UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended SeptemberJune 30, 2017
or
☐ | |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from
to .Commission file number: 001-37497
LIVE OAK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
North Carolina | 26-4596286 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1741 Tiburon Drive Wilmington, North Carolina | 28403 |
(Address of principal executive offices) | (Zip Code) |
(910) 790-5867
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Voting Common Stock, no par value per share | LOB | The NASDAQ Stock Market LLC |
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 4, 2017,August 5, 2019, there were 35,233,24135,590,365 shares of the registrant’s voting common stock outstanding and 4,643,530 shares of the registrant’s non-voting common stock outstanding.
Live Oak Bancshares, Inc. and Subsidiaries
Form 10-Q
For the Quarterly Period Ended SeptemberJune 30, 2017
TABLE OF CONTENTS
Page | |||||
PART I. FINANCIAL INFORMATION | |||||
Item 1. | 1 | ||||
Condensed Consolidated Balance Sheets as of | 1 | ||||
2 | |||||
3 | |||||
4 | |||||
6 | |||||
Notes to Unaudited Condensed Consolidated Financial Statements | 8 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 45 | |||
Item 3. | 64 | ||||
Item 4. | 64 | ||||
PART II. OTHER INFORMATION | |||||
Item 1. | 65 | ||||
Item 1A. | 65 | ||||
Item 2. | 65 | ||||
Item 3. | 65 | ||||
Item 4. | 65 | ||||
Item 5. | 65 | ||||
Item 6. | 66 | ||||
66 | |||||
67 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Live Oak Bancshares, Inc.
Condensed Consolidated Balance Sheets
As of SeptemberJune 30, 20172019 (unaudited) and December 31, 2016*
(Dollars in thousands)
|
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
| $ | 115,292 |
|
| $ | 316,823 |
|
Federal funds sold |
|
| 68,153 |
|
|
| — |
|
Certificates of deposit with other banks |
|
| 7,250 |
|
|
| 7,250 |
|
Investment securities available-for-sale |
|
| 576,275 |
|
|
| 380,490 |
|
Loans held for sale |
|
| 857,837 |
|
|
| 687,393 |
|
Loans and leases held for investment |
|
| 2,225,473 |
|
|
| 1,843,419 |
|
Allowance for loan and lease losses |
|
| (38,048 | ) |
|
| (32,434 | ) |
Net loans and leases |
|
| 2,187,425 |
|
|
| 1,810,985 |
|
Premises and equipment, net |
|
| 281,126 |
|
|
| 262,524 |
|
Foreclosed assets |
|
| 6,044 |
|
|
| 1,094 |
|
Servicing assets |
|
| 41,687 |
|
|
| 47,641 |
|
Operating lease right-of-use assets |
|
| 1,996 |
|
|
| — |
|
Other assets |
|
| 131,216 |
|
|
| 156,249 |
|
Total assets |
| $ | 4,274,301 |
|
| $ | 3,670,449 |
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
| $ | 55,416 |
|
| $ | 53,993 |
|
Interest-bearing |
|
| 3,666,181 |
|
|
| 3,095,590 |
|
Total deposits |
|
| 3,721,597 |
|
|
| 3,149,583 |
|
Short term borrowings |
|
| 1,345 |
|
|
| 1,441 |
|
Long term borrowings |
|
| 16 |
|
|
| 16 |
|
Operating lease liabilities |
|
| 2,162 |
|
|
| — |
|
Other liabilities |
|
| 30,195 |
|
|
| 25,849 |
|
Total liabilities |
|
| 3,755,315 |
|
|
| 3,176,889 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at June 30, 2019 and December 31, 2018 |
|
| — |
|
|
| — |
|
Class A common stock, no par value, 100,000,000 shares authorized, 35,577,386 and 35,512,262 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively |
|
| 284,987 |
|
|
| 278,945 |
|
Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 shares issued and outstanding at June 30, 2019 and December 31, 2018 |
|
| 49,168 |
|
|
| 49,168 |
|
Retained earnings |
|
| 171,954 |
|
|
| 167,124 |
|
Accumulated other comprehensive income (loss) |
|
| 12,877 |
|
|
| (1,677 | ) |
Total shareholders’ equity |
|
| 518,986 |
|
|
| 493,560 |
|
Total liabilities and shareholders’ equity |
| $ | 4,274,301 |
|
| $ | 3,670,449 |
|
September 30, 2017 | December 31, 2016* | ||||||
Assets | |||||||
Cash and due from banks | $ | 260,907 | $ | 238,008 | |||
Certificates of deposit with other banks | 3,250 | 7,250 | |||||
Investment securities available-for-sale | 76,575 | 71,056 | |||||
Loans held for sale | 692,586 | 394,278 | |||||
Loans and leases held for investment | 1,169,887 | 907,566 | |||||
Allowance for loan and lease losses | (21,027 | ) | (18,209 | ) | |||
Net loans and leases | 1,148,860 | 889,357 | |||||
Premises and equipment, net | 129,233 | 64,661 | |||||
Foreclosed assets | 2,231 | 1,648 | |||||
Servicing assets | 53,392 | 51,994 | |||||
Other assets | 65,155 | 37,009 | |||||
Total assets | $ | 2,432,189 | $ | 1,755,261 | |||
Liabilities and Shareholders’ Equity | |||||||
Liabilities | |||||||
Deposits: | |||||||
Noninterest-bearing | $ | 55,260 | $ | 27,990 | |||
Interest-bearing | 1,957,631 | 1,457,086 | |||||
Total deposits | 2,012,891 | 1,485,076 | |||||
Long term borrowings | 26,872 | 27,843 | |||||
Other liabilities | 27,835 | 19,495 | |||||
Total liabilities | 2,067,598 | 1,532,414 | |||||
Shareholders’ equity | |||||||
Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at September 30, 2017 and December 31, 2016 | — | — | |||||
Class A common stock, no par value, 100,000,000 shares authorized, 35,218,617 and 29,530,072 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 266,336 | 149,966 | |||||
Class B common stock, no par value, 10,000,000 shares authorized, 4,643,530 and 4,723,530 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 49,168 | 50,015 | |||||
Retained earnings | 49,707 | 23,518 | |||||
Accumulated other comprehensive loss | (620 | ) | (652 | ) | |||
Total equity | 364,591 | 222,847 | |||||
Total liabilities and shareholders’ equity | $ | 2,432,189 | $ | 1,755,261 |
*Derived from audited consolidated financial statements.
See Notes to Unaudited Condensed Consolidated Financial Statements
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Income
For the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 (unaudited)
(Dollars in thousands, except per share data)
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and fees on loans |
| $ | 49,914 |
|
| $ | 36,267 |
|
| $ | 94,880 |
|
| $ | 68,958 |
|
Investment securities, taxable |
|
| 4,116 |
|
|
| 2,530 |
|
|
| 7,433 |
|
|
| 3,647 |
|
Other interest earning assets |
|
| 1,108 |
|
|
| 2,179 |
|
|
| 2,747 |
|
|
| 3,394 |
|
Total interest income |
|
| 55,138 |
|
|
| 40,976 |
|
|
| 105,060 |
|
|
| 75,999 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 21,203 |
|
|
| 13,927 |
|
|
| 40,520 |
|
|
| 24,345 |
|
Borrowings |
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 130 |
|
Total interest expense |
|
| 21,203 |
|
|
| 13,928 |
|
|
| 40,520 |
|
|
| 24,475 |
|
Net interest income |
|
| 33,935 |
|
|
| 27,048 |
|
|
| 64,540 |
|
|
| 51,524 |
|
Provision for loan and lease losses |
|
| 3,463 |
|
|
| 2,087 |
|
|
| 6,205 |
|
|
| 6,479 |
|
Net interest income after provision for loan and lease losses |
|
| 30,472 |
|
|
| 24,961 |
|
|
| 58,335 |
|
|
| 45,045 |
|
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing revenue |
|
| 7,063 |
|
|
| 6,965 |
|
|
| 14,473 |
|
|
| 13,863 |
|
Loan servicing asset revaluation |
|
| (403 | ) |
|
| (3,670 | ) |
|
| (2,649 | ) |
|
| (8,758 | ) |
Net gains on sales of loans |
|
| 6,015 |
|
|
| 23,061 |
|
|
| 10,213 |
|
|
| 47,479 |
|
Equity method investments income (loss) |
|
| (1,736 | ) |
|
| (673 | ) |
|
| (3,750 | ) |
|
| (1,037 | ) |
Gain on sale of investment securities available-for-sale |
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
Lease income |
|
| 2,369 |
|
|
| 1,920 |
|
|
| 4,694 |
|
|
| 3,528 |
|
Construction supervision fee income |
|
| 386 |
|
|
| 597 |
|
|
| 1,165 |
|
|
| 1,376 |
|
Title insurance income |
|
| — |
|
|
| 996 |
|
|
| — |
|
|
| 2,296 |
|
Other noninterest income |
|
| 1,007 |
|
|
| 1,417 |
|
|
| 3,577 |
|
|
| 2,622 |
|
Total noninterest income |
|
| 14,701 |
|
|
| 30,613 |
|
|
| 27,728 |
|
|
| 61,369 |
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 21,990 |
|
|
| 22,146 |
|
|
| 43,845 |
|
|
| 42,355 |
|
Travel expense |
|
| 1,541 |
|
|
| 2,041 |
|
|
| 2,741 |
|
|
| 3,884 |
|
Professional services expense |
|
| 1,621 |
|
|
| 1,119 |
|
|
| 3,803 |
|
|
| 2,417 |
|
Advertising and marketing expense |
|
| 1,665 |
|
|
| 1,868 |
|
|
| 3,029 |
|
|
| 3,530 |
|
Occupancy expense |
|
| 1,848 |
|
|
| 1,882 |
|
|
| 3,457 |
|
|
| 3,739 |
|
Data processing expense |
|
| 1,947 |
|
|
| 2,906 |
|
|
| 4,346 |
|
|
| 5,743 |
|
Equipment expense |
|
| 4,239 |
|
|
| 3,368 |
|
|
| 7,564 |
|
|
| 6,445 |
|
Other loan origination and maintenance expense |
|
| 1,708 |
|
|
| 1,414 |
|
|
| 3,347 |
|
|
| 2,743 |
|
Renewable energy tax credit investment impairment |
|
| 602 |
|
|
| — |
|
|
| 602 |
|
|
| — |
|
FDIC insurance |
|
| 699 |
|
|
| 1,010 |
|
|
| 1,334 |
|
|
| 1,582 |
|
Title insurance closing services expense |
|
| — |
|
|
| 372 |
|
|
| — |
|
|
| 798 |
|
Other expense |
|
| 1,716 |
|
|
| 2,704 |
|
|
| 3,709 |
|
|
| 5,666 |
|
Total noninterest expense |
|
| 39,576 |
|
|
| 40,830 |
|
|
| 77,777 |
|
|
| 78,902 |
|
Income before taxes |
|
| 5,597 |
|
|
| 14,744 |
|
|
| 8,286 |
|
|
| 27,512 |
|
Income tax expense |
|
| 662 |
|
|
| 491 |
|
|
| 979 |
|
|
| 806 |
|
Net income |
| $ | 4,935 |
|
| $ | 14,253 |
|
| $ | 7,307 |
|
| $ | 26,706 |
|
Basic earnings per share |
| $ | 0.12 |
|
| $ | 0.36 |
|
| $ | 0.18 |
|
| $ | 0.67 |
|
Diluted earnings per share |
| $ | 0.12 |
|
| $ | 0.34 |
|
| $ | 0.18 |
|
| $ | 0.64 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest income | |||||||||||||||
Loans and fees on loans | $ | 26,977 | $ | 14,961 | $ | 70,290 | $ | 38,868 | |||||||
Investment securities, taxable | 325 | 337 | 964 | 840 | |||||||||||
Other interest earning assets | 870 | 264 | 1,682 | 650 | |||||||||||
Total interest income | 28,172 | 15,562 | 72,936 | 40,358 | |||||||||||
Interest expense | |||||||||||||||
Deposits | 6,758 | 3,689 | 16,893 | 9,376 | |||||||||||
Borrowings | 389 | 242 | 985 | 725 | |||||||||||
Total interest expense | 7,147 | 3,931 | 17,878 | 10,101 | |||||||||||
Net interest income | 21,025 | 11,631 | 55,058 | 30,257 | |||||||||||
Provision for loan and lease losses | 2,426 | 3,806 | 5,481 | 8,692 | |||||||||||
Net interest income after provision for loan and lease losses | 18,599 | 7,825 | 49,577 | 21,565 | |||||||||||
Noninterest income | |||||||||||||||
Loan servicing revenue | 6,490 | 5,860 | 18,587 | 15,725 | |||||||||||
Loan servicing asset revaluation | (3,691 | ) | (3,421 | ) | (6,864 | ) | (5,051 | ) | |||||||
Net gains on sales of loans | 18,148 | 21,833 | 55,276 | 52,813 | |||||||||||
Gain on sale of investment securities available-for-sale | — | 1 | — | 1 | |||||||||||
Construction supervision fee income | 362 | 502 | 1,077 | 1,799 | |||||||||||
Title insurance income | 1,968 | — | 5,803 | — | |||||||||||
Other noninterest income | 1,783 | 657 | 3,601 | 1,925 | |||||||||||
Total noninterest income | 25,060 | 25,432 | 77,480 | 67,212 | |||||||||||
Noninterest expense | |||||||||||||||
Salaries and employee benefits | 19,037 | 17,471 | 55,687 | 45,875 | |||||||||||
Travel expense | 2,289 | 2,218 | 6,035 | 6,394 | |||||||||||
Professional services expense | 1,068 | 907 | 4,228 | 2,345 | |||||||||||
Advertising and marketing expense | 1,516 | 1,097 | 4,977 | 3,425 | |||||||||||
Occupancy expense | 1,473 | 1,058 | 4,018 | 3,306 | |||||||||||
Data processing expense | 1,982 | 1,252 | 5,536 | 3,864 | |||||||||||
Equipment expense | 2,228 | 611 | 5,005 | 1,696 | |||||||||||
Other loan origination and maintenance expense | 1,601 | 806 | 3,587 | 2,001 | |||||||||||
FDIC insurance | 858 | 210 | 2,308 | 507 | |||||||||||
Title insurance closing services expense | 687 | — | 1,877 | — | |||||||||||
Other expense | 3,117 | 1,588 | 8,883 | 4,648 | |||||||||||
Total noninterest expense | 35,856 | 27,218 | 102,141 | 74,061 | |||||||||||
Income before taxes | 7,803 | 6,039 | 24,916 | 14,716 | |||||||||||
Income tax (benefit) expense | (5,059 | ) | 2,561 | (3,853 | ) | 6,432 | |||||||||
Net income | 12,862 | 3,478 | 28,769 | 8,284 | |||||||||||
Net loss attributable to noncontrolling interest | — | 1 | — | 9 | |||||||||||
Net income attributable to Live Oak Bancshares, Inc. | $ | 12,862 | $ | 3,479 | $ | 28,769 | $ | 8,293 | |||||||
Basic earnings per share | $ | 0.34 | $ | 0.10 | $ | 0.81 | $ | 0.24 | |||||||
Diluted earnings per share | $ | 0.33 | $ | 0.10 | $ | 0.78 | $ | 0.24 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income
For the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 (unaudited)
(Dollars in thousands)
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net income |
| $ | 4,935 |
|
| $ | 14,253 |
|
| $ | 7,307 |
|
| $ | 26,706 |
|
Other comprehensive income (loss) before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on investment securities arising during the period |
|
| 15,637 |
|
|
| (1,965 | ) |
|
| 19,155 |
|
|
| (4,920 | ) |
Reclassification adjustment for gain on sale of securities available-for-sale included in net income |
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
Other comprehensive income (loss) before tax |
|
| 15,637 |
|
|
| (1,965 | ) |
|
| 19,150 |
|
|
| (4,920 | ) |
Income tax (expense) benefit |
|
| (3,753 | ) |
|
| 471 |
|
|
| (4,596 | ) |
|
| 1,181 |
|
Other comprehensive income (loss), net of tax |
|
| 11,884 |
|
|
| (1,494 | ) |
|
| 14,554 |
|
|
| (3,739 | ) |
Total comprehensive income |
| $ | 16,819 |
|
| $ | 12,759 |
|
| $ | 21,861 |
|
| $ | 22,967 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 12,862 | $ | 3,478 | $ | 28,769 | $ | 8,284 | |||||||
Other comprehensive income before tax: | |||||||||||||||
Net unrealized (loss) gain on investment securities arising during the period | (168 | ) | (115 | ) | 52 | 525 | |||||||||
Reclassification adjustment for (gain) loss on sale of securities available-for-sale included in net income | — | (1 | ) | — | (1 | ) | |||||||||
Other comprehensive income before tax | (168 | ) | (116 | ) | 52 | 524 | |||||||||
Income tax benefit (expense) | 65 | 45 | (20 | ) | (202 | ) | |||||||||
Other comprehensive (loss) income, net of tax | (103 | ) | (71 | ) | 32 | 322 | |||||||||
Total comprehensive income | $ | 12,759 | $ | 3,407 | $ | 28,801 | $ | 8,606 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Changes in Shareholders’ Equity
For the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018 (unaudited)
(Dollars in thousands)
|
| Three Months Ended |
| |||||||||||||||||||||||
|
| Common stock |
|
|
|
|
|
| Accumulated other |
|
|
|
|
|
|
| ||||||||||
|
| Shares |
|
|
|
|
|
| Retained |
|
| comprehensive |
|
|
|
| Total |
| ||||||||
|
| Class A |
|
| Class B |
|
| Amount |
|
| earnings |
|
| income (loss) |
|
|
|
| equity |
| ||||||
Balance at March 31, 2019 |
|
| 35,531,549 |
|
|
| 4,643,530 |
|
| $ | 331,162 |
|
| $ | 168,225 |
|
| $ | 993 |
|
|
|
| $ | 500,380 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,935 |
|
|
| — |
|
|
|
|
| 4,935 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,884 |
|
|
|
|
| 11,884 |
|
Issuance of restricted stock |
|
| 19,346 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| — |
|
Withholding cash issued in lieu of restricted stock issuance |
|
| — |
|
|
| — |
|
|
| (81 | ) |
|
| — |
|
|
| — |
|
|
|
|
| (81 | ) |
Stock option exercises |
|
| 26,491 |
|
|
| — |
|
|
| 158 |
|
|
| — |
|
|
| — |
|
|
|
|
| 158 |
|
Stock option based compensation expense |
|
| — |
|
|
| — |
|
|
| 400 |
|
|
| — |
|
|
| — |
|
|
|
|
| 400 |
|
Restricted stock expense |
|
| — |
|
|
| — |
|
|
| 2,516 |
|
|
| — |
|
|
| — |
|
|
|
|
| 2,516 |
|
Cash dividends ($0.03 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,206 | ) |
|
| — |
|
|
|
|
| (1,206 | ) |
Balance at June 30, 2019 |
|
| 35,577,386 |
|
|
| 4,643,530 |
|
| $ | 334,155 |
|
| $ | 171,954 |
|
| $ | 12,877 |
|
|
|
| $ | 518,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018 |
|
| 35,330,618 |
|
|
| 4,643,530 |
|
| $ | 320,619 |
|
| $ | 131,739 |
|
| $ | (3,522 | ) |
|
|
| $ | 448,836 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,253 |
|
|
| — |
|
|
|
|
| 14,253 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,494 | ) |
|
|
|
| (1,494 | ) |
Issuance of restricted stock |
|
| 21,844 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| — |
|
Withholding cash issued in lieu of restricted stock issuance |
|
| — |
|
|
| — |
|
|
| (184 | ) |
|
| — |
|
|
| — |
|
|
|
|
| (184 | ) |
Stock option exercises |
|
| 90,417 |
|
|
| — |
|
|
| 561 |
|
|
| — |
|
|
| — |
|
|
|
|
| 561 |
|
Stock option based compensation expense |
|
| — |
|
|
| — |
|
|
| 346 |
|
|
| — |
|
|
| — |
|
|
|
|
| 346 |
|
Restricted stock expense |
|
| — |
|
|
| — |
|
|
| 1,869 |
|
|
| — |
|
|
| — |
|
|
|
|
| 1,869 |
|
Cash dividends ($0.03 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,201 | ) |
|
| — |
|
|
|
|
| (1,201 | ) |
Balance at June 30, 2018 |
|
| 35,442,879 |
|
|
| 4,643,530 |
|
| $ | 323,211 |
|
| $ | 144,791 |
|
| $ | (5,016 | ) |
|
|
| $ | 462,986 |
|
Common stock | Retained earnings | Accumulated other comprehensive income (loss) | Non- controlling interest | Total equity | |||||||||||||||||||||
Shares | |||||||||||||||||||||||||
Class A | Class B | Amount | |||||||||||||||||||||||
Balance at December 31, 2015 | 29,449,369 | 4,723,530 | $ | 187,507 | $ | 12,140 | $ | (192 | ) | $ | 33 | $ | 199,488 | ||||||||||||
Net income (loss) | — | — | — | 8,293 | — | (9 | ) | 8,284 | |||||||||||||||||
Other comprehensive income | — | — | — | — | 322 | — | 322 | ||||||||||||||||||
Issuance of restricted stock | 16,745 | — | — | — | — | — | — | ||||||||||||||||||
Stock option exercises | 25,406 | — | 147 | — | — | — | 147 | ||||||||||||||||||
Stock option based compensation expense | — | — | 1,752 | — | — | — | 1,752 | ||||||||||||||||||
Restricted stock expense | — | — | 5,893 | — | — | — | 5,893 | ||||||||||||||||||
Acquisition of non-controlling interest | — | — | — | — | — | (24 | ) | (24 | ) | ||||||||||||||||
Dividends (distributions to shareholders) | — | — | — | (1,710 | ) | — | — | (1,710 | ) | ||||||||||||||||
Balance at September 30, 2016 | 29,491,520 | 4,723,530 | $ | 195,299 | $ | 18,723 | $ | 130 | $ | — | $ | 214,152 | |||||||||||||
Balance at December 31, 2016 | 29,530,072 | 4,723,530 | $ | 199,981 | $ | 23,518 | $ | (652 | ) | $ | — | $ | 222,847 | ||||||||||||
Net income | — | — | — | 28,769 | — | — | 28,769 | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 32 | — | 32 | ||||||||||||||||||
Issuance of restricted stock | 306,902 | — | — | — | — | — | — | ||||||||||||||||||
Withholding cash issued in lieu of restricted stock issuance | — | — | (4,891 | ) | — | — | — | (4,891 | ) | ||||||||||||||||
Employee stock purchase program | 22,634 | — | 445 | — | — | — | 445 | ||||||||||||||||||
Stock option exercises | 76,285 | — | 602 | — | — | — | 602 | ||||||||||||||||||
Stock option based compensation expense | — | — | 1,496 | — | — | — | 1,496 | ||||||||||||||||||
Restricted stock expense | — | — | 4,210 | — | — | — | 4,210 | ||||||||||||||||||
Stock issued in acquisition of Reltco, Inc. | 27,724 | — | 565 | — | — | — | 565 | ||||||||||||||||||
Non-voting common stock converted to voting common stock in private sale | 80,000 | (80,000 | ) | — | — | — | — | — | |||||||||||||||||
Issuance of common stock in connection with secondary offering, net of issue costs | 5,175,000 | — | 113,096 | — | — | — | 113,096 | ||||||||||||||||||
Dividends (distributions to shareholders) | — | — | — | (2,580 | ) | — | — | (2,580 | ) | ||||||||||||||||
Balance at September 30, 2017 | 35,218,617 | 4,643,530 | $ | 315,504 | $ | 49,707 | $ | (620 | ) | $ | — | $ | 364,591 |
See Notes to Unaudited Condensed Consolidated Financial Statements
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued)
For the three and six months ended June 30, 2019 and 2018 (unaudited)
(Dollars in thousands)
|
| Six Months Ended |
| |||||||||||||||||||||||
|
| Common stock |
|
|
|
|
|
| Accumulated other |
|
|
|
|
|
|
| ||||||||||
|
| Shares |
|
|
|
|
|
| Retained |
|
| comprehensive |
|
|
|
| Total |
| ||||||||
|
| Class A |
|
| Class B |
|
| Amount |
|
| earnings |
|
| income (loss) |
|
|
|
| equity |
| ||||||
Balance at December 31, 2018 |
|
| 35,512,262 |
|
|
| 4,643,530 |
|
| $ | 328,113 |
|
| $ | 167,124 |
|
| $ | (1,677 | ) |
|
|
| $ | 493,560 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,307 |
|
|
| — |
|
|
|
|
| 7,307 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,554 |
|
|
|
|
| 14,554 |
|
Issuance of restricted stock |
|
| 21,486 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| — |
|
Withholding cash issued in lieu of restricted stock issuance |
|
| — |
|
|
| — |
|
|
| (86 | ) |
|
| — |
|
|
| — |
|
|
|
|
| (86 | ) |
Employee stock purchase program |
|
| 14,059 |
|
|
| — |
|
|
| 182 |
|
|
| — |
|
|
| — |
|
|
|
|
| 182 |
|
Stock option exercises |
|
| 29,579 |
|
|
| — |
|
|
| 172 |
|
|
| — |
|
|
| — |
|
|
|
|
| 172 |
|
Stock option based compensation expense |
|
| — |
|
|
| — |
|
|
| 870 |
|
|
| — |
|
|
| — |
|
|
|
|
| 870 |
|
Restricted stock expense |
|
| — |
|
|
| — |
|
|
| 4,904 |
|
|
| — |
|
|
| — |
|
|
|
|
| 4,904 |
|
Cumulative effect of accounting change for Accounting Standards Update 2016-02 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (66 | ) |
|
| — |
|
|
|
|
| (66 | ) |
Cash dividends ($0.06 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,411 | ) |
|
| — |
|
|
|
|
| (2,411 | ) |
Balance at June 30, 2019 |
|
| 35,577,386 |
|
|
| 4,643,530 |
|
| $ | 334,155 |
|
| $ | 171,954 |
|
| $ | 12,877 |
|
|
|
| $ | 518,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017 |
|
| 35,252,053 |
|
|
| 4,643,530 |
|
| $ | 317,725 |
|
| $ | 120,241 |
|
| $ | (1,033 | ) |
|
|
| $ | 436,933 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 26,706 |
|
|
| — |
|
|
|
|
| 26,706 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,739 | ) |
|
|
|
| (3,739 | ) |
Issuance of restricted stock |
|
| 39,133 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
| — |
|
Withholding cash issued in lieu of restricted stock issuance |
|
| — |
|
|
| — |
|
|
| (495 | ) |
|
| — |
|
|
| — |
|
|
|
|
| (495 | ) |
Employee stock purchase program |
|
| 7,022 |
|
|
| — |
|
|
| 165 |
|
|
| — |
|
|
| — |
|
|
|
|
| 165 |
|
Stock option exercises |
|
| 144,671 |
|
|
| — |
|
|
| 1,252 |
|
|
| — |
|
|
| — |
|
|
|
|
| 1,252 |
|
Stock option based compensation expense |
|
| — |
|
|
| — |
|
|
| 809 |
|
|
| — |
|
|
| — |
|
|
|
|
| 809 |
|
Restricted stock expense |
|
| — |
|
|
| — |
|
|
| 3,755 |
|
|
| — |
|
|
| — |
|
|
|
|
| 3,755 |
|
Reclassification of accumulated other comprehensive income due to tax rate change |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 244 |
|
|
| (244 | ) |
|
|
|
| — |
|
Cash dividends ($0.06 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,400 | ) |
|
| — |
|
|
|
|
| (2,400 | ) |
Balance at June 30, 2018 |
|
| 35,442,879 |
|
|
| 4,643,530 |
|
| $ | 323,211 |
|
| $ | 144,791 |
|
| $ | (5,016 | ) |
|
|
| $ | 462,986 |
|
See Notes to Unaudited Condensed Consolidated Financial Statements
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows
For the ninesix months ended SeptemberJune 30, 20172019 and 20162018 (unaudited)
(Dollars in thousands)
|
| Six Months Ended June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 7,307 |
|
| $ | 26,706 |
|
Adjustments to reconcile net income to net cash used by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 9,101 |
|
|
| 7,823 |
|
Provision for loan and lease losses |
|
| 6,205 |
|
|
| 6,479 |
|
Amortization of premium on securities, net of accretion |
|
| 254 |
|
|
| 353 |
|
Change in discount on unguaranteed loans |
|
