satisfy all or part of the debt, modification of the terms of debt or the substitution or addition of debtor(s).
The following table provides information with respect to nonperforming assets, and troubled debt restructuringsexcluding loans measured at fair value, at the dates indicated.
| | | | | | | | | | | |
| June 30, 2023 (1) | | December 31, 2022 (1) |
Nonaccrual loans and leases: | | | |
Total nonperforming loans and leases (all on nonaccrual) | $ | 111,221 | | | $ | 73,392 | |
| | | |
Foreclosed assets | — | | | — | |
Total nonperforming assets | $ | 111,221 | | | $ | 73,392 | |
Allowance for credit losses on loans and leases | $ | 120,116 | | | $ | 96,566 | |
Total nonperforming loans and leases to total loans and leases held for investment | 1.50 | % | | 1.07 | % |
Total nonperforming loans and leases to total assets | 1.07 | % | | 0.78 | % |
Allowance for credit losses on loans and leases to loans and leases held for investment | 1.62 | % | | 1.41 | % |
Allowance for credit losses on loans and leases to total nonperforming loans and leases | 108.00 | % | | 131.58 | % |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Nonperforming assets: | | | |
Total nonperforming loans (all on nonaccrual) | $ | 22,420 |
| | $ | 23,781 |
|
Total accruing loans past due 90 days or more | — |
| | — |
|
Foreclosed assets | 2,231 |
| | 1,648 |
|
Total troubled debt restructurings | 8,527 |
| | 9,856 |
|
Less nonaccrual troubled debt restructurings | (6,078 | ) | | (7,688 | ) |
Total performing troubled debt restructurings | 2,449 |
| | 2,168 |
|
Total nonperforming assets and troubled debt restructurings | $ | 27,100 |
| | $ | 27,597 |
|
Total nonperforming loans to total loans and leases held for investment | 1.92 | % | | 2.62 | % |
Total nonperforming loans to total assets | 0.92 | % | | 1.36 | % |
Total nonperforming assets and troubled debt restructurings to total assets | 1.11 | % | | 1.57 | % |
(1)Excludes loans measured at fair value. | | | | | | | | | | | |
| June 30, 2023 (1) | | December 31, 2022 (1) |
Nonaccrual loans and leases guaranteed by U.S. government: | | | |
Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual) | $ | 66,322 | | | $ | 54,608 | |
Foreclosed assets guaranteed by the U.S. government | — | | | — | |
Total nonperforming assets guaranteed by the U.S. government | $ | 66,322 | | | $ | 54,608 | |
Allowance for credit losses on loans and leases | $ | 120,116 | | | $ | 96,566 | |
Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases | 0.61 | % | | 0.27 | % |
Total nonperforming loans and leases not guaranteed by the U.S. government to total assets | 0.43 | % | | 0.20 | % |
Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government | 267.52 | % | | 514.09 | % |
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| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Nonperforming assets guaranteed by U.S. government: | | | |
Total nonperforming loans guaranteed by the SBA (all on nonaccrual) | $ | 19,121 |
| | $ | 18,997 |
|
Total accruing loans past due 90 days or more guaranteed by the SBA | — |
| | — |
|
Foreclosed assets guaranteed by the SBA | 1,785 |
| | 1,402 |
|
Total troubled debt restructurings guaranteed by the SBA | 5,427 |
| | 6,723 |
|
Less nonaccrual troubled debt restructurings guaranteed by the SBA | (5,340 | ) | | (6,602 | ) |
Total performing troubled debt restructurings guaranteed by SBA | 87 |
| | 121 |
|
Total nonperforming assets and troubled debt restructurings guaranteed by the SBA | $ | 20,993 |
| | $ | 20,520 |
|
Total nonperforming loans not guaranteed by the SBA to total held for investment loans and leases | 0.28 | % | | 0.53 | % |
Total nonperforming loans not guaranteed by the SBA to total assets | 0.14 | % | | 0.27 | % |
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets | 0.25 | % | | 0.40 | % |
(1)Excludes loans measured at fair value.Total nonperforming assets, and troubled debt restructuringsincluding loans measured at Septemberfair value, at June 30, 20172023 were $27.1$168.8 million, which represented a $497 thousand,$48.4 million, or 1.8%40.2%, decreaseincrease from December 31, 2016. Total nonperforming assets at September 30, 2017 were comprised of $22.4 million in nonaccrual loans and $2.2 million in foreclosed assets.2022. Of the $27.1$168.8 million of nonperforming assets, and troubled debt restructurings ("TDRs"), $21.0$113.2 million carried an SBAa government guarantee, leaving an unguaranteed exposure of $6.1$55.6 million in total nonperforming assets and TDRs at SeptemberJune 30, 2017. The2023. This represents an increase of $29.5 million, or 113.4%, from an unguaranteed exposure of $26.0 million at December 31, 2022.
