Companies: 10,796     total market cap: $144.532 T
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Live Oak Bank
LOB
#5124
Rank
$1.73 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$37.46
Share price
3.88%
Change (1 day)
54.99%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Live Oak Bank
  2. Quarterly Reports (10-Q)
  3. Submitted on 2019-11-07

Live Oak Bank - 10-Q quarterly report FY Q3


Text size:
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

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

For the quarterly period ended September 30, 2019

or

☐

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

For the transition period from              to             .

Commission file number: 001-37497

LIVE OAK BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

North Carolina

26-4596286

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1741 Tiburon Drive

Wilmington, North Carolina

28403

(Address of principal executive offices)

(Zip Code)

(910) 790-5867

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    YES  ☒    NO  ☐

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

 

Large accelerated filer

 

☒

 

Accelerated filer

 

☐

Non-accelerated filer

 

☐

 

Smaller reporting company

 

☐

 

 

 

 

Emerging growth company

 

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Voting Common Stock, no par value per share

LOB

The NASDAQ Stock Market LLC

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 6, 2019, there were 36,471,738 shares of the registrant’s voting common stock outstanding and 3,815,531 shares of the registrant’s non-voting common stock outstanding.

 

 

 

 

Live Oak Bancshares, Inc.

Form 10-Q

For the Quarterly Period Ended September 30, 2019

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (Unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

 

1

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018

 

2

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018

 

3

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

Item 2.

 

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

 

46

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

65

Item 4.

 

Controls and Procedures

 

65

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

66

Item 1A.

 

Risk Factors

 

66

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

Item 3.

 

Defaults Upon Senior Securities

 

66

Item 4.

 

Mine Safety Disclosures

 

66

Item 5.

 

Other Information

 

66

Item 6.

 

Exhibits

 

67

 

 

Index to Exhibits

 

67

 

 

Signatures

 

68

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of September 30, 2019 (unaudited) and December 31, 2018*

(Dollars in thousands)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

159,527

 

 

$

316,823

 

Federal funds sold

 

 

88,919

 

 

 

—

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,250

 

Investment securities available-for-sale

 

 

570,795

 

 

 

380,490

 

Loans held for sale

 

 

903,095

 

 

 

687,393

 

Loans and leases held for investment

 

 

2,441,953

 

 

 

1,843,419

 

Allowance for loan and lease losses

 

 

(42,944

)

 

 

(32,434

)

Net loans and leases

 

 

2,399,009

 

 

 

1,810,985

 

Premises and equipment, net

 

 

280,942

 

 

 

262,524

 

Foreclosed assets

 

 

5,702

 

 

 

1,094

 

Servicing assets

 

 

37,583

 

 

 

47,641

 

Operating lease right-of-use assets

 

 

1,890

 

 

 

—

 

Other assets

 

 

148,985

 

 

 

156,249

 

Total assets

 

$

4,603,697

 

 

$

3,670,449

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

56,373

 

 

$

53,993

 

Interest-bearing

 

 

3,962,894

 

 

 

3,095,590

 

Total deposits

 

 

4,019,267

 

 

 

3,149,583

 

Short term borrowings

 

 

1,295

 

 

 

1,441

 

Long term borrowings

 

 

15

 

 

 

16

 

Operating lease liabilities

 

 

2,041

 

 

 

—

 

Other liabilities

 

 

52,860

 

 

 

25,849

 

Total liabilities

 

 

4,075,478

 

 

 

3,176,889

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding

   at September 30, 2019 and December 31, 2018

 

 

—

 

 

 

—

 

Class A common stock, no par value, 100,000,000 shares authorized, 36,457,377

   and 35,512,262 shares issued and outstanding at September 30, 2019 and

   December 31, 2018, respectively

 

 

296,925

 

 

 

278,945

 

Class B common stock, no par value, 10,000,000 shares authorized, 3,815,531 and

   4,643,530 shares issued and outstanding at September 30, 2019 and

   December 31, 2018, respectively

 

 

40,401

 

 

 

49,168

 

Retained earnings

 

 

174,641

 

 

 

167,124

 

Accumulated other comprehensive income (loss)

 

 

16,252

 

 

 

(1,677

)

Total shareholders’ equity

 

 

528,219

 

 

 

493,560

 

Total liabilities and shareholders’ equity

 

$

4,603,697

 

 

$

3,670,449

 

 

*Derived from audited consolidated financial statements.

See Notes to Unaudited Condensed Consolidated Financial Statements

1

 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Income

For the three and nine months ended September 30, 2019 and 2018 (unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and fees on loans

 

$

55,939

 

 

$

37,724

 

 

$

150,819

 

 

$

106,682

 

Investment securities, taxable

 

 

4,001

 

 

 

2,528

 

 

 

11,434

 

 

 

6,175

 

Other interest earning assets

 

 

1,167

 

 

 

1,638

 

 

 

3,914

 

 

 

5,032

 

Total interest income

 

 

61,107

 

 

 

41,890

 

 

 

166,167

 

 

 

117,889

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

23,576

 

 

 

14,165

 

 

 

64,096

 

 

 

38,510

 

Borrowings

 

 

—

 

 

 

1

 

 

 

—

 

 

 

131

 

Total interest expense

 

 

23,576

 

 

 

14,166

 

 

 

64,096

 

 

 

38,641

 

Net interest income

 

 

37,531

 

 

 

27,724

 

 

 

102,071

 

 

 

79,248

 

Provision for loan and lease losses

 

 

7,160

 

 

 

(243

)

 

 

13,365

 

 

 

6,236

 

Net interest income after provision for loan and lease losses

 

 

30,371

 

 

 

27,967

 

 

 

88,706

 

 

 

73,012

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

 

6,831

 

 

 

7,506

 

 

 

21,304

 

 

 

21,369

 

Loan servicing asset revaluation

 

 

(859

)

 

 

(9,380

)

 

 

(3,508

)

 

 

(18,138

)

Net gains on sales of loans

 

 

7,425

 

 

 

22,004

 

 

 

17,638

 

 

 

69,483

 

Equity method investments income (loss)

 

 

(2,370

)

 

 

(360

)

 

 

(6,120

)

 

 

(1,397

)

Equity security investments gains (losses), net

 

 

3,346

 

 

 

39

 

 

 

3,481

 

 

 

134

 

Gain on sale of investment securities available-for-sale

 

 

87

 

 

 

—

 

 

 

92

 

 

 

—

 

Lease income

 

 

2,361

 

 

 

2,194

 

 

 

7,055

 

 

 

5,722

 

Construction supervision fee income

 

 

360

 

 

 

578

 

 

 

1,525

 

 

 

1,954

 

Title insurance income

 

 

—

 

 

 

479

 

 

 

—

 

 

 

2,775

 

Other noninterest income

 

 

1,447

 

 

 

1,271

 

 

 

4,889

 

 

 

3,798

 

Total noninterest income

 

 

18,628

 

 

 

24,331

 

 

 

46,356

 

 

 

85,700

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

22,717

 

 

 

20,553

 

 

 

66,562

 

 

 

62,908

 

Travel expense

 

 

1,934

 

 

 

2,003

 

 

 

4,675

 

 

 

5,887

 

Professional services expense

 

 

2,073

 

 

 

1,228

 

 

 

5,876

 

 

 

3,645

 

Advertising and marketing expense

 

 

1,277

 

 

 

1,462

 

 

 

4,306

 

 

 

4,992

 

Occupancy expense

 

 

2,131

 

 

 

1,588

 

 

 

5,588

 

 

 

5,327

 

Data processing expense

 

 

3,072

 

 

 

3,661

 

 

 

7,418

 

 

 

9,404

 

Equipment expense

 

 

4,361

 

 

 

3,649

 

 

 

11,925

 

 

 

10,094

 

Other loan origination and maintenance expense

 

 

3,535

 

 

 

1,742

 

 

 

6,882

 

 

 

4,485

 

Renewable energy tax credit investment impairment

 

 

—

 

 

 

—

 

 

 

602

 

 

 

—

 

FDIC insurance

 

 

101

 

 

 

1,105

 

 

 

1,435

 

 

 

2,687

 

Title insurance closing services expense

 

 

—

 

 

 

114

 

 

 

—

 

 

 

912

 

Impairment expense on goodwill and other intangibles, net

 

 

—

 

 

 

2,680

 

 

 

—

 

 

 

2,680

 

Other expense

 

 

1,536

 

 

 

1,459

 

 

 

5,245

 

 

 

7,125

 

Total noninterest expense

 

 

42,737

 

 

 

41,244

 

 

 

120,514

 

 

 

120,146

 

Income before taxes

 

 

6,262

 

 

 

11,054

 

 

 

14,548

 

 

 

38,566

 

Income tax expense (benefit)

 

 

2,367

 

 

 

(3,198

)

 

 

3,346

 

 

 

(2,392

)

Net income

 

$

3,895

 

 

$

14,252

 

 

$

11,202

 

 

$

40,958

 

Basic earnings per share

 

$

0.10

 

 

$

0.36

 

 

$

0.28

 

 

$

1.02

 

Diluted earnings per share

 

$

0.09

 

 

$

0.34

 

 

$

0.27

 

 

$

0.98

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2

 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2019 and 2018 (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

3,895

 

 

$

14,252

 

 

$

11,202

 

 

$

40,958

 

Other comprehensive income (loss) before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on investment securities

   arising during the period

 

 

4,528

 

 

 

(2,094

)

 

 

23,683

 

 

 

(7,014

)

Reclassification adjustment for gain on sale of

   securities available-for-sale included in net income

 

 

(87

)

 

 

—

 

 

 

(92

)

 

 

—

 

Other comprehensive income (loss) before tax

 

 

4,441

 

 

 

(2,094

)

 

 

23,591

 

 

 

(7,014

)

Income tax (expense) benefit

 

 

(1,066

)

 

 

502

 

 

 

(5,662

)

 

 

1,683

 

Other comprehensive income (loss), net of tax

 

 

3,375

 

 

 

(1,592

)

 

 

17,929

 

 

 

(5,331

)

Total comprehensive income

 

$

7,270

 

 

$

12,660

 

 

$

29,131

 

 

$

35,627

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

3

 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the three and nine months ended September 30, 2019 and 2018 (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

Common stock

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Retained

 

 

comprehensive

 

 

 

 

Total

 

 

 

Class A

 

 

Class B

 

 

Amount

 

 

earnings

 

 

income (loss)

 

 

 

 

equity

 

Balance at June 30, 2019

 

 

35,577,386

 

 

 

4,643,530

 

 

$

334,155

 

 

$

171,954

 

 

$

12,877

 

 

 

 

$

518,986

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,895

 

 

 

—

 

 

 

 

 

3,895

 

Other comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,375

 

 

 

 

 

3,375

 

Issuance of restricted stock

 

 

18,891

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

—

 

 

 

—

 

 

 

(142

)

 

 

—

 

 

 

—

 

 

 

 

 

(142

)

Employee stock purchase program

 

 

15,434

 

 

 

—

 

 

 

255

 

 

 

—

 

 

 

—

 

 

 

 

 

255

 

Stock option exercises

 

 

17,667

 

 

 

—

 

 

 

115

 

 

 

—

 

 

 

—

 

 

 

 

 

115

 

Stock option based compensation expense

 

 

—

 

 

 

—

 

 

 

440

 

 

 

—

 

 

 

—

 

 

 

 

 

440

 

Restricted stock expense

 

 

—

 

 

 

—

 

 

 

2,503

 

 

 

—

 

 

 

—

 

 

 

 

 

2,503

 

Non-voting common stock converted to

   voting common stock in private sale

 

 

827,999

 

 

 

(827,999

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

Cash dividends ($0.03 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,208

)

 

 

—

 

 

 

 

 

(1,208

)

Balance at September 30, 2019

 

 

36,457,377

 

 

 

3,815,531

 

 

$

337,326

 

 

$

174,641

 

 

$

16,252

 

 

 

 

$

528,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

35,442,879

 

 

 

4,643,530

 

 

$

323,211

 

 

$

144,791

 

 

$

(5,016

)

 

 

 

$

462,986

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14,252

 

 

 

—

 

 

 

 

 

14,252

 

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,592

)

 

 

 

 

(1,592

)

Issuance of restricted stock

 

 

20,029

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

—

 

 

 

—

 

 

 

(213

)

 

 

—

 

 

 

—

 

 

 

 

 

(213

)

Employee stock purchase program

 

 

7,317

 

 

 

—

 

 

 

177

 

 

 

—

 

 

 

—

 

 

 

 

 

177

 

Stock option exercises

 

 

26,662

 

 

 

—

 

 

 

335

 

 

 

—

 

 

 

—

 

 

 

 

 

335

 

Stock option based compensation expense

 

 

—

 

 

 

—

 

 

 

501

 

 

 

—

 

 

 

—

 

 

 

 

 

501

 

Restricted stock expense

 

 

—

 

 

 

—

 

 

 

1,988

 

 

 

—

 

 

 

—

 

 

 

 

 

1,988

 

Cash dividends ($0.03 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,204

)

 

 

—

 

 

 

 

 

(1,204

)

Balance at September 30, 2018

 

 

35,496,887

 

 

 

4,643,530

 

 

$

325,999

 

 

$

157,839

 

 

$

(6,608

)

 

 

 

$

477,230

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

4

 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued)

For the three and nine months ended September 30, 2019 and 2018 (unaudited)

(Dollars in thousands)

 

 

 

Nine Months Ended

 

 

 

Common stock

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Retained

 

 

comprehensive

 

 

 

 

Total

 

 

 

Class A

 

 

Class B

 

 

Amount

 

 

earnings

 

 

income (loss)

 

 

 

 

equity

 

Balance at December 31, 2018

 

 

35,512,262

 

 

 

4,643,530

 

 

$

328,113

 

 

$

167,124

 

 

$

(1,677

)

 

 

 

$

493,560

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

11,202

 

 

 

—

 

 

 

 

 

11,202

 

Other comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17,929

 

 

 

 

 

17,929

 

Issuance of restricted stock

 

 

40,377

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

—

 

 

 

—

 

 

 

(228

)

 

 

—

 

 

 

—

 

 

 

 

 

(228

)

Employee stock purchase program

 

 

29,493

 

 

 

—

 

 

 

437

 

 

 

—

 

 

 

—

 

 

 

 

 

437

 

Stock option exercises

 

 

47,246

 

 

 

—

 

 

 

287

 

 

 

—

 

 

 

—

 

 

 

 

 

287

 

Stock option based compensation expense

 

 

—

 

 

 

—

 

 

 

1,310

 

 

 

—

 

 

 

—

 

 

 

 

 

1,310

 

Restricted stock expense

 

 

—

 

 

 

—

 

 

 

7,407

 

 

 

—

 

 

 

—

 

 

 

 

 

7,407

 

Non-voting common stock converted to

   voting common stock in private sale

 

 

827,999

 

 

 

(827,999

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

Cumulative effect of accounting change for

   Accounting Standards Update 2016-02

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(66

)

 

 

—

 

 

 

 

 

(66

)

Cash dividends ($0.09 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,619

)

 

 

—

 

 

 

 

 

(3,619

)

Balance at September 30, 2019

 

 

36,457,377

 

 

 

3,815,531

 

 

$

337,326

 

 

$

174,641

 

 

$

16,252

 

 

 

 

$

528,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

35,252,053

 

 

 

4,643,530

 

 

$

317,725

 

 

$

120,241

 

 

$

(1,033

)

 

 

 

$

436,933

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

40,958

 

 

 

—

 

 

 

 

 

40,958

 

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(5,331

)

 

 

 

 

(5,331

)

Issuance of restricted stock

 

 

59,162

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

—

 

 

 

—

 

 

 

(708

)

 

 

—

 

 

 

—

 

 

 

 

 

(708

)

Employee stock purchase program

 

 

14,339

 

 

 

—

 

 

 

342

 

 

 

—

 

 

 

—

 

 

 

 

 

342

 

Stock option exercises

 

 

171,333

 

 

 

—

 

 

 

1,587

 

 

 

—

 

 

 

—

 

 

 

 

 

1,587

 

Stock option based compensation expense

 

 

—

 

 

 

—

 

 

 

1,310

 

 

 

—

 

 

 

—

 

 

 

 

 

1,310

 

Restricted stock expense

 

 

—

 

 

 

—

 

 

 

5,743

 

 

 

—

 

 

 

—

 

 

 

 

 

5,743

 

Reclassification of accumulated other

   comprehensive income due to tax rate

   change

 

 

—

 

 

 

—

 

 

 

—

 

 

 

244

 

 

 

(244

)

 

 

 

 

—

 

Cash dividends ($0.09 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,604

)

 

 

—

 

 

 

 

 

(3,604

)

Balance at September 30, 2018

 

 

35,496,887

 

 

 

4,643,530

 

 

$

325,999

 

 

$

157,839

 

 

$

(6,608

)

 

 

 

$

477,230

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

5

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2019 and 2018 (unaudited)

(Dollars in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

11,202

 

 

$

40,958

 

Adjustments to reconcile net income to net cash used by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,303

 

 

 

12,009

 

Provision for loan and lease losses

 

 

13,365

 

 

 

6,236

 

Amortization of premium on securities, net of accretion

 

 

429

 

 

 

576

 

Change in discount on unguaranteed loans

 

 

(6,815

)

 

 

5,282

 

Impairment expense on goodwill and other intangibles, net

 

 

—

 

 

 

2,680

 

Deferred tax (benefit) expense

 

 

533

 

 

 

(2,392

)

Originations of loans held for sale

 

 

(712,000

)

 

 

(826,478

)

Proceeds from sales of loans held for sale

 

 

310,852

 

 

 

966,076

 

Net gains on sale of loans held for sale

 

 

(17,638

)

 

 

(69,483

)

Net loss on sale of foreclosed assets

 

 

7

 

 

 

19

 

Net decrease in servicing assets

 

 

10,058

 

 

 

3,037

 

Gain on sale of securities available-for-sale

 

 

(92

)

 

 

—

 

Net gain on disposal of long-lived asset

 

 

(357

)

 

 

—

 

Net loss on disposal of property and equipment

 

 

109

 

 

 

37

 

Equity method investments (income) loss

 

 

6,120

 

 

 

1,397

 

Equity security investments (gains) losses, net

 

 

(3,481

)

 

 

(134

)

Renewable energy tax credit investment impairment

 

 

602

 

 

 

—

 

Stock option based compensation expense

 

 

1,310

 

 

 

1,310

 

Restricted stock expense

 

 

7,407

 

 

 

5,743

 

Stock based compensation expense tax (shortfall) benefit

 

 

(63

)

 

 

110

 

Business combination contingent consideration fair value adjustment

 

 

—

 

 

 

(260

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Lease right-of-use assets and liabilities, net

 

 

87

 

 

 

—

 

Other assets

 

 

9,730

 

 

 

(5,421

)

Other liabilities

 

 

1,526

 

 

 

2,665

 

Net cash (used) provided by operating activities

 

 

(352,806

)

 

 

143,967

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of securities available-for-sale

 

 

(230,256

)

 

 

(327,422

)

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

   securities available-for-sale

 

 

63,205

 

 

 

36,813

 

Proceeds from SBA reimbursement/sale of foreclosed assets

 

 

724

 

 

 

392

 

Maturities of certificates of deposits with other banks

 

 

—

 

 

 

2,250

 

Sale of title insurance business, net of cash sold

 

 

—

 

 

 

(209

)

Loan and lease originations and principal collections, net

 

 

(396,548

)

 

 

(332,115

)

Proceeds from sale of long-lived asset

 

 

10,895

 

 

 

—

 

Proceeds from sale of premises and equipment

 

 

—

 

 

 

865

 

Purchases of premises and equipment, net

 

 

(30,003

)

 

 

(87,831

)

Net cash used by investing activities

 

 

(581,983

)

 

 

(707,257

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

6

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the three and nine months ended September 30, 2019 and 2018 (unaudited)

(Dollars in thousands)

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

$

869,684

 

 

$

664,025

 

Proceeds from long term borrowings

 

 

—

 

 

 

18

 

Repayment of long term borrowings

 

 

(3

)

 

 

(25,076

)

Repayment of short term borrowings

 

 

(146

)

 

 

—

 

Stock option exercises

 

 

287

 

 

 

1,587

 

Employee stock purchase program

 

 

437

 

 

 

342

 

Withholding cash issued in lieu of restricted stock

 

 

(228

)

 

 

(708

)

Shareholder dividend distributions

 

 

(3,619

)

 

 

(3,604

)

Net cash provided by financing activities

 

 

866,412

 

 

 

636,584

 

Net (decrease) increase in cash and cash equivalents

 

 

(68,377

)

 

 

73,294

 

Cash and cash equivalents, beginning

 

 

316,823

 

 

 

295,271

 

Cash and cash equivalents, ending

 

$

248,446

 

 

$

368,565

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

62,963

 

 

$

38,598

 

Income tax received, net

 

 

(11,092

)

 

 

(383

)

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash operating, investing, and financing activities

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on available-for-sale

    securities, net of taxes

 

$

17,929

 

 

$

(5,331

)

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

 

 

5,058

 

 

 

346

 

Net transfers from SBA receivable to foreclosed real estate

 

 

281

 

 

 

213

 

Right-of-use assets obtained in exchange for lessee operating lease liabilities

 

 

2,241

 

 

 

—

 

Loans to finance sale of other assets

 

 

—

 

 

 

3,642

 

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

 

 

225,217

 

 

 

43,185

 

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

 

 

35,936

 

 

 

89,980

 

Accrued premises and equipment additions

 

 

2,927

 

 

 

10,518

 

Equity method investment commitments

 

 

16,751

 

 

 

—

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

7

 

 

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. The Bank identifies and grows lending to credit-worthy borrowers both within specific 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 the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP"), Business & Industry ("B&I") and Water & Waste Disposal (“WEP”) loan programs.  On July 28, 2015 the Company completed its initial public offering with a secondary offering completed in August of 2017.