| (3,431 | ) |
|
| 3,501 |
|
Deferred tax (benefit) expense |
|
| (417 | ) |
|
| 807 |
|
Originations of loans held for sale |
|
| (455,456 | ) |
|
| (621,290 | ) |
Proceeds from sales of loans held for sale |
|
| 168,981 |
|
|
| 613,911 |
|
Net gains on sale of loans held for sale |
|
| (10,213 | ) |
|
| (47,479 | ) |
Net loss on sale of foreclosed assets |
|
| 4 |
|
|
| 1 |
|
Net decrease (increase) in servicing assets |
|
| 5,954 |
|
|
| (391 | ) |
Gain on sale of securities available-for-sale |
|
| (5 | ) |
|
| — |
|
Net gain on disposal of long-lived asset |
|
| (357 | ) |
|
| — |
|
Net loss on disposal of property and equipment |
|
| 109 |
|
|
| — |
|
Renewable energy tax credit investment impairment |
|
| 602 |
|
|
| — |
|
Stock option based compensation expense |
|
| 870 |
|
|
| 809 |
|
Restricted stock expense |
|
| 4,904 |
|
|
| 3,755 |
|
Stock based compensation expense tax (shortfall) benefit |
|
| (76 | ) |
|
| 24 |
|
Business combination contingent consideration fair value adjustment |
|
| — |
|
|
| (260 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Lease right-of-use assets and liabilities, net |
|
| 102 |
|
|
| — |
|
Other assets |
|
| 13,704 |
|
|
| (7,445 | ) |
Other liabilities |
|
| 154 |
|
|
| 909 |
|
Net cash used by operating activities |
|
| (251,704 | ) |
|
| (11,787 | ) |
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of securities available-for-sale |
|
| (205,829 | ) |
|
| (316,588 | ) |
Proceeds from sales, maturities, calls, and principal paydown of securities available-for-sale |
|
| 28,945 |
|
|
| 19,727 |
|
Proceeds from SBA reimbursement/sale of foreclosed assets |
|
| 393 |
|
|
| 212 |
|
Maturities of certificates of deposits with other banks |
|
| — |
|
|
| 750 |
|
Loan and lease originations and principal collections, net |
|
| (258,028 | ) |
|
| (217,743 | ) |
Proceeds from sale of long-lived asset |
|
| 10,895 |
|
|
| — |
|
Purchases of premises and equipment, net |
|
| (27,823 | ) |
|
| (61,217 | ) |
Net cash used by investing activities |
|
| (451,447 | ) |
|
| (574,859 | ) |
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | 28,769 | $ | 8,284 | |||
Adjustments to reconcile net income to net cash used by operating activities: | |||||||
Depreciation and amortization | 7,020 | 3,201 | |||||
Provision for loan losses | 5,481 | 8,692 | |||||
Amortization of premium on securities, net of accretion | 355 | 135 | |||||
Amortization of discount on unguaranteed loans, net | 1,263 | 773 | |||||
Deferred tax expense (benefit) | 413 | (510 | ) | ||||
Originations of loans held for sale | (884,741 | ) | (701,415 | ) | |||
Proceeds from sales of loans held for sale | 648,300 | 555,192 | |||||
Net gains on sale of loans held for sale | (55,276 | ) | (52,813 | ) | |||
Net loss on sale of foreclosed assets | 30 | 61 | |||||
Net increase in servicing assets | (1,398 | ) | (5,499 | ) | |||
Gain on sale of securities available-for-sale | — | (1 | ) | ||||
Net loss on disposal of premises and equipment | 213 | — | |||||
Stock option based compensation expense | 1,496 | 1,752 | |||||
Restricted stock expense | 4,210 | 5,893 | |||||
Stock based compensation expense excess tax benefits | 1,073 | — | |||||
Business combination contingent consideration fair value adjustment | 350 | — | |||||
Changes in assets and liabilities: | |||||||
Other assets | (17,661 | ) | (858 | ) | |||
Other liabilities | 3,875 | 2,652 | |||||
Net cash used by operating activities | (256,228 | ) | (174,461 | ) | |||
Cash flows from investing activities | |||||||
Purchases of securities available-for-sale | (13,009 | ) | (24,946 | ) | |||
Proceeds from sales, maturities, calls, and principal paydowns of securities available-for-sale | 7,187 | 8,764 | |||||
Proceeds from sale/collection of foreclosed assets | 50 | 680 | |||||
Business combination, net of cash acquired | (7,696 | ) | — | ||||
Maturities of certificates of deposit with other banks | 4,000 | 2,750 | |||||
Loan and lease originations and principal collections, net | (273,501 | ) | (154,738 | ) | |||
Purchases of premises and equipment, net | (71,420 | ) | (1,194 | ) | |||
Net cash used in investing activities | (354,389 | ) | (168,684 | ) |
See Notes to Unaudited Condensed Consolidated Financial Statements
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
For the ninethree and six months ended SeptemberJune 30, 20172019 and 20162018 (unaudited)
(Dollars in thousands)
|
| Six Months Ended June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net increase in deposits |
| $ | 572,014 |
|
| $ | 708,973 |
|
Proceeds from long term borrowings |
|
| — |
|
|
| 18 |
|
Repayment of long term borrowings |
|
| (2 | ) |
|
| (23,197 | ) |
Repayment of short term borrowings |
|
| (96 | ) |
|
| — |
|
Stock option exercises |
|
| 172 |
|
|
| 1,252 |
|
Employee stock purchase program |
|
| 182 |
|
|
| 165 |
|
Withholding cash issued in lieu of restricted stock |
|
| (86 | ) |
|
| (495 | ) |
Shareholder dividend distributions |
|
| (2,411 | ) |
|
| (2,400 | ) |
Net cash provided by financing activities |
|
| 569,773 |
|
|
| 684,316 |
|
Net (decrease) increase in cash and cash equivalents |
|
| (133,378 | ) |
|
| 97,670 |
|
Cash and cash equivalents, beginning |
|
| 316,823 |
|
|
| 295,271 |
|
Cash and cash equivalents, ending |
| $ | 183,445 |
|
| $ | 392,941 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Interest paid |
| $ | 39,391 |
|
| $ | 24,308 |
|
Income tax received |
|
| (12,439 | ) |
|
| (542 | ) |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash operating, investing, and financing activities |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on available-for-sale securities, net of taxes |
| $ | 14,554 |
|
| $ | (3,739 | ) |
Transfers from loans and leases to foreclosed real estate and other repossessions |
|
| 5,058 |
|
|
| 346 |
|
Net transfers from SBA receivable to foreclosed real estate |
|
| 289 |
|
|
| 311 |
|
Right-of-use assets obtained in exchange for lessee operating lease liabilities |
|
| 2,241 |
|
|
| — |
|
Transfer of loans held for sale to loans and leases held for investment |
|
| 146,305 |
|
|
| 19,774 |
|
Transfer of loans and leases held for investment to loans held for sale |
|
| 23,321 |
|
|
| 51,614 |
|
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Cash flows from financing activities | |||||||
Net increase in deposits | 527,815 | 598,229 | |||||
Proceeds from long term borrowings | 16,900 | — | |||||
Repayment of long term borrowings | (25,971 | ) | (301 | ) | |||
Proceeds from short term borrowings | 23,100 | — | |||||
Repayment of short term borrowings | (15,000 | ) | — | ||||
Stock option exercises | 602 | 147 | |||||
Employee stock purchase program | 445 | — | |||||
Withholding cash issued in lieu of restricted stock | (4,891 | ) | — | ||||
Sale of common stock, net of issuance costs | 113,096 | — | |||||
Shareholder dividend distributions | (2,580 | ) | (2,052 | ) | |||
Net cash provided by financing activities | 633,516 | 596,023 | |||||
Net increase in cash and cash equivalents | 22,899 | 252,878 | |||||
Cash and cash equivalents, beginning | 238,008 | 102,607 | |||||
Cash and cash equivalents, ending | $ | 260,907 | $ | 355,485 | |||
Supplemental disclosure of cash flow information | |||||||
Interest paid | $ | 17,927 | $ | 10,120 | |||
Income tax | 7,094 | 5,739 | |||||
Supplemental disclosures of noncash operating, investing, and financing activities | |||||||
Unrealized holding gains on available-for-sale securities, net of taxes | $ | 32 | $ | 322 | |||
Transfers from loans to foreclosed real estate and other repossessions | 663 | 406 | |||||
Transfers from foreclosed real estate to SBA receivable | — | 96 | |||||
Transfer of loans held for sale to loans held for investment | 5,713 | 339,322 | |||||
Transfer of loans held for investment to loans held for sale | 18,990 | 2,296 | |||||
Contingent consideration in acquisition of controlling interest in equity method investment | — | 24 | |||||
Transfers from short term borrowings to long term borrowings | 8,100 | — | |||||
Business combination: | |||||||
Assets acquired (excluding goodwill) | 5,766 | — | |||||
Liabilities assumed | 4,681 | — | |||||
Purchase price | 8,363 | — | |||||
Goodwill recorded | 7,278 | — |
See Notes to Unaudited Condensed Consolidated Financial Statements
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Nature of Operations
Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending services to small businesses nationwide in targeted industries, which we refer to as verticals.nationwide. The Bank identifies and grows lending to credit-worthy borrowers both within credit-worthyspecific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and to a lesser extent by the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP") and, Business & Industry ("B&I") and Water & Waste Disposal (“WEP”) loan programs. On July 28, 2015 the Company completed its initial public offering with a secondary offering completed in August of 2017.
In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.
In addition to the Bank, the Company owns Live Oak Grove, LLC, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), formed to serve as the investment adviser to the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.
In August 2016, the Company formed Live Oak Ventures, Inc. (formerly known as “Canapi, Inc.”) for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.
In November 2016, the Company formed Live Oak Clean Energy Financing LLC (“LOCEF”) for the purpose of providing financing to entities for renewable energy applications.
On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), two nationwide title agencies under common control based in Tampa, Florida. See Note 4. Business CombinationEffective August 1, 2018, Reltco was sold.
In June 2018, the Bank formed Live Oak Private Wealth, LLC for the purpose of providing high-net-worth individuals and families with strategic wealth and investment management services.
In September 2018, the Company formed Canapi Advisors, LLC for the purpose of providing investment advisory services to a further discussionseries of this transaction.
The Company earnsgenerates revenue primarily from net interest income and the origination and sale of SBA and USDA-guaranteedgovernment guaranteed loans. Income from the retention of loans and netis comprised of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on the salesales of loans, revenues on the servicing of sold loans and valuation of loan servicing rights.loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
General
In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017.2019. The consolidated balance sheet as of December 31, 20162018 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, filed with the Securities Exchange Commission on March 9, 2017February 27, 2019 (SEC File No. 001-37497) (the "2016"2018 Annual Report"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 20162018 Annual Report. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes in the Company's 20162018 Annual Report.
The preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Business Segments
Management has determined that the Company has one significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment.
As of September 30, 2017 | Amount | |||
2017 | $ | 463 | ||
2018 | 3,204 | |||
2019 | 3,214 | |||
2020 | 3,233 | |||
2021 | 3,254 | |||
Thereafter | 19,625 | |||
Total | $ | 32,993 |
Three months ended September 30, 2017 | Nine months ended September 30, 2017 | |||||||
Decrease in: | ||||||||
Net income | $ | 202 | $ | 692 | ||||
Basic EPS | $ | 0.01 | $ | 0.02 | ||||
Diluted EPS | $ | 0.01 | $ | 0.02 |
Reclassifications
Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications.
Accounting Change
On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02 “Leases (Topic 842),” (“ASU 2016-02”) and all subsequent ASUs that modified Topic 842. The Company elected to apply certain practical expedients provided under ASU 2016-02 whereby the Company will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company has also applied the practical expedient to use hindsight in determining the lease term and in assessing impairment of the right-of-use assets. The Company does not apply the recognition and measurement requirements to any short-term leases (as defined by ASU 2016-02). The Company accounts for lease and non-lease components separately because such amounts are readily determinable under the lease contracts. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11, “Leases (Topic 842) Targeted Improvements” (“ASU 2018-11”). The implementation of the new standard resulted in the Company recording $2.2 million of operating lease right-of-use ("ROU") assets, $2.4 million of operating lease liabilities and a cumulative effect adjustment to opening retained earnings of $66 thousand. The Company also recorded $18 thousand of finance ROU assets and finance lease liabilities.
The Company determines if an arrangement is or contains a lease at inception. If it is determined to be or contain a lease, then the lease is classified as an operating or finance lease.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are measured on commencement date based on the present value of the lease payments over the lease term, discounted using the discount rate for the lease at commencement. The discount rate shall be the rate implicit in the lease, however, if that is not readily determinable, the Company will use its incremental borrowing rate. The ROU asset also includes any lease payments made before the commencement date and initial direct costs and excludes any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Operating leases are included in operating lease right-of-use assets and operating lease liabilities in the consolidated balance sheets. Finance leases are included in other assets and long term borrowings in the consolidated balance sheets. Lease expense for operating leases and finance leases is included in occupancy expense in the consolidated statements of income and interest expense for finance leases is included in other interest expense in the consolidated statements of income.
Note 2. Recent Accounting Pronouncements
In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers2016-13, “Financial Instruments – Credit Losses (Topic 606)” (“ASU 2014-09”). This standard is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The Company's revenue is comprised of loan servicing revenue, net gains on sales of loans and net interest income on financial assets and financial liabilities, all of which are explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company's revenue streams included in non-interest income that are within the scope of the guidance are primarily related to sales of foreclosed assets, construction supervision fees, title insurance income and trust fiduciary fees. The Company does not expect the adoption of ASU 2014-09 to have a material effect on the consolidated financial statements. The Company expects to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.
In January 2017,June 2018, the FASB issued ASU No. 2017-01, “Business Combinations2018-07, “Compensation - Stock Compensation (Topic 805) - Clarifying the Definition of a Business”718) Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2017-01”2018-07”). ASU 2017-012018-07 amends Accounting Standard Codification 718 to largely align accounting for share-based payment awards issued to employees and nonemployees. Under the new guidance, existing employee guidance will generally apply to nonemployee share-based transactions, except for specific guidance on inputs into option pricing models and the attribution of cost. The Company adopted the standard on January 1, 2019 with no material effect on its consolidated financial statements.
In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”). ASU 2019-01 provides updates to Topic 842 including: (i) guidance on how to determine fair value of leased items for lessors who are not dealers or manufacturers, (ii) cash flow presentation for lessors of sales-type and direct financing leases and (iii) clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will bethat certain transition disclosures. The amendments are effective for the Company on January 1, 2018. 2020. The Company does not expect this amendmentthese amendments to have a material effect on its consolidated financial statements.
In January 2017,April 2019, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Other (Topic 350) - Simplifying the Test for Goodwill Impairment”Hedging, and Topic 825, Financial Instruments” (“ASU 2017-04”2019-04”). ASU 2017-04 removes Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not2019-04 provides clarification and minor improvements related to exceed the carrying amountASU 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of goodwill. Financial Assets and Financial Liabilities,” ASU 2017-042016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and ASU 2017-12 “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” The standard will be effective for the Company on January 1, 2020 with early adoption permitted for interim or annual impairment tests performed after January 1, 2017. ASU 2017-04 ispermitted. The Company does not expectedexpect this standard to have a material impacteffect on its consolidated financial statements.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
In February 2017,May 2019, the FASB issued ASU No. 2017-05, “Other Income - Gains and2019-05, “Financial Instruments – Credit Losses from(Topic 326): Targeted Transition Relief” (“ASU 2019-05”). ASU 2019-05 allows entities an option to irrevocably elect the Derecognitionfair value option for eligible instruments upon adoption of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets.Topic 326. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ASU 2017-05 will beare effective for the Company on January 1, 2018 and is not expected2020. See discussion of ASU 2016-13 above for impact to have a significant impact on itsthe consolidated financial statements.
Note 3. Earnings Per Share
Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then be shared in the net income of the Company.
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
| $ | 4,935 |
|
| $ | 14,253 |
|
| $ | 7,307 |
|
| $ | 26,706 |
|
Weighted-average basic shares outstanding |
|
| 40,196,662 |
|
|
| 40,027,336 |
|
|
| 40,178,491 |
|
|
| 39,977,336 |
|
Basic earnings per share |
| $ | 0.12 |
|
| $ | 0.36 |
|
| $ | 0.18 |
|
| $ | 0.67 |
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, for diluted earnings per share |
| $ | 4,935 |
|
| $ | 14,253 |
|
| $ | 7,307 |
|
| $ | 26,706 |
|
Total weighted-average basic shares outstanding |
|
| 40,196,662 |
|
|
| 40,027,336 |
|
|
| 40,178,491 |
|
|
| 39,977,336 |
|
Add effect of dilutive stock options and restricted stock grants |
|
| 801,879 |
|
|
| 1,592,311 |
|
|
| 801,879 |
|
|
| 1,538,997 |
|
Total weighted-average diluted shares outstanding |
|
| 40,998,541 |
|
|
| 41,619,647 |
|
|
| 40,980,370 |
|
|
| 41,516,333 |
|
Diluted earnings per share |
| $ | 0.12 |
|
| $ | 0.34 |
|
| $ | 0.18 |
|
| $ | 0.64 |
|
Anti-dilutive shares |
|
| 1,578,197 |
|
|
| — |
|
|
| 1,578,197 |
|
|
| 9,102 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Basic earnings per share: | |||||||||||||||
Net income available to common shareholders | $ | 12,862 | $ | 3,479 | $ | 28,769 | $ | 8,293 | |||||||
Weighted-average basic shares outstanding | 37,366,041 | 34,206,943 | 35,485,371 | 34,191,014 | |||||||||||
Basic earnings per share | $ | 0.34 | $ | 0.10 | $ | 0.81 | $ | 0.24 | |||||||
Diluted earnings per share: | |||||||||||||||
Net income available to common shareholders, for diluted earnings per share | $ | 12,862 | $ | 3,479 | $ | 28,769 | $ | 8,293 | |||||||
Total weighted-average basic shares outstanding | 37,366,041 | 34,206,943 | 35,485,371 | 34,191,014 | |||||||||||
Add effect of dilutive stock options and restricted stock grants | 1,278,636 | 794,874 | 1,244,683 | 812,408 | |||||||||||
Total weighted-average diluted shares outstanding | 38,644,677 | 35,001,817 | 36,730,054 | 35,003,422 | |||||||||||
Diluted earnings per share | $ | 0.33 | $ | 0.10 | $ | 0.78 | $ | 0.24 | |||||||
Anti-dilutive shares | 243,199 | 1,778,995 | 250,698 | 1,778,995 |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Fair value of assets acquired | |||
Cash | $ | 102 | |
Accounts receivable | 159 | ||
Intangible assets | 5,505 | ||
Total assets acquired | 5,766 | ||
Fair value of liabilities assumed | |||
Contingent consideration | 4,300 | ||
Accounts payable and other liabilities | 381 | ||
Total liabilities assumed | 4,681 | ||
Net assets acquired | $ | 1,085 | |
Purchase price | |||
Common shares issued | 27,724 | ||
Purchase price per share of the Company’s common stock | $ | 20.38 | |
Company common stock issued | 565 | ||
Cash | 7,798 | ||
Total purchase price | 8,363 | ||
Goodwill | $ | 7,278 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue (net interest income and noninterest income) | $ | 46,085 | $ | 40,627 | $ | 133,306 | $ | 106,960 | |||||||
Net income available to common stockholders | 12,862 | 4,183 | 28,807 | 9,952 | |||||||||||
Basic earnings per share | 0.34 | 0.12 | 0.81 | 0.29 | |||||||||||
Diluted earnings per share | 0.33 | 0.12 | 0.78 | 0.28 |
Note 5.4. Investment Securities
The carrying amount of investment securities and their approximate fair values are reflected in the following table:
June 30, 2019 |
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
| ||||
US treasury securities |
| $ | 4,979 |
|
| $ | 36 |
|
| $ | — |
|
| $ | 5,015 |
|
US government agencies |
|
| 48,303 |
|
|
| 613 |
|
|
| 11 |
|
|
| 48,905 |
|
Mortgage-backed securities |
|
| 497,529 |
|
|
| 16,479 |
|
|
| 659 |
|
|
| 513,349 |
|
Municipal bonds |
|
| 8,521 |
|
|
| 492 |
|
|
| 7 |
|
|
| 9,006 |
|
Total |
| $ | 559,332 |
|
| $ | 17,620 |
|
| $ | 677 |
|
| $ | 576,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US treasury securities |
| $ | 4,969 |
|
| $ | — |
|
| $ | 3 |
|
| $ | 4,966 |
|
US government agencies |
|
| 31,121 |
|
|
| 48 |
|
|
| 225 |
|
|
| 30,944 |
|
Mortgage-backed securities |
|
| 345,606 |
|
|
| 1,340 |
|
|
| 3,365 |
|
|
| 343,581 |
|
Municipal bond |
|
| 1,000 |
|
|
| — |
|
|
| 1 |
|
|
| 999 |
|
Total |
| $ | 382,696 |
|
| $ | 1,388 |
|
| $ | 3,594 |
|
| $ | 380,490 |
|
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
September 30, 2017 | |||||||||||||||
US government agencies | $ | 17,829 | $ | 11 | $ | 35 | $ | 17,805 | |||||||
Residential mortgage-backed securities | 57,685 | — | 936 | 56,749 | |||||||||||
Mutual fund | 2,070 | — | 49 | 2,021 | |||||||||||
Total | $ | 77,584 | $ | 11 | $ | 1,020 | $ | 76,575 | |||||||
December 31, 2016 | |||||||||||||||
US government agencies | $ | 17,803 | $ | 52 | $ | 32 | $ | 17,823 | |||||||
Residential mortgage-backed securities | 52,301 | 3 | 1,031 | 51,273 | |||||||||||
Mutual fund | 2,012 | — | 52 | 1,960 | |||||||||||
Total | $ | 72,116 | $ | 55 | $ | 1,115 | $ | 71,056 |
There were no sales of securities during the three and nine months ended SeptemberJune 30, 2017.The2019 and 2018. During the six months ended June 30, 2019, $900 thousand of one municipal bond was sold resulting in a net gain of $5 thousand. There were no sales of securities during the six months ended June 30, 2018.
