Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended SeptemberJune 30, 2017

2020

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

liveoakbancshareslogo.jpg

LIVE OAK BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

North Carolina

26-4596286

North Carolina26-4596286

(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  ý    NO  ¨

YesNo

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  ý    NO  ¨

YesNo

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

x

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company

¨

Emerging growth company

x

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  ¨    NO  ý

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 NovemberAugust 4, 2017,2020, there were 35,233,24137,817,698 shares of the registrant’s voting common stock outstanding and 4,643,5302,715,531 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

2020

TABLE OF CONTENTS


Page

PART I. FINANCIAL INFORMATION

Page
PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172020 and December 31, 20162019

1

Condensed Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

2

Condensed Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

3

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the NineThree and Six Months Ended SeptemberJune 30, 20172020 and 20162019

4

Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

6

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

60

Item 4.

Controls and Procedures

60

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

61

Item 1A.

Risk Factors

61

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3.

Defaults Upon Senior Securities

63

Item 4.

Mine Safety Disclosures

63

Item 5.

Other Information

63

Item 6.

64

64

XSignatures

65






PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of SeptemberJune 30, 20172020 (unaudited) and December 31, 2016*

2019*

(Dollars in thousands)

 

 

June 30,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,256,958

 

 

$

124,610

 

Federal funds sold

 

 

91,188

 

 

 

96,787

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,250

 

Investment securities available-for-sale

 

 

779,794

 

 

 

540,045

 

Loans held for sale (includes $32,071 and $16,198 measured at fair value,

   respectively)

 

 

976,594

 

 

 

966,447

 

Loans and leases held for investment (includes $834,602 and $824,520 measured

   at fair value, respectively)

 

 

4,650,056

 

 

 

2,627,286

 

Allowance for credit losses on loans and leases

 

 

(44,083

)

 

 

(28,234

)

Net loans and leases

 

 

4,605,973

 

 

 

2,599,052

 

Premises and equipment, net

 

 

269,063

 

 

 

279,099

 

Foreclosed assets

 

 

5,660

 

 

 

5,612

 

Servicing assets

 

 

33,834

 

 

 

35,365

 

Operating lease right-of-use assets

 

 

2,886

 

 

 

2,427

 

Other assets

 

 

179,954

 

 

 

156,134

 

Total assets

 

$

8,209,154

 

 

$

4,812,828

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

53,938

 

 

$

51,965

 

Interest-bearing

 

 

5,819,354

 

 

 

4,175,015

 

Total deposits

 

 

5,873,292

 

 

 

4,226,980

 

Borrowings

 

 

1,721,029

 

 

 

14

 

Operating lease liabilities

 

 

3,079

 

 

 

2,619

 

Other liabilities

 

 

63,319

 

 

 

50,829

 

Total liabilities

 

 

7,660,719

 

 

 

4,280,442

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, no par value, 1,000,000 authorized, NaN issued or outstanding

   at June 30, 2020 and December 31, 2019

 

 

 

 

 

 

Class A common stock, no par value, 100,000,000 shares authorized, 37,810,101

   and 37,401,443 shares issued and outstanding at June 30, 2020 and

   December 31, 2019, respectively

 

 

319,542

 

 

 

309,526

 

Class B common stock, no par value, 10,000,000 shares authorized, 2,715,531 and

   2,915,531 shares issued and outstanding at June 30, 2020 and December 31, 2019,

   respectively

 

 

28,753

 

 

 

30,871

 

Retained earnings

 

 

174,837

 

 

 

180,265

 

Accumulated other comprehensive income

 

 

25,303

 

 

 

11,724

 

Total shareholders’ equity

 

 

548,435

 

 

 

532,386

 

Total liabilities and shareholders’ equity

 

$

8,209,154

 

 

$

4,812,828

 

*

Derived from audited consolidated financial statements.

 September 30,
2017
 December 31,
2016*
Assets   
Cash and due from banks$260,907
 $238,008
Certificates of deposit with other banks3,250
 7,250
Investment securities available-for-sale76,575
 71,056
Loans held for sale692,586
 394,278
Loans and leases held for investment1,169,887
 907,566
Allowance for loan and lease losses(21,027) (18,209)
Net loans and leases1,148,860
 889,357
Premises and equipment, net129,233
 64,661
Foreclosed assets2,231
 1,648
Servicing assets53,392
 51,994
Other assets65,155
 37,009
Total assets$2,432,189
 $1,755,261
Liabilities and Shareholders’ Equity   
Liabilities   
Deposits:   
Noninterest-bearing$55,260
 $27,990
Interest-bearing1,957,631
 1,457,086
Total deposits2,012,891
 1,485,076
Long term borrowings26,872
 27,843
Other liabilities27,835
 19,495
Total liabilities2,067,598
 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, respectively266,336
 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, respectively49,168
 50,015
Retained earnings49,707
 23,518
Accumulated other comprehensive loss(620) (652)
Total equity364,591
 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, 20172020 and 20162019 (unaudited)

(Dollars in thousands, except per share data)

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and fees on loans

 

$

62,022

 

 

$

49,914

 

 

$

120,983

 

 

$

94,880

 

Investment securities, taxable

 

 

3,786

 

 

 

4,116

 

 

 

7,548

 

 

 

7,433

 

Other interest earning assets

 

 

1,009

 

 

 

1,108

 

 

 

1,759

 

 

 

2,747

 

Total interest income

 

 

66,817

 

 

 

55,138

 

 

 

130,290

 

 

 

105,060

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

25,121

 

 

 

21,203

 

 

 

48,376

 

 

 

40,520

 

Borrowings

 

 

798

 

 

 

 

 

 

855

 

 

 

 

Total interest expense

 

 

25,919

 

 

 

21,203

 

 

 

49,231

 

 

 

40,520

 

Net interest income

 

 

40,898

 

 

 

33,935

 

 

 

81,059

 

 

 

64,540

 

Provision for loan and lease credit losses

 

 

9,958

 

 

 

3,412

 

 

 

21,750

 

 

 

6,443

 

Net interest income after provision for loan and lease credit

   losses

 

 

30,940

 

 

 

30,523

 

 

 

59,309

 

 

 

58,097

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

 

6,691

 

 

 

7,063

 

 

 

13,113

 

 

 

14,473

 

Loan servicing asset revaluation

 

 

(1,571

)

 

 

(3,245

)

 

 

(6,263

)

 

 

(7,285

)

Net gains on sales of loans

 

 

10,695

 

 

 

6,015

 

 

 

21,807

 

 

 

10,213

 

Net (loss) gain on loans accounted for under the fair value

   option

 

 

(1,089

)

 

 

2,791

 

 

 

(11,727

)

 

 

4,874

 

Equity method investments income (loss)

 

 

(2,243

)

 

 

(1,736

)

 

 

(4,721

)

 

 

(3,750

)

Equity security investments gains (losses), net

 

 

161

 

 

 

32

 

 

 

97

 

 

 

135

 

Gain on sale of investment securities available-for-sale, net

 

 

734

 

 

 

 

 

 

655

 

 

 

5

 

Lease income

 

 

2,635

 

 

 

2,369

 

 

 

5,259

 

 

 

4,694

 

Management fee income

 

 

1,206

 

 

 

91

 

 

 

2,850

 

 

 

91

 

Construction supervision fee income

 

 

684

 

 

 

386

 

 

 

1,074

 

 

 

1,165

 

Other noninterest income

 

 

4,508

 

 

 

884

 

 

 

6,009

 

 

 

3,351

 

Total noninterest income

 

 

22,411

 

 

 

14,650

 

 

 

28,153

 

 

 

27,966

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

30,782

 

 

 

21,990

 

 

 

58,845

 

 

 

43,845

 

Travel expense

 

 

364

 

 

 

1,541

 

 

 

2,145

 

 

 

2,741

 

Professional services expense

 

 

1,385

 

 

 

1,621

 

 

 

3,322

 

 

 

3,803

 

Advertising and marketing expense

 

 

624

 

 

 

1,665

 

 

 

1,985

 

 

 

3,029

 

Occupancy expense

 

 

1,955

 

 

 

1,848

 

 

 

4,376

 

 

 

3,457

 

Data processing expense

 

 

2,764

 

 

 

1,947

 

 

 

5,921

 

 

 

4,346

 

Equipment expense

 

 

4,652

 

 

 

4,239

 

 

 

9,287

 

 

 

7,564

 

Other loan origination and maintenance expense

 

 

2,492

 

 

 

1,708

 

 

 

4,948

 

 

 

3,347

 

Renewable energy tax credit investment impairment

 

 

 

 

 

602

 

 

 

 

 

 

602

 

FDIC insurance

 

 

1,721

 

 

 

699

 

 

 

3,231

 

 

 

1,334

 

Other expense

 

 

1,361

 

 

 

1,716

 

 

 

3,531

 

 

 

3,709

 

Total noninterest expense

 

 

48,100

 

 

 

39,576

 

 

 

97,591

 

 

 

77,777

 

Income (loss) before taxes

 

 

5,251

 

 

 

5,597

 

 

 

(10,129

)

 

 

8,286

 

Income tax expense (benefit)

 

 

1,474

 

 

 

662

 

 

 

(6,304

)

 

 

979

 

Net income (loss)

 

$

3,777

 

 

$

4,935

 

 

$

(3,825

)

 

$

7,307

 

Basic earnings (loss) per share

 

$

0.09

 

 

$

0.12

 

 

$

(0.10

)

 

$

0.18

 

Diluted earnings (loss) per share

 

$

0.09

 

 

$

0.12

 

 

$

(0.10

)

 

$

0.18

 

 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, taxable325
 337
 964
 840
Other interest earning assets870
 264
 1,682
 650
Total interest income28,172
 15,562
 72,936
 40,358
Interest expense       
Deposits6,758
 3,689
 16,893
 9,376
Borrowings389
 242
 985
 725
Total interest expense7,147
 3,931
 17,878
 10,101
Net interest income21,025
 11,631
 55,058
 30,257
Provision for loan and lease losses2,426
 3,806
 5,481
 8,692
Net interest income after provision for loan and lease losses18,599
 7,825
 49,577
 21,565
Noninterest income       
Loan servicing revenue6,490
 5,860
 18,587
 15,725
Loan servicing asset revaluation(3,691) (3,421) (6,864) (5,051)
Net gains on sales of loans18,148
 21,833
 55,276
 52,813
Gain on sale of investment securities available-for-sale
 1
 
 1
Construction supervision fee income362
 502
 1,077
 1,799
Title insurance income1,968
 
 5,803
 
Other noninterest income1,783
 657
 3,601
 1,925
Total noninterest income25,060
 25,432
 77,480
 67,212
Noninterest expense       
Salaries and employee benefits19,037
 17,471
 55,687
 45,875
Travel expense2,289
 2,218
 6,035
 6,394
Professional services expense1,068
 907
 4,228
 2,345
Advertising and marketing expense1,516
 1,097
 4,977
 3,425
Occupancy expense1,473
 1,058
 4,018
 3,306
Data processing expense1,982
 1,252
 5,536
 3,864
Equipment expense2,228
 611
 5,005
 1,696
Other loan origination and maintenance expense1,601
 806
 3,587
 2,001
FDIC insurance858
 210
 2,308
 507
Title insurance closing services expense687
 
 1,877
 
Other expense3,117
 1,588
 8,883
 4,648
Total noninterest expense35,856
 27,218
 102,141
 74,061
Income before taxes7,803
 6,039
 24,916
 14,716
Income tax (benefit) expense(5,059) 2,561
 (3,853) 6,432
Net income12,862
 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, 20172020 and 20162019 (unaudited)

(Dollars in thousands)

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

3,777

 

 

$

4,935

 

 

$

(3,825

)

 

$

7,307

 

Other comprehensive income before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on investment securities

   arising during the period

 

 

10,673

 

 

 

15,637

 

 

 

18,522

 

 

 

19,155

 

Reclassification adjustment for gain on sale of

   securities available-for-sale included in net income

 

 

(734

)

 

 

 

 

 

(655

)

 

 

(5

)

Other comprehensive income before tax

 

 

9,939

 

 

 

15,637

 

 

 

17,867

 

 

 

19,150

 

Income tax expense

 

 

(2,385

)

 

 

(3,753

)

 

 

(4,288

)

 

 

(4,596

)

Other comprehensive income, net of tax

 

 

7,554

 

 

 

11,884

 

 

 

13,579

 

 

 

14,554

 

Total comprehensive income

 

$

11,331

 

 

$

16,819

 

 

$

9,754

 

 

$

21,861

 

 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



Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the ninethree and six months ended SeptemberJune 30, 20172020 and 20162019 (unaudited)

(Dollars in thousands)

 

 

Three Months Ended

 

 

 

Common stock

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Retained

 

 

comprehensive

 

 

Total

 

 

 

Class A

 

 

Class B

 

 

Amount

 

 

earnings

 

 

income

 

 

equity

 

Balance at March 31, 2020

 

 

37,664,670

 

 

 

2,715,531

 

 

$

343,747

 

 

$

172,276

 

 

$

17,749

 

 

$

533,772

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,777

 

 

 

 

 

 

3,777

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,554

 

 

 

7,554

 

Issuance of restricted stock

 

 

21,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

 

 

 

 

 

 

(61

)

 

 

 

 

 

 

 

 

(61

)

Stock option exercises

 

 

33,539

 

 

 

 

 

 

148

 

 

 

 

 

 

 

 

 

148

 

Stock option based compensation expense

 

 

 

 

 

 

 

 

406

 

 

 

 

 

 

 

 

 

406

 

Restricted stock expense

 

 

 

 

 

 

 

 

2,933

 

 

 

 

 

 

 

 

 

2,933

 

Issuance of common stock in connection with

   acquisition of wholly-owned subsidiary

 

 

89,927

 

 

 

 

 

 

1,122

 

 

 

 

 

 

 

 

 

1,122

 

Cash dividends ($0.03 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,216

)

 

 

 

 

 

(1,216

)

Balance at June 30, 2020

 

 

37,810,101

 

 

 

2,715,531

 

 

$

348,295

 

 

$

174,837

 

 

$

25,303

 

 

$

548,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 Common stock 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Non-
controlling
interest
 
Total
equity
Shares   
Class A Class B Amount 
Balance at December 31, 201529,449,369
 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 stock16,745
 
 
 
 
 
 
Stock option exercises25,406
 
 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, 201629,491,520
 4,723,530
 $195,299
 $18,723
 $130
 $
 $214,152
Balance at December 31, 201629,530,072
 4,723,530
 $199,981
 $23,518
 $(652) $
 $222,847
Net income
 
 
 28,769
 
 
 28,769
Other comprehensive income
 
 
 
 32
 
 32
Issuance of restricted stock306,902
 
 
 
 
 
 
Withholding cash issued in lieu of restricted stock issuance
 
 (4,891) 
 
 
 (4,891)
Employee stock purchase program22,634
 
 445
 
 
 
 445
Stock option exercises76,285
 
 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 sale80,000
 (80,000) 
 
 
 
 
Issuance of common stock in connection with secondary offering, net of issue costs5,175,000
 
 113,096
 
 
 
 113,096
Dividends (distributions to shareholders)
 
 
 (2,580) 
 
 (2,580)
Balance at September 30, 201735,218,617
 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, 2020 and 2019 (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, 2019

 

 

37,401,443

 

 

 

2,915,531

 

 

$

340,397

 

 

$

180,265

 

 

$

11,724

 

 

$

532,386

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,825

)

 

 

 

 

 

(3,825

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,579

 

 

 

13,579

 

Issuance of restricted stock

 

 

29,389

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

 

 

 

 

 

 

(109

)

 

 

 

 

 

 

 

 

(109

)

Employee stock purchase program

 

 

25,161

 

 

 

 

 

 

232

 

 

 

 

 

 

 

 

 

232

 

Stock option exercises

 

 

64,181

 

 

 

 

 

 

406

 

 

 

 

 

 

 

 

 

406

 

Stock option based compensation expense

 

 

 

 

 

 

 

 

772

 

 

 

 

 

 

 

 

 

772

 

Restricted stock expense

 

 

 

 

 

 

 

 

5,475

 

 

 

 

 

 

 

 

 

5,475

 

Issuance of common stock in connection with

   acquisition of wholly-owned subsidiary

 

 

89,927

 

 

 

 

 

 

1,122

 

 

 

 

 

 

 

 

 

1,122

 

Non-voting common stock converted to

   voting common stock in private sale

 

 

200,000

 

 

 

(200,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change for

   Accounting Standards Update 2016-13

 

 

 

 

 

 

 

 

 

 

 

822

 

 

 

 

 

 

822

 

Cash dividends ($0.06 per share)

 

 

 

 

 

 

 

 

 

 

 

(2,425

)

 

 

 

 

 

(2,425

)

Balance at June 30, 2020

 

 

37,810,101

 

 

 

2,715,531

 

 

$

348,295

 

 

$

174,837

 

 

$

25,303

 

 

$

548,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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, 20172020 and 20162019 (unaudited)

(Dollars in thousands)

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,825

)

 

$

7,307

 

Adjustments to reconcile net (loss) income to net cash used by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,194

 

 

 

9,101

 

Provision for loan and lease credit losses

 

 

21,750

 

 

 

6,443

 

Amortization of premium on securities, net of accretion

 

 

636

 

 

 

254

 

Deferred tax benefit

 

 

(11,164

)

 

 

(417

)

Originations of loans held for sale

 

 

(483,741

)

 

 

(455,456

)

Proceeds from sales of loans held for sale

 

 

391,706

 

 

 

168,981

 

Net gains on sale of loans held for sale

 

 

(21,807

)

 

 

(10,213

)

Net (gain) loss on sale of foreclosed assets

 

 

(10

)

 

 

4

 

Net loss (gain) on loans accounted for under fair value option

 

 

11,727

 

 

 

(4,874

)

Net decrease in servicing assets

 

 

1,531

 

 

 

5,954

 

Gain on sale of investment securities available-for-sale, net

 

 

(655

)

 

 

(5

)

Net gain on disposal of long-lived asset

 

 

 

 

 

(357

)

Net loss on disposal of property and equipment

 

 

38

 

 

 

109

 

Equity method investments (income) loss

 

 

4,721

 

 

 

3,750

 

Equity security investments (gains) losses, net

 

 

(97

)

 

 

(135

)

Renewable energy tax credit investment impairment

 

 

 

 

 

602

 

Stock option based compensation expense

 

 

772

 

 

 

870

 

Restricted stock expense

 

 

5,475

 

 

 

4,904

 

Stock based compensation expense tax shortfall

 

 

(93

)

 

 

(76

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Lease right-of-use assets and liabilities, net

 

 

1

 

 

 

102

 

Other assets

 

 

(24,383

)

 

 

10,089

 

Other liabilities

 

 

16,886

 

 

 

154

 

Net cash used by operating activities

 

 

(79,338

)

 

 

(252,909

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of securities available-for-sale

 

 

(292,825

)

 

 

(205,829

)

Proceeds from sales, maturities, calls, and principal paydown of

   securities available-for-sale

 

 

70,962

 

 

 

28,945

 

Proceeds from SBA reimbursement/sale of foreclosed assets

 

 

2,026

 

 

 

393

 

Business combination, net of cash acquired

 

 

(895

)

 

 

 

Loan and lease originations and principal collections, net

 

 

(1,937,416

)

 

 

(256,823

)

Proceeds from sale of long-lived asset

 

 

 

 

 

10,895

 

Purchases of premises and equipment, net

 

 

(1,196

)

 

 

(27,823

)

Net cash used by investing activities

 

 

(2,159,344

)

 

 

(450,242

)

 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 amortization7,020
 3,201
Provision for loan losses5,481
 8,692
Amortization of premium on securities, net of accretion355
 135
Amortization of discount on unguaranteed loans, net1,263
 773
Deferred tax expense (benefit)413
 (510)
Originations of loans held for sale(884,741) (701,415)
Proceeds from sales of loans held for sale648,300
 555,192
Net gains on sale of loans held for sale(55,276) (52,813)
Net loss on sale of foreclosed assets30
 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 equipment213
 
Stock option based compensation expense1,496
 1,752
Restricted stock expense4,210
 5,893
Stock based compensation expense excess tax benefits1,073
 
     Business combination contingent consideration fair value adjustment350
 
Changes in assets and liabilities:   
Other assets(17,661) (858)
Other liabilities3,875
 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-sale7,187
 8,764
Proceeds from sale/collection of foreclosed assets50
 680
Business combination, net of cash acquired(7,696) 
Maturities of certificates of deposit with other banks4,000
 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 ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited)

(Dollars in thousands)

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

$

1,646,312

 

 

$

566,698

 

Proceeds from borrowings

 

 

1,781,966

 

 

 

 

Repayment of borrowings

 

 

(60,951

)

 

 

(98

)

Stock option exercises

 

 

406

 

 

 

172

 

Employee stock purchase program

 

 

232

 

 

 

182

 

Withholding cash issued in lieu of restricted stock

 

 

(109

)

 

 

(86

)

Shareholder dividend distributions

 

 

(2,425

)

 

 

(2,411

)

Net cash provided by financing activities

 

 

3,365,431

 

 

 

564,457

 

Net increase (decrease) in cash and cash equivalents

 

 

1,126,749

 

 

 

(138,694

)

Cash and cash equivalents, beginning

 

 

221,397

 

 

 

319,311

 

Cash and cash equivalents, ending

 

$

1,348,146

 

 

$

180,617

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

49,397

 

 

$

39,391

 

Income tax paid (received)

 

 

460

 

 

 

(12,439

)

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash operating, investing, and financing activities

 

 

 

 

 

 

 

 

Unrealized holding gains on available-for-sale securities, net of taxes

 

$

13,579

 

 

$

14,554

 

Transfers from loans and leases to foreclosed real estate and other repossessions

 

 

2,034

 

 

 

5,058

 

Net transfers between foreclosed real estate and SBA receivable

 

 

30

 

 

 

(289

)

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

 

 

98,002

 

 

 

146,305

 

Transfer of loans and leases held for investment to loans held for sale

 

 

22,948

 

 

 

23,321

 

Business combination:

 

 

 

 

 

 

 

 

Assets acquired (excluding goodwill)

 

 

2,523

 

 

 

 

Liabilities assumed

 

 

2,074

 

 

 

 

Goodwill recorded

 

 

1,797

 

 

 

 

 Nine Months Ended
September 30,
 2017 2016
Cash flows from financing activities   
Net increase in deposits527,815
 598,229
Proceeds from long term borrowings16,900
 
Repayment of long term borrowings(25,971) (301)
Proceeds from short term borrowings23,100
 
Repayment of short term borrowings(15,000) 
Stock option exercises602
 147
Employee stock purchase program445
 
Withholding cash issued in lieu of restricted stock(4,891) 
Sale of common stock, net of issuance costs113,096
 
Shareholder dividend distributions(2,580) (2,052)
Net cash provided by financing activities633,516
 596,023
Net increase in cash and cash equivalents22,899
 252,878
Cash and cash equivalents, beginning238,008
 102,607
Cash and cash equivalents, ending$260,907
 $355,485
    
Supplemental disclosure of cash flow information   
Interest paid$17,927
 $10,120
Income tax7,094
 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 repossessions663
 406
Transfers from foreclosed real estate to SBA receivable
 96
Transfer of loans held for sale to loans held for investment5,713
 339,322
Transfer of loans held for investment to loans held for sale18,990
 2,296
Contingent consideration in acquisition of controlling interest in equity method investment
 24
Transfers from short term borrowings to long term borrowings8,100
 
Business combination:   
Assets acquired (excluding goodwill)5,766
 
Liabilities assumed4,681
 
Purchase price8,363
 
Goodwill recorded7,278
 

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"), Water and Environmental Program (“WEP”) and Business & Industry ("B&I") 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

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., a wholly-ownedLive Oak Clean Energy Financing LLC (“LOCEF”), and Live Oak Private Wealth, LLC.  

Live Oak Private Wealth, LLC’s wholly owned subsidiary to holdis Jolley Asset Management, LLC (“JAM”).  See Business Combination discussion below for more information on this new subsidiary.

The Company’s wholly owned subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“the Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi”).

Live Oak Number One, Inc. holds 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”), GLS is a management and technology consulting firm that specializesadvises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programprograms and USDA-guaranteed loans;USDA guaranteed loans. The Grove provides Company employees 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.
The Company acquired control over 504FA, previously carried asbusiness visitors an equity method investment, on February 2, 2015 by increasing its ownership from 50.0% to 91.3%. The acquisition of an additional 41.3% of ownership occurred in exchange for contingent consideration estimated to total $170 thousand. Transactions in the third quarter of 2015 and first quarter of 2016 increased the Company’s ownership to 92.9%. On September 1, 2016, the Company acquired the remaining 7.1% ownership from a third party investor in exchange for contingent consideration estimated to total $24 thousand.
In August 2016, the Company formedon-site restaurant location. Live Oak Ventures, Inc. for theVentures’ purpose ofis 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 for the purpose of providing  LOCEF provides financing to entities for renewable energy applications.
On February 1, 2017,applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth, LLC and JAM provide high-net-worth individuals and families with strategic wealth and investment management services. Canapi provides investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial technology companies.

The Company jointly formed 504 Fund Advisors, LLC (“504FA”) to serve as the investment adviser for the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.  504FA exited as advisor for the 504 Fund in May 2019 and 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 Combination for a further discussion ofsubsequently dissolved this transaction.

legal entity.

The Company earnsgenerates revenue primarily from net interest income and secondarily through the origination and sale of SBAgovernment guaranteed loans.  Income from the retention of loans is comprised of interest income.  The Company elects to account for certain loans under the fair value option with interest reported in interest income and USDA-guaranteedchanges in fair value reported in the net (loss) gain on loans and net interestaccounted for under the fair value option line item of the consolidated statements of 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 credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.


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, 20172020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017.2020. The condensed consolidated balance sheet as of December 31, 20162019 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, 2016,2019, filed with the Securities Exchange Commission on March 9, 2017February 27, 2020 (SEC File No. 001-37497) (the "2016"2019 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 20162019 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 20162019 Annual Report.



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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.

Equipment Leasing
The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment.
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 4-6 years which is consistent with the useful life of the equipment with no residual value.  As of September 30, 2017 the Company had net investments in direct financing lease receivables of $1.1 million.
Operating Leases
The term of each operating lease is generally 10 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 over a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives and residual values are generally 15 years and 30%, respectively; however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.
If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose.   Repair and maintenance costs that do not extend the lives of the rental equipment are charged to direct operating expenses at the time the costs are incurred.
As of September 30, 2017 the Company had a net investment of $47.5 million in assets included in premises and equipment that are subject to operating leases.
A maturity analysis of future minimum lease payments under non-cancelable operating leases is as follows:


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Impairment of Long-Lived Assets
The Company evaluates the carrying value of rental equipment and identifiable definite lived intangible assets for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. A key element in determining the recoverability of long-lived assets is the Company’s outlook as to the future market conditions for its rental equipment. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value. The Company determines fair value based upon the condition of the rental equipment and the projected net cash flows from its rental and sale considering current market conditions. Goodwill and identifiable indefinite lived assets are evaluated for potential impairment annually or when circumstances indicate potential impairment may have occurred. Impairment losses, if any, are determined based upon the excess of carrying value over the estimated fair value of the asset. There have been no impairments of long-lived assets.
Change in Accounting Estimate
During 2017, the Company assessed its estimate of the useful lives of the Company’s aircraft transportation. The Company revised its original useful life estimate of 20 years and currently estimates that its aircraft transportation will have a useful life of 10 years. The effects of reflecting this change in accounting estimate on the 2017 consolidated financial statements are as follows:
  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.  Current period reclassifications were primarily related to fair value presentation requirements for loans in which the fair value option had previously been elected and included a reclassification of amounts representing the credit component of the fair value discount that was previously reported as a component of the allowance for credit losses on loans and leases to be netted directly against loans and leases held for investment on the Company’s consolidated balance sheet.  Amounts reclassified from the allowance for credit losses on loans and leases to net directly against total loans and leases held for investment was $20.0 million, as of December 31, 2019. In addition, the change in the credit component of the fair value discount was previously reported in the provision for loan and lease credit losses while the change in the liquidity component of the fair value discount was previously reported in the loan servicing asset revaluation in the consolidated statements of income, but both have now been reclassified to net (loss) gain on loans accounted for under the fair value option.  Amounts reclassified from the provision for loan and lease credit losses and the loan servicing asset revaluation to net (loss) gain on loans accounted for under the fair value option were $(51) thousand and $2.8 million, respectively, for the three months ended June 30, 2019, and $(238) thousand and $4.6 million, respectively for the six months ended June 30, 2019.