See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming assetsloans and TDRs at December 31, 2016 was $7.1 million. Unguaranteed exposure relating to nonperforming assets and TDRs at September 30, 2017 decreased by $970 thousand, or 13.7%, compared to December 31, 2016.leases.
As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 10.2%12.8% at SeptemberJune 30, 2017,2023, compared to nonperforming loans of 15.3% of the Bank’s total capital9.0% at December 31, 2016.2022. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at Septemberboth June 30, 20172023 and December 31, 20162022 were 1.5%5.2% and 3.1%2.3%, respectively.
As of SeptemberJune 30, 20172023, and December 31, 2016,2022, potential problem (also referred to as criticized) and impairedclassified loans and leases, excluding loans measured at fair value, totaled $66.0$556.6 million and $64.1$424.7 million, respectively.The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and impaired loans.classified loans and leases. For a complete description of the risk grading system, see Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2022 Form 10-K. At SeptemberJune 30, 2017,2023, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $28.2$227.1 million resulting inand total portfolio unguaranteed exposure risk of $37.8was $329.5 million, or 3.3%7.0% of total held for investment unguaranteed exposure.exposure carried at historical cost. This compares to the December 31, 20162022 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $29.0$195.8 million resulting inand total portfolio unguaranteed exposure risk of $35.1was $228.9 million, or 4.0%5.5% of total held for investment unguaranteed exposure.exposure carried at historical cost. As of SeptemberJune 30, 20172023, loans in Veterinary, Healthcare and Independent Pharmacies industryleases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and impairedclassified loans and leases: Wine and Craft Beverage at 28.5%12.3%, 30.8%Senior Housing at 12.2%, Sponsor Finance at 12.1% (principally related to Search Fund Lending), General Lending at 10.1%, Healthcare at 5.0%, Senior Care at 4.7%, Fitness Centers at 4.6%, Hotels at 4.6%, Venture Banking at 4.4% and 20.4%, respectively.Agriculture at 4.0%. As of December 31, 20162022, loans inand leases carried at historical cost within the Healthcare and Veterinary industriesfollowing verticals comprise the largest portion of the total potential problem and impairedclassified loans and leases: Wine and Craft Beverage at 30.8%11.5%, General Lending at 10.3%, Senior Housing at 10.2%, Sponsor Finance at 7.8%, Healthcare at 6.4%, Hotels at 5.9%, Fitness Centers at 5.1%, Agriculture at 4.5% and 32.9%, respectively.Senior Care at 4.0%. Of the above listed verticals, Senior Housing, Sponsor Finance and Venture Banking are within the Company’s Specialty Lending division while Hotels are within the Energy & Infrastructure division, the remainder of the above listed verticals are within the Small Business Banking division. The majority of the $131.9 million increase in potential problem and classified loans and leases in the first six months of 2023 was comprised of several relationships that did not have a government guarantee. The Company believes that its underwriting and credit quality standards have improved as the business has matured.remained high and continues to consider changing economic conditions in a rising interest rate environment.
The Bank does not classify loansLoans and leases that experience insignificant payment delays and payment shortfalls as impaired.are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. In all cases, creditCredit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease 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 typically alter the rate or lengthen the amortization of the note due to insignificant payment delays. Short term modifications are not classified as TDRs, because they do not meet the definition set by the applicable accounting standards and the Federal Deposit Insurance Corporation.
During the third quarter of 2017, the Southern U.S. and Puerto Rico encountered three hurricanes while California suffered from wildfires. As a nationwide lenderAt June 30, 2023, the Company has over approximately 350 borrowershad a total of $21.7 million in loans modified in the affected areas. As a resultfirst half of these unfortunate disasters, Live Oak has actively reached out2023 to eachborrowers experiencing financial difficulty, all of these borrowers to workwhich remained current with any that have been impacted. At this time, there have been a limited number of short-term$4.5 million on principal payment deferrals provided to help borrowers in need with none deemed to meet the definition of a troubled debt restructuring and no impairments have been realized as a result of these events. We are continuing to work with borrowers impacted by these disasters.deferral.