In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.

In addition to the Bank, the Company owns Live Oak Grove, LLC, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), formed to serve as the investment adviser to the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.  As of May 1, 2019, 504FA exited as advisor for the 504 Fund.

In August 2016, the Company formed Live Oak Ventures, Inc. (formerly known as “Canapi, Inc.”) for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.

In November 2016, the Company formed Live Oak Clean Energy Financing LLC (“LOCEF”) for the purpose of providing financing to entities for renewable energy applications. During the first quarter of 2019, LOCEF became a wholly-owned subsidiary of the Bank.

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.  Effective August 1, 2018, Reltco was sold.

 

In June 2018, the Bank formed Live Oak Private Wealth, LLC for the purpose of providing high-net-worth individuals and families with strategic wealth and investment management services.

 

In September 2018, the Company formed Canapi Advisors, LLC for the purpose of providing investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial service technology companies.

The Company generates revenue primarily from net interest income and the origination and sale of government guaranteed loans.  Income from the retention of loans is comprised of interest income.  Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

 


8

 

 

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 nine months ended September 30, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019. The consolidated balance sheet as of December 31, 2018 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, 2018, filed with the Securities Exchange Commission on February 27, 2019 (SEC File No. 001-37497) (the "2018 Annual Report"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2018 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 2018 Annual Report.

The preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.

Business Segments

Management has determined that the Company has one significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment.

Reclassifications

Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications.

Accounting Change

On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02 “Leases (Topic 842),” (“ASU 2016-02”) and all subsequent ASUs that modified Topic 842. The Company elected to apply certain practical expedients provided under ASU 2016-02 whereby the Company will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company has also applied the practical expedient to use hindsight in determining the lease term and in assessing impairment of the right-of-use assets. The Company does not apply the recognition and measurement requirements to any short-term leases (as defined by ASU 2016-02). The Company accounts for lease and non-lease components separately because such amounts are readily determinable under the lease contracts. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11, “Leases (Topic 842) Targeted Improvements” (“ASU 2018-11”). The implementation of the new standard resulted in the Company recording $2.2 million of operating lease right-of-use ("ROU") assets, $2.4 million of operating lease liabilities and a cumulative effect adjustment to opening retained earnings of $66 thousand. The Company also recorded $18 thousand of finance ROU assets and finance lease liabilities.

The Company determines if an arrangement is or contains a lease at inception. If it is determined to be or contain a lease, then the lease is classified as an operating or finance lease.


9

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are measured on commencement date based on the present value of the lease payments over the lease term, discounted using the discount rate for the lease at commencement. The discount rate shall be the rate implicit in the lease, however, if that is not readily determinable, the Company will use its incremental borrowing rate. The ROU asset also includes any lease payments made before the commencement date and initial direct costs and excludes any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Operating leases are included in operating lease right-of-use assets and operating lease liabilities in the consolidated balance sheets. Finance leases are included in other assets and long term borrowings in the consolidated balance sheets. Lease expense for operating leases and finance leases is included in occupancy expense in the consolidated statements of income and interest expense for finance leases is included in other interest expense in the consolidated statements of income.

 

Note 2. Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “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.  An update on the Company’s readiness is as follows:

 

•

The Company’s cross-functional working group continues to make progress in accordance with its implementation plan for adoption as of the effective date.  With the assistance of a third-party vendor, the Company has selected and been deeply involved in the development of a new expected credit losses model using the discounted cash flow (DCF) method.  

 

 

•

Incorporating reasonable and supportable forecasts of economic conditions into the estimate of expected credit losses will require significant judgment, such as selecting economic variables and forecast scenarios as well as determining the appropriate length of the forecast horizon. Management expects to initially estimate credit losses over a one-year forecast horizon and revert to long term historical loss experience on a straight-line basis over a one-year period. The duration of the forecast period, the method of reversion, and the duration of the reversion period will all be reevaluated at each reporting period to ensure those judgements are appropriate. Management expects to include forecasted levels of employment as the primary economic variable it believes to be most relevant based on the nature and composition of the loan portfolio.  Management currently intends to leverage economic projections from a reputable and independent third party to inform its reasonable and supportable forecasts over the forecast period. Other internal and external indicators of economic forecasts will also be considered by management when developing the forecast metrics.  

 

 

•

The Company’s DCF model is currently in the process of refinement through parallel runs throughout 2019 as the processes, controls and policies are also finalized.  Key model assumptions continue to be refined, and as a result the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13.  

 

 

•

The impact of this adoption will ultimately be significantly influenced by the composition, characteristics and quality of loan and securities portfolios as well as the economic conditions and forecasts as of the adoption date.  The impact of this standard could also be subject to further regulatory or accounting guidance. 

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”).  ASU 2018-07 amends Accounting Standard Codification 718 to largely align accounting for share-based payment awards issued to employees and nonemployees.  Under the new guidance, existing employee guidance will generally apply to nonemployee share-based transactions, except for specific

10

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

guidance on inputs into option pricing models and the attribution of cost.  The Company adopted the standard on January 1, 2019 with no material effect on its consolidated financial statements.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”). ASU 2019-01 provides updates to Topic 842 including: (i) guidance on how to determine fair value of leased items for lessors who are not dealers or manufacturers, (ii) cash flow presentation for lessors of sales-type and direct financing leases and (iii) clarifies that certain transition disclosures. The amendments are effective for the Company on January 1, 2020. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In 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 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and ASU 2017-12 “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.”  The standard will be effective for the Company on January 1, 2020 with early adoption permitted. The Company does not expect this standard to have a material effect on its consolidated financial statements.

In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief” (“ASU 2019-05”). ASU 2019-05 allows entities an option to irrevocably elect the fair value option for eligible instruments upon adoption of Topic 326.  The amendments are effective for the Company on January 1, 2020.  See discussion of ASU 2016-13 above for impact to the 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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

3,895

 

 

$

14,252

 

 

$

11,202

 

 

$

40,958

 

Weighted-average basic shares outstanding

 

 

40,240,740

 

 

 

40,119,561

 

 

 

40,199,468

 

 

 

40,025,265

 

Basic earnings per share

 

$

0.10

 

 

$

0.36

 

 

$

0.28

 

 

$

1.02

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders,

   for diluted earnings per share

 

$

3,895

 

 

$

14,252

 

 

$

11,202

 

 

$

40,958

 

Total weighted-average basic shares outstanding

 

 

40,240,740

 

 

 

40,119,561

 

 

 

40,199,468

 

 

 

40,025,265

 

Add effect of dilutive stock options and

   restricted stock grants

 

 

872,835

 

 

 

1,568,869

 

 

 

812,140

 

 

 

1,561,722

 

Total weighted-average diluted shares outstanding

 

 

41,113,575

 

 

 

41,688,430

 

 

 

41,011,608

 

 

 

41,586,987

 

Diluted earnings per share

 

$

0.09

 

 

$

0.34

 

 

$

0.27

 

 

$

0.98

 

Anti-dilutive shares

 

 

1,100,645

 

 

 

—

 

 

 

1,100,645

 

 

 

—

 

 

11

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 4. Investment Securities

The carrying amount of investment securities and their approximate fair values are reflected in the following table:

 

September 30, 2019

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

US treasury securities

 

$

4,983

 

 

$

28

 

 

$

—

 

 

$

5,011

 

US government agencies

 

 

32,566

 

 

 

500

 

 

 

1

 

 

 

33,065

 

Mortgage-backed securities

 

 

503,354

 

 

 

20,673

 

 

 

535

 

 

 

523,492

 

Municipal bonds

 

 

8,507

 

 

 

729

 

 

 

9

 

 

 

9,227

 

Total

 

$

549,410

 

 

$

21,930

 

 

$

545

 

 

$

570,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

4,969

 

 

$

—

 

 

$

3

 

 

$

4,966

 

US government agencies

 

 

31,121

 

 

 

48

 

 

 

225

 

 

 

30,944

 

Mortgage-backed securities

 

 

345,606

 

 

 

1,340

 

 

 

3,365

 

 

 

343,581

 

Municipal bond

 

 

1,000

 

 

 

—

 

 

 

1

 

 

 

999

 

Total

 

$

382,696

 

 

$

1,388

 

 

$

3,594

 

 

$

380,490

 

 

During the three months ended September 30, 2019, four US government agencies totaling $14.3 million were sold resulting in a net gain of $87 thousand. There were no sales of securities during the three months ended September 30, 2018. During the nine months ended September 30, 2019, $900 thousand of one municipal bond and four US government agencies totaling $14.3 million were sold resulting in a net gain of $92 thousand.  There were no sales of securities during the nine months ended September 30, 2018.

The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

September 30, 2019

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

US government agencies

 

$

—

 

 

$

—

 

 

$

2,498

 

 

$

1

 

 

$

2,498

 

 

$

1

 

Mortgage-backed securities

 

 

11,692

 

 

 

29

 

 

 

38,874

 

 

 

506

 

 

 

50,566

 

 

 

535

 

Municipal bonds

 

 

91

 

 

 

9

 

 

 

—

 

 

 

—

 

 

 

91

 

 

 

9

 

Total

 

$

11,783

 

 

$

38

 

 

$

41,372

 

 

$

507

 

 

$

53,155

 

 

$

545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2018

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

US treasury securities

 

$

4,966

 

 

$

3

 

 

$

—

 

 

$

—

 

 

$

4,966

 

 

$

3

 

US government agencies

 

 

—

 

 

 

—

 

 

 

16,268

 

 

 

225

 

 

 

16,268

 

 

 

225

 

Mortgage-backed securities

 

 

164,836

 

 

 

1,177

 

 

 

51,371

 

 

 

2,188

 

 

 

216,207

 

 

 

3,365

 

Municipal bond

 

 

999

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

999

 

 

 

1

 

Total

 

$

170,801

 

 

$

1,181

 

 

$

67,639

 

 

$

2,413

 

 

$

238,440

 

 

$

3,594

 

 

At September 30, 2019, there were twenty-two mortgage-backed securities and one US government agencies in unrealized loss positions for greater than 12 months and four mortgage-backed securities and one municipal bond in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2018 were comprised of thirty-one mortgage-backed securities and six US government agencies in unrealized loss positions for greater than 12 months and twenty-five mortgage-backed securities, one US treasury security and one municipal bond in unrealized loss positions for less than 12 months.

These unrealized losses are primarily the result of volatility in the market and are related to market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the securities are deemed to be other than temporarily impaired.

12

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

All mortgage-backed securities in the Company’s portfolio at September 30, 2019 and December 31, 2018 were backed by U.S. government sponsored enterprises (“GSEs”).

The following is a summary of investment securities by maturity:

 

 

 

September 30, 2019

 

 

 

Amortized

cost

 

 

Fair

value

 

US treasury securities

 

 

 

 

 

 

 

 

Within one year

 

$

4,983

 

 

$

5,011

 

Total

 

 

4,983

 

 

 

5,011

 

US government agencies

 

 

 

 

 

 

 

 

Within one year

 

 

6,999

 

 

 

7,013

 

One to five years

 

 

22,653

 

 

 

22,997

 

Five to ten years

 

 

2,914

 

 

 

3,055

 

Total

 

 

32,566

 

 

 

33,065

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

One to five years

 

 

2,459

 

 

 

2,471

 

Five to ten years

 

 

156,961

 

 

 

165,507

 

After 10 years

 

 

343,934

 

 

 

355,514

 

Total

 

 

503,354

 

 

 

523,492

 

Municipal bonds

 

 

 

 

 

 

 

 

After 10 years

 

 

8,507

 

 

 

9,227

 

Total

 

 

8,507

 

 

 

9,227

 

Total

 

$

549,410

 

 

$

570,795

 

The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled.

There were no investment securities pledged at September 30, 2019. At December 31, 2018, investment securities 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 $2.5 million were pledged to the Company's trust department for uninsured trust assets held by the trust department.

 


13

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 5. Loans and Leases Held for Investment and Allowance for Loan and Lease Losses

Loan and Lease Portfolio Segments

The following describes the risk characteristics relevant to each of the portfolio segments. Each loan and lease category is assigned a risk grade during the origination and closing process based on criteria described later in this section.

Commercial and Industrial

Commercial and industrial loans (C&I) receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of the Bank’s C&I loans generally comes from the generation of cash flow as the result of the borrower’s business operations. This business cycle itself brings a certain level of risk to the portfolio. In some instances, these loans may carry a higher degree of risk due to a variety of reasons – illiquid collateral, specialized equipment, highly depreciable assets, uncollectable accounts receivable, revolving balances, or simply being unsecured. As a result of these characteristics, the SBA guarantee on these loans is an important factor in mitigating risk.

Construction and Development

Construction and development loans are for the purpose of acquisition and development of land to be improved through the construction of commercial buildings. Such loans are usually paid off through the conversion to permanent financing for the long-term benefit of the borrower’s ongoing operations. At the completion of the project, if the loan is converted to permanent financing or if scheduled loan amortization begins, it is then reclassified to the “Commercial Real Estate” segment. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.

Commercial Real Estate

Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Such repayment of commercial real estate loans is commonly derived from the successful ongoing operations of the business occupying the property. These typically include small businesses and professional practices.

Commercial Land

Commercial land loans are extensions of credit secured by farmland. Such loans are often for land improvements related to agricultural endeavors that may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loans amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.

Each of the loan types referenced in the sections above is further segmented into verticals in which the Bank chooses to operate. The Bank chooses to finance businesses operating in specific industries because of certain similarities. The similarities range from historical default and loss characteristics to business operations. However, there are differences that create the necessity to underwrite these loans according to varying criteria and guidelines. When underwriting a loan, the Bank considers numerous factors such as cash flow coverage, the credit scores of the guarantors, revenue growth, practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines require compensating strengths when considering a proposed loan.

14

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Loans and leases consist of the following:

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Commercial & Industrial

 

 

 

 

 

 

 

 

Agriculture

 

$

8,119

 

 

$

6,400

 

Funeral Home & Cemetery

 

 

26,450

 

 

 

17,378

 

Healthcare

 

 

44,411

 

 

 

51,082

 

Independent Pharmacies

 

 

110,678

 

 

 

108,783

 

Registered Investment Advisors

 

 

100,477

 

 

 

94,338

 

Veterinary Industry

 

 

48,858

 

 

 

45,604

 

Other Industries

 

 

478,698

 

 

 

295,163

 

Total

 

 

817,691

 

 

 

618,748

 

Construction & Development

 

 

 

 

 

 

 

 

Agriculture

 

 

38,719

 

 

 

43,454

 

Funeral Home & Cemetery

 

 

10,304

 

 

 

9,874

 

Healthcare

 

 

86,678

 

 

 

81,619

 

Independent Pharmacies

 

 

454

 

 

 

2,149

 

Registered Investment Advisors

 

 

2,274

 

 

 

1,232

 

Veterinary Industry

 

 

24,439

 

 

 

14,094

 

Other Industries

 

 

164,819

 

 

 

96,482

 

Total

 

 

327,687

 

 

 

248,904

 

Commercial Real Estate

 

 

 

 

 

 

 

 

Agriculture

 

 

49,733

 

 

 

53,085

 

Funeral Home & Cemetery

 

 

93,682

 

 

 

71,344

 

Healthcare

 

 

234,884

 

 

 

188,531

 

Independent Pharmacies

 

 

26,686

 

 

 

20,597

 

Registered Investment Advisors

 

 

7,387

 

 

 

7,905

 

Veterinary Industry

 

 

137,310

 

 

 

136,721

 

Other Industries

 

 

401,351

 

 

 

260,847

 

Total

 

 

951,033

 

 

 

739,030

 

Commercial Land

 

 

 

 

 

 

 

 

Agriculture

 

 

341,078

 

 

 

243,798

 

Total

 

 

341,078

 

 

 

243,798

 

Total Loans 1

 

 

2,437,489

 

 

 

1,850,480

 

Net Deferred Costs

 

 

10,772

 

 

 

5,960

 

Discount on SBA 7(a) Unguaranteed 2

 

 

(6,308

)

 

 

(13,021

)

Loans, Net of Unearned

 

$

2,441,953

 

 

$

1,843,419

 

 

 

1

Total loans and leases include $628.7 million and $305.4 million of U.S. government guaranteed loans as of September 30, 2019 and December 31, 2018, respectively.

2

The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. The value of these retained loan balances is discounted based on the estimates derived from comparable unguaranteed loan sales.


15

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Credit Risk Profile

The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases by industry segment. An independent review of the loan and lease portfolio is performed annually by an external firm. The goal of the Bank’s annual review of select borrowers' financial performance is to validate the adequacy of the risk grade assigned.

The Bank uses a grading system to rank the quality of each loan and lease. The grade is periodically evaluated and adjusted as performance dictates. Loan and lease grades 1 through 4 are passing grades and grade 5 is special mention. Collectively, grades 6 through 8 represent classified loans and leases in the Bank’s portfolio. The following guidelines govern the assignment of these risk grades:

Exceptional (1 Rated): These loans and leases are of the highest quality, with strong, well-documented sources of repayment. These loans and leases will typically have multiple demonstrated sources of repayment with no significant identifiable risk to collection, exhibit well-qualified management, and have liquid financial statements relative to both direct and indirect obligations.

Quality (2 Rated): These loans and leases are of very high credit quality, with strong, well-documented sources of repayment. These loans and leases exhibit very strong, well defined primary and secondary sources of repayment, with no significant identifiable risk of collection and have internally generated cash flow that more than adequately covers current maturities of long-term debt.

Satisfactory (3 rated): These loans and leases exhibit satisfactory credit risk and have excellent sources of repayment, with no significant identifiable risk of collection. These loans and leases have documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources. They have adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Acceptable (4 rated): These loans and leases show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss. These loans and leases may have unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected performance. They may also contain marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

Special mention (5 rated): These loans and leases show signs of weaknesses in either adequate sources of repayment or collateral. These loans and leases may contain underwriting guideline tolerances and/or exceptions with no mitigating factors; and/or instances where adverse economic conditions develop subsequent to origination that do not jeopardize liquidation of the debt but substantially increase the level of risk.

Substandard (6 rated): Loans and leases graded Substandard are inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral. Loans and leases classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. These loans and leases are consistently not meeting the repayment schedule.

Doubtful (7 rated): Loans and leases graded Doubtful have all the weaknesses inherent in those classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists. Once the loss position is determined, the amount is charged off.

Loss (8 rated): Loss rated loans and leases are considered uncollectible and of such little value that their continuance as assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this credit even though partial recovery may be affected in the future.