The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
|
| Less Than 12 Months |
|
| 12 Months or More |
|
| Total |
| |||||||||||||||
June 30, 2019 |
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
| ||||||
US government agencies |
| $ | — |
|
| $ | — |
|
| $ | 6,471 |
|
| $ | 11 |
|
| $ | 6,471 |
|
| $ | 11 |
|
Mortgage-backed securities |
|
| — |
|
|
| — |
|
|
| 44,567 |
|
|
| 659 |
|
|
| 44,567 |
|
|
| 659 |
|
Municipal bonds |
|
| 93 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| 93 |
|
|
| 7 |
|
Total |
| $ | 93 |
|
| $ | 7 |
|
| $ | 51,038 |
|
| $ | 670 |
|
| $ | 51,131 |
|
| $ | 677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less Than 12 Months |
|
| 12 Months or More |
|
| Total |
| |||||||||||||||
December 31, 2018 |
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
|
| Fair Value |
|
| Unrealized Losses |
| ||||||
US treasury securities |
| $ | 4,966 |
|
| $ | 3 |
|
| $ | — |
|
| $ | — |
|
| $ | 4,966 |
|
| $ | 3 |
|
US government agencies |
|
| — |
|
|
| — |
|
|
| 16,268 |
|
|
| 225 |
|
|
| 16,268 |
|
|
| 225 |
|
Mortgage-backed securities |
|
| 164,836 |
|
|
| 1,177 |
|
|
| 51,371 |
|
|
| 2,188 |
|
|
| 216,207 |
|
|
| 3,365 |
|
Municipal bond |
|
| 999 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 999 |
|
|
| 1 |
|
Total |
| $ | 170,801 |
|
| $ | 1,181 |
|
| $ | 67,639 |
|
| $ | 2,413 |
|
| $ | 238,440 |
|
| $ | 3,594 |
|
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
September 30, 2017 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||
US government agencies | $ | 4,996 | $ | 16 | $ | 1,496 | $ | 19 | $ | 6,492 | $ | 35 | |||||||||||
Residential mortgage-backed securities | 28,397 | 461 | 21,767 | 475 | 50,164 | 936 | |||||||||||||||||
Mutual fund | 2,021 | 49 | — | — | 2,021 | 49 | |||||||||||||||||
Total | $ | 35,414 | $ | 526 | $ | 23,263 | $ | 494 | $ | 58,677 | $ | 1,020 | |||||||||||
Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
December 31, 2016 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||
US government agencies | $ | 6,508 | $ | 32 | $ | — | $ | — | $ | 6,508 | $ | 32 | |||||||||||
Residential mortgage-backed securities | 49,109 | 1,017 | 1,635 | 14 | 50,744 | 1,031 | |||||||||||||||||
Mutual fund | 1,960 | 52 | — | — | 1,960 | 52 | |||||||||||||||||
Total | $ | 57,577 | $ | 1,101 | $ | 1,635 | $ | 14 | $ | 59,212 | $ | 1,115 |
At SeptemberJune 30, 2017,2019, there were twelve residentialtwenty-five mortgage-backed securities and onethree US government agency securityagencies in unrealized loss positions for greater than 12 months and fourteen residential mortgage-backed securities, two US government agency securities and the 504 Fund mutual fund investmentone municipal bond in an unrealized loss positionpositions for less than 12 months. Unrealized losses at December 31, 20162018 were comprised of two residentialthirty-one mortgage-backed securities and six US government agencies in unrealized loss positions for greater than 12 months and three US government agency securities, twenty-two residentialtwenty-five mortgage-backed securities, one US treasury security and the 504 Fund mutual fund investmentone municipal bond in an unrealized loss positionpositions for less than 12 months.
These unrealized losses are primarily the result of volatility in the market and are related to market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the securities are deemed to be other than temporarily impaired.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
All residential mortgage-backed securities in the Company’s portfolio at SeptemberJune 30, 20172019 and December 31, 20162018 were backed by USU.S. government sponsored enterprises (“GSEs”).
The following is a summary of investment securities by maturity:
|
| June 30, 2019 |
| |||||
|
| Amortized cost |
|
| Fair value |
| ||
US treasury securities |
|
|
|
|
|
|
|
|
One to five years |
| $ | 4,979 |
|
| $ | 5,015 |
|
Total |
|
| 4,979 |
|
|
| 5,015 |
|
US government agencies |
|
|
|
|
|
|
|
|
Within one year |
|
| 6,483 |
|
|
| 6,471 |
|
One to five years |
|
| 29,909 |
|
|
| 30,345 |
|
Five to ten years |
|
| 11,911 |
|
|
| 12,089 |
|
Total |
|
| 48,303 |
|
|
| 48,905 |
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
One to five years |
|
| 2,743 |
|
|
| 2,760 |
|
Five to ten years |
|
| 150,463 |
|
|
| 156,698 |
|
After 10 years |
|
| 344,323 |
|
|
| 353,891 |
|
Total |
|
| 497,529 |
|
|
| 513,349 |
|
Municipal bonds |
|
|
|
|
|
|
|
|
After 10 years |
|
| 8,521 |
|
|
| 9,006 |
|
Total |
|
| 8,521 |
|
|
| 9,006 |
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 559,332 |
|
| $ | 576,275 |
|
September 30, 2017 | |||||||
Available-for-Sale | |||||||
Amortized cost | Fair value | ||||||
US government agencies | |||||||
Within one year | $ | 11,302 | $ | 11,312 | |||
One to five years | 6,527 | 6,492 | |||||
Total | 17,829 | 17,804 | |||||
Residential mortgage-backed securities | |||||||
Five to ten years | 7,264 | 7,200 | |||||
After 10 years | 50,421 | 49,550 | |||||
Total | 57,685 | 56,750 | |||||
Total | $ | 75,514 | $ | 74,554 |
The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled. This table excludes the 504 Fund mutual fund investment.
There were no investment securities pledged at June 30, 2019. At December 31, 2016, an2018, investment security with a fair market value of $1.5 million was pledged to secure a line of credit with the Company’s correspondent bank. At September 30, 2017, the security pledged to secure a line of credit with the Company's correspondent bank was released. At September 30, 2017 and December 31, 2016, an investment securitysecurities with a fair market value of $100 thousand was pledged to the Ohio State Treasurer to allow the Company's trust department to conduct business in the stateState of Ohio and investment securities with a fair market value of $2.5 million and $1.2 million, respectively, were pledged to the Company's trust department for uninsured trust assets held by the trust department.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 6.5. Loans and Leases Held for Investment and Allowance for Loan and Lease Losses
Loan and Lease Portfolio Segments
The following describes the risk characteristics relevant to each of the portfolio segments. Each loan and lease category is assigned a risk grade during the origination and closing process based on criteria described later in this section.
Commercial and Industrial
Commercial and industrial loans (C&I) receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of the Bank’s C&I loans generally comes from the generation of cash flow as the result of the borrower’s business operations. This business cycle itself brings a certain level of risk to the portfolio. In some instances, these loans may carry a higher degree of risk due to a variety of reasons – illiquid collateral, specialized equipment, highly depreciable assets, uncollectable accounts receivable, revolving balances, or simply being unsecured. As a result of these characteristics, the SBA guarantee on these loans is an important factor in mitigating risk.
Construction and Development
Construction and development loans are for the purpose of acquisition and development of land to be improved through the construction of commercial buildings. Such loans are usually paid off through the conversion to permanent financing for the long-term benefit of the borrower’s ongoing operations. At the completion of the project, if the loan is converted to permanent financing or if scheduled loan amortization begins, it is then reclassified to the “Commercial Real Estate” segment. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.
Commercial Real Estate
Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Such repayment of commercial real estate loans is commonly derived from the successful ongoing operations of the business occupying the property. These typically include small businesses and professional practices.
Commercial Land
Commercial land loans are extensions of credit secured by farmland. Such loans are often for land improvements related to agricultural endeavors that may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loans amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.
Each of the loan types referenced in the sections above is further segmented into verticals in which the Bank chooses to operate. The Bank chooses to finance businesses operating in specific industries because of certain similarities. The similarities range from historical default and loss characteristics to business operations. However, there are differences that create the necessity to underwrite these loans according to varying criteria and guidelines. When underwriting a loan, the Bank considers numerous factors such as cash flow coverage, the credit scores of the guarantors, revenue growth, practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines require compensating strengths when considering a proposed loan.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Loans and leases consist of the following:
|
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Commercial & Industrial |
|
|
|
|
|
|
|
|
Agriculture |
| $ | 6,305 |
|
| $ | 6,400 |
|
Funeral Home & Cemetery |
|
| 22,709 |
|
|
| 17,378 |
|
Healthcare |
|
| 46,344 |
|
|
| 51,082 |
|
Independent Pharmacies |
|
| 110,956 |
|
|
| 108,783 |
|
Registered Investment Advisors |
|
| 92,901 |
|
|
| 94,338 |
|
Veterinary Industry |
|
| 47,744 |
|
|
| 45,604 |
|
Other Industries |
|
| 402,962 |
|
|
| 295,163 |
|
Total |
|
| 729,921 |
|
|
| 618,748 |
|
Construction & Development |
|
|
|
|
|
|
|
|
Agriculture |
|
| 40,258 |
|
|
| 43,454 |
|
Funeral Home & Cemetery |
|
| 10,840 |
|
|
| 9,874 |
|
Healthcare |
|
| 92,296 |
|
|
| 81,619 |
|
Independent Pharmacies |
|
| 1,193 |
|
|
| 2,149 |
|
Registered Investment Advisors |
|
| 2,138 |
|
|
| 1,232 |
|
Veterinary Industry |
|
| 22,694 |
|
|
| 14,094 |
|
Other Industries |
|
| 155,313 |
|
|
| 96,482 |
|
Total |
|
| 324,732 |
|
|
| 248,904 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
Agriculture |
|
| 49,532 |
|
|
| 53,085 |
|
Funeral Home & Cemetery |
|
| 86,830 |
|
|
| 71,344 |
|
Healthcare |
|
| 221,195 |
|
|
| 188,531 |
|
Independent Pharmacies |
|
| 26,877 |
|
|
| 20,597 |
|
Registered Investment Advisors |
|
| 8,152 |
|
|
| 7,905 |
|
Veterinary Industry |
|
| 135,470 |
|
|
| 136,721 |
|
Other Industries |
|
| 354,321 |
|
|
| 260,847 |
|
Total |
|
| 882,377 |
|
|
| 739,030 |
|
Commercial Land |
|
|
|
|
|
|
|
|
Agriculture |
|
| 288,467 |
|
|
| 243,798 |
|
Total |
|
| 288,467 |
|
|
| 243,798 |
|
Total Loans |
|
| 2,225,497 |
|
|
| 1,850,480 |
|
Net Deferred Costs |
|
| 9,767 |
|
|
| 5,960 |
|
Discount on SBA 7(a) Unguaranteed |
|
| (9,791 | ) |
|
| (13,021 | ) |
Loans, Net of Unearned |
| $ | 2,225,473 |
|
| $ | 1,843,419 |
|
September 30, 2017 | December 31, 2016 | ||||||
Commercial & Industrial | |||||||
Agriculture | $ | 2,698 | $ | 1,714 | |||
Death Care Management | 12,101 | 9,684 | |||||
Healthcare | 41,454 | 37,270 | |||||
Independent Pharmacies | 97,171 | 83,677 | |||||
Registered Investment Advisors | 91,241 | 68,335 | |||||
Veterinary Industry | 45,570 | 38,930 | |||||
Other Industries | 142,115 | 94,836 | |||||
Total | 432,350 | 334,446 | |||||
Construction & Development | |||||||
Agriculture | 34,636 | 32,372 | |||||
Death Care Management | 4,744 | 3,956 | |||||
Healthcare | 46,814 | 30,467 | |||||
Independent Pharmacies | 1,696 | 2,013 | |||||
Registered Investment Advisors | 329 | 294 | |||||
Veterinary Industry | 13,265 | 11,514 | |||||
Other Industries | 45,052 | 31,715 | |||||
Total | 146,536 | 112,331 | |||||
Commercial Real Estate | |||||||
Agriculture | 14,689 | 5,591 | |||||
Death Care Management | 61,462 | 52,510 | |||||
Healthcare | 121,331 | 114,281 | |||||
Independent Pharmacies | 18,508 | 15,151 | |||||
Registered Investment Advisors | 13,550 | 11,462 | |||||
Veterinary Industry | 110,028 | 102,906 | |||||
Other Industries | 106,418 | 46,245 | |||||
Total | 445,986 | 348,146 | |||||
Commercial Land | |||||||
Agriculture | 146,814 | 113,569 | |||||
Total | 146,814 | 113,569 | |||||
Total Loans and Leases1 | 1,171,686 | 908,492 | |||||
Net Deferred Costs | 8,038 | 7,648 | |||||
Discount on SBA 7(a) and USDA Unguaranteed2 | (9,837 | ) | (8,574 | ) | |||
Loans and Leases, Net of Unearned | $ | 1,169,887 | $ | 907,566 |
1 | |
Total loans and leases include |
2 | |
The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. The value of these retained loan balances is discounted based on the estimates derived from comparable unguaranteed loan sales. |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Credit Risk Profile
The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases by industry segment. An independent review of the loan and lease portfolio is performed annually by an external firm. The goal of the Bank’s annual review of select borrowers' financial performance is to validate the adequacy of the risk grade assigned.
The Bank uses a grading system to rank the quality of each loan and lease. The grade is periodically evaluated and adjusted as performance dictates. Loan and lease grades 1 through 4 are passing grades and grade 5 is special mention. Collectively, grades 6 through 8 represent classified loans and leases in the Bank’s portfolio. The following guidelines govern the assignment of these risk grades:
Exceptional (1 Rated): These loans and leases are of the highest quality, with strong, well-documented sources of repayment. Debt service coverage (“DSC”) is over 1.75X based on historical results. Secondary sourceThese loans and leases will typically have multiple demonstrated sources of repayment is strong, with a loanno significant identifiable risk to value (“LTV”) of 65% or less if secured solely by commercial real estate (“CRE”). Discounted collateral coverage from all sources should exceed 125%. Guarantorscollection, exhibit well-qualified management, and have credit scores above 740.
Quality (2 Rated): These loans and leases are of goodvery high credit quality, with good,strong, well-documented sources of repayment. DSC is over 1.25X based on historical or pro-forma results. Secondary sourceThese loans and leases exhibit very strong, well defined primary and secondary sources of repayment, is good, with a LTVno significant identifiable risk of 75% or less if secured solely by CRE. Discounted collateral coverage should exceed 100%. Guarantorscollection and have credit scores above 700.
Satisfactory (3 rated): These loans and leases are of acceptable quality, with acceptableexhibit satisfactory credit risk and have excellent sources of repayment. DSCrepayment, with no significant identifiable risk of over 1.00X based oncollection. These loans and leases have documented historical cash flow that meets or pro-forma results. Companiesexceeds required minimum Bank guidelines, or that do not meet these credit metrics mustcan be evaluatedsupplemented with verifiable cash flow from other sources. They have adequate secondary sources to determine if they should be graded below this level.
Acceptable (4 rated): These loans and leases are considered very weak pass.show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss. These loans and leases are riskier than a 3-rated credit, butmay have unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to various mitigating factors are not considered a Special mentionminor operational issues, financial trends, or worse. The mitigating factors must clearly be identifiedreliance on projected performance. They may also contain marginal or unproven secondary sources to offset further downgrade. Examplesliquidate the debt, including combinations of loansliquidation of collateral and leases that may be put in this category include start-up loans and leases and loans and leases with less than 1:1 cash flow coverage with other sourcesliquidation value to the net worth of repayment.
Special mention (5 rated): These loans and leases are considered as emerging problems, with potentially unsatisfactory characteristics.show signs of weaknesses in either adequate sources of repayment or collateral. These loans and leases require greater management attention. A loan may contain underwriting guideline tolerances and/or lease may be put into this category ifexceptions with no mitigating factors; and/or instances where adverse economic conditions develop subsequent to origination that do not jeopardize liquidation of the Bank is unable to obtain financial reporting from a company to fully evaluate its position.
Substandard (6 rated): Loans and leases graded Substandard are inadequately protected by current sound net worth, paying capacity of the borrower,obligor, or pledged collateral. They typicallyLoans and leases classified as Substandard must have unsatisfactory characteristics causing more than acceptable levels of risk, and have onea well-defined weakness or more well-defined weaknesses that could jeopardize the repaymentliquidation of the debt.
Doubtful (7 rated): Loans and leases graded Doubtful have all the weaknesses inherent in those classified as Substandard, plus the added characteristic that the weaknesses that make collection or liquidation in full questionable. Loanson the basis of currently existing facts, conditions, and leases graded Doubtful must bevalues highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status.
Loss (8 rated): Loss rated loans and leases are considered uncollectible and of such little value that their continuance as an active Bank assetassets is not warranted. TheThis classification does not mean that the asset should be chargedhas absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this credit even though partial recovery may be possibleaffected in the future.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following tables summarize the risk grades of each category:
Risk Grades 1 - 4 | Risk Grade 5 | Risk Grades 6 - 8 | Total | ||||||||||||
September 30, 2017 | |||||||||||||||
Commercial & Industrial | |||||||||||||||
Agriculture | $ | 2,470 | $ | 228 | $ | — | $ | 2,698 | |||||||
Death Care Management | 11,976 | 118 | 7 | 12,101 | |||||||||||
Healthcare | 32,350 | 1,716 | 7,388 | 41,454 | |||||||||||
Independent Pharmacies | 87,173 | 6,523 | 3,475 | 97,171 | |||||||||||
Registered Investment Advisors | 87,940 | 2,566 | 735 | 91,241 | |||||||||||
Veterinary Industry | 41,738 | 1,833 | 1,999 | 45,570 | |||||||||||
Other Industries | 142,096 | 19 | — | 142,115 | |||||||||||
Total | 405,743 | 13,003 | 13,604 | 432,350 | |||||||||||
Construction & Development | |||||||||||||||
Agriculture | 34,636 | — | — | 34,636 | |||||||||||
Death Care Management | 4,744 | — | — | 4,744 | |||||||||||
Healthcare | 44,937 | 704 | 1,173 | 46,814 | |||||||||||
Independent Pharmacies | 1,696 | — | — | 1,696 | |||||||||||
Registered Investment Advisors | 329 | — | — | 329 | |||||||||||
Veterinary Industry | 13,265 | — | — | 13,265 | |||||||||||
Other Industries | 45,052 | — | — | 45,052 | |||||||||||
Total | 144,659 | 704 | 1,173 | 146,536 | |||||||||||
Commercial Real Estate | |||||||||||||||
Agriculture | 14,689 | — | — | 14,689 | |||||||||||
Death Care Management | 54,684 | 4,288 | 2,490 | 61,462 | |||||||||||
Healthcare | 111,943 | 5,050 | 4,338 | 121,331 | |||||||||||
Independent Pharmacies | 15,043 | 1,843 | 1,622 | 18,508 | |||||||||||
Registered Investment Advisors | 13,406 | 144 | — | 13,550 | |||||||||||
Veterinary Industry | 95,055 | 2,680 | 12,293 | 110,028 | |||||||||||
Other Industries | 105,738 | 680 | — | 106,418 | |||||||||||
Total | 410,558 | 14,685 | 20,743 | 445,986 | |||||||||||
Commercial Land | |||||||||||||||
Agriculture | 144,687 | 2,104 | 23 | 146,814 | |||||||||||
Total | 144,687 | 2,104 | 23 | 146,814 | |||||||||||
Total1 | $ | 1,105,647 | $ | 30,496 | $ | 35,543 | $ | 1,171,686 |
|
| Risk Grades 1 - 4 |
|
| Risk Grade 5 |
|
| Risk Grades 6 - 8 |
|
| Total1 |
| ||||
June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | 5,760 |
|
| $ | 545 |
|
| $ | — |
|
| $ | 6,305 |
|
Funeral Home & Cemetery |
|
| 20,811 |
|
|
| 1,898 |
|
|
| — |
|
|
| 22,709 |
|
Healthcare |
|
| 34,936 |
|
|
| 2,888 |
|
|
| 8,520 |
|
|
| 46,344 |
|
Independent Pharmacies |
|
| 99,284 |
|
|
| 6,502 |
|
|
| 5,170 |
|
|
| 110,956 |
|
Registered Investment Advisors |
|
| 88,782 |
|
|
| 2,050 |
|
|
| 2,069 |
|
|
| 92,901 |
|
Veterinary Industry |
|
| 44,419 |
|
|
| 1,016 |
|
|
| 2,309 |
|
|
| 47,744 |
|
Other Industries |
|
| 382,016 |
|
|
| 15,437 |
|
|
| 5,509 |
|
|
| 402,962 |
|
Total |
|
| 676,008 |
|
|
| 30,336 |
|
|
| 23,577 |
|
|
| 729,921 |
|
Construction & Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 40,258 |
|
|
| — |
|
|
| — |
|
|
| 40,258 |
|
Funeral Home & Cemetery |
|
| 10,840 |
|
|
| — |
|
|
| — |
|
|
| 10,840 |
|
Healthcare |
|
| 88,885 |
|
|
| 3,411 |
|
|
| — |
|
|
| 92,296 |
|
Independent Pharmacies |
|
| 1,193 |
|
|
| — |
|
|
| — |
|
|
| 1,193 |
|
Registered Investment Advisors |
|
| 2,138 |
|
|
| — |
|
|
| — |
|
|
| 2,138 |
|
Veterinary Industry |
|
| 22,694 |
|
|
| — |
|
|
| — |
|
|
| 22,694 |
|
Other Industries |
|
| 142,116 |
|
|
| 13,197 |
|
|
| — |
|
|
| 155,313 |
|
Total |
|
| 308,124 |
|
|
| 16,608 |
|
|
| — |
|
|
| 324,732 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 46,841 |
|
|
| 466 |
|
|
| 2,225 |
|
|
| 49,532 |
|
Funeral Home & Cemetery |
|
| 79,149 |
|
|
| 5,720 |
|
|
| 1,961 |
|
|
| 86,830 |
|
Healthcare |
|
| 191,816 |
|
|
| 8,377 |
|
|
| 21,002 |
|
|
| 221,195 |
|
Independent Pharmacies |
|
| 17,303 |
|
|
| 2,411 |
|
|
| 7,163 |
|
|
| 26,877 |
|
Registered Investment Advisors |
|
| 8,114 |
|
|
| 38 |
|
|
| — |
|
|
| 8,152 |
|
Veterinary Industry |
|
| 119,320 |
|
|
| 3,362 |
|
|
| 12,788 |
|
|
| 135,470 |
|
Other Industries |
|
| 336,073 |
|
|
| 8,914 |
|
|
| 9,334 |
|
|
| 354,321 |
|
Total |
|
| 798,616 |
|
|
| 29,288 |
|
|
| 54,473 |
|
|
| 882,377 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 263,961 |
|
|
| 10,749 |
|
|
| 13,757 |
|
|
| 288,467 |
|
Total |
|
| 263,961 |
|
|
| 10,749 |
|
|
| 13,757 |
|
|
| 288,467 |
|
Total |
| $ | 2,046,709 |
|
| $ | 86,981 |
|
| $ | 91,807 |
|
| $ | 2,225,497 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| Risk Grades 1 - 4 |
|
| Risk Grade 5 |
|
| Risk Grades 6 - 8 |
|
| Total1 |
| ||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | 6,187 |
|
| $ | 213 |
|
| $ | — |
|
| $ | 6,400 |
|
Funeral Home & Cemetery |
|
| 17,085 |
|
|
| 287 |
|
|
| 6 |
|
|
| 17,378 |
|
Healthcare |
|
| 38,908 |
|
|
| 2,502 |
|
|
| 9,672 |
|
|
| 51,082 |
|
Independent Pharmacies |
|
| 93,976 |
|
|
| 5,734 |
|
|
| 9,073 |
|
|
| 108,783 |
|
Registered Investment Advisors |
|
| 88,614 |
|
|
| 2,381 |
|
|
| 3,343 |
|
|
| 94,338 |
|
Veterinary Industry |
|
| 42,175 |
|
|
| 1,190 |
|
|
| 2,239 |
|
|
| 45,604 |
|
Other Industries |
|
| 272,771 |
|
|
| 18,463 |
|
|
| 3,929 |
|
|
| 295,163 |
|
Total |
|
| 559,716 |
|
|
| 30,770 |
|
|
| 28,262 |
|
|
| 618,748 |
|
Construction & Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 43,454 |
|
|
| — |
|
|
| — |
|
|
| 43,454 |
|
Funeral Home & Cemetery |
|
| 9,874 |
|
|
| — |
|
|
| — |
|
|
| 9,874 |
|
Healthcare |
|
| 79,814 |
|
|
| 1,805 |
|
|
| — |
|
|
| 81,619 |
|
Independent Pharmacies |
|
| 2,149 |
|
|
| — |
|
|
| — |
|
|
| 2,149 |
|
Registered Investment Advisors |
|
| 1,232 |
|
|
| — |
|
|
| — |
|
|
| 1,232 |
|
Veterinary Industry |
|
| 14,094 |
|
|
| — |
|
|
| — |
|
|
| 14,094 |
|
Other Industries |
|
| 96,482 |
|
|
| — |
|
|
| — |
|
|
| 96,482 |
|
Total |
|
| 247,099 |
|
|
| 1,805 |
|
|
| — |
|
|
| 248,904 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 52,518 |
|
|
| 567 |
|
|
| — |
|
|
| 53,085 |
|
Funeral Home & Cemetery |
|
| 64,487 |
|
|
| 3,711 |
|
|
| 3,146 |
|
|
| 71,344 |
|
Healthcare |
|
| 161,026 |
|
|
| 7,696 |
|
|
| 19,809 |
|
|
| 188,531 |
|
Independent Pharmacies |
|
| 12,509 |
|
|
| 2,495 |
|
|
| 5,593 |
|
|
| 20,597 |
|
Registered Investment Advisors |
|
| 7,780 |
|
|
| 125 |
|
|
| — |
|
|
| 7,905 |
|
Veterinary Industry |
|
| 117,879 |
|
|
| 4,205 |
|
|
| 14,637 |
|
|
| 136,721 |
|
Other Industries |
|
| 255,651 |
|
|
| 5,196 |
|
|
| — |
|
|
| 260,847 |
|
Total |
|
| 671,850 |
|
|
| 23,995 |
|
|
| 43,185 |
|
|
| 739,030 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 223,826 |
|
|
| 8,914 |
|
|
| 11,058 |
|
|
| 243,798 |
|
Total |
|
| 223,826 |
|
|
| 8,914 |
|
|
| 11,058 |
|
|
| 243,798 |
|
Total |
| $ | 1,702,491 |
|
| $ | 65,484 |
|
| $ | 82,505 |
|
| $ | 1,850,480 |
|
Risk Grades 1 - 4 | Risk Grade 5 | Risk Grades 6 - 8 | Total | ||||||||||||
December 31, 2016 | |||||||||||||||
Commercial & Industrial | |||||||||||||||
Agriculture | $ | 1,656 | $ | 58 | $ | — | $ | 1,714 | |||||||
Death Care Management | 9,452 | 121 | 111 | 9,684 | |||||||||||
Healthcare | 28,723 | 681 | 7,866 | 37,270 | |||||||||||
Independent Pharmacies | 73,948 | 6,542 | 3,187 | 83,677 | |||||||||||
Registered Investment Advisors | 65,297 | 2,246 | 792 | 68,335 | |||||||||||
Veterinary Industry | 34,407 | 1,967 | 2,556 | 38,930 | |||||||||||
Other Industries | 94,736 | 100 | — | 94,836 | |||||||||||
Total | 308,219 | 11,715 | 14,512 | 334,446 | |||||||||||
Construction & Development | |||||||||||||||
Agriculture | 32,061 | — | 311 | 32,372 | |||||||||||
Death Care Management | 3,956 | — | — | 3,956 | |||||||||||
Healthcare | 30,467 | — | — | 30,467 | |||||||||||
Independent Pharmacies | 2,013 | — | — | 2,013 | |||||||||||
Registered Investment Advisors | 294 | — | — | 294 | |||||||||||
Veterinary Industry | 9,725 | 1,789 | — | 11,514 | |||||||||||
Other Industries | 31,715 | — | — | 31,715 | |||||||||||
Total | 110,231 | 1,789 | 311 | 112,331 | |||||||||||
Commercial Real Estate | |||||||||||||||
Agriculture | 5,591 | — | — | 5,591 | |||||||||||
Death Care Management | 46,427 | 4,314 | 1,769 | 52,510 | |||||||||||
Healthcare | 103,097 | 7,142 | 4,042 | 114,281 | |||||||||||
Independent Pharmacies | 12,654 | 1,968 | 529 | 15,151 | |||||||||||
Registered Investment Advisors | 11,462 | — | — | 11,462 | |||||||||||
Veterinary Industry | 88,168 | 3,995 | 10,743 | 102,906 | |||||||||||
Other Industries | 46,245 | — | — | 46,245 | |||||||||||
Total | 313,644 | 17,419 | 17,083 | 348,146 | |||||||||||
Commercial Land | |||||||||||||||
Agriculture | 112,333 | 1,138 | 98 | 113,569 | |||||||||||
Total | 112,333 | 1,138 | 98 | 113,569 | |||||||||||
Total1 | $ | 844,427 | $ | 32,061 | $ | 32,004 | $ | 908,492 |
1 | |
Total loans and leases include |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Past Due Loans and Leases
Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans and leases less than 30 days past due and accruing are included within current loans and leases shown below. The following tables show an age analysis of past due loans and leases as of the dates presented.