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The effect of the above discussed reclassifications on the consolidated balance sheet as of December 31, 2019 is reflected in the March 31, 2020 10-Q. The effect on the consolidated statements of income and consolidated statements of cash flows for each period are presented below:

 

 

As Reported

 

 

Reclassifications

 

 

As Reclassified

 

Consolidated Statement of Income for the three months ended

   June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease credit losses

 

$

3,463

 

 

$

(51

)

 

$

3,412

 

Net interest income after provision for loan and lease credit losses

 

 

30,472

 

 

 

51

 

 

 

30,523

 

Loan servicing asset revaluation

 

 

(403

)

 

 

(2,842

)

 

 

(3,245

)

Net (loss) gain on loans accounted for under the fair value option

 

 

 

 

 

2,791

 

 

 

2,791

 

Total noninterest income

 

 

14,701

 

 

 

(51

)

 

 

14,650

 

Net income

 

 

4,935

 

 

 

 

 

 

4,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Income for the six months ended

   June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease credit losses

 

$

6,205

 

 

$

238

 

 

$

6,443

 

Net interest income after provision for loan and lease credit losses

 

 

58,335

 

 

 

(238

)

 

 

58,097

 

Loan servicing asset revaluation

 

 

(2,649

)

 

 

(4,636

)

 

 

(7,285

)

Net (loss) gain on loans accounted for under the fair value option

 

 

 

 

 

4,874

 

 

 

4,874

 

Total noninterest income

 

 

27,728

 

 

 

238

 

 

 

27,966

 

Net income

 

 

7,307

 

 

 

 

 

 

7,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows for the six months ended

   June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease credit losses

 

$

6,205

 

 

$

238

 

 

$

6,443

 

Net decrease in servicing assets

 

 

5,954

 

 

 

 

 

 

5,954

 

Change in discount on unguaranteed loans

 

 

(3,431

)

 

 

3,431

 

 

 

 

Net loss (gain) on loans accounted for under fair value option

 

 

 

 

 

(4,874

)

 

 

(4,874

)

Net cash used by operating activities

 

 

(251,704

)

 

 

(1,205

)

 

 

(252,909

)

Loan and lease originations and principal collections, net

 

 

(258,028

)

 

 

1,205

 

 

 

(256,823

)

Net cash used by investing activities

 

 

(451,447

)

 

 

1,205

 

 

 

(450,242

)

As a result of the increase in number and diversification of the industry verticals that the Company serves, management also made changes to the loan and lease classes used in the credit quality disclosures in Note 5. Loans and leases are now grouped in one of the following classes (also referred to as divisions): Small Business Banking, Specialty Lending, or Paycheck Protection Program. Small Business Banking includes loans to customers in verticals that generally have traditional loan structures. Specialty Lending includes loans to customers in verticals that generally have atypical ownership structures as well as complex collateral arrangements, underwriting requirements, and servicing needs. Paycheck Protection Program (“PPP”) includes all loans originated under the PPP pursuant to the Coronavirus Aid, Relief, and Economic Security Act’s (“CARES Act”) economic relief program and carry a 100% government guarantee.  These loan and lease classes were determined based on industry risk characteristics and management’s method for monitoring credit risk and managing those lending divisions. There were no changes to the Company’s portfolio segments.


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Adoption of New Accounting Standard

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) along with its amendments, which replaces the incurred loss impairment methodology in current standards with the current expected credit loss methodology (“CECL”) and requires consideration of a broader range of information to determine credit loss estimates.  ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell.

The Company adopted Accounting Standards Codification (“ASC”) 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net increase to retained earnings of $822 thousand, comprised of a $1.3 million decrease in the allowance for credit losses combined with a $499 thousand increase in reserve on unfunded commitments, as of January 1, 2020 for the cumulative effect of adopting ASC 326.

Allowance for Credit Losses – Loans and Leases Held for Investment

The allowance for credit losses (“ACL”) is a valuation account that is deducted from, or added to, the amortized cost basis of loans and leases to present a net amount expected to be collected. The ACL excludes loans held for sale and loans accounted for under the fair value option. Loans and leases are charged-off against the ACL when management believes the uncollectibility of a loan or lease balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The Company’s ACL on loans and leases is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. Management adjusts historical loss information for differences in current risk characteristics such as portfolio risk grading, delinquency levels, or portfolio mix as well as for changes in environmental conditions such as changes in unemployment rates.  

The ACL is measured on a pooled basis when similar risk characteristics are present in the portfolio. The Company has identified portfolio segments based on industry and whether the receivable is secured by real estate or another form of collateral. Additional information related to the portfolio segments can be found in the Company’s 2019 Form 10-K. Expected credit losses for pooled loans and leases are estimated using a discounted cash flow (“DCF”) methodology.

Loans or leases that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company 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 meeting the criteria defined below must be reviewed quarterly to determine if they should be evaluated for expected credit losses on an individual basis.

All commercial loans and leases classified substandard or worse.

Any loan or lease that is on nonaccrual, or any loan or lease that is delinquent greater than 90 days past due and still accruing interest.

Any loan or lease that meets the definition of a troubled debt restructuring (“TDR”).


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Expected credit losses are estimated over the contractual term of the loan or lease, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Company.  

When the ACL, for pooled or individually evaluated loans and leases, is estimated using the DCF method, the effective interest rate used to discount expected cash flows is adjusted for expected prepayments.

Past due status of loans and leases is determined based on contractual terms. Loans and leases are placed in nonaccrual status and interest accrual is discontinued if they become 90 days delinquent or there is evidence that the borrower’s ability to make the required payments is impaired. When interest accrual is discontinued, all unpaid accrued interest is reversed.  Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.

A loan or lease is accounted for as a TDR if the Company, for reasons related to the borrower’s financial difficulties, restructures a loan or lease, and grants a concession to the borrower that it would not otherwise grant. A TDR typically involves a more than short-term modification of terms such as a reduction of the interest rate below the current market rate for a loan or lease with similar risk characteristics or the waiving of certain financial covenants without corresponding offsetting compensation or additional support.

When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Allowance for Credit Losses – Off-Balance Sheet Credit Exposures

Expected credit losses on off-balance sheet credit exposures is estimated over the contractual period in which the Company is exposed to such losses, unless the obligation to extend credit is unconditionally cancellable. The estimate of off-balance sheet credit exposures includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated losses. The estimate is influenced by historical loss experience, adjusted for current risk characteristics, and economic forecasts.

Allowance for Credit Losses – Available-for-Sale Securities

When available-for-sale debt securities are in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.  If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. Available-for-sale debt securities that do not meet the aforementioned criteria are evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected from the security is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.  Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale debt securities from the estimate of credit losses.  Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Common Stock

On March 15, 2020, the Board of Directors of the Company authorized the repurchase of up to $20,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2020 (the “Repurchase Program”). The Repurchase Program enables the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determines to be advisable. Actions in connection with the repurchase program will be subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be extended, modified, or discontinued at any time. There were 0 shares repurchased during the three and six months ended June 30, 2020.

Business Combination

On April 1, 2020, the Company acquired 100% of the equity interests of JAM, a registered investment advisor based in Rocky Mount, North Carolina.  Goodwill, intangible assets and contingent consideration of $1.8 million, $2.3 million and $2.1 million, respectively, have been recorded by the Company.  Intangible assets are almost entirely comprised of customer relationships that are being amortized using the straight-line method over 15 years.  As a result of this acquisition, the Bank's subsidiary Live Oak Private Wealth, LLC, expects to broaden service offerings to existing high-net-worth individuals and families, attract new clients from an expanded footprint and benefit from economies of scale.  The acquisition did not materially impact the Company's financial position, results of operations or cash flows.  Given the impact of the above acquisition was immaterial to the Company and its result of operations, pro forma information has not been included.

Note 2. Recent Accounting Pronouncements

In May 2014,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU No. 2014-09, “Revenue from Contracts with Customers2018-13, “Fair Value Measurement (Topic 606)”820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2014-09”2018-13”). This standard is intended to clarify the principles for recognizing revenueASU 2018-13 removes, modifies and to develop a common revenue standard for GAAP. The Company's revenue is comprised of loan servicing revenue, net gainsadds certain fair value disclosure requirements 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.fair value measurements. The Company does not expectadopted the adoption of ASU 2014-09 to have astandard on January 1, 2020 with no material effect on theits consolidated financial statements. The Company expects to adopt the standard in the first quarter of

In August 2018, with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2016-02”2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities onCompany adopted the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for the Companystandard on January 1, 2019. The impact of this standard will depend2020 with no material effect on the Company's lease portfolio at the time of the adoption and the Company is currently assessing the effect that the adoption of this standard will have on theits consolidated financial statements.

In March 2016,2019, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation2019-01, “Leases (Topic 718)842): Improvements to Employee Share-Based Payment AccountingCodification Improvements” (“ASU 2016-09”2019-01”). ASU 2016-09 simplifies2019-01 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 certain transition disclosures. The Company adopted the accounting for share-based payment transactions for items including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective and adopted by the Companystandard on January 1, 2017. Starting in the first quarter of 2017, stock-based compensation excess tax benefits or deficiencies are reflected in the Consolidated Statements of Income as a component of the income tax expense, where as they previously were recognized in equity. Additionally, the Consolidated Statements of Cash

Flows now present excess tax benefits as an operating activity while any cash paid in lieu of shares for tax-withholding being classified as a financing activity. There were2020 with no excess tax benefits in the prior period presented for reclassification. Finally, the Company will continue to incorporate actual forfeitures as they occur in the accrual of compensation expense. As a result of the adoption of ASU 2016-09, the Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 was adjusted as follows: a $1.1 million increase to net cash provided by operating activities and a $4.8 million increase to net cash used in financing activities. The adoption of ASU 2016-09 further resulted in a $0.03 increase in basic and diluted EPS for the nine months ended September 30, 2017. See Note 9 for information regarding the additional impactmaterial effect on ourits consolidated financial statements.

In June 2016,April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”). ASU 2019-04 provides clarification and minor improvements related to ASU 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-13 “Measurement“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance replaces the incurred loss impairment methodology in current standards with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on the financial statements. In that regard, a cross-functional working group has been formed, under the direction of the Company's Chief Financial Officer and Chief Credit Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. The Company is currently developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. The Company is also currently evaluating selected third-party vendor solutions to assist in the application of the ASU 2016-13. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, the impact of adoption is expected to be significantly influenced by the composition, characteristics and quality of loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (“ASU 2017-01”).  ASU 2017-01 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 be effective for the Company on January 1, 2018. The Company does not expect this amendment to have a material effect on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). 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, not to exceed the carrying amount of goodwill. ASU 2017-04 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 is not expected to have a material impact on its consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition 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. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ASU 2017-05 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting" ("ASU 2017-09"). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award should be accounted for as a modification. This guidance indicates modification accounting is required when the fair value, vesting conditions, or classification of the award changes. ASU 2017-09 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12 “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"). ASU 2017-12 amendsActivities.” The Company adopted the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed tostandard on January 1, 2020 with no material effect on its consolidated financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk
statements.



Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


management activities

In January 2020, the FASB issued ASU No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”).  ASU 2020-01 clarifies the interaction between accounting standards related to reduceequity securities, equity method investments, and certain derivatives including accounting for the complexitytransition into and out of the equity method and simplify the application of hedge accounting. ASU 2017-12measuring certain purchased options and forward contracts to acquire investments. The amendments in this standard will be effective for the Company on January 1, 2019 and is2021. The Company does not expectedexpect this standard to have a significantmaterial effect on its consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-03, “Codification Improvements to Financial Instruments” (“ASU 2020-03”).  The amendments represent clarification and improvements to the codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a material effect on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”).  ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments are effective for the Company as of March 12, 2020 through December 31, 2022. The Company does not believe this standard will have a material impact on its 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,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,777

 

 

$

4,935

 

 

$

(3,825

)

 

$

7,307

 

Weighted-average basic shares outstanding

 

 

40,506,671

 

 

 

40,196,662

 

 

 

40,420,425

 

 

 

40,178,491

 

Basic earnings (loss) per share

 

$

0.09

 

 

$

0.12

 

 

$

(0.10

)

 

$

0.18

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss), for diluted earnings (loss) per share

 

$

3,777

 

 

$

4,935

 

 

$

(3,825

)

 

$

7,307

 

Total weighted-average basic shares outstanding

 

 

40,506,671

 

 

 

40,196,662

 

 

 

40,420,425

 

 

 

40,178,491

 

Add effect of dilutive stock options and restricted stock

   grants

 

 

615,354

 

 

 

801,879

 

 

 

677,612

 

 

 

801,879

 

Total weighted-average diluted shares outstanding

 

 

41,122,025

 

 

 

40,998,541

 

 

 

41,098,037

 

 

 

40,980,370

 

Diluted earnings (loss) per share

 

$

0.09

 

 

$

0.12

 

 

$

(0.10

)

 

$

0.18

 

Anti-dilutive shares

 

 

2,077,886

 

 

 

1,578,197

 

 

 

2,077,886

 

 

 

1,578,197

 

 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 outstanding37,366,041
 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 outstanding37,366,041
 34,206,943
 35,485,371
 34,191,014
Add effect of dilutive stock options and restricted stock grants1,278,636
 794,874
 1,244,683
 812,408
Total weighted-average diluted shares outstanding38,644,677
 35,001,817
 36,730,054
 35,003,422
Diluted earnings per share$0.33
 $0.10
 $0.78
 $0.24
Anti-dilutive shares243,199
 1,778,995
 250,698
 1,778,995



Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 4. Business Combination
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. The acquisition continues the Company's growth strategy, including vertically integrating with complementary services to deliver a high-quality customer experience with speed.
On the acquisition date, the fair value of Reltco included $5.8 million in assets and $4.7 million in liabilities. The total acquisition gross consideration at the time of the transaction, including earn-out contingent consideration was approximately $15.8 million. The acquisition was valued at $12.7 million after consideration of the applicable fair value adjustments to the earn-out, resulting in the Company paying $7.8 million in cash and issuing 27,724 shares of its common stock at closing in addition to an earn-out of up to 184,012 shares of its stock and $3.8 million in cash, in exchange for all of the outstanding shares of Reltco. The earn-out was recorded as a $4.3 million contingent liability on the acquisition date and is earned proportionally based on the ratio of the new subsidiary's actual future aggregate net income after tax divided by a target net income after tax of approximately $6.0 million over the four year earn-out period. Fair value measurement of the earn-out was calculated using the Monte Carlo Simulation. The Monte Carlo Simulation simulates 100,000 trials to assess the expected market price as of the earn-out measurement date at the end of each of the next four years based on the Cox, Ross & Rubinstein option pricing methodology. The Monte Carlo Simulation utilized various assumptions that include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of 30.00% over four years and a dividend yield of 0.40%.
The merger was accounted for in accordance with the acquisition method of accounting, and the identifiable assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date separately from goodwill. The estimated fair values of assets acquired and liabilities assumed are based on the information available at the date of the acquisition. Management continues to evaluate these fair values, which are subject to revision as additional information becomes available. During the one year measurement period, contingent consideration is recorded at fair value based on the terms of the purchase agreement with subsequent quarterly changes in fair value recorded through earnings. For the nine months ended September 30, 2017 the Company recorded expense of $350 thousand, related to the increased fair value of contingent consideration using the Monte Carlo Simulation. There was no expense recorded for this contingent consideration during the three months ended September 30, 2017. The assumptions utilized include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of 30.00% over the remaining 3.25 years and a dividend yield of 0.51%.


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table summarizes the allocation of the purchase price on the date of acquisition to assets acquired and the liabilities assumed based on their estimated fair values:
Fair value of assets acquired 
Cash$102
Accounts receivable159
Intangible assets5,505
Total assets acquired5,766
Fair value of liabilities assumed 
Contingent consideration4,300
Accounts payable and other liabilities381
Total liabilities assumed4,681
Net assets acquired$1,085
Purchase price 
Common shares issued27,724
Purchase price per share of the Company’s common stock$20.38
Company common stock issued565
Cash7,798
Total purchase price8,363
Goodwill$7,278
Goodwill recorded represents future revenues and efficiencies gained through the Reltco acquisition. Goodwill in this transaction is expected to be deductible for income tax purposes. Intangible assets consist of trade names of $1.2 million, customer relationships of $3.9 million, and non-compete agreements of $405 thousand. The trade names have indefinite lives and the customer relationships and non-compete agreements range from five to eight years.
The Company recorded merger expenses of $766 thousand during the nine month period ended September 30, 2017. No merger expenses were recorded during the three month period ended September 30, 2017. The company recorded $52 thousand and $62 thousand in merger expenses during the three and nine months period ended September 30, 2016.
The following pro forma financial information for the quarters ended September 30, 2017 and 2016 reflects the Company's estimated consolidated pro forma results of operations as if the Reltco acquisition occurred on January 1, 2016:
 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 stockholders12,862
 4,183
 28,807
 9,952
Basic earnings per share0.34
 0.12
 0.81
 0.29
Diluted earnings per share0.33
 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, 2020

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Allowance for Credit Losses

 

 

Fair

Value

 

US treasury securities

 

$

4,997

 

 

$

21

 

 

$

 

 

$

 

 

$

5,018

 

US government agencies

 

 

19,942

 

 

 

652

 

 

 

 

 

 

 

 

 

20,594

 

Mortgage-backed securities

 

 

718,285

 

 

 

32,329

 

 

 

65

 

 

 

 

 

 

750,549

 

Municipal bonds

 

 

3,277

 

 

 

362

 

 

 

6

 

 

 

 

 

 

3,633

 

Total

 

$

746,501

 

 

$

33,364

 

 

$

71

 

 

$

 

 

$

779,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

4,988

 

 

$

27

 

 

$

 

 

$

 

 

$

5,015

 

US government agencies

 

 

22,444

 

 

 

335

 

 

 

 

 

 

 

 

 

22,779

 

Mortgage-backed securities

 

 

488,694

 

 

 

15,530

 

 

 

927

 

 

 

 

 

 

503,297

 

Municipal bonds

 

 

8,493

 

 

 

469

 

 

 

8

 

 

 

 

 

 

8,954

 

Total

 

$

524,619

 

 

$

16,361

 

 

$

935

 

 

$

 

 

$

540,045

 


 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
September 30, 2017       
US government agencies$17,829
 $11
 $35
 $17,805
Residential mortgage-backed securities57,685
 
 936
 56,749
Mutual fund2,070
 
 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 securities52,301
 3
 1,031
 51,273
Mutual fund2,012
 
 52
 1,960
Total$72,116
 $55
 $1,115
 $71,056
$114 thousand, and 2 municipal bonds totaling $5.2 million were sold resulting in a net gain of $620 thousand. There were no0 sales of securities during the three and nine months ended SeptemberJune 30, 2017.The2019.

During the six months ended June 30, 2020, 1 US government agency matured at $2.5 million, 13 mortgage-backed securities totaling $14.2 million were sold resulting in a net gain of $35 thousand, and 2 municipal bonds totaling $5.2 million were sold resulting in a net gain of $620 thousand. During the six months ended June 30, 2019, $900 thousand of 1 municipal bond was sold resulting in a net gain of $5 thousand.

Accrued interest receivable on available-for-sale securities totaled $2.0 million and $1.6 million at June 30, 2020 and December 31, 2019, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets.

The following tables show grossdebt securities available-for-sale in an unrealized loss position for which an allowance for credit losses and fair value,has not been recorded, 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, 2020

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Mortgage-backed securities

 

$

14,345

 

 

$

41

 

 

$

2,627

 

 

$

24

 

 

$

16,972

 

 

$

65

 

Municipal bonds

 

 

 

 

 

 

 

 

94

 

 

 

6

 

 

 

94

 

 

 

6

 

Total

 

$

14,345

 

 

$

41

 

 

$

2,721

 

 

$

30

 

 

$

17,066

 

 

$

71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2019

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Mortgage-backed securities

 

$

42,835

 

 

$

460

 

 

$

36,518

 

 

$

467

 

 

$

79,353

 

 

$

927

 

Municipal bonds

 

 

 

 

 

 

 

 

92

 

 

 

8

 

 

 

92

 

 

 

8

 

Total

 

$

42,835

 

 

$

460

 

 

$

36,610

 

 

$

475

 

 

$

79,445

 

 

$

935

 


 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 securities28,397
 461
 21,767
 475
 50,164
 936
Mutual fund2,021
 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 securities49,109
 1,017
 1,635
 14
 50,744
 1,031
Mutual fund1,960
 52
 
 
 1,960
 52
Total$57,577
 $1,101
 $1,635
 $14
 $59,212
 $1,115

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Management evaluates available-for-sale debt securities to determine whether the unrealized loss is due to credit related factors or non-credit related factors. The evaluation considers the extent to which the security’s fair value is less than cost, the financial condition and near-term prospects of the issuer, and intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At SeptemberJune 30, 2017,2020, there were twelve residential4 mortgage-backed securities and one US government agency security1 municipal bond in unrealized loss positions for greater than 12 months and fourteen residential5 mortgage-backed securities two US government agency securities and the 504 Fund mutual fund investment in an unrealized loss positionpositions for less than 12 months. Unrealized losses at December 31, 20162019 were comprised of two residentialNaN mortgage-backed securities and 1 municipal bond in unrealized loss positions for greater than 12 months and three US government agency securities, twenty-two residential20 mortgage-backed securities and the 504 Fund mutual fund investment in an unrealized loss positionpositions for less than 12 months.

These unrealized losses are primarily the result of non-credit related 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, noneNaN of the securities are deemed to be other than temporarily impaired.

losses have been recognized in the Company’s consolidated statements of income.

All residential mortgage-backed securities in the Company’s portfolio at SeptemberJune 30, 20172020 and December 31, 20162019 were backed by USU.S. government sponsored enterprises (“GSEs”).



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following is a summary of investment securities by maturity:

 

 

June 30, 2020

 

 

 

Amortized

cost

 

 

Fair

value

 

US treasury securities

 

 

 

 

 

 

 

 

Within one year

 

$

4,997

 

 

$

5,018

 

Total

 

 

4,997

 

 

 

5,018

 

US government agencies

 

 

 

 

 

 

 

 

Within one year

 

 

9,503

 

 

 

9,644

 

One to five years

 

 

7,518

 

 

 

7,832

 

Five to ten years

 

 

2,921

 

 

 

3,118

 

Total

 

 

19,942

 

 

 

20,594

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

One to five years

 

 

2,501

 

 

 

2,709

 

Five to ten years

 

 

217,499

 

 

 

236,085

 

After 10 years

 

 

498,285

 

 

 

511,755

 

Total

 

 

718,285

 

 

 

750,549

 

Municipal bonds

 

 

 

 

 

 

 

 

After 10 years

 

 

3,277

 

 

 

3,633

 

Total

 

 

3,277

 

 

 

3,633

 

 

 

 

 

 

 

 

 

 

Total

 

$

746,501

 

 

$

779,794

 

 September 30, 2017
 Available-for-Sale
 
Amortized
cost
 
Fair
value
US government agencies   
Within one year$11,302
 $11,312
One to five years6,527
 6,492
Total17,829
 17,804
    
Residential mortgage-backed securities   
Five to ten years7,264
 7,200
After 10 years50,421
 49,550
Total57,685
 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.

At

There were 0 securities pledged at June 30, 2020 or December 31, 2016, an investment security with a fair market value of $1.5 million was pledged2019.



Live Oak Bancshares, Inc.

Notes 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 security 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 state 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.

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 eachCredit Quality

As described in Note 1. Basis of the portfolio segments. EachPresentation, loan and lease category is assigned a risk gradeclasses were changed during the originationcurrent period. Small Business Banking includes loans to customers in verticals that generally have traditional loan structures. Specialty Lending includes loans to customers in verticals that generally have atypical ownership structures as well as complex collateral arrangements, underwriting requirements, and closing process based on criteria described later in this section.

Commercialservicing needs. Paycheck Protection Program includes all loans originated under the CARES Act’s economic relief program 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.



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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 Consolidated Financial Statements

Loans and leases consist of the following:
 September 30,
2017
 December 31,
2016
Commercial & Industrial   
Agriculture$2,698
 $1,714
Death Care Management12,101
 9,684
Healthcare41,454
 37,270
Independent Pharmacies97,171
 83,677
Registered Investment Advisors91,241
 68,335
Veterinary Industry45,570
 38,930
Other Industries142,115
 94,836
Total432,350
 334,446
Construction & Development   
Agriculture34,636
 32,372
Death Care Management4,744
 3,956
Healthcare46,814
 30,467
Independent Pharmacies1,696
 2,013
Registered Investment Advisors329
 294
Veterinary Industry13,265
 11,514
Other Industries45,052
 31,715
Total146,536
 112,331
Commercial Real Estate   
Agriculture14,689
 5,591
Death Care Management61,462
 52,510
Healthcare121,331
 114,281
Independent Pharmacies18,508
 15,151
Registered Investment Advisors13,550
 11,462
Veterinary Industry110,028
 102,906
Other Industries106,418
 46,245
Total445,986
 348,146
Commercial Land   
Agriculture146,814
 113,569
Total146,814
 113,569
Total Loans and Leases1
1,171,686
 908,492
Net Deferred Costs8,038
 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
1Total loans and leases include $40.4 million and $37.7 million of U.S. government guaranteed loans as of September 30, 2017 and December 31, 2016, respectively.
2The 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 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. 100% government guarantee.

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 source of repayment is strong, with a loan to value (“LTV”) of 65% or less if secured solely by commercial real estate (“CRE”). Discounted collateral coverage from all sources should exceed 125%. Guarantors have credit scores above 740.
Quality (2 Rated): These loans and leases are of good quality, with good, well-documented sources of repayment. DSC is over 1.25X based on historical or pro-forma results. Secondary source of repayment is good, with a LTV of 75% or less if secured solely by CRE. Discounted collateral coverage should exceed 100%. Guarantors have credit scores above 700.
Acceptable (3 rated): These loans and leases are of acceptable quality, with acceptable sources of repayment. DSC of over 1.00X based on historical or pro-forma results. Companies that do not meet these credit metrics must be evaluated to determine if they should be graded below this level.
Acceptable (4 rated): These loans and leases are considered very weak pass. These loans and leases are riskier than a 3-rated credit, but due to various mitigating factors are not considered a Special mention or worse. The mitigating factors must clearly be identified to offset further downgrade. Examples of loans and leases that may be put in this category include start-uptables present total loans and leases and loans and leases with less than 1:1 cash flow coverage with other sources of repayment.
Special mention (5 rated): These loans and leases are considered as emerging problems, with potentially unsatisfactory characteristics. These loans and leases require greater management attention. A loan or lease may be put into this category ifan aging analysis for 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, or pledged collateral. They typically have unsatisfactory characteristics causing more than acceptable levels of risk, and have one or more well-defined weaknesses that could jeopardize the repayment of the debt.
Doubtful (7 rated): Loans and leases graded Doubtful have inherent weaknesses that make collection or liquidation in full questionable. Loans and leases graded Doubtful must be 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 asset is not warranted. The asset should be charged off, even though partial recovery may be possible in the future.