16

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following tables summarize the risk grades of each category:

 

 

 

Risk

Grades

1 - 4

 

 

Risk

Grade 5

 

 

Risk

Grades

6 - 8

 

 

Total1

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

7,538

 

 

$

225

 

 

$

356

 

 

$

8,119

 

Funeral Home & Cemetery

 

 

24,473

 

 

 

1,977

 

 

 

—

 

 

 

26,450

 

Healthcare

 

 

34,346

 

 

 

1,729

 

 

 

8,336

 

 

 

44,411

 

Independent Pharmacies

 

 

96,146

 

 

 

6,915

 

 

 

7,617

 

 

 

110,678

 

Registered Investment Advisors

 

 

96,849

 

 

 

1,927

 

 

 

1,701

 

 

 

100,477

 

Veterinary Industry

 

 

45,093

 

 

 

1,101

 

 

 

2,664

 

 

 

48,858

 

Other Industries

 

 

425,936

 

 

 

41,206

 

 

 

11,556

 

 

 

478,698

 

Total

 

 

730,381

 

 

 

55,080

 

 

 

32,230

 

 

 

817,691

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

38,719

 

 

 

—

 

 

 

—

 

 

 

38,719

 

Funeral Home & Cemetery

 

 

10,304

 

 

 

—

 

 

 

—

 

 

 

10,304

 

Healthcare

 

 

82,726

 

 

 

3,242

 

 

 

710

 

 

 

86,678

 

Independent Pharmacies

 

 

454

 

 

 

—

 

 

 

—

 

 

 

454

 

Registered Investment Advisors

 

 

2,274

 

 

 

—

 

 

 

—

 

 

 

2,274

 

Veterinary Industry

 

 

24,439

 

 

 

—

 

 

 

—

 

 

 

24,439

 

Other Industries

 

 

153,211

 

 

 

11,608

 

 

 

—

 

 

 

164,819

 

Total

 

 

312,127

 

 

 

14,850

 

 

 

710

 

 

 

327,687

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

46,507

 

 

 

1,103

 

 

 

2,123

 

 

 

49,733

 

Funeral Home & Cemetery

 

 

85,574

 

 

 

6,152

 

 

 

1,956

 

 

 

93,682

 

Healthcare

 

 

202,421

 

 

 

6,699

 

 

 

25,764

 

 

 

234,884

 

Independent Pharmacies

 

 

17,473

 

 

 

2,127

 

 

 

7,086

 

 

 

26,686

 

Registered Investment Advisors

 

 

7,094

 

 

 

293

 

 

 

—

 

 

 

7,387

 

Veterinary Industry

 

 

119,416

 

 

 

4,844

 

 

 

13,050

 

 

 

137,310

 

Other Industries

 

 

381,563

 

 

 

14,952

 

 

 

4,836

 

 

 

401,351

 

Total

 

 

860,048

 

 

 

36,170

 

 

 

54,815

 

 

 

951,033

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

306,966

 

 

 

8,265

 

 

 

25,847

 

 

 

341,078

 

Total

 

 

306,966

 

 

 

8,265

 

 

 

25,847

 

 

 

341,078

 

Total

 

$

2,209,522

 

 

$

114,365

 

 

$

113,602

 

 

$

2,437,489

 

17

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Risk

Grades

1 - 4

 

 

Risk

Grade 5

 

 

Risk

Grades

6 - 8

 

 

Total1

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

6,187

 

 

$

213

 

 

$

—

 

 

$

6,400

 

Funeral Home & Cemetery

 

 

17,085

 

 

 

287

 

 

 

6

 

 

 

17,378

 

Healthcare

 

 

38,908

 

 

 

2,502

 

 

 

9,672

 

 

 

51,082

 

Independent Pharmacies

 

 

93,976

 

 

 

5,734

 

 

 

9,073

 

 

 

108,783

 

Registered Investment Advisors

 

 

88,614

 

 

 

2,381

 

 

 

3,343

 

 

 

94,338

 

Veterinary Industry

 

 

42,175

 

 

 

1,190

 

 

 

2,239

 

 

 

45,604

 

Other Industries

 

 

272,771

 

 

 

18,463

 

 

 

3,929

 

 

 

295,163

 

Total

 

 

559,716

 

 

 

30,770

 

 

 

28,262

 

 

 

618,748

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

43,454

 

 

 

—

 

 

 

—

 

 

 

43,454

 

Funeral Home & Cemetery

 

 

9,874

 

 

 

—

 

 

 

—

 

 

 

9,874

 

Healthcare

 

 

79,814

 

 

 

1,805

 

 

 

—

 

 

 

81,619

 

Independent Pharmacies

 

 

2,149

 

 

 

—

 

 

 

—

 

 

 

2,149

 

Registered Investment Advisors

 

 

1,232

 

 

 

—

 

 

 

—

 

 

 

1,232

 

Veterinary Industry

 

 

14,094

 

 

 

—

 

 

 

—

 

 

 

14,094

 

Other Industries

 

 

96,482

 

 

 

—

 

 

 

—

 

 

 

96,482

 

Total

 

 

247,099

 

 

 

1,805

 

 

 

—

 

 

 

248,904

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

52,518

 

 

 

567

 

 

 

—

 

 

 

53,085

 

Funeral Home & Cemetery

 

 

64,487

 

 

 

3,711

 

 

 

3,146

 

 

 

71,344

 

Healthcare

 

 

161,026

 

 

 

7,696

 

 

 

19,809

 

 

 

188,531

 

Independent Pharmacies

 

 

12,509

 

 

 

2,495

 

 

 

5,593

 

 

 

20,597

 

Registered Investment Advisors

 

 

7,780

 

 

 

125

 

 

 

—

 

 

 

7,905

 

Veterinary Industry

 

 

117,879

 

 

 

4,205

 

 

 

14,637

 

 

 

136,721

 

Other Industries

 

 

255,651

 

 

 

5,196

 

 

 

—

 

 

 

260,847

 

Total

 

 

671,850

 

 

 

23,995

 

 

 

43,185

 

 

 

739,030

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

223,826

 

 

 

8,914

 

 

 

11,058

 

 

 

243,798

 

Total

 

 

223,826

 

 

 

8,914

 

 

 

11,058

 

 

 

243,798

 

Total

 

$

1,702,491

 

 

$

65,484

 

 

$

82,505

 

 

$

1,850,480

 

 

 

1

Total loans and leases include $628.7 million of U.S. government guaranteed loans as of September 30, 2019, segregated by risk grade as follows: Risk Grades 1 – 4 = $520.4 million, Risk Grade 5 = $27.6 million, Risk Grades 6 – 8 = $80.7 million. As of December 31, 2018, total loans and leases include $305.4 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $236.1 million, Risk Grade 5 = $10.1 million, Risk Grades 6 – 8 = $59.2 million.

18

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Past Due Loans and Leases

Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans and leases less than 30 days past due and accruing are included within current loans and leases shown below. The following tables show an age analysis of past due loans and leases as of the dates presented.

 

 

 

Less Than 30

Days Past

Due & Not

Accruing

 

 

30-89 Days

Past Due

& Accruing

 

 

30-89 Days

Past Due &

Not Accruing

 

 

Greater

Than 90

Days Past

Due

 

 

Total Not

Accruing

& Past Due

Loans

 

 

Current

Loans

 

 

Total Loans

 

 

Loans 90

Days or More

Past Due &

Still Accruing

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

269

 

 

$

87

 

 

$

—

 

 

$

—

 

 

$

356

 

 

$

7,763

 

 

$

8,119

 

 

$

—

 

Funeral Home & Cemetery

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,450

 

 

 

26,450

 

 

 

—

 

Healthcare

 

 

1,204

 

 

 

15

 

 

 

1,521

 

 

 

4,084

 

 

 

6,824

 

 

 

37,587

 

 

 

44,411

 

 

 

—

 

Independent Pharmacies

 

 

1,319

 

 

 

60

 

 

 

2,262

 

 

 

3,976

 

 

 

7,617

 

 

 

103,061

 

 

 

110,678

 

 

 

—

 

Registered Investment Advisors

 

 

—

 

 

 

—

 

 

 

1,173

 

 

 

279

 

 

 

1,452

 

 

 

99,025

 

 

 

100,477

 

 

 

—

 

Veterinary Industry

 

 

—

 

 

 

—

 

 

 

521

 

 

 

1,458

 

 

 

1,979

 

 

 

46,879

 

 

 

48,858

 

 

 

—

 

Other Industries

 

 

533

 

 

 

552

 

 

 

3,514

 

 

 

4,385

 

 

 

8,984

 

 

 

469,714

 

 

 

478,698

 

 

 

—

 

Total

 

 

3,325

 

 

 

714

 

 

 

8,991

 

 

 

14,182

 

 

 

27,212

 

 

 

790,479

 

 

 

817,691

 

 

 

—

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

38,719

 

 

 

38,719

 

 

 

—

 

Funeral Home & Cemetery

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

10,304

 

 

 

10,304

 

 

 

—

 

Healthcare

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

86,678

 

 

 

86,678

 

 

 

—

 

Independent Pharmacies

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

454

 

 

 

454

 

 

 

—

 

Registered Investment Advisors

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,274

 

 

 

2,274

 

 

 

—

 

Veterinary Industry

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

24,439

 

 

 

24,439

 

 

 

—

 

Other Industries

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

164,819

 

 

 

164,819

 

 

 

—

 

Total

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

327,687

 

 

 

327,687

 

 

 

—

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

2,123

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,123

 

 

 

47,610

 

 

 

49,733

 

 

 

—

 

Funeral Home & Cemetery

 

 

132

 

 

 

—

 

 

 

—

 

 

 

1,824

 

 

 

1,956

 

 

 

91,726

 

 

 

93,682

 

 

 

—

 

Healthcare

 

 

—

 

 

 

—

 

 

 

1,870

 

 

 

11,109

 

 

 

12,979

 

 

 

221,905

 

 

 

234,884

 

 

 

—

 

Independent Pharmacies

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,761

 

 

 

5,761

 

 

 

20,925

 

 

 

26,686

 

 

 

—

 

Registered Investment Advisors

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,387

 

 

 

7,387

 

 

 

—

 

Veterinary Industry

 

 

1,790

 

 

 

—

 

 

 

—

 

 

 

4,771

 

 

 

6,561

 

 

 

130,749

 

 

 

137,310

 

 

 

—

 

Other Industries

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,465

 

 

 

1,465

 

 

 

399,886

 

 

 

401,351

 

 

 

—

 

Total

 

 

4,045

 

 

 

—

 

 

 

1,870

 

 

 

24,930

 

 

 

30,845

 

 

 

920,188

 

 

 

951,033

 

 

 

—

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

21,911

 

 

 

—

 

 

 

1,503

 

 

 

—

 

 

 

23,414

 

 

 

317,664

 

 

 

341,078

 

 

 

—

 

Total

 

 

21,911

 

 

 

—

 

 

 

1,503

 

 

 

—

 

 

 

23,414

 

 

 

317,664

 

 

 

341,078

 

 

 

—

 

Total1

 

$

29,281

 

 

$

714

 

 

$

12,364

 

 

$

39,112

 

 

$

81,471

 

 

$

2,356,018

 

 

$

2,437,489

 

 

$

—

 

19

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Less Than 30

Days Past

Due & Not

Accruing

 

 

30-89 Days

Past Due

& Accruing

 

 

30-89 Days

Past Due &

Not Accruing

 

 

Greater

Than 90

Days Past

Due

 

 

Total Not

Accruing

& Past Due

Loans

 

 

Current

Loans

 

 

Total Loans

 

 

Loans 90

Days or More

Past Due &

Still Accruing

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

6,400

 

 

$

6,400

 

 

$

—

 

Funeral Home & Cemetery

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17,378

 

 

 

17,378

 

 

 

—

 

Healthcare

 

 

41

 

 

 

1,027

 

 

 

665

 

 

 

6,821

 

 

 

8,554

 

 

 

42,528

 

 

 

51,082

 

 

 

—

 

Independent Pharmacies

 

 

1,399

 

 

 

29

 

 

 

—

 

 

 

7,570

 

 

 

8,998

 

 

 

99,785

 

 

 

108,783

 

 

 

—

 

Registered Investment Advisors

 

 

—

 

 

 

232

 

 

 

320

 

 

 

2,741

 

 

 

3,293

 

 

 

91,045

 

 

 

94,338

 

 

 

—

 

Veterinary Industry

 

 

—

 

 

 

—

 

 

 

600

 

 

 

906

 

 

 

1,506

 

 

 

44,098

 

 

 

45,604

 

 

 

—

 

Other Industries

 

 

2,669

 

 

 

166

 

 

 

—

 

 

 

504

 

 

 

3,339

 

 

 

291,824

 

 

 

295,163

 

 

 

—

 

Total

 

 

4,109

 

 

 

1,454

 

 

 

1,585

 

 

 

18,542

 

 

 

25,690

 

 

 

593,058

 

 

 

618,748

 

 

 

—

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

43,454

 

 

 

43,454

 

 

 

—

 

Funeral Home & Cemetery

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

9,874

 

 

 

9,874

 

 

 

—

 

Healthcare

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

81,619

 

 

 

81,619

 

 

 

—

 

Independent Pharmacies

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,149

 

 

 

2,149

 

 

 

—

 

Registered Investment Advisors

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,232

 

 

 

1,232

 

 

 

—

 

Veterinary Industry

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14,094

 

 

 

14,094

 

 

 

—

 

Other Industries

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

96,482

 

 

 

96,482

 

 

 

—

 

Total

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

248,904

 

 

 

248,904

 

 

 

—

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

53,085

 

 

 

53,085

 

 

 

—

 

Funeral Home & Cemetery

 

 

248

 

 

 

—

 

 

 

—

 

 

 

2,762

 

 

 

3,010

 

 

 

68,334

 

 

 

71,344

 

 

 

—

 

Healthcare

 

 

42

 

 

 

1,668

 

 

 

—

 

 

 

7,417

 

 

 

9,127

 

 

 

179,404

 

 

 

188,531

 

 

 

—

 

Independent Pharmacies

 

 

—

 

 

 

3,400

 

 

 

—

 

 

 

2,193

 

 

 

5,593

 

 

 

15,004

 

 

 

20,597

 

 

 

—

 

Registered Investment Advisors

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

7,905

 

 

 

7,905

 

 

 

—

 

Veterinary Industry

 

 

1,644

 

 

 

3,757

 

 

 

2,899

 

 

 

5,191

 

 

 

13,491

 

 

 

123,230

 

 

 

136,721

 

 

 

—

 

Other Industries

 

 

—

 

 

 

10,743

 

 

 

—

 

 

 

—

 

 

 

10,743

 

 

 

250,104

 

 

 

260,847

 

 

 

—

 

Total

 

 

1,934

 

 

 

19,568

 

 

 

2,899

 

 

 

17,563

 

 

 

41,964

 

 

 

697,066

 

 

 

739,030

 

 

 

—

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

6,277

 

 

 

—

 

 

 

—

 

 

 

4,781

 

 

 

11,058

 

 

 

232,740

 

 

 

243,798

 

 

 

—

 

Total

 

 

6,277

 

 

 

—

 

 

 

—

 

 

 

4,781

 

 

 

11,058

 

 

 

232,740

 

 

 

243,798

 

 

 

—

 

Total1

 

$

12,320

 

 

$

21,022

 

 

$

4,484

 

 

$

40,886

 

 

$

78,712

 

 

$

1,771,768

 

 

$

1,850,480

 

 

$

—

 

 

1

Total loans and leases include $628.7 million of U.S. government guaranteed loans as of September 30, 2019, of which $31.3 million is greater than 90 days past due, $8.5 million is 30-89 days past due and $588.9 million is included in current loans and leases as presented above. As of December 31, 2018, total loans and leases include $305.4 million of U.S. government guaranteed loans, of which $33.4 million is greater than 90 days past due, $9.0 million is 30-89 days past due and $263.0 million is included in current loans and leases as presented above.


20

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Nonaccrual Loans and Leases

Loans and leases that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans and leases had been accrued in accordance with the original terms, interest income would have increased by approximately $1.1 million and $800 thousand for the three months ended September 30, 2019 and 2018, respectively, and for the nine months ended September 30, 2019 and 2018 interest income would have increased approximately $3.3 million and $1.8 million, respectively. All nonaccrual loans and leases are included in the held for investment portfolio.

Nonaccrual loans and leases as of September 30, 2019 and December 31, 2018 are as follows:

 

September 30, 2019

 

Loan

Balance

 

 

Guaranteed

Balance

 

 

Unguaranteed

Exposure

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

269

 

 

$

215

 

 

$

54

 

Healthcare

 

 

6,809

 

 

 

5,799

 

 

 

1,010

 

Independent Pharmacies

 

 

7,557

 

 

 

6,650

 

 

 

907

 

Registered Investment Advisors

 

 

1,452

 

 

 

1,089

 

 

 

363

 

Veterinary Industry

 

 

1,979

 

 

 

1,830

 

 

 

149

 

Other Industries

 

 

8,432

 

 

 

5,926

 

 

 

2,506

 

Total

 

 

26,498

 

 

 

21,509

 

 

 

4,989

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

2,123

 

 

 

1,592

 

 

 

531

 

Funeral Home & Cemetery

 

 

1,956

 

 

 

1,368

 

 

 

588

 

Healthcare

 

 

12,979

 

 

 

7,754

 

 

 

5,225

 

Independent Pharmacies

 

 

5,761

 

 

 

5,022

 

 

 

739

 

Veterinary Industry

 

 

6,561

 

 

 

5,406

 

 

 

1,155

 

Other Industries

 

 

1,465

 

 

 

1,465

 

 

 

—

 

Total

 

 

30,845

 

 

 

22,607

 

 

 

8,238

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

23,414

 

 

 

16,825

 

 

 

6,589

 

Total

 

 

23,414

 

 

 

16,825

 

 

 

6,589

 

Total

 

$

80,757

 

 

$

60,941

 

 

$

19,816

 

 

December 31, 2018

 

Loan

Balance

 

 

Guaranteed

Balance

 

 

Unguaranteed

Exposure

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

$

7,527

 

 

$

6,517

 

 

$

1,010

 

Independent Pharmacies

 

 

8,969

 

 

 

7,896

 

 

 

1,073

 

Registered Investment Advisors

 

 

3,061

 

 

 

2,427

 

 

 

634

 

Veterinary Industry

 

 

1,506

 

 

 

1,361

 

 

 

145

 

Other Industries

 

 

3,173

 

 

 

2,147

 

 

 

1,026

 

Total

 

 

24,236

 

 

 

20,348

 

 

 

3,888

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

Funeral Home & Cemetery

 

 

3,010

 

 

 

2,260

 

 

 

750

 

Healthcare

 

 

7,459

 

 

 

4,963

 

 

 

2,496

 

Independent Pharmacies

 

 

2,193

 

 

 

1,863

 

 

 

330

 

Veterinary Industry

 

 

9,734

 

 

 

8,271

 

 

 

1,463

 

Total

 

 

22,396

 

 

 

17,357

 

 

 

5,039

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

11,058

 

 

 

5,497

 

 

 

5,561

 

Total

 

 

11,058

 

 

 

5,497

 

 

 

5,561

 

Total

 

$

57,690

 

 

$

43,202

 

 

$

14,488

 

 

21

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Allowance for Loan and Lease Loss Methodology

The methodology and the estimation process for calculating the Allowance for Loan and Lease Losses (“ALLL”) is described below:

Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in GAAP. The Company’s methodology for determining the ALLL is based on the requirements of GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan and lease component, which addresses specific reserves for impaired loans and leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired is excluded from its homogenous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.

The ALLL policy for pooled loans and leases is governed in accordance with banking regulatory guidance for homogenous pools of non-impaired loans and leases that have similar risk characteristics. The Company follows a consistent and structured approach for assessing the need for reserves within each individual loan and lease pool.

Loans and leases are considered impaired when, based on current information and events, it is probable that the creditor will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan or lease agreement. The Company has determined that loans and leases that meet the criteria defined below must be reviewed quarterly to determine if they are impaired.

 

•

All commercial loans and leases classified substandard or worse.

 

•

Any other delinquent loan or lease that is in a nonaccrual status, or any loan or lease that is delinquent 90 days or more and still accruing interest.

 

•

Any loan or lease which has been modified such that it meets the definition of a Troubled Debt Restructuring (TDR).

The Company’s policy for impaired loan and lease accounting subjects all loans and leases to impairment recognition; however, loan and lease relationships with unguaranteed credit exposure of less than $100,000 are generally not evaluated on an individual basis for impairment and instead are evaluated collectively using a methodology based on historical specific reserves on similar sized loans and leases.  Any loan or lease not meeting the above criteria and determined to be impaired is subjected to an impairment analysis, which is a calculation of the probable loss on the loan or lease. This portion is the loan's or lease’s “impairment,” and is established as a specific reserve against the loan or lease, or charged against the ALLL.

Individual specific reserve amounts imply probability of loss and may not be carried in the reserve indefinitely. When the amount of the actual loss becomes reasonably quantifiable, the amount of the loss is charged off against the ALLL, whether or not all liquidation and recovery efforts have been completed. If the total amount of the individual specific reserve that will eventually be charged off cannot yet be sufficiently quantified but some portion of the impairment can be viewed as a confirmed loss, then the confirmed loss portion should be charged off against the ALLL and the individual specific reserve reduced by a corresponding amount.

For impaired loans or leases, the reserve amount is calculated on a loan or lease-specific basis. The Company utilizes two methods of analyzing impaired loans and leases not guaranteed by the SBA:

 

•

The Fair Market Value of Collateral method utilizes the value at which the collateral could be sold considering the appraised value, appraisal discount rate, prior liens and selling costs. The amount of the reserve is the deficit of the estimated collateral value compared to the loan or lease balance.