Management endeavors to be proactive in its approach to identify and resolve special mention (Risk Grade 5)problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At SeptemberJune 30, 20172023, and December 31, 2016,2022, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $30.5$404.3 million and $32.1$286.5 million, respectively.respectively, for a six month increase of $117.8 million. The decrease in Risk Grade 5 loans from December 31, 2016 to September 30, 2017 was principally confined to three verticals; Veterinary ($3.2 million or 41.8% of decrease), Healthcare ($353 thousand or 4.5% of decrease), and Independent Pharmacy ($144 thousand or 1.7% of decrease). The decrease in these three verticals was offset by an increase in Risk Grade 5 loans from December 31, 2016and leases, exclusive of loans measured at fair value, during the first half of 2023 was principally confined to September 30, 2017 in two verticals; Agricultureeight verticals: Sponsor Finance ($1.135.9 million or 95.0%30.4%, principally related to Search Fund Lending), Wine and Craft Beverage ($19.7 million or 16.7%), Venture Banking ($17.1 million or 14.5%), Bioenergy ($13.5 million or 11.4%), Senior Housing ($12.5 million or 10.6%), Conventional Financing ($10.3 million or 8.7%), General Lending ($6.4 million or 5.4%), and Senior Care ($6.1 million or 5.2%). Of the above listed verticals, Sponsor Finance, Senior Housing, Venture Banking and Conventional Financing are within the Company’s Specialty Lending division while Bioenergy is within the Energy & Infrastructure division, the remainder of increase)the above listed verticals are within the Small Business Banking division.
At June 30, 2023, approximately 97.5% of loans and Investment Advisors ($464 thousand or 20.7% of decrease). The overall decrease in Risk Grade 5 loans from December 31, 2016 to September 30, 2017 was the result of routine credit monitoring in the ongoing risk grade management process. At September 30, 2017, approximately 99.9% of loansleases classified as Risk Grade 5 are performing with no currentrelationships having payments past due.due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio.
Allowance for Loan As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. At June 30, 2023, the Company had $9.5 million in unguaranteed loans on SBA payment assistance. Management monitors these borrowers closely and Lease Losses
The allowance for loan and lease losses (“ALLL”), 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 and lease losses chargedhas observed financial conditions continuing to earnings to account for losses that are inherent in the loan and lease portfolio and estimated to occur, and is maintained at a level that management considers appropriate to absorb potential losses in the portfolio. Loan and lease losses are charged against the ALLL when management believes that the collectibility of the principal loan and lease balance is unlikely. Subsequent recoveries, if any, are credited to the ALLL when received.
Judgment in determining the adequacy of the ALLL 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 ALLL is evaluated on a quarterly basis by management and takes into consideration such factors as changes in the nature and volume of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases and current economic conditions and trends that may affect the borrower’s ability to repay.
Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in accounting principles generally accepted in the United States of America (“GAAP”). Methodology for determining the ALLL is generally based on GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accountingimprove.
pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan or lease component, which addresses specific reservesAllowance for impaired loans or leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loansCredit Losses on Loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired should be excluded from its homogeneous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.
During the second quarter of 2016, the Company implemented enhancements to the methodology for estimating the allowance for loan and lease losses, including refinements to the measurement of qualitative factors in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance.Leases
The ALLLACL of $18.2$96.6 million at December 31, 20162022, increased by $2.8$23.6 million, or 15.5%24.4%, to $21.0$120.1 million at SeptemberJune 30, 2017.2023. The ALLL,ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.8% at September 30, 20171.4% and 2.0%1.6% at December 31, 2016.2022 and June 30, 2023, respectively. The declining levelincrease in the ACL during the first six months of 2023 was primarily the allowance forresult of loan and lease losses in relation to total loans and leases held for investment was principally driven by improvements in industry-specific loss rates and lower levels of classified loansgrowth, combined with the migration to Company-specific loss rates for maturing verticals which was partially offset by an increase in reserves due to loanportfolio trends and lease volume and the effect of higher net charge-offs, as addressedchanges in the Provisionmacroeconomic outlook. See also the above section captioned “Provision for Loan and Lease Losses sectionCredit Losses” in “Results of ResultsOperations” for related information.