Live Oak Bancshares, Inc.
Notes to Unaudited 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 Management11,976
 118
 7
 12,101
Healthcare32,350
 1,716
 7,388
 41,454
Independent Pharmacies87,173
 6,523
 3,475
 97,171
Registered Investment Advisors87,940
 2,566
 735
 91,241
Veterinary Industry41,738
 1,833
 1,999
 45,570
Other Industries142,096
 19
 
 142,115
Total405,743
 13,003
 13,604
 432,350
Construction & Development       
Agriculture34,636
 
 
 34,636
Death Care Management4,744
 
 
 4,744
Healthcare44,937
 704
 1,173
 46,814
Independent Pharmacies1,696
 
 
 1,696
Registered Investment Advisors329
 
 
 329
Veterinary Industry13,265
 
 
 13,265
Other Industries45,052
 
 
 45,052
Total144,659
 704
 1,173
 146,536
Commercial Real Estate       
Agriculture14,689
 
 
 14,689
Death Care Management54,684
 4,288
 2,490
 61,462
Healthcare111,943
 5,050
 4,338
 121,331
Independent Pharmacies15,043
 1,843
 1,622
 18,508
Registered Investment Advisors13,406
 144
 
 13,550
Veterinary Industry95,055
 2,680
 12,293
 110,028
Other Industries105,738
 680
 
 106,418
Total410,558
 14,685
 20,743
 445,986
Commercial Land       
Agriculture144,687
 2,104
 23
 146,814
Total144,687
 2,104
 23
 146,814
Total1
$1,105,647
 $30,496
 $35,543
 $1,171,686


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

 
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 Management9,452
 121
 111
 9,684
Healthcare28,723
 681
 7,866
 37,270
Independent Pharmacies73,948
 6,542
 3,187
 83,677
Registered Investment Advisors65,297
 2,246
 792
 68,335
Veterinary Industry34,407
 1,967
 2,556
 38,930
Other Industries94,736
 100
 
 94,836
Total308,219
 11,715
 14,512
 334,446
Construction & Development       
Agriculture32,061
 
 311
 32,372
Death Care Management3,956
 
 
 3,956
Healthcare30,467
 
 
 30,467
Independent Pharmacies2,013
 
 
 2,013
Registered Investment Advisors294
 
 
 294
Veterinary Industry9,725
 1,789
 
 11,514
Other Industries31,715
 
 
 31,715
Total110,231
 1,789
 311
 112,331
Commercial Real Estate       
Agriculture5,591
 
 
 5,591
Death Care Management46,427
 4,314
 1,769
 52,510
Healthcare103,097
 7,142
 4,042
 114,281
Independent Pharmacies12,654
 1,968
 529
 15,151
Registered Investment Advisors11,462
 
 
 11,462
Veterinary Industry88,168
 3,995
 10,743
 102,906
Other Industries46,245
 
 
 46,245
Total313,644
 17,419
 17,083
 348,146
Commercial Land       
Agriculture112,333
 1,138
 98
 113,569
Total112,333
 1,138
 98
 113,569
Total1
$844,427
 $32,061
 $32,004
 $908,492
1Total loans and leases include $40.4 million of U.S. government guaranteed loans as of September 30, 2017, segregated by risk grade as follows: Risk Grades 1 – 4 = $12.1 million, Risk Grade 5 = $3.7 million, Risk Grades 6 – 8 = $24.6 million. As of December 31, 2016, total loans and leases include $37.7 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $8.7 million, Risk Grade 5 = $7.7 million, Risk Grades 6 – 8 = $21.3 million.


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Past Due Loans and Leases
Company’s portfolio segments. 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
 
Healthcare535
 76
 16
 6,152
 6,779
 34,675
 41,454
 
Independent Pharmacies331
 44
 
 2,274
 2,649
 94,522
 97,171
 
Registered Investment Advisors
 
 
 
 
 91,241
 91,241
 
Veterinary Industry224
 29
 536
 796
 1,585
 43,985
 45,570
 
Other Industries
 
 
 
 
 142,115
 142,115
 
Total1,090
 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
 
Healthcare40
 
 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 Industry1,906
 3,915
 132
 2,749
 8,702
 101,326
 110,028
 
Other Industries
 7,750
 
 
 7,750
 98,668
 106,418
 
Total1,946
 11,963
 2,985
 6,602
 23,496
 422,490
 445,986
 
Commercial Land               
Agriculture23
 
 
 
 23
 146,791
 146,814
 
Total23
 
 
 
 23
 146,791
 146,814
 
Total1
$3,059
 $12,112
 $3,537
 $15,824
 $34,532
 $1,137,154
 $1,171,686
 $

Table of Contents

 

 

Current or Less than 30 Days Past Due

 

 

30-89 Days

Past Due

 

 

90 Days or More Past Due

 

 

Total Past Due

 

 

Total Carried at Amortized Cost1

 

 

Loans Accounted for Under the Fair Value Option2

 

 

Total Loans and Leases

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

405,176

 

 

$

1,908

 

 

$

4,028

 

 

$

5,936

 

 

$

411,112

 

 

$

298,349

 

 

$

709,461

 

Specialty Lending

 

 

208,564

 

 

 

437

 

 

 

155

 

 

 

592

 

 

 

209,156

 

 

 

70,612

 

 

 

279,768

 

Paycheck Protection Program

 

 

1,738,441

 

 

 

 

 

 

 

 

 

 

 

 

1,738,441

 

 

 

 

 

 

1,738,441

 

Total

 

 

2,352,181

 

 

 

2,345

 

 

 

4,183

 

 

 

6,528

 

 

 

2,358,709

 

 

 

368,961

 

 

 

2,727,670

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

250,479

 

 

 

 

 

 

 

 

 

 

 

 

250,479

 

 

 

 

 

 

250,479

 

Specialty Lending

 

 

61,577

 

 

 

3,715

 

 

 

 

 

 

3,715

 

 

 

65,292

 

 

 

 

 

 

65,292

 

Total

 

 

312,056

 

 

 

3,715

 

 

 

 

 

 

3,715

 

 

 

315,771

 

 

 

 

 

 

315,771

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

666,543

 

 

 

 

 

 

8,089

 

 

 

8,089

 

 

 

674,632

 

 

 

331,152

 

 

 

1,005,784

 

Specialty Lending

 

 

192,690

 

 

 

5,525

 

 

 

1,849

 

 

 

7,374

 

 

 

200,064

 

 

 

24,006

 

 

 

224,070

 

Total

 

 

859,233

 

 

 

5,525

 

 

 

9,938

 

 

 

15,463

 

 

 

874,696

 

 

 

355,158

 

 

 

1,229,854

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

302,989

 

 

 

2,111

 

 

 

2,168

 

 

 

4,279

 

 

 

307,268

 

 

 

110,483

 

 

 

417,751

 

Total

 

 

302,989

 

 

 

2,111

 

 

 

2,168

 

 

 

4,279

 

 

 

307,268

 

 

 

110,483

 

 

 

417,751

 

Total

 

$

3,826,459

 

 

$

13,696

 

 

$

16,289

 

 

$

29,985

 

 

$

3,856,444

 

 

$

834,602

 

 

$

4,691,046

 

Net Deferred (Fees) Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(40,990

)

Loan and Leases, Net of unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,650,056

 


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Current or Less than 30 Days Past Due

 

 

30-89 Days

Past Due

 

 

90 Days or More Past Due

 

 

Total Past Due

 

 

Total Carried at Amortized Cost1

 

 

Loans Accounted for Under the Fair Value Option2

 

 

Total Loans and Leases

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

374,283

 

 

$

7,363

 

 

$

4,577

 

 

$

11,940

 

 

$

386,223

 

 

$

275,269

 

 

$

661,492

 

Specialty Lending

 

 

166,710

 

 

 

532

 

 

 

776

 

 

 

1,308

 

 

 

168,018

 

 

 

58,044

 

 

 

226,062

 

Total

 

 

540,993

 

 

 

7,895

 

 

 

5,353

 

 

 

13,248

 

 

 

554,241

 

 

 

333,313

 

 

 

887,554

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

302,470

 

 

 

 

 

 

 

 

 

 

 

 

302,470

 

 

 

 

 

 

302,470

 

Specialty Lending

 

 

44,848

 

 

 

 

 

 

 

 

 

 

 

 

44,848

 

 

 

 

 

 

44,848

 

Total

 

 

347,318

 

 

 

 

 

 

 

 

 

 

 

 

347,318

 

 

 

 

 

 

347,318

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

525,858

 

 

 

7,210

 

 

 

5,586

 

 

 

12,796

 

 

 

538,654

 

 

 

358,359

 

 

 

897,013

 

Specialty Lending

 

 

121,191

 

 

 

1,849

 

 

 

 

 

 

1,849

 

 

 

123,040

 

 

 

27,291

 

 

 

150,331

 

Total

 

 

647,049

 

 

 

9,059

 

 

 

5,586

 

 

 

14,645

 

 

 

661,694

 

 

 

385,650

 

 

 

1,047,344

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

234,133

 

 

 

 

 

 

 

 

 

 

 

 

234,133

 

 

 

105,557

 

 

 

339,690

 

Total

 

 

234,133

 

 

 

 

 

 

 

 

 

 

 

 

234,133

 

 

 

105,557

 

 

 

339,690

 

Total

 

$

1,769,493

 

 

$

16,954

 

 

$

10,939

 

 

$

27,893

 

 

$

1,797,386

 

 

$

824,520

 

 

$

2,621,906

 

Net Deferred (Fees) Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,380

 

Loan and Leases, Net of unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,627,286

 


 
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 Pharmacies42
 293
 408
 2,349
 3,092
 80,585
 83,677
 
Registered Investment Advisors
 
 
 
 
 68,335
 68,335
 
Veterinary Industry32
 151
 646
 1,441
 2,270
 36,660
 38,930
 
Other Industries
 
 
 
 
 94,836
 94,836
 
Total74
 716
 1,550
 9,710
 12,050
 322,396
 334,446
 
Construction & Development               
Agriculture231
 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
 
Total231
 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 Industry898
 3,981
 737
 5,158
 10,774
 92,132
 102,906
 
Other Industries
 
 
 
 
 46,245
 46,245
 
Total898
 3,981
 4,105
 7,155
 16,139
 332,007
 348,146
 
Commercial Land               
Agriculture58
 40
 
 
 98
 113,471
 113,569
 
Total58
 40
 
 
 98
 113,471
 113,569
 
Total1
$1,261
 $4,817
 $5,655
 $16,865
 $28,598
 $879,894
 $908,492
 $

1

1

Total loans and leases include $40.4$2.47 billion of U.S. government guaranteed loans as of June 30, 2020, of which $11.1 million is 90 days or more past due, $3.5 million is past due 30-89 days and $2.46 billion are current.  Total loans and leases include $622.6 million of U.S. government guaranteed loans as of September 30, 2017,December 31, 2019, of which $14.3$6.4 million is greater than 90 days or more past due, $5.0$13.6 million is past due 30-89 days past due and $21.1$602.6 million is included in currentare current.

2

The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. See Note 9. Fair Value of Financial Instruments for additional information.


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Credit Quality Indicators

The following tables presents asset quality indicators by portfolio class and origination year.  See Note 5. Loans and Leases Held for Investment and Credit Quality in the Company’s 2019 Form 10-K for additional discussion around the asset quality indicators that the Company uses to manage and monitor credit risk.

 

 

Term Loans and Leases Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Revolving Loans Amortized Cost Basis

 

 

Revolving Loans Converted to Term

 

 

Total1,2

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

$

152,493

 

 

$

485,989

 

 

$

316,738

 

 

$

280,574

 

 

$

178,817

 

 

$

71,894

 

 

$

32,064

 

 

$

622

 

 

$

1,519,191

 

   Risk Grade 5

 

 

582

 

 

 

11,182

 

 

 

24,647

 

 

 

19,148

 

 

 

17,308

 

 

 

4,497

 

 

 

5,070

 

 

 

71

 

 

 

82,505

 

   Risk Grades 6 - 8

 

 

 

 

 

3,270

 

 

 

7,619

 

 

 

12,389

 

 

 

7,929

 

 

 

9,972

 

 

 

442

 

 

 

175

 

 

 

41,796

 

Total

 

 

153,075

 

 

 

500,441

 

 

 

349,004

 

 

 

312,111

 

 

 

204,054

 

 

 

86,363

 

 

 

37,576

 

 

 

868

 

 

 

1,643,492

 

Specialty Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

105,105

 

 

 

107,475

 

 

 

61,902

 

 

 

82,857

 

 

 

7,339

 

 

 

37,008

 

 

 

49,857

 

 

 

332

 

 

 

451,875

 

   Risk Grade 5

 

 

 

 

 

 

 

 

2,946

 

 

 

 

 

 

8,479

 

 

 

 

 

 

480

 

 

 

 

 

 

11,905

 

   Risk Grades 6 - 8

 

 

 

 

 

 

 

 

8,715

 

 

 

155

 

 

 

1,849

 

 

 

 

 

 

12

 

 

 

 

 

 

10,731

 

Total

 

 

105,105

 

 

 

107,475

 

 

 

73,563

 

 

 

83,012

 

 

 

17,667

 

 

 

37,008

 

 

 

50,349

 

 

 

332

 

 

 

474,511

 

Payroll Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

1,738,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,738,441

 

   Risk Grade 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 6 - 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,738,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,738,441

 

Total

 

$

1,996,621

 

 

$

607,916

 

 

$

422,567

 

 

$

395,123

 

 

$

221,721

 

 

$

123,371

 

 

$

87,925

 

 

$

1,200

 

 

$

3,856,444

 

 

 

 

 

 

 

 

Total1,2

 

December 31, 2019

 

 

 

 

Small Business Banking

 

 

 

 

   Risk Grades 1 - 4

 

$

1,361,220

 

   Risk Grade 5

 

 

63,015

 

   Risk Grades 6 - 8

 

 

37,249

 

Total

 

 

1,461,484

 

Specialty Lending

 

 

 

 

   Risk Grades 1 - 4

 

 

307,098

 

   Risk Grade 5

 

 

26,497

 

   Risk Grades 6 - 8

 

 

2,307

 

Total

 

 

335,902

 

Total

 

$

1,797,386

 

1

Total loans and leases include $2.47 billion of U.S. government guaranteed loans as presented above.of June 30, 2020, segregated by risk grade as follows: Risk Grades 1 – 4 = $2.39 billion, Risk Grade 5 = $46.0 million, Risk Grades 6 – 8 = $33.0 million. As of December 31, 2016,2019, total loans and leases include $37.7$622.6 million of U.S. government guaranteed loans, of which $13.7segregated by risk grade as follows: Risk Grades 1 – 4 = $556.8 million, is greater than 90 days past due, $6.8Risk Grade 5 = $42.7 million, is 30-89 days past due and $17.2 million is included in currentRisk Grades 6 – 8 = $23.1 million. Total loans and leases as presented above.exclude loans accounted for under the fair value option.


Table of Contents

2

Excludes $834.6 million and $824.5 million of loans accounted for under the fair value option as of June 30, 2020 and December 31, 2019, respectively.    


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Nonaccrual Loans and Leases

Loans

As of June 30, 2020 and leases that becomeDecember 31, 2019 there were 0 loans greater than 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 statuspast due and still accruing. There was 0 interest accrual is discontinued. If interestincome recognized on nonaccrual loans and leases had been accrued in accordance with the original terms, interest income would have increased by approximately $302 thousand and $165 thousand forduring the three monthsand six month periods ended SeptemberJune 30, 2017 and 2016, respectively, and for the nine months ended September2020 or June 30, 2017 and 2016 interest income would have increased approximately $831 thousand and $451 thousand, respectively.2019. All nonaccrual loans and leases are included in the held for investment portfolio.

Accrued interest receivable on loans totaled $27.2 million and $19.8 million at June 30, 2020 and December 31, 2019, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets.

Nonaccrual loans and leases as of SeptemberJune 30, 20172020 and December 31, 20162019 are as follows:

June 30, 2020

 

Loan

Balance1

 

 

Guaranteed

Balance

 

 

Unguaranteed Balance

 

 

Unguaranteed

Exposure with No ACL

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

13,777

 

 

$

11,844

 

 

$

1,933

 

 

$

 

Specialty Lending

 

 

155

 

 

 

155

 

 

 

 

 

 

 

Total

 

 

13,932

 

 

 

11,999

 

 

 

1,933

 

 

 

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Lending

 

 

3,715

 

 

 

 

 

 

3,715

 

 

 

3,715

 

Total

 

 

3,715

 

 

 

 

 

 

3,715

 

 

 

3,715

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

11,501

 

 

 

6,654

 

 

 

4,847

 

 

 

1,841

 

Specialty Lending

 

 

6,849

 

 

 

5,137

 

 

 

1,712

 

 

 

 

Total

 

 

18,350

 

 

 

11,791

 

 

 

6,559

 

 

 

1,841

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

4,278

 

 

 

3,363

 

 

 

915

 

 

 

32

 

Total

 

 

4,278

 

 

 

3,363

 

 

 

915

 

 

 

32

 

Total

 

$

40,275

 

 

$

27,153

 

 

$

13,122

 

 

$

5,588

 

December 31, 2019

 

Loan

Balance1

 

 

Guaranteed

Balance

 

 

Unguaranteed Balance

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

6,162

 

 

$

5,399

 

 

$

763

 

Specialty Lending

 

 

776

 

 

 

157

 

 

 

619

 

Total

 

 

6,938

 

 

 

5,556

 

 

 

1,382

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

8,245

 

 

 

4,130

 

 

 

4,115

 

Total

 

 

8,245

 

 

 

4,130

 

 

 

4,115

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

6,756

 

 

 

5,028

 

 

 

1,728

 

Total

 

 

6,756

 

 

 

5,028

 

 

 

1,728

 

Total

 

$

21,939

 

 

$

14,714

 

 

$

7,225

 

1

Excludes nonaccrual loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information.

September 30, 2017Loan and Lease Balance 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Healthcare$6,703
 $5,712
 $991
Independent Pharmacies2,605
 2,253
 352
Registered Investment Advisors
 
 
Veterinary Industry1,556
 1,517
 39
Total10,864
 9,482
 1,382
Commercial Real Estate
    
Death Care Management1,576
 1,246
 330
Healthcare3,548
 2,749
 799
Independent Pharmacies1,622
 1,622
 
Veterinary Industry4,787
 3,999
 788
Total11,533
 9,616
 1,917
Commercial Land

    
    Agriculture23
 23
 
     Total23
 23
 
Total$22,420
 $19,121
 $3,299

 



Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


December 31, 2016Loan and Lease Balance 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Healthcare$6,416
 $5,152
 $1,264
Independent Pharmacies2,799
 2,204
 595
Veterinary Industry2,119
 2,079
 40
Total11,334
 9,435
 1,899
Construction & Development     
Agriculture231
 173
 58
Total231
 173
 58
Commercial Real Estate     
Death Care Management1,611
 1,263
 348
Healthcare3,225
 2,731
 494
Independent Pharmacies529
 
 529
Veterinary Industry6,793
 5,395
 1,398
Total12,158
 9,389
 2,769
Commercial Land     
Agriculture58
 
 58
Total58
 
 58
Total$23,781
 $18,997
 $4,784


Live Oak Bancshares, Inc.
Notescollateral-dependent loans and leases, which are individually evaluated to Unaudited Consolidated Financial Statementsdetermine expected credit losses, as of June 30, 2020:

 

 

Total Collateral Dependent Loans

 

 

Unguaranteed Portion

 

June 30, 2020

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Allowance for Credit Losses

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

2,468

 

 

$

5,401

 

 

$

207

 

 

$

572

 

 

$

136

 

 

$

75

 

 

$

161

 

Specialty Lending

 

 

 

 

 

163

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

8

 

Total

 

 

2,468

 

 

 

5,564

 

 

 

207

 

 

 

572

 

 

 

144

 

 

 

75

 

 

 

169

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

8,857

 

 

 

 

 

 

 

 

 

3,457

 

 

 

 

 

 

 

 

 

183

 

Specialty Lending

 

 

1,869

 

 

 

 

 

 

 

 

 

483

 

 

 

 

 

 

 

 

 

3

 

Total

 

 

10,726

 

 

 

 

 

 

 

 

 

3,940

 

 

 

 

 

 

 

 

 

186

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

4,299

 

 

 

 

 

 

 

 

 

934

 

 

 

 

 

 

 

 

 

314

 

Total

 

 

4,299

 

 

 

 

 

 

 

 

 

934

 

 

 

 

 

 

 

 

 

314

 

Total

 

$

17,493

 

 

$

5,564

 

 

$

207

 

 

$

5,446

 

 

$

144

 

 

$

75

 

 

$

669

 


Allowance for LoanCredit Losses - Loans and Lease Loss Methodology

The methodology andLeases

On January 1, 2020 the estimation process for calculatingCompany adopted ASC 326.  Upon adoption, the Allowance for Loan and Lease Losses (“ALLL”) is described below:

EstimatedCompany maintains the ACL at levels management believes represents the future expected credit losses should meetin the criterialoan and lease portfolios as of the balance sheet date.  See Note 1. Basis of Presentation for accrual of a loss contingency, i.e., a provision toadditional information around the ALLL, set forth in GAAP. The Company’s methodology for determiningestimating the ALLL is based on the requirementsACL.  See Note 1. Organization and Summary of GAAP, the Interagency Policy Statement on the Allowance for LoanSignificant Accounting Policies 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.
Note 5. Loans and leases are considered impaired when, based on currentLeases Held for Investment and Credit Quality in the Company’s 2019 Form 10-K for additional information and events, it is probable that the creditor will be unable to collect all interest and principal payments due accordingrelated to the originally contracted, or reasonably modified, terms ofCompany’s methodology for estimating the loan or lease agreement. The Company has determined that loans and leases that meet the criteria defined below must be reviewed quarterly to determine if they are impaired.
All commercial loans and leases classified substandard or worse.
Any other delinquent loan or lease that is in a nonaccrual status, or any loan or lease that is delinquent more than 89 days and still accruing interest.
Any loan or lease which has been modified such that it meets the definition of a Troubled Debt Restructuring (TDR).
The Company’s policyprior period allowance 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 Consolidated Financial Statements

losses under ASC 310.

The following table details activity in the allowance for loan and lease lossesACL by portfolio segment allowance for the periods presented:

Three Months Ended

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,823

 

 

$

13,110

 

 

$

16,337

 

 

$

1,636

 

 

$

35,906

 

Charge offs

 

 

 

 

 

 

 

 

(1,825

)

 

 

 

 

 

(1,825

)

Recoveries

 

 

 

 

 

15

 

 

 

29

 

 

 

 

 

 

44

 

Provision

 

 

38

 

 

 

2,972

 

 

 

6,962

 

 

 

(14

)

 

 

9,958

 

Ending Balance

 

$

4,861

 

 

$

16,097

 

 

$

21,503

 

 

$

1,622

 

 

$

44,083

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,236

 

 

$

5,379

 

 

$

8,282

 

 

$

1,653

 

 

$

17,550

 

Charge offs

 

 

 

 

 

 

 

 

(145

)

 

 

(24

)

 

 

(169

)

Recoveries

 

 

 

 

 

6

 

 

 

42

 

 

 

 

 

 

48

 

Provision

 

 

688

 

 

 

1,463

 

 

 

1,162

 

 

 

99

 

 

 

3,412

 

Ending Balance

 

$

2,924

 

 

$

6,848

 

 

$

9,341

 

 

$

1,728

 

 

$

20,841

 


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Six Months Ended

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance, prior to adoption of ASC 326

 

$

2,732

 

 

$

8,427

 

 

$

15,757

 

 

$

1,318

 

 

$

28,234

 

Impact of adopting ASC 326

 

 

1,131

 

 

 

1,916

 

 

 

(4,561

)

 

 

193

 

 

 

(1,321

)

Charge offs

 

 

 

 

 

(109

)

 

 

(4,170

)

 

 

(408

)

 

 

(4,687

)

Recoveries

 

 

 

 

 

43

 

 

 

64

 

 

 

 

 

 

107

 

Provision

 

 

998

 

 

 

5,820

 

 

 

14,413

 

 

 

519

 

 

 

21,750

 

Ending Balance

 

$

4,861

 

 

$

16,097

 

 

$

21,503

 

 

$

1,622

 

 

$

44,083

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,042

 

 

$

5,259

 

 

$

6,524

 

 

$

607

 

 

$

14,432

 

Charge offs

 

 

 

 

 

 

 

 

(145

)

 

 

(24

)

 

 

(169

)

Recoveries

 

 

 

 

 

14

 

 

 

121

 

 

 

 

 

 

135

 

Provision

 

 

882

 

 

 

1,575

 

 

 

2,841

 

 

 

1,145

 

 

 

6,443

 

Ending Balance

 

$

2,924

 

 

$

6,848

 

 

$

9,341

 

 

$

1,728

 

 

$

20,841

 

During the three and six month periods ended June 30, 2020, increases to the ACL were primarily related to the severity of forecasted unemployment rates and ongoing developments as a result of the COVID-19 pandemic. Unemployment rates were forecasted for twelve months followed by a twelve-month straight-line reversion period. Additionally, the provision expense was impacted by loan and lease growth and net charge-offs during the period.

The following tables represent the types of TDRs that were made during the periods presented:

 

 

Three Months Ended June 30, 2020

 

 

 

Extended Amortization

 

 

Payment Deferral

 

 

Total TDRs

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

$

 

 

 

3

 

 

$

439

 

 

 

3

 

 

$

439

 

Total

 

 

 

 

 

 

 

 

3

 

 

 

439

 

 

 

3

 

 

 

439

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1

 

 

 

4,921

 

 

 

 

 

 

 

 

 

1

 

 

 

4,921

 

Total

 

 

1

 

 

 

4,921

 

 

 

 

 

 

 

 

 

1

 

 

 

4,921

 

Total

 

 

1

 

 

$

4,921

 

 

 

3

 

 

$

439

 

 

 

4

 

 

$

5,360

 

There were 0 TDRs modified during the three months ended June 30, 2019.

 

 

Six Months Ended June 30, 2020

 

 

 

Extended Amortization

 

 

Payment Deferral

 

 

Total TDRs

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

$

 

 

 

5

 

 

$

1,882

 

 

 

5

 

 

$

1,882

 

Specialty Lending

 

 

1

 

 

 

224

 

 

 

 

 

 

 

 

 

1

 

 

 

224

 

Total

 

 

1

 

 

 

224

 

 

 

5

 

 

 

1,882

 

 

 

6

 

 

 

2,106

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

1

 

 

 

3,412

 

 

 

1

 

 

 

3,412

 

Total

 

 

 

 

 

 

 

 

1

 

 

 

3,412

 

 

 

1

 

 

 

3,412

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1

 

 

 

4,921

 

 

 

 

 

 

 

 

 

1

 

 

 

4,921

 

Total

 

 

1

 

 

 

4,921

 

 

 

 

 

 

 

 

 

1

 

 

 

4,921

 

Total

 

 

2

 

 

$

5,145

 

 

 

6

 

 

$

5,294

 

 

 

8

 

 

$

10,439

 


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Six Months Ended June 30, 2019

 

 

 

Extended Amortization

 

 

Payment Deferral

 

 

Total TDRs

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

$

 

 

 

1

 

 

$

1,853

 

 

 

1

 

 

$

1,853

 

Total

 

 

 

 

 

 

 

 

1

 

 

 

1,853

 

 

 

1

 

 

 

1,853

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1

 

 

 

3,475

 

 

 

 

 

 

 

 

 

1

 

 

 

3,475

 

Total

 

 

1

 

 

 

3,475

 

 

 

 

 

 

 

 

 

1

 

 

 

3,475

 

Total

 

 

1

 

 

$

3,475

 

 

 

1

 

 

$

1,853

 

 

 

2

 

 

$

5,328

 

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
Provision36
 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
Provision225
 261
 2,907
 413
 3,806
Ending Balance$1,433
 $4,341
 $7,570
 $1,834
 $15,178
Nine months endedConstruction &
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
Provision369
 1,858
 5,667
 798
 8,692
Ending Balance$1,433
 $4,341
 $7,570
 $1,834
 $15,178

Concessions made to improve a loan or lease’s performance have varying degrees of success. NaN TDR was modified within the twelve months ended June 30, 2020 and subsequently defaulted during the three and six months ended June 30, 2020. The TDR that defaulted was a Commercial & Industrial Small Business Banking loan that had been previously modified for payment deferral and had a recorded investment of $39 thousand at June 30, 2020. NaN TDRs that were modified within the twelve months ended June 30, 2019 subsequently defaulted during the three and six months ended June 30, 2019.