 

•

The Present Value of Future Cash Flows method takes into account the amount and timing of cash flows and the effective interest rate used to discount the cash flows.

22

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

Three Months Ended

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,924

 

 

$

12,589

 

 

$

16,907

 

 

$

5,628

 

 

$

38,048

 

Charge offs

 

 

—

 

 

 

(1,103

)

 

 

(1,060

)

 

 

(149

)

 

 

(2,312

)

Recoveries

 

 

—

 

 

 

6

 

 

 

42

 

 

 

—

 

 

 

48

 

Provision

 

 

(629

)

 

 

284

 

 

 

7,175

 

 

 

330

 

 

 

7,160

 

Ending Balance

 

$

2,295

 

 

$

11,776

 

 

$

23,064

 

 

$

5,809

 

 

$

42,944

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,227

 

 

$

11,408

 

 

$

13,377

 

 

$

2,338

 

 

$

29,350

 

Charge offs

 

 

—

 

 

 

(397

)

 

 

(1,966

)

 

 

(106

)

 

 

(2,469

)

Recoveries

 

 

—

 

 

 

141

 

 

 

18

 

 

 

—

 

 

 

159

 

Provision

 

 

(555

)

 

 

(1,115

)

 

 

(148

)

 

 

1,575

 

 

 

(243

)

Ending Balance

 

$

1,672

 

 

$

10,037

 

 

$

11,281

 

 

$

3,807

 

 

$

26,797

 

 

Nine Months Ended

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,042

 

 

$

11,044

 

 

$

14,562

 

 

$

4,786

 

 

$

32,434

 

Charge offs

 

 

—

 

 

 

(1,104

)

 

 

(1,698

)

 

 

(327

)

 

 

(3,129

)

Recoveries

 

 

—

 

 

 

29

 

 

 

240

 

 

 

5

 

 

 

274

 

Provision

 

 

253

 

 

 

1,807

 

 

 

9,960

 

 

 

1,345

 

 

 

13,365

 

Ending Balance

 

$

2,295

 

 

$

11,776

 

 

$

23,064

 

 

$

5,809

 

 

$

42,944

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,030

 

 

$

9,180

 

 

$

10,751

 

 

$

2,229

 

 

$

24,190

 

Charge offs

 

 

—

 

 

 

(816

)

 

 

(3,187

)

 

 

(106

)

 

 

(4,109

)

Recoveries

 

 

—

 

 

 

174

 

 

 

306

 

 

 

—

 

 

 

480

 

Provision

 

 

(358

)

 

 

1,499

 

 

 

3,411

 

 

 

1,684

 

 

 

6,236

 

Ending Balance

 

$

1,672

 

 

$

10,037

 

 

$

11,281

 

 

$

3,807

 

 

$

26,797

 

 

The following tables detail the recorded allowance for loan and lease losses and the investment in loans and leases related to each portfolio segment, disaggregated on the basis of impairment evaluation methodology:

 

September 30, 2019

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases individually evaluated for

   impairment

 

$

20

 

 

$

3,150

 

 

$

6,354

 

 

$

4,665

 

 

$

14,189

 

Loans and leases collectively evaluated for

   impairment

 

 

2,275

 

 

 

8,626

 

 

 

16,710

 

 

 

1,144

 

 

 

28,755

 

Total allowance for loan and lease losses

 

$

2,295

 

 

$

11,776

 

 

$

23,064

 

 

$

5,809

 

 

$

42,944

 

Loans and leases receivable1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases individually evaluated for

   impairment

 

$

725

 

 

$

59,374

 

 

$

32,809

 

 

$

43,068

 

 

$

135,976

 

Loans and leases collectively evaluated for

    impairment

 

 

326,962

 

 

 

891,659

 

 

 

784,882

 

 

 

298,010

 

 

 

2,301,513

 

Total loans and leases receivable

 

$

327,687

 

 

$

951,033

 

 

$

817,691

 

 

$

341,078

 

 

$

2,437,489

 

23

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

December 31, 2018

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases individually evaluated for

   impairment

 

$

118

 

 

$

2,424

 

 

$

2,598

 

 

$

3,951

 

 

$

9,091

 

Loans and leases collectively evaluated for

   impairment

 

 

1,924

 

 

 

8,620

 

 

 

11,964

 

 

 

835

 

 

 

23,343

 

Total allowance for loan and lease losses

 

$

2,042

 

 

$

11,044

 

 

$

14,562

 

 

$

4,786

 

 

$

32,434

 

Loans and leases receivable1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases individually evaluated for

   impairment

 

$

5,027

 

 

$

46,731

 

 

$

28,659

 

 

$

21,997

 

 

$

102,414

 

Loans and leases collectively evaluated for

    impairment

 

 

243,877

 

 

 

692,299

 

 

 

590,089

 

 

 

221,801

 

 

 

1,748,066

 

Total loans and leases receivable

 

$

248,904

 

 

$

739,030

 

 

$

618,748

 

 

$

243,798

 

 

$

1,850,480

 

 

1

Loans and leases receivable includes $628.7 million of U.S. government guaranteed loans as of September 30, 2019, of which $96.4 million are impaired.  As of December 31, 2018, loans and leases receivable includes $305.4 million of U.S. government guaranteed loans, of which $72.4 million are considered impaired.

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

 

September 30, 2019

 

Recorded

Investment

 

 

 

 

Guaranteed

Balance

 

 

Unguaranteed

Exposure

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

368

 

 

 

 

$

289

 

 

$

79

 

Healthcare

 

 

8,363

 

 

 

 

 

5,800

 

 

 

2,563

 

Independent Pharmacies

 

 

7,619

 

 

 

 

 

6,649

 

 

 

970

 

Registered Investment Advisors

 

 

1,696

 

 

 

 

 

1,089

 

 

 

607

 

Veterinary Industry

 

 

2,718

 

 

 

 

 

2,239

 

 

 

479

 

Other Industries

 

 

12,045

 

 

 

 

 

6,332

 

 

 

5,713

 

Total

 

 

32,809

 

 

 

 

 

22,398

 

 

 

10,411

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

725

 

 

 

 

 

533

 

 

 

192

 

Total

 

 

725

 

 

 

 

 

533

 

 

 

192

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

2,123

 

 

 

 

 

1,592

 

 

 

531

 

Funeral Home & Cemetery

 

 

1,961

 

 

 

 

 

1,368

 

 

 

593

 

Healthcare

 

 

25,868

 

 

 

 

 

17,204

 

 

 

8,664

 

Independent Pharmacies

 

 

7,096

 

 

 

 

 

6,016

 

 

 

1,080

 

Veterinary Industry

 

 

13,721

 

 

 

 

 

9,689

 

 

 

4,032

 

Other Industries

 

 

8,605

 

 

 

 

 

6,127

 

 

 

2,478

 

Total

 

 

59,374

 

 

 

 

 

41,996

 

 

 

17,378

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

43,068

 

 

 

 

 

31,436

 

 

 

11,632

 

Total

 

 

43,068

 

 

 

 

 

31,436

 

 

 

11,632

 

Total

 

$

135,976

 

 

 

 

$

96,363

 

 

$

39,613

 

24

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

December 31, 2018

 

Recorded

Investment

 

 

Guaranteed

Balance

 

 

Unguaranteed

Exposure

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

7

 

 

$

—

 

 

$

7

 

Funeral Home & Cemetery

 

 

6

 

 

 

—

 

 

 

6

 

Healthcare

 

 

9,668

 

 

 

7,229

 

 

 

2,439

 

Independent Pharmacies

 

 

9,356

 

 

 

7,896

 

 

 

1,460

 

Registered Investment Advisors

 

 

3,347

 

 

 

2,427

 

 

 

920

 

Veterinary Industry

 

 

2,326

 

 

 

1,819

 

 

 

507

 

Other Industries

 

 

3,949

 

 

 

2,304

 

 

 

1,645

 

Total

 

 

28,659

 

 

 

21,675

 

 

 

6,984

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

5,027

 

 

 

3,704

 

 

 

1,323

 

Total

 

 

5,027

 

 

 

3,704

 

 

 

1,323

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

1,798

 

 

 

1,299

 

 

 

499

 

Funeral Home & Cemetery

 

 

3,143

 

 

 

2,261

 

 

 

882

 

Healthcare

 

 

20,442

 

 

 

14,559

 

 

 

5,883

 

Independent Pharmacies

 

 

5,633

 

 

 

4,079

 

 

 

1,554

 

Veterinary Industry

 

 

15,715

 

 

 

11,613

 

 

 

4,102

 

Total

 

 

46,731

 

 

 

33,811

 

 

 

12,920

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

21,997

 

 

 

13,177

 

 

 

8,820

 

Total

 

 

21,997

 

 

 

13,177

 

 

 

8,820

 

Total

 

$

102,414

 

 

$

72,367

 

 

$

30,047

 

25

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following table presents evaluated balances of loans and leases classified as impaired at the dates presented that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest and net deferred loan and lease fees or costs.

 

 

 

September 30, 2019

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

With a

Recorded

Allowance

 

 

With No

Recorded

Allowance

 

 

Total

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

Recorded

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

363

 

 

$

5

 

 

$

368

 

 

$

379

 

 

$

11

 

Healthcare

 

 

8,363

 

 

 

—

 

 

 

8,363

 

 

 

9,065

 

 

 

1,085

 

Independent Pharmacies

 

 

7,619

 

 

 

—

 

 

 

7,619

 

 

 

8,702

 

 

 

422

 

Registered Investment Advisors

 

 

1,696

 

 

 

—

 

 

 

1,696

 

 

 

1,771

 

 

 

403

 

Veterinary Industry

 

 

2,550

 

 

 

168

 

 

 

2,718

 

 

 

3,013

 

 

 

79

 

Other Industries

 

 

12,045

 

 

 

—

 

 

 

12,045

 

 

 

11,965

 

 

 

4,354

 

Total

 

 

32,636

 

 

 

173

 

 

 

32,809

 

 

 

34,895

 

 

 

6,354

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

725

 

 

 

—

 

 

 

725

 

 

 

710

 

 

 

20

 

Total

 

 

725

 

 

 

—

 

 

 

725

 

 

 

710

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

2,123

 

 

 

—

 

 

 

2,123

 

 

 

2,123

 

 

 

54

 

Funeral Home & Cemetery

 

 

1,829

 

 

 

132

 

 

 

1,961

 

 

 

2,091

 

 

 

94

 

Healthcare

 

 

23,839

 

 

 

2,029

 

 

 

25,868

 

 

 

25,782

 

 

 

1,608

 

Independent Pharmacies

 

 

7,096

 

 

 

—

 

 

 

7,096

 

 

 

7,377

 

 

 

51

 

Veterinary Industry

 

 

12,073

 

 

 

1,648

 

 

 

13,721

 

 

 

14,892

 

 

 

1,292

 

Other Industries

 

 

7,718

 

 

 

887

 

 

 

8,605

 

 

 

9,650

 

 

 

51

 

Total

 

 

54,678

 

 

 

4,696

 

 

 

59,374

 

 

 

61,915

 

 

 

3,150

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

43,068

 

 

 

—

 

 

 

43,068

 

 

 

43,329

 

 

 

4,665

 

Total

 

 

43,068

 

 

 

—

 

 

 

43,068

 

 

 

43,329

 

 

 

4,665

 

Total Impaired Loans and Leases

 

$

131,107

 

 

$

4,869

 

 

$

135,976

 

 

$

140,849

 

 

$

14,189

 

26

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

December 31, 2018

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

With a

Recorded

Allowance

 

 

With No

Recorded

Allowance

 

 

Total

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

Recorded

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

—

 

 

$

7

 

 

$

7

 

 

$

6

 

 

$

—

 

Funeral Home & Cemetery

 

 

—

 

 

 

6

 

 

 

6

 

 

 

6

 

 

 

—

 

Healthcare

 

 

9,604

 

 

 

64

 

 

 

9,668

 

 

 

10,432

 

 

 

827

 

Independent Pharmacies

 

 

9,032

 

 

 

324

 

 

 

9,356

 

 

 

10,564

 

 

 

478

 

Registered Investment Advisors

 

 

3,347

 

 

 

—

 

 

 

3,347

 

 

 

3,839

 

 

 

811

 

Veterinary Industry

 

 

2,160

 

 

 

166

 

 

 

2,326

 

 

 

2,593

 

 

 

65

 

Other Industries

 

 

3,496

 

 

 

453

 

 

 

3,949

 

 

 

4,097

 

 

 

417

 

Total

 

 

27,639

 

 

 

1,020

 

 

 

28,659

 

 

 

31,537

 

 

 

2,598

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

5,027

 

 

 

—

 

 

 

5,027

 

 

 

4,939

 

 

 

118

 

Total

 

 

5,027

 

 

 

—

 

 

 

5,027

 

 

 

4,939

 

 

 

118

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

1,798

 

 

 

—

 

 

 

1,798

 

 

 

1,732

 

 

 

93

 

Funeral Home & Cemetery

 

 

2,859

 

 

 

284

 

 

 

3,143

 

 

 

3,281

 

 

 

30

 

Healthcare

 

 

20,211

 

 

 

231

 

 

 

20,442

 

 

 

20,461

 

 

 

1,145

 

Independent Pharmacies

 

 

5,184

 

 

 

449

 

 

 

5,633

 

 

 

5,884

 

 

 

220

 

Veterinary Industry

 

 

15,606

 

 

 

109

 

 

 

15,715

 

 

 

16,677

 

 

 

936

 

Total

 

 

45,658

 

 

 

1,073

 

 

 

46,731

 

 

 

48,035

 

 

 

2,424

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

21,997

 

 

 

—

 

 

 

21,997

 

 

 

22,147

 

 

 

3,951

 

Total

 

 

21,997

 

 

 

—

 

 

 

21,997

 

 

 

22,147

 

 

 

3,951

 

Total Impaired Loans and Leases

 

$

100,321

 

 

$

2,093

 

 

$

102,414

 

 

$

106,658

 

 

$

9,091

 

 

27

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

 

 

Three Months Ended

September 30, 2019

 

 

Three Months Ended

September 30, 2018

 

 

 

Average

Balance

 

 

Interest

Income

Recognized

 

 

Average

Balance

 

 

Interest

Income

Recognized

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

366

 

 

$

1

 

 

$

—

 

 

$

—

 

Funeral Home & Cemetery

 

 

—

 

 

 

—

 

 

 

6

 

 

 

—

 

Healthcare

 

 

9,074

 

 

 

35

 

 

 

7,152

 

 

 

28

 

Independent Pharmacies

 

 

7,771

 

 

 

12

 

 

 

10,325

 

 

 

4

 

Registered Investment Advisors

 

 

1,890

 

 

 

5

 

 

 

3,589

 

 

 

7

 

Veterinary Industry

 

 

2,744

 

 

 

13

 

 

 

2,423

 

 

 

16

 

Other Industries

 

 

12,004

 

 

 

30

 

 

 

1,822

 

 

 

17

 

Total

 

 

33,849

 

 

 

96

 

 

 

25,317

 

 

 

72

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

724

 

 

 

4

 

 

 

2,162

 

 

 

12

 

Total

 

 

724

 

 

 

4

 

 

 

2,162

 

 

 

12

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

2,179

 

 

 

—

 

 

 

—

 

 

 

—

 

Funeral Home & Cemetery

 

 

1,964

 

 

 

—

 

 

 

3,098

 

 

 

24

 

Healthcare

 

 

23,850

 

 

 

259

 

 

 

18,765

 

 

 

150

 

Independent Pharmacies

 

 

7,114

 

 

 

25

 

 

 

2,739

 

 

 

—

 

Veterinary Industry

 

 

13,772

 

 

 

113

 

 

 

16,731

 

 

 

98

 

Other Industries

 

 

10,662

 

 

 

68

 

 

 

—

 

 

 

—

 

Total

 

 

59,541

 

 

 

465

 

 

 

41,333

 

 

 

272

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

41,716

 

 

 

226

 

 

 

21,792

 

 

 

38

 

Total

 

 

41,716

 

 

 

226

 

 

 

21,792

 

 

 

38

 

Total

 

$

135,830

 

 

$

791

 

 

$

90,604

 

 

$

394

 

28

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Nine Months Ended

September 30, 2019

 

 

Nine Months Ended

September 30, 2018

 

 

 

Average

Balance

 

 

Interest

Income

Recognized

 

 

Average

Balance

 

 

Interest

Income

Recognized

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

$

366

 

 

$

1

 

 

$

—

 

 

$

—

 

Funeral Home & Cemetery

 

 

—

 

 

 

—

 

 

 

7

 

 

 

—

 

Healthcare

 

 

9,585

 

 

 

100

 

 

 

7,232

 

 

 

59

 

Independent Pharmacies

 

 

7,466

 

 

 

27

 

 

 

10,180

 

 

 

31

 

Registered Investment Advisors

 

 

1,969

 

 

 

15

 

 

 

3,007

 

 

 

31

 

Veterinary Industry

 

 

2,691

 

 

 

40

 

 

 

2,488

 

 

 

54

 

Other Industries

 

 

12,200

 

 

 

54

 

 

 

1,875

 

 

 

22

 

Total

 

 

34,277

 

 

 

237

 

 

 

24,789

 

 

 

197

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

724

 

 

 

4

 

 

 

2,162

 

 

 

63

 

Total

 

 

724

 

 

 

4

 

 

 

2,162

 

 

 

63

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

2,191

 

 

 

—

 

 

 

—

 

 

 

—

 

Funeral Home & Cemetery

 

 

1,972

 

 

 

2

 

 

 

3,115

 

 

 

88

 

Healthcare

 

 

23,818

 

 

 

746

 

 

 

17,535

 

 

 

230

 

Independent Pharmacies

 

 

6,813

 

 

 

92

 

 

 

2,763

 

 

 

1

 

Veterinary Industry

 

 

14,197

 

 

 

319

 

 

 

17,081

 

 

 

333

 

Other Industries

 

 

12,398

 

 

 

129

 

 

 

—

 

 

 

—

 

Total

 

 

61,389

 

 

 

1,288

 

 

 

40,494

 

 

 

652

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

34,254

 

 

 

744

 

 

 

21,803

 

 

 

68

 

Total

 

 

34,254

 

 

 

744

 

 

 

21,803

 

 

 

68

 

Total

 

$

130,644

 

 

$

2,273

 

 

$

89,248

 

 

$

980

 

 


29

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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

 

 

 

Three Months Ended September 30, 2019

 

 

Three Months Ended September 30, 2018

 

 

 

All Restructurings

 

 

All Restructurings

 

 

 

Number of

Loans

 

 

Pre-

modification

Recorded

Investment

 

 

Post-

modification

Recorded

Investment

 

 

Number of

Loans

 

 

Pre-

modification

Recorded

Investment

 

 

Post-

modification

Recorded

Investment

 

Interest Only

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Industries

 

 

1

 

 

$

350

 

 

$

350

 

 

 

—

 

 

$

—

 

 

$

—

 

Total Interest Only

 

 

1

 

 

 

350

 

 

 

350

 

 

 

—

 

 

 

—

 

 

 

—

 

Interest Only & Rate Concession

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4

 

 

 

10,276

 

 

 

10,276

 

Total Interest Only & Rate

   Concession

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4

 

 

 

10,276

 

 

 

10,276

 

Extended Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1

 

 

 

8

 

 

 

8

 

Total Extend Amortization

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1

 

 

 

8

 

 

 

8

 

Extended Amortization & Rate Concession

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

4

 

 

 

7,940

 

 

 

7,940

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Extend Amortization & Rate

   Concession

 

 

4

 

 

 

7,940

 

 

 

7,940

 

 

 

—

 

 

 

—

 

 

 

—

 

Payment Deferral & Rate Concession

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Industries

 

 

2

 

 

 

3,710

 

 

 

3,710

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Payment Deferral & Rate

   Concession

 

 

2

 

 

 

3,710

 

 

 

3,710

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

7

 

 

$

12,000

 

 

$

12,000

 

 

 

5

 

 

$

10,284

 

 

$

10,284

 

 

 

30

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Nine Months Ended September 30, 2019

 

 

Nine Months Ended September 30, 2018

 

 

 

All Restructurings

 

 

All Restructurings

 

 

 

Number of

Loans

 

 

Pre-

modification

Recorded

Investment

 

 

Post-

modification

Recorded

Investment

 

 

Number of

Loans

 

 

Pre-

modification

Recorded

Investment

 

 

Post-

modification

Recorded

Investment

 

Interest Only

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

—

 

 

$

—

 

 

$

—

 

 

 

1

 

 

$

612

 

 

$

612

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Industries

 

 

1

 

 

 

350

 

 

 

350

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Interest Only

 

 

1

 

 

 

350

 

 

 

350

 

 

 

1

 

 

 

612

 

 

 

612

 

Interest Only & Rate Concession

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4

 

 

 

10,276

 

 

 

10,276

 

Total Interest Only & Rate

   Concession

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4

 

 

 

10,276

 

 

 

10,276

 

Extended Amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

1

 

 

 

3,489

 

 

 

3,489

 

 

 

1

 

 

 

8

 

 

 

8

 

Total Extend Amortization

 

 

1

 

 

 

3,489

 

 

 

3,489

 

 

 

1

 

 

 

8

 

 

 

8

 

Extended Amortization & Rate Concession

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture

 

 

4

 

 

 

7,940

 

 

 

7,940

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Extended Amortization & Rate

   Concession

 

 

4

 

 

 

7,940

 

 

 

7,940

 

 

 

—

 

 

 

—

 

 

 

—

 

Payment Deferral

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

1

 

 

 

144

 

 

 

144

 

 

 

—

 

 

 

—

 

 

 

—

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

1

 

 

 

1,853

 

 

 

1,853

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Payment Deferral

 

 

2

 

 

 

1,997

 

 

 

1,997

 

 

 

—

 

 

 

—

 

 

 

—

 

Payment Deferral & Rate Concession

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Industries

 

 

2

 

 

 

3,710

 

 

 

3,710

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Payment Deferral & Rate

   Concession

 

 

2

 

 

 

3,710

 

 

 

3,710

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

10

 

 

$

17,486

 

 

$

17,486

 

 

$

6

 

 

$

10,896

 

 

$

10,896

 

Concessions made to improve a loan or lease’s performance have varying degrees of success. Two TDRs were modified within the twelve months ended September 30, 2019 and subsequently defaulted during the three and nine months ended September 30, 2019.  One TDR default was a commercial real estate healthcare loan that was previously modified for payment deferral and had a recorded investment of $1.8 million at September 30, 2019  The second TDR default was a commercial & industrial healthcare loan that was previously modified for payment deferral and had a recorded investment of $574 thousand at September 30, 2019  No TDRs that were modified within the twelve months ended September 30, 2018 subsequently defaulted during the three and nine months ended September 30, 2018.