Less Than 30 Days Past Due & Not Accruing | 30-89 Days Past Due & Accruing | 30-89 Days Past Due & Not Accruing | Greater Than 90 Days Past Due | Total Not Accruing & Past Due | Current | Total Loans and Leases | 90 Days or More Past Due & Still Accruing | ||||||||||||||||||||||||
September 30, 2017 | |||||||||||||||||||||||||||||||
Commercial & Industrial | |||||||||||||||||||||||||||||||
Agriculture | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,698 | $ | 2,698 | $ | — | |||||||||||||||
Death Care Management | — | — | — | — | — | 12,101 | 12,101 | — | |||||||||||||||||||||||
Healthcare | 535 | 76 | 16 | 6,152 | 6,779 | 34,675 | 41,454 | — | |||||||||||||||||||||||
Independent Pharmacies | 331 | 44 | — | 2,274 | 2,649 | 94,522 | 97,171 | — | |||||||||||||||||||||||
Registered Investment Advisors | — | — | — | — | — | 91,241 | 91,241 | — | |||||||||||||||||||||||
Veterinary Industry | 224 | 29 | 536 | 796 | 1,585 | 43,985 | 45,570 | — | |||||||||||||||||||||||
Other Industries | — | — | — | — | — | 142,115 | 142,115 | — | |||||||||||||||||||||||
Total | 1,090 | 149 | 552 | 9,222 | 11,013 | 421,337 | 432,350 | — | |||||||||||||||||||||||
Construction & Development | |||||||||||||||||||||||||||||||
Agriculture | — | — | — | — | — | 34,636 | 34,636 | — | |||||||||||||||||||||||
Death Care Management | — | — | — | — | — | 4,744 | 4,744 | — | |||||||||||||||||||||||
Healthcare | — | — | — | — | — | 46,814 | 46,814 | — | |||||||||||||||||||||||
Independent Pharmacies | — | — | — | — | — | 1,696 | 1,696 | — | |||||||||||||||||||||||
Registered Investment Advisors | — | — | — | — | — | 329 | 329 | — | |||||||||||||||||||||||
Veterinary Industry | — | — | — | — | — | 13,265 | 13,265 | — | |||||||||||||||||||||||
Other Industries | — | — | — | — | — | 45,052 | 45,052 | — | |||||||||||||||||||||||
Total | — | — | — | — | — | 146,536 | 146,536 | — | |||||||||||||||||||||||
Commercial Real Estate | |||||||||||||||||||||||||||||||
Agriculture | — | — | — | — | — | 14,689 | 14,689 | — | |||||||||||||||||||||||
Death Care Management | — | 298 | 174 | 1,402 | 1,874 | 59,588 | 61,462 | — | |||||||||||||||||||||||
Healthcare | 40 | — | 2,679 | 829 | 3,548 | 117,783 | 121,331 | — | |||||||||||||||||||||||
Independent Pharmacies | — | — | — | 1,622 | 1,622 | 16,886 | 18,508 | — | |||||||||||||||||||||||
Registered Investment Advisors | — | — | — | — | — | 13,550 | 13,550 | — | |||||||||||||||||||||||
Veterinary Industry | 1,906 | 3,915 | 132 | 2,749 | 8,702 | 101,326 | 110,028 | — | |||||||||||||||||||||||
Other Industries | — | 7,750 | — | — | 7,750 | 98,668 | 106,418 | — | |||||||||||||||||||||||
Total | 1,946 | 11,963 | 2,985 | 6,602 | 23,496 | 422,490 | 445,986 | — | |||||||||||||||||||||||
Commercial Land | |||||||||||||||||||||||||||||||
Agriculture | 23 | — | — | — | 23 | 146,791 | 146,814 | — | |||||||||||||||||||||||
Total | 23 | — | — | — | 23 | 146,791 | 146,814 | — | |||||||||||||||||||||||
Total1 | $ | 3,059 | $ | 12,112 | $ | 3,537 | $ | 15,824 | $ | 34,532 | $ | 1,137,154 | $ | 1,171,686 | $ | — |
|
| 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 Loans |
|
| Current Loans |
|
| Total Loans |
|
| Loans 90 Days or More Past Due & Still Accruing |
| ||||||||
June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 6,305 |
|
| $ | 6,305 |
|
| $ | — |
|
Funeral Home & Cemetery |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 22,709 |
|
|
| 22,709 |
|
|
| — |
|
Healthcare |
|
| 906 |
|
|
| — |
|
|
| 623 |
|
|
| 5,498 |
|
|
| 7,027 |
|
|
| 39,317 |
|
|
| 46,344 |
|
|
| — |
|
Independent Pharmacies |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,170 |
|
|
| 5,170 |
|
|
| 105,786 |
|
|
| 110,956 |
|
|
| — |
|
Registered Investment Advisors |
|
| 1,201 |
|
|
| — |
|
|
| 399 |
|
|
| 209 |
|
|
| 1,809 |
|
|
| 91,092 |
|
|
| 92,901 |
|
|
| — |
|
Veterinary Industry |
|
| — |
|
|
| — |
|
|
| 576 |
|
|
| 1,031 |
|
|
| 1,607 |
|
|
| 46,137 |
|
|
| 47,744 |
|
|
| — |
|
Other Industries |
|
| 557 |
|
|
| 1,192 |
|
|
| 2,804 |
|
|
| 2,148 |
|
|
| 6,701 |
|
|
| 396,261 |
|
|
| 402,962 |
|
|
| — |
|
Total |
|
| 2,664 |
|
|
| 1,192 |
|
|
| 4,402 |
|
|
| 14,056 |
|
|
| 22,314 |
|
|
| 707,607 |
|
|
| 729,921 |
|
|
| — |
|
Construction & Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 40,258 |
|
|
| 40,258 |
|
|
| — |
|
Funeral Home & Cemetery |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,840 |
|
|
| 10,840 |
|
|
| — |
|
Healthcare |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 92,296 |
|
|
| 92,296 |
|
|
| — |
|
Independent Pharmacies |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,193 |
|
|
| 1,193 |
|
|
| — |
|
Registered Investment Advisors |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,138 |
|
|
| 2,138 |
|
|
| — |
|
Veterinary Industry |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 22,694 |
|
|
| 22,694 |
|
|
| — |
|
Other Industries |
|
| — |
|
|
| — |
|
|
| ��� |
|
|
| — |
|
|
| — |
|
|
| 155,313 |
|
|
| 155,313 |
|
|
| — |
|
Total |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 324,732 |
|
|
| 324,732 |
|
|
| — |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,226 |
|
|
| 2,226 |
|
|
| 47,306 |
|
|
| 49,532 |
|
|
| — |
|
Funeral Home & Cemetery |
|
| 137 |
|
|
| — |
|
|
| — |
|
|
| 1,824 |
|
|
| 1,961 |
|
|
| 84,869 |
|
|
| 86,830 |
|
|
| — |
|
Healthcare |
|
| — |
|
|
| 1,034 |
|
|
| — |
|
|
| 7,076 |
|
|
| 8,110 |
|
|
| 213,085 |
|
|
| 221,195 |
|
|
| — |
|
Independent Pharmacies |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,831 |
|
|
| 5,831 |
|
|
| 21,046 |
|
|
| 26,877 |
|
|
| — |
|
Registered Investment Advisors |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,152 |
|
|
| 8,152 |
|
|
| — |
|
Veterinary Industry |
|
| 634 |
|
|
| — |
|
|
| 3,682 |
|
|
| 3,023 |
|
|
| 7,339 |
|
|
| 128,131 |
|
|
| 135,470 |
|
|
| — |
|
Other Industries |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,568 |
|
|
| 6,568 |
|
|
| 347,753 |
|
|
| 354,321 |
|
|
| — |
|
Total |
|
| 771 |
|
|
| 1,034 |
|
|
| 3,682 |
|
|
| 26,548 |
|
|
| 32,035 |
|
|
| 850,342 |
|
|
| 882,377 |
|
|
| — |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 10,010 |
|
|
| 714 |
|
|
| 3,340 |
|
|
| — |
|
|
| 14,064 |
|
|
| 274,403 |
|
|
| 288,467 |
|
|
| — |
|
Total |
|
| 10,010 |
|
|
| 714 |
|
|
| 3,340 |
|
|
| — |
|
|
| 14,064 |
|
|
| 274,403 |
|
|
| 288,467 |
|
|
| — |
|
Total1 |
| $ | 13,445 |
|
| $ | 2,940 |
|
| $ | 11,424 |
|
| $ | 40,604 |
|
| $ | 68,413 |
|
| $ | 2,157,084 |
|
| $ | 2,225,497 |
|
| $ | — |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| 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 Loans |
|
| Current Loans |
|
| Total Loans |
|
| Loans 90 Days or More Past Due & Still Accruing |
| ||||||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 6,400 |
|
| $ | 6,400 |
|
| $ | — |
|
Funeral Home & Cemetery |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,378 |
|
|
| 17,378 |
|
|
| — |
|
Healthcare |
|
| 41 |
|
|
| 1,027 |
|
|
| 665 |
|
|
| 6,821 |
|
|
| 8,554 |
|
|
| 42,528 |
|
|
| 51,082 |
|
|
| — |
|
Independent Pharmacies |
|
| 1,399 |
|
|
| 29 |
|
|
| — |
|
|
| 7,570 |
|
|
| 8,998 |
|
|
| 99,785 |
|
|
| 108,783 |
|
|
| — |
|
Registered Investment Advisors |
|
| — |
|
|
| 232 |
|
|
| 320 |
|
|
| 2,741 |
|
|
| 3,293 |
|
|
| 91,045 |
|
|
| 94,338 |
|
|
| — |
|
Veterinary Industry |
|
| — |
|
|
| — |
|
|
| 600 |
|
|
| 906 |
|
|
| 1,506 |
|
|
| 44,098 |
|
|
| 45,604 |
|
|
| — |
|
Other Industries |
|
| 2,669 |
|
|
| 166 |
|
|
| — |
|
|
| 504 |
|
|
| 3,339 |
|
|
| 291,824 |
|
|
| 295,163 |
|
|
| — |
|
Total |
|
| 4,109 |
|
|
| 1,454 |
|
|
| 1,585 |
|
|
| 18,542 |
|
|
| 25,690 |
|
|
| 593,058 |
|
|
| 618,748 |
|
|
| — |
|
Construction & Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 43,454 |
|
|
| 43,454 |
|
|
| — |
|
Funeral Home & Cemetery |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,874 |
|
|
| 9,874 |
|
|
| — |
|
Healthcare |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 81,619 |
|
|
| 81,619 |
|
|
| — |
|
Independent Pharmacies |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,149 |
|
|
| 2,149 |
|
|
| — |
|
Registered Investment Advisors |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,232 |
|
|
| 1,232 |
|
|
| — |
|
Veterinary Industry |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,094 |
|
|
| 14,094 |
|
|
| — |
|
Other Industries |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 96,482 |
|
|
| 96,482 |
|
|
| — |
|
Total |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 248,904 |
|
|
| 248,904 |
|
|
| — |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 53,085 |
|
|
| 53,085 |
|
|
| — |
|
Funeral Home & Cemetery |
|
| 248 |
|
|
| — |
|
|
| — |
|
|
| 2,762 |
|
|
| 3,010 |
|
|
| 68,334 |
|
|
| 71,344 |
|
|
| — |
|
Healthcare |
|
| 42 |
|
|
| 1,668 |
|
|
| — |
|
|
| 7,417 |
|
|
| 9,127 |
|
|
| 179,404 |
|
|
| 188,531 |
|
|
| — |
|
Independent Pharmacies |
|
| — |
|
|
| 3,400 |
|
|
| — |
|
|
| 2,193 |
|
|
| 5,593 |
|
|
| 15,004 |
|
|
| 20,597 |
|
|
| — |
|
Registered Investment Advisors |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,905 |
|
|
| 7,905 |
|
|
| — |
|
Veterinary Industry |
|
| 1,644 |
|
|
| 3,757 |
|
|
| 2,899 |
|
|
| 5,191 |
|
|
| 13,491 |
|
|
| 123,230 |
|
|
| 136,721 |
|
|
| — |
|
Other Industries |
|
| — |
|
|
| 10,743 |
|
|
| — |
|
|
| — |
|
|
| 10,743 |
|
|
| 250,104 |
|
|
| 260,847 |
|
|
| — |
|
Total |
|
| 1,934 |
|
|
| 19,568 |
|
|
| 2,899 |
|
|
| 17,563 |
|
|
| 41,964 |
|
|
| 697,066 |
|
|
| 739,030 |
|
|
| — |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 6,277 |
|
|
| — |
|
|
| — |
|
|
| 4,781 |
|
|
| 11,058 |
|
|
| 232,740 |
|
|
| 243,798 |
|
|
| — |
|
Total |
|
| 6,277 |
|
|
| — |
|
|
| — |
|
|
| 4,781 |
|
|
| 11,058 |
|
|
| 232,740 |
|
|
| 243,798 |
|
|
| — |
|
Total1 |
| $ | 12,320 |
|
| $ | 21,022 |
|
| $ | 4,484 |
|
| $ | 40,886 |
|
| $ | 78,712 |
|
| $ | 1,771,768 |
|
| $ | 1,850,480 |
|
| $ | — |
|
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 |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Nonaccrual Loans and Leases
Loans and leases that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans and leases had been accrued in accordance with the original terms, interest income would have increased by approximately $302 thousand$1.1 million and $165$588 thousand for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 interest income would have increased approximately $831 thousand$2.2 million and $451 thousand,$1.0 million, respectively. All nonaccrual loans and leases are included in the held for investment portfolio.
Nonaccrual loans and leases as of SeptemberJune 30, 20172019 and December 31, 20162018 are as follows:
June 30, 2019 |
| Loan Balance |
|
| Guaranteed Balance |
|
| Unguaranteed Exposure |
| |||
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare |
| $ | 7,027 |
|
| $ | 6,097 |
|
| $ | 930 |
|
Independent Pharmacies |
|
| 5,170 |
|
|
| 4,105 |
|
|
| 1,065 |
|
Registered Investment Advisors |
|
| 1,809 |
|
|
| 1,409 |
|
|
| 400 |
|
Veterinary Industry |
|
| 1,607 |
|
|
| 1,458 |
|
|
| 149 |
|
Other Industries |
|
| 5,509 |
|
|
| 3,806 |
|
|
| 1,703 |
|
Total |
|
| 21,122 |
|
|
| 16,875 |
|
|
| 4,247 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 2,226 |
|
|
| 1,669 |
|
|
| 557 |
|
Funeral Home & Cemetery |
|
| 1,961 |
|
|
| 1,368 |
|
|
| 593 |
|
Healthcare |
|
| 7,076 |
|
|
| 4,708 |
|
|
| 2,368 |
|
Independent Pharmacies |
|
| 5,831 |
|
|
| 5,084 |
|
|
| 747 |
|
Veterinary Industry |
|
| 7,339 |
|
|
| 6,157 |
|
|
| 1,182 |
|
Other Industries |
|
| 6,568 |
|
|
| 3,747 |
|
|
| 2,821 |
|
Total |
|
| 31,001 |
|
|
| 22,733 |
|
|
| 8,268 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 13,350 |
|
|
| 7,513 |
|
|
| 5,837 |
|
Total |
|
| 13,350 |
|
|
| 7,513 |
|
|
| 5,837 |
|
Total |
| $ | 65,473 |
|
| $ | 47,121 |
|
| $ | 18,352 |
|
December 31, 2018 |
| Loan Balance |
|
| Guaranteed Balance |
|
| Unguaranteed Exposure |
| |||
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare |
| $ | 7,527 |
|
| $ | 6,517 |
|
| $ | 1,010 |
|
Independent Pharmacies |
|
| 8,969 |
|
|
| 7,896 |
|
|
| 1,073 |
|
Registered Investment Advisors |
|
| 3,061 |
|
|
| 2,427 |
|
|
| 634 |
|
Veterinary Industry |
|
| 1,506 |
|
|
| 1,361 |
|
|
| 145 |
|
Other Industries |
|
| 3,173 |
|
|
| 2,147 |
|
|
| 1,026 |
|
Total |
|
| 24,236 |
|
|
| 20,348 |
|
|
| 3,888 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home & Cemetery |
|
| 3,010 |
|
|
| 2,260 |
|
|
| 750 |
|
Healthcare |
|
| 7,459 |
|
|
| 4,963 |
|
|
| 2,496 |
|
Independent Pharmacies |
|
| 2,193 |
|
|
| 1,863 |
|
|
| 330 |
|
Veterinary Industry |
|
| 9,734 |
|
|
| 8,271 |
|
|
| 1,463 |
|
Total |
|
| 22,396 |
|
|
| 17,357 |
|
|
| 5,039 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 11,058 |
|
|
| 5,497 |
|
|
| 5,561 |
|
Total |
|
| 11,058 |
|
|
| 5,497 |
|
|
| 5,561 |
|
Total |
| $ | 57,690 |
|
| $ | 43,202 |
|
| $ | 14,488 |
|
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
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 |
Allowance for Loan and Lease Loss Methodology
The methodology 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 based 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 impaired loans and leases are mutually exclusive; any loan or lease that is impaired is excluded from its homogenous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.
The ALLL policy for pooled loans and leases is governed in accordance with banking regulatory guidance for homogenous pools of non-impaired loans and leases that have similar risk characteristics. The Company follows a consistent and structured approach for assessing 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 90 days or more 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:
• | The 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. |
• | 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
The following table details activity in the allowance for loan and lease losses by portfolio segment allowance for the periods presented:
Three Months Ended |
| Construction & Development |
|
| Commercial Real Estate |
|
| Commercial & Industrial |
|
| Commercial Land |
|
| Total |
| |||||
June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
| $ | 2,236 |
|
| $ | 10,623 |
|
| $ | 16,543 |
|
| $ | 5,709 |
|
| $ | 35,111 |
|
Charge offs |
|
| — |
|
|
| (1 | ) |
|
| (416 | ) |
|
| (178 | ) |
|
| (595 | ) |
Recoveries |
|
| — |
|
|
| 13 |
|
|
| 56 |
|
|
| — |
|
|
| 69 |
|
Provision |
|
| 688 |
|
|
| 1,954 |
|
|
| 724 |
|
|
| 97 |
|
|
| 3,463 |
|
Ending Balance |
| $ | 2,924 |
|
| $ | 12,589 |
|
| $ | 16,907 |
|
| $ | 5,628 |
|
| $ | 38,048 |
|
June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
| $ | 2,428 |
|
| $ | 11,244 |
|
| $ | 12,201 |
|
| $ | 2,177 |
|
| $ | 28,050 |
|
Charge offs |
|
| — |
|
|
| (419 | ) |
|
| (549 | ) |
|
| — |
|
|
| (968 | ) |
Recoveries |
|
| — |
|
|
| 29 |
|
|
| 152 |
|
|
| — |
|
|
| 181 |
|
Provision |
|
| (201 | ) |
|
| 554 |
|
|
| 1,573 |
|
|
| 161 |
|
|
| 2,087 |
|
Ending Balance |
| $ | 2,227 |
|
| $ | 11,408 |
|
| $ | 13,377 |
|
| $ | 2,338 |
|
| $ | 29,350 |
|
Six Months Ended |
| Construction & Development |
|
| Commercial Real Estate |
|
| Commercial & Industrial |
|
| Commercial Land |
|
| Total |
| |||||
June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
| $ | 2,042 |
|
| $ | 11,044 |
|
| $ | 14,562 |
|
| $ | 4,786 |
|
| $ | 32,434 |
|
Charge offs |
|
| — |
|
|
| (1 | ) |
|
| (638 | ) |
|
| (178 | ) |
|
| (817 | ) |
Recoveries |
|
| — |
|
|
| 23 |
|
|
| 198 |
|
|
| 5 |
|
|
| 226 |
|
Provision |
|
| 882 |
|
|
| 1,523 |
|
|
| 2,785 |
|
|
| 1,015 |
|
|
| 6,205 |
|
Ending Balance |
| $ | 2,924 |
|
| $ | 12,589 |
|
| $ | 16,907 |
|
| $ | 5,628 |
|
| $ | 38,048 |
|
June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
| $ | 2,030 |
|
| $ | 9,180 |
|
| $ | 10,751 |
|
| $ | 2,229 |
|
| $ | 24,190 |
|
Charge offs |
|
| — |
|
|
| (419 | ) |
|
| (1,221 | ) |
|
| — |
|
|
| (1,640 | ) |
Recoveries |
|
| — |
|
|
| 33 |
|
|
| 288 |
|
|
| — |
|
|
| 321 |
|
Provision |
|
| 197 |
|
|
| 2,614 |
|
|
| 3,559 |
|
|
| 109 |
|
|
| 6,479 |
|
Ending Balance |
| $ | 2,227 |
|
| $ | 11,408 |
|
| $ | 13,377 |
|
| $ | 2,338 |
|
| $ | 29,350 |
|
Three months ended | Construction & Development | Commercial Real Estate | Commercial & Industrial | Commercial Land | Total | ||||||||||||||
September 30, 2017 | |||||||||||||||||||
Beginning Balance | $ | 1,603 | $ | 7,494 | $ | 8,351 | $ | 2,112 | $ | 19,560 | |||||||||
Charge offs | — | (665 | ) | (343 | ) | — | (1,008 | ) | |||||||||||
Recoveries | — | 4 | 39 | 6 | 49 | ||||||||||||||
Provision | 36 | 1,565 | 827 | (2 | ) | 2,426 | |||||||||||||
Ending Balance | $ | 1,639 | $ | 8,398 | $ | 8,874 | $ | 2,116 | $ | 21,027 | |||||||||
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 |
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 |
June 30, 2019 |
| Construction & Development |
|
| Commercial Real Estate |
|
| Commercial & Industrial |
|
| Commercial Land |
|
| Total |
| |||||
Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases individually evaluated for impairment |
| $ | — |
|
| $ | 3,610 |
|
| $ | 3,128 |
|
| $ | 4,721 |
|
| $ | 11,459 |
|
Loans and leases collectively evaluated for impairment |
|
| 2,924 |
|
|
| 8,979 |
|
|
| 13,779 |
|
|
| 907 |
|
|
| 26,589 |
|
Total allowance for loan and lease losses |
| $ | 2,924 |
|
| $ | 12,589 |
|
| $ | 16,907 |
|
| $ | 5,628 |
|
| $ | 38,048 |
|
Loans and leases receivable1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases individually evaluated for impairment |
| $ | — |
|
| $ | 57,444 |
|
| $ | 24,473 |
|
| $ | 35,192 |
|
| $ | 117,109 |
|
Loans and leases collectively evaluated for impairment |
|
| 324,732 |
|
|
| 824,933 |
|
|
| 705,448 |
|
|
| 253,275 |
|
|
| 2,108,388 |
|
Total loans and leases receivable |
| $ | 324,732 |
|
| $ | 882,377 |
|
| $ | 729,921 |
|
| $ | 288,467 |
|
| $ | 2,225,497 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2018 |
| Construction & Development |
|
| Commercial Real Estate |
|
| Commercial & Industrial |
|
| Commercial Land |
|
| Total |
| |||||
Allowance for loan and lease losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases individually evaluated for impairment |
| $ | 118 |
|
| $ | 2,424 |
|
| $ | 2,598 |
|
| $ | 3,951 |
|
| $ | 9,091 |
|
Loans and leases collectively evaluated for impairment |
|
| 1,924 |
|
|
| 8,620 |
|
|
| 11,964 |
|
|
| 835 |
|
|
| 23,343 |
|
Total allowance for loan and lease losses |
| $ | 2,042 |
|
| $ | 11,044 |
|
| $ | 14,562 |
|
| $ | 4,786 |
|
| $ | 32,434 |
|
Loans and leases receivable1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases individually evaluated for impairment |
| $ | 5,027 |
|
| $ | 46,731 |
|
| $ | 28,659 |
|
| $ | 21,997 |
|
| $ | 102,414 |
|
Loans and leases collectively evaluated for impairment |
|
| 243,877 |
|
|
| 692,299 |
|
|
| 590,089 |
|
|
| 221,801 |
|
|
| 1,748,066 |
|
Total loans and leases receivable |
| $ | 248,904 |
|
| $ | 739,030 |
|
| $ | 618,748 |
|
| $ | 243,798 |
|
| $ | 1,850,480 |
|
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 |
1 | |
Loans and leases receivable includes |
Loans and leases classified as impaired as of the dates presented are summarized in the following tables.
