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Live Oak Bancshares (LOB)

Filed: 5 Aug 20, 5:09pm

 

 

 

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 June 30, 2020

or

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

For the transition period from             to             .

Commission file number: 001-37497

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 August 4, 2020, there were 37,817,698 shares of the registrant’s voting common stock outstanding and 2,715,531 shares of the registrant’s non-voting common stock outstanding.

 

 


 

 

Live Oak Bancshares, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2020

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (Unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

 

1

 

 

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019

 

2

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019

 

3

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

Item 2.

 

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

 

38

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

60

Item 4.

 

Controls and Procedures

 

60

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

61

Item 1A.

 

Risk Factors

 

61

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

Item 3.

 

Defaults Upon Senior Securities

 

63

Item 4.

 

Mine Safety Disclosures

 

63

Item 5.

 

Other Information

 

63

Item 6.

 

Exhibits

 

64

 

 

Index to Exhibits

 

64

 

 

Signatures

 

65

 

 

 

 


 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2020 (unaudited) and December 31, 2019*

(Dollars in thousands)

 

 

 

June 30,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,256,958

 

 

$

124,610

 

Federal funds sold

 

 

91,188

 

 

 

96,787

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,250

 

Investment securities available-for-sale

 

 

779,794

 

 

 

540,045

 

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

   respectively)

 

 

976,594

 

 

 

966,447

 

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

   at fair value, respectively)

 

 

4,650,056

 

 

 

2,627,286

 

Allowance for credit losses on loans and leases

 

 

(44,083

)

 

 

(28,234

)

Net loans and leases

 

 

4,605,973

 

 

 

2,599,052

 

Premises and equipment, net

 

 

269,063

 

 

 

279,099

 

Foreclosed assets

 

 

5,660

 

 

 

5,612

 

Servicing assets

 

 

33,834

 

 

 

35,365

 

Operating lease right-of-use assets

 

 

2,886

 

 

 

2,427

 

Other assets

 

 

179,954

 

 

 

156,134

 

Total assets

 

$

8,209,154

 

 

$

4,812,828

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

53,938

 

 

$

51,965

 

Interest-bearing

 

 

5,819,354

 

 

 

4,175,015

 

Total deposits

 

 

5,873,292

 

 

 

4,226,980

 

Borrowings

 

 

1,721,029

 

 

 

14

 

Operating lease liabilities

 

 

3,079

 

 

 

2,619

 

Other liabilities

 

 

63,319

 

 

 

50,829

 

Total liabilities

 

 

7,660,719

 

 

 

4,280,442

 

Shareholders’ equity

 

 

 

 

 

 

 

 

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

   at June 30, 2020 and December 31, 2019

 

 

 

 

 

 

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

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

   December 31, 2019, respectively

 

 

319,542

 

 

 

309,526

 

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

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

   respectively

 

 

28,753

 

 

 

30,871

 

Retained earnings

 

 

174,837

 

 

 

180,265

 

Accumulated other comprehensive income

 

 

25,303

 

 

 

11,724

 

Total shareholders’ equity

 

 

548,435

 

 

 

532,386

 

Total liabilities and shareholders’ equity

 

$

8,209,154

 

 

$

4,812,828

 

 

*

Derived from audited consolidated financial statements.

See Notes to Unaudited Condensed Consolidated Financial Statements

1


 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Income

For the three and six months ended June 30, 2020 and 2019 (unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and fees on loans

 

$

62,022

 

 

$

49,914

 

 

$

120,983

 

 

$

94,880

 

Investment securities, taxable

 

 

3,786

 

 

 

4,116

 

 

 

7,548

 

 

 

7,433

 

Other interest earning assets

 

 

1,009

 

 

 

1,108

 

 

 

1,759

 

 

 

2,747

 

Total interest income

 

 

66,817

 

 

 

55,138

 

 

 

130,290

 

 

 

105,060

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

25,121

 

 

 

21,203

 

 

 

48,376

 

 

 

40,520

 

Borrowings

 

 

798

 

 

 

 

 

 

855

 

 

 

 

Total interest expense

 