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:

December 31, 2019

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total1,2

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases individually evaluated for

   impairment

 

$

17

 

 

$

2,067

 

 

$

3,989

 

 

$

748

 

 

$

6,821

 

Loans and leases collectively evaluated for

   impairment

 

 

2,715

 

 

 

6,360

 

 

 

11,768

 

 

 

570

 

 

 

21,413

 

Total allowance for loan and lease losses

 

$

2,732

 

 

$

8,427

 

 

$

15,757

 

 

$

1,318

 

 

$

28,234

 

Loans and leases receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases individually evaluated for

   impairment

 

$

719

 

 

$

25,389

 

 

$

14,052

 

 

$

17,347

 

 

$

57,507

 

Loans and leases collectively evaluated for

    impairment

 

 

346,599

 

 

 

636,305

 

 

 

540,189

 

 

 

216,786

 

 

 

1,739,879

 

Total loans and leases receivable

 

$

347,318

 

 

$

661,694

 

 

$

554,241

 

 

$

234,133

 

 

$

1,797,386

 

September 30, 2017
Construction &
Development
 
Commercial
Real Estate
 
Commercial
& Industrial
 
Commercial
Land
 Total
Allowance for Loan and Lease Losses:         
Loans and leases individually evaluated for impairment$53
 $1,610
 $1,290
 $
 $2,953
Loans and leases collectively evaluated for impairment2
1,586
 6,788
 7,584
 2,116
 18,074
Total allowance for loan and lease losses$1,639
 $8,398
 $8,874
 $2,116
 $21,027
Loans and leases receivable1:
         
Loans and leases individually evaluated for impairment$1,151
 $16,231
 $7,321
 $
 $24,703
Loans and leases collectively evaluated for impairment2
145,385
 429,755
 425,029
 146,814
 1,146,983
Total loans and leases receivable$146,536
 $445,986
 $432,350
 $146,814
 $1,171,686


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

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

1Loans and leases receivable includes $40.4 million of U.S. government guaranteed loans as of September 30, 2017, of which $24.7 million are impaired.

As of December 31, 2016,2019, loans and leases receivable includes $37.7$622.6 million of U.S. government guaranteed loans, of which $22.1$36.0 million are considered impaired.

2

2
Included in loans

Loans and leases collectively evaluated for impairment are impaired loans and leases with individual unguaranteed exposure of less than $100 thousand. As of September 30, 2017, these balances totaled $13.4receivable exclude $824.5 million of which $12 million are guaranteed byloans accounted for under the U.S. government and $1.4 million are unguaranteed. As of December 31, 2016, these balances totaled $12.3 million, of which $10.0 million are guaranteed by the U.S. government and $2.3 million are unguaranteed.The allowance for loan and lease losses associated with these loans and leases totaled $417 thousand and $438 thousand as of September 30, 2017 and December 31, 2016, respectively.

fair value option.



Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Loans and leases classified as impaired as of the dates presented are summarized in the following tables.

December 31, 2019

 

Recorded

Investment

 

 

Guaranteed

Balance

 

 

Unguaranteed

Exposure

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

11,612

 

 

$

7,841

 

 

$

3,771

 

Specialty Lending

 

 

2,440

 

 

 

157

 

 

 

2,283

 

Total

 

 

14,052

 

 

 

7,998

 

 

 

6,054

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

719

 

 

 

530

 

 

 

189

 

Total

 

 

719

 

 

 

530

 

 

 

189

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

23,473

 

 

 

13,198

 

 

 

10,275

 

Specialty Lending

 

 

1,916

 

 

 

1,387

 

 

 

529

 

Total

 

 

25,389

 

 

 

14,585

 

 

 

10,804

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

17,347

 

 

 

12,898

 

 

 

4,449

 

Total

 

 

17,347

 

 

 

12,898

 

 

 

4,449

 

Total

 

$

57,507

 

 

$

36,011

 

 

$

21,496

 

September 30, 2017
Recorded
Investment
 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Death Care Management$8
 $
 $8
Healthcare7,384
 5,712
 1,672
Independent Pharmacies4,282
 2,514
 1,768
Registered Investment Advisors743
 
 743
Veterinary Industry2,407
 1,605
 802
Total14,824
 9,831
 4,993
Construction & Development     
Healthcare1,151
 880
 271
Total1,151
 880
 271
Commercial Real Estate     
Death Care Management2,486
 1,246
 1,240
Healthcare4,334
 2,999
 1,335
Independent Pharmacies1,622
 1,622
 
Veterinary Industry13,700
 8,051
 5,649
Total22,142
 13,918
 8,224
Commercial Land     
Agriculture23
 23
 
Total23
 23
 
Total$38,140
 $24,652
 $13,488
December 31, 2016
Recorded
Investment
 
Guaranteed
Balance
 
Unguaranteed
Exposure
Commercial & Industrial     
Death Care Management$111
 $
 $111
Healthcare7,923
 5,453
 2,470
Independent Pharmacies3,514
 2,495
 1,019
Registered Investment Advisors796
 
 796
Veterinary Industry2,882
 2,199
 683
Total15,226
 10,147
 5,079
Construction & Development     
Agriculture300
 233
 67
Total300
 233
 67
Commercial Real Estate     
Death Care Management1,768
 1,264
 504
Healthcare4,044
 2,985
 1,059
Independent Pharmacies528
 
 528
Veterinary Industry13,561
 7,518
 6,043
Total19,901
 11,767
 8,134
Commercial Land     
Agriculture91
 
 91
Total91
 
 91
Total$35,518
 $22,147
 $13,371


Live Oak Bancshares, Inc.
Notes to Unaudited 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.

 

 

December 31, 2019

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

With a

Recorded

Allowance

 

 

With No

Recorded

Allowance

 

 

Total

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

Recorded

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

11,607

 

 

$

5

 

 

$

11,612

 

 

$

12,577

 

 

$

1,967

 

Specialty Lending

 

 

2,440

 

 

 

 

 

 

2,440

 

 

 

2,307

 

 

 

2,022

 

Total

 

 

14,047

 

 

 

5

 

 

 

14,052

 

 

 

14,884

 

 

 

3,989

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

719

 

 

 

 

 

 

719

 

 

 

706

 

 

 

17

 

Total

 

 

719

 

 

 

 

 

 

719

 

 

 

706

 

 

 

17

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

21,370

 

 

 

2,103

 

 

 

23,473

 

 

 

23,996

 

 

 

2,055

 

Specialty Lending

 

 

1,916

 

 

 

 

 

 

1,916

 

 

 

1,849

 

 

 

12

 

Total

 

 

23,286

 

 

 

2,103

 

 

 

25,389

 

 

 

25,845

 

 

 

2,067

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

17,347

 

 

 

 

 

 

17,347

 

 

 

17,399

 

 

 

748

 

Total

 

 

17,347

 

 

 

 

 

 

17,347

 

 

 

17,399

 

 

 

748

 

Total Impaired Loans and Leases

 

$

55,399

 

 

$

2,108

 

 

$

57,507

 

 

$

58,834

 

 

$

6,821

 

 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
 $
Healthcare6,675
 709
 7,384
 8,034
 681
Independent Pharmacies2,622
 1,660
 4,282
 4,697
 76
Registered Investment Advisors668
 75
 743
 735
 521
Veterinary Industry2,033
 374
 2,407
 2,800
 173
Total11,998
 2,826
 14,824
 16,273
 1,451
Construction & Development         
Healthcare1,151
 
 1,151
 1,173
 53
Total1,151
 
 1,151
 1,173
 53
Commercial Real Estate         
Death Care Management1,867
 619
 2,486
 2,625
 187
Healthcare3,759
 575
 4,334
 4,352
 261
Independent Pharmacies1,622
 
 1,622
 2,163
 9
Veterinary Industry11,506
 2,194
 13,700
 14,787
 1,408
Total18,754
 3,388
 22,142
 23,927
 1,865
Commercial Land         
Agriculture23
 
 23
 58
 
Total23
 
 23
 58
 
Total Impaired Loans and Leases$31,926
 $6,214
 $38,140
 $41,431
 $3,369



Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


 December 31, 2016
 Recorded Investment    
 
With a
Recorded
Allowance
 
With No
Recorded
Allowance
 Total 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
Commercial & Industrial         
Death Care Management$8
 $103
 $111
 $111
 $1
Healthcare7,259
 664
 7,923
 8,120
 778
Independent Pharmacies3,184
 330
 3,514
 3,610
 327
Registered Investment Advisors796
 
 796
 792
 514
Veterinary Industry2,754
 128
 2,882
 3,369
 106
Total14,001
 1,225
 15,226
 16,002
 1,726
Construction & Development         
Agriculture300
 
 300
 311
 13
Total300
 
 300
 311
 13
Commercial Real Estate         
Death Care Management1,580
 188
 1,768
 1,904
 34
Healthcare3,514
 530
 4,044
 4,042
 47
Independent Pharmacies528
 
 528
 529
 284
Veterinary Industry11,193
 2,368
 13,561
 14,283
 1,273
Total16,815
 3,086
 19,901
 20,758
 1,638
Commercial Land         
Agriculture91
 
 91
 161
 15
Total91
 
 91
 161
 15
Total Impaired Loans and Leases$31,207
 $4,311
 $35,518
 $37,232
 $3,392


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table presents the average recorded investment of impaired loans and leases for each period presented and interest income recognized during the period in which the loans and leases were considered impaired.

 

 

Three Months Ended

June 30, 2019

 

 

 

Average

Balance

 

 

Interest

Income

Recognized

 

Commercial & Industrial

 

 

 

 

 

 

 

 

Small Business Banking

 

$

7,135

 

 

$

24

 

Specialty Lending

 

 

765

 

 

 

7

 

Total

 

 

7,900

 

 

 

31

 

Commercial Real Estate

 

 

 

 

 

 

 

 

Small Business Banking

 

 

15,945

 

 

 

167

 

Specialty Lending

 

 

1,588

 

 

 

 

Total

 

 

17,533

 

 

 

167

 

Commercial Land

 

 

 

 

 

 

 

 

Small Business Banking

 

 

18,940

 

 

 

236

 

Total

 

 

18,940

 

 

 

236

 

Total

 

$

44,373

 

 

$

434

 

 

 

Six Months Ended

June 30, 2019

 

 

 

Average

Balance

 

 

Interest

Income

Recognized

 

Commercial & Industrial

 

 

 

 

 

 

 

 

Small Business Banking

 

$

7,196

 

 

$

54

 

Specialty Lending

 

 

763

 

 

 

24

 

Total

 

 

7,959

 

 

 

78

 

Commercial Real Estate

 

 

 

 

 

 

 

 

Small Business Banking

 

 

16,000

 

 

 

309

 

Specialty Lending

 

 

1,588

 

 

 

 

Total

 

 

17,588

 

 

 

309

 

Commercial Land

 

 

 

 

 

 

 

 

Small Business Banking

 

 

19,000

 

 

 

432

 

Total

 

 

19,000

 

 

 

432

 

Total

 

$

44,547

 

 

$

819

 

 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
 $
Healthcare7,076
 11
 6,345
 38
Independent Pharmacies4,266
 26
 1,946
 18
Registered Investment Advisors894
 14
 742
 7
Veterinary Industry2,511
 11
 2,501
 13
Total14,789
 63
 11,543
 76
Construction & Development       
Healthcare602
 2
 
 
Total602
 2
 
 
Commercial Real Estate       
Death Care Management2,512
 13
 1,801
 2
Healthcare3,079
 11
 1,012
 12
Independent Pharmacies1,985
 
 551
 2
Veterinary Industry13,950
 132
 12,218
 87
Total21,526
 156
 15,582
 103
Commercial Land       
Agriculture23
 
 156
 
Total23
 
 156
 
Total$36,940
 $221
 $27,281
 $179



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 leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases.  Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment.

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, 2020

 

 

December 31, 2019

 

Gross direct finance lease payments receivable

 

$

12,452

 

 

$

13,959

 

Less – unearned interest

 

 

(2,110

)

 

 

(2,562

)

Net investment in direct financing leases

 

$

10,342

 

 

$

11,397

 

Future minimum lease payments under finance leases are as follows:

As of June 30, 2020

 

Amount

 

2020

 

$

1,606

 

2021

 

 

3,100

 

2022

 

 

2,675

 

2023

 

 

2,233

 

2024

 

 

1,591

 

Thereafter

 

 

1,247

 

Total

 

$

12,452

 

Interest income of $212 thousand and $267 thousand was recognized in the three months ended June 30, 2020 and 2019, respectively. Interest income of $445 thousand and $501 thousand was recognized in the six months ended June 30, 2020 and 2019, 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 2 additional terms or purchase the equipment at the then current fair market value.

Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease.  Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life.  The useful lives generally range from 20 to 25 years and residual values generally range from 20% to 50%, however, they are subject to periodic evaluation.  Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment.  The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.

If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose.   Repair and maintenance costs that do not extend the lives of the rental equipment are charged to direct operating expenses at the time the costs are incurred.



 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
 $
Healthcare4,996
 25
 5,777
 60
Independent Pharmacies7,998
 52
 1,927
 51
Registered Investment Advisors1,438
 28
 588
 13
Veterinary Industry4,329
 24
 2,715
 29
Total19,074
 132
 11,016
 153
Construction & Development       
Healthcare120
 2
 
 
Total120
 2
 
 
Commercial Real Estate       
Death Care Management2,030
 30
 1,811
 5
Healthcare2,940
 24
 1,013
 27
Independent Pharmacies149
 
 551
 2
Veterinary Industry13,069
 278
 12,266
 249
Total18,188
 332
 15,641
 283
Commercial Land       
Agriculture199
 
 355
 
Total199
 
 355
 
Total$37,581
 $466
 $27,012
 $436


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


The following tables present

As of June 30, 2020 and December 31, 2019, the typesCompany had a net investment of TDRs$139.4 million and $144.3 million, respectively, in assets included in premises and equipment that were made duringare subject to operating leases. Of the net investment, the gross balance of the assets was $164.3 million as of June 30, 2020 and December 31, 2019 and accumulated depreciation was $24.9 million and $20.0 million as of June 30, 2020 and December 31, 2019, respectively. Depreciation expense recognized on these assets for the three and nine months ended SeptemberJune 30, 20172020 and 2016:


Three months ended September 30, 2017
Three months ended September 30, 2016

All Restructurings
All Restructurings

Number of Loans
Pre-
modification
Recorded
Investment

Post-
modification
Recorded
Investment

Number of
Loans

Pre-
modification
Recorded
Investment

Post-
modification
Recorded
Investment
Payment Deferral and Extended Amortization










Commercial & Industrial










Independent Pharmacies

$

$



$

$
Total Payment Deferral and Extended Amortization










Payment Deferral










Commercial & Industrial










Healthcare





1

440

440
Veterinary Industry2

559

559






Total Payment Deferral2

559

559

1

440

440
Total2

$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 Pharmacies1

262

262






Total Payment Deferral and Extended Amortization1

262

262






Payment Deferral










Commercial & Industrial










Healthcare





1

440

440
Veterinary Industry2

559

559

1

420

420
Total Payment Deferral2

559

559

2

860

860
Total3

$821

$821

2

$860

$860

Concessions made to improve a loan and lease’s performance have varying degrees of success. No TDRS that were modified within2019 was $2.4 million. Depreciation expense recognized on these assets for the twelvesix months ended SeptemberJune 30, 2017 subsequently defaulted during2020 and 2019 was $4.9 million and $4.8 million, respectively.

Lease income of $2.4 million was recognized in the three or nine months ended SeptemberJune 30, 2017.



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

As of September 30, 2016, one TDR that$4.8 million and $4.7 million was modified withinrecognized in the twelvesix months ended SeptemberJune 30, 2016 subsequently defaulted during the nine months ended September 30, 2016. This TDR was a commercial2020 and industrial veterinary loan that was previously modified for payment deferral. The recorded investment for this TDR at September 30, 2016 was $311 thousand.

Table2019, respectively.

A maturity analysis of Contentsfuture minimum lease payments under non-cancelable operating leases is as follows:

As of June 30, 2020

 

Amount

 

2020

 

$

4,010

 

2021

 

 

9,052

 

2022

 

 

9,044

 

2023

 

 

9,075

 

2024

 

 

8,808

 

Thereafter

 

 

40,110

 

Total

 

$

80,099

 


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying condensed consolidated balance sheet.sheets. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $2.36$2.25 billion and $2.22$2.26 billion at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively.

The unpaid principal balance for all loans serviced for others was $3.07 billion and $2.97 billion at June 30, 2020 and December 31, 2019, respectively.

The following summarizes the activity pertaining to servicing rights:

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Balance at beginning of period

 

$

33,532

 

 

$

44,324

 

 

$

35,365

 

 

$

47,641

 

Additions, net

 

 

1,873

 

 

 

608

 

 

 

4,732

 

 

 

1,331

 

Fair value changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due to changes in valuation inputs or assumptions

 

 

(123

)

 

 

260

 

 

 

(2,162

)

 

 

(489

)

Decay due to increases in principal paydowns or runoff

 

 

(1,448

)

 

 

(3,505

)

 

 

(4,101

)

 

 

(6,796

)

Balance at end of period

 

$

33,834

 

 

$

41,687

 

 

$

33,834

 

 

$

41,687

 

 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, net3,527
 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, 20172020 and 8.1% to 14.1% on September 30, 2016.2019. The fair value of servicing rights was determined using a weighted average prepayment speeds ranging from 3.1% to 10.0%speed of 18.7% on SeptemberJune 30, 20172020 and 2.9% to 9.8%14.1% on SeptemberJune 30, 2016,2019, 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 typically have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets.assets, however, weakening economic conditions or significant declines in interest rates can also increase loan prepayment activity. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.




Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 8. Borrowings

Total outstanding long term borrowings consisted of the following:

 

 

June 30,

2020

 

 

December 31,

2019

 

Borrowings

 

 

 

 

 

 

 

 

In 2019, the Company renewed a revolving line of credit issued in 2017.  The line of credit is unsecured and accrues interest at 30-day LIBOR plus 1.15% for a term of 13 months.  Payments are interest only with all principal and accrued interest due on October 20, 2020.  The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios.  The $50.0 million line of credit was fully advanced at March 31, 2020. The Company made a principal paydown of $45.0 million on May 28, 2020 and there is $45.0 million of available credit at June 30, 2020.

 

$

5,000

 

 

$

 

In April 2020, the Company entered into the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF"). Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S. Small Business Administration's 7(a) loan program titled the Paycheck Protection Program. The PPPLF accrues interest at NaN basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from April 1, 2022 to June 24, 2022, and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company shall repay the advance plus accrued interest. This $1.72 billion borrowing was fully advanced at June 30, 2020.

 

 

1,716,018

 

 

 

 

In October 2017, the Company entered into a financing 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.

 

 

11

 

 

 

14

 

Total borrowings

 

$

1,721,029

 

 

$

14

 

 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, 20172020 and December 31, 2016, respectively.2019. 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 no0 outstanding balances on the lines of credit as of SeptemberJune 30, 20172020 and December 31, 2016.

The Company has $25 million available in an unsecured line of credit with a correspondent bank as of September 30, 2017. The line was increased from $8.1 million to $25 million on April 18, 2017. At December 31, 2016, there was $8.1 million available on this unsecured line of credit. The term is 24 months, maturing April 30, 2019, and interest accrues at Prime minus 0.50%. Payments are interest only with all principal and accrued interest due on April 30, 2019. The terms of the loan require the Company to maintain minimum capital, liquidity and Texas ratios. There was no outstanding balance on this line of credit as of September 30, 2017 and December 31, 2016.


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

The Company has entered into a repurchase agreement with a third party for $5$5.0 million as of SeptemberJune 30, 20172020 and December 31, 2016.2019.  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 no0 outstanding balance on the repurchase agreement as of SeptemberJune 30, 20172020 and December 31, 2016.

2019.

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, 2020 and December 31, 2019, the Company had approximately $1.30 billion and $1.14 billion, respectively, in borrowing capacity available under these agreements.  There is no collateral pledged and no advances outstanding as of June 30, 2020 and December 31, 2019.

The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $321.0 million$1.40 billion and $281.3$526.8 million as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively.  At SeptemberJune 30, 20172020 and December 31, 2016,2019, the Company had approximately $175.0 million$1.03 billion and $142.7$294.5 million, respectively, in borrowing capacity available under these arrangements with no0 outstanding balance as of SeptemberJune 30, 20172020 and December 31, 2016.2019.


Note 9. Income Taxes
The Company's effective tax rate is lower than the U.S. statutory rate primarily because of the anticipated effect of investment tax credits during 2017. The Company's effective tax rate in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.
In the first quarter of 2017, share based compensation expense excess tax benefits of $874 thousand were reflected in the consolidated statements of income as a component of the provision for income taxes as a result of the adoption of ASU 2016-09. Please refer

Live Oak Bancshares, Inc.

Notes to Note 2 for more details regarding the adoption of ASU 2016-09.

Unaudited Condensed Consolidated Financial Statements

Note 10.9. Fair Value of Financial Instruments

Fair Value Hierarchy

There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

Financial Instruments Measured at

Recurring Fair Value

The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy:

Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include USU.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Impaired

Loans held for sale: The fair values of loans: Impairment held for sale are determined by discounting estimated cash flows using interest rates approximating prevailing market rates for similar loans adjusted to reflect the inherent credit risk.

Loans held for investment: The fair values of aloans held for investment are typically determined based on discounted cash flow analyses using market-based interest rate spreads. Discounted cash flow analyses are adjusted, as appropriate, to reflect current market conditions and borrower-specific credit risk. If the loan is collateral dependent, the fair value is determined based on the difference between the fair value of the collateral and the amortized cost basis of the loan for collateral-dependent loans.as of the measurement date. Fair value of the loan’s collateral when the loan is dependent on collateral, is determined by appraisals, or independent valuation, or management’s estimation of fair value 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.

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 asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public companies that operate in similar industries as the companies in the Company’s private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company.  The Company classifies equity warrant assets within Level 3 of the valuation hierarchy.

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.

June 30, 2020

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

5,018

 

 

$

 

 

$

5,018

 

 

$

 

US government agencies

 

 

20,594

 

 

 

 

 

 

20,594

 

 

 

 

Mortgage-backed securities

 

 

750,549

 

 

 

 

 

 

750,549

 

 

 

 

Municipal bonds1

 

 

3,633

 

 

 

 

 

 

3,539

 

 

 

94

 

Loans held for sale

 

 

32,071

 

 

 

 

 

 

 

 

 

32,071

 

Loans held for investment

 

 

834,602

 

 

 

 

 

 

 

 

 

834,602

 

Servicing assets2

 

 

33,834

 

 

 

 

 

 

 

 

 

33,834

 

Mutual fund

 

 

2,303

 

 

 

 

 

 

2,303

 

 

 

 

Equity warrant assets3

 

 

855

 

 

 

 

 

 

 

 

 

855

 

Total assets at fair value

 

$

1,683,459

 

 

$

 

 

$

782,003

 

 

$

901,456

 

December 31, 2019

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

5,015

 

 

$

 

 

$

5,015

 

 

$

 

US government agencies

 

 

22,779

 

 

 

 

 

 

22,779

 

 

 

 

Mortgage-backed securities

 

 

503,297

 

 

 

 

 

 

503,297

 

 

 

 

Municipal bonds1

 

 

8,954

 

 

 

 

 

 

8,862

 

 

 

92

 

Loans held for sale

 

 

16,198

 

 

 

 

 

 

 

 

 

16,198

 

Loans held for investment

 

 

824,520

 

 

 

 

 

 

 

 

 

824,520

 

Servicing assets2

 

 

35,365

 

 

 

 

 

 

 

 

 

35,365

 

Mutual fund

 

 

2,206

 

 

 

 

 

 

2,206

 

 

 

 

Equity warrant assets3

 

 

570

 

 

 

 

 

 

 

 

 

570

 

Total assets at fair value

 

$

1,418,904

 

 

$

 

 

$

542,159

 

 

$

876,745

 

1

During the three and six months ended June 30, 2020, the Company recorded a fair value adjustment gain of $1 thousand and $2 thousand, respectively. 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 0 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 ,2020, the Company entered into equity warrant assets with a fair value of $179 thousand at the time of issuance and recorded net gains on derivative instruments of $106 thousand. During the three months ended June 30, 2020, the Company entered into equity warrant assets with a fair value of $15 thousand at the time of issuance and recorded net gains on derivative instruments of $138 thousand. 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.


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Fair Value Option

The Company elects to account for retained participating interests of government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income on loans accounted for under the fair value option is recognized in loans and fees on loans on the Company’s consolidated statements of income. There were 0 loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at June 30, 2020 or December 31, 2019. The unpaid principal balance of unguaranteed exposure for nonaccruals was $8.5 million and $10.7 million at June 30, 2020 and December 31, 2019, respectively.

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at June 30, 2020 and December 31, 2019.

 

 

June 30, 2020

 

 

 

Total Loans

 

 

Nonaccruals

 

 

90 Days or More Past Due

 

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

Fair Value Option Elections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

32,071

 

 

$

34,424

 

 

$

(2,353

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Loans held for investment

 

 

834,602

 

 

 

862,735

 

 

 

(28,133

)

 

 

46,221

 

 

 

50,536

 

 

 

(4,315

)

 

 

27,312

 

 

 

29,435

 

 

 

(2,123

)

 

 

$

866,673

 

 

$

897,159

 

 

$

(30,486

)

 

$

46,221

 

 

$

50,536

 

 

$

(4,315

)

 

$

27,312

 

 

$

29,435

 

 

$

(2,123

)

 

 

December 31, 2019

 

 

 

Total Loans

 

 

Nonaccruals

 

 

90 Days or More Past Due

 

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

Fair Value Option Elections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

16,198

 

 

$

17,230

 

 

$

(1,032

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Loans held for investment

 

 

824,520

 

 

��

842,456

 

 

 

(17,936

)

 

 

49,739

 

 

 

54,370

 

 

 

(4,631

)

 

 

26,644

 

 

 

28,137

 

 

 

(1,493

)

 

 

$

840,718

 

 

$

859,686

 

 

$

(18,968

)

 

$

49,739

 

 

$

54,370

 

 

$

(4,631

)

 

$

26,644

 

 

$

28,137

 

 

$

(1,493

)

The following table presents the net gains (losses) from changes in fair value.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Gains (Losses) on Loans Accounted for under the Fair Value

   Option

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Loans held for sale

 

$

(106

)

 

$

822

 

 

$

14

 

 

$

471

 

Loans held for investment

 

 

(983

)

 

 

1,969

 

 

 

(11,741

)

 

 

4,403

 

 

 

$

(1,089

)

 

$

2,791

 

 

$

(11,727

)

 

$

4,874

 

Losses related to borrower-specific credit risk were $913 thousand and $1.8 million for the three and six months ended June 30, 2020, respectively, and $1.1 million and $1.7 million for the three and six months ended June 30, 2019, respectively.

The following tables summarize the activity pertaining to loans accounted for under the fair value option.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Loans held for sale

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Balance at beginning of period

 

$

19,151

 

 

$

25,293

 

 

$

16,198

 

 

$

17,745

 

Issuances

 

 

13,154

 

 

 

6,207

 

 

 

16,199

 

 

 

19,842

 

Fair value changes

 

 

(106

)

 

 

822

 

 

 

14

 

 

 

471

 

Sales

 

 

 

 

 

(5,644

)

 

 

 

 

 

(11,344

)

Settlements

 

 

(128

)

 

 

(75

)

 

 

(340

)

 

 

(111

)

Balance at end of period

 

$

32,071

 

 

$

26,603

 

 

$

32,071

 

 

$

26,603

 


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Loans held for investment

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Balance at beginning of period

 

$

831,426

 

 

$

868,654

 

 

$

824,520

 

 

$

885,527

 

Issuances

 

 

37,761

 

 

 

24,413

 

 

 

99,372

 

 

 

54,521

 

Fair value changes

 

 

(983

)

 

 

1,969

 

 

 

(11,741

)

 

 

4,403

 

Settlements

 

 

(33,602

)

 

 

(55,956

)

 

 

(77,549

)

 

 

(105,371

)

Balance at end of period

 

$

834,602

 

 

$

839,080

 

 

$

834,602

 

 

$

839,080

 

Non-recurring Fair Value

The following sections provide a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis, as well as the general classification of such instruments pursuant to the fair value hierarchy:

Collateral dependent loans: Loans are considered collateral dependent when the Company has determined that foreclosure of the collateral is probable or when a borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of collateral. A collateral dependent loan’s ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan’s collateral is determined by appraisals, independent valuation, or management’s estimation of fair value which is then adjusted for the cost related to liquidation of the collateral. Collateral dependent loans are generally classified as Level 3 based on management’s judgment and estimation.

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.