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 |
June 30, 2019 |
| Recorded Investment |
|
|
|
| Guaranteed Balance |
|
| Unguaranteed Exposure |
| |||
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | 7 |
|
|
|
| $ | — |
|
| $ | 7 |
|
Healthcare |
|
| 9,096 |
|
|
|
|
| 6,530 |
|
|
| 2,566 |
|
Independent Pharmacies |
|
| 5,457 |
|
|
|
|
| 4,105 |
|
|
| 1,352 |
|
Registered Investment Advisors |
|
| 2,076 |
|
|
|
|
| 1,409 |
|
|
| 667 |
|
Veterinary Industry |
|
| 2,357 |
|
|
|
|
| 1,876 |
|
|
| 481 |
|
Other Industries |
|
| 5,480 |
|
|
|
|
| 3,806 |
|
|
| 1,674 |
|
Total |
|
| 24,473 |
|
|
|
|
| 17,726 |
|
|
| 6,747 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 2,226 |
|
|
|
|
| 1,669 |
|
|
| 557 |
|
Funeral Home & Cemetery |
|
| 1,958 |
|
|
|
|
| 1,368 |
|
|
| 590 |
|
Healthcare |
|
| 22,879 |
|
|
|
|
| 14,206 |
|
|
| 8,673 |
|
Independent Pharmacies |
|
| 7,168 |
|
|
|
|
| 6,082 |
|
|
| 1,086 |
|
Veterinary Industry |
|
| 13,846 |
|
|
|
|
| 9,466 |
|
|
| 4,380 |
|
Other Industries |
|
| 9,367 |
|
|
|
|
| 5,821 |
|
|
| 3,546 |
|
Total |
|
| 57,444 |
|
|
|
|
| 38,612 |
|
|
| 18,832 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 35,192 |
|
|
|
|
| 22,980 |
|
|
| 12,212 |
|
Total |
|
| 35,192 |
|
|
|
|
| 22,980 |
|
|
| 12,212 |
|
Total |
| $ | 117,109 |
|
|
|
| $ | 79,318 |
|
| $ | 37,791 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2018 |
| Recorded Investment |
|
| Guaranteed Balance |
|
| Unguaranteed Exposure |
| |||
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | 7 |
|
| $ | — |
|
| $ | 7 |
|
Funeral Home & Cemetery |
|
| 6 |
|
|
| — |
|
|
| 6 |
|
Healthcare |
|
| 9,668 |
|
|
| 7,229 |
|
|
| 2,439 |
|
Independent Pharmacies |
|
| 9,356 |
|
|
| 7,896 |
|
|
| 1,460 |
|
Registered Investment Advisors |
|
| 3,347 |
|
|
| 2,427 |
|
|
| 920 |
|
Veterinary Industry |
|
| 2,326 |
|
|
| 1,819 |
|
|
| 507 |
|
Other Industries |
|
| 3,949 |
|
|
| 2,304 |
|
|
| 1,645 |
|
Total |
|
| 28,659 |
|
|
| 21,675 |
|
|
| 6,984 |
|
Construction & Development |
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 5,027 |
|
|
| 3,704 |
|
|
| 1,323 |
|
Total |
|
| 5,027 |
|
|
| 3,704 |
|
|
| 1,323 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 1,798 |
|
|
| 1,299 |
|
|
| 499 |
|
Funeral Home & Cemetery |
|
| 3,143 |
|
|
| 2,261 |
|
|
| 882 |
|
Healthcare |
|
| 20,442 |
|
|
| 14,559 |
|
|
| 5,883 |
|
Independent Pharmacies |
|
| 5,633 |
|
|
| 4,079 |
|
|
| 1,554 |
|
Veterinary Industry |
|
| 15,715 |
|
|
| 11,613 |
|
|
| 4,102 |
|
Total |
|
| 46,731 |
|
|
| 33,811 |
|
|
| 12,920 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 21,997 |
|
|
| 13,177 |
|
|
| 8,820 |
|
Total |
|
| 21,997 |
|
|
| 13,177 |
|
|
| 8,820 |
|
Total |
| $ | 102,414 |
|
| $ | 72,367 |
|
| $ | 30,047 |
|
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 |
|
| June 30, 2019 |
| |||||||||||||||||
|
| Recorded Investment |
|
|
|
|
|
|
|
|
| |||||||||
|
| With a Recorded Allowance |
|
| With No Recorded Allowance |
|
| Total |
|
| Unpaid Principal Balance |
|
| Related Allowance Recorded |
| |||||
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | 7 |
|
| $ | — |
|
| $ | 7 |
|
| $ | 6 |
|
| $ | 7 |
|
Funeral Home & Cemetery |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Healthcare |
|
| 9,039 |
|
|
| 57 |
|
|
| 9,096 |
|
|
| 9,827 |
|
|
| 870 |
|
Independent Pharmacies |
|
| 5,161 |
|
|
| 296 |
|
|
| 5,457 |
|
|
| 5,763 |
|
|
| 833 |
|
Registered Investment Advisors |
|
| 2,076 |
|
|
| — |
|
|
| 2,076 |
|
|
| 2,138 |
|
|
| 432 |
|
Veterinary Industry |
|
| 2,180 |
|
|
| 177 |
|
|
| 2,357 |
|
|
| 2,667 |
|
|
| 57 |
|
Other Industries |
|
| 5,480 |
|
|
| — |
|
|
| 5,480 |
|
|
| 5,655 |
|
|
| 929 |
|
Total |
|
| 23,943 |
|
|
| 530 |
|
|
| 24,473 |
|
|
| 26,056 |
|
|
| 3,128 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 2,226 |
|
|
| — |
|
|
| 2,226 |
|
|
| 2,226 |
|
|
| 13 |
|
Funeral Home & Cemetery |
|
| 1,821 |
|
|
| 137 |
|
|
| 1,958 |
|
|
| 1,961 |
|
|
| 87 |
|
Healthcare |
|
| 20,754 |
|
|
| 2,125 |
|
|
| 22,879 |
|
|
| 22,873 |
|
|
| 1,266 |
|
Independent Pharmacies |
|
| 7,168 |
|
|
| — |
|
|
| 7,168 |
|
|
| 7,453 |
|
|
| 43 |
|
Veterinary Industry |
|
| 13,146 |
|
|
| 700 |
|
|
| 13,846 |
|
|
| 14,650 |
|
|
| 1,277 |
|
Other Industries |
|
| 9,367 |
|
|
| — |
|
|
| 9,367 |
|
|
| 9,334 |
|
|
| 924 |
|
Total |
|
| 54,482 |
|
|
| 2,962 |
|
|
| 57,444 |
|
|
| 58,497 |
|
|
| 3,610 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 35,192 |
|
|
| — |
|
|
| 35,192 |
|
|
| 34,988 |
|
|
| 4,721 |
|
Total |
|
| 35,192 |
|
|
| — |
|
|
| 35,192 |
|
|
| 34,988 |
|
|
| 4,721 |
|
Total Impaired Loans and Leases |
| $ | 113,617 |
|
| $ | 3,492 |
|
| $ | 117,109 |
|
| $ | 119,541 |
|
| $ | 11,459 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| December 31, 2018 |
| |||||||||||||||||
|
| Recorded Investment |
|
|
|
|
|
|
|
|
| |||||||||
|
| With a Recorded Allowance |
|
| With No Recorded Allowance |
|
| Total |
|
| Unpaid Principal Balance |
|
| Related Allowance Recorded |
| |||||
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | — |
|
| $ | 7 |
|
| $ | 7 |
|
| $ | 6 |
|
| $ | — |
|
Funeral Home & Cemetery |
|
| — |
|
|
| 6 |
|
|
| 6 |
|
|
| 6 |
|
|
| — |
|
Healthcare |
|
| 9,604 |
|
|
| 64 |
|
|
| 9,668 |
|
|
| 10,432 |
|
|
| 827 |
|
Independent Pharmacies |
|
| 9,032 |
|
|
| 324 |
|
|
| 9,356 |
|
|
| 10,564 |
|
|
| 478 |
|
Registered Investment Advisors |
|
| 3,347 |
|
|
| — |
|
|
| 3,347 |
|
|
| 3,839 |
|
|
| 811 |
|
Veterinary Industry |
|
| 2,160 |
|
|
| 166 |
|
|
| 2,326 |
|
|
| 2,593 |
|
|
| 65 |
|
Other Industries |
|
| 3,496 |
|
|
| 453 |
|
|
| 3,949 |
|
|
| 4,097 |
|
|
| 417 |
|
Total |
|
| 27,639 |
|
|
| 1,020 |
|
|
| 28,659 |
|
|
| 31,537 |
|
|
| 2,598 |
|
Construction & Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 5,027 |
|
|
| — |
|
|
| 5,027 |
|
|
| 4,939 |
|
|
| 118 |
|
Total |
|
| 5,027 |
|
|
| — |
|
|
| 5,027 |
|
|
| 4,939 |
|
|
| 118 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 1,798 |
|
|
| — |
|
|
| 1,798 |
|
|
| 1,732 |
|
|
| 93 |
|
Funeral Home & Cemetery |
|
| 2,859 |
|
|
| 284 |
|
|
| 3,143 |
|
|
| 3,281 |
|
|
| 30 |
|
Healthcare |
|
| 20,211 |
|
|
| 231 |
|
|
| 20,442 |
|
|
| 20,461 |
|
|
| 1,145 |
|
Independent Pharmacies |
|
| 5,184 |
|
|
| 449 |
|
|
| 5,633 |
|
|
| 5,884 |
|
|
| 220 |
|
Veterinary Industry |
|
| 15,606 |
|
|
| 109 |
|
|
| 15,715 |
|
|
| 16,677 |
|
|
| 936 |
|
Total |
|
| 45,658 |
|
|
| 1,073 |
|
|
| 46,731 |
|
|
| 48,035 |
|
|
| 2,424 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 21,997 |
|
|
| — |
|
|
| 21,997 |
|
|
| 22,147 |
|
|
| 3,951 |
|
Total |
|
| 21,997 |
|
|
| — |
|
|
| 21,997 |
|
|
| 22,147 |
|
|
| 3,951 |
|
Total Impaired Loans and Leases |
| $ | 100,321 |
|
| $ | 2,093 |
|
| $ | 102,414 |
|
| $ | 106,658 |
|
| $ | 9,091 |
|
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 Condensed 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 |
|
| Three Months Ended June 30, 2019 |
|
| Three Months Ended June 30, 2018 |
| ||||||||||
|
| Average Balance |
|
| Interest Income Recognized |
|
| Average Balance |
|
| Interest Income Recognized |
| ||||
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | 6 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Funeral Home & Cemetery |
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
Healthcare |
|
| 9,280 |
|
|
| 34 |
|
|
| 5,094 |
|
|
| 19 |
|
Independent Pharmacies |
|
| 5,459 |
|
|
| 5 |
|
|
| 7,978 |
|
|
| 7 |
|
Registered Investment Advisors |
|
| 2,083 |
|
|
| 5 |
|
|
| 2,818 |
|
|
| 12 |
|
Veterinary Industry |
|
| 2,394 |
|
|
| 13 |
|
|
| 2,930 |
|
|
| 18 |
|
Other Industries |
|
| 5,904 |
|
|
| 7 |
|
|
| 1,373 |
|
|
| 5 |
|
Total |
|
| 25,126 |
|
|
| 64 |
|
|
| 20,200 |
|
|
| 61 |
|
Construction & Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| — |
|
|
| — |
|
|
| 2,526 |
|
|
| — |
|
Healthcare |
|
| — |
|
|
| — |
|
|
| 1,799 |
|
|
| 28 |
|
Total |
|
| — |
|
|
| — |
|
|
| 4,325 |
|
|
| 28 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 2,228 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Funeral Home & Cemetery |
|
| 1,967 |
|
|
| — |
|
|
| 3,122 |
|
|
| 27 |
|
Healthcare |
|
| 23,057 |
|
|
| 259 |
|
|
| 12,852 |
|
|
| 64 |
|
Independent Pharmacies |
|
| 7,198 |
|
|
| 25 |
|
|
| 2,836 |
|
|
| 1 |
|
Veterinary Industry |
|
| 13,984 |
|
|
| 105 |
|
|
| 16,135 |
|
|
| 98 |
|
Other Industries |
|
| 9,357 |
|
|
| 52 |
|
|
| — |
|
|
| — |
|
Total |
|
| 57,791 |
|
|
| 441 |
|
|
| 34,945 |
|
|
| 190 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 32,435 |
|
|
| 280 |
|
|
| 5,138 |
|
|
| 25 |
|
Total |
|
| 32,435 |
|
|
| 280 |
|
|
| 5,138 |
|
|
| 25 |
|
Total |
| $ | 115,352 |
|
| $ | 785 |
|
| $ | 64,608 |
|
| $ | 304 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| Six Months Ended June 30, 2019 |
|
| Six Months Ended June 30, 2018 |
| ||||||||||
|
| Average Balance |
|
| Interest Income Recognized |
|
| Average Balance |
|
| Interest Income Recognized |
| ||||
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
| $ | 6 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Funeral Home & Cemetery |
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
Healthcare |
|
| 9,421 |
|
|
| 65 |
|
|
| 5,188 |
|
|
| 31 |
|
Independent Pharmacies |
|
| 5,385 |
|
|
| 15 |
|
|
| 8,038 |
|
|
| 27 |
|
Registered Investment Advisors |
|
| 2,103 |
|
|
| 10 |
|
|
| 2,825 |
|
|
| 24 |
|
Veterinary Industry |
|
| 2,417 |
|
|
| 27 |
|
|
| 2,917 |
|
|
| 38 |
|
Other Industries |
|
| 5,745 |
|
|
| 24 |
|
|
| 1,373 |
|
|
| 5 |
|
Total |
|
| 25,077 |
|
|
| 141 |
|
|
| 20,348 |
|
|
| 125 |
|
Construction & Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| — |
|
|
| — |
|
|
| 2,509 |
|
|
| 5 |
|
Healthcare |
|
| — |
|
|
| — |
|
|
| 1,579 |
|
|
| 51 |
|
Total |
|
| — |
|
|
| — |
|
|
| 4,088 |
|
|
| 56 |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 2,228 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Funeral Home & Cemetery |
|
| 1,974 |
|
|
| 2 |
|
|
| 3,133 |
|
|
| 64 |
|
Healthcare |
|
| 23,198 |
|
|
| 487 |
|
|
| 12,486 |
|
|
| 80 |
|
Independent Pharmacies |
|
| 6,663 |
|
|
| 67 |
|
|
| 2,836 |
|
|
| 1 |
|
Veterinary Industry |
|
| 14,412 |
|
|
| 206 |
|
|
| 16,159 |
|
|
| 235 |
|
Other Industries |
|
| 9,357 |
|
|
| 61 |
|
|
| — |
|
|
| — |
|
Total |
|
| 57,832 |
|
|
| 823 |
|
|
| 34,614 |
|
|
| 380 |
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 31,825 |
|
|
| 518 |
|
|
| 5,138 |
|
|
| 25 |
|
Total |
|
| 31,825 |
|
|
| 518 |
|
|
| 5,138 |
|
|
| 25 |
|
Total |
| $ | 114,734 |
|
| $ | 1,482 |
|
| $ | 64,188 |
|
| $ | 586 |
|
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 Condensed Consolidated Financial Statements
There were no TDRs modified during the three months ended June 30, 2019 and 2018.
The following tables presentrepresent the types of TDRs that were made during the three and nine months ended September 30, 2017 and 2016:periods presented:
|
| Six Months Ended June 30, 2019 |
|
| Six Months Ended June 30, 2018 |
| ||||||||||||||||||
|
| 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 |
| ||||||
Interest Only |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare |
|
| — |
|
| $ | — |
|
| $ | — |
|
|
| 1 |
|
| $ | 612 |
|
| $ | 612 |
|
Total Interest Only |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 612 |
|
|
| 612 |
|
Extended Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture |
|
| 1 |
|
|
| 3,489 |
|
|
| 3,489 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Extend Amortization |
|
| 1 |
|
|
| 3,489 |
|
|
| 3,489 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Payment Deferral |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare |
|
| 1 |
|
|
| 144 |
|
|
| 144 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare |
|
| 1 |
|
|
| 1,853 |
|
|
| 1,853 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total Payment Deferral |
|
| 2 |
|
|
| 1,997 |
|
|
| 1,997 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
|
| 3 |
|
| $ | 5,486 |
|
| $ | 5,486 |
|
|
| 1 |
|
| $ | 612 |
|
| $ | 612 |
|
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 andor lease’s performance have varying degrees of success. No TDRSTDRs that were modified within the twelve months ended SeptemberJune 30, 20172019 and 2018 subsequently defaulted during the three or nineand six months ended SeptemberJune 30, 2017.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 6. Leases
Lessor Equipment Leasing
The Company purchases new equipment for the purpose of September 30, 2016, one TDR thatleasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment.
Direct Financing Leases
Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3-7 years which is consistent with the useful life of the equipment with no residual value. The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows:
|
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Gross direct finance lease payments receivable |
| $ | 15,587 |
|
| $ | 12,541 |
|
Less – unearned interest |
|
| (3,063 | ) |
|
| (2,635 | ) |
Net investment in direct financing leases |
| $ | 12,524 |
|
| $ | 9,906 |
|
Future minimum lease payments under finance leases are as follows:
As of June 30, 2019 |
| Amount |
| |
2019 |
| $ | 1,544 |
|
2020 |
|
| 3,061 |
|
2021 |
|
| 3,007 |
|
2022 |
|
| 2,744 |
|
2023 |
|
| 2,286 |
|
Thereafter |
|
| 2,945 |
|
Total |
| $ | 15,587 |
|
Interest income of $267 thousand and $73 thousand was modified withinrecognized in the twelvethree months ended SeptemberJune 30, 2016 subsequently defaulted during2019 and 2018, respectively. Interest income of $501 thousand and $120 thousand was recognized in the ninesix months ended SeptemberJune 30, 2016. This TDR was2019 and 2018, 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 the then current fair market value.
Rental revenue from operating leases is recognized on a commercialstraight-line basis over the term of the lease. Rental equipment is recorded at cost and industrial veterinary loandepreciated 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 was previously modified for payment deferral. The recorded investment for this TDRdo not extend the lives of the rental equipment are charged to direct operating expenses at September 30, 2016 was $311 thousand.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2019 and December 31, 2018, the Company had a net investment of $147.4 million and $148.8 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 $162.6 million and $159.2 million and accumulated depreciation was $15.2 million and $10.4 million as of June 30, 2019 and December 31, 2018, respectively. Depreciation expense recognized on these assets for the three months ended June 30, 2019 and 2018 was $2.4 million, and $2.0 million, respectively. Depreciation expense recognized on these assets for the six months ended June 30, 2019 and 2018 was $4.8 million and $3.7 million, respectively.
Lease income of $2.4 million and $1.9 million was recognized in the three months ended June 30, 2019 and 2018, respectively. Lease income of $4.7 million and $3.5 million was recognized in the six months ended June 30, 2019 and 2018, respectively.
A maturity analysis of future minimum lease payments under non-cancelable operating leases is as follows:
As of June 30, 2019 |
| Amount |
| |
2019 |
| $ | 3,889 |
|
2020 |
|
| 8,883 |
|
2021 |
|
| 8,930 |
|
2022 |
|
| 8,924 |
|
2023 |
|
| 8,956 |
|
Thereafter |
|
| 48,267 |
|
Total |
| $ | 87,849 |
|
Lessee Lease Arrangements
The Company has operating leases for real property, land, copiers and other equipment. These leases have remaining lease terms of 1 year to 27 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases. The Company has concluded that it is reasonably certain it will exercise the options to extend for only one lease, which was therefore recognized as part of the ROU asset and lease liability.
The Company has a finance lease for fitness equipment and it has a remaining lease term of approximately 3.4 years. There are no options to extend or terminate this lease.
The components of lease expense are as follows:
|
| Three Months Ended June 30, 2019 |
|
| Six Months Ended June 30, 2019 |
| ||
Operating lease cost |
| $ | 169 |
|
| $ | 326 |
|
Short-term lease cost |
|
| 166 |
|
|
| 375 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
| 1 |
|
|
| 2 |
|
Interest expense on lease liabilities |
|
| — |
|
|
| — |
|
Sublease income |
|
| (9 | ) |
|
| (18 | ) |
Total net lease cost |
| $ | 327 |
|
| $ | 685 |
|
Supplemental disclosure for the consolidated balance sheet related to finance leases is as follows:
|
| June 30, 2019 |
| |
Finance lease right-of-use asset |
| $ | 16 |
|
Finance lease liability |
|
| 16 |
|
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The weighted average remaining lease term and weighted average discount rate for leases are as follows:
As of June 30, 2019 | ||||
Weighted average remaining lease term (years) | ||||
Operating leases | 15.30 | |||
Finance lease | 3.42 | |||
Weighted average discount rate | ||||
Operating leases | 3.50 | % | ||
Finance lease | 3.10 | % |
A maturity analysis of operating and finance lease liabilities is as follows:
As of June 30, 2019 |
| Operating Leases |
|
| Finance Leases |
| ||
2019 |
| $ | 343 |
|
| $ | 3 |
|
2020 |
|
| 504 |
|
|
| 5 |
|
2021 |
|
| 297 |
|
|
| 5 |
|
2022 |
|
| 275 |
|
|
| 4 |
|
2023 |
|
| 143 |
|
|
| — |
|
Thereafter |
|
| 1,285 |
|
|
| — |
|
Total lease payments |
|
| 2,847 |
|
|
| 17 |
|
Less: imputed interest |
|
| (685 | ) |
|
| (1 | ) |
Total lease liabilities |
| $ | 2,162 |
|
| $ | 16 |
|
Note 7. Servicing Assets
Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $2.36$2.39 billion and $2.22$2.63 billion at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
The following summarizes the activity pertaining to servicing rights:
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Balance at beginning of period |
| $ | 44,324 |
|
| $ | 53,120 |
|
| $ | 47,641 |
|
| $ | 52,298 |
|
Additions, net |
|
| 608 |
|
|
| 4,202 |
|
|
| 1,331 |
|
|
| 9,076 |
|
Fair value changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to changes in valuation inputs or assumptions |
|
| 260 |
|
|
| (552 | ) |
|
| (489 | ) |
|
| (553 | ) |
Decay due to increases in principal paydowns or runoff |
|
| (3,505 | ) |
|
| (4,081 | ) |
|
| (6,796 | ) |
|
| (8,132 | ) |
Balance at end of period |
| $ | 41,687 |
|
| $ | 52,689 |
|
| $ | 41,687 |
|
| $ | 52,689 |
|
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 |
The fair value of servicing rights was determined using a weighted average discount rates ranging from 10.1% to 14.5%rate of 13.4% on SeptemberJune 30, 20172019 and 8.1% to 14.1%13.0% on SeptemberJune 30, 2016.2018. The fair value of servicing rights was determined using a weighted average prepayment speeds ranging from 3.1% to 10.0%speed of 14.1% on SeptemberJune 30, 20172019 and 2.9% to 9.8%9.6% on SeptemberJune 30, 2016,2018, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 8. Borrowings
Total outstanding short and long term borrowings consisted of the following:
|
| June 30, 2019 |
|
| December 31, 2018 |
| |||
Short term borrowings |
|
|
|
|
|
|
|
| |
On September 18, 2014, the Company entered into a note payable revolving line of credit of $8.1 million with an unaffiliated commercial bank. On April 18, 2017, the Company renewed and increased the revolving line of credit to $25 million. The note was unsecured and accrued interest at Prime minus 0.50% for a term of 24 months. Payments were interest only with all principal and accrued interest due on April 30, 2019. The terms of this loan required the Company to maintain minimum capital, liquidity and Texas ratios. This line of credit was paid in full on August 25, 2017. This line of credit matured on April 30, 2019 and there is no available credit at June 30, 2019. |
| $ | — |
|
| $ | — |
| |
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. One of the loans with an outstanding balance of $1.3 million was paid in full on August 17, 2018. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at June 30, 2019 is 6.50%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $1.3 million at June 30, 2019. The underlying loan carries a risk grade of 3 and is current with no delinquency. |
|
| 1,345 |
|
|
| 1,441 |
| |
On October 20, 2017, the Company entered into a revolving line of credit of $20 million with an unaffiliated commercial bank. On October 2, 2018, the Company renewed the revolving $20 million line of credit. The note is unsecured and accrues interest at LIBOR plus 1.750% for a term of 12 months. Payments are interest only with all principal and accrued interest due on October 18, 2019. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. No advances have been made to this line of credit and there is $20 million of available credit at June 30, 2019. |
|
| — |
|
|
| — |
| |
Total short term borrowings |
| $ | 1,345 |
|
| $ | 1,441 |
|
|
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Long term borrowings |
|
|
|
|
|
|
|
|
In October 2017, the Company entered into a capital lease of $19 thousand with an unaffiliated equipment lease company, secured by fitness equipment which is included in other assets on the consolidated balance sheet. Payments are principal and interest due monthly starting December 15, 2017 over a term of 60 months. At the end of the lease term there is a $1.00 bargain purchase option. As of January 1, 2019, this borrowing was revised in accordance with ASU 2016-02. |
| $ | 16 |
|
| $ | 16 |
|
Total long term borrowings |
| $ | 16 |
|
| $ | 16 |
|
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 funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $47.5 million and $26.5$72.5 million as of SeptemberJune 30, 20172019 and December 31, 2016, respectively.2018. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of SeptemberJune 30, 20172019 and December 31, 2016.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has entered into a repurchase agreement with a third party for $5$5.0 million as of SeptemberJune 30, 20172019 and December 31, 2016.2018. 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 SeptemberJune 30, 20172019 and December 31, 2016.