 

25,919

 

 

 

21,203

 

 

 

49,231

 

 

 

40,520

 

Net interest income

 

 

40,898

 

 

 

33,935

 

 

 

81,059

 

 

 

64,540

 

Provision for loan and lease credit losses

 

 

9,958

 

 

 

3,412

 

 

 

21,750

 

 

 

6,443

 

Net interest income after provision for loan and lease credit

   losses

 

 

30,940

 

 

 

30,523

 

 

 

59,309

 

 

 

58,097

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

 

6,691

 

 

 

7,063

 

 

 

13,113

 

 

 

14,473

 

Loan servicing asset revaluation

 

 

(1,571

)

 

 

(3,245

)

 

 

(6,263

)

 

 

(7,285

)

Net gains on sales of loans

 

 

10,695

 

 

 

6,015

 

 

 

21,807

 

 

 

10,213

 

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

   option

 

 

(1,089

)

 

 

2,791

 

 

 

(11,727

)

 

 

4,874

 

Equity method investments income (loss)

 

 

(2,243

)

 

 

(1,736

)

 

 

(4,721

)

 

 

(3,750

)

Equity security investments gains (losses), net

 

 

161

 

 

 

32

 

 

 

97

 

 

 

135

 

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

 

 

734

 

 

 

 

 

 

655

 

 

 

5

 

Lease income

 

 

2,635

 

 

 

2,369

 

 

 

5,259

 

 

 

4,694

 

Management fee income

 

 

1,206

 

 

 

91

 

 

 

2,850

 

 

 

91

 

Construction supervision fee income

 

 

684

 

 

 

386

 

 

 

1,074

 

 

 

1,165

 

Other noninterest income

 

 

4,508

 

 

 

884

 

 

 

6,009

 

 

 

3,351

 

Total noninterest income

 

 

22,411

 

 

 

14,650

 

 

 

28,153

 

 

 

27,966

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

30,782

 

 

 

21,990

 

 

 

58,845

 

 

 

43,845

 

Travel expense

 

 

364

 

 

 

1,541

 

 

 

2,145

 

 

 

2,741

 

Professional services expense

 

 

1,385

 

 

 

1,621

 

 

 

3,322

 

 

 

3,803

 

Advertising and marketing expense

 

 

624

 

 

 

1,665

 

 

 

1,985

 

 

 

3,029

 

Occupancy expense

 

 

1,955

 

 

 

1,848

 

 

 

4,376

 

 

 

3,457

 

Data processing expense

 

 

2,764

 

 

 

1,947

 

 

 

5,921

 

 

 

4,346

 

Equipment expense

 

 

4,652

 

 

 

4,239

 

 

 

9,287

 

 

 

7,564

 

Other loan origination and maintenance expense

 

 

2,492

 

 

 

1,708

 

 

 

4,948

 

 

 

3,347

 

Renewable energy tax credit investment impairment

 

 

 

 

 

602

 

 

 

 

 

 

602

 

FDIC insurance

 

 

1,721

 

 

 

699

 

 

 

3,231

 

 

 

1,334

 

Other expense

 

 

1,361

 

 

 

1,716

 

 

 

3,531

 

 

 

3,709

 

Total noninterest expense

 

 

48,100

 

 

 

39,576

 

 

 

97,591

 

 

 

77,777

 

Income (loss) before taxes

 

 

5,251

 

 

 

5,597

 

 

 

(10,129

)

 

 

8,286

 

Income tax expense (benefit)

 

 

1,474

 

 

 

662

 

 

 

(6,304

)

 

 

979

 

Net income (loss)

 

$

3,777

 

 

$

4,935

 

 

$

(3,825

)

 

$

7,307

 

Basic earnings (loss) per share

 

$

0.09

 

 

$

0.12

 

 

$

(0.10

)

 

$

0.18

 

Diluted earnings (loss) per share

 

$

0.09

 

 

$

0.12

 

 

$

(0.10

)

 

$

0.18

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2


 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the three and six months ended June 30, 2020 and 2019 (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

3,777

 

 

$

4,935

 