Contingent consideration liability: Contingent consideration associated with the acquisition of Reltco will be adjusted to fair value quarterly until settled. The assumptions used to measure fair value are based on internal metrics that are unobservable and thereforesame issuer. When an observable price change in an orderly transaction occurs, the contingent consideration liabilityinvestment is classified withinas nonrecurring Level 3 of1 within 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.
September 30, 2017Total Level 1 Level 2 Level 3
Investment securities available-for-sale       
US government agencies$17,804
 $
 $17,804
 $
Residential mortgage-backed securities56,750
 
 56,750
 
Mutual fund2,021
 
 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, 2016Total Level 1 Level 2 Level 3
Investment securities available-for-sale       
US government agencies$17,823
 $
 $17,823
 $
Residential mortgage-backed securities51,273
 
 51,273
 
Mutual fund1,960
 
 1,960
 
Servicing assets1
51,994
 
 
 51,994
Total assets at fair value$123,050
 $
 $71,056
 $51,994
1
See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets and various assumptions used in the fair value measurement.
2See Note 4 for activity related to the recurring Level 3 fair value for the contingent consideration liability and various assumptions used in the fair value measurement.
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, 2020

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Collateral dependent loans

 

$

2,056

 

 

$

 

 

$

 

 

$

2,056

 

Foreclosed assets

 

 

5,660

 

 

 

 

 

 

 

 

 

5,660

 

Total assets at fair value

 

$

7,716

 

 

$

 

 

$

 

 

$

7,716

 

December 31, 2019

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Collateral dependent loans

 

$

1,245

 

 

$

 

 

$

 

 

$

1,245

 

Foreclosed assets

 

 

5,612

 

 

 

 

 

 

 

 

 

5,612

 

Equity security investment with a non-readily

   determinable fair value

 

 

8,738

 

 

 

8,738

 

 

 

 

 

 

 

Total assets at fair value

 

$

15,595

 

 

$

8,738

 

 

$

 

 

$

6,857

 

September 30, 2017Total Level 1 Level 2 Level 3
Impaired loans and leases$28,557
 $
 $
 $28,557
Foreclosed assets2,231
 
 
 2,231
Total assets at fair value$30,788
 $
 $
 $30,788
December 31, 2016Total Level 1 Level 2 Level 3
Impaired loans and leases$27,815
 $
 $
 $27,815
Foreclosed assets1,648
 
 
 1,648
Total assets at fair value$29,463
 $
 $
 $29,463



Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 20172020 and December 31, 20162019 the significant unobservable inputs used in the fair value measurements were as follows:

September

June 30, 20172020

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Recurring fair value

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

$

94

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.1%

5.0%

Loans held for sale

 

$

32,071

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

5.1% to 21.1%

WAVG 18.6%

Loans held for

   investment

 

$

834,602

 

 

Discounted expected cash flows

Discounted appraisals

 

Loss rate

Discount rate

Prepayment speed

Appraisal adjustments

 

0.0% to 74.2% (WAVG 1.8%)

5.1% to 21.1%

WAVG 18.6%

10% to 45%

Equity warrant assets

 

$

855

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

25.8 to 84.9%

0.66%

20.0%

5-10 years

Non-recurring fair value

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   loans

 

$

2,056

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 55.0%

Foreclosed assets

 

$

5,660

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

4.0% to 14.5%

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, 20162019

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Recurring fair value

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

$

92

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.6%

5.0%

Loans held for sale

 

$

16,198

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

7.7% to 21.4%

WAVG 13.1%

Loans held for

   investment

 

$

824,520

 

 

Discounted expected cash flows

Discounted appraisals

 

Loss rate

Discount rate

Prepayment speed

Appraisal adjustments

 

0.0% to 10.9% (WAVG 1.3%)

7.7% to 21.4%

WAVG 13.1%

10.0% to 70.0%

Equity warrant assets

 

$

570

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

21.0-75.0%

1.90%

20.0%

8-10 years

Non-recurring fair value

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   loans

 

$

1,245

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 57.0%

Foreclosed assets

 

$

5,612

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 37.0%

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)

(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 following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments not measured at fair value on the consolidated balance sheets:
Cash and due from banks: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.
Certificates of deposit with other banks: The fair value of certificates of deposit with other banks is estimated based on discounting cash flows using the rates currently offered for instruments of similar remaining maturities.
Loans held for sale: The fair values of loans held for sale are based on quoted market prices, where available, and determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans adjusted to reflect the inherent credit risk.
Loans and leases held for investment: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans and leases are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans and leases with similar terms to borrowers of similar credit quality. Loan and lease fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.
Accrued interest: The carrying amounts of accrued interest approximate fair value.


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short and long term borrowings: The fair values of the Company’s short term borrowings approximate fair value while long term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental debt rates for similar types of debt arrangements.
sheets.  

The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:

June 30, 2020

 

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

 

$

1,256,958

 

 

$

1,256,958

 

 

$

 

 

$

 

 

$

1,256,958

 

Federal funds sold

 

 

91,188

 

 

 

91,188

 

 

 

 

 

 

 

 

 

91,188

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,753

 

 

 

 

 

 

 

 

 

7,753

 

Loans held for sale

 

 

944,523

 

 

 

 

 

 

 

 

 

1,022,635

 

 

 

1,022,635

 

Loans and leases, net of allowance for

   credit losses on loans and leases

 

 

3,771,371

 

 

 

 

 

 

 

 

 

3,928,595

 

 

 

3,928,595

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

5,873,292

 

 

 

 

 

 

5,935,529

 

 

 

 

 

 

5,935,529

 

Borrowings

 

 

1,721,029

 

 

 

 

 

 

 

 

 

1,718,449

 

 

 

1,718,449

 

December 31, 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

 

$

124,610

 

 

$

124,610

 

 

$

 

 

$

 

 

$

124,610

 

Federal funds sold

 

 

96,787

 

 

 

96,787

 

 

 

 

 

 

 

 

 

96,787

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,568

 

 

 

 

 

 

 

 

 

7,568

 

Loans held for sale

 

 

950,249

 

 

 

 

 

 

 

 

 

1,004,135

 

 

 

1,004,135

 

Loans and leases, net of allowance for

   credit losses on loans and leases

 

 

1,774,532

 

 

 

 

 

 

 

 

 

1,822,569

 

 

 

1,822,569

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

4,226,980

 

 

 

 

 

 

4,211,522

 

 

 

 

 

 

4,211,522

 

Borrowings

 

 

14

 

 

 

 

 

 

 

 

 

14

 

 

 

14

 

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 banks3,250
 3,251
 
 
 3,251
Investment securities, available-for-sale76,575
 
 76,575
 
 76,575
Loans held for sale692,586
 
 
 770,923
 770,923
Loans and leases, net of allowance for loan and lease losses1,148,860
 
 
 1,151,601
 1,151,601
Servicing assets53,392
 
 
 53,392
 53,392
Accrued interest receivable9,669
 9,669
 
 
 9,669
Financial liabilities         
Deposits2,012,891
 
 1,996,493
 
 1,996,493
Accrued interest payable270
 270
 
 
 270
Long term borrowings26,872
 
 
 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 banks7,250
 7,236
 
 
 7,236
Investment securities, available-for-sale71,056
 
 71,056
 
 71,056
Loans held for sale394,278
 
 
 426,220
 426,220
Loans and leases, net of allowance for loan and lease losses889,357
 
 
 873,158
 873,158
Servicing assets51,994
 
 
 51,994
 51,994
Accrued interest receivable7,520
 7,520
 
 
 7,520
Financial liabilities         
Deposits1,485,076
 
 1,469,173
 
 1,469,173
Accrued interest payable319
 319
 
 
 319
Long term borrowings27,843
 
 
 29,559
 29,559



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Note 11.10. Commitments and Contingencies

Litigation

In the normal course of business the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.

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.


Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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,

2020

 

 

December 31,

2019

 

Commitments to extend credit

 

$

1,575,314

 

 

$

1,834,449

 

Standby letters of credit

 

 

26,997

 

 

 

25,532

 

Total unfunded off-balance-sheet credit risk

 

$

1,602,311

 

 

$

1,859,981

 

 September 30,
2017
 December 31,
2016
Commitments to extend credit$1,563,688
 $1,342,271
Standby letters of credit1,861
 343
Solar purchase commitments182,610
 
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, 20172020 and December 31, 2016,2019, the Company had unfunded commitments to provide capital contributions for on-balance sheeton-balance-sheet investments in the amount of $4.4$16.8 million and $4.9$16.9 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 seventeen34 relationships that have a retained unguaranteed exposure of $144.6$422.3 million of which $90.8$248.4 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$80.1 million, of which $28.0$57.4 million is due from twofour relationships.



Live Oak Bancshares, Inc.
Notes to Unaudited 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.



Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12.11. 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 Restricted stock grants vest in equal installments ranging from immediate vesting to share-based payment transactions are recognized inover a seven year period from the financial statements with measurement based upon the fair valuedate of the equitygrant.  Market Restricted Stock Units 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 liability instruments issued. Forabove a specified price defined at time of grant.

Stock Options

There were 0 stock options granted during the three and six months ended SeptemberJune 30, 2017 and 2016, the Company recognized $536 thousand and $580 thousand in compensation expense for stock options, respectively. For the nine months ended September2020.

At June 30, 2017 and 2016, the Company recognized $1.4 million and $1.8 million in compensation expense for stock options, respectively.

Stock option activity under the Plan during the nine month periods ended September 30, 2017 and 2016 is summarized below.
 Shares 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 20163,478,208
 $11.51
    
Exercised76,285
 7.89
    
Forfeited203,671
 14.12
    
Granted
 
    
Outstanding at September 30, 20173,198,252
 $11.43
 7.31 years $38,411,802
Exercisable at September 30, 2017703,425
 $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, 20153,546,992
 $11.17
    
Exercised25,406
 5.79
    
Forfeited166,483
 9.01
    
Granted169,987
 14.02
    
Outstanding at September 30, 20163,525,090
 $11.44
 8.30 years $14,212,513
Exercisable at September 30, 2016478,141
 $9.22
 7.84 years $2,887,741
The following is a summary of non-vested stock option activity for the Company for the nine months ended September 30, 2017 and 2016.


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

 Shares 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 20163,016,100
 $4.78
Granted
 
Vested317,602
 4.17
Forfeited203,671
 6.03
Non-vested at September 30, 20172,494,827
 $4.75
 Shares 
Weighted
Average
Grant Date
Fair Value
Non-vested at December 31, 20153,393,441
 $4.56
Granted169,987
 6.58
Vested349,996
 4.22
Forfeited166,483
 3.13
Non-vested at September 30, 20163,046,949
 $4.79
The total intrinsic value of options exercised at September 30, 2017 and 2016 was $1.1 million and $223 thousand, respectively.
At September 30, 2017,2020, unrecognized compensation costs relating to stock options amounted to $9.8$3.2 million which will be recognized over a weighted average period of 2.932.11 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 nine months ended September 30, 2017.

Restricted Stock

Restricted stock awards are authorized in the form of restricted stock awards or units ("RSU"s) and restricted stock awards or units with a market price condition ("Market RSU"s).

RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related performance criteria. The fair value of the RSUs is based on the closing price on the date of the grant.

Market RSUs also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria 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.

RSU stock activity under the Plan during the first nine months of 2017 is summarized below.
 Shares 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2016134,969
 $14.96
Granted62,721
 23.85
Vested38,205
 15.40
Forfeited7,485
 13.96
Non-vested at September 30, 2017152,000
 $18.57


Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

For the three months ended SeptemberJune 30, 2017 and 2016, the Company recognized $191 thousand and $3.1 million in compensation expense for2020, 58,348 RSUs respectively.were granted with a weighted average grant date fair value of $12.52. For the ninesix months ended SeptemberJune 30, 2017 and 2016,2020, 541,679 RSUs were granted with a weighted average grant date fair value of $17.39. Of the Company recognized $517 thousand and $5.3 millionRSUs granted in compensation expense for RSUs, respectively.

the six month period, 447,273 were awarded in connection with annual long term incentive stock compensation.

At SeptemberJune 30, 2017,2020, unrecognized compensation costs relating to RSUs amounted to $2.5$15.9 million which will be recognized over a weighted average period of 4.554.61 years.



Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements

Market RSU stock activity under the Plan during the first nine months of 2017 is summarized below.
 Shares 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 20162,364,500
 $8.28
Granted233,791
 
Vested
 
Forfeited4,007
 11.38
Non-vested at September 30, 20172,594,284
 $8.79
The compensation expense for Market RSUs is measured based on their grant date fair value as calculated using the Monte Carlo Simulation and is recognized on a straight-line basis over the average vesting period. The Monte Carlo Simulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.
Related to the 100,733

There were 0 Market RSUs granted on January 31, 2017 and the 3,058 Market RSUs granted on May 8, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.0 years. The implied term of the restricted stock was 4.1 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.28%, expected volatility of 30.00% and a dividend yield of 0.39%.

Related to the 130,000 Market RSUs granted on August 7, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 7.0 years. The implied term of the restricted stock was 3.9 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.07%, expected volatility of 30.00% and a dividend yield of 0.33%.
Forduring the three and six months ended SeptemberJune 30, 2017 and 2016, the Company recognized $1.3 million and $346 thousand in compensation expense for Market RSUs, respectively. For the nine months ended September2020.

At June 30, 2017 and 2016, the Company recognized $3.7 million and $577 thousand in compensation expense for Market RSUs, respectively.

All of the Company's Market RSUs had an effective grant date of May 24, 2016, November 30, 2016, January 31, 2017, May 8, 2017 and August 7, 2017
At September 30, 2017,2020, unrecognized compensation costs relating to Market RSUs amounted to $17.9$8.0 million which will be recognized over a weighted average period of 3.272.91 years.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan on October 8, 2014. On May 24, 2016, the plan was amended and the Amended and Restated Employee Stock Purchase Plan (the "ESPP") became effective within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, eligible employees are able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in the ESPP they must be employed or on an authorized leave of absence from the Company or any subsidiary immediately prior to the grant date. ESPP stock purchases cannot exceed $25 thousand in fair market value per employee per calendar year. Options to purchase shares under the ESPP are granted at a 15% discount to fair market value. Expense recognized in relation to the ESPP for the nine months ended September 30, 2017 was $79 thousand. There were no ESPP purchases for the nine months ended September 30, 2016. For the three months ended September 30, 2017 and 2016, the Company recognized $36 thousand and $0 expense, respectively.




Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Note 13. Subsequent Event

Management has evaluated subsequent events through the date the financial statements were available to be issued and determined that the following event required disclosure:
Unconsolidated Joint Venture
On October 1, 2017,12. Significant Equity Method Investments

In accordance with Rule 10-01(b)(1) of Regulation S-X, the Company closedmust assess whether any of its equity method investments are significant equity method investments. In evaluating the digital banking joint venture between Live Oak Bankingsignificance of these investments, the Company and First Data Corporation ("First Data"). The new company, named Apiture, combines First Data'sperformed the income test and the Bank's digital banking platforms, products, services,investment test described in S-X 3-05 and certain human resources usedS-X 1-02(w). Rule 10-01(b)(1) of Regulation S-X requires summarized financial information in the creation and delivery of technology solutions for financial institutions. The contributed assets of both the Company and First Data are considered businesses in accordance with relevant accounting standards. At closing both the Bank and First Data received equal voting interests in Apiture in exchange for their respective contributions. As a termquarterly report if any of the closing agreements, First Data is entitled to a preference in Apiture's cash earnings for the remainder of calender 2017 and all of 2018, not to exceed $18.0 million and $18.9 million, respectively.

As a result of this transaction, the Company and First Data each have, directly or indirectly, equal voting interests in Apiture. In addition, the Company has analyzed the Contribution Agreement and determined that Apiture is not a variable interest entity. The Company also considered the partners' participating rights under the Contribution Agreement and determined that the joint venture partners have the ability to participate in major decisions, which equates to shared decision making. Accordingly, the Bank has significant influence but does not control the joint venture. Therefore, the joint venture will be accounted for as an equity method investment effective on October 1, 2017 (the date of the transaction)two tests exceeds 20%. Under the income test, the Company’s proportionate share of its equity method investees' aggregated net losses exceeded the applicable threshold of accounting,20% and is accordingly required to provide summarized financial information for these investees for all periods presented in this Form 10-Q.  

The following table provides summarized balance sheet information for the netCompany’s equity investmentmethod investments as of the BankJune 30, 2020 and the Bank's share of net income or loss from the unconsolidated entity will be reflectedDecember 31, 2019. The Company’s equity method investments are included in the Company'sother assets line on the condensed consolidated balance sheets and are largely concentrated in new or emerging financial service technology companies.

 

 

June 30, 2020

 

 

December 31, 2019

 

Balance sheet data

 

 

 

 

 

 

 

 

Current assets

 

$

47,724

 

 

$

56,710

 

Noncurrent assets

 

 

175,022

 

 

 

162,304

 

Total assets

 

$

222,746

 

 

$

219,014

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

22,698

 

 

$

19,910

 

Noncurrent liabilities

 

 

451

 

 

 

683

 

Total liabilities

 

 

23,149

 

 

 

20,593

 

Equity interests

 

 

199,597

 

 

 

198,421

 

Total liabilities and equity

 

$

222,746

 

 

$

219,014

 

The following table provides summarized income statement information for the consolidated statements of income.

The preliminary estimated fair value of Apiture at the date of closing was approximately $150 million. Based on the aforementioned cash earnings preference to First Data during 2017 and 2018, the valuation of equity interests received in exchange for contributions by the two initial investors was unequal. As a consequence of this preference the preliminary initial economic interest in Apiture for First Data was equal to 54.7% or $82.0 million, while the Company's preliminary initial economic interest in Apiture was equal to 45.3%, or $68.0 million. As the Company had no carrying amount for its contribution in the formation of Apiture, the preliminary pre-tax results for this transaction as of the date of closing would be a $68.0 million equity method investment on the balance sheet and a one-time gain of the same amount on the income statement.
The Company is undertaking a comprehensive review of the preliminary fair value estimates to ensure they conform to the measurement and reporting requirements set forth in the accounting guidance forCompany’s equity method investments for the three and joint ventures, business combinations,six months ended June 30, 2020 and fair value measurements guidance. Determining the fair value of the joint venture and the partners' contributions to the joint venture are complex analyses that involve significant judgment regarding estimates and assumptions. Accordingly, the initial accounting for this transaction is still in process.2019.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Summary of operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

16,180

 

 

$

13,851

 

 

$

31,972

 

 

$

27,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(13,053

)

 

 

(6,100

)

 

 

(29,486

)

 

 

(13,220

)



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, 20162019 (the "2016"2019 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.


When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this quarterly report on Form 10-Q are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:

deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;

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 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 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 rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture;

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;

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;

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;

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

the potential impacts of the Coronavirus Disease 2019 (COVID-19) pandemic on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;

a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model, including a failure in or a breach of the Company’s operational or security systems or those of its third party

a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model or to develop a next-generation banking platform, including a failure in or a breach of the Company’s operational or security systems or those of its third-party service providers;

changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reductions in rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development and prices, premiums paid in the secondary market for the sale of loans, and valuation of servicing rights;

changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;
the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;
the Company's ability to attract and retain key personnel;
changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA 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;

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


other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s 2016 Annual Report and the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017;

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

the success at managing the risks involved in the foregoing.

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 and various state agencies;

the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result;

operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market;

the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired;

other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s 2019 Annual Report; and

the Company’s success at managing the risks involved in the foregoing.

Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Amounts in all tables in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.

Nature of Operations

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.Water and Environmental Program (“WEP”) and Business & Industry ("B&I") 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.

In addition to the Bank,2018, the Company owns 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 technology companies.  In 2019, Live Oak Clean Energy Financing LLC (“LOCEF”) became a subsidiary of the Bank.LOCEF was formed in November 2016 as a subsidiary of the Company for the purpose of providing financing to entities for renewable energy applications;applications. In 2018, 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 on April 1, 2020, it acquired Jolley Asset Management, LLC to broaden service offerings for existing high-net-worth individuals and families, attract new clients from an expanded footprint and benefit from economies of scale.  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 addition to the Bank, the Company owns Live Oak Ventures, Inc., formed in August 2016 for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; Live Oak Grove, LLC, openedformed in SeptemberFebruary 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; and 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")-guaranteed loans; andUSDA-guaranteed loans. In 2019, 504 Fund Advisors, LLC (“504FA”), which was formed to serve exited as the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.

On February 1, 2017,and the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco" or "title insurance business"), two nationwide title agencies under common control based in Tampa, Florida.
dissolved this legal entity.

The Company generates revenue primarily from thenet interest income and secondarily through origination and sale of SBA-guaranteedgovernment guaranteed loans.  Income from the retention of loans and USDA guaranteed Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loans andis comprised principally of interest income.  The Company elects to account for certain loans under the fair value option with interest reported in interest income and changes in fair value reported in the net (loss) gain on loans accounted for under the fair value option line item of the consolidated statements of income.Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets andalong with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

On July 23, 2015

Recent Developments

The COVID-19 pandemic in the United States continues to have a complex and significant adverse impact on the economy, the banking industry and the Company, closed on its initial public offering withall subject to a secondary offering completed in Augusthigh degree of 2017.

Business Outlook
Belowuncertainty. While it is a discussionstill not possible to know the full universe or extent of management’s current expectations regarding company performance over the near-term based on market conditions, the regulatory environment and business strategiesthese impacts as of the date of this filing, we are disclosing potentially material items of which we are currently aware.


Financial position and results of operations

Relating to our June 30, 2020 financial condition and results of operations, COVID-19 had a significant impact on the allowance for credit losses (“ACL”) on loans and leases, loans carried at fair value, loan servicing asset revaluation, net gains on sales of loans and net interest income. While the Company has not yet experienced any charge-offs related to COVID-19, the ACL and loan fair value calculation and resulting provision for loan and lease credit losses and net loss on loans accounted for under the fair value option were significantly impacted by changes in forecasted economic conditions. Given that forecasted economic scenarios continued to be negative with substantial uncertainty since the pandemic was declared in early March combined with effects surfacing in certain pandemic-at-risk verticals and the risk that payments being made by the SBA for borrowers under its programs may be skewing actual indications of ability to repay, the need for additional credit related reserves increased significantly by the end of the second quarter. Refer to the discussion of the ACL and loans at fair value in Notes 5 and 9, respectively, of the unaudited condensed consolidated financial statements as well as further discussion below in MD&A. Also impacted by deteriorating market conditions was the Company’s valuation of the loan servicing asset as discussed in Note 7 of the unaudited condensed consolidated financial statements and net gains on sales of loans, both of which are further discussed below in MD&A.  The secondary market improved at the end of the second quarter which offset earlier negative COVID-19 adjustments for loans carried at fair value and the loan servicing asset valuation.  In the second quarter the net interest margin was negatively impacted by significant rate cuts in response to stimulus efforts combined with heightened levels of liquidity at the Company as a part of pandemic preparedness, while the Paycheck Protection Program (the “PPP”) lending had a positive impact on net interest margin, as discussed more fully below in MD&A.  Should economic conditions worsen, the Company could experience further increases in the required ACL and negative fair value marks and record additional credit or market related loss expense. It is also possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

While there are current signs of recovery in the secondary market pricing, the income from gain on sale of loans in future periods could be reduced due to COVID-19.  Impacts began to be felt in the latter part of March and early April with loan sales executed at that time as secondary markets conditions began to weaken.  At this time, the Company filedis unable to project the materiality of such an impact but recognizes the breadth of the economic impact is likely to impact gains in future periods.

Interest income could be further reduced due to COVID-19.  In keeping with guidance from banking regulators, the Company has and continues to actively work with COVID-19 affected borrowers to help defer their payments, interest, and fees.  In addition to regulatory relief on deferrals from banking regulators, six months of payment relief are also available from the SBA for certain loans guaranteed by that agency.   While interest and fees will still accrue to interest, should eventual credit losses on these loans with deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this Report. Actual outcomestime, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Capital and resultsliquidity

As of June 30, 2020, all of the Company’s capital ratios, and the Bank’s capital ratios, were in excess of all regulatory requirements.  While the Company believes that capital is sufficient to withstand an extended economic recession brought about by COVID-19, reported and regulatory capital ratios could be adversely impacted by further credit losses.  The Company relies on cash on hand as well as dividends from the Bank to service any debt at the Company.  If our capital deteriorates such that the Bank is unable to pay dividends to the Company for an extended period of time, the Company may differ materiallynot be able to service its debt.  

The Company maintains access to multiple sources of liquidity.  Wholesale funding markets have remained open to the Company, but rates for short term funding have recently been volatile and the secondary market for guaranteed loans has shown reactionary and varying responses to the changing economic environment.  In addition to increased levels of loan sales, the Company also increased its levels of deposits and borrowings in the first half of the year, as discussed further in MD&A.  If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin.  If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.


The Federal Reserve has created the Paycheck Protection Program Liquidity Facility (“PPPLF”) to help provide financing for the origination of PPP loans.  The PPPLF extends loans to banks that have loaned money to small businesses under the PPP, discussed in more detail below. Amounts borrowed are non-recourse and have a 100% advance rate equal to the principal amount of PPP loans pledged as security. In addition, loans financed under the PPPLF have a neutral impact on regulatory leverage capital ratios.  The maturity date of a borrowing under the PPPLF is equal to the maturity date of the PPP loan pledged to secure the borrowing and would be accelerated (i) if the underlying PPP loan goes into default and is transferred to the SBA to realize on the SBA guarantee or (ii) to the extent that any loan forgiveness reimbursement is received from whatthe SBA. Borrowings under the PPPLF bear interest at a rate of 0.35%, and there are no fees paid by the Company.  As of June 30, 2020, the Company had borrowed $1.72 billion from the PPPLF.

Lending operations and accommodations to borrowers

With the passage of the PPP, administered by the SBA, the Company has actively interpreted and implemented new loan programs and systems using its technology platform while participating in assisting its customers and other small businesses in need of resources through the program.  PPP loans earn interest at 1% and currently have a two-year or five-year contractual term depending on the origination date.  For the earlier loans with a two-year term there 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.


an option to extend to five years if requested by the borrower and approved by the lender. The Company expects to originate approximately $1.90 to 2.00that some portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.  As of June 30, 2020, the Company has secured funding from the SBA for 10,847 PPP loans representing $1.74 billion in originations.  Loans funded through the PPP are fully guaranteed by the SBA, subject to the terms and conditions of the program. Should those circumstances change, the Company could be required to record additional credit loss expense through earnings.

With the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020, the SBA will be making six months of principal and interest payments on all fully disbursed SBA 7(a) and SBA Express loans in regular servicing status that close by September 27, 2020.  In addition, with regulatory guidance to work with borrowers during this unprecedented situation, the Company has also mobilized to provide a payment deferral program when needed by customers that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days.  In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.  At June 30, 2020 the Company estimated that as a percentage to total loans and leases at amortized cost, excluding PPP, 60% of its loans were receiving the six months of payments from the SBA and maintain an effective tax ratethat 9% of less than 10%its loans had a payment deferral in place.  

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the “new Act”) was signed into law, and made significant changes to the PPP to provide additional relief for small businesses. The new Act increased flexibility for small businesses that have been unable to rehire employees due to lack of employee availability, or have been unable to operate as normal due to COVID-19 related restrictions. It extended the full yearperiod that businesses have to use PPP funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the original rules. The new Act also relaxed the requirements that loan recipients must adhere to in order to qualify for loan forgiveness. In addition, the new Act extended the payment deferral period for PPP loans until the date when the amount of 2017, excludingloan forgiveness is determined and remitted to the effectlender. For PPP recipients who do not apply for forgiveness, the loan deferral period is 10 months after the applicable forgiveness period ends.

Credit

While all industries have and will continue to experience adverse impacts as a result of COVID-19, the Company has exposures in the following verticals considered to be “at-risk” of significant impact as of June 30, 2020: hotels, wine and craft beverage, educational services, entertainment centers, fitness centers, and quick service restaurants each comprising $178.9 million or 8.1%, $101.6 million or 4.6%, $80.4 million or 3.6%, $56.8 million or 2.6%, $22.8 million or 1.0%, and $12.3 million or 0.6% of total unguaranteed loans and leases (all at amortized cost, inclusive of loans carried at fair value), respectively.  