Actual past due held for investment loans and leases, inclusive of Operations. General reservesloans measured at fair value, have increased by $40.6 million since December 31, 2022. Total loans and leases 90 or more days past due increased $41.1 million, or 72.7%, compared to December 31, 2022. This increase was comprised of a $11.5 million increase in unguaranteed exposure combined with a $29.7 million increase in the guaranteed portion of past due loans compared to December 31, 2022. At June 30, 2023 and December 31, 2022, total held for investment unguaranteed loans and leases past due as a percentage of non-impaired loans amounted to 1.56% at September 30, 2017 and 1.70% December 31, 2016. See the aforementioned Provisiontotal held for Loan and Lease Losses section of this section for a discussion of the Company's charge-off experience.
Actual past dueinvestment unguaranteed loans and leases, have decreased sinceinclusive of loans measured at fair value, was 0.9% and 0.7%, respectively. Total unguaranteed loans and leases past due were comprised of $35.8 million carried at historical cost, an increase of $14.6 million, and $11.8 million measured at fair value, an increase of $2.2 million, as of June 30, 2023 compared to December 31, 2016 as management2022. Management continues to actively monitor and work to improve asset quality. Management believes the ALLLACL of $21.0$120.1 million at SeptemberJune 30, 20172023 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid. Thus, there can beAccordingly, no assurance that loan and lease losses in future periods will not exceed the current ALLL or that future increases in the ALLL will not be required. No assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ALLL,ACL, thus adversely affecting the Company’s operating results. Additional information on the ALLLACL is presented in Note 6 -5. Loans and Leases Held for Investment and Allowance for Loan and Lease LossesCredit Quality of the Notes to the Unaudited Condensed Consolidated Financial Statements in this report.
Liquidity Management
Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At SeptemberJune 30, 2017,2023, the total amount of these four items was $589.1 million,$4.59 billion, or 25.1%42.4% of total assets an increase of $93.3 million from $495.8 million, or 28.2%compared to 40.7% of total assets, at December 31, 2016.2022.
Loans and other assets are funded primarily by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and an increaseda stable amount of long-term brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. Additionally,The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity purposes.purposes, whether via pledging to the Federal Home Loan Bank, Federal Reserve Bank Term Funding Program or through liquidation. Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation.
At SeptemberJune 30, 2017,2023, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, while $100 thousand was pledged for trust activities in the State of Ohio and $2.5 million was pledged for uninsured trust assets, leaving $74.0 million$1.13 billion available to pledge as lendable collateral. In addition, of the $260.9 million in cash on hand, $1.5 million was pledged for ACH processing at one of the correspondent depository banks.
Contractual Obligations
The following table presents the Company’sCompany has entered into significant fixed and determinable contractual obligations by payment date asfor future payments. Other than normal changes in the ordinary course of September 30, 2017. The paymentthe Company’s operations, there have been no significant changes in the types of contractual obligations or amounts represent those amounts contractually due since December 31, 2022. See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s 2022 Form 10-K for additional discussion of contractual obligations.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the recipient. The table excludes liabilities recorded where management cannot reasonably estimateform of commitments to extend credit and standby letters of credit. For more information, see Note 10. Commitments and Contingencies in the timing of any payments that may be required in connection with these liabilities.accompanying notes to Unaudited Condensed Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | Less than One Year | | One to Three Years | | Three to Five Years | | More Than Five Years |
Contractual Obligations | |
Deposits without stated maturity | $ | 828,947 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Time deposits | 1,183,944 |
| | 860,718 |
| | 209,019 |
| | 114,207 |
| | — |
|
Long term borrowings | 26,872 |
| | 844 |
| | 5,472 |
| | 20,556 |
| | — |
|
Operating lease obligations1 | 3,037 |
| | 941 |
| | 1,345 |
| | 463 |
| | 288 |
|
Total | $ | 2,042,800 |
| | $ | 862,503 |
| | $ | 215,836 |
| | $ | 135,226 |
| | $ | 288 |
|
| |
1 | The following obligations only include base rent and does not include any additional payments such as taxes, insurance, maintenance and repairs or common area maintenance. |
As of September 30, 2017 and December 31, 2016, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of $4.4 million and $4.9 million, respectively.