31

 

 

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:

 

 

 

September 30, 2019

 

 

December 31, 2018

 

Gross direct finance lease payments receivable

 

$

14,717

 

 

$

12,541

 

Less – unearned interest

 

 

(2,807

)

 

 

(2,635

)

Net investment in direct financing leases

 

$

11,910

 

 

$

9,906

 

 

Future minimum lease payments under finance leases are as follows:

 

As of September 30, 2019

 

Amount

 

2019

 

$

775

 

2020

 

 

3,034

 

2021

 

 

2,981

 

2022

 

 

2,717

 

2023

 

 

2,266

 

Thereafter

 

 

2,944

 

Total

 

$

14,717

 

 

Interest income of $244 thousand and $100 thousand was recognized in the three months ended September 30, 2019 and 2018, respectively. Interest income of $745 thousand and $220 thousand was recognized in the nine months ended September 30, 2019 and 2018, respectively.

Operating Leases

The term of each operating lease is generally 10 to 15 years.  The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation.  At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then current fair market value.

Rental revenue from operating leases is recognized on a 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.


32

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

As of September 30, 2019 and December 31, 2018, the Company had a net investment of $145.0 million and $148.8 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $162.6 million and $159.2 million and accumulated depreciation was $17.6 million and $10.4 million as of September 30, 2019 and December 31, 2018, respectively. Depreciation expense recognized on these assets for the three months ended September 30, 2019 and 2018 was $2.4 million, and $2.2 million, respectively. Depreciation expense recognized on these assets for the nine months ended September 30, 2019 and 2018 was $7.2 million and $5.9 million, respectively.

 

Lease income of $2.4 million and $2.2 million was recognized in the three months ended September 30, 2019 and 2018, respectively. Lease income of $7.0 million and $5.7 million was recognized in the nine months ended September 30, 2019 and 2018, respectively.

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

 

As of September 30, 2019

 

Amount

 

2019

 

$

2,001

 

2020

 

 

8,883

 

2021

 

 

8,930

 

2022

 

 

8,924

 

2023

 

 

8,956

 

Thereafter

 

 

48,267

 

Total

 

$

85,961

 

Lessee Lease Arrangements

The Company has operating leases for real property, land, copiers and other equipment. These leases have remaining lease terms of 1 year to 27 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases. The Company has concluded that it is reasonably certain it will exercise the options to extend for only one lease, which was therefore recognized as part of the ROU asset and lease liability.

The Company has a finance lease for fitness equipment and it has a remaining lease term of approximately 3.17 years. There are no options to extend or terminate this lease.

The components of lease expense are as follows:

 

 

Three Months Ended

September 30, 2019

 

 

Nine Months Ended

September 30, 2019

 

Operating lease cost

 

$

157

 

 

$

483

 

Short-term lease cost

 

 

147

 

 

 

522

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

1

 

 

 

3

 

Interest expense on lease liabilities

 

 

—

 

 

 

—

 

Sublease income

 

 

(9

)

 

 

(27

)

Total net lease cost

 

$

296

 

 

$

981

 

Supplemental disclosure for the consolidated balance sheet related to finance leases is as follows:

 

 

September 30, 2019

 

Finance lease right-of-use asset

 

$

15

 

Finance lease liability

 

 

15

 

33

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The weighted average remaining lease term and weighted average discount rate for leases are as follows:

 

 

As of September 30, 2019

 

Weighted average remaining lease term (years)

 

 

 

 

Operating leases

 

 

15.65

 

Finance lease

 

 

3.17

 

Weighted average discount rate

 

 

 

 

Operating leases

 

 

3.51

%

Finance lease

 

 

3.10

%

A maturity analysis of operating and finance lease liabilities is as follows:

As of September 30, 2019

 

Operating Leases

 

 

Finance Leases

 

2019

 

$

178

 

 

$

2

 

2020

 

 

521

 

 

 

5

 

2021

 

 

306

 

 

 

5

 

2022

 

 

276

 

 

 

4

 

2023

 

 

143

 

 

 

—

 

Thereafter

 

 

1,285

 

 

 

—

 

Total lease payments

 

 

2,709

 

 

 

16

 

Less: imputed interest

 

 

(668

)

 

 

(1

)

Total lease liabilities

 

$

2,041

 

 

$

15

 

 

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $2.27 billion and $2.63 billion at September 30, 2019 and December 31, 2018, respectively. The unpaid principal balance for all loans serviced for others was $3.01 billion and $3.22 billion at September 30, 2019 and December 31, 2018, respectively.

The following summarizes the activity pertaining to servicing rights:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Balance at beginning of period

 

$

41,687

 

 

$

52,689

 

 

$

47,641

 

 

$

52,298

 

Additions, net

 

 

1,057

 

 

 

5,558

 

 

 

2,388

 

 

 

14,634

 

Fair value changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due to changes in valuation inputs or assumptions

 

 

(1,542

)

 

 

(5,336

)

 

 

(1,850

)

 

 

(7,336

)

Decay due to increases in principal paydowns or runoff

 

 

(3,619

)

 

 

(3,650

)

 

 

(10,596

)

 

 

(10,335

)

Balance at end of period

 

$

37,583

 

 

$

49,261

 

 

$

37,583

 

 

$

49,261

 

 

The fair value of servicing rights was determined using a weighted average discount rate of 14.1% on September 30, 2019 and 16.1% on September 30, 2018. The fair value of servicing rights was determined using a weighted average prepayment speed of 15.7% on September 30, 2019 and 11.1% on September 30, 2018, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

34

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 8. Borrowings

Total outstanding short and long term borrowings consisted of the following:

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Short term borrowings

 

 

 

 

 

 

 

 

On September 18, 2014, the Company entered into a note payable revolving line of credit of $8.1 million with an unaffiliated commercial bank. On April 18, 2017, the Company renewed and increased the revolving line of credit to $25 million.  The note was unsecured and accrued interest at Prime minus 0.50% for a term of 24 months. Payments were interest only with all principal and accrued interest due on April 30, 2019. The terms of this loan required the Company to maintain minimum capital, liquidity and Texas ratios. This line of credit was paid in full on August 25, 2017. This line of credit matured on April 30, 2019 and there is no available credit at September 30, 2019.

 

$

—

 

 

$

—

 

On February 23, 2015, the Company transferred two related party loans to an unaffiliated commercial bank in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the unaffiliated commercial bank identified the transaction as a secured borrowing for accounting purposes. One of the loans with an outstanding balance of $1.3 million was paid in full on August 17, 2018. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at September 30, 2019 is 6.50%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $1.3 million at September 30, 2019. The underlying loan carries a risk grade of 3 and is current with no delinquency.

 

 

1,295

 

 

 

1,441

 

Total short term borrowings

 

$

1,295

 

 

$

1,441

 

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Long term borrowings

 

 

 

 

 

 

 

 

In October 2017, the Company entered into a capital lease of $19 thousand with an unaffiliated equipment lease company, secured by fitness equipment which is included in other assets on the consolidated balance sheet. Payments are principal and interest due monthly starting December 15, 2017 over a term of 60 months. At the end of the lease term there is a $1.00 bargain purchase option. As of January 1, 2019, this borrowing was revised in accordance with ASU 2016-02.

 

$

15

 

 

$

16

 

On October 20, 2017, the Company entered into a revolving line of credit of $20 million with an unaffiliated commercial bank.  On September 20, 2019, the Company renewed and increased the revolving  line of credit from $20 million to $50 million.  The note is unsecured and accrues interest at LIBOR plus 1.150% for a term of 13 months.  Payments are interest only with all principal and accrued interest due on October 20, 2020. No advances have been made to this line of credit and there is $50 million of available credit at September 30, 2019.

 

 

-

 

 

 

-

 

Total long term borrowings

 

$

15

 

 

$

16

 

 

The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $72.5 million as of September 30, 2019 and December 31, 2018. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of September 30, 2019 and December 31, 2018.

 


35

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The Company has entered into a repurchase agreement with a third party for $5.0 million as of September 30, 2019 and December 31, 2018.  At the time the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received.  The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had no outstanding balance on the repurchase agreement as of September 30, 2019 and December 31, 2018.

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 September 30, 2019 and December 31, 2018, the Company had approximately $1.1 billion and $849.1 million, respectively, in borrowing capacity available under these agreements.  There is no collateral pledged and no advances outstanding as of September 30, 2019 and December 31, 2018.

The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $541.4 million and $395.2 million as of September 30, 2019 and December 31, 2018, respectively.  At September 30, 2019 and December 31, 2018, the Company had approximately $308.4 million and $218.0 million, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of September 30, 2019 and December 31, 2018.

Note 9. Income Taxes

The Company's effective tax rate increased to exceed the U.S. statutory rate primarily because of changes in forecasted results, including reduced levels of anticipated investment tax credits, during the remainder of 2019. The Company's effective tax rate in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.

 

 


36

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 10. Fair Value of Financial Instruments

Fair Value Hierarchy

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

Financial Instruments Measured at Fair Value

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

Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include U.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: Impairment of a loan is based on the fair value of the collateral of the loan for collateral-dependent loans. Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. For non-collateral dependent loans, impairment is determined by the present value of expected future cash flows. Impaired loans classified as Level 3 are based on management’s judgment and estimation.

Servicing assets: Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy.

Foreclosed assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3.

Mutual fund: The following mutual fund is registered with the Securities and Exchange Commission as a closed-end, non-diversified management investment company and operates as an interval fund. The fund primarily invests in the unguaranteed portion of SBA504 First Lien Loans secured by owner-occupied commercial real estate. This investment is valued using quoted prices in markets that are not active and is classified as Level 2 within the valuation hierarchy.

37

 

 

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 our 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.

Equity security investment with a non-readily determinable fair value: The following equity security investment is measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. When an observable price change in an orderly transaction occurs, the investment is classified as nonrecurring Level 1 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, 2019

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

5,011

 

 

$

—

 

 

$

5,011

 

 

$

—

 

US government agencies

 

 

33,065

 

 

 

—

 

 

 

33,065

 

 

 

—

 

Mortgage-backed securities

 

 

523,492

 

 

 

—

 

 

 

523,492

 

 

 

—

 

Municipal bonds1

 

 

9,227

 

 

 

—

 

 

 

9,136

 

 

 

91

 

Servicing assets2

 

 

37,583

 

 

 

—

 

 

 

—

 

 

 

37,583

 

Mutual fund

 

 

2,201

 

 

 

—

 

 

 

2,201

 

 

 

—

 

Equity warrant assets3

 

 

688

 

 

 

—

 

 

 

—

 

 

 

688

 

Total assets at fair value

 

$

611,267

 

 

$

—

 

 

$

572,905

 

 

$

38,362

 

 

December 31, 2018

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

4,966

 

 

$

—

 

 

$

4,966

 

 

$

—

 

US government agencies

 

 

30,944

 

 

 

—

 

 

 

30,944

 

 

 

—

 

Mortgage-backed securities

 

 

343,581

 

 

 

—

 

 

 

343,581

 

 

 

—

 

Municipal bond1

 

 

999

 

 

 

—

 

 

 

—

 

 

 

999

 

Servicing assets2

 

 

47,641

 

 

 

—

 

 

 

—

 

 

 

47,641

 

Mutual fund

 

 

2,099

 

 

 

—

 

 

 

2,099

 

 

 

—

 

Equity warrant assets3

 

 

527

 

 

 

—

 

 

 

—

 

 

 

527

 

Total assets at fair value

 

$

430,757

 

 

$

—

 

 

$

381,590

 

 

$

49,167

 

 

1

During the nine months ended September 30, 2019, the Company sold $900 thousand of a municipal bond to a third party and recorded a fair value adjustment loss of $9 thousand. During the three months ended September 30, 2019, the Company recorded a fair value adjustment loss of $2 thousand.

2

See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets.

3

During the nine months ended September 30, 2019, the Company recorded net gains on derivative instruments of $161 thousand, respectively. During the three months ended September 30, 2019, the Company recorded net losses on derivative instruments of $32 thousand. During the nine months ended September 30, 2018, the Company entered into equity warrant assets with a fair value of $551  thousand at the time of issuance and recorded net losses on derivative instruments of $13 thousand. During the three months ended September 30, 2018, the Company entered into equity warrant assets with a fair value of $152 thousand at the time of issuance and recorded net losses on derivative instruments of $13 thousand.

38

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Non-recurring Fair Value

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

 

September 30, 2019

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans

 

$

116,927

 

 

$

—

 

 

$

—

 

 

$

116,927

 

Foreclosed assets

 

 

5,702

 

 

 

—

 

 

 

—

 

 

 

5,702

 

Equity security investment with a non-readily

   determinable fair value

 

 

8,738

 

 

 

8,738

 

 

 

—

 

 

 

—

 

Total assets at fair value

 

$

131,367

 

 

$

8,738

 

 

$

—

 

 

$

122,629

 

 

December 31, 2018

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans

 

$

91,230

 

 

$

—

 

 

$

—

 

 

$

91,230

 

Foreclosed assets

 

 

1,094

 

 

 

—

 

 

 

—

 

 

 

1,094

 

Total assets at fair value

 

$

92,324

 

 

$

—

 

 

$

—

 

 

$

92,324

 

 

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2019 and December 31, 2018 the significant unobservable inputs used in the fair value measurements were as follows:

September 30, 2019

 

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Municipal bond

 

$

91

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.35%

5.00%

Impaired loans

 

$

116,927

 

 

Discounted appraisals

Discounted expected cash flows

 

Appraisal adjustments (1)

Interest rate & repayment term

 

10% to 50%

Weighted average

discount rate 6.89%

Foreclosed assets

 

$

5,702

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10% to 37%

Equity warrant assets

 

$

688

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

21.10%

1.73%

20.00%

8 - 9 years

 

 

December 31, 2018

 

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Municipal bond

 

$

999

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

5.14%

5.00%

Impaired loans

 

$

91,230

 

 

Discounted appraisals

Discounted expected cash flows

 

Appraisal adjustments (1)

Interest rate & repayment term

 

8% to 48%

Weighted average

discount rate 6.58%

Foreclosed assets

 

$

1,094

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

9% to 37%

Equity warrant assets

 

$

527

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

20.40%

2.69%

20.00%

9 - 10 years

 

 

39

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

(1)

Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of the fair value of financial instruments carried at book value on the consolidated balance sheets.  

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:

 

September 30, 2019

 

Carrying

Amount

 

 

Quoted Price

In Active

Markets for

Identical Assets

/Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

Fair

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

159,527

 

 

$

159,527

 

 

$

—

 

 

$

—

 

 

$

159,527

 

Federal funds sold

 

 

88,919

 

 

 

88,919

 

 

 

—

 

 

 

—

 

 

 

88,919

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,625

 

 

 

—

 

 

 

—

 

 

 

7,625

 

Investment securities, available-for-sale

 

 

570,795

 

 

 

—

 

 

 

570,704

 

 

 

91

 

 

 

570,795

 

Loans held for sale

 

 

903,095

 

 

 

—

 

 

 

—

 

 

 

956,764

 

 

 

956,764

 

Loans and leases, net of allowance for loan

   and lease losses

 

 

2,399,009

 

 

 

—

 

 

 

—

 

 

 

2,468,211

 

 

 

2,468,211

 

Servicing assets

 

 

37,583

 

 

 

—

 

 

 

—

 

 

 

37,583

 

 

 

37,583

 

Accrued interest receivable

 

 

19,860

 

 

 

19,860

 

 

 

—

 

 

 

—

 

 

 

19,860

 

Mutual fund

 

 

2,201

 

 

 

—

 

 

 

2,201

 

 

 

—

 

 

 

2,201

 

Equity warrant assets

 

 

688

 

 

 

—

 

 

 

—

 

 

 

688

 

 

 

688

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

4,019,267

 

 

 

—

 

 

 

4,036,336

 

 

 

—

 

 

 

4,036,336

 

Accrued interest payable

 

 

1,994

 

 

 

1,994

 

 

 

—

 

 

 

—

 

 

 

1,994

 

Short term borrowings

 

 

1,295

 

 

 

—

 

 

 

—

 

 

 

1,296

 

 

 

1,296

 

Long term borrowings

 

 

15

 

 

 

—

 

 

 

—

 

 

 

15

 

 

 

15

 

 

December 31, 2018

 

Carrying

Amount

 

 

Quoted Price

In Active

Markets for

Identical Assets

/Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

Fair

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

316,823

 

 

$

316,823

 

 

$

—

 

 

$

—

 

 

$

316,823

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,442

 

 

 

—

 

 

 

—

 

 

 

7,442

 

Investment securities, available-for-sale

 

 

380,490

 

 

 

—

 

 

 

379,491

 

 

 

999

 

 

 

380,490

 

Loans held for sale

 

 

687,393

 

 

 

—

 

 

 

—

 

 

 

695,154

 

 

 

695,154

 

Loans and leases, net of allowance for loan

   and lease losses

 

 

1,810,985

 

 

 

—

 

 

 

—

 

 

 

1,807,528

 

 

 

1,807,528

 

Servicing assets

 

 

47,641

 

 

 

—

 

 

 

—

 

 

 

47,641

 

 

 

47,641

 

Accrued interest receivable

 

 

15,895

 

 

 

15,895

 

 

 

—

 

 

 

—

 

 

 

15,895

 

Mutual fund

 

 

2,099

 

 

 

—

 

 

 

2,099

 

 

 

—

 

 

 

2,099

 

Equity warrant assets

 

 

527

 

 

 

—

 

 

 

—

 

 

 

527

 

 

 

527

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,149,583

 

 

 

—

 

 

 

3,117,941

 

 

 

—

 

 

 

3,117,941

 

Accrued interest payable

 

 

861

 

 

 

861

 

 

 

—

 

 

 

—

 

 

 

861

 

Short term borrowings

 

 

1,441

 

 

 

—

 

 

 

—

 

 

 

1,441

 

 

 

1,441

 

Long term borrowings

 

 

16

 

 

 

—

 

 

 

—

 

 

 

16

 

 

 

16

 

 

40

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 11. Commitments and Contingencies

Litigation

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

Financial Instruments with Off-balance-sheet Risk

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows:

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Commitments to extend credit

 

$

1,701,121

 

 

$

1,435,024

 

Standby letters of credit

 

 

25,653

 

 

 

2,150

 

Solar purchase commitments

 

 

2,400

 

 

 

—

 

Airplane purchase agreement commitments

 

 

—

 

 

 

10,450

 

Total unfunded off-balance-sheet credit risk

 

$

1,729,174

 

 

$

1,447,624

 

 

 


41

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 September 30, 2019 and December 31, 2018, the Company had unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $17.9 million and $2.8 million, respectively.