The Company continues to work with customers directly affected by COVID-19 and is prepared to offer short-term assistance in accordance with regulatory guidelines.  As a result of the expected one-time gain arising fromuncertain economic environment caused by COVID-19, the recently announced joint ventureCompany is engaging in more frequent communication with First Data.borrowers to better understand their situation and the challenges faced and circumstances evolve, which the Company anticipates will allow it to respond proactively as needs and issues arise.


Results of Operations

Performance Summary

Three months ended SeptemberJune 30, 20172020 compared with three months ended SeptemberJune 30, 2016

2019

For the three months ended SeptemberJune 30, 2017,2020, the Company reported net incomeearnings of $12.9$3.8 million, or $0.33$0.09 per diluted share, compared to net earnings of $4.9 million, or $0.12 per diluted share, for the second quarter of 2019.  This decrease in net income was largely due to continued risks and uncertainties related to the COVID-19 pandemic with significant impacts to the Company’s credit reserves and fair value adjustments, as outlined below:

The provision for loan and lease credit losses increased $6.5 million, or 191.9%; and

The net loss on loans accounted for under the fair value option increased $3.8 million, or 139.0%.

Outside of the continued effects of COVID-19, which was intensified by the adoption of new current expected credit losses model (“CECL”) in the first quarter of 2020, salaries and employee benefits increased $8.8 million, or 40.0%, as the Company continued to invest in its workforce to support growth and a variety of initiatives including $7.2 million in expense for a performance bonus pool that was available to all employees other than executive officers.

The primary factors partially offsetting the decrease in net income for the three months ended June 30, 2020 were:

Increase in net interest income of $7.0 million, or 20.5%, predominately driven by significant growth in total loan and lease portfolios which was accentuated by the origination of $1.74 billion in PPP loans during the second quarter of 2020;

Net gains on sales of loans increased $4.7 million, or 77.8%, due largely to a higher volume of loans sold in the second quarter of 2020.  The volume in guaranteed loan sales in the second quarter of 2020 increased to $154.5 million, in line with the Company’s balance sheet strategy, compared to $71.9 million in the second quarter of 2019; and

Other noninterest income increased $3.6 million, or 410.0%, primarily as the result of $2.5 million in revenue resulting from the sale of services from co-developed technology for processing PPP loans.

Six months ended June 30, 2020 compared with six months ended June 30, 2019

For the six months ended June 30, 2020, the Company reported a net loss of $3.8 million, or $(0.10) per diluted share, as compared to $3.5net earnings of $7.3 million, or $0.10$0.18 per diluted share, for the threesix months ended SeptemberJune 30, 2016.2019.  This increasedecrease in net income is primarilywas largely the due to the following items:

Increased net interest income of $9.4 million, or 80.8%, predominately driven by significant growth in the loans and leases held for sale and held for investment portfolios combined with a much higher net interest margin;
Decreased provision for loan and lease losses of $1.4 million was driven largely by improvements in the performancecontinuation of the loan portfolio;
Increased loan servicing revenue of $630 thousand, or 10.8%, as a result of continued growth in the servicing portfolio due to ongoing loan sales;
Revenues of $2.0 million from the title insurance company subsidiary acquired in the first quarter of 2017;
Increases in other noninterest income of $1.1 million, or 171.4%,above-mentioned risks and uncertainties related to the growth inCOVID-19 pandemic during the Company’s renewable energy leasing business and trust management services; and
Decreased income tax expensefirst half of $7.6 million, or 297.5%, due to2020, as reflected below:

The provision for loan and lease credit losses increased $15.3 million, or 237.6%; and

The net loss on loans accounted for under the fair value option increased $16.6 million, or 340.6%.

Outside of COVID-19 effects on the ongoing operationfirst half of the renewable energy leasing business yielding investment tax credits.

Partially offsetting the above factors that contributed to increased levels of net income was a $3.7 million decrease in the net gains on sales of loans, $1.6 million increase in 2020, salaries and employee benefits $1.6increased $15.0 million, or 34.2%, as the Company continued to invest in equipment expenseits workforce to support growth and $1.5 million in other expenses. a variety of initiatives, as discussed more fully above.

The increase in salaries and employee benefits and other expenses were influenced byprimary factors partially offsetting the growth of the overall business, including the addition of the title insurance subsidiary in the first quarter of 2017, 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 purchasednet loss for the renewable energy leasing initiative.

Ninesix months ended SeptemberJune 30, 2017 compared with nine months ended September 30, 20162020 were:

Increase in net interest income of $16.5 million, or 25.6%, predominately driven by significant growth in total loan and lease portfolios which was accentuated by the origination of $1.74 billion in PPP loans during the second quarter of 2020;

Net gains on sales of loans increased $11.6 million, or 113.5% largely due to higher sale volumes in the first quarter to strengthen the Company’s capital and liquidity profile in preparation for pandemic uncertainties.  The volume in guaranteed loan sales in the first half of 2020 increased to $317.3 million compared to $134.9 million in the first half of 2019;


Other noninterest income increased $2.7 million, or 79.3%, primarily as the result of $2.5 million in revenue resulting from the sale of services from co-developed technology for processing PPP loans; and

For the nine months ended September 30, 2017, the Company reported net income of $28.8 million, or $0.78 per diluted share, as compared to $8.3 million, or $0.24 per diluted share, for the nine months ended September 30, 2016. This increase in net income is primarily attributable to the following items:

Income tax benefit increased $7.3 million primarily as a result of a $3.7 million estimated benefit related to the enactment of the CARES Act which allows the carryback of certain net operating losses for five years combined with the Company’s overall net pretax loss in the first half of 2020.

Increased net interest income of $24.8 million, or 82.0%, predominately driven by significant growth in the loans and leases held for sale and held for investment portfolios combined with a significantly higher net interest margin;
Decreased provision for loan and lease losses of $3.2 million principally driven by the one-time transfer of $318.8 million in unguaranteed loans from held for sale to held for investment classification during the second quarter of 2016;
Increased loan servicing revenue of $2.9 million, or 18.2%, as a result of continued growth in the servicing portfolio due to ongoing loan sales;
Increased net gains on sales of loans of $2.5 million, or 4.7%, due to a higher year-to-date sale volume partially offset by a decrease in the average net gain per loan sold;
Revenues of $5.8 million from the title insurance company subsidiary acquired in the first quarter of 2017; and
Decreased income tax expense of $10.3 million, or 159.9%, due to the ongoing operation of the renewable energy leasing business yielding investment tax credits.
Partially offsetting the above factors that contributed to increased levels of net income was a $28.1 million increase in noninterest expense, largely comprised of the effects of continued investments to support growing levels of business and business diversification.

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.them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” WithoutAs a bank without a branch network, the Bank generatesgathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.

Three months ended SeptemberJune 30, 20172020 compared with three months ended SeptemberJune 30, 2016

2019

For the three months ended SeptemberJune 30, 2017,2020, net interest income increased $9.4$7.0 million, or 80.8%20.5%, to $21.0$40.9 million compared to $11.6$33.9 million for the three months ended SeptemberJune 30, 2016. This2019. The increase was principally due to the significant growth in average interest earning assetsthe held for investment loan and lease portfolio reflecting the Company's ongoing initiative to grow recurring revenue sources and strengthen liquidity.  This increase over the prior year was primarily a lesser extent higher yields on these assets which outpacedproduct of the growth and changeaforementioned origination of $1.74 billion in PPP loans in the costsecond quarter of 2020 with $8.7 million in interest bearing liabilities. Averageincome coming from recognition of net deferred fees combined with a 1% annualized interest rate.  Accordingly, average interest earning assets increased by $746.9 million,$2.73 billion, or 53.8%74.6%, to $2.13$6.40 billion for the three months ended SeptemberJune 30, 2017,2020, compared to $1.39$3.66 billion for the three months ended SeptemberJune 30, 2016,2019, while the yield on average interest earning assets rose sharply by seventy-ninedecreased 185 basis points to 5.24%4.19%. The cost of funds on interest bearing liabilities for the three months ended SeptemberJune 30, 2017 increased twenty2020 decreased 76 basis points to 1.43%1.65%, and the average balance of interest bearing liabilities increased by $717.1 million,$2.78 billion, or 56.6%78.8%, over the same period. period in 2019. The increase in average interest bearing liabilities was largely driven by strategically heightened levels of liquidity related to COVID-19 risks and uncertainties and funding for PPP loans. As indicated in the rate/volume table below, increased interest earning asset volume more than offset lower yields outpacing the higher volume and lower levels of cost declines for interest bearing liabilities, resulting in increased interest income of $11.7 million and increased interest expense of $4.7 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.  For the three months ended June 30, 2019 compared to the three months ended June 30, 2020, net interest margin decreased from 3.71% to 2.56%, respectively, principally due to the Company’s interest earning assets repricing more rapidly from lower fed funds rates than its interest bearing liabilities, combined with above mentioned impacts of PPP related activities and heightened liquidity.  

Six Months Ended June 30, 2020 compared with six months ended June 30, 2019

For the six months ended June 30, 2020, net interest income increased $16.5 million, or 25.6%, to $81.1 million compared to $64.5 million for the six months ended June 30, 2019. This increase was principally due to the significant growth in the combined held for sale and held for investment loan and lease portfolios along with higher investment security holdings reflecting the Company's ongoing initiative to grow recurring revenue sources and strengthen liquidity.  This increase over the first half of 2019 was also enhanced by the above mentioned origination of PPP loans in the second quarter.  Accordingly, average interest earning assets increased by $1.93 billion, or 54.7%, to $5.47 billion for the six months ended June 30, 2020, compared to $3.53 billion for the six months ended June 30, 2019, while the yield on average interest earning assets decreased 122 basis points to 4.78%. The cost of funds on interest bearing liabilities for the six months ended June 30, 2020 decreased 54 basis points to 1.85%, and the average balance of interest bearing liabilities increased by $1.93 billion, or 56.5%, over the same period in 2019. The increase in average interest bearing liabilities was also largely impacted by strategically heightened levels of liquidity in the first half of 2020 related to COVID-19 risks and uncertainties and funding sources for PPP loans. As indicated in the rate/volume table below, the increase in interest bearing liabilitiesearning assets and corresponding yields outpaced the higher volume and decreased 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$25.2 million and increased interest expense of $3.2$8.7 million for the threesix months ended SeptemberJune 30, 20172020 compared to the threesix months ended SeptemberJune 30, 2016.2019.  For the threesix months ended SeptemberJune 30, 20172019 compared to the threesix months ended SeptemberJune 30, 2016,2020, net interest margin increased sharplydecreased from 3.32%3.68% to 3.91% due to the aforementioned effects.

Nine months ended September 30, 2017 compared with nine months ended September 30, 2016
For the nine months ended September 30, 2017, net interest income increased $24.8 million, or 82.0%2.97%, to $55.1 million compared to $30.3 million for the nine months ended September 30, 2016. This increase was alsorespectively, principally due to lower fed funds rates impacting the significant growth in averageyield on interest earning assets and to a lesser extent higher yields on these assets outpacing the growth and change inmore rapidly than the cost of interest bearing liabilities. Average interest earning assets increased by $702.0 million, or 58.4%, to $1.90 billion for the nine months ended September 30, 2017 compared to $1.20 billion for the nine months ended September 30, 2016, while the yield on average interest earning assets increased by sixty-four basis points to 5.12%. The cost of funds on interest bearing liabilities for the nine months ended September 30, 2017 increased by eleven basis points to 1.34%, and the average balance of interest bearing liabilities increased by $688.0 million, or 63.13%, during the same period. As indicated in the rate/volume table below,first half of 2020, combined with the increase in interest bearing liabilitiesabove mentioned impacts of PPP related activities and corresponding costheightened  levels of funds was outpaced by the positive effects of the increased volume of interest earning assets along with much higher yields, resulting in increased interest income of $32.6 million and increased interest expense of $7.8 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, net interest margin increased sharply from 3.36% to 3.87% due to the aforementioned effects.

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,

 

 

 

2020

 

 

2019

 

 

 

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

 

$

711,916

 

 

$

1,009

 

 

 

0.57

%

 

$

184,986

 

 

$

1,108

 

 

 

2.40

%

Investment securities

 

 

556,014

 

 

 

3,786

 

 

 

2.73

 

 

 

566,159

 

 

 

4,116

 

 

 

2.92

 

Loans held for sale

 

 

921,956

 

 

 

13,115

 

 

 

5.71

 

 

 

839,724

 

 

 

14,333

 

 

 

6.85

 

Loans and leases held for

   investment(1)

 

 

4,208,109

 

 

 

48,907

 

 

 

4.66

 

 

 

2,073,297

 

 

 

35,581

 

 

 

6.88

 

Total interest earning assets

 

 

6,397,995

 

 

 

66,817

 

 

 

4.19

 

 

 

3,664,166

 

 

 

55,138

 

 

 

6.04

 

Less: Allowance for credit losses on loans

   and leases

 

 

(35,875

)

 

 

 

 

 

 

 

 

 

 

(19,196

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

603,610

 

 

 

 

 

 

 

 

 

 

 

472,529

 

 

 

 

 

 

 

 

 

Total assets

 

$

6,965,730

 

 

 

 

 

 

 

 

 

 

$

4,117,499

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

462,977

 

 

$

646

 

 

 

0.56

%

 

$

 

 

$

 

 

 

%

Savings

 

 

1,398,378

 

 

 

4,814

 

 

 

1.38

 

 

 

989,512

 

 

 

5,235

 

 

 

2.12

 

Money market accounts

 

 

82,908

 

 

 

89

 

 

 

0.43

 

 

 

85,982

 

 

 

161

 

 

 

0.75

 

Certificates of deposit

 

 

3,689,041

 

 

 

19,572

 

 

 

2.13

 

 

 

2,452,159

 

 

 

15,807

 

 

 

2.59

 

Total deposits

 

 

5,633,304

 

 

 

25,121

 

 

 

1.79

 

 

 

3,527,653

 

 

 

21,203

 

 

 

2.41

 

Borrowings

 

 

676,849

 

 

 

798

 

 

 

0.47

 

 

 

1,409

 

 

 

 

 

 

 

Total interest bearing liabilities

 

 

6,310,153

 

 

 

25,919

 

 

 

1.65

 

 

 

3,529,062

 

 

 

21,203

 

 

 

2.41

 

Non-interest bearing deposits

 

 

41,218

 

 

 

 

 

 

 

 

 

 

 

49,466

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities

 

 

50,554

 

 

 

 

 

 

 

 

 

 

 

26,580

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

563,805

 

 

 

 

 

 

 

 

 

 

 

512,391

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

6,965,730

 

 

 

 

 

 

 

 

 

 

$

4,117,499

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

40,898

 

 

 

2.54

%

 

 

 

 

 

$

33,935

 

 

 

3.63

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.56

%

 

 

 

 

 

 

 

 

 

 

3.71

%

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

101.39

%

 

 

 

 

 

 

 

 

 

 

103.83

%

  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)

(1)

Average loan and lease balances include non-accruing loans.loans and leases.


 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

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

 

$

470,901

 

 

$

1,759

 

 

 

0.75

%

 

$

233,904

 

 

$

2,747

 

 

 

2.37

%

Investment securities

 

 

546,110

 

 

 

7,548

 

 

 

2.77

 

 

 

514,038

 

 

 

7,433

 

 

 

2.92

 

Loans held for sale

 

 

963,359

 

 

 

28,980

 

 

 

6.03

 

 

 

794,919

 

 

 

26,934

 

 

 

6.83

 

Loans and leases held for

   investment(1)

 

 

3,485,135

 

 

 

92,003

 

 

 

5.29

 

 

 

1,990,054

 

 

 

67,946

 

 

 

6.89

 

Total interest earning assets

 

 

5,465,505

 

 

 

130,290

 

 

 

4.78

 

 

 

3,532,915

 

 

 

105,060

 

 

 

6.00

 

Less: Allowance for credit losses on loans

   and leases

 

 

(31,439

)

 

 

 

 

 

 

 

 

 

 

(17,600

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

555,469

 

 

 

 

 

 

 

 

 

 

 

473,512

 

 

 

 

 

 

 

 

 

Total assets

 

$

5,989,535

 

 

 

 

 

 

 

 

 

 

$

3,988,827

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

231,489

 

 

$

646

 

 

 

0.56

%

 

$

84

 

 

$

 

 

 

%

Savings

 

 

1,261,131

 

 

 

9,658

 

 

 

1.54

 

 

 

958,716

 

 

 

10,021

 

 

 

2.11

 

Money market accounts

 

 

80,265

 

 

 

189

 

 

 

0.47

 

 

 

84,648

 

 

 

269

 

 

 

0.64

 

Certificates of deposit

 

 

3,425,850

 

 

 

37,883

 

 

 

2.22

 

 

 

2,367,902

 

 

 

30,230

 

 

 

2.57

 

Total deposits

 

 

4,998,735

 

 

 

48,376

 

 

 

1.94

 

 

 

3,411,350

 

 

 

40,520

 

 

 

2.40

 

Borrowings

 

 

342,002

 

 

 

855

 

 

 

0.50

 

 

 

1,436

 

 

 

 

 

 

 

Total interest bearing liabilities

 

 

5,340,737

 

 

 

49,231

 

 

 

1.85

 

 

 

3,412,786

 

 

 

40,520

 

 

 

2.39

 

Non-interest bearing deposits

 

 

45,071

 

 

 

 

 

 

 

 

 

 

 

47,294

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities

 

 

52,024

 

 

 

 

 

 

 

 

 

 

 

20,548

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

551,703

 

 

 

 

 

 

 

 

 

 

 

508,199

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

5,989,535

 

 

 

 

 

 

 

 

 

 

$

3,988,827

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

81,059

 

 

 

2.93

%

 

 

 

 

 

$

64,540

 

 

 

3.61

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.97

%

 

 

 

 

 

 

 

 

 

 

3.68

%

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

102.34

%

 

 

 

 

 

 

 

 

 

 

103.52

%

  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)

(1)

Average loan and lease balances include non-accruing loans.loans and leases.


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,

 

 

 

2020 vs. 2019

 

 

2020 vs. 2019

 

 

 

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

 

$

(2,050

)

 

$

1,951

 

 

$

(99

)

 

$

(2,822

)

 

$

1,834

 

 

$

(988

)

Investment securities

 

 

(259

)

 

 

(71

)

 

 

(330

)

 

 

(339

)

 

 

454

 

 

 

115

 

Loans held for sale

 

 

(2,505

)

 

 

1,287

 

 

 

(1,218

)

 

 

(3,341

)

 

 

5,387

 

 

 

2,046

 

Loans and leases held for investment

 

 

(17,398

)

 

 

30,724

 

 

 

13,326

 

 

 

(21,200

)

 

 

45,257

 

 

 

24,057

 

Total interest income

 

 

(22,212

)

 

 

33,891

 

 

 

11,679

 

 

 

(27,702

)

 

 

52,932

 

 

 

25,230

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

 

 

 

 

646

 

 

 

646

 

 

 

 

 

 

646

 

 

 

646

 

Savings

 

 

(2,206

)

 

 

1,785

 

 

 

(421

)

 

 

(3,101

)

 

 

2,738

 

 

 

(363

)

Money market accounts

 

 

(67

)

 

 

(5

)

 

 

(72

)

 

 

(68

)

 

 

(12

)

 

 

(80

)

Certificates of deposit

 

 

(3,503

)

 

 

7,268

 

 

 

3,765

 

 

 

(4,950

)

 

 

12,603

 

 

 

7,653

 

Borrowings

 

 

2

 

 

 

796

 

 

 

798

 

 

 

4

 

 

 

851

 

 

 

855

 

Total interest expense

 

 

(5,774

)

 

 

10,490

 

 

 

4,716

 

 

 

(8,115

)

 

 

16,826

 

 

 

8,711

 

Net interest income

 

$

(16,438

)

 

$

23,401

 

 

$

6,963

 

 

$

(19,587

)

 

$

36,106

 

 

$

16,519

 

 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 sale640
 4,286
 4,926
 1,343
 5,670
 7,013
Loans and leases held for investment1,468
 5,622
 7,090
 2,538
 21,871
 24,409
Total interest income2,561
 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 accounts478
 (41) 437
 689
 292
 981
Certificates of deposit81
 1,818
 1,899
 (74) 5,744
 5,670
Other borrowings22
 125
 147
 26
 234
 260
Total interest expense581
 2,635
 3,216
 641
 7,136
 7,777
Net interest income$1,980
 $7,414
 $9,394
 $4,030
 $20,771
 $24,801

Provision for Loan and Lease Credit Losses

The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for loancredit losses (“ACL”) on loans and lease lossesleases at a level that is appropriate in relation to the estimated losses inherent in the loan and lease portfolio. A number of factors are considered in determining the required level of loan and lease loss reserves and the provision required to achieve the appropriate reserve level, including loan and lease growth, credit risk rating trends, nonperforming loan and lease levels, delinquencies, loan and lease portfolio concentrations and economic and market trends.

The provision for loan and lease losses for the third quarter of 2017 was $2.4 million compared to $3.8 million for the same period in 2016, a decrease of $1.4 million, or 36.3%, largely driven by lower levels of specific reserve requirements. For the nine months ended September 30, 2017 the provision was $5.5 million compared to $8.7 million for the same period in 2016, a decrease of $3.2 million, or 36.9%. The decrease in the provision for loan and lease losses for the nine months ended September 30, 2017 was principally driven by the one-time transfer in the second quarter of 2016 of $318.8 million in unguaranteed loans and leases from being classified as held for sale to held for investment. This reclassification resulted in a $4.0 million increase in the provision for loan and lease losses during the second quarter of 2016. Partially offsetting the effects of the 2016 loan reclassification were additional reserves recorded to accommodate robust loan and lease growth in 2017.
Loans and leases held for investment of $1.17 billion as of September 30, 2017 increased by $402.9 million, or 52.5%, compared to September 30, 2016. This growth was fueled by strong loan origination volume of $1.45 billion in the first three quarters of 2017.
Net charge-offs were $959 thousand, or 0.34% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended September 30, 2017, compared to net charge-offs of $937 thousand, or 0.51%, for the three months ended September 30, 2016. Net charge-offs for the first nine months of 2017 and 2016 totaled $2.7 million and $929 thousand, respectively. Year-to-date net charge-offs as a percentage of year-to-date average loans held for investment were 0.26% and 0.18% at September 30, 2017 and 2016, respectively. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for loan and lease losses.
In addition, at September 30, 2017, nonperforming loans and leases not guaranteed by the SBA totaled $3.3 million, which was 0.28% of the held-for-investment loan and lease portfolio compared to $3.4 million, or 0.44%, of loans and leases held for investment at September 30, 2016.

Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typical SBA 7(a) loan carries a 75% guarantee while USDA guarantees range from 60%50% to 80%90% 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 2020, the provision for loan and lease credit losses was $10.0 million compared to $3.4 million for the same period in 2019, an increase of $6.5 million.  For the first half of 2020, the provision for loan and lease credit losses was $21.8 million compared to $6.4 million for the same period in 2019, an increase of $15.3 million.  The Company adopted the new current expected credit losses (“CECL”) standard effective January 1, 2020 and accordingly determined to use forecasted levels of unemployment as a primary economic variable in forecasting future expected losses.  The majority of the provision for the second quarter of 2020 was due to the effects of the COVID-19 pandemic, while approximately $15.5 million of the first half of 2020 provision was estimated to be based upon the severity of ongoing developments resulting from the COVID-19 pandemic.  

Loans and leases held for investment at historical cost were $3.82 billion as of June 30, 2020, increasing by $2.45 billion, or 178.7%, compared to June 30, 2019.  This growth was largely fueled by $1.74 billion in PPP loan originations in the second quarter of 2020.  Excluding PPP loan originations and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was $2.13 billion at June 30, 2020, an increase of $758.2 million, or 55.4%, over June 30, 2019.  This growth, outside of PPP activity in the second quarter of 2020, was fueled by continued origination volumes combined with retention of substantially more loans on the balance sheet.


Net charge-offs for loans and leases carried at historical cost were $1.8 million, or 0.21% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2020, compared to $121 thousand, or 0.04%, for the three months ended June 30, 2019.  Net charge-offs for loans and leases carried at historical cost for the second quarter of 2020 was 0.25% of average quarterly loans and leases held for investment, excluding PPP loans, on an annualized basis.  For the six months ended June 30, 2020, net charge-offs totaled $4.6 million compared to $34 thousand for the six months ended June 30, 2019, an increase of $4.5 million, or 13,370.6%. The increase in net charge-offs largely consisted of a number of loans in the Government Contracting, Healthcare, Family Entertainment, and Independent Pharmacies verticals.  Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.  

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $6.4 million and $7.7 million accounted for under the fair value option at June 30, 2020 and 2019, respectively, totaled $13.1 million, which was 0.34% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2020, compared to $6.5 million, or 0.48% of loans and leases held for investment at June 30, 2019.  Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.62% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at June 30, 2020.

Noninterest Income

Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and revaluation.related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net (loss) gain on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk.  Other less 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,

 

 

2020/2019 Increase (Decrease)

 

 

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

6,691

 

 

$

7,063

 

 

$

(372

)

 

 

(5.27

)%

Loan servicing asset revaluation

 

 

(1,571

)

 

 

(3,245

)

 

 

1,674

 

 

 

51.59

 

Net gains on sales of loans

 

 

10,695

 

 

 

6,015

 

 

 

4,680

 

 

 

77.81

 

Net (loss) gain on loans accounted for under the fair

   value option

 

 

(1,089

)

 

 

2,791

 

 

 

(3,880

)

 

 

(139.02

)

Equity method investments income (loss)

 

 

(2,243

)

 

 

(1,736

)

 

 

(507

)

 

 

29.21

 

Equity security investments gains (losses), net

 

 

161

 

 

 

32

 

 

 

129

 

 

 

403.13

 

Gain on sale of investment securities

   available-for-sale, net

 

 

734

 

 

 

 

 

 

734

 

 

 

100.00

 

Lease income

 

 

2,635

 

 

 

2,369

 

 

 

266

 

 

 

11.23

 

Management fee income

 

 

1,206

 

 

 

91

 

 

 

1,115

 

 

 

1,225.27

 

Construction supervision fee income

 

 

684

 

 

 

386

 

 

 

298

 

 

 

77.20

 

Other noninterest income

 

 

4,508

 

 

 

884

 

 

 

3,624

 

 

 

409.95

 

Total noninterest income

 

$

22,411

 

 

$

14,650

 

 

$

7,761

 

 

 

52.98

%


 

 

Six Months Ended June 30,

 

 

2020/2019 Increase (Decrease)

 

 

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

13,113

 

 

$

14,473

 

 

$

(1,360

)

 

 

(9.40

)%

Loan servicing asset revaluation

 

 

(6,263

)

 

 

(7,285

)

 

 

1,022

 

 

 

14.03

 

Net gains on sales of loans

 

 

21,807

 

 

 

10,213

 

 

 

11,594

 

 

 

113.52

 

Net (loss) gain on loans accounted for under the fair

   value option

 

 

(11,727

)

 

 

4,874

 

 

 

(16,601

)

 

 

(340.60

)

Equity method investments income (loss)

 

 

(4,721

)

 

 

(3,750

)

 

 

(971

)

 

 

25.89

 

Equity security investments gains (losses), net

 

 

97

 

 

 

135

 

 

 

(38

)

 

 

(28.15

)

Gain on sale of investment securities

   available-for-sale, net

 

 

655

 

 

 

5

 

 

 

650

 

 

 

13,000.00

 

Lease income

 

 

5,259

 

 

 

4,694

 

 

 

565

 

 

 

12.04

 

Management fee income

 

 

2,850

 

 

 

91

 

 

 

2,759

 

 

 

3,031.87

 

Construction supervision fee income

 

 

1,074

 

 

 

1,165

 

 

 

(91

)

 

 

(7.81

)

Other noninterest income

 

 

6,009

 

 

 

3,351

 

 

 

2,658

 

 

 

79.32

 

Total noninterest income

 

$

28,153

 

 

$

27,966

 

 

$

187

 

 

 

0.67

%

 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 loans18,148
 21,833
 (3,685) (16.88)
Gain on sale of securities available-for-sale
 1
 (1) (100.00)
Construction supervision fee income362
 502
 (140) (27.89)
Title insurance income1,968
 
 1,968
 100.00
Other noninterest income1,783
 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 loans55,276
 52,813
 2,463
 4.66
Gain on sale of investment securities available-for-sale
 1
 (1) (100.00)
Construction supervision fee income1,077
 1,799
 (722) (40.13)
Title insurance income5,803
 
 5,803
 100.00
Other noninterest income3,601
 1,925
 1,676
 87.06
Total noninterest income$77,480
 $67,212
 $10,268
 15.28 %

For the three months ended SeptemberJune 30, 2017,2020, noninterest income decreasedincreased by $372 thousand,$7.8 million, or 1.5%53.0%, compared to the three months ended SeptemberJune 30, 2016.2019.  The declineincrease from the prior year is primarily the result of the aforementioned increase in net gains on sales of loans decreasing $3.7combined with a $3.6 million to $18.1increase  in other noninterest income largely comprised of $2.5 million in revenue resulting from the thirdsale of services from co-developed technology for processing PPP loans.  Other items contributing to the increase in noninterest income were a lower net loss on the loan servicing asset revaluation of $1.7 million and management fee income earned by Canapi Advisors, the Company’s investment advisor subsidiary, increasing by $1.1 million.  Offsetting the increases in noninterest income for the second quarter of 20172020 was the aforementioned net negative valuation adjustment related to loans measured at fair value which increased by $3.9 million.