Asset/Liability Management and Interest Rate Sensitivity
One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. ThisAs of June 30, 2023, the balance sheet’s total cumulative gap position was 5.0%. For further information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, or market value.growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate scenariosshocks applied to more accuratelya static balance sheet and non-parallel interest rate shocks applied to a dynamic balance sheet to measure interest rate risk.
The As of June 30, 2023, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet is asset-sensitive with a total cumulative gap position of 5.92% at September 30, 2017. The cash on hand from the August 2017 capital raiseslightly asset-sensitive. For more information, see Item 3. Quantitative and growth in savings deposits during the quarter has increased the asset-liability sensitivity of the Company in the current period. Qualitative Disclosures About Market Risk.
An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk with the majority ofby match funding assets and liabilities being short-term, adjustablewith similar rate instruments. The quarterly revaluation adjustment to the servicing asset, however, adjusts in an opposite direction to interest rate changes. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes, rates on cash accounts that adjusts as the federal funds rate changes and the longer duration of indeterminate term deposits. Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability-sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.
Capital
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are the following: to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and client needs; to comply with relevant laws, regulations, and supervisory guidance; to achieve optimal credit ratings for the Company and its subsidiaries; and to provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.
The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
Capital amounts and ratios as of SeptemberJune 30, 20172023, and December 31, 2016,2022, are presented in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Capital Requirement | | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions (1) |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Consolidated - June 30, 2023 | | | | | | | | | | | |
Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 911,721 | | | 11.55 | % | | $ | 355,139 | | | 4.50 | % | | N/A | | N/A |
Total Capital (to Risk-Weighted Assets) | 1,010,695 | | | 12.81 | | | 631,358 | | | 8.00 | | | N/A | | N/A |
Tier 1 Capital (to Risk-Weighted Assets) | 911,721 | | | 11.55 | | | 473,519 | | | 6.00 | | | N/A | | N/A |
Tier 1 Capital (to Average Assets) | 911,721 | | | 8.46 | | | 430,986 | | | 4.00 | | | N/A | | N/A |
Bank - June 30, 2023 | | | | | | | | | | | |
Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 770,449 | | | 10.14 | % | | $ | 342,051 | | | 4.50 | % | | $ | 494,074 | | | 6.50 | % |
Total Capital (to Risk-Weighted Assets) | 865,832 | | | 11.39 | | | 608,091 | | | 8.00 | | | 760,113 | | | 10.00 | |
Tier 1 Capital (to Risk-Weighted Assets) | 770,449 | | | 10.14 | | | 456,068 | | | 6.00 | | | 608,091 | | | 8.00 | |
Tier 1 Capital (to Average Assets) | 770,449 | | | 7.23 | | | 426,493 | | | 4.00 | | | 533,116 | | | 5.00 | |
Consolidated - December 31, 2022 | | | | | | | | | | | |
Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 888,235 | | | 12.47 | % | | $ | 320,446 | | | 4.50 | % | | N/A | | N/A |
Total Capital (to Risk-Weighted Assets) | 977,360 | | | 13.73 | | | 569,681 | | | 8.00 | | | N/A | | N/A |
Tier 1 Capital (to Risk-Weighted Assets) | 888,235 | | | 12.47 | | | 427,261 | | | 6.00 | | | N/A | | N/A |
Tier 1 Capital (to Average Assets) | 888,235 | | | 9.26 | | | 383,499 | | | 4.00 | | | N/A | | N/A |
Bank - December 31, 2022 | | | | | | | | | | | |
Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 730,092 | | | 10.70 | % | | $ | 307,179 | | | 4.50 | % | | $ | 443,703 | | | 6.50 | % |
Total Capital (to Risk-Weighted Assets) | 815,577 | | | 11.95 | | | 546,096 | | | 8.00 | | | 682,620 | | | 10.00 | |
Tier 1 Capital (to Risk-Weighted Assets) | 730,092 | | | 10.70 | | | 409,572 | | | 6.00 | | | 546,096 | | | 8.00 | |