Concentrations of Credit Risk

Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 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 $7.5 million, except for 20 relationships that have a retained unguaranteed exposure of $218.7 million of which $154.4 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling $86.0 million, of which $62.5 million is due from four relationships.

The Company from time-to-time may have cash and cash equivalents on deposit with financial institutions that exceed federally-insured limits.

 

Note 12. Stock Plans

On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 7,000,000 common voting shares and has an expiration date of March 20, 2025. On May 15, 2018, the Amended and Restated 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of 8,750,000 common voting shares. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the "Plan") expire no more than 10 years from the date of grant. Exercise prices under the Plan are set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Options vest over a minimum of three years from the date of the grant. Restricted stock grants vest in equal installments ranging from immediate vesting to over a seven year period from the date of the grant.  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 above a specified price defined at time of grant.

Stock Options

Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the three months ended September 30, 2019 and 2018, the Company recognized $395 thousand and $470 thousand in compensation expense for stock options, respectively. For the nine months ended September 30, 2019 and 2018, the Company recognized $1.2 million and $1.2 million in compensation expense for stock options, respectively.  

42

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Stock option activity under the Plan during the nine month periods ended September 30, 2019 and 2018, is summarized below.

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

Aggregate

Intrinsic

Value

 

Outstanding at December 31, 2018

 

 

2,656,855

 

 

$

11.27

 

 

 

 

 

 

 

Exercised 1

 

 

48,301

 

 

 

6.31

 

 

 

 

 

 

 

Forfeited

 

 

55,355

 

 

 

9.47

 

 

 

 

 

 

 

Granted

 

 

—

 

 

 

—

 

 

 

 

 

 

 

Outstanding at September 30, 2019

 

 

2,553,199

 

 

$

11.40

 

 

5.27 years

 

$

17,319,078

 

Exercisable at September 30, 2019

 

 

1,045,576

 

 

$

10.97

 

 

5.12 years

 

$

7,545,508

 

 

1

Exercised stock options include 1,055 stock options that were surrendered for taxes and not issued.

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Terms

 

Aggregate

Intrinsic

Value

 

Outstanding at December 31, 2017

 

 

3,058,459

 

 

$

11.30

 

 

 

 

 

 

 

Exercised

 

 

171,333

 

 

 

9.26

 

 

 

 

 

 

 

Forfeited

 

 

174,845

 

 

 

13.69

 

 

 

 

 

 

 

Granted

 

 

—

 

 

 

—

 

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

2,712,281

 

 

$

11.27

 

 

6.28 years

 

$

47,005,905

 

Exercisable at September 30, 2018

 

 

813,730

 

 

$

10.67

 

 

6.11 years

 

$

14,587,733

 

 

The following is a summary of non-vested stock option activity for the Company for the nine months ended September 30, 2019 and 2018.

 

 

Shares

 

 

Weighted

Average Grant

Date Fair

Value

 

Non-vested at December 31, 2018

 

 

1,839,830

 

 

$

4.60

 

Granted

 

 

—

 

 

 

—

 

Vested

 

 

(276,852

)

 

 

4.92

 

Forfeited

 

 

(55,355

)

 

 

9.47

 

Non-vested at September 30, 2019

 

 

1,507,623

 

 

 

11.70

 

 

 

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Non-vested at December 31, 2017

 

 

2,364,999

 

 

$

4.65

 

Granted

 

 

—

 

 

 

—

 

Vested

 

 

(291,603

)

 

 

3.95

 

Forfeited

 

 

(174,845

)

 

 

5.98

 

Non-vested at September 30, 2018

 

 

1,898,551

 

 

 

4.63

 

 

The total intrinsic value of options exercised at September 30, 2019 and 2018, was $209 thousand and $493 thousand, respectively.

At September 30, 2019, unrecognized compensation costs relating to stock options amounted to $4.6 million which will be recognized over a weighted average period of 2.8 years.

43

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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, 2019 and 2018.

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 $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 simulation method.

RSU stock activity under the Plan during the nine months of 2019 is summarized below.

 

 

 

Shares

 

 

Weighted

Average Grant

Date Fair Value

 

Non-vested at December 31, 2018

 

 

388,187

 

 

$

23.85

 

Granted

 

 

130,176

 

 

 

16.73

 

Vested

 

 

(54,063

)

 

 

25.21

 

Forfeited

 

 

(16,029

)

 

 

20.44

 

Non-vested at September 30, 2019

 

 

448,271

 

 

 

21.74

 

For the three months ended September 30, 2019 and 2018, the Company recognized $518 thousand and $401 thousand in compensation expense for RSUs, respectively. For the nine months ended September 30, 2019 and 2018, the Company recognized $1.6 million and $2.2 million in compensation expense for RSUs, respectively.

 

At September 30, 2019, unrecognized compensation costs relating to RSUs amounted to $8.5 million which will be recognized over a weighted average period of 4.8 years.

Market RSU stock activity under the Plan during the nine months of 2019 is summarized below.

 

 

 

Shares

 

 

Weighted

Average Grant

Date Fair Value

 

Non-vested at December 31, 2018

 

 

2,709,202

 

 

$

9.87

 

Granted

 

 

500,000

 

 

 

8.81

 

Vested

 

 

—

 

 

 

—

 

Forfeited

 

 

(52,878

)

 

 

9.22

 

Non-vested at September 30, 2019

 

 

3,156,324

 

 

 

8.44

 

 

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.

 


44

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Related to the 500,000 Market RSUs granted on February 11, 2019, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of 10.0 years. The implied term of the restricted stock ranges from 4.5 to 5.8 years. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of 2.62%, expected volatility of 37.6% and a dividend yield of 0.78%.

On February 11, 2019, 75,000 Market RSUs granted on May 14, 2018 to one employee were modified to lengthen the vesting term from 7 to 10 years and change the target stock price from $48.00 to a range of $35.00 to $48.00 per share for at least twenty (20) consecutive trading days. Additionally, 410,000 Market RSUs granted on August 10, 2018 to eleven employees were modified to lengthen the vesting term from 7 to 10 years and change the amount of Market RSUs that vest at various target stock prices to 20% per tier.  As a result of modification, the Company recognized additional compensation expense of $155 thousand and $388 thousand for the three and nine months periods ended September 30, 2019, respectively.

For the three months ended September 30, 2019 and 2018, the Company recognized $2.0 million and $1.6 million in compensation expense for Market RSUs, respectively. For the nine months ended September 30, 2019 and 2018, the Company recognized $5.8 million and $3.5 million in compensation expense for Market RSUs, respectively.

At September 30, 2019, unrecognized compensation costs relating to Market RSUs amounted to $16.8 million which will be recognized over a weighted average period of 3.1 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. For the three months ended September 30, 2019 and 2018, the company recognized $45 thousand and $31 thousand, respectively. For the nine months ended September 30, 2019 and 2018, the Company recognized $77 thousand and $60 thousand in expense, respectively.

Note 13. Subsequent Event

On October 30, 2019, the Company was notified that 203,283 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) under a private placement sale of shares effective September 24, 2019. The Company’s consolidated financial statements as of September 30, 2019 have been updated accordingly.

 

 

45

 

 

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, 2018 (the "2018 Annual Report"). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.

Important Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this quarterly report on Form 10-Q. 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;

 

•

changes in Small Business Administration ("SBA") rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of Live Oak Banking Company (the "Bank") as an SBA Preferred Lender;

 

•

changes in rules, regulations or procedures for other government loan programs, including those of the USDA;

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

46

 

 

 

•

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

 

•

the Company's ability to attract and retain key personnel;

 

•

changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits;

 

•

changes in political and economic conditions;

 

•

the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau;

 

•

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

 

•

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

 

•

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

 

•

other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s 2018 Annual Report; and

 

•

the success at managing the risks involved in the foregoing.

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

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

Nature of Operations

LOB is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending services to small businesses nationwide. 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 the 7(a) Loan Program and the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP"), Business & Industry ("B&I") and Water & Waste Disposal (“WEP”) loan programs.


47

 

 

Effective July 29, 2016, the Company elected to become a “financial holding company” within the meaning of the Bank Holding Company Act.  A financial holding company, and the nonbank companies under its control, are permitted to engage in activities considered financial in nature or incidental to financial activities.  For the Company to become and remain eligible for financial holding company status, it and the Bank must meet certain criteria, including capital, management and Community Reinvestment Act (“CRA”) requirements. The failure to meet such criteria could, depending on which requirements were not met, result in the Company facing restrictions on new financial activities or acquisitions or being required to discontinue existing activities that are not otherwise permissible for bank holding companies.

During the fourth quarter of 2018, the Company began implementing a strategic decision to retain a larger portion of its loans eligible for sale on its balance sheet.  Management believes this decision will reduce future earnings volatility and maximize long-term profitability.  This strategic change had immediate impacts through the reclassification of $80.3 million in guaranteed loans from held-for-sale to held-for-investment status.  Other effects of this change are reflected in the financial statements in the fourth quarter of 2018 and in the first nine months of 2019 with significantly fewer loans sold during the respective quarters and the consequential effect of increased net interest income and increased loans held for sale and held for investment along with lower gains on loan sales.

 

In 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 the Company formed Canapi Advisors, LLC for the purpose of providing investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial services technology companies.  In 2017, the Bank entered into a joint venture, Apiture LLC (“Apiture”), with First Data Corporation for the purpose of creating next generation technology for financial institutions.  In August 2018, the Company exited the title insurance business by financing the sale of its entire ownership interest in Reltco, Inc. and National Assurance Title, Inc. for $3.0 million. This divestiture was driven by lower expectations of future profitability for this business.  The title insurance business was acquired in 2017.  In 2016, the Company formed Live Oak Clean Energy Financing LLC (“LOCEF”), for the purpose of providing financing to entities for renewable energy applications. During the three months ended March 31, 2019, LOCEF became a subsidiary of the Bank.  In addition to the Bank, the Company owns Live Oak Ventures, Inc. (formerly known as "Canapi, Inc."), formed in August 2016 for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; Live Oak Grove, LLC, formed in February 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), formed to serve as the investment advisor to The 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.  During the first half of 2019, 504FA completed the transfer of its advisory agreement and no longer serves as the investment advisor to The 504 Fund.

The Company generates revenue primarily from net interest income and the origination and sale of government guaranteed loans.  Income from the retention of loans is comprised principally of interest income.  Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

Business Outlook

Below is a discussion of management’s current expectations regarding company performance over the near-term based on market conditions, the regulatory environment and business strategies as of the time the Company filed this Report. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. See “Important Note Regarding Forward-Looking Statements” in this Report for more information on forward-looking statements.

We believe our strategic decision to retain a larger portion of loans eligible for sale on our balance sheet will reduce future earnings volatility and maximize long-term profitability.  As a result of this decision, we anticipate that gains on the sale of loans will comprise a diminishing component of our revenue in 2019.  Management anticipates that the Company's held-for-sale and held-for-investment loan portfolios will continue to grow as a result of ongoing origination volumes and higher levels of loan retention intended to promote long-term recurring revenue and profitability, including the continued pursuit of potential opportunities in conventional lending outside of SBA or other government guarantee programs.  

The Company expects its effective tax rate will approximate 20% to 25% for 2019.  This estimate is subject to change dependent upon the nature and amount of future income, expenses and investments that may have unexpected tax consequences.

48

 

 

Results of Operations

Performance Summary

Three months ended September 30, 2019 compared with three months ended September 30, 2018

For the three months ended September 30, 2019, the Company reported net income of $3.9 million, or $0.09 per diluted share, as compared to $14.3 million, or $0.34 per diluted share, for the third quarter of 2018.  This decrease in net income is primarily due to the following items:

 

•

The Company’s strategic shift in the latter part of 2018 to hold substantially more of its eligible-for-sale production on balance sheet resulted in lower net income in the near-term by decreasing net gains on sales of loans by $14.6 million, or 66.3%.  The volume of guaranteed loan sales in the third quarter of 2019 declined to $100.5 million compared to $298.1 million in the third quarter of 2018;

 

 

•

The provision for loan and lease losses increased $7.4 million due primarily to accommodate significant portfolio growth combined with an increase in criticized and classified loans and leases; and

 

 

•

Income tax expense increased $5.6 million.  This increase was largely the result of forecasted reductions in targeted solar panel leasing activity and related investment tax credits for the remainder of the year which negatively impacted the annual effective tax rate.

The primary factors partially offsetting the above decrease in net income were:

 

•

Increase in net interest income of $9.8 million, or 35.4%, predominately driven by the above referenced strategic growth in loan and lease portfolios combined with higher investment security holdings which benefited from rising interest rates; and

 

 

•

Net negative loan servicing revaluation decreased by $8.5 million, or 90.8%, principally due to improving market conditions, such as increased premiums, for sold loans.

 

Nine Months Ended September 30, 2019 compared with nine months ended September 30, 2018

For the nine months ended September 30, 2019, the Company reported net income of $11.2 million, or $0.27 per diluted share, as compared to $41.0 million, or $0.98 per diluted share, for the nine months ended September 30, 2018.  This decrease in net income is primarily due to the following items:

 

•

The Company’s above referenced strategic shift in the latter part of 2018 to hold substantially more of its eligible-for-sale production on balance sheet resulted in lower net income in the near-term by decreasing net gains on sales of loans by $51.8 million, or 74.6%.  The volume of guaranteed loan sales in the first nine months of 2019 declined to $235.4 million compared to $840.5 million in the first nine months of 2018, a 72.0% decrease;

 

 

•

The provision for loan and lease losses increased $7.1 million primarily due to significant portfolio growth combined with an increase in criticized and classified loans and leases;

 

 

•

The flow-through loss from investments accounted for under the equity method totaled $6.1 million compared to $1.4 for the nine months ended September 30, 2018; and

 

 

•

Income tax expense increased $5.7 million.  This increase was largely the result of forecasted reductions in the targeted solar panel leasing activity for the remainder of the year which negatively impacted the annual effective tax rate.

The primary factors partially offsetting the above decrease in net income were:

 

•

Increase in net interest income of $22.8 million, or 28.8%, predominately driven by the above referenced strategic growth in loan and lease portfolios combined with higher investment security holdings which benefited from rising interest rates; and

 

49

 

 

 

•

Net negative loan servicing revaluation decreased by $14.6 million, or 80.7%, principally due to improving market conditions, such as increased premiums, for sold loans.

Net Interest Income and Margin

Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost it incurs on interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” Without a branch network, the Bank generates deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.

Three months ended September 30, 2019 compared with three months ended September 30, 2018

For the three months ended September 30, 2019, net interest income increased $9.8 million, or 35.4%, to $37.5 million compared to $27.7 million for the three months ended September 30, 2018. 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 deploy liquidity while improving the asset-liability repricing mix.   Average interest earning assets increased by $940.2 million, or 30.9%, to $3.98 billion for the three months ended September 30, 2019, compared to $3.04 billion for the three months ended September 30, 2018, while the yield on average interest earning assets increased sixty-two basis points to 6.08%. The cost of funds on interest bearing liabilities for the three months ended September 30, 2019 increased fifty-one basis points to 2.44%, and the average balance of interest bearing liabilities increased by $921.4 million, or 31.7%, over the same period in 2019. As indicated in the rate/volume table below, the increase in interest earning assets outpaced the higher volume and increased cost of interest bearing liabilities, resulting in increased interest income of $19.2 million and increased interest expense of $9.4 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.  For the three months ended September 30, 2018 compared to the three months ended September 30, 2019, net interest margin increased from 3.61% to 3.74%, respectively, principally due to the volume of interest earnings assets outpacing the growth in the volume of interest bearing liabilities.

Nine Months Ended September 30, 2019 compared with nine months ended September 30, 2018

For the nine months ended September 30, 2019, net interest income increased $22.8 million, or 28.8%, to $102.1 million compared to $79.2 million for the nine months ended September 30, 2018. 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 deploy liquidity while improving the asset-liability repricing mix.   Average interest earning assets increased by $746.6 million, or 25.3%, to $3.70 billion for the nine months ended September 30, 2019, compared to $2.95 billion for the nine months ended September 30, 2018, while the yield on average interest earning assets increased sixty-seven basis points to 6.01%. The cost of funds on interest bearing liabilities for the nine months ended September 30, 2019 increased fifty-seven basis points to 2.41%, and the average balance of interest bearing liabilities increased by $743.8 million, or 26.5%, over the same period in 2018. As indicated in the rate/volume table below, the increase in interest earning assets and corresponding yields outpaced the higher volume and increased cost of interest bearing liabilities, resulting in increased interest income of $48.3 million and increased interest expense of $25.5 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.  For the nine months ended September 30, 2018 compared to the nine months ended September 30, 2019, net interest margin increased from 3.59% to 3.69%, respectively, principally due to the growth in the volume of interest earnings assets outpacing the growth in interest bearing liabilities.

50

 

 

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 September 30,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest earning

   balances in other banks

 

$

205,342

 

 

$

1,167

 

 

 

2.25

%

 

$

349,739

 

 

$

1,638

 

 

 

1.86

%

Investment securities

 

 

554,871

 

 

 

4,001

 

 

 

2.86

 

 

 

388,520

 

 

 

2,528

 

 

 

2.58

 

Loans held for sale

 

 

910,837

 

 

 

15,982

 

 

 

6.96

 

 

 

693,517

 

 

 

11,270

 

 

 

6.45

 

Loans and leases held for

   investment(1)

 

 

2,313,615

 

 

 

39,957

 

 

 

6.85

 

 

 

1,612,699

 

 

 

26,454

 

 

 

6.51

 

Total interest earning assets

 

 

3,984,665

 

 

 

61,107

 

 

 

6.08

 

 

 

3,044,475

 

 

 

41,890

 

 

 

5.46

 

Less: Allowance for loan and lease

   losses

 

 

(37,995

)

 

 

 

 

 

 

 

 

 

 

(29,266

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

501,369

 

 

 

 

 

 

 

 

 

 

 

434,963

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,448,039

 

 

 

 

 

 

 

 

 

 

$

3,450,172

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

—

 

 

$

—

 

 

 

—

%

 

$

31,950

 

 

$

87

 

 

 

1.08

%

Savings

 

 

1,036,858

 

 

 

5,501

 

 

 

2.10

 

 

 

943,958

 

 

 

4,026

 

 

 

1.69

 

Money market accounts

 

 

91,813

 

 

 

179

 

 

 

0.77

 

 

 

120,702

 

 

 

314

 

 

 

1.03

 

Certificates of deposit

 

 

2,701,350

 

 

 

17,896

 

 

 

2.63

 

 

 

1,810,040

 

 

 

9,738

 

 

 

2.13

 

Total deposits

 

 

3,830,021

 

 

 

23,576

 

 

 

2.44

 

 

 

2,906,650

 

 

 

14,165

 

 

 

1.93

 

Other borrowings

 

 

1,359

 

 

 

—

 

 

 

—

 

 

 

3,365

 

 

 

1

 

 

 

0.12

 

Total interest bearing liabilities

 

 

3,831,380

 

 

 

23,576

 

 

 

2.44

 

 

 

2,910,015

 

 

 

14,166

 

 

 

1.93

 

Non-interest bearing deposits

 

 

51,781

 

 

 

 

 

 

 

 

 

 

 

46,272

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities

 

 

35,654

 

 

 

 

 

 

 

 

 

 

 

21,804

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

529,224

 

 

 

 

 

 

 

 

 

 

 

472,081

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

4,448,039

 

 

 

 

 

 

 

 

 

 

$

3,450,172

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

37,531

 

 

 

3.64

%

 

 

 

 

 

$

27,724

 

 

 

3.53

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.74

 

 

 

 

 

 

 

 

 

 

 

3.61

 

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

104.00

%

 

 

 

 

 

 

 

 

 

 

104.62

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Average loan and lease balances include non-accruing loans.