For the six months ended June 30, 2020, noninterest income increased by $187 thousand, or 0.7%, compared to $21.8 millionthe six months ended June 30, 2019.  The slight increase from the prior year is also primarily the result of the aforementioned increase 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. Partially offsetting the effects of lower gains on sales of loans were increased servicing revenue of $630 thousand, title insurance income of $2.0combined with a $2.7 million from the acquisition of a nationwide title insurance business on February 1, 2017 and increased other noninterest income of $1.1 million. The increase in other noninterest income was primarilylargely comprised of $682 thousand$2.5 million in revenue resulting from the sale of operating lease incomeservices from renewable energy assets and trust management income of $236 thousand.

For the nine months ended September 30, 2017, noninterest income increased by $10.3 million, or 15.3%, comparedco-developed technology for processing PPP loans.  Other items contributing to the nine months ended September 30, 2016. Increasesincrease in noninterest income were primarilya lower net loss on the resultloan servicing asset revaluation of higher year-to-date levels in$1.0 million and management fee income earned by Canapi Advisors, the serviced loan portfolio andCompany’s investment advisor subsidiary, increasing by $2.8 million.  Offsetting the volume of loans sold in the secondary market which generated $2.9 million of increased servicing revenue and $2.5 million of increased net gains on sale of loans. Also driving increased levels of noninterest income was $5.8 million in title insurance revenue from the acquisition of a nationwide title insurance business in early 2017 and increased other

noninterest income of $1.7 million. The increase in other noninterest income was primarily comprised of $691 thousand of operating lease income from renewable energy assets and trust management income of $845 thousand. Partly offsetting the overall increaseincreases in noninterest income for the first half of 2020 was a higherthe aforementioned net negative valuation adjustment related to loans measured at fair value which increased by $16.6 million and decreased loan servicing revaluation adjustmentrevenue of $1.8$1.4 million.

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,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Amount of loans and leases

   originated

 

$

2,175,055

 

 

$

525,088

 

 

$

500,634

 

 

$

390,851

 

Guaranteed portions

   of loans sold

 

 

154,980

 

 

 

71,934

 

 

 

162,297

 

 

 

62,940

 

Outstanding balance of

   guaranteed loans sold (1)

 

 

2,840,429

 

 

 

2,870,108

 

 

 

2,761,015

 

 

 

2,952,774

 



 

 

Six Months Ended June 30,

 

 

For years ended December 31,

 

 

 

2020

 

 

2019

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

Amount of loans and leases

   originated

 

$

2,675,689

 

 

$

915,939

 

 

$

2,001,886

 

 

$

1,765,680

 

 

$

1,934,238

 

 

$

1,537,010

 

Guaranteed portions of

   loans sold

 

 

317,277

 

 

 

134,874

 

 

 

340,374

 

 

 

945,178

 

 

 

787,926

 

 

 

761,933

 

Outstanding balance of

   guaranteed loans sold (1)

 

 

2,840,429

 

 

 

2,870,108

 

 

 

2,746,840

 

 

 

3,045,460

 

 

 

2,680,641

 

 

 

2,278,618

 

 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 sold163,843
 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 sold576,272
 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)

(1)

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

Changes in various components of noninterest income are discussed in more detail below.

Loan Servicing Revenue: While portions of the loans that the Bank originates are sold and generate gain on sale revenue, servicing rights for all loans that the Bank originates, including loansthose sold portions are retained by the Bank. In exchange for continuing to service sold loans, that are sold, the Bank receives fee income represented in loan servicing revenue equivalent to one percent1.0% of the outstanding balance of SBA loans sold and 0.40% of the outstanding balance of USDA loans sold. In addition, the standard cost of(adequate compensation) for servicing sold loans is approximately 0.40% of the balance of the loans sold, which is included in the loan servicing revaluation computations. Unrecognized servicing revenue above the standard cost to service is reflected in a servicing asset recorded on the balance sheet. Revenues associated with the servicing of loans are recognized over the expected life of the loan through the income statement, and the servicing asset is reduced as this revenue is recognized. For three and nine monthsthe quarter ended SeptemberJune 30, 2017,2020, loan servicing revenue increased $630decreased $372 thousand, or 10.8%5.27%, and $2.9to $6.7 million or 18.2%, respectively,as compared to the three and ninequarter ended June 30, 2019.  For the six months ended SeptemberJune 30, 2016,2020, loan servicing revenue decreased $1.4 million, or 9.4% to $13.1 million as compared to the six months ended June 30, 2019.  The lower servicing revenue for the second quarter and first half of 2020 has been a result of an increase in the average outstandingdeclining balance of guaranteed loans sold.the serviced portfolio. At SeptemberJune 30, 2017,2020, the outstanding balance of government guaranteed loans sold in the secondary market was $2.58 billion. At September$2.84 billion compared to $2.87 billion at June 30, 2016, the outstanding balance of SBA guaranteed loans sold was $2.10 billion.

2019.

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 ended SeptemberJune 30, 2017,2020, there was a net negative loan servicing revaluation adjustment of $3.7$1.6 million compared to a net negative revaluation adjustment of $3.4$3.2 million for the three months ended SeptemberJune 30, 2016.2019.  For the ninesix months ended SeptemberJune 30, 2017,2020, there was a net negative loan servicing revaluation adjustment of $6.9$6.3 million compared to a net negative revaluation adjustment of $5.1$7.3 million for the ninesix months ended SeptemberJune 30, 2016. The higher negative loan servicing2019.The lower revaluation amount for the thirdsecond quarter and first half of 20172020 as compared to the third quartercorresponding period of 20162019 was driven by amortizationprimarily a result of the serviced portfolio during that period partially offset by improvements in the secondary market. The higher year-to-date negative loan servicing revaluation amount as compared to the same period in 2016 was principally driven by amortization of the serviced portfolio combined with decreases in the secondaryimproving market for guaranteed portions of 7(a) loans.


conditions.  

Net Gains on Sale of Loans: For the three and nine months ended SeptemberJune 30, 2017,2020, net gains on sales of loans decreased $3.7increased $4.7 million, or 16.9%77.8%, and increased $2.5 million, or 4.7%, respectively, compared to the three and nine months ended SeptemberJune 30, 2016.2019. For the three months ended SeptemberJune 30, 2017, the volume of guaranteed loans sold decreased $46.8 million, or 22.2%, to $163.8 million from $210.6 million for the three months ended September 30, 2016. This decline in guaranteed sale volume was principally the result of a decrease in the percentage of loans that were fully funded and thereby eligible for sale at closing arising largely from seasonality in our renewable energy vertical. For the nine months ended September 30, 2017,2020, the volume of guaranteed loans sold increased $74.5$83.0 million, or 14.8%115.4%, to $576.3$155.0 million from $501.8$71.9 million for the ninethree months ended SeptemberJune 30, 2016. The volume-driven increases in2019.  For the year-to-datesix months ended June 30, 2020, net gaingains on loan sale comparisons were partially offset by lower average premiums paid insales of loans increased $11.6 million, or 113.5%, compared to the secondary market.six months ended June 30, 2019. For the six months ended June 30, 2020, the volume of guaranteed loans sold increased $182.4 million, or 135.2%, to $317.3 million from $134.9 million for the six months ended June 30, 2019.  The average net gain on guaranteed loan sales decreased from $80.1 thousand to $66.8 thousand, per million sold, in the second quarters of 2019 and 2020, respectively, and decreased from $71.3 thousand to $65.2 thousand, per million sold, in the first half of 2019 and 2020, respectively.  With this overall decrease in market value due to loan sales earlier in the second quarter combined with the mix of loan sales, the increase in net gains on sales of loans in the second quarter and second half of 2020 is due to a higher volume of loans sold.  Secondary market values continued to recover as the second quarter of 2020 progressed.  The volume of sales in the first quarter of 2020 was heightened to strengthen the Company’s capital and liquidity profile in light of uncertain market conditions while the second quarter of 2020 sales volume is in-line with the Company’s balance sheet strategy.  Also enhancing the increase in net gains on sale of loans in the second quarter of 2020 are $1.1 million in decreased losses from fair value changes in exchange-traded interest rate futures contracts.  This decrease in volatility of exchange-traded interest rate futures contracts was the product of the Company preemptively exiting such contracts in the first quarter.  


Net (Loss) Gain on Loans Accounted for Under the Fair Value Option:  For the three and nine months ended SeptemberJune 30, 2017 was $111 thousand and $97 thousand of revenue2020, the net loss on loans accounted for each $1under the fair value option increased $3.9 million, in loans sold, respectively,or 139.0%, compared to $104 thousand and $105 thousand of revenue for each $1 million in loans sold for the three and nine months ended SeptemberJune 30, 2016.2019.  For the six months ended June 30, 2020, the net loss on loans accounted for under the fair value option increased $16.6 million, or 340.6%, compared to the six months ended June 30, 2019.  The lower average premiums recordedcarrying amount of loans accounted for under the fair value option at June 30, 2020 and 2019 was $866.7 million ($32.1 million classified as held for sale and $834.6 million classified as held for investment) and $865.7 million ($26.6 million classified as held for sale and $839.1 million classified as held for investment), respectively, an increase of $990 thousand, or 0.1%.  The first half of 2020 net loss on loans accounted for under the fair value option was estimated to be approximately $9.7 million related to the severity of ongoing developments of the COVID-19 pandemic.  The magnitude of COVID-19 related impacts on loan fair value adjustments in 2017 were driventhe second quarter of 2020 was dampened by increased USDA guaranteed loan sales which commonly receive lower premiums than SBA guaranteed loan sales.

improving market conditions for unguaranteed loans.

Noninterest Expense

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

The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.

 

 

Three Months Ended June 30,

 

 

2020/2019 Increase (Decrease)

 

 

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

30,782

 

 

$

21,990

 

 

$

8,792

 

 

 

39.98

%

Non-staff expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel expense

 

 

364

 

 

 

1,541

 

 

 

(1,177

)

 

 

(76.38

)

Professional services expense

 

 

1,385

 

 

 

1,621

 

 

 

(236

)

 

 

(14.56

)

Advertising and marketing expense

 

 

624

 

 

 

1,665

 

 

 

(1,041

)

 

 

(62.52

)

Occupancy expense

 

 

1,955

 

 

 

1,848

 

 

 

107

 

 

 

5.79

 

Data processing expense

 

 

2,764

 

 

 

1,947

 

 

 

817

 

 

 

41.96

 

Equipment expense

 

 

4,652

 

 

 

4,239

 

 

 

413

 

 

 

9.74

 

Other loan origination and maintenance expense

 

 

2,492

 

 

 

1,708

 

 

 

784

 

 

 

45.90

 

Renewable energy tax credit investment impairment

 

 

 

 

��

602

 

 

 

(602

)

 

 

(100.00

)

FDIC insurance

 

 

1,721

 

 

 

699

 

 

 

1,022

 

 

 

146.21

 

Other expense

 

 

1,361

 

 

 

1,716

 

 

 

(355

)

 

 

(20.69

)

Total non-staff expenses

 

 

17,318

 

 

 

17,586

 

 

 

(268

)

 

 

(1.52

)

Total noninterest expense

 

$

48,100

 

 

$

39,576

 

 

$

8,524

 

 

 

21.54

%

 

 

Six Months Ended June 30,

 

 

2020/2019 Increase (Decrease)

 

 

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

58,845

 

 

$

43,845

 

 

$

15,000

 

 

 

34.21

%

Non-staff expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel expense

 

 

2,145

 

 

 

2,741

 

 

 

(596

)

 

 

(21.74

)

Professional services expense

 

 

3,322

 

 

 

3,803

 

 

 

(481

)

 

 

(12.65

)

Advertising and marketing expense

 

 

1,985

 

 

 

3,029

 

 

 

(1,044

)

 

 

(34.47

)

Occupancy expense

 

 

4,376

 

 

 

3,457

 

 

 

919

 

 

 

26.58

 

Data processing expense

 

 

5,921

 

 

 

4,346

 

 

 

1,575

 

 

 

36.24

 

Equipment expense

 

 

9,287

 

 

 

7,564

 

 

 

1,723

 

 

 

22.78

 

Other loan origination and maintenance expense

 

 

4,948

 

 

 

3,347

 

 

 

1,601

 

 

 

47.83

 

Renewable energy tax credit investment impairment

 

 

 

 

 

602

 

 

 

(602

)

 

 

(100.00

)

FDIC insurance

 

 

3,231

 

 

 

1,334

 

 

 

1,897

 

 

 

142.20

 

Other expense

 

 

3,531

 

 

 

3,709

 

 

 

(178

)

 

 

(4.80

)

Total non-staff expenses

 

 

38,746

 

 

 

33,932

 

 

 

4,814

 

 

 

14.19

 

Total noninterest expense

 

$

97,591

 

 

$

77,777

 

 

$

19,814

 

 

 

25.48

%

 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 expense2,289
 2,218
 71
 3.20
Professional services expense1,068
 907
 161
 17.75
Advertising and marketing expense1,516
 1,097
 419
 38.20
Occupancy expense1,473
 1,058
 415
 39.22
Data processing expense1,982
 1,252
 730
 58.31
Equipment expense2,228
 611
 1,617
 264.65
Other loan origination and maintenance expense1,601
 806
 795
 98.64
FDIC insurance858
 210
 648
 308.57
Title insurance closing services expense687
 
 687
 100.00
Other expense3,117
 1,588
 1,529
 96.28
Total non-staff expenses16,819
 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 expense6,035
 6,394
 (359) (5.61)
Professional services expense4,228
 2,345
 1,883
 80.30
Advertising and marketing expense4,977
 3,425
 1,552
 45.31
Occupancy expense4,018
 3,306
 712
 21.54
Data processing expense5,536
 3,864
 1,672
 43.27
Equipment expense5,005
 1,696
 3,309
 195.11
Other loan origination and maintenance expense3,587
 2,001
 1,586
 79.26
FDIC insurance2,308
 507
 1,801
 355.23
Title insurance closing services expense1,877
 
 1,877
 100.00
Other expense8,883
 4,648
 4,235
 91.11
Total non-staff expenses46,454
 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, 20172020 increased $8.6$8.5 million, or 31.7%21.5%, and $28.1$19.8 million, or 37.9%25.5%, respectively, compared to the same periods in 2016.2019. The increase in noninterest expense was predominately impacted by increased personnel, equipment expense and other expenses primarilylargely driven by the significant growth of the Company's core business.salaries and employee benefits.  Changes in various components of noninterest expense are discussed below.

Salaries and employee benefits: Total personnel expense for the three and ninesix months ended SeptemberJune 30, 20172020 increased by $1.6$8.8 million, or 9.0%40.0%, and $9.8$15.0 million, or 21.4%34.2%, respectively, compared to the same periods in 2016. A significant driver for2019.  While personnel expense is carefully managed, this increase was the acquisition of a nationwide title insurance business on February 1, 2017 with 54 full-time and 5 part-time employees. Also contributingis principally due to the growth in personnel expense was continuedCompany’s commitment to and investment in human capitalits workforce to support the growing loangrowth and lease production from new and existing verticals.a variety of initiatives combined with $7.2 million in expense for a performance bonus pool that was available to all employees other than executive officers. Total full-time equivalent employees increased from 400531 at SeptemberJune 30, 20162019 to 530640 at SeptemberJune 30, 2017.2020.  Salaries and employee benefits expense included $2.0$3.3 million and $4.1 million of stock based compensation in the three months ended September 30, 2017 and 2016, respectively, and $6.2 million of stock-based compensation for the three and $7.6six months ended June 30, 2020, respectively, compared to $2.9 million and $5.8 million for the ninethree and six months ended SeptemberJune 30, 2017 and 2016,2019, respectively.  Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock basedstock-based compensation.

Of the total stock based compensation, $286 thousand

Data processing expense: Total data processing expense for the third quarter of 2017 and $1.0 million for the first nine months of 2017 included in salaries and employee benefits is related to restricted stock unit ("RSU") awards with a market price condition of $34 per share for key employee retention with an effective grant date of May 24, 2016. See Note 10 - Stock 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.


Professional services expense: For the three and ninesix months ended SeptemberJune 30, 2017, total professional services expense2020 increased $161by $817 thousand, or 17.8%42.0%, and $1.9$1.6 million, or 80.3%36.2%, respectively, compared to the same periods in 2016.2019.  The primary drivers of the year over year increase were advisory, consulting,was predominantly driven by third party costs incurred in internal software development and due diligence expenses relatedwith additional software subscriptions  to the February 2017 acquisition of a title insurance business.
Advertising and marketing expense: help maximize operational efficiencies.

Equipment expense:For the three and ninesix months ended SeptemberJune 30, 2017, total advertising and marketing2020, equipment expense increased $419$413 thousand, or 38.2%9.7%, and $1.6$1.7 million, or 45.3%22.8%, respectively, compared to the same periods in 2016. The primary driver2019.  Primary factors contributing to this increase were the depreciation of technology and infrastructure investments to support the increase in advertisingCompany’s growth initiatives.

Other loan origination and marketing expense was the cost of growing brand recognition in new and existing verticals and launching a new deposit platform.

Data processing expense: maintenance expense:For the three and ninesix months ended SeptemberJune 30, 2017, total data processing2020, other loan origination and maintenance expense increased $730$784 thousand, or 58.3%45.9%, and $1.7$1.6 million, or 43.3%47.8%, respectively, compared to the same periods in 2016. The primary driver2019 due to increased levels of the increase in data processing expense was the growth in our loan and deposit portfolios and the development of a new deposit platform.
Equipment expense:SBA loans.

FDIC insurance:For the three and ninesix months ended SeptemberJune 30, 2017, the total costs associated with equipment2020, FDIC insurance increased $1.6$1.0 million, or 264.6%146.2%, and $3.3$1.9 million, or 195.1%, respectively, compared to the same period in 2016. A major factor behind


this increase was the higher level of depreciation related to the first quarter addition of two new aircraft combined with useful lives being shortened for existing aircraft as well as for solar panels acquired to meet leasing commitments.
FDIC insurance: For the three and nine months ended September 30, 2017, total Federal Deposit Insurance Corporation (FDIC) insurance expense increased $648 thousand, or 308.6%, and $1.8 million, or 355.2%142.2%, respectively, compared to the same periods in 2016.2019 due to higher required premiums.

Travel & Advertising and marketing expenses:For the three and six months ended June 30, 2020, travel & advertising and marketing expenses in aggregate decreased $2.2 million, or 69.2%, and $1.6 million, or 28.4%, respectively.  This increasedecrease was the result of revised premium requirementscertain activities being paused due to the impact of all FDIC-insured financial institutions in the latter part of 2016 along with significantly higher deposit levels.

Title insurance closing services expense: With the first quarter 2017 acquisition of a nationwide title insurance company, this is a new expense category. This category reflects the cost of closing services such as notary and abstracting in the delivery of title insurance agency products. COVID-19.

Income Tax Expense

For the three and nine months ended SeptemberJune 30, 2017, total title insurance closing services2020, income tax expense was $687increased by $812 thousand and $1.9 million, respectively.

Other expense: For the three and nine months ended September 30, 2017, the total costs associated with other expenses increased $1.5 million, or 96.3%, and $4.2 million, or 91.1%, respectively, compared to the same periodsperiod in 2016. The quarter-over-quarter increase in other expenses was predominately comprised of costs associated with support expenses2019, and infrastructure driven by business growth and an increase in charitable contributions. The year-over-year increase in other expense was comprised predominately of charitable initiatives, costs associated with the newly acquired title company, and a first quarter 2017 loss incurred upon the trade-in of an existing aircraft.
Income Tax Expense
TheCompany’s effective tax rates forwere 28.1% and 11.8%, respectively.  The increase in the three and ninesecond quarter of 2020 over the second quarter of 2019 is primarily due to the absence of expected tax credits during 2020.  

For the six months ended SeptemberJune 30, 2017 were (64.8)2020, the Company had an income tax benefit of $(6.3) million with an effective tax rate of (62.2)% and (15.5)%, respectively, compared towhile the first half of 2019 had income tax expense of $979 thousand with an effective ratestax rate of 42.4% and 43.7% for the three and nine months ended September 30, 2016, respectively. 11.8%.  The negative effective ratestax rate during the first half of (64.8)%2020 was a result of a discrete, estimated income tax benefit of $3.7 million related to the enactment of the CARES Act on March 27, 2020.  The CARES Act allows taxpayers to carryback certain net operating losses to each of the five taxable years preceding the taxable year of such losses.  As a result, the Company will be allowed to carryback its 2018 net operating loss which had been utilized and (15.5)%measured under the prior law using a 21% corporate income tax rate to pre-2018 taxable years during which the corporate income tax rate was 35%.  The remaining income tax benefit in the first half of 2020 was predominantly driven by the Company’s overall net pretax loss.  Based upon current projections, the effective tax rate for the threeremainder of 2020 is expected to be approximately 26.0% to 28.0%; however, there can be no assurance as to the actual amount because it will be dependent upon the nature and nine-month periods ended September 30, 2017 principally reflected an increase in anticipated investment in renewable energy assetsamount of future income and expenses, investments generating investment tax credits. As the lessor of these assets, the Company is accomplishing broader strategic initiatives in the renewable energy sector. The year to datecredits and transactions with discrete tax rate also benefited from the first quarter adoption of a new accounting pronouncement related to the treatment of share based compensation issued by the Financial Accounting Standards Board that was effective January 1, 2017; "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," also referred to as ASU 2016-09.effects.



Discussion and Analysis of Financial Condition

September

June 30, 20172020 vs. December 31, 2016

2019  

Total assets at SeptemberJune 30, 20172020 were $2.43$8.21 billion, an increase of $676.9 million,$3.40 billion, or 38.6%70.6%, compared to total assets of $1.76$4.81 billion at December 31, 2016.2019. The growth in total assets was principally driven by the following:

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, increased $1.13 billion as a product of increased levels of borrowings, deposits and loan sales arising from strategically heightened levels of liquidity related to COVID-19 risks and uncertainties and funding for PPP loans originated in the second quarter;


Increased investment securities available-for-sale of $239.7 million.  This increase in investment securities was due to availability of excess surplus liquidity, discussed above related to pandemic readiness, accelerating 2020 investment growth in accordance with the Company’s asset-liability and liquidity management plan; and

Increased

Growth in loans and leases held for sale and held for investment of $2.03 billion resulting from strong origination activity in the first half of 2020, largely comprised of $1.74 billion in PPP loans.

Cash and cash equivalents, comprised of cash and due from banks due to the successful secondary offering completed in August of 2017 of $113.1 million and growth from deposit gathering campaigns generating $527.8 million in new deposits;

Growth in loan and lease originations combined with longer retention times 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;
Growth in premises and equipment related primarily to construction of a new aircraft hangar, the addition of two new aircraft in replacement of two older ones and the addition of solar panels to meet leasing commitments;
Increased other assets largely related to:
goodwill and intangibles generated by the first quarter acquisition of Reltco, and
income taxes receivable arising from investment tax credits generated by investment in solar panels classified in premises and equipment in which the Company is the lessor.

Cash and cash equivalents were $260.9 millionfederal funds sold, was $1.35 billion at SeptemberJune 30, 2017,2020, an increase of $22.9 million,$1.13 billion, or 9.6%508.9%, compared to $238.0$221.4 million at December 31, 2016. This2019.  As mentioned above, this increase primarily reflectedreflects the resultsimpact of a successful deposit gathering campaign combined withstrategically heightened levels of liquidity related to COVID-19 risks and uncertainties and funding for PPP loans during the net proceeds from the Company’s secondary capital raise in the thirdsecond quarter.

Total investment securities increased $5.5$239.7 million during the first ninesix months of 2017,2020, from $71.1$540.0 million at December 31, 2016,2019, to $76.6$779.8 million at SeptemberJune 30, 2017,2020, an increase of 7.8%44.4%.  The Company increased its investment securities position during the first half of 2020 largely as a part of improving returns on excess liquidity and meeting annual investment asset-liability plans, as discussed above.  At June 30, 2020, the investment portfolio iswas comprised of USU.S. treasury, U.S. government agency, securities, residentialU.S. government- sponsored entity mortgage-backed securities and a mutual fund.


municipal bonds.

Loans and leases held for saleinvestment increased $298.3 million,$2.02 billion, or 75.7%77.0%, during the first ninesix months of 2017,2020, from $394.3 million$2.63 billion at December 31, 2016,2019, to $692.6 million$4.65 billion at SeptemberJune 30, 2017.2020. The increase was primarily the result of strong growth$1.74 billion in PPP loan origination activities throughout 2017originations combined with $930.8 million in other loan originations in the first half of 2020.

Premises and the strategy to enhance interest income by increasing the retention time of guaranteed loans along with growth in certain loans that take time to fully fund.

Loans and leases held for investment increased $262.3equipment, net, decreased $10.0 million, or 28.9%3.6%, during the first ninesix months of 2017, from $907.6 million at December 31, 2016, to $1.17 billion at September 30, 2017. The increase was primarily the result of robust loan and lease growth from origination activities during the first three quarters of 2017 combined with greater retention of loans on the consolidated balance sheet.
Premises and equipment, net increased $64.6 million, or 99.9%, during the first nine months of 2017. This increase2020 which was primarily driven by constructionincreased levels of a new aircraft hangardepreciation of facilities and the replacement of two older aircraft with two new ones better suitedinfrastructure to service the Company's growing nationwide customer baseaccommodate Company growth and the addition of solar panels to meet leasing commitments.
Servicingobligations in prior periods.

Other assets increased $1.4$23.8 million, or 2.7%15.3%, during the first nine months of 2017, from $52.0$156.1 million at December 31, 2016,2019 to $53.4$180.0 million at SeptemberJune 30, 2017. The2020.  This increase was due to a variety of items, principally comprised of a $7.7 million increase in servicing assets is primarily the result of loan sales outpacing the amortization of the existing serviced portfolio.

Other assets increased $28.1 million, or 76.1%, during the first nine months of 2017, from $37.0 million at December 31, 2016 to $65.2 million at September 30, 2017. The increase in other assets was primarilyaccrued interest receivable driven by the recognitionhigher levels of $8.9interest earning assets combined with $4.6 million in income taxes receivable arising from investment tax credits generatedincreased receivables from the investmentSBA for guarantee recoveries, $4.1 million in solar panel leasing activities combined with the first quarter 2017 acquisition of the nationwide title insurance business. Asnew intangibles added as a result of the title insurance acquisition other assets includes goodwillof Jolley Asset Management, LLC (as discussed more fully in Note 1. Basis of Presentation under the subheading Business Combination), $2.5 million in additional receivables for co-developed technology PPP loan processing services and intangible assets of $7.3$2.3 million in capitalized software development and $5.3 million, respectively.
implementation costs.

Total deposits were $2.01$5.87 billion at SeptemberJune 30, 2017,2020, an increase of $527.8 million,$1.65 billion, or 35.5%38.9%, from $1.49$4.23 billion at December 31, 2016.2019. The increase in deposits was largely driven by a new deposit savings productthe planned origination of PPP loans and success of deposit gathering campaignsfollowing the defensive strategy to support the growth in loan and lease originations.