On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of Atlanta. These borrowings must be secured with eligible collateral approved by the Federal Home Loan Bank of Atlanta. At June 30, 2019 and December 31, 2018, the Company had approximately $1.01 billion and $849.1 million, respectively, in borrowing capacity available under these agreements. There is no collateral pledged and no advances outstanding as of June 30, 2019 and December 31, 2018.
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$412.9 million and $281.3$395.2 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. At SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company had approximately $175.0$234.9 million and $142.7$218.0 million, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of SeptemberJune 30, 20172019 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 2017.2019. The Company's effective tax rate in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.
Live Oak Bancshares, Inc.
Notes to Note 2 for more details regarding the adoption of ASU 2016-09.
Note 10. 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 includeImpaired 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.Mutual fund: The following mutual fund is registered with the Securities and Exchange Commission as a closed-end, non-diversified management investment company and operates as an interval fund. The fund primarily invests in the unguaranteed portion of SBA504 First Lien Loans secured by owner-occupied commercial real estate. This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Equity warrant assets: Fair value measurements of equity warrant assets of private companies are priced based on a Black-Scholes option pricing model to estimate the acquisition of Reltco will be adjusted to fairasset value quarterly until settled. Theby using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used to measure fair valuein the Black-Scholes model are based on internal metricspublic companies that operate in similar industries as the companies in our private company portfolio. Option expiration dates are unobservable and thereforemodified to account for estimates to actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the contingent consideration liability is classifiedprivate nature of the associated underlying company. The Company classifies equity warrant assets within Level 3 of the valuation hierarchy.
Recurring Fair Value
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
June 30, 2019 |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US treasury securities |
| $ | 5,015 |
|
| $ | — |
|
| $ | 5,015 |
|
| $ | — |
|
US government agencies |
|
| 48,905 |
|
|
| — |
|
|
| 48,905 |
|
|
| — |
|
Mortgage-backed securities |
|
| 513,349 |
|
|
| — |
|
|
| 513,349 |
|
|
| — |
|
Municipal bonds1 |
|
| 9,006 |
|
|
| — |
|
|
| 8,913 |
|
|
| 93 |
|
Servicing assets2 |
|
| 41,687 |
|
|
| — |
|
|
| — |
|
|
| 41,687 |
|
Mutual fund |
|
| 2,175 |
|
|
| — |
|
|
| 2,175 |
|
|
| — |
|
Equity warrant assets3 |
|
| 720 |
|
|
| — |
|
|
| — |
|
|
| 720 |
|
Total assets at fair value |
| $ | 620,857 |
|
| $ | — |
|
| $ | 578,357 |
|
| $ | 42,500 |
|
December 31, 2018 |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US treasury securities |
| $ | 4,966 |
|
| $ | — |
|
| $ | 4,966 |
|
| $ | — |
|
US government agencies |
|
| 30,944 |
|
|
| — |
|
|
| 30,944 |
|
|
| — |
|
Mortgage-backed securities |
|
| 343,581 |
|
|
| — |
|
|
| 343,581 |
|
|
| — |
|
Municipal bond1 |
|
| 999 |
|
|
| — |
|
|
| — |
|
|
| 999 |
|
Servicing assets2 |
|
| 47,641 |
|
|
| — |
|
|
| — |
|
|
| 47,641 |
|
Mutual fund |
|
| 2,099 |
|
|
| — |
|
|
| 2,099 |
|
|
| — |
|
Equity warrant assets3 |
|
| 527 |
|
|
| — |
|
|
| — |
|
|
| 527 |
|
Total assets at fair value |
| $ | 430,757 |
|
| $ | — |
|
| $ | 381,590 |
|
| $ | 49,167 |
|
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, 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 | During the six months ended June 30, 2019, the Company sold $900 thousand of a municipal bond to a third party and recorded a fair value adjustment loss of $7 thousand. During the three months ended June 30, 2019, the Company recorded no fair value adjustment. |
2 | See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. |
3 | During the six months ended June 30, 2019, the Company recorded net gains on derivative instruments of $193 thousand. During the three months ended June 30, 2019, the Company recorded net losses on derivative instruments of $62 thousand. During the six months ended June 30, 2018, the Company entered into equity warrant assets |
Non-recurring Fair Value
The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis.
June 30, 2019 |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Impaired loans |
| $ | 102,158 |
|
| $ | — |
|
| $ | — |
|
| $ | 102,158 |
|
Foreclosed assets |
|
| 6,044 |
|
|
| — |
|
|
| — |
|
|
| 6,044 |
|
Total assets at fair value |
| $ | 108,202 |
|
| $ | — |
|
| $ | — |
|
| $ | 108,202 |
|
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
December 31, 2018 |
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Impaired loans |
| $ | 91,230 |
|
| $ | — |
|
| $ | — |
|
| $ | 91,230 |
|
Foreclosed assets |
|
| 1,094 |
|
|
| — |
|
|
| — |
|
|
| 1,094 |
|
Total assets at fair value |
| $ | 92,324 |
|
| $ | — |
|
| $ | — |
|
| $ | 92,324 |
|
Level 3 Analysis
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 20172019 and December 31, 20162018 the significant unobservable inputs used in the fair value measurements were as follows:
June 30, 20172019
Level 3 Assets with Significant Unobservable Inputs |
| Fair Value |
|
| Valuation Technique |
| Significant Unobservable Inputs |
| Range | |
Municipal bond |
| $ | 93 |
|
| Discounted expected cash flows |
| Discount rate Prepayment speed |
| 4.76% 5.00% |
Impaired loans |
| $ | 102,158 |
|
| Discounted appraisals Discounted expected cash flows |
| Appraisal adjustments (1) Interest rate & repayment term |
| 0% to 48% Weighted average discount rate 6.77% |
Foreclosed assets |
| $ | 6,044 |
|
| Discounted appraisals |
| Appraisal adjustments (1) |
| 9% to 37% |
Equity warrant assets |
| $ | 720 |
|
| Black-Scholes option pricing model |
| Volatility Risk-free interest rate Marketability discount Remaining life |
| 20.90% 2.03% 20.00% 8 - 9 years
|
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, 20162018
Level 3 Assets with Significant Unobservable Inputs |
| Fair Value |
|
| Valuation Technique |
| Significant Unobservable Inputs |
| Range | |
Municipal bond |
| $ | 999 |
|
| Discounted expected cash flows |
| Discount rate Prepayment speed |
| 5.14% 5.00% |
Impaired loans |
| $ | 91,230 |
|
| Discounted appraisals Discounted expected cash flows |
| Appraisal adjustments (1) Interest rate & repayment term |
| 8% to 48% Weighted average discount rate 6.58% |
Foreclosed assets |
| $ | 1,094 |
|
| Discounted appraisals |
| Appraisal adjustments (1) |
| 9% to 37% |
Equity warrant assets |
| $ | 527 |
|
| Black-Scholes option pricing model |
| Volatility Risk-free interest rate Marketability discount Remaining life |
| 20.40% 2.69% 20.00% 9 - 10 years
|
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. |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 carrying amounts and estimated fair values of the Company’s financial instruments are as follows:
June 30, 2019 |
| 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 |
| $ | 115,292 |
|
| $ | 115,292 |
|
| $ | — |
|
| $ | — |
|
| $ | 115,292 |
|
Federal funds sold |
|
| 68,153 |
|
|
| 68,153 |
|
|
| — |
|
|
| — |
|
|
| 68,153 |
|
Certificates of deposit with other banks |
|
| 7,250 |
|
|
| 7,604 |
|
|
| — |
|
|
| — |
|
|
| 7,604 |
|
Investment securities, available-for-sale |
|
| 576,275 |
|
|
| — |
|
|
| 576,182 |
|
|
| 93 |
|
|
| 576,275 |
|
Loans held for sale |
|
| 857,837 |
|
|
| — |
|
|
| — |
|
|
| 881,747 |
|
|
| 881,747 |
|
Loans and leases, net of allowance for loan and lease losses |
|
| 2,187,425 |
|
|
| — |
|
|
| — |
|
|
| 2,182,023 |
|
|
| 2,182,023 |
|
Servicing assets |
|
| 41,687 |
|
|
| — |
|
|
| — |
|
|
| 41,687 |
|
|
| 41,687 |
|
Accrued interest receivable |
|
| 19,791 |
|
|
| 19,791 |
|
|
| — |
|
|
| — |
|
|
| 19,791 |
|
Mutual fund |
|
| 2,175 |
|
|
| — |
|
|
| 2,175 |
|
|
| — |
|
|
| 2,175 |
|
Equity warrant assets |
|
| 720 |
|
|
| — |
|
|
| — |
|
|
| 720 |
|
|
| 720 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 3,721,597 |
|
|
| — |
|
|
| 3,734,139 |
|
|
| — |
|
|
| 3,734,139 |
|
Accrued interest payable |
|
| 1,990 |
|
|
| 1,990 |
|
|
| — |
|
|
| — |
|
|
| 1,990 |
|
Short term borrowings |
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| 1,347 |
|
|
| 1,347 |
|
Long term borrowings |
|
| 16 |
|
|
| — |
|
|
| — |
|
|
| 16 |
|
|
| 16 |
|
December 31, 2018 |
| 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 |
| $ | 316,823 |
|
| $ | 316,823 |
|
| $ | — |
|
| $ | — |
|
| $ | 316,823 |
|
Certificates of deposit with other banks |
|
| 7,250 |
|
|
| 7,442 |
|
|
| — |
|
|
| — |
|
|
| 7,442 |
|
Investment securities, available-for-sale |
|
| 380,490 |
|
|
| — |
|
|
| 379,491 |
|
|
| 999 |
|
|
| 380,490 |
|
Loans held for sale |
|
| 687,393 |
|
|
| — |
|
|
| — |
|
|
| 695,154 |
|
|
| 695,154 |
|
Loans and leases, net of allowance for loan and lease losses |
|
| 1,810,985 |
|
|
| — |
|
|
| — |
|
|
| 1,807,528 |
|
|
| 1,807,528 |
|
Servicing assets |
|
| 47,641 |
|
|
| — |
|
|
| — |
|
|
| 47,641 |
|
|
| 47,641 |
|
Accrued interest receivable |
|
| 15,895 |
|
|
| 15,895 |
|
|
| — |
|
|
| — |
|
|
| 15,895 |
|
Mutual fund |
|
| 2,099 |
|
|
| — |
|
|
| 2,099 |
|
|
| — |
|
|
| 2,099 |
|
Equity warrant assets |
|
| 527 |
|
|
| — |
|
|
| — |
|
|
| 527 |
|
|
| 527 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 3,149,583 |
|
|
| — |
|
|
| 3,117,941 |
|
|
| — |
|
|
| 3,117,941 |
|
Accrued interest payable |
|
| 861 |
|
|
| 861 |
|
|
| — |
|
|
| — |
|
|
| 861 |
|
Short term borrowings |
|
| 1,441 |
|
|
| — |
|
|
| — |
|
|
| 1,441 |
|
|
| 1,441 |
|
Long term borrowings |
|
| 16 |
|
|
| — |
|
|
| — |
|
|
| 16 |
|
|
| 16 |
|
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 Condensed Consolidated Financial Statements
Note 11. 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.
Financial Instruments with Off-balance-sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows:
|
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Commitments to extend credit |
| $ | 1,641,814 |
|
| $ | 1,435,024 |
|
Standby letters of credit |
|
| 12,285 |
|
|
| 2,150 |
|
Airplane purchase agreement commitments |
|
| — |
|
|
| 10,450 |
|
Total unfunded off-balance-sheet credit risk |
| $ | 1,654,099 |
|
| $ | 1,447,624 |
|
September 30, 2017 | December 31, 2016 | ||||||
Commitments to extend credit | $ | 1,563,688 | $ | 1,342,271 | |||
Standby letters of credit | 1,861 | 343 | |||||
Solar purchase commitments | 182,610 | — | |||||
Airplane purchase agreement commitments | — | 21,500 | |||||
Total unfunded off-balance-sheet credit risk | $ | 1,748,159 | $ | 1,364,114 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. In 2012, the Company began issuing commitment letters after approval of the loan by the Credit Department. Commitment letters 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 SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company had unfunded commitments to provide capital contributions for on-balance sheeton-balance-sheet investments in the amount of $4.4$1.6 million and $4.9$2.8 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 6.5. 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$7.5 million, except for seventeen16 relationships that have a retained unguaranteed exposure of $144.6$193.0 million of which $90.8$137.0 million of the unguaranteed exposure has been disbursed.
Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling $33.0$87.8 million, of which $28.0$63.7 million is due from twofour relationships.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company from time-to-time may have cash and cash equivalents on deposit with 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. On May 15, 2018, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 8,750,000 common voting shares. 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 SeptemberJune 30, 20172019 and 2016,2018, the Company recognized $536$400 thousand and $580$347 thousand in compensation expense for stock options, respectively. For the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, the Company recognized $1.4 million$838 thousand and $1.8 million$780 thousand in compensation expense for stock options, respectively.
Stock option activity under the Plan during the ninesix month periods ended SeptemberJune 30, 20172019 and 20162018, is summarized below.
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term |
| Aggregate Intrinsic Value |
| |||
Outstanding at December 31, 2018 |
|
| 2,656,855 |
|
| $ | 11.27 |
|
|
|
|
|
|
|
Exercised |
|
| 30,634 |
|
|
| 6.16 |
|
|
|
|
|
|
|
Forfeited |
|
| 32,042 |
|
|
| 9.34 |
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
Outstanding at June 30, 2019 |
|
| 2,594,179 |
|
| $ | 11.35 |
|
| 5.52 years |
| $ | 15,457,477 |
|
Exercisable at June 30, 2019 |
|
| 954,353 |
|
| $ | 10.24 |
|
| 5.30 years |
| $ | 6,721,334 |
|
|
| Shares |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Terms |
| Aggregate Intrinsic Value |
| |||
Outstanding at December 31, 2017 |
|
| 3,058,459 |
|
| $ | 11.30 |
|
|
|
|
|
|
|
Exercised |
|
| 144,671 |
|
|
| 8.66 |
|
|
|
|
|
|
|
Forfeited |
|
| 134,623 |
|
|
| 14.11 |
|
|
|
|
|
|
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
Outstanding at June 30, 2018 |
|
| 2,779,165 |
|
| $ | 11.30 |
|
| 6.54 years |
| $ | 53,786,948 |
|
Exercisable at June 30, 2018 |
|
| 727,697 |
|
| $ | 9.83 |
|
| 6.27 years |
| $ | 15,148,795 |
|
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 |
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following is a summary of non-vested stock option activity for the Company for the ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.
|
| Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
Non-vested at December 31, 2018 |
|
| 1,839,830 |
|
| $ | 4.60 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| (167,962 | ) |
|
| 2.85 |
|
Forfeited |
|
| (32,042 | ) |
|
| 9.34 |
|
Non-vested at June 30, 2019 |
|
| 1,639,826 |
|
|
| 12.00 |
|
|
| Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
Non-vested at December 31, 2017 |
|
| 2,364,999 |
|
| $ | 4.65 |
|
Granted |
|
| — |
|
|
| — |
|
Vested |
|
| (178,908 | ) |
|
| 2.95 |
|
Forfeited |
|
| (134,623 | ) |
|
| 6.26 |
|
Non-vested at June 30, 2018 |
|
| 2,051,468 |
|
|
| 4.79 |
|
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 |
The total intrinsic value of options exercised at SeptemberJune 30, 20172019 and 20162018, was $1.1$326 thousand and $2.9 million, and $223 thousand, respectively.
At SeptemberJune 30, 2017,2019, unrecognized compensation costs relating to stock options amounted to $9.8$5.1 million which will be recognized over a weighted average period of 2.933.1 years.
The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. There were no stock options granted during the three and ninesix months ended SeptemberJune 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 related to the Company’s share price closing at or above a specified price ranging from $34.00 to $38.00$55.00 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 Simulationsimulation method.
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
RSU stock activity under the Plan during the first ninesix months of 20172019 is summarized below.
|
| Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
Non-vested at December 31, 2018 |
|
| 388,187 |
|
| $ | 23.85 |
|
Granted |
|
| 69,621 |
|
|
| 16.02 |
|
Vested |
|
| (26,714 | ) |
|
| 28.33 |
|
Forfeited |
|
| (4,918 | ) |
|
| 23.96 |
|
Non-vested at June 30, 2019 |
|
| 426,176 |
|
|
| 22.29 |
|
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 |
For the three months ended SeptemberJune 30, 20172019 and 2016,2018, the Company recognized $191$556 thousand and $3.1 million$921 thousand in compensation expense for RSUs, respectively. For the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, the Company recognized $517 thousand$1.1 million and $5.3$1.8 million in compensation expense for RSUs, respectively.
At SeptemberJune 30, 2017,2019, unrecognized compensation costs relating to RSUs amounted to $2.5$8.2 million which will be recognized over a weighted average period of 4.554.7 years.
Market RSU stock activity under the Plan during the first ninethree months of 20172019 is summarized below.
|
| Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
Non-vested at December 31, 2018 |
|
| 2,709,202 |
|
| $ | 9.87 |
|
Granted |
|
| 500,000 |
|
|
| 8.81 |
|
Vested |
|
| — |
|
|
| — |
|
Forfeited |
|
| (22,347 | ) |
|
| 9.28 |
|
Non-vested at June 30, 2019 |
|
| 3,186,855 |
|
|
| 8.45 |
|
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 Simulationsimulation and is recognized on a straight-line basis over the average vesting period. The Monte Carlo Simulationsimulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.
Related to the 100,733500,000 Market RSUs granted on January 31, 2017 and the 3,058 Market RSUs granted on May 8, 2017,February 11, 2019, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.010.0 years. The implied term of the restricted stock was 4.1ranges from 4.5 to 5.8 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.28%2.62%, expected volatility of 30.00%37.6% and a dividend yield of 0.39%0.78%.
On February 11, 2019, 75,000 Market RSUs granted on May 14, 2018 to one employee were modified to lengthen the 130,000vesting term from 7 to 10 years and change the target stock price from $48.00 to a range of $35.00 to $48.00 per share for at least twenty (20) consecutive trading days. Additionally, 410,000 Market RSUs granted on August 10, 2018 to eleven employees were modified to lengthen the vesting term from 7 2017,to 10 years and change the share price simulation was based onamount of Market RSUs that vest at various target stock prices to 20% per tier. As a result of modification, the Cox, Ross & Rubinstein option pricing methodologyCompany recognized additional compensation expense of $166 thousand and $234 thousand 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%three and a dividend yield of 0.33%.
For the three months ended SeptemberJune 30, 20172019 and 2016,2018, the Company recognized $1.3$2.0 million and $346$947 thousand in compensation expense for Market RSUs, respectively. For the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, the Company recognized $3.7$3.8 million and $577 thousand$1.9 million in compensation expense for Market RSUs, respectively.
At June 30, 2016, January 31, 2017, May 8, 2017 and August 7, 2017
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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. ExpenseThere was no 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 SeptemberJune 30, 20172019 and 2016,2018. For the six months ended June 30, 2019 and 2018, the Company recognized $36$32 thousand and $0$29 thousand in expense, respectively.
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 “Company” or “LOB”). This discussion should be read in conjunction with the 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, 20162018 (the "2016"2018 Annual Report"). 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. 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.
• | 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") 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") as an SBA Preferred Lender; |
• | changes in rules, regulations or procedures for other government loan programs, including those of the 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; |
• | 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, 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; |
• | 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; |
• | 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; |
• | other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s 2018 Annual Report; 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 have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Nature of Operations
LOB is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending services to small businesses nationwide in targeted industries.nationwide. The Bank identifies and grows within selected industry sectors, or verticals, by leveraging expertise within those industries, and more broadly to select borrowers outside of those industries. 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 Bank formed Live Oak Number One, Inc.U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP"), a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.Business & Industry ("B&I") and Water & Waste Disposal (“WEP”) loan programs.
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.
During the fourth quarter of 2018, the Company began implementing a strategic decision to retain a larger portion of its loans eligible for sale on its balance sheet. Management believes this decision will reduce future earnings volatility and maximize long-term profitability. This strategic change had immediate impacts through the reclassification of $80.3 million in guaranteed loans from held-for-sale to held-for-investment status. Other effects of this change are reflected in the financial statements in the fourth quarter of 2018 and in the first half of 2019 with significantly fewer loans sold during the respective quarters and the consequential effect of increased net interest income and increased loans held for sale and held for investment along with lower gains on loan sales.
In addition to2018, the Bank formed Live Oak Private Wealth, LLC, a registered investment advisor that provides high-net-worth individuals and families with strategic wealth and investment management services; and formed Canapi Advisors, LLC for the purpose of providing investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial services technology companies. In 2017, the Bank entered into a joint venture, Apiture LLC (“Apiture”), with First Data Corporation for the purpose of creating next generation technology for financial institutions. In August 2018, the Company owns exited the title insurance business by financing the sale of its entire ownership interest in Reltco, Inc. and National Assurance Title, Inc. for $3.0 million. This divestiture was driven by lower expectations of future profitability for this business. The title insurance business was acquired in 2017. In 2016, the Company formed Live Oak Clean Energy Financing LLC formed in November 2016,(“LOCEF”), for the purpose of providing financing to entities for renewable energy applications;applications. During the three months ended March 31, 2019, LOCEF became a subsidiary of the Bank. In addition to the Bank, the Company owns Live Oak Ventures, Inc. (formerly known as "Canapi, 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, LLC, openedformed in SeptemberFebruary 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and U.S. Department of Agriculture ("USDA")-guaranteedUSDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), which was formed to serve as the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.
The Company generates revenue primarily from net interest income and the 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 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 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.
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 strategies 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” in this Report for more information on forward-looking statements.
We believe our strategic decision to retain a larger portion of loans eligible for sale on our balance sheet will reduce future earnings volatility and maximize long-term profitability. As a result of this decision, we anticipate that gains on the sale of loans will comprise a diminishing component of our revenue in 2019. Management anticipates that the Company's held-for-sale and held-for-investment loan portfolios will continue to grow as a result of ongoing origination volumes and higher levels of loan retention intended to promote long-term recurring revenue and profitability, including the continued pursuit of potential opportunities in conventional lending outside of SBA or other government guarantee programs.
Results of Operations
Performance Summary
Three months ended SeptemberJune 30, 20172019 compared with three months ended SeptemberJune 30, 2016
For the three months ended SeptemberJune 30, 2017,2019, the Company reported net income of $12.9$4.9 million, or $0.33$0.12 per diluted share, as compared to $3.5$14.3 million, or $0.10$0.34 per diluted share, for the three months ended September 30, 2016.second quarter of 2018. This increasedecrease in net income is primarily due to the following items:
• | The Company’s strategic shift in the latter part of 2018 to hold substantially more of its eligible-for-sale production on balance sheet resulted in lower net income in the near-term by decreasing net gains on sales of loans by $17.0 million, or 73.9%. The volume of guaranteed loan sales in the second quarter of 2019 declined to $71.9 million compared to $295.2 million in the second quarter of 2018; |
• | The provision for loan and lease losses increased $1.4 million primarily due to portfolio growth from the second quarter of 2018; |
• | The flow-through loss from investments accounted for under the equity method totaled $1.7 million compared to $673 thousand for the three months ended June 30, 2018; and |
• | Title insurance income decreased $1.0 million due to the Company’s sale of its title insurance business in August of 2018. |
The primary factors partially offsetting the above factors that contributed to increased levels ofdecrease in net income was a $3.7 million decrease in the net gains on sales of loans, $1.6 million increase in salaries and employee benefits, $1.6 million in equipment expense and $1.5 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,were:
• | Increase in net interest income of $6.9 million, or 25.5%, predominately driven by the above referenced strategic growth in loan and lease portfolios combined with higher investment security holdings which benefited from rising interest rates; and |
• | Net negative loan servicing revaluation decreased by $3.3 million, or 89.0%, compared to the second quarter of 2018 principally due to an improving secondary market for sold loans. |
Six Months Ended June 30, 2019 compared to the same period 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.