 

51

 

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest earning

   balances in other banks

 

$

224,278

 

 

$

3,914

 

 

 

2.33

%

 

$

403,024

 

 

$

5,032

 

 

 

1.67

%

Investment securities

 

 

527,799

 

 

 

11,434

 

 

 

2.90

 

 

 

315,120

 

 

 

6,175

 

 

 

2.62

 

Loans held for sale

 

 

834,043

 

 

 

42,948

 

 

 

6.88

 

 

 

722,308

 

 

 

34,423

 

 

 

6.37

 

Loans and leases held for

   investment(1)

 

 

2,109,775

 

 

 

107,871

 

 

 

6.84

 

 

 

1,508,833

 

 

 

72,259

 

 

 

6.40

 

Total interest earning assets

 

 

3,695,895

 

 

 

166,167

 

 

 

6.01

 

 

 

2,949,285

 

 

 

117,889

 

 

 

5.34

 

Less: Allowance for loan and lease

   losses

 

 

(35,215

)

 

 

 

 

 

 

 

 

 

 

(27,157

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

484,194

 

 

 

 

 

 

 

 

 

 

 

422,295

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,144,874

 

 

 

 

 

 

 

 

 

 

$

3,344,423

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

55

 

 

$

—

 

 

 

—

%

 

$

37,448

 

 

$

290

 

 

 

1.04

%

Savings

 

 

985,050

 

 

 

15,522

 

 

 

2.11

 

 

 

922,028

 

 

 

11,206

 

 

 

1.62

 

Money market accounts

 

 

87,063

 

 

 

448

 

 

 

0.69

 

 

 

147,002

 

 

 

1,297

 

 

 

1.18

 

Certificates of deposit

 

 

2,480,273

 

 

 

48,126

 

 

 

2.59

 

 

 

1,697,620

 

 

 

25,717

 

 

 

2.03

 

Total deposits

 

 

3,552,441

 

 

 

64,096

 

 

 

2.41

 

 

 

2,804,098

 

 

 

38,510

 

 

 

1.84

 

Other borrowings

 

 

1,410

 

 

 

—

 

 

 

—

 

 

 

5,998

 

 

 

131

 

 

 

2.92

 

Total interest bearing liabilities

 

 

3,553,851

 

 

 

64,096

 

 

 

2.41

 

 

 

2,810,096

 

 

 

38,641

 

 

 

1.84

 

Non-interest bearing deposits

 

 

50,101

 

 

 

 

 

 

 

 

 

 

 

52,225

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities

 

 

25,638

 

 

 

 

 

 

 

 

 

 

 

20,691

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

515,284

 

 

 

 

 

 

 

 

 

 

 

461,411

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

4,144,874

 

 

 

 

 

 

 

 

 

 

$

3,344,423

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

102,071

 

 

 

3.60

%

 

 

 

 

 

$

79,248

 

 

 

3.50

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.69

%

 

 

 

 

 

 

 

 

 

 

3.59

 

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

104.00

%

 

 

 

 

 

 

 

 

 

 

104.95

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Average loan and lease balances include non-accruing loans.

52

 

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019 vs. 2018

 

 

2019 vs. 2018

 

 

 

Increase (Decrease) Due to

 

 

Increase (Decrease) Due to

 

 

 

Rate

 

 

Volume

 

 

Total

 

 

Rate

 

 

Volume

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest

   earning balances in other banks

 

$

277

 

 

$

(748

)

 

$

(471

)

 

$

1,558

 

 

$

(2,676

)

 

$

(1,118

)

Investment securities

 

 

332

 

 

 

1,141

 

 

 

1,473

 

 

 

872

 

 

 

4,387

 

 

 

5,259

 

Loans held for sale

 

 

1,040

 

 

 

3,672

 

 

 

4,712

 

 

 

2,986

 

 

 

5,539

 

 

 

8,525

 

Loans and leases held for investment

 

 

1,702

 

 

 

11,801

 

 

 

13,503

 

 

 

5,859

 

 

 

29,753

 

 

 

35,612

 

Total interest income

 

 

3,351

 

 

 

15,866

 

 

 

19,217

 

 

 

11,275

 

 

 

37,003

 

 

 

48,278

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

 

—

 

 

 

(87

)

 

 

(87

)

 

 

(145

)

 

 

(145

)

 

 

(290

)

Savings

 

 

1,030

 

 

 

445

 

 

 

1,475

 

 

 

3,436

 

 

 

880

 

 

 

4,316

 

Money market accounts

 

 

(69

)

 

 

(66

)

 

 

(135

)

 

 

(430

)

 

 

(419

)

 

 

(849

)

Certificates of deposit

 

 

2,808

 

 

 

5,350

 

 

 

8,158

 

 

 

8,888

 

 

 

13,521

 

 

 

22,409

 

Other borrowings

 

 

(1

)

 

 

—

 

 

 

(1

)

 

 

(81

)

 

 

(50

)

 

 

(131

)

Total interest expense

 

 

3,768

 

 

 

5,642

 

 

 

9,410

 

 

 

11,668

 

 

 

13,787

 

 

 

25,455

 

Net interest income

 

$

(417

)

 

$

10,224

 

 

$

9,807

 

 

$

(393

)

 

$

23,216

 

 

$

22,823

 

 

Provision for Loan and Lease Losses

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

Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. A typical SBA 7(a) loan carries a 75% guarantee while USDA guarantees range from 60% to 80% depending on loan size, which serve 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 third quarter of 2019 the provision for loan and lease losses was $7.2 million compared to negative provision of $243 thousand for the same period in 2018, an increase of $7.4 million.  The increase in the provision for loan and lease losses compared to the prior year quarter was primarily the result of a growing loan portfolio through robust loan originations and higher balance sheet retention rates combined with an increase in criticized and classified loans.

Loans and leases held for investment were $2.44 billion as of September 30, 2019, increasing by $810.6 million, or 49.7%, compared to September 30, 2018.  This growth was fueled by strong loan origination volumes and the above referenced strategic shift to retain substantially more loans on the balance sheet.

Net charge-offs were $2.3 million, or 0.39% of average quarterly loans and leases held for investment on an annualized basis, for the three months ended September 30, 2019, compared to $2.3 million, or 0.57%, for the three months ended September 30, 2018.  For the nine months ended September 30, 2019, net charge-offs totaled $2.9 million compared to $3.6 million for the nine months ended September 30, 2018, a decrease of $774 thousand, or 21.3%.  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, 2019, nonperforming loans and leases not guaranteed by the SBA totaled $19.8 million, which was 0.81% of the held-for-investment loan and lease portfolio compared to $12.9 million, or 0.79% of loans and leases held for investment at September 30, 2018.

53

 

 

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 related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Noninterest income also commonly includes equity method investments income (loss), lease income, construction supervision fee income and in prior periods title insurance income. Other less common elements of noninterest income include nonrecurring gains and losses on investments.

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

 

 

 

Three Months Ended September 30,

 

 

2019/2018 Increase (Decrease)

 

 

 

2019

 

 

2018

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

6,831

 

 

$

7,506

 

 

$

(675

)

 

 

(8.99

)%

Loan servicing asset revaluation

 

 

(859

)

 

 

(9,380

)

 

 

8,521

 

 

 

90.84

 

Net gains on sales of loans

 

 

7,425

 

 

 

22,004

 

 

 

(14,579

)

 

 

(66.26

)

Equity method investments income (loss)

 

 

(2,370

)

 

 

(360

)

 

 

(2,010

)

 

 

558.33

 

Equity security investments gains (losses)

 

 

3,346

 

 

 

39

 

 

 

3,307

 

 

 

8,479.49

 

Gain on sale of investment securities available-for-sale

 

 

87

 

 

 

—

 

 

 

87

 

 

 

100.00

 

Lease income

 

 

2,361

 

 

 

2,194

 

 

 

167

 

 

 

7.61

 

Construction supervision fee income

 

 

360

 

 

 

578

 

 

 

(218

)

 

 

(37.72

)

Title insurance income

 

 

—

 

 

 

479

 

 

 

(479

)

 

 

(100.00

)

Other noninterest income

 

 

1,447

 

 

 

1,271

 

 

 

176

 

 

 

13.85

 

Total noninterest income

 

$

18,628

 

 

$

24,331

 

 

$

(5,703

)

 

 

(23.44

)%

 

 

 

Nine Months Ended September 30,

 

 

2019/2018 Increase (Decrease)

 

 

 

2019

 

 

2018

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

21,304

 

 

$

21,369

 

 

$

(65

)

 

 

(0.30

)%

Loan servicing asset revaluation

 

 

(3,508

)

 

 

(18,138

)

 

 

14,630

 

 

 

80.66

 

Net gains on sales of loans

 

 

17,638

 

 

 

69,483

 

 

 

(51,845

)

 

 

(74.62

)

Equity method investments income (loss)

 

 

(6,120

)

 

 

(1,397

)

 

 

(4,723

)

 

 

338.08

 

Equity security investments gains (losses)

 

 

3,481

 

 

 

134

 

 

 

3,347

 

 

 

2,497.76

 

Gain on sale of investment securities available-for-sale

 

 

92

 

 

 

—

 

 

 

92

 

 

 

100.00

 

Lease income

 

 

7,055

 

 

 

5,722

 

 

 

1,333

 

 

 

23.30

 

Construction supervision fee income

 

 

1,525

 

 

 

1,954

 

 

 

(429

)

 

 

(21.95

)

Title insurance income

 

 

—

 

 

 

2,775

 

 

 

(2,775

)

 

 

(100.00

)

Other noninterest income

 

 

4,889

 

 

 

3,798

 

 

 

1,091

 

 

 

28.73

 

Total noninterest income

 

$

46,356

 

 

$

85,700

 

 

$

(39,344

)

 

 

(45.91

)%

 

For the three months ended September 30, 2019, noninterest income decreased by $5.7 million, or 23.4%, compared to the three months ended September 30, 2018.  The decrease from the prior year is primarily the result of the aforementioned strategic decision to sell fewer loans, resulting in net gains on sales of loans declining to $7.4 million in the third quarter of 2019 compared to $22.0 million in the third quarter of 2018, a reduction of $14.6 million, or 66.3%.  The flow-through loss from investments accounted for under the equity method increased $2.0 million for the third quarter of 2019 compared to the third quarter of 2018.  These flow-through losses reflect the Company’s pro-rata portion of operating results for certain strategic start-up investments.  Partially offsetting the overall decrease in noninterest income was a $8.5 million, or 90.8%, decrease in the net negative loan servicing revaluation principally due to improving market conditions, such as increased premiums, combined with an increase in net gains on equity security investments of $3.3 million. The Company’s equity security portfolio is largely comprised of investments in strategic start-ups.

 

54

 

 

For the nine months ended September 30, 2019, noninterest income decreased by $39.3 million, or 45.9%, compared to the nine months ended September 30, 2018.  The decrease from the prior year is also primarily the result of the aforementioned strategic decision to sell fewer loans, resulting in net gains on sales of loans declining to $17.6 million for the nine months ended September 30, 2019, compared to $69.5 million for the nine months ended September 30, 2018, a reduction of $51.8 million, or 74.6%.   The flow-through loss from investments accounted for under the equity method increased $4.7 million for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018.  Also impacting the overall decrease in noninterest income was a decline in title insurance income of $2.8 million during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, due to the sale of the title insurance business in third quarter of 2018.  Partially offsetting the overall decrease in noninterest income was a $14.6 million, or 80.7%, decrease in the net negative loan servicing revaluation principally due to improving market conditions, such as increased premiums, combined with an increase in net gains on equity security investments of $3.3 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 September 30,

 

 

Three months ended June 30,

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Amount of loans and leases

   originated

 

$

562,259

 

 

$

377,337

 

 

$

525,088

 

 

$

491,797

 

 

$

390,851

 

 

$

397,559

 

Guaranteed portions

   of loans sold

 

 

100,498

 

 

 

298,073

 

 

 

71,934

 

 

 

295,216

 

 

 

62,940

 

 

 

247,243

 

Outstanding balance of

   guaranteed loans sold (1)

 

 

2,802,073

 

 

 

3,102,820

 

 

 

2,870,108

 

 

 

2,951,379

 

 

 

2,952,774

 

 

 

2,812,108

 

 

 

 

Nine Months Ended September 30,

 

 

For years ended December 31,

 

 

 

2019

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Amount of loans and leases

   originated

 

$

1,478,198

 

 

$

1,266,693

 

 

$

1,765,680

 

 

$

1,934,238

 

 

$

1,537,010

 

 

$

1,158,640

 

Guaranteed portions of

   loans sold

 

 

235,372

 

 

 

840,532

 

 

 

945,178

 

 

 

787,926

 

 

 

761,933

 

 

 

640,886

 

Outstanding balance of

   guaranteed loans sold (1)

 

 

2,802,073

 

 

 

3,102,820

 

 

 

3,045,460

 

 

 

2,680,641

 

 

 

2,278,618

 

 

 

1,779,989

 

 

(1)

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

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

Loan Servicing Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The revaluation considers the amortization of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds. For the three months ended September 30, 2019, there was a net negative loan servicing revaluation adjustment of $859 thousand compared to a net negative adjustment of $9.4 million for the three months ended September 30, 2018.  For the nine months ended September 30, 2019, there was a net negative loan servicing revaluation adjustment of $3.5 million compared to a net negative loan servicing revaluation adjustment of $18.1 million for the nine months ended September 30, 2018.  The lower revaluation amount for the quarter and year to date periods ended September 30, 2019 as compared to the corresponding periods of 2018 was primarily a result of improving market conditions.

Net Gains on Sale of Loans: For the three months ended September 30, 2019, net gains on sales of loans decreased $14.6 million, or 66.3%, compared to the three months ended September 30, 2018. For the three months ended September 30, 2019, the volume of guaranteed loans sold decreased $197.6 million, or 66.3%, to $100.5 million from $298.1 million for the three months ended September 30, 2018. For the nine months ended September 30, 2019, net gains on sale of loans totaled $17.6 million, a $51.8 million decrease from the nine months ended September 30, 2018, as the volume of guaranteed loans sold decreased $605.2 million to $235.4 million, or 72.0%.  The volume-driven decrease in the net gain on loan sales was offset by higher average premiums paid in the secondary market in both the quarter and year to date periods ended September 30, 2019 compared to the corresponding periods in 2018. Excluding fair value fluctuations in exchange traded-interest rate lock commitments, the average net gain on sale of loans for the three and nine months ended September 30, 2019 was higher at $95 thousand and $93 thousand for each $1 million in loans sold, respectively, compared to $69 thousand and $81 thousand for the three and nine months ended September 30, 2018, respectively.  


55

 

 

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 September 30,

 

 

2019/2018 Increase (Decrease)

 

 

 

2019

 

 

2018

 

 

Amount

 

 

Percent

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

22,717

 

 

$

20,553

 

 

$

2,164

 

 

 

10.53

%

Non-staff expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel expense

 

 

1,934

 

 

 

2,003

 

 

 

(69

)

 

 

(3.44

)

Professional services expense

 

 

2,073

 

 

 

1,228

 

 

 

845

 

 

 

68.81

 

Advertising and marketing expense

 

 

1,277

 

 

 

1,462

 

 

 

(185

)

 

 

(12.65

)

Occupancy expense

 

 

2,131

 

 

 

1,588

 

 

 

543

 

 

 

34.19

 

Data processing expense

 

 

3,072

 

 

 

3,661

 

 

 

(589

)

 

 

(16.09

)

Equipment expense

 

 

4,361

 

 

 

3,649

 

 

 

712

 

 

 

19.51

 

Other loan origination and maintenance expense

 

 

3,535

 

 

 

1,742

 

 

 

1,793

 

 

 

102.93

 

FDIC insurance

 

 

101

 

 

 

1,105

 

 

 

(1,004

)

 

 

(90.86

)

Title insurance closing services expense

 

 

—

 

 

 

114

 

 

 

(114

)

 

 

(100.00

)

Impairment expense on goodwill and other

   intangibles, net

 

 

—

 

 

 

2,680

 

 

 

(2,680

)

 

 

(100.00

)

Other expense

 

 

1,536

 

 

 

1,459

 

 

 

77

 

 

 

5.28

 

Total non-staff expenses

 

 

20,020

 

 

 

20,691

 

 

 

(671

)

 

 

(3.24

)

Total noninterest expense

 

$

42,737

 

 

$

41,244

 

 

$

1,493

 

 

 

3.62

%

 

 

 

Nine Months Ended September 30,

 

 

2019/2018 Increase (Decrease)

 

 

 

2019

 

 

2018

 

 

Amount

 

 

Percent

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

66,562

 

 

$

62,908

 

 

$

3,654

 

 

 

5.81

%

Non-staff expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel expense

 

 

4,675

 

 

 

5,887

 

 

 

(1,212

)

 

 

(20.59

)

Professional services expense

 

 

5,876

 

 

 

3,645

 

 

 

2,231

 

 

 

61.21

 

Advertising and marketing expense

 

 

4,306

 

 

 

4,992

 

 

 

(686

)

 

 

(13.74

)

Occupancy expense

 

 

5,588

 

 

 

5,327

 

 

 

261

 

 

 

4.90

 

Data processing expense

 

 

7,418

 

 

 

9,404

 

 

 

(1,986

)

 

 

(21.12

)

Equipment expense

 

 

11,925

 

 

 

10,094

 

 

 

1,831

 

 

 

18.14

 

Other loan origination and maintenance expense

 

 

6,882

 

 

 

4,485

 

 

 

2,397

 

 

 

53.44

 

Renewable energy tax credit investment impairment

 

 

602

 

 

 

—

 

 

 

602

 

 

 

100.00

 

FDIC insurance

 

 

1,435

 

 

 

2,687

 

 

 

(1,252

)

 

 

(46.59

)

Title insurance closing services expense

 

 

—

 

 

 

912

 

 

 

(912

)

 

 

(100.00

)

Impairment expense on goodwill and other

   intangibles, net

 

 

—

 

 

 

2,680

 

 

 

(2,680

)

 

 

(100.00

)

Other expense

 

 

5,245

 

 

 

7,125

 

 

 

(1,880

)

 

 

(26.39

)

Total non-staff expenses

 

 

53,952

 

 

 

57,238

 

 

 

(3,286

)

 

 

(5.74

)

Total noninterest expense

 

$

120,514

 

 

$

120,146

 

 

$

368

 

 

 

0.31

%

 

Total noninterest expense for the three and nine months ended September 30, 2019 increased $1.5 million, or 3.6%, and $368 thousand, or 0.3%, respectively, compared to the same periods in 2018. The increase in noninterest expense was largely driven by salaries and employee benefits, professional services, and loan related expenses.  Changes in various components of noninterest expense are discussed below.

56

 

 

Salaries and employee benefits: Total personnel expense for the three and nine months ended September 30, 2019 increased by $2.2 million, or 10.5%, and $3.7 million, or 5.8%, respectively, compared to the same periods in 2018.  While personnel expense is carefully managed, the Company continues to invest in human capital to support a variety of initiatives by the Company, including growing loan production and financial services technology.  Total full-time equivalent employees increased from 504 at September 30, 2018 to 569 at September 30, 2019.  Salaries and employee benefits expense included $2.9 million and $8.7 million of stock-based compensation expense in the three and nine months ended September 30, 2019, respectively, compared to $2.5 million and $7.1 million for the three and nine months ended September 30, 2018, respectively.  Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Of the total stock-based compensation included in salaries and employee benefits, $360 thousand for both the third quarter of 2019 and 2018, and $1.1 million for both the first nine months of 2019 and 2018 were related to restricted stock unit ("RSU") awards for key employee retention with an effective grant date of May 24, 2016.

 

Travel expense:  For the three and nine months ended September 30, 2019, total travel services expense decreased $69 thousand, or 3.4% and $1.2 million, or 20.6%, respectively compared to the same periods in 2018.  This decrease was principally due to a reduction in repairs and maintenance costs associated with an older aircraft that was sold during the first quarter of 2019, higher deferred travel costs as more loans were retained, and general improvements in operational efficiency.

 

Professional services expense:  For the three and nine months ended September 30, 2019, total professional services expense increased $845 thousand, or 68.9%, and $2.2 million, or 61.2%, respectively compared to the same periods in 2018.  This increase was driven by legal, accounting, and consulting fees incurred for various strategic initiatives, such as the Company’s investments in Apiture and Canapi Advisors, LLC.

 

Data processing expense:  For the three and nine months ended September 30, 2018, total data processing expense decreased $589 thousand, or 16.1%, and $2.0 million, or 21.1%, respectively, compared to the same periods in 2018. The decrease is primarily the result of the expiration of software development services provided by Apiture directly to the Company at the end of 2018 combined with the capitalization of certain software development costs during the 2019. 

 

Equipment expense:  For the three and nine months ended September 30, 2019, equipment expense increased $712 thousand, or 19.5%, and $1.8 million, or 18.1%, respectively, compared to the same periods in 2018.  Primary factors contributing to this increase were the depreciation of solar panels arising from operating lease activities and a new aircraft placed in service in the third quarter of 2019.

 

Other loan origination and maintenance expense:  For the three and nine months ended September 30, 2019, other loan origination and maintenance expense increased $1.8 million and $2.4 million, respectively, compared to the same periods in 2018.    This increase was due principally to expenses associated with the repurchase of certain guaranteed loans in the portfolio during the third quarter of 2019 along with increases in the ongoing guarantee fees arising from holding a higher volume of loans on balance sheet.  