Long term borrowings decreased $971 thousand, or 3.5%,build liquidity during the first nine monthsquarter of 2017,2020 due to the uncertainty of the effects of COVID-19.

Borrowings increased to $1.72 billion at June 30, 2020 from $27.8$14 thousand at December 31, 2019.  This increase was related to $1.72 billion in new borrowings through the PPPLF in the second quarter of 2020. These PPPLF borrowings were used to help fund PPP loans and complement the defensive strategy to build liquidity which commenced in the first quarter of 2020 due to the uncertainty of the effects of COVID-19.

Shareholders’ equity at June 30, 2020 was $548.4 million as compared to $532.4 million at December 31, 2016 to $26.9 million at September 30, 2017. The decrease in long term borrowings was primarily the result of debt reduction following a successful capital raise in the third quarter.

Other liabilities increased $8.3 million, or 42.8%, during the first nine months of 2017, from $19.5 million at December 31, 2016 to $27.8 million at September 30, 2017. The increase in other liabilities was principally driven by a $4.7 million earn-out contingent liability related to the acquisition of the title insurance business and an increase in accrued expenses of $5.7 million in support of ongoing business growth. This was partially offset by a decrease in income taxes payable of $2.1 million.
Shareholders’ equity at September 30, 2017 was $364.6 million as compared to $222.8 million at December 31, 2016.2019. The book value per share was $9.15$13.53 at SeptemberJune 30, 20172020 compared to a book value per share of $6.51$13.20 at December 31, 2016.2019. Average equity to average assets was 12.2%9.2% for the ninesix months ended SeptemberJune 30, 20172020 compared to 14.6%12.2% for the year ended December 31, 2016.2019. The increase in shareholders’ equity was principally the result of the issuanceother comprehensive income of 5.2 million additional common shares with net proceeds of $113.1$13.6 million and net income to common shareholders for the nine months ended September 30, 2017 of $28.8 million combined with stock basedstock-based compensation expense of $5.7$6.2 million, and $565 thousand related to the issuance of stock in the title insurance company acquisition, partially offset by cash withheld in lieua net loss of issuing restricted stock upon vesting of $4.8$3.8 million and $2.6$2.4 million in dividends.


During the first half of 2020, 200,000 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) under a private sale. The conversion decreased the value of Class B common stock (non-voting) and increased the value of Class A common stock (voting) by $2.1 million.

Asset Quality

Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit & Risk Committee of the Board of Directors.

Nonperforming Assets

The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan.


loan or lease.

Troubled debt restructurings (“TDRs”) 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).


$90.1 million in nonaccrual loans and leases and $5.7 million in foreclosed assets. Of the $134.3 million of nonperforming assets and TDRs, $100.9 million carried an SBA guarantee, leaving an unguaranteed exposure of $33.4 million in total nonperforming assets and TDRs at June 30, 2020. This represents an increase of $6.2 million, or 22.8%, from an unguaranteed exposure of $27.2 million at December 31, 2019.  

The following table provides information with respect to nonperforming assets and troubled debt restructurings, excluding loans measured at fair value, at the dates indicated.

 

 

June 30, 2020 (1)

 

 

December 31, 2019 (1)

 

Nonaccrual loans and leases:

 

 

 

 

 

 

 

 

Total nonperforming loans and leases (all on nonaccrual)

 

$

40,275

 

 

$

21,937

 

Total accruing loans and leases past due 90 days or more

 

 

 

 

 

 

Foreclosed assets

 

 

5,660

 

 

 

5,612

 

Total troubled debt restructurings

 

 

26,781

 

 

 

16,566

 

Less nonaccrual troubled debt restructurings

 

 

(7,477

)

 

 

(2,225

)

Total performing troubled debt restructurings

 

 

19,304

 

 

 

14,341

 

Total nonperforming assets and troubled debt restructurings

 

$

65,239

 

 

$

41,890

 

Total nonperforming loans and leases to total loans and leases held for

   investment

 

 

1.06

%

 

 

1.22

%

Total nonperforming loans and leases to total assets

 

 

0.55

%

 

 

0.55

%

Total nonperforming assets and troubled debt restructurings to total assets

 

 

0.89

%

 

 

1.05

%


 

 

June 30, 2020 (1)

 

 

December 31, 2019 (1)

 

Nonaccrual loans and leases guaranteed by U.S. government:

 

 

 

 

 

 

 

 

Total nonperforming loans and leases guaranteed by the SBA (all on

   nonaccrual)

 

$

27,153

 

 

$

14,713

 

Total accruing loans and leases past due 90 days or more guaranteed by the

   SBA

 

 

 

 

 

 

Foreclosed assets guaranteed by the SBA

 

 

4,461

 

 

 

4,492

 

Total troubled debt restructurings guaranteed by the SBA

 

 

18,147

 

 

 

10,845

 

Less nonaccrual troubled debt restructurings guaranteed by the SBA

 

 

(4,117

)

 

 

(385

)

Total performing troubled debt restructurings guaranteed by SBA

 

 

14,030

 

 

 

10,460

 

Total nonperforming assets and troubled debt restructurings guaranteed

   by the SBA

 

$

45,644

 

 

$

29,665

 

Total nonperforming loans and leases not guaranteed by the SBA to total

   loans and leases held for investment

 

 

0.34

%

 

 

0.40

%

Total nonperforming loans and leases not guaranteed by the SBA to total

   assets

 

 

0.18

%

 

 

0.18

%

Total nonperforming assets and troubled debt restructurings not

   guaranteed by the SBA to total assets

 

 

0.27

%

 

 

0.31

%

(1)

Excludes loans measured at fair value.

 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 assets2,231
 1,648
Total troubled debt restructurings8,527
 9,856
Less nonaccrual troubled debt restructurings(6,078) (7,688)
Total performing troubled debt restructurings2,449
 2,168
Total nonperforming assets and troubled debt restructurings$27,100
 $27,597
Total nonperforming loans to total loans and leases held for investment1.92% 2.62%
Total nonperforming loans to total assets0.92% 1.36%
Total nonperforming assets and troubled debt restructurings to total assets1.11% 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 SBA1,785
 1,402
Total troubled debt restructurings guaranteed by the SBA5,427
 6,723
Less nonaccrual troubled debt restructurings guaranteed by the SBA(5,340) (6,602)
Total performing troubled debt restructurings guaranteed by SBA87
 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 leases0.28% 0.53%
Total nonperforming loans not guaranteed by the SBA to total assets0.14% 0.27%
Total nonperforming assets and troubled debt restructurings not guaranteed by the SBA to total assets0.25% 0.40%
Total nonperforming

Nonperforming assets and troubled debt restructuringsTDRs, excluding loans measured at Septemberfair value, at June 30, 20172020 were $27.1$65.2 million, which represented a $497 thousand,$23.3 million, or 1.8%55.7%, decreaseincrease from December 31, 2016. Total2019. These nonperforming assets, at SeptemberJune 30, 20172020 were comprised of $22.4$40.3 million in nonaccrual loans and $2.2leases and $5.7 million in foreclosed assets. Of the $27.1$65.2 million of nonperforming assets and troubled debt restructurings ("TDRs"), $21.0TDRs, $45.6 million carried an SBA guarantee, leaving an unguaranteed exposure of $6.1$19.6 million in total nonperforming assets and TDRs at SeptemberJune 30, 2017. The2020. This represents an increase of $7.4 million, or 60.3%, from an unguaranteed exposure of $12.2 million at December 31, 2019.  

See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming assetsloans and TDRs at December 31, 2016 was $7.1 million. Unguaranteed exposure relating to nonperforming assets and TDRs at September 30, 2017 decreased by $970 thousand, or 13.7%, compared to December 31, 2016.

leases.

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 10.2%8.1% at SeptemberJune 30, 2017,2020, compared to nonperforming loans of 15.3% of the Bank’s total capital4.4% at December 31, 2016.2019. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at SeptemberJune 30, 20172020 and December 31, 20162019 were 1.5%2.6% and 3.1%1.5%, respectively.


As of SeptemberJune 30, 20172020, and December 31, 2016,2019, potential problem (also referred to as criticized) and impairedclassified loans and leases, excluding loans measured at fair value, totaled $66.0$146.9 million and $64.1$129.1 million, respectively.  The following is a discussion of these loans and leases.  Risk Grades 5 through 8 represent the spectrum of criticized and impaired loans.classified loans and leases.  At SeptemberJune 30, 2017,2020, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $28.2$79.0 million resulting in unguaranteed exposure risk of $37.8$68.0 million, or 3.3%4.9% of total held for investment unguaranteed exposure.exposure carried at historical cost. This compares to the December 31, 20162019 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $29.0$65.8 million resulting in unguaranteed exposure risk of $35.1$63.3 million, or 4.0%5.4% of total held for investment unguaranteed exposure.exposure carried at historical cost. As of SeptemberJune 30, 20172020, loans in Veterinary, Healthcare and Independent Pharmacies industryleases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and impairedclassified loans and leases: Healthcare at 28.5%20.8%, 30.8%Wine and 20.4%Craft Beverage at 15.1%, respectively. Hotels at 13.0%, Entertainment Centers at 9.6%, Veterinary at 9.2%, Self Storage at 5.8% and Educational Services at 5.0%.  As of December 31, 20162019, loans inand leases carried at historical cost within the Healthcare and Veterinary industriesfollowing verticals comprise the largest portion of the total potential problem and classified loans and leases: Healthcare at 20.8%, Hotels at 14.7%, Wine and Craft Beverage at 14.3%, Self Storage at 8.4%, Veterinary at 7.1%, Government Contracting at 6.1%, and Educational Services at 5.7%.  Other than Hotels and Government Contracting which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division. Two previously impaired Government Contracting relationships were charged off in the first half of 2020 which resulted in a reduction in impaired loans at 30.8%for this vertical.  The majority of the increase in potential problem and 32.9%, respectively. Theclassified loans and leases was comprised of a relatively small number of borrowers largely concentrated in the Company’s more mature verticals.  Furthermore, the Company believes that its underwriting and credit quality standards have improvedcontinued to tighten with emphasis on new production in pandemic resilient verticals and increased monitoring of existing loans in pandemic susceptible verticals as the business has matured.

impacts and uncertainties COVID-19 continue to evolve.  With this emphasis, systemic issues which began to emerge during the latter part of 2019 related to higher than expected levels of competition in the Wine and Craft Beverage and Entertainment Center verticals combined with pandemic susceptibility continue to contribute to the increase in criticized and classified loans and leases.  

The Bank does not classify loans and leases that experience insignificant payment delays and payment shortfalls as impaired. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less, unless the borrower was not past due at the time of a modification as a part of a COVID-19 assistance program.  In such instances this time period could extend to a period of three months 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 personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. To date, the only types of short 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.

During the third quarter of 2017, the Southern U.S. and Puerto Rico encountered three hurricanes while California suffered from wildfires. As a nationwide lender the Company has over approximately 350 borrowers in the affected areas. As a result of these unfortunate disasters, Live Oak has actively reached out to each of these borrowers to work with any that have been impacted. At this time, there have been a limited number of short-term payment deferrals provided to help borrowers in need with none deemed to meet the definition of a troubled debt restructuring and no impairments have been realized as a result of these events. We are continuing to work with borrowers impacted by these disasters.

Management endeavors to be proactive in its approach to identify and resolve special mention (Risk Grade 5)problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted.  Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At SeptemberJune 30, 20172020, and December 31, 2016,2019, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $30.5$94.4 million and $32.1$89.5 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, 2016and leases, exclusive of loans measured at fair value, during the first half of 2020 was principally confined to September 30, 2017 in two verticals; Agriculturefive verticals: Entertainment Centers  ($9.2 million or 187.7%), Senior Care ($4.0 million or 82.6%), Healthcare ($4.0 million or 81.5%), Veterinary ($3.6 million or 74.2%), General Lending Solutions ($1.4 million or 29.4%), and Funeral Home & Cemetery ($1.1 million or 95.0% of increase) and Investment Advisors ($464 thousand or 20.7% of decrease)21.9%).  The overall decreaseLargely offsetting the increase in the above Risk Grade 5 loans from December 31, 2016and leases were decreases in Hotels ($10.5 million or 213.3%) Government Contracting ($3.8 million or 78.4%) and Self Storage ($2.1 million or 43.3%). Other than Hotels and Government Contracting which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division. The decrease in Hotels was due to September 30, 2017 was the result of routine credit monitoring in the ongoingtwo relationships moving to risk grade management process.6 (substandard) while the decrease in Government Contracting was due to loan paydowns which moved loans back to pass grades, and the decrease in Self Storage was due to one relationship being upgraded to a risk grade 4 (acceptable).  At SeptemberJune 30, 2017,2020, approximately 99.9%100.0% of loans and leases 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, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio. In conjunction with this, management believes that volumes of delinquencies may be not be an accurate depiction of the borrower’s repayment abilities under the current pandemic induced circumstances due to payments being made by the SBA on behalf of borrower with loans under its programs.  This payment assistance commenced in the first quarter and will continue for six months.  


Allowance for LoanCredit Losses on Loans and Lease Losses

Leases

The allowance for loancredit losses (“ACL”) on loans and lease losses (“ALLL”),leases is a material estimate which could change significantly invaluation account that is deducted from, or added to, the near-term inamortized cost basis of loans and leases to present a net amount expected to be collected. The ACL excludes loans held for sale and loans accounted for under the event of rapidly deteriorating credit quality, is established through a provision for loanfair value option. Loans and lease losses charged to earnings to account for losses thatleases 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 chargedcharged-off against the ALLLACL when management believes that the collectibilityuncollectibility of the principala loan andor lease balance is unlikely. Subsequentconfirmed. Expected recoveries if any, are crediteddo not exceed the aggregate of amounts previously charged-off and expected to the ALLL when received.

be charged-off.Judgment in determining the adequacy of the ALLLACL 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 ALLLACL is evaluated on a quarterly basis by management and takes into considerationis estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company’s historical credit loss experience provides the basis for the estimation of expected credit losses. Management adjusts historical loss information for differences in current risk characteristics such factorsas portfolio risk grading, delinquency levels, or portfolio mix as well as for changes in environmental conditions such as changes in the nature and volumeunemployment rates.  

The ACL 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

pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan or lease component, which addresses specific reserves for impaired loans or 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 should be excluded from its homogeneous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.
During the second quarter of 2016, the Company implemented enhancements to the methodology for estimating the allowance for loan and lease losses, including refinements to the measurement of qualitative factors in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance.
The ALLL of $18.2$28.2 million at December 31, 20162019 increased by $2.8$15.8 million, or 15.5%56.1%, to $21.0$44.1 million at SeptemberJune 30, 2017.2020. The ALLL,ACL, as a percentage of loans and leases held for investment at historical cost amounted to 1.8%1.2% at SeptemberJune 30, 20172020 and 2.0%1.6% at December 31, 2016. The declining level2019. Excluding PPP loans and related reserves, the ACL, as a percentage of the allowance for loan and lease losses in relation to total loans and leases held for investment was principally driven by improvementsat historical cost amounted to 2.0% at June 30, 2020.  As mentioned earlier, the Company adopted the new CECL standard effective January 1, 2020.  Upon adoption, the Company recorded a $1.3 million decrease in industry-specific loss rates and lowerthe ACL.  In implementing CECL, the Company accordingly determined to use forecasted levels of classifiedunemployment as a primary economic variable in forecasting future expected losses.  Based upon the severity of ongoing developments resulting from the COVID-19 pandemic, the Company’s allowance for credit losses on loans and leases increased significantly, combined with the migration to Company-specific loss rates for maturing verticals which was partially offset by an increase in reserves due to loaneffects of the above discussed increased levels of criticized and lease volumeclassified loans and the effect of higher netleases and charge-offs, as addressed more fully in the Provision for Loan and Lease Credit Losses section of Results of Operations.  General reserves

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have decreased by $8.5 million since December 31, 2019.  This decrease was due to monthly payments being made by SBA for our SBA 7(a) borrowers. Total loans and leases 90 or more days past due increased $6.6 million, or 17.0%, compared to December 31, 2019.  The increase was the result of a $6.9 million increase in the guaranteed portion of past due loans compared to December 31, 2019.  At June 30, 2020 and December 31, 2019, total held for investment unguaranteed loans and leases past due as a percentage of non-impaired loans amounted to 1.56% at September 30, 2017 and 1.70% December 31, 2016. See the aforementioned Provisiontotal held for Loan and Lease Losses section of this section for a discussion of the Company's charge-off experience.

Actual past dueinvestment unguaranteed loans and leases, have decreased sinceinclusive of loans measured at fair value, was 0.9% and 1.7%, respectively.  Total unguaranteed loans and leases past due were comprised of $9.4 million carried at historical cost, an increase of $1.4 million, and $4.1 million measured at fair value, a decrease of $7.6 million as of June 30, 2020 compared to December 31, 2016 as management2019.  Management continues to actively monitor and work to improve asset quality. Management believes the ALLLACL of $21.0$44.1 million at SeptemberJune 30, 20172020 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid. Thus, there can bevalid, including but not limited to factors related to the above mentioned SBA delinquency effect and pandemic-susceptible verticals. Accordingly, no assurance that loan and lease losses in future periods will not exceed the current ALLL or that future increases in the ALLL will not be required. No assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ALLL,ACL, thus adversely affecting the Company’s operating results. Additional information on the ALLLACL is presented in Note 6 -5. Loans and Leases Held for Investment and Allowance for Loan and Lease LossesCredit Quality of the Notes to the Unaudited Condensed Consolidated Financial Statements in this report.

Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At SeptemberJune 30, 2017,2020, the total amount of these four items was $589.1 million,$3.28 billion, or 25.1%40.0% of total assets, an increase of $93.3 million$2.09 billion from $495.8 million,$1.19 billion, or 28.2%24.8% of total assets, at December 31, 2016.

2019.

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, 2017,2020, 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$779.8 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, 2017.2020. 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

 

$

2,247,774

 

 

$

2,247,774

 

 

$

 

 

$

 

 

$

 

Time deposits

 

 

3,625,518

 

 

 

2,396,055

 

 

 

812,146

 

 

 

340,346

 

 

 

76,971

 

Borrowings

 

 

1,721,029

 

 

 

5,004

 

 

 

1,716,025

 

 

 

 

 

 

 

Operating lease obligations

 

 

3,753

 

 

 

736

 

 

 

1,430

 

 

 

363

 

 

 

1,224

 

Total

 

$

7,598,074

 

 

$

4,649,569

 

 

$

2,529,601

 

 

$

340,709

 

 

$

78,195

 


 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 deposits1,183,944
 860,718
 209,019
 114,207
 
Long term borrowings26,872
 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
1The 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, 20172020, and December 31, 2016,2019, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of $4.4$16.8 million and $4.9$16.9 million, respectively.

Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. ThisAs of June 30, 2020, the balance sheet’s total cumulative gap position was slightly liability-sensitive at -1.5%. The shift to liability-sensitive versus the prior quarter asset-sensitive position is primarily due to the variable, short-term funding added in early in the second quarter of 2020 to provide initial funding for the Payroll Protection Program fixed rate loans.  

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, or market value.value, changes in account behaviors based on the interest rate environment, 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 positionrisk more accurately.  As of 5.92% at SeptemberJune 30, 2017. The cash on hand from2020, the August 2017 capital raise and growth in savings deposits duringCompany’s interest rate risk profile under the quarter has increased the asset-liability sensitivity of the Company in the current period.earnings simulation model method remains asset-sensitive. 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.

The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.
The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

Capital amounts and ratios as of SeptemberJune 30, 20172020 and December 31, 2016,2019, 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, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

498,283

 

 

 

12.84

%

 

$

174,660

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk-Weighted Assets)

 

$

542,984

 

 

 

13.99

%

 

$

310,506

 

 

 

8.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk-Weighted Assets)

 

$

498,283

 

 

 

12.84

%

 

$

232,879

 

 

 

6.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Assets)

 

$

498,283

 

 

 

7.96

%

 

$

250,488

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Bank - June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

453,473

 

 

 

11.85

%

 

$

172,243

 

 

 

4.50

%

 

$

248,795

 

 

 

6.50

%

Total Capital (to Risk-Weighted Assets)

 

$

498,174

 

 

 

13.02

%

 

$

306,210

 

 

 

8.00

%

 

$

382,762

 

 

 

10.00

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

453,473

 

 

 

11.85

%

 

$

229,657

 

 

 

6.00

%

 

$

306,210

 

 

 

8.00

%

Tier 1 Capital (to Average Assets)

 

$

453,473

 

 

 

7.30

%

 

$

248,462

 

 

 

4.00

%

 

$

310,577

 

 

 

5.00

%

Consolidated - December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

499,513

 

 

 

14.90

%

 

$

150,927

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk-Weighted Assets)

 

$

527,747

 

 

 

15.74

%

 

$

268,315

 

 

 

8.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk-Weighted Assets)

 

$

499,513

 

 

 

14.90

%

 

$

201,236

 

 

 

6.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Assets)

 

$

499,513

 

 

 

10.65

%

 

$

187,582

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Bank - December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

451,807

 

 

 

13.66

%

 

$

148,950

 

 

 

4.50

%

 

$

215,150

 

 

 

6.50

%

Total Capital (to Risk-Weighted Assets)

 

$

480,040

 

 

 

14.51

%

 

$

264,800

 

 

 

8.00

%

 

$

331,000

 

 

 

10.00

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

451,807

 

 

 

13.66

%

 

$

198,600

 

 

 

6.00

%

 

$

264,800

 

 

 

8.00

%

Tier 1 Capital (to Average Assets)

 

$

451,807

 

 

 

9.68

%

 

$

186,627

 

 

 

4.00

%

 

$

233,283

 

 

 

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)

(1)

Prompt corrective action provisions are not applicable at the bank holding company level.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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 credit losses on loans and leases;

Determination of the allowance for loan losses;

Valuation of loans accounted for under the fair value option;

Valuation of servicing assets;

Valuation of foreclosed assets; and

Income taxes;

Valuation of earn-out contingent liability.

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, 2017,2020, 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, 20172020, 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

Beginning January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The Company implemented changes to the policies, processes, and controls over the estimation of the allowance for credit losses to support the adoption of ASU 2016-13.  While many controls in operation under this new standard mirror controls under prior GAAP, there were some new controls implemented.

During the three months ended June 30, 2020, the Company implemented new processes and controls related to the origination of loans through the SBA’s Paycheck Protection Program.  As a part of the Company’s PPP efforts in the second quarter, a new loan accounting system was implemented and utilized as the system of record for PPP loans.  The Company will continue to monitor and evaluate internal controls over financial reporting as it relates to the PPP portfolio and this new loan system.

Except as related to the adoption of ASU 2016‑13 and the loan accounting system for PPP loans, there were no changes in the Company’s internal control over financial reporting during the three monthsand six month periods ended SeptemberJune 30, 20172020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



PART II. OTHER INFORMATION

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, 2017,2020, 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 in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of the following:

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations, and financial condition, and such effects will depend on future developments that are highly uncertain and difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have had a significant negative impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to historically high unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our operations and the operations of our borrowers, customers, and business partners. For example, as a result of the significant uncertainty due to the COVID-19 pandemic we realized a substantial build in our allowance for credit losses for the first half of 2020. We could also experience declining values of other financial assets and other negative impacts on our financial position, including possible constraints on liquidity and capital, as well as higher costs of capital. A number of factors impacting us or our borrowers, customers or business partners could materially adversely affect our business, results of operations, and financial condition, including but not limited to:

elevated levels of unemployment may lead to increases in loan delinquencies, losses, and charge-offs;

See

collateral for loans, including real estate, may decline in value, which could cause loan losses to increase;

demand for our products and services may decline, making it difficult to grow or maintain assets and income;

noninterest income from premiums paid in the secondary market for the sale of loans may be reduced due to deteriorating market conditions and a decrease in the number of potential buyers;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

we may experience operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions;

third-party vendors on which we rely may not be able to provide us critical services;

our risk management policies and practices may be negatively impacted in general, including, but not limited to, the effectiveness and accuracy of our models given the lack of data and comparable precedent;

cyber and payment fraud risk may increase as cybercriminals attempt to profit from the disruption given increased online and remote activity; and

FDIC deposit insurance premiums may increase if the agency experiences additional resolution costs.


The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel and developing work-from-home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers, and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

Federal, state and local governmental authorities have enacted, and may enact in the future, legislation, regulations, and protocols in response to the COVID-19 pandemic, including governmental programs intended to provide economic relief to businesses and individuals. Our participation in and execution of any such programs may cause operational, compliance, reputational, and credit risks, which could result in litigation, governmental action or other forms of loss.  There remains significant uncertainty regarding the measures that authorities will enact in the future and the ultimate impact of the legislation, regulations, and protocols that have been and will be enacted.  For example, the CARES Act temporarily added a new program titled the Paycheck Protection Program (the “PPP”) to the SBA’s 7(a) loan program.  The PPP is intended to provide economic relief to small businesses nationwide.  Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved lenders that enroll in the program, subject to numerous limitations and eligibility criteria.  Since the PPP launched on April 3, 2020, we have been an active participant in the program originating a substantial number and principal amount of PPP loans.  Rules and guidance regarding the PPP were not readily available at the start of the program, and the SBA and other government agencies continue to release additional rules and guidance that change or update the requirements and expectations of the regulatory agencies administering the PPP and regulating participating lenders.  As of the date of this report, there remains some ambiguity in the laws, rules, and guidance regarding the operation of the PPP, with a number of important aspects of the PPP where regulatory agencies have not provided adequate guidance, particularly with respect to process, procedures and criteria for forgiveness of PPP loans.  Banks participating in the PPP have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and regarding claims for fees to be paid to purported agents and other third parties, and we are exposed to the risk of litigation regarding the PPP. If any such litigation is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome.  We also face credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.

Additionally, our future success and profitability substantially depends on the management skills of our executive officers and directors. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

The extent to which the COVID-19 outbreak impacts our business, results of operations, and financial condition will depend on future developments that are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business, financial condition, and results of operations and prospects as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity, and any recession that has occurred or may occur in the future. For more information on the impacts of COVID-19 on our business, results of operations and financial condition, see “Recent Developments” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations, or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” in Part 1, Item 1Asection of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and "Risk Factors" in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, for a detailed discussion of risk factors affecting the Company. There have been no material changes to the risk factors previously disclosed in these filings.2019.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

On April 1, 2020, the Company issued 89,927 shares of voting common stock to the members of Jolley Asset Management, LLC ("JAM"), pursuant to the acquisition of all of the outstanding membership interests of JAM. These shares were exempt from registration under the Securities Act of 1933, or the Securities Act, because they were issued in a private placement under Section 4(a)(2) of the Securities Act.

On March 15, 2020, the Board of Directors of the Company authorized the repurchase of up to $20,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2020 (the “Repurchase Program”). The Repurchase Program enables the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determines to be advisable. Actions in connection with the repurchase program will be subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be extended, modified, or discontinued at any time.  As of June 30, 2020, the Company had not made any purchases of shares under the Repurchase Program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

















Item 6. Exhibits.

Exhibits


to this report are listed in the Index to Exhibits section of this report.

INDEX TO EXHIBITS

Exhibit

No.

Description of Exhibit

3.1


3.2


4.1


4.2


31.1

10.1


10.2.1

Amendment to Software Service Agreement dated April 1, 2020, between Live Oak Banking Company and nCino, Inc.*

10.2.2

Amendment to Software Service Agreement dated April 5, 2020, between Live Oak Banking Company and nCino, Inc.*

10.2.3

Amendment to Software Service Agreement dated April 24, 2020, between Live Oak Banking Company and nCino, Inc.*

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2


32


101


Interactive data files pursuant to Rule 405 of Regulation S-T:S-T, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172020 and December 31, 2016;2019; (ii) Condensed Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 2016;2019; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 2016;2019; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the NineThree and Six Months Ended SeptemberJune 30, 20172020 and 2016;2019; (v) Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemeberJune 30, 20172020 and 2016;2019; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements*

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.

*    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.



#

Denotes management contract or compensatory plan.


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: November 6, 2017August 5, 2020

By:

/s/  S. Brett Caines

S. Brett Caines

Chief Financial Officer


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