Tier 1 Capital (to Average Assets) | 730,092 | | | 7.70 | | | 379,396 | | | 4.00 | | | 474,245 | | | 5.00 | |
|
| | | | | | | | | | | | | | | | | | | | |
| Actual | | Minimum Capital Requirement | | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions (1) |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Consolidated - September 30, 2017 | | | | | | | | | | | |
Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 323,780 |
| | 17.72 | % | | $ | 82,232 |
| | 4.50 | % | | N/A |
| | N/A |
|
Total Capital (to Risk-Weighted Assets) | $ | 344,807 |
| | 18.87 | % | | $ | 146,191 |
| | 8.00 | % | | N/A |
| | N/A |
|
Tier 1 Capital (to Risk-Weighted Assets) | $ | 323,780 |
| | 17.72 | % | | $ | 109,643 |
| | 6.00 | % | | N/A |
| | N/A |
|
Tier 1 Capital (to Average Assets) | $ | 323,780 |
| | 13.95 | % | | $ | 92,863 |
| | 4.00 | % | | N/A |
| | N/A |
|
Bank - September 30, 2017 | | | | | | | | | | | |
Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 198,353 |
| | 11.26 | % | | $ | 79,287 |
| | 4.50 | % | | $ | 114,525 |
| | 6.50 | % |
Total Capital (to Risk-Weighted Assets) | $ | 219,651 |
| | 12.47 | % | | $ | 140,954 |
| | 8.00 | % | | $ | 176,193 |
| | 10.00 | % |
Tier 1 Capital (to Risk-Weighted Assets) | $ | 198,353 |
| | 11.26 | % | | $ | 105,716 |
| | 6.00 | % | | $ | 140,954 |
| | 8.00 | % |
Tier 1 Capital (to Average Assets) | $ | 198,353 |
| | 8.78 | % | | $ | 90,382 |
| | 4.00 | % | | $ | 112,978 |
| | 5.00 | % |
Consolidated - December 31, 2016 | | | | | | | | | | | |
Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 206,670 |
| | 15.31 | % | | $ | 60,732 |
| | 4.50 | % | | N/A |
| | N/A |
|
Total Capital (to Risk-Weighted Assets) | $ | 223,559 |
| | 16.56 | % | | $ | 107,968 |
| | 8.00 | % | | N/A |
| | N/A |
|
Tier 1 Capital (to Risk-Weighted Assets) | $ | 206,670 |
| | 15.31 | % | | $ | 80,976 |
| | 6.00 | % | | N/A |
| | N/A |
|
Tier 1 Capital (to Average Assets) | $ | 206,670 |
| | 12.00 | % | | $ | 68,919 |
| | 4.00 | % | | N/A |
| | N/A |
|
Bank - December 31, 2016 | | | | | | | | | | | |
Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 139,078 |
| | 10.68 | % | | $ | 58,579 |
| | 4.50 | % | | $ | 84,615 |
| | 6.50 | % |
Total Capital (to Risk-Weighted Assets) | $ | 155,423 |
| | 11.94 | % | | $ | 104,141 |
| | 8.00 | % | | $ | 130,177 |
| | 10.00 | % |
Tier 1 Capital (to Risk-Weighted Assets) | $ | 139,078 |
| | 10.68 | % | | $ | 78,106 |
| | 6.00 | % | | $ | 104,141 |
| | 8.00 | % |
Tier 1 Capital (to Average Assets) | $ | 139,078 |
| | 8.41 | % | | $ | 66,142 |
| | 4.00 | % | | $ | 82,678 |
| | 5.00 | % |
(1)Prompt corrective action provisions are not applicable at the bank holding company level. | |
(1) | Prompt corrective action provisions are not applicable at the bank holding company level. |
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that theThe Company’s most critical accounting policies and estimates are listed belowbelow. These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.
Determination•Allowance for credit losses;
•Valuation of loans accounted for under the allowance for loan losses;fair value option;
•Valuation of servicing assets; and
Valuation of earn-out contingent liability.•Income taxes
Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a material impact on the Company’s financial position, results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management considers interest rate risk the most significant market risk. Interest rate risk is a significant market risk and can result from timing and volume differences in the exposure to adverserepricing of rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of market yield curves. The Company manages the interest rate sensitivity of interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Management of interest rate risk is carried out primarily through strategies involving available-for-sale securities, loan and lease portfolio, and available funding sources.
The Company has an Asset/Liability Committee to support prudent oversight of interest rate risk management. The Asset/Liability Committee monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Adherence to relevant policies is monitored on an ongoing basis by the Asset/Liability Committee.