 

FDIC insurance:  For the three and nine months ended September 30, 2019, FDIC insurance decreased $1.0 million and $1.3 million, respectively, compared to the same periods in 2018. This decrease was due to lower required premiums.

 

Impairment expense on goodwill and other intangibles:  During the third quarter of 2018, the Company incurred a one-time impairment expense of $2.7 million on goodwill and other intangibles associated with the sale of Reltco, Inc.

 

Other expenses:  For the three and nine months ended September 30, 2019, other expenses increased $77 thousand and decreased $1.9 million, respectively, compared to the same periods in 2018.  The $1.9 million decline in other expenses is attributable to the elimination of costs associated with the operation of the title insurance business, which was sold in the third quarter of 2018, and impairment related expenses recognized in the third quarter of 2018 with the transfer of the title business to held for sale.

Income Tax Expense

The effective tax rate for the both the three and nine months ended September 30, 2019 was 37.8% and 23.0%, respectively, compared to the effective rate of (28.9)% and (6.2)%, respectively, for the same periods in 2018.  The Company’s effective tax rate is influenced by the leasing of renewable energy assets which generate investment tax credits.  The significant increase in the effective tax rate compared to 2018 is largely the result of forecasted reductions in the targeted solar panel leasing activity for the remainder of the year.

57

 

 

Discussion and Analysis of Financial Condition

September 30, 2019 vs. December 31, 2018

Total assets at September 30, 2019 were $4.60 billion, an increase of $933.2 million, or 25.4%, compared to total assets of $3.67 billion at December 31, 2018. The growth in total assets was principally driven by the following:

 

•

Increased investment securities available-for-sale of $190.3 million which was driven by the Company’s strategic plan to enhance liquidity and improve asset-liability repricing mix; and

 

•

Growth in loans and leases held for sale and held for investment of $814.2 million resulting from strong originations and higher levels of balances being retained to support the Company's strategic plan to hold more loans.

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, was $248.4 million at September 30, 2019, a decrease of $68.4 million, or 21.1%, compared to $316.8 million at December 31, 2018.  This decrease reflects the Company’s maximization of returns on liquid assets by redeployment of funds into higher-yielding available-for-sale securities.

Total investment securities increased $190.3 million during the first nine months of 2019, from $380.5 million at December 31, 2018, to $570.8 million at September 30, 2019, an increase of 50.0%.  The Company increased its investment securities position during the first quarter of 2019 as part of its strategy to improve the returns of an enhanced liquidity profile and improve asset-liability repricing mix.  At September 30, 2019, the investment portfolio was comprised of U.S. treasury, U.S. government agency, mortgage-backed securities and municipal bonds.

Loans held for sale increased $215.7 million, or 31.4%, during the first nine months of 2019, from $687.4 million at December 31, 2018, to $903.1 million at September 30, 2019. This increase reflected the impact of a significantly lower volume of loan sales combined with strong origination activity during the first nine months of 2019.  

Loans and leases held for investment increased $598.5 million, or 32.5%, during the first nine months of 2019, from $1.84 billion at December 31, 2018, to $2.44 billion at September 30, 2019. The increase was primarily the result of $1.48 billion in loan and lease origination activities during the first nine months of 2019 combined with the earlier mentioned strategic shift to retain higher levels of loans on the balance sheet.

Premises and equipment, net, increased $18.4 million, or 7.0%, during the first nine months of 2019 which was primarily driven by construction of new facilities and infrastructure to accommodate Company growth and the addition of solar panels to meet leasing obligations earlier in the year.

Foreclosed assets increased $4.6 million, or 421.2%, during the first nine months of 2019 to $5.7 million compared to $1.1 million at December 31, 2018.  The increase in foreclosed assets arose from two relationships in agriculture and healthcare verticals.  The underlying loans were subject to an SBA guarantee and the total current estimated exposure to the Company is considered negligible for these new foreclosures.

Servicing assets decreased $10.1 million, or 21.1%, to $37.6 million during the first nine months of 2019 due to the reduced level of loan sales during the quarter combined with amortization of the outstanding balance of guaranteed loans sold.  At September 30, 2019, the outstanding balance of government guaranteed loans sold in the secondary market was $2.80 billion compared to $3.05 billion at December 31, 2018.

 

Operating leases right-of-use assets and operating lease liabilities were additions to the balance sheet pursuant to the adoption of the new lease standard (ASU No. 2016-02) effective January 1, 2019.  These balance sheet accounts reflect the Company’s rights and obligations created by almost all leases in which it is a lessee with remaining terms of more than 12 months.  See Note 1. Basis of Presentation and Note 6. Leases for more information on the adoption of this new standard.

Other assets decreased $7.3 million, or 4.6% from $156.2 million at December 31, 2018 to $149.0 million at September 30, 2019.  This decrease was principally the result of a reduction in taxes receivable of $15.1 million, largely comprised of a 2019 tax refund, the sale of corporate aircraft carried at $10.5 million which was classified as held-for-sale during the fourth quarter of 2018 and $6.1 million in equity method investment flow-through losses.  Partially offsetting these decreases in other assets was a $16.8 million increase in unfunded investment commitments to a series of new funds advised by Canapi Advisors combined with a $5.7 million increase in the carrying amount of an equity security investment for a non-cash gain arising from observable fair market value changes in a recent capital raise.  Investments giving rise to these increases in other assets are in new and emerging financial services technology companies.

58

 

 

Total deposits were $4.02 billion at September 30, 2019, an increase of $869.7 million, or 27.6%, from $3.15 billion at December 31, 2018. The increase in deposits was driven by the combined success of deposit gathering campaigns to support the growth in loan and lease originations and balance sheet management initiatives.

Other liabilities were $52.9 million at September 30, 2019, an increase of $27.0 million, or 104.5%, from $25.8 million at December 31, 2018. The increase in other liabilities was largely driven by the above discussed $16.8 million increase in unfunded investment commitments to a series of new funds advised by Canapi Advisors and an increased deferred tax liability of $5.7 million related to unrealized gains on the Company’s growing investment securities available-for-sale portfolio.

Shareholders’ equity at September 30, 2019 was $528.2 million as compared to $493.6 million at December 31, 2018. The book value per share was $13.12 at September 30, 2019 compared to $12.29 at December 31, 2018. Average equity to average assets was 12.4% for the nine months ended September 30, 2019 compared to 13.8% for the full year ended December 31, 2018. The increase in shareholders’ equity was principally the result of net income to common shareholders for the nine months ended September 30, 2019 of $11.2 million combined with other comprehensive income of $17.9 million and stock-based compensation expense of $8.7 million, partially offset by $3.6 million in dividends.

During the third quarter of 2019, 827,999 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 $8.8 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 on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan are applied to the outstanding principal as determined at the time of collection of the loan.

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

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

 

 

September 30, 2019

 

 

December 31, 2018

 

Nonaccrual loans and leases:

 

 

 

 

 

 

 

 

Total nonperforming loans and leases (all on nonaccrual)

 

$

80,757

 

 

$

57,690

 

Total accruing loans and leases past due 90 days or more

 

 

—

 

 

 

—

 

Foreclosed assets

 

 

5,702

 

 

 

1,094

 

Total troubled debt restructurings

 

 

43,359

 

 

 

27,495

 

Less nonaccrual troubled debt restructurings

 

 

(15,700

)

 

 

(6,494

)

Total performing troubled debt restructurings

 

 

27,659

 

 

 

21,001

 

Total nonperforming assets and troubled debt restructurings

 

$

114,118

 

 

$

79,785

 

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

   investment

 

 

3.31

%

 

 

3.13

%

Total nonperforming loans and leases to total assets

 

 

1.75

%

 

 

1.57

%

Total nonperforming assets and troubled debt restructurings to total assets

 

 

2.48

%

 

 

2.17

%

 

59

 

 

 

 

September 30, 2019

 

 

December 31, 2018

 

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

 

 

 

 

 

 

 

 

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

   nonaccrual)

 

$

60,941

 

 

$

43,202

 

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

   SBA

 

 

—

 

 

 

—

 

Foreclosed assets guaranteed by the SBA

 

 

4,560

 

 

 

946

 

Total troubled debt restructurings guaranteed by the SBA

 

 

30,712

 

 

 

19,780

 

Less nonaccrual troubled debt restructurings guaranteed by the SBA

 

 

(10,900

)

 

 

(5,684

)

Total performing troubled debt restructurings guaranteed by SBA

 

 

19,812

 

 

 

14,096

 

Total nonperforming assets and troubled debt restructurings guaranteed

   by the SBA

 

$

85,313

 

 

$

58,244

 

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

   held for investment loans and leases

 

 

0.81

%

 

 

0.79

%

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

   assets

 

 

0.43

%

 

 

0.39

%

Total nonperforming assets and troubled debt restructurings not

   guaranteed by the SBA to total assets

 

 

0.63

%

 

 

0.59

%

 

Total nonperforming assets and troubled debt restructurings at September 30, 2019 were $114.1 million, which represented a $34.3 million, or 43.0%, increase from December 31, 2018. Total nonperforming assets at September 30, 2019 were comprised of $80.8 million in nonaccrual loans and $5.7 million in foreclosed assets. Of the $114.1 million of nonperforming assets and troubled debt restructurings ("TDRs"), $85.3 million carried an SBA guarantee, leaving an unguaranteed exposure of $28.8 million in total nonperforming assets and TDRs at September 30, 2019. This represents an increase of $7.3 million, or 33.7%, from an unguaranteed exposure of $21.5 million at December 31, 2018.  The vast majority of this increase in nonperforming assets and TDRs arose from our mature verticals.  See the below discussion related to the change in potential problem and impaired loans for management’s overall observations regarding growth in this area.

As a percentage of the Bank’s total capital, nonperforming loans represented 16.8% at September 30, 2019, compared to 14.8% at December 31, 2018. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at September 30, 2019 and December 31, 2018 were 4.1% and 3.7%, respectively.

As of September 30, 2019, and December 31, 2018, potential problem (also referred to as criticized) and classified loans and leases totaled $228.0 million and $148.0 million, respectively.  Risk Grades 5 through 8 represent the spectrum of criticized and classified loans and leases.  At September 30, 2019, the portion of criticized loans and leases guaranteed by the SBA or USDA totaled $108.3 million resulting in unguaranteed exposure risk of $119.7 million, or 6.6% of total held for investment unguaranteed exposure. This compares to the December 31, 2018 portion of criticized loans and leases guaranteed by the SBA or USDA which totaled $69.3 million resulting in unguaranteed exposure risk of $78.7 million, or 5.1% of total held for investment unguaranteed exposure. As of September 30, 2019, loans and leases in Other Industries, Healthcare, Agriculture, Independent Pharmacies and Veterinary verticals comprise the largest portion of the total potential problem and classified loans at 36.9%, 20.4%, 16.6%, 10.4% and 9.5%, respectively. Of the 36.9% of total potential problem and classified loans and leases in the Other Industries, 12.0% was related to Government Contractors, 7.9% was related to Wine and Craft Beverage and 6.9% was related to Hotels.  As of December 31, 2018, loans and leases in the Healthcare, Other Industries, Independent Pharmacies and Veterinary Industry verticals comprise the largest portion of the total potential problem and impaired loans and leases at 28.0%, 18.6%, 15.5% and 15.0%, respectively. Of the 18.6% of total potential problem and impaired loans and leases in the Other Industries, 8.7% was related to Government Contractors and 6.8% was related to Wine and Craft Beverage industries.  The majority of the increase in potential problem and classified loans and leases was comprised of a relatively small number of borrowers largely concentrated in our more mature verticals.  Furthermore, the Company believes that its underwriting and credit quality standards have improved as the business has matured.  However, systemic issues have begun to emerge during the latter part of 2019 related to higher than expected levels of competition in the Wine and Craft Beverage and Family Entertainment Center Verticals.  This unexpected level of competition has begun to result in lower revenues for these borrowers which has resulted in heightened levels of criticized loans.  In addition, the increase in the Government Contractors criticized loan portfolio was principally comprised of one loan due to a covenant violation which management believes will be remedied in the fourth quarter of 2019.   


60

 

 

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

Management endeavors to be proactive in its approach to identify and resolve 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. For example, at September 30, 2019, and December 31, 2018, Risk Grade 5 loans and leases totaled $114.4 million and $65.5 million, respectively. The increase in Risk Grade 5 loans during the first nine months of 2019 was principally confined to nine relationships across five verticals; Government Contractors ($11.7 million or 23.9%), Self Storage ($10.9 million or 22.4%), Hotels ($8.2 million or 16.8%), Wine and Craft Beverage ($6.2 million or 12.6% of increase) and Funeral Home & Cemetery ($4.1 million or 8.5%). The increase in risk grade 5 loans in 2019 was primarily due to the continued maturity of these verticals combined with the above mentioned issues that have begun to emerge in certain verticals. At September 30, 2019, approximately 100.0% of loans classified as Risk Grade 5 are performing with no current payments past due more than 30 days.  While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio.

Allowance for Loan and Lease Losses

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

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

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

Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in accounting principles generally accepted in the United States of America (“GAAP”). Methodology for determining the ALLL is generally based on GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting 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.

The ALLL of $32.4 million at December 31, 2018 increased by $10.5 million, or 32.4%, to $42.9 million at September 30, 2019. The ALLL, as a percentage of loans and leases held for investment, amounted to 1.8% at both September 30, 2019 and December 31, 2018. The increase in the allowance for loan and lease losses was largely attributable to continued growth in the loan and lease portfolio combined with the above discussed increased levels of criticized and classified loans and leases, as addressed more fully in the Provision for Loan and Lease Losses section of Results of Operations. General reserves as a percentage of non-impaired loans amounted to 1.25% at September 30, 2019 and 1.34% at December 31, 2018. Also, see the aforementioned Provision for Loan and Lease Losses section for a discussion of the Company's charge-off experience.

61

 

 

Actual past due held for investment loans and leases have decreased by $14.2 million since December 31, 2018.  Of this decrease, $7.9 million was related to a single loan which was temporarily past due at year end and returned to current status early in the first quarter of 2019.  Excluding this single loan, total past dues decreased $6.3 million since December 31, 2018.  Total loans 90 or more days past due decreased $1.8 million, or 4.3%, compared to December 31, 2018.  The decrease was primarily the result of the decline in the guaranteed portion of past due loans which declined $2.1 million compared to December 31, 2018.  At September 30, 2019 and December 31, 2018, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases was 0.69% and 1.56%, respectively.  Management continues to actively monitor and work to improve asset quality. Management believes the ALLL of $42.9 million at September 30, 2019 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current events that it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that loan and lease losses in future periods will not exceed the current ALLL or that future increases in the ALLL will not be required. No assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ALLL, thus adversely affecting the Company’s operating results. Additional information on the ALLL is presented in Note 5 - Loans and Leases Held for Investment and Allowance for Loan and Lease Losses of the Notes to the Unaudited Condensed Consolidated Financial Statements in this report.

Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At September 30, 2019, the total amount of these four items was $1.26 billion, or 27.4% of total assets, an increase of $219.9 million from $1.04 billion, or 28.4% of total assets, at December 31, 2018.

Loans and other assets are funded by loan sales, wholesale deposits and core deposits. To date, an increasing retail deposit base and an increased long term wholesale deposit base have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. Additionally, the investment securities portfolio is available for both immediate and secondary liquidity purposes.

At September 30, 2019, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $570.8 million available as lendable collateral.

Contractual Obligations

The following table presents the Company’s significant fixed and determinable contractual obligations by payment date as of September 30, 2019. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities.

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than

One Year

 

 

One to

Three Years

 

 

Three to

Five Years

 

 

More than

Five Years

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits without stated maturity

 

$

1,230,975

 

 

$

1,230,975

 

 

$

—

 

 

$

—

 

 

$

—

 

Time deposits

 

 

2,788,292

 

 

 

2,111,127

 

 

 

531,476

 

 

 

85,199

 

 

 

60,490

 

Short term borrowings

 

 

1,295

 

 

 

1,295

 

 

 

—

 

 

 

—

 

 

 

—

 

Long term borrowings

 

 

15

 

 

 

5

 

 

 

9

 

 

 

1

 

 

 

—

 

Operating lease obligations

 

 

2,319

 

 

 

825

 

 

 

905

 

 

 

512

 

 

 

77

 

Total

 

$

4,022,896

 

 

$

3,344,227

 

 

$

532,390

 

 

$

85,712

 

 

$

60,567

 

 

1

The following obligations only include base rent and does not include any additional payments such as taxes, insurance, maintenance and repairs or common area maintenance.

As of September 30, 2019, and December 31, 2018, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of $17.9 million and $2.8 million, respectively.


62

 

 

Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. This method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value nor growth. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk.

The balance sheet is asset-sensitive with a total cumulative gap position of 1.7% at September 30, 2019. The asset sensitivity is relatively stable from the prior quarter.  An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk by match funding assets and liabilities with 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.


63

 

 

Capital amounts and ratios as of September 30, 2019 and December 31, 2018, are presented in the table below.

 

 

 

Actual

 

 

Minimum Capital

Requirement

 

 

Minimum To Be

Well Capitalized

Under Prompt

Corrective Action

Provisions (1)

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Consolidated - September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

489,901

 

 

 

15.22

%

 

$

144,830

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk-Weighted Assets)

 

$

530,164

 

 

 

16.47

%

 

$

257,476

 

 

 

8.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk-Weighted Assets)

 

$

489,901

 

 

 

15.22

%

 

$

193,107

 

 

 

6.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Assets)

 

$

489,901

 

 

 

11.12

%

 

$

176,300

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Bank - September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

439,813

 

 

 

13.86

%

 

$

142,820

 

 

 

4.50

%

 

$

206,295

 

 

 

6.50

%

Total Capital (to Risk-Weighted Assets)

 

$

479,525

 

 

 

15.11

%

 

$

253,902

 

 

 

8.00

%

 

$

317,378

 

 

 

10.00

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

439,813

 

 

 

13.86

%

 

$

190,427

 

 

 

6.00

%

 

$

253,902

 

 

 

8.00

%

Tier 1 Capital (to Average Assets)

 

$

439,813

 

 

 

10.02

%

 

$

175,618

 

 

 

4.00

%

 

$

219,523

 

 

 

5.00

%

Consolidated - December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

467,033

 

 

 

17.10

%

 

$

122,937

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk-Weighted Assets)

 

$

499,467

 

 

 

18.28

%

 

$

218,555

 

 

 

8.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk-Weighted Assets)

 

$

467,033

 

 

 

17.10

%

 

$

163,917

 

 

 

6.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Assets)

 

$

467,033

 

 

 

13.40

%

 

$

139,453

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Bank - December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

385,030

 

 

 

14.35

%

 

$

120,706

 

 

 

4.50

%

 

$

174,353

 

 

 

6.50

%

Total Capital (to Risk-Weighted Assets)

 

$

417,609

 

 

 

15.57

%

 

$

214,588

 

 

 

8.00

%

 

$

268,235

 

 

 

10.00

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

385,030

 

 

 

14.35

%

 

$

160,941

 

 

 

6.00

%

 

$

214,588

 

 

 

8.00

%

Tier 1 Capital (to Average Assets)

 

$

385,030

 

 

 

11.22

%

 

$

137,304

 

 

 

4.00

%

 

$

171,630

 

 

 

5.00

%

 

(1)

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

Critical Accounting Policies and Estimates

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

Accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

 

•

Determination of the allowance for loan and lease losses;

 

•

Valuation of servicing assets;

 

•

Income taxes;

 

•

Restricted stock unit awards with market price conditions;

 

•

Valuation of foreclosed assets;

 

•

Business combination and goodwill; and

64

 

 

 

•

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 September 30, 2019, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2019 in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

65

 

 

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 months ended September 30, 2019, any pending legal proceedings other than nonmaterial proceedings occurring in the ordinary course of business.

Item 1A. Risk Factors

There have been no material changes to the risk factors that have been previously disclosed in the Company’s 2018 Annual Report filed with the SEC.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

66

 

 

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

 

 

Amended and Restated Articles of Incorporation of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the registration statement on Form S-1, filed on June 19, 2015)

 3.2

 

 

Amended Bylaws of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the amended registration statement on Form S-1, filed on July 13, 2015)

 4.1

 

 

Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the registration statement on Form S-1, filed on June 19, 2015)

 4.2

 

 

Registration and Other Rights Agreement between Live Oak Bancshares, Inc. and Wellington purchasers (incorporated by reference to Exhibit 4.2 of the registration statement on Form S-1, filed on June 19, 2015)

31.1

 

 

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

31.2

 

 

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

32

 

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

101

 

 

Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018; (ii) Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018; (v) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018; 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.

**

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.

67

 

 

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 7, 2019

By:

/s/  S. Brett Caines

 

 

S. Brett Caines

 

 

Chief Financial Officer

 

 

68

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