For the six months ended SeptemberJune 30, 2016
• | The Company’s above referenced strategic shift in the latter part of 2018 to hold substantially more of its eligible-for-sale production on balance sheet resulted in lower net income in the near-term by decreasing net gains on sales of loans by $37.3 million, or 78.5%. The volume of guaranteed loan sales in the first six months of 2019 declined to $134.9 million compared to $542.5 million in the first six months of 2018; |
• | The flow-through loss from investments accounted for under the equity method totaled $3.8 million compared to $1.0 for the six months ended June 30, 2018; and |
• | Title insurance income decreased $2.3 million due to the Company’s sale of its title insurance business in August of 2018. |
The primary factors partially offset by a decrease in the average net gain per loan sold;
• | Increase in net interest income of $13.0 million, or 25.3%, predominately driven by the above referenced strategic growth in loan and lease portfolios combined with higher investment security holdings which benefited from rising interest rates; and |
• | Net negative loan servicing revaluation decreased by $6.1 million, or 69.8%, principally due to an improving secondary market for sold loans. |
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 ofit incurs on 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. 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.” Without a branch network, the Bank generates 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, 20172019 compared with three months ended SeptemberJune 30, 2016
For the three months ended SeptemberJune 30, 2017,2019, net interest income increased $9.4$6.9 million, or 80.8%25.5%, to $21.0$33.9 million compared to $11.6$27.0 million for the three months ended SeptemberJune 30, 2016.2018. This increase was principally due to the significant growth in average interest earning assetsthe combined held for sale and held for investment loan and lease portfolios along with higher investment security holdings reflecting the Company's ongoing initiative to a lesser extent higher yields on these assets which outpacedgrow recurring revenue sources and deploy liquidity while improving the growth and change in the cost of interest bearing liabilities.asset-liability repricing mix. Average interest earning assets increased by $746.9$542.1 million, or 53.8%17.3%, to $2.13$3.68 billion for the three months ended SeptemberJune 30, 2017,2019, compared to $1.39$3.14 billion for the three months ended SeptemberJune 30, 2016,2018, while the yield on average interest earning assets rose sharply by seventy-nineincreased seventy-seven basis points to 5.24%6.01%. The cost of funds on interest bearing liabilities for the three months ended SeptemberJune 30, 20172019 increased twentyfifty-five basis points to 1.43%2.41%, and the average balance of interest bearing liabilities increased by $717.1$532.2 million, or 56.6%17.8%, over the same period.period in 2018. As indicated in the rate/volume table below, the increase in interest bearing liabilitiesearning assets outpaced the higher volume and correspondingincreased cost of funds was outpaced by the positive effects of the increased volume of interest earning assets along with much higher yields,bearing liabilities, resulting in increased interest income of $12.6$14.2 million and increased interest expense of $3.2$7.3 million for the three months ended SeptemberJune 30, 20172019 compared to the three months ended SeptemberJune 30, 2016.2018. For the three months ended SeptemberJune 30, 20172018 compared to the three months ended SeptemberJune 30, 2016,2019, net interest margin increased sharply from 3.32%3.46% to 3.91%3.70%, respectively, principally due to the aforementioned effects.
Six Months Ended June 30, 2019 compared with six months ended SeptemberJune 30, 2017 compared with nine2018
For the six months ended SeptemberJune 30, 2016
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, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
|
| Average Balance |
|
| Interest |
|
| Average Yield/Rate |
|
| Average Balance |
|
| Interest |
|
| Average Yield/Rate |
| ||||||
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest earning balances in other banks |
| $ | 184,986 |
|
| $ | 1,108 |
|
|
| 2.40 | % |
| $ | 505,351 |
|
| $ | 2,179 |
|
|
| 1.73 | % |
Investment securities |
|
| 566,159 |
|
|
| 4,116 |
|
|
| 2.92 |
|
|
| 383,154 |
|
|
| 2,530 |
|
|
| 2.65 |
|
Loans held for sale |
|
| 839,724 |
|
|
| 14,333 |
|
|
| 6.85 |
|
|
| 744,789 |
|
|
| 11,937 |
|
|
| 6.43 |
|
Loans and leases held for investment(1) |
|
| 2,089,225 |
|
|
| 35,581 |
|
|
| 6.83 |
|
|
| 1,504,738 |
|
|
| 24,330 |
|
|
| 6.49 |
|
Total interest earning assets |
|
| 3,680,094 |
|
|
| 55,138 |
|
|
| 6.01 |
|
|
| 3,138,032 |
|
|
| 40,976 |
|
|
| 5.24 |
|
Less: Allowance for loan and lease losses |
|
| (35,124 | ) |
|
|
|
|
|
|
|
|
|
| (27,930 | ) |
|
|
|
|
|
|
|
|
Non-interest earning assets |
|
| 474,706 |
|
|
|
|
|
|
|
|
|
|
| 424,100 |
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 4,119,676 |
|
|
|
|
|
|
|
|
|
| $ | 3,534,202 |
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing checking |
| $ | — |
|
| $ | — |
|
|
| — | % |
| $ | 36,926 |
|
| $ | 100 |
|
|
| 1.09 | % |
Savings |
|
| 989,512 |
|
|
| 5,235 |
|
|
| 2.12 |
|
|
| 998,521 |
|
|
| 4,061 |
|
|
| 1.63 |
|
Money market accounts |
|
| 85,982 |
|
|
| 161 |
|
|
| 0.75 |
|
|
| 151,880 |
|
|
| 463 |
|
|
| 1.22 |
|
Certificates of deposit |
|
| 2,452,159 |
|
|
| 15,807 |
|
|
| 2.59 |
|
|
| 1,806,063 |
|
|
| 9,303 |
|
|
| 2.07 |
|
Total deposits |
|
| 3,527,653 |
|
|
| 21,203 |
|
|
| 2.41 |
|
|
| 2,993,390 |
|
|
| 13,927 |
|
|
| 1.87 |
|
Other borrowings |
|
| 1,409 |
|
|
| — |
|
|
| — |
|
|
| 3,488 |
|
|
| 1 |
|
|
| 0.11 |
|
Total interest bearing liabilities |
|
| 3,529,062 |
|
|
| 21,203 |
|
|
| 2.41 |
|
|
| 2,996,878 |
|
|
| 13,928 |
|
|
| 1.86 |
|
Non-interest bearing deposits |
|
| 51,643 |
|
|
|
|
|
|
|
|
|
|
| 53,922 |
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities |
|
| 26,580 |
|
|
|
|
|
|
|
|
|
|
| 21,217 |
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
| 512,391 |
|
|
|
|
|
|
|
|
|
|
| 462,185 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
| $ | 4,119,676 |
|
|
|
|
|
|
|
|
|
| $ | 3,534,202 |
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread |
|
|
|
|
| $ | 33,935 |
|
|
| 3.60 | % |
|
|
|
|
| $ | 27,048 |
|
|
| 3.38 | % |
Net interest margin |
|
|
|
|
|
|
|
|
|
| 3.70 |
|
|
|
|
|
|
|
|
|
|
| 3.46 |
|
Ratio of average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
| 104.28 | % |
|
|
|
|
|
|
|
|
|
| 104.71 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
| |||||||||||||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||||||||||
|
| Average Balance |
|
| Interest |
|
| Average Yield/Rate |
|
| Average Balance |
|
| Interest |
|
| Average Yield/Rate |
| ||||||
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest earning balances in other banks |
| $ | 233,904 |
|
| $ | 2,747 |
|
|
| 2.37 | % |
| $ | 430,107 |
|
| $ | 3,394 |
|
|
| 1.59 | % |
Investment securities |
|
| 514,038 |
|
|
| 7,433 |
|
|
| 2.92 |
|
|
| 283,083 |
|
|
| 3,647 |
|
|
| 2.60 |
|
Loans held for sale |
|
| 794,919 |
|
|
| 26,934 |
|
|
| 6.83 |
|
|
| 736,323 |
|
|
| 23,085 |
|
|
| 6.32 |
|
Loans and leases held for investment(1) |
|
| 2,006,255 |
|
|
| 67,946 |
|
|
| 6.83 |
|
|
| 1,456,659 |
|
|
| 45,873 |
|
|
| 6.35 |
|
Total interest earning assets |
|
| 3,549,116 |
|
|
| 105,060 |
|
|
| 5.97 |
|
|
| 2,906,172 |
|
|
| 75,999 |
|
|
| 5.27 |
|
Less: Allowance for loan and lease losses |
|
| (33,801 | ) |
|
|
|
|
|
|
|
|
|
| (26,085 | ) |
|
|
|
|
|
|
|
|
Non-interest earning assets |
|
| 475,464 |
|
|
|
|
|
|
|
|
|
|
| 410,585 |
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 3,990,779 |
|
|
|
|
|
|
|
|
|
| $ | 3,290,672 |
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing checking |
| $ | 84 |
|
| $ | — |
|
|
| — | % |
| $ | 40,243 |
|
| $ | 203 |
|
|
| 1.02 | % |
Savings |
|
| 958,716 |
|
|
| 10,021 |
|
|
| 2.11 |
|
|
| 910,880 |
|
|
| 7,179 |
|
|
| 1.59 |
|
Money market accounts |
|
| 84,648 |
|
|
| 269 |
|
|
| 0.64 |
|
|
| 160,370 |
|
|
| 983 |
|
|
| 1.24 |
|
Certificates of deposit |
|
| 2,367,902 |
|
|
| 30,230 |
|
|
| 2.57 |
|
|
| 1,640,479 |
|
|
| 15,980 |
|
|
| 1.96 |
|
Total deposits |
|
| 3,411,350 |
|
|
| 40,520 |
|
|
| 2.40 |
|
|
| 2,751,972 |
|
|
| 24,345 |
|
|
| 1.78 |
|
Other borrowings |
|
| 1,436 |
|
|
| — |
|
|
| — |
|
|
| 7,336 |
|
|
| 130 |
|
|
| 3.57 |
|
Total interest bearing liabilities |
|
| 3,412,786 |
|
|
| 40,520 |
|
|
| 2.39 |
|
|
| 2,759,308 |
|
|
| 24,475 |
|
|
| 1.79 |
|
Non-interest bearing deposits |
|
| 49,246 |
|
|
|
|
|
|
|
|
|
|
| 55,252 |
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities |
|
| 20,548 |
|
|
|
|
|
|
|
|
|
|
| 20,125 |
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
| 508,199 |
|
|
|
|
|
|
|
|
|
|
| 455,987 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
| $ | 3,990,779 |
|
|
|
|
|
|
|
|
|
| $ | 3,290,672 |
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread |
|
|
|
|
| $ | 64,540 |
|
|
| 3.58 | % |
|
|
|
|
| $ | 51,524 |
|
|
| 3.48 | % |
Net interest margin |
|
|
|
|
|
|
|
|
|
| 3.67 |
|
|
|
|
|
|
|
|
|
|
| 3.58 |
|
Ratio of average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
| 103.99 | % |
|
|
|
|
|
|
|
|
|
| 105.32 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
| ||||||||||||||||||
|
| 2019 vs. 2018 |
|
| 2019 vs. 2018 |
| ||||||||||||||||||
|
| Increase (Decrease) Due to |
|
| Increase (Decrease) Due to |
| ||||||||||||||||||
|
| Rate |
|
| Volume |
|
| Total |
|
| Rate |
|
| Volume |
|
| Total |
| ||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest earning balances in other banks |
| $ | 579 |
|
| $ | (1,650 | ) |
| $ | (1,071 | ) |
| $ | 1,279 |
|
| $ | (1,926 | ) |
| $ | (647 | ) |
Investment securities |
|
| 317 |
|
|
| 1,269 |
|
|
| 1,586 |
|
|
| 628 |
|
|
| 3,158 |
|
|
| 3,786 |
|
Loans held for sale |
|
| 825 |
|
|
| 1,571 |
|
|
| 2,396 |
|
|
| 1,938 |
|
|
| 1,911 |
|
|
| 3,849 |
|
Loans and leases held for investment |
|
| 1,549 |
|
|
| 9,702 |
|
|
| 11,251 |
|
|
| 4,112 |
|
|
| 17,961 |
|
|
| 22,073 |
|
Total interest income |
|
| 3,270 |
|
|
| 10,892 |
|
|
| 14,162 |
|
|
| 7,957 |
|
|
| 21,104 |
|
|
| 29,061 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing checking |
|
| — |
|
|
| (100 | ) |
|
| (100 | ) |
|
| (102 | ) |
|
| (101 | ) |
|
| (203 | ) |
Savings |
|
| 1,216 |
|
|
| (42 | ) |
|
| 1,174 |
|
|
| 2,403 |
|
|
| 439 |
|
|
| 2,842 |
|
Money market accounts |
|
| (140 | ) |
|
| (162 | ) |
|
| (302 | ) |
|
| (362 | ) |
|
| (352 | ) |
|
| (714 | ) |
Certificates of deposit |
|
| 2,758 |
|
|
| 3,746 |
|
|
| 6,504 |
|
|
| 6,064 |
|
|
| 8,186 |
|
|
| 14,250 |
|
Other borrowings |
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
|
| (78 | ) |
|
| (52 | ) |
|
| (130 | ) |
Total interest expense |
|
| 3,833 |
|
|
| 3,442 |
|
|
| 7,275 |
|
|
| 7,925 |
|
|
| 8,120 |
|
|
| 16,045 |
|
Net interest income |
| $ | (563 | ) |
| $ | 7,450 |
|
| $ | 6,887 |
|
| $ | 32 |
|
| $ | 12,984 |
|
| $ | 13,016 |
|
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 Losses
The provision for loan and lease losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan and lease losses at a level that 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.
Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typical SBA 7(a) loan carries a 75% guarantee while USDA guarantees range from 60% to 80% depending on loan size, 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 2019 the provision for loan and lease losses was $3.5 million compared to $2.1 million for the same period in 2018, an increase of $1.4 million, or 65.9%. The increase in the provision for loan and lease losses compared to the prior year quarter was primarily the result of a growing loan portfolio through robust loan originations and higher balance sheet retention rates.
Loans and leases held for investment were $2.23 billion as of June 30, 2019, increasing by $691.1 million, or 45.0%, compared to June 30, 2018. This growth was fueled by strong loan origination volumes and the above referenced strategic shift to retain substantially more loans on the balance sheet.
Net charge-offs were $526 thousand, or 0.10% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended June 30, 2019, compared to $787 thousand, or 0.21%, for the three months ended June 30, 2018. For the six months ended June 30, 2019, net charge-offs totaled $591 thousand compared to $1.3 million for the six months ended June 30, 2018, a decrease of $728 thousand, or 55.2%. 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 June 30, 2019, nonperforming loans and leases not guaranteed by the SBA totaled $18.4 million, which was 0.82% of the held-for-investment loan and lease portfolio compared to $11.5 million, or 0.75% of loans and leases held for investment at June 30, 2018.
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. Noninterest income also commonly includes equity method investments income (loss), lease income, construction supervision fee income and in prior periods title insurance income. Other less common elements of noninterest income include nonrecurring gains and losses on investments.
The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.
|
| Three Months Ended June 30, |
|
| 2019/2018 Increase (Decrease) |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Amount |
|
| Percent |
| ||||
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing revenue |
| $ | 7,063 |
|
| $ | 6,965 |
|
| $ | 98 |
|
|
| 1.41 | % |
Loan servicing asset revaluation |
|
| (403 | ) |
|
| (3,670 | ) |
|
| 3,267 |
|
|
| 89.02 |
|
Net gains on sales of loans |
|
| 6,015 |
|
|
| 23,061 |
|
|
| (17,046 | ) |
|
| (73.92 | ) |
Equity method investments income (loss) |
|
| (1,736 | ) |
|
| (673 | ) |
|
| (1,063 | ) |
|
| 157.95 |
|
Lease income |
|
| 2,369 |
|
|
| 1,920 |
|
|
| 449 |
|
|
| 23.39 |
|
Construction supervision fee income |
|
| 386 |
|
|
| 597 |
|
|
| (211 | ) |
|
| (35.34 | ) |
Title insurance income |
|
| — |
|
|
| 996 |
|
|
| (996 | ) |
|
| (100.00 | ) |
Other noninterest income |
|
| 1,007 |
|
|
| 1,417 |
|
|
| (410 | ) |
|
| (28.93 | ) |
Total noninterest income |
| $ | 14,701 |
|
| $ | 30,613 |
|
| $ | (15,912 | ) |
|
| (51.98 | )% |
|
| Six Months Ended June 30, |
|
| 2019/2018 Increase (Decrease) |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Amount |
|
| Percent |
| ||||
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing revenue |
| $ | 14,473 |
|
| $ | 13,863 |
|
| $ | 610 |
|
|
| 4.40 | % |
Loan servicing asset revaluation |
|
| (2,649 | ) |
|
| (8,758 | ) |
|
| 6,109 |
|
|
| 69.75 |
|
Net gains on sales of loans |
|
| 10,213 |
|
|
| 47,479 |
|
|
| (37,266 | ) |
|
| (78.49 | ) |
Equity method investments income (loss) |
|
| (3,750 | ) |
|
| (1,037 | ) |
|
| (2,713 | ) |
|
| 261.62 |
|
Gain on sale of investment securities available-for-sale |
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| 100.00 |
|
Lease income |
|
| 4,694 |
|
|
| 3,528 |
|
|
| 1,166 |
|
|
| 33.05 |
|
Construction supervision fee income |
|
| 1,165 |
|
|
| 1,376 |
|
|
| (211 | ) |
|
| (15.33 | ) |
Title insurance income |
|
| — |
|
|
| 2,296 |
|
|
| (2,296 | ) |
|
| (100.00 | ) |
Other noninterest income |
|
| 3,577 |
|
|
| 2,622 |
|
|
| 955 |
|
|
| 36.42 |
|
Total noninterest income |
| $ | 27,728 |
|
| $ | 61,369 |
|
| $ | (33,641 | ) |
|
| (54.82 | )% |
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) | |||||||||||||
2017 | 2016 | Amount | Percent | |||||||||||
Noninterest income | ||||||||||||||
Loan servicing revenue | $ | 18,587 | $ | 15,725 | $ | 2,862 | 18.20 | % | ||||||
Loan servicing asset revaluation | (6,864 | ) | (5,051 | ) | (1,813 | ) | 35.89 | |||||||
Net gains on sales of loans | 55,276 | 52,813 | 2,463 | 4.66 | ||||||||||
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 | ||||||||||
Other noninterest income | 3,601 | 1,925 | 1,676 | 87.06 | ||||||||||
Total noninterest income | $ | 77,480 | $ | 67,212 | $ | 10,268 | 15.28 | % |
For the three months ended SeptemberJune 30, 2017,2019, noninterest income decreased by $372 thousand,$15.9 million, or 1.5%52.0%, compared to the three months ended SeptemberJune 30, 2016.2018. The declinedecrease from the prior year is primarily the result of the aforementioned strategic decision to sell fewer loans, resulting in net gains on sales of loans decreasing $3.7 milliondeclining to $18.1$6.0 million in the second quarter of 2019 compared to $23.1 million in the second quarter of 2018, a reduction of $17.0 million, or 73.9%. The flow-through loss from investments accounted for under the equity method increased $1.1 million for the second quarter of 2019 compared to the second quarter of 2018. These flow-through losses reflect the Company’s pro-rata portion of operating results for certain strategic start-up investments. Also impacting the overall decrease in noninterest income was a decline in title insurance income of $996 thousand during the second quarter of 2019 compared to the second quarter of 2018 due to the sale of the title insurance business in 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 sale of guaranteed loans.2018. Partially offsetting the effectsoverall decrease in noninterest income was a $3.3 million, or 89.0%, decrease in the net negative loan servicing revaluation principally due to improving secondary market premiums.
For the six months ended June 30, 2019, noninterest income decreased by $33.6 million, or 54.8%, compared to the six months ended June 30, 2018. The decrease from the prior year is also primarily the result of lowerthe aforementioned strategic decision to sell fewer loans, resulting in net gains on sales of loans were increased servicing revenue of $630 thousand, title insurance income of $2.0declining to $10.2 million fromfor 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 noninterest income was primarily comprised of $682 thousand of operating lease income from renewable energy assets and trust management income of $236 thousand.
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, |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Amount of loans and leases originated |
| $ | 525,088 |
|
| $ | 491,797 |
|
| $ | 390,851 |
|
| $ | 397,559 |
|
Guaranteed portions of loans sold |
|
| 71,934 |
|
|
| 295,216 |
|
|
| 62,940 |
|
|
| 247,243 |
|
Outstanding balance of guaranteed loans sold (1) |
|
| 2,870,108 |
|
|
| 2,951,379 |
|
|
| 2,952,774 |
|
|
| 2,812,108 |
|
|
| Six Months Ended June 30, |
|
| For years ended December 31, |
| ||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| ||||||
Amount of loans and leases originated |
| $ | 915,939 |
|
| $ | 889,356 |
|
| $ | 1,765,680 |
|
| $ | 1,934,238 |
|
| $ | 1,537,010 |
|
| $ | 1,158,640 |
|
Guaranteed portions of loans sold |
|
| 134,874 |
|
|
| 542,459 |
|
|
| 945,178 |
|
|
| 787,926 |
|
|
| 761,933 |
|
|
| 640,886 |
|
Outstanding balance of guaranteed loans sold (1) |
|
| 2,870,108 |
|
|
| 2,951,379 |
|
|
| 3,045,460 |
|
|
| 2,680,641 |
|
|
| 2,278,618 |
|
|
| 1,779,989 |
|
Three months ended September 30, | Three months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Amount of loans and leases originated | $ | 395,682 | $ | 381,050 | $ | 586,471 | $ | 356,865 | |||||||
Guaranteed portions of loans sold | 163,843 | 210,610 | 203,714 | 135,555 | |||||||||||
Outstanding balance of guaranteed loans sold (1) | 2,584,163 | 2,102,468 | 2,521,506 | 1,970,908 |
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 Revaluation:
The Company revalues its serviced loan portfolio at least quarterly. The revaluation considers the amortization of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds. For the three months endedNet Gains on Sale of Loans:
For the threeNoninterest 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, |
|
| 2019/2018 Increase (Decrease) |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Amount |
|
| Percent |
| ||||
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries and employee benefits |
| $ | 21,990 |
|
| $ | 22,146 |
|
| $ | (156 | ) |
|
| (0.70 | )% |
Non-staff expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel expense |
|
| 1,541 |
|
|
| 2,041 |
|
|
| (500 | ) |
|
| (24.50 | ) |
Professional services expense |
|
| 1,621 |
|
|
| 1,119 |
|
|
| 502 |
|
|
| 44.86 |
|
Advertising and marketing expense |
|
| 1,665 |
|
|
| 1,868 |
|
|
| (203 | ) |
|
| (10.87 | ) |
Occupancy expense |
|
| 1,848 |
|
|
| 1,882 |
|
|
| (34 | ) |
|
| (1.81 | ) |
Data processing expense |
|
| 1,947 |
|
|
| 2,906 |
|
|
| (959 | ) |
|
| (33.00 | ) |
Equipment expense |
|
| 4,239 |
|
|
| 3,368 |
|
|
| 871 |
|
|
| 25.86 |
|
Other loan origination and maintenance expense |
|
| 1,708 |
|
|
| 1,414 |
|
|
| 294 |
|
|
| 20.79 |
|
Renewable energy tax credit investment impairment |
|
| 602 |
|
|
| — |
|
|
| 602 |
|
|
| 100.00 |
|
FDIC insurance |
|
| 699 |
|
|
| 1,010 |
|
|
| (311 | ) |
|
| (30.79 | ) |
Title insurance closing services expense |
|
| — |
|
|
| 372 |
|
|
| (372 | ) |
|
| (100.00 | ) |
Other expense |
|
| 1,716 |
|
|
| 2,704 |
|
|
| (988 | ) |
|
| (36.54 | ) |
Total non-staff expenses |
|
| 17,586 |
|
|
| 18,684 |
|
|
| (1,098 | ) |
|
| (5.88 | ) |
Total noninterest expense |
| $ | 39,576 |
|
| $ | 40,830 |
|
| $ | (1,254 | ) |
|
| (3.07 | )% |
|
| Six Months Ended June 30, |
|
| 2019/2018 Increase (Decrease) |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| Amount |
|
| Percent |
| ||||
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries and employee benefits |
| $ | 43,845 |
|
| $ | 42,355 |
|
| $ | 1,490 |
|
|
| 3.52 | % |
Non-staff expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Travel expense |
|
| 2,741 |
|
|
| 3,884 |
|
|
| (1,143 | ) |
|
| (29.43 | ) |
Professional services expense |
|
| 3,803 |
|
|
| 2,417 |
|
|
| 1,386 |
|
|
| 57.34 |
|
Advertising and marketing expense |
|
| 3,029 |
|
|
| 3,530 |
|
|
| (501 | ) |
|
| (14.19 | ) |
Occupancy expense |
|
| 3,457 |
|
|
| 3,739 |
|
|
| (282 | ) |
|
| (7.54 | ) |
Data processing expense |
|
| 4,346 |
|
|
| 5,743 |
|
|
| (1,397 | ) |
|
| (24.33 | ) |
Equipment expense |
|
| 7,564 |
|
|
| 6,445 |
|
|
| 1,119 |
|
|
| 17.36 |
|
Other loan origination and maintenance expense |
|
| 3,347 |
|
|
| 2,743 |
|
|
| 604 |
|
|
| 22.02 |
|
Renewable energy tax credit investment impairment |
|
| 602 |
|
|
| — |
|
|
| 602 |
|
|
| 100.00 |
|
FDIC insurance |
|
| 1,334 |
|
|
| 1,582 |
|
|
| (248 | ) |
|
| (15.68 | ) |
Title insurance closing services expense |
|
| — |
|
|
| 798 |
|
|
| (798 | ) |
|
| (100.00 | ) |
Other expense |
|
| 3,709 |
|
|
| 5,666 |
|
|
| (1,957 | ) |
|
| (34.54 | ) |
Total non-staff expenses |
|
| 33,932 |
|
|
| 36,547 |
|
|
| (2,615 | ) |
|
| (7.16 | ) |
Total noninterest expense |
| $ | 77,777 |
|
| $ | 78,902 |
|
| $ | (1,125 | ) |
|
| (1.43 | )% |
Three Months Ended September 30, | Increase (Decrease) | |||||||||||||
2017 | 2016 | Amount | Percent | |||||||||||
Noninterest expense | ||||||||||||||
Salaries and employee benefits | $ | 19,037 | $ | 17,471 | $ | 1,566 | 8.96 | % | ||||||
Non-staff expenses: | ||||||||||||||
Travel expense | 2,289 | 2,218 | 71 | 3.20 | ||||||||||
Professional services expense | 1,068 | 907 | 161 | 17.75 | ||||||||||
Advertising and marketing expense | 1,516 | 1,097 | 419 | 38.20 | ||||||||||
Occupancy expense | 1,473 | 1,058 | 415 | 39.22 | ||||||||||
Data processing expense | 1,982 | 1,252 | 730 | 58.31 | ||||||||||
Equipment expense | 2,228 | 611 | 1,617 | 264.65 | ||||||||||
Other loan origination and maintenance expense | 1,601 | 806 | 795 | 98.64 | ||||||||||
FDIC insurance | 858 | 210 | 648 | 308.57 | ||||||||||
Title insurance closing services expense | 687 | — | 687 | 100.00 | ||||||||||
Other expense | 3,117 | 1,588 | 1,529 | 96.28 | ||||||||||
Total non-staff expenses | 16,819 | 9,747 | 7,072 | 72.56 | ||||||||||
Total noninterest expense | $ | 35,856 | $ | 27,218 | $ | 8,638 | 31.74 | % |
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 $8.62019 decreased $1.3 million, or 31.7%3.1%, and $28.1$1.1 million, or 37.9%1.4%, respectively, compared to the same periods in 2016.2018. The increasedecrease in noninterest expense was predominately impactedlargely driven by increased personnel, equipment expenselower levels of travel, data processing, title insurance closing services and other expenses primarily driven by the significant growth of the Company's core business.while salaries and employee benefits remained somewhat static. Changes in various components of noninterest expense are discussed below.