The Company has a total cumulative gap in interest-earning assets and interest-bearing liabilities of 5.0% as of June 30, 2023, indicating that, overall, over the expected life of the instruments, assets will reprice before liabilities.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Company analyzes interest rate sensitivity position to manage the risk associated with interest rate movements through the use of two simulation models: economic value of equity (“EVE”) and net interest income (“NII”) simulations. These simulations project both short-term and long-term interest rate risk under a variety of instantaneous parallel rate shocks applied to a static balance sheet. The EVE simulation provides a long-term view of interest rate risk because it analyzes all of the Company’s future cash flows. EVE is defined as the present value of the Company’s assets, less the present value of its liabilities, adjusted for any off-balance sheet items. The results show a theoretical change in the economic value of shareholders’ equity as interest rates change.
EVE and NII simulations are completed regularly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on equity and net interest income under a range of assumptions. The numerous assumptions used in the simulation process are provided to the Asset/Liability Committee on at least an annual basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.
Simulation analysis is only an estimate of interest rate risk exposure at a particular point in time. The Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.
The table below sets forth an approximation of the Company’s NII sensitivity exposure for the 12-month periods ending June 30, 2024 and 2025, and the Company’s EVE sensitivity at June 30, 2023. The simulation uses projected repricing of assets and liabilities at June 30, 2023, on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Critical model assumptions such as loan and investment prepayment rates, deposit decay rates, changes in deposit pricing, both in amount and timing, relative to changes in interest rates. Consistency of netmarket rates (commonly referred to as deposit betas and lags, respectively) and assumed replacement pricing can have a significant impact on interest income simulation. A static balance sheet is largely dependent uponmaintained to remove volume considerations and to place the effective managementfocal point on the rate sensitivity of interest rate risk.
The Company’s Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk. See “Asset/Liability Management and Interest Rate Sensitivity” in Item 2 of this Form 10-Q for further discussion.
The objective of asset/liability management is the maximization of net interest income within the Company’s risk guidelines. This objective is accomplished throughbalance sheet. While management ofbelieves such assumptions to be reasonable, actual future activity may differ from the balance sheet composition, maturities, liquidity,results shown below as it will include growth considerations, non-parallel rate movements, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.
To identify and manage its interest rate risk,management actions to mitigate the Company employs an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on contractual cash flows and repricing characteristics and incorporates market-based assumptions regarding the effectimpacts of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in eachbalance sheet’s earnings profile.
| | | | | | | | | | | | | | | | | | | | |
| | Estimated Increase/Decrease in Net Interest Income | | Estimated Percentage Change in EVE |
Basis Point ("bp") Change in Interest Rates | | 12 Months Ending June 30, 2024 | | 12 Months Ending June 30, 2025 | | As of June 30, 2023 |
+400 | | 1.0% | | (4.0)% | | (28.0)% |
+300 | | 0.9 | | (2.9) | | (21.2) |
+200 | | 0.7 | | (1.8) | | (14.2) |
+100 | | 0.3 | | (0.9) | | (7.1) |
-100 | | (0.9) | | — | | 6.8 |
-200 | | (1.9) | | (0.4) | | 13.5 |
-300 | | (3.0) | | (0.9) | | 20.1 |
Rates are increased instantaneously at the beginning of the product lines offered byprojection. The Company's asset/liability profile is slightly asset sensitive in year one, as the Bank. AssumptionsCompany’s variable rate loan portfolio reprices the full amount of the assumed change in interest rates, while the retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta. The Company is slightly liability sensitive in year two from a net interest income perspective as the company's interest rate increases on new and existing deposits are inherently uncertain,repricing more rapidly than the company's total loan and lease portfolio. Interest rates do not normally move all at once or evenly over time, but management believes that the measurementanalysis is useful to understanding the potential direction and magnitude of net interest income or the impact of rate fluctuations on net interest income cannot be precisely predicted. Actual results may differ materially from simulated resultschanges due to timing, magnitude,changing interest rates.
The EVE analysis shows that the Company would theoretically lose market value in a rising rate environment. The favorable EVE change resulting from the loan and frequencylease portfolio in a rising rate analysis is more than offset by the devaluation of interestthe interest-bearing liabilities. This is largely driven by the Company’s longer asset duration, primarily consisting of investments and loans, versus the shorter duration of its funding portfolio, primarily consisting of retail savings and short-term retail certificates of deposits. Increased fixed rate changes as well as changesloan production since 2020, given the historical low market rate environment, has also been a significant driver in market conditions and management strategies.the model results.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of SeptemberJune 30, 2017,2023, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of SeptemberJune 30, 20172023, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months quarter ended SeptemberJune 30, 20172023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. ExhibitsExhibits.