Salaries and employee benefits
: Total personnel expense for the three andOf the total stock basedstock-based compensation $286 thousand for the third quarter of 2017 and $1.0 million for the first nine months of 2017 included in salaries and employee benefits, is$357 thousand for both the second quarter of 2019 and 2018, and $709 thousand for both the first half of 2019 and 2018 were 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 Plans 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.
Travel expense
: For the three andProfessional services expense
: For the three andData processing expense
Equipment expense:For the three and six months ended June 30, 2019, equipment expense increased $730$871 thousand, or 58.3%25.9%, and $1.7$1.1 million, or 43.3%17.4%, respectively, compared to the same periods in 2016. The primary driver2018. Primary factors contributing to this increase were the depreciation of the increase in data processing expense was the growth in our loansolar panels arising from operating lease activities and deposit portfolios and the development of a new deposit platform.
Other expenses: For the three and ninesix months ended SeptemberJune 30, 2017, the total costs associated with equipment increased $1.62019, other expenses decreased $988 thousand and $2.0 million, or 264.6%, and $3.3 million, or 195.1%, respectively, compared to the same period in 2016. A major factor behind
Income Tax Expense
The effective tax rate for the both the three and ninesix months ended SeptemberJune 30, 2017, total title insurance closing services expense2019 was $687 thousand11.8% compared to the effective rate of 3.3% and $1.9 million, respectively.
Discussion and Analysis of Financial Condition
June 30, 20172019 vs. December 31, 2016
Total assets at SeptemberJune 30, 20172019 were $2.43$4.27 billion, an increase of $676.9$603.9 million, or 38.6%16.5%, compared to total assets of $1.76$3.67 billion at December 31, 2016.2018. The growth in total assets was principally driven by the following:
• | Increased investment securities available-for-sale of $195.8 million which was driven by the Company’s strategic plan to enhance liquidity and improve asset-liability repricing mix; and |
• | Growth in loans and leases held for sale and held for investment of $552.5 million resulting from strong originations and higher levels of balances being retained to support the Company's strategic plan to hold more loans. |
Cash and cash equivalents, comprised of cash and due from banks dueand federal funds sold, was $183.4 million at June 30, 2019, a decrease of $133.4 million, or 42.1%, compared to $316.8 million at December 31, 2018. This decrease reflects the successful secondary offering completed in AugustCompany’s maximization of 2017returns on liquid assets by deployment of $113.1funds into higher-yielding available-for-sale securities.
Total investment securities increased $195.8 million during the first six months of 2019, from $380.5 million at December 31, 2018, to $576.3 million at June 30, 2019, an increase of 51.5%. The Company increased its investment securities position during the first quarter of 2019 as part of its strategy to improve the returns of an enhanced liquidity profile and growthimprove asset-liability repricing mix. At June 30, 2019, the investment portfolio was comprised of U.S. treasury, U.S. government agency, mortgage-backed securities and municipal bonds.
Loans held for sale increased $170.4 million, or 24.8%, during the first six months of 2019, from deposit gathering campaigns generating $527.8$687.4 million in new deposits;
Loans and leases held for investment increased $382.1 million, or 20.7%, during the first six months of 2019, from $1.84 billion at December 31, 2018, to $2.23 billion at June 30, 2019. The increase was primarily the result of $915.9 million in loan and lease originationsorigination activities during the first six months of 2019 combined with longer retention timesthe earlier mentioned strategic shift to retain higher levels of loans held for sale, comprised largely of loans intentionally held for longer periods and those in newer verticals which require a period of loan advances to become fully funded prior to being sold;
Premises and equipment, relatednet, increased $18.6 million, or 7.1%, during the first six months of 2019 which was primarily todriven by construction of a new aircraft hangar, the addition of two new aircraft in replacement of two older onesfacilities and infrastructure to accommodate Company growth and the addition of solar panels to meet leasing commitments;
Foreclosed assets largely related to:
Servicing assets decreased $6.0 million, or 12.5%, to $41.7 million during the first ninesix months of 2017,2019 due to the reduced level of loan sales during the quarter combined with amortization of the outstanding balance of guaranteed loans sold. At June 30, 2019, the outstanding balance of government guaranteed loans sold in the secondary market was $2.87 billion compared to $3.05 billion at December 31, 2018.
Operating leases right-of-use assets and operating lease liabilities were additions to the balance sheet pursuant to the adoption of the new lease standard (ASU No. 2016-02) effective January 1, 2019. These balance sheet accounts reflect the Company’s rights and obligations created by almost all leases in which it is a lessee with remaining terms of more than 12 months. See Note 1. Basis of Presentation and Note 6. Leases for more information on the adoption of this new standard.
Other assets decreased $25.0 million, or 16.0% from $71.1$156.2 million at December 31, 2016,2018 to $76.6$131.2 million at SeptemberJune 30, 2017,2019. This decrease was principally the result of a reduction in taxes receivable of $13.8 million, largely comprised of a recent tax refund, and the sale of corporate aircraft carried at $10.5 million which was classified as held-for-sale during the fourth quarter of 2018.
Total deposits were $3.72 billion at June 30, 2019, an increase of 7.8%. The portfolio is comprised of US government agency securities, residential mortgage-backed securities and a mutual fund.
Other liabilities were $30.2 million at June 30, 2019, an increase of $4.3 million, or 3.5%16.8%, during the first nine months of 2017, from $27.8$25.8 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.
Shareholders’ equity at SeptemberJune 30, 20172019 was $364.6$519.0 million as compared to $222.8$493.6 million at December 31, 2016.2018. The book value per share was $9.15$12.90 at SeptemberJune 30, 20172019 compared to a book value per share of $6.51$12.29 at December 31, 2016.2018. Average equity to average assets was 12.2%12.7% for the ninesix months ended SeptemberJune 30, 20172019 compared to 14.6%13.8% for the full year ended December 31, 2016.2018. 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 ninesix months ended SeptemberJune 30, 20172019 of $28.8$7.3 million combined with stock basedother comprehensive income of $14.6 million and stock-based compensation expense of $5.7$5.8 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$2.4 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 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 is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan are applied to the outstanding principal as determined at the time of collection of the loan.
Troubled debt restructurings occur when, because of economic or legal reasons pertaining to the debtor’s financial difficulties, 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 restructurings at the dates indicated.
|
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Nonaccrual loans: |
|
|
|
|
|
|
|
|
Total nonperforming loans (all on nonaccrual) |
| $ | 65,473 |
|
| $ | 57,690 |
|
Total accruing loans past due 90 days or more |
|
| — |
|
|
| — |
|
Foreclosed assets |
|
| 6,044 |
|
|
| 1,094 |
|
Total troubled debt restructurings |
|
| 31,995 |
|
|
| 27,495 |
|
Less nonaccrual troubled debt restructurings |
|
| (4,961 | ) |
|
| (6,494 | ) |
Total performing troubled debt restructurings |
|
| 27,034 |
|
|
| 21,001 |
|
Total nonperforming assets and troubled debt restructurings |
| $ | 98,551 |
|
| $ | 79,785 |
|
Total nonperforming loans to total loans held for investment |
|
| 2.94 | % |
|
| 3.13 | % |
Total nonperforming loans to total assets |
|
| 1.53 | % |
|
| 1.57 | % |
Total nonperforming assets and troubled debt restructurings to total assets |
|
| 2.31 | % |
|
| 2.17 | % |
|
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Nonaccrual loans guaranteed by U.S. government: |
|
|
|
|
|
|
|
|
Total nonperforming loans guaranteed by the SBA (all on nonaccrual) |
| $ | 47,121 |
|
| $ | 43,202 |
|
Total accruing loans past due 90 days or more guaranteed by the SBA |
|
| — |
|
|
| — |
|
Foreclosed assets guaranteed by the SBA |
|
| 4,816 |
|
|
| 946 |
|
Total troubled debt restructurings guaranteed by the SBA |
|
| 21,586 |
|
|
| 19,780 |
|
Less nonaccrual troubled debt restructurings guaranteed by the SBA |
|
| (4,317 | ) |
|
| (5,684 | ) |
Total performing troubled debt restructurings guaranteed by SBA |
|
| 17,269 |
|
|
| 14,096 |
|
Total nonperforming assets and troubled debt restructurings guaranteed by the SBA |
| $ | 69,206 |
|
| $ | 58,244 |
|
Total nonperforming loans not guaranteed by the SBA to total held for investment loans |
|
| 0.82 | % |
|
| 0.79 | % |
Total nonperforming loans not guaranteed by the SBA to total assets |
|
| 0.43 | % |
|
| 0.39 | % |
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets |
|
| 0.69 | % |
|
| 0.59 | % |
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 | % |
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 | % |
Total nonperforming assets and troubled debt restructurings at SeptemberJune 30, 20172019 were $27.1$98.6 million, which represented a $497 thousand,$18.8 million, or 1.8%23.5%, decreaseincrease from December 31, 2016.2018. Total nonperforming assets at SeptemberJune 30, 20172019 were comprised of $22.4$65.5 million in nonaccrual loans and $2.2$6.0 million in foreclosed assets. Of the $27.1$98.6 million of nonperforming assets and troubled debt restructurings ("TDRs"), $21.0$69.2 million carried an SBA guarantee, leaving an unguaranteed exposure of $6.1$29.3 million in total nonperforming assets and TDRs at SeptemberJune 30, 2017. The2019. This represents an increase of $7.8 million, or 36.2%, from an unguaranteed exposure of $21.5 million at December 31, 2018. The vast majority of this increase in total nonperforming assets and TDRs at December 31, 2016 was $7.1 million. Unguaranteed exposure relatingarose from our mature verticals. See the below discussion related to nonperforming assetsthe change in potential problem and TDRs at September 30, 2017 decreased by $970 thousand, or 13.7%, compared to December 31, 2016.
As a percentage of the Bank’s total capital, nonperforming loans represented 10.2%14.0% at SeptemberJune 30, 2017,2019, compared to nonperforming loans of 15.3% of the Bank’s total capital14.8% at December 31, 2016.2018. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at SeptemberJune 30, 20172019 and December 31, 20162018 were 1.5%3.9% and 3.1%3.7%, respectively.
As of SeptemberJune 30, 20172019, and December 31, 2016,2018, potential problem and impaired loans and leases totaled $66.0$178.8 million and $64.1$148.0 million, respectively. Risk Grades 5 through 8 represent the spectrum of criticized and impaired loans.loans and leases. At SeptemberJune 30, 2017,2019, the portion of criticized loans and leases guaranteed by the SBA or USDA totaled $28.2$88.0 million resulting in unguaranteed exposure risk of $37.8$90.8 million, or 3.3%5.3% of total held for investment unguaranteed exposure. This compares to the December 31, 20162018 portion of criticized loans and leases guaranteed by the SBA or USDA which totaled $29.0$69.3 million resulting in unguaranteed exposure risk of $35.1$78.7 million, or 4.0%5.1% of total held for investment unguaranteed exposure. As of SeptemberJune 30, 20172019, loans and leases in Veterinary,Other Industries, Healthcare, Agriculture and Independent Pharmacies industry verticals comprise the largest portion of the total potential problem and impaired loans at 28.5%29.3%, 30.8%24.7%, 15.5% and 20.4%11.9%, respectively. With 29.3% of total potential problem and impaired loans and leases in the Other Industries, 11.5% was related to Hotel and 10.0% was related to Wine and Craft Beverage industries. As of December 31, 20162018, loansand leases in the Healthcare, Other Industries, Independent Pharmacies and Veterinary industriesIndustry verticals comprise the largest portion of the total potential problem and impaired loans and leases at 30.8%28.0%, 18.6%, 15.5% and 32.9%15.0%, respectively. With 18.6% of total potential problem and impaired loans and leases in the Other Industries, 8.7% was related to Government Contractors and 6.8% was related to Wine and Craft Beverage industries. No systemic issues were identified in the first six months of 2019. The increase in potential problem and impaired loans and leases, which were comprised of a relatively small number of borrowers, was largely concentrated in our more mature verticals. Furthermore, the Company believes that its underwriting and credit quality standards have improved as the business has matured.
The Bank does not classify loans and leases that experience insignificant payment delays and payment shortfalls as impaired. The Bank considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would 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, credit will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. To date, the only types of short termshort-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.
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. At SeptemberManagement implements a proactive approach to identifying and classifying loans and leases as special mention, Risk Grade 5. For example, at June 30, 20172019, and December 31, 2016,2018, Risk Grade 5 loans and leases totaled $30.5$87.0 million and $32.1$65.5 million, respectively. 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, 2016during the first six months of 2019 was principally confined to September 30, 2017 in twonine relationships across four verticals; AgricultureHotels ($1.18.1 million or 95.0%37.5%), Self Storage ($6.7 million or 31.1%), Wine and Craft Beverage ($6.3 million or 29.1% of increase) and Investment AdvisorsFuneral Home & Cemetery ($464 thousand3.6 million or 20.7% of decrease)16.8%). The overallThese increases were somewhat offset by a decrease in Risk GradeGovernment Contracting ($9.0 million). The increase in risk grade 5 loans from December 31, 2016in 2019 was due to Septemberthe continued maturity of these verticals. At June 30, 2017 was the result of routine credit monitoring in the ongoing risk grade management process. At September 30, 2017,2019, approximately 99.9%98.6% of loans classified as Risk Grade 5 are performing with no current payments past due.due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, 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 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 charged 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 collectibilitycollectability 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 accounting
The ALLL of $18.2$32.4 million at December 31, 20162018 increased by $2.8$5.6 million, or 15.5%17.3%, to $21.0$38.0 million at SeptemberJune 30, 2017.2019. The ALLL, as a percentage of loans and leases held for investment, amounted to 1.8%1.7% at SeptemberJune 30, 20172019 and 2.0%1.8% at December 31, 2016.2018. The declining level ofincrease in the allowance for loan and lease losses in relation toas a percentage of total loans and leases held for investment was principally driven by improvementslargely attributable to continued growth in industry-specific loss rates and lower levels of classified loans combined with the migration to Company-specific loss rates for maturing verticals which was partially offset by an increase in reserves due to loan and lease volume andportfolio, with the effectmagnitude somewhat softened by the greater levels of higher netguaranteed loan production combined with decreased levels of charge-offs in the first half of 2019, as addressed more fully in the Provision for Loan and Lease Losses section of Results of Operations. General reserves as a percentage of non-impaired loans amounted to 1.56%1.26% at SeptemberJune 30, 20172019 and 1.70%1.34% at December 31, 2016. See2018. Also, see the aforementioned Provision for Loan and Lease Losses section of this section for a discussion of the Company's charge-off experience.
Actual past due held for investment loans and leases have decreased by $11.4 million since December 31, 20162018. Of this decrease, $7.9 million was related to a single loan which was temporarily past due at year end and returned to current status early in the first quarter of 2019. Excluding this single loan, total past dues decreased $3.5 million since December 31, 2018. Total loans 90 or more days past due decreased $281 thousand, or 0.7%, compared to December 31, 2018. The decrease was primarily the result of the decline in the guaranteed portion of past due loans which declined $2.9 million compared to December 31, 2018. At June 30, 2019 and December 31, 2018, total held for investment unguaranteed loans and leases past due as managementa percentage of total held for investment unguaranteed loans and leases was 0.90% and 1.56%, respectively. Management continues to actively monitor and work to improve asset quality. Management believes the ALLL of $21.0$38.0 million at SeptemberJune 30, 20172019 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current events that it believes to be reasonable, but which may or may not be valid. Thus, there can be 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, thus adversely affecting the Company’s operating results. Additional information on the ALLL is presented in Note 65 - Loans and Leases Held for Investment and Allowance for Loan and Lease Losses 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, 2017,2019, the total amount of these four items was $589.1 million,$1.10 billion, or 25.1%25.7% of total assets, an increase of $93.3$56.9 million from $495.8 million,$1.04 billion, or 28.2%28.4% of total assets, at December 31, 2016.
Loans and other assets are funded primarily by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and an increased amount of long-term brokered depositslong term wholesale deposit base have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. Additionally, anthe investment securities portfolio is available for both immediate and secondary liquidity purposes.
At SeptemberJune 30, 2017,2019, 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$576.3 million available 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’s significant fixed and determinable contractual obligations by payment date as of SeptemberJune 30, 2017.2019. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities.
|
| 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 |
| $ | 1,164,788 |
|
| $ | 1,164,788 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Time deposits |
|
| 2,556,809 |
|
|
| 1,965,696 |
|
|
| 460,423 |
|
|
| 70,200 |
|
|
| 60,490 |
|
Short term borrowings |
|
| 1,345 |
|
|
| 1,345 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Long term borrowings |
|
| 16 |
|
|
| 5 |
|
|
| 9 |
|
|
| 2 |
|
|
| — |
|
Operating lease obligations |
|
| 2,525 |
|
|
| 889 |
|
|
| 939 |
|
|
| 610 |
|
|
| 87 |
|
Total |
| $ | 3,725,483 |
|
| $ | 3,132,723 |
|
| $ | 461,371 |
|
| $ | 70,812 |
|
| $ | 60,577 |
|
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 SeptemberJune 30, 20172019, and December 31, 2016,2018, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of $4.4$1.6 million and $4.9$2.8 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. This method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, or market value.value nor growth. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk.
The balance sheet is asset-sensitive with a total cumulative gap position of 5.92%2.0% at SeptemberJune 30, 2017.2019. The cash on handasset sensitivity is relatively stable from the August 2017 capital raise and growth in savings deposits during the quarter has increased the asset-liability sensitivity of the Company in the current period.prior quarter. 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 and the longer duration of indeterminate term deposits.
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 to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; provide financial flexibility to support future growth and client needs; comply with relevant laws, regulations, and supervisory guidance; achieve optimal credit ratings for the Company and its subsidiaries; and 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.
Capital amounts and ratios as of SeptemberJune 30, 20172019 and December 31, 2016,2018, 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, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 (to Risk-Weighted Assets) |
| $ | 481,414 |
|
|
| 15.94 | % |
| $ | 135,935 |
|
|
| 4.50 | % |
| N/A |
|
| N/A |
| ||
Total Capital (to Risk-Weighted Assets) |
| $ | 519,177 |
|
|
| 17.19 | % |
| $ | 241,663 |
|
|
| 8.00 | % |
| N/A |
|
| N/A |
| ||
Tier 1 Capital (to Risk-Weighted Assets) |
| $ | 481,414 |
|
|
| 15.94 | % |
| $ | 181,247 |
|
|
| 6.00 | % |
| N/A |
|
| N/A |
| ||
Tier 1 Capital (to Average Assets) |
| $ | 481,414 |
|
|
| 11.77 | % |
| $ | 163,664 |
|
|
| 4.00 | % |
| N/A |
|
| N/A |
| ||
Bank - June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 (to Risk-Weighted Assets) |
| $ | 430,767 |
|
|
| 14.43 | % |
| $ | 134,329 |
|
|
| 4.50 | % |
| $ | 194,031 |
|
|
| 6.50 | % |
Total Capital (to Risk-Weighted Assets) |
| $ | 468,089 |
|
|
| 15.68 | % |
| $ | 238,807 |
|
|
| 8.00 | % |
| $ | 298,509 |
|
|
| 10.00 | % |
Tier 1 Capital (to Risk-Weighted Assets) |
| $ | 430,767 |
|
|
| 14.43 | % |
| $ | 179,105 |
|
|
| 6.00 | % |
| $ | 238,807 |
|
|
| 8.00 | % |
Tier 1 Capital (to Average Assets) |
| $ | 430,767 |
|
|
| 10.58 | % |
| $ | 162,917 |
|
|
| 4.00 | % |
| $ | 203,646 |
|
|
| 5.00 | % |
Consolidated - December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 (to Risk-Weighted Assets) |
| $ | 467,033 |
|
|
| 17.10 | % |
| $ | 122,937 |
|
|
| 4.50 | % |
| N/A |
|
| N/A |
| ||
Total Capital (to Risk-Weighted Assets) |
| $ | 499,467 |
|
|
| 18.28 | % |
| $ | 218,555 |
|
|
| 8.00 | % |
| N/A |
|
| N/A |
| ||
Tier 1 Capital (to Risk-Weighted Assets) |
| $ | 467,033 |
|
|
| 17.10 | % |
| $ | 163,917 |
|
|
| 6.00 | % |
| N/A |
|
| N/A |
| ||
Tier 1 Capital (to Average Assets) |
| $ | 467,033 |
|
|
| 13.40 | % |
| $ | 139,453 |
|
|
| 4.00 | % |
| N/A |
|
| N/A |
| ||
Bank - December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 (to Risk-Weighted Assets) |
| $ | 385,030 |
|
|
| 14.35 | % |
| $ | 120,706 |
|
|
| 4.50 | % |
| $ | 174,353 |
|
|
| 6.50 | % |
Total Capital (to Risk-Weighted Assets) |
| $ | 417,609 |
|
|
| 15.57 | % |
| $ | 214,588 |
|
|
| 8.00 | % |
| $ | 268,235 |
|
|
| 10.00 | % |
Tier 1 Capital (to Risk-Weighted Assets) |
| $ | 385,030 |
|
|
| 14.35 | % |
| $ | 160,941 |
|
|
| 6.00 | % |
| $ | 214,588 |
|
|
| 8.00 | % |
Tier 1 Capital (to Average Assets) |
| $ | 385,030 |
|
|
| 11.22 | % |
| $ | 137,304 |
|
|
| 4.00 | % |
| $ | 171,630 |
|
|
| 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. |
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, 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 the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.
• | Determination of the allowance for loan and lease losses; |
• | Valuation of servicing assets; |
• | Income taxes; |
• | Restricted stock unit awards with market price conditions; |
• | Valuation of foreclosed assets; |
• | Business combination and goodwill; and |
• | Unconsolidated joint ventures. |
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 the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of net interest income is largely dependent upon the effective management 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 through management of the balance sheet composition, maturities, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.
To identify and manage its interest rate risk, 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 effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in each of the product lines offered by the Bank. Assumptions are inherently uncertain, and the measurement 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 results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.
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, 2017,2019, 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, 20172019 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 during the three months ended SeptemberJune 30, 20172019 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
In the ordinary course of operations, the Company is party to various legal proceedings. The Company is not involved in, nor has it terminated during the three and nine months ended SeptemberJune 30, 2017,2019, any pending legal proceedings other than nonmaterial proceedings occurring in the ordinary course of business.
Item 1A. Risk Factors
There have been no material changes to the risk factors that have been previously disclosed in these filings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits.
Exhibits
INDEX TO EXHIBITS
Exhibit No. | Description of Exhibit | ||
3.1 | |||
3.2 | |||
4.1 | |||
4.2 | |||
10.1 | |||
10.2 | Amendment to 2008 Nonstatutory Stock Option Plan effective July 1, 2019* # | ||
31.1 | |||
31.2 | |||
32 | |||
101 | Interactive data files pursuant to Rule 405 of Regulation | ||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Indicates a document being filed with this Form 10-Q. |
** | |
Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Live Oak Bancshares, Inc. | |||
( Registrant) | |||
Date: | By: | / s/ S. Brett Caines | |
S. Brett Caines | |||
Chief Financial Officer |
67