 

$

(3,825

)

 

$

7,307

 

Other comprehensive income before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on investment securities

   arising during the period

 

 

10,673

 

 

 

15,637

 

 

 

18,522

 

 

 

19,155

 

Reclassification adjustment for gain on sale of

   securities available-for-sale included in net income

 

 

(734

)

 

 

 

 

 

(655

)

 

 

(5

)

Other comprehensive income before tax

 

 

9,939

 

 

 

15,637

 

 

 

17,867

 

 

 

19,150

 

Income tax expense

 

 

(2,385

)

 

 

(3,753

)

 

 

(4,288

)

 

 

(4,596

)

Other comprehensive income, net of tax

 

 

7,554

 

 

 

11,884

 

 

 

13,579

 

 

 

14,554

 

Total comprehensive income

 

$

11,331

 

 

$

16,819

 

 

$

9,754

 

 

$

21,861

 

 

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 six months ended June 30, 2020 and 2019 (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

Common stock

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Retained

 

 

comprehensive

 

 

Total

 

 

 

Class A

 

 

Class B

 

 

Amount

 

 

earnings

 

 

income

 

 

equity

 

Balance at March 31, 2020

 

 

37,664,670

 

 

 

2,715,531

 

 

$

343,747

 

 

$

172,276

 

 

$

17,749

 

 

$

533,772

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,777

 

 

 

 

 

 

3,777

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,554

 

 

 

7,554

 

Issuance of restricted stock

 

 

21,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

 

 

 

 

 

 

(61

)

 

 

 

 

 

 

 

 

(61

)

Stock option exercises

 

 

33,539

 

 

 

 

 

 

148

 

 

 

 

 

 

 

 

 

148

 

Stock option based compensation expense

 

 

 

 

 

 

 

 

406

 

 

 

 

 

 

 

 

 

406

 

Restricted stock expense

 

 

 

 

 

 

 

 

2,933

 

 

 

 

 

 

 

 

 

2,933

 

Issuance of common stock in connection with

   acquisition of wholly-owned subsidiary

 

 

89,927

 

 

 

 

 

 

1,122

 

 

 

 

 

 

 

 

 

1,122

 

Cash dividends ($0.03 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,216

)

 

 

 

 

 

(1,216

)

Balance at June 30, 2020

 

 

37,810,101

 

 

 

2,715,531

 

 

$

348,295

 

 

$

174,837

 

 

$

25,303

 

 

$

548,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

 

35,531,549

 

 

 

4,643,530

 

 

$

331,162

 

 

$

168,225

 

 

$

993

 

 

$

500,380

 

Net income

 

 

 

 

 

 

 

 

 

 

 

4,935

 

 

 

 

 

 

4,935

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,884

 

 

 

11,884

 

Issuance of restricted stock

 

 

19,346

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

 

 

 

 

 

 

(81

)

 

 

 

 

 

 

 

 

(81

)

Stock option exercises

 

 

26,491

 

 

 

 

 

 

158

 

 

 

 

 

 

 

 

 

158

 

Stock option based compensation expense

 

 

 

 

 

 

 

 

400

 

 

 

 

 

 

 

 

 

400

 

Restricted stock expense

 

 

 

 

 

 

 

 

2,516

 

 

 

 

 

 

 

 

 

2,516

 

Cash dividends ($0.03 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,206

)

 

 

 

 

 

(1,206

)

Balance at June 30, 2019

 

 

35,577,386

 

 

 

4,643,530

 

 

$

334,155

 

 

$

171,954

 

 

$

12,877

 

 

$

518,986

 

 

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 six months ended June 30, 2020 and 2019 (unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

 

 

 

Common stock

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Retained

 

 

comprehensive

 

 

Total

 

 

 

Class A

 

 

Class B

 

 

Amount

 

 

earnings

 

 

income (loss)

 

 

equity

 

Balance at December 31, 2019

 

 

37,401,443

 

 

 

2,915,531

 

 

$

340,397

 

 

$

180,265

 

 

$

11,724

 

 

$

532,386

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,825

)

 

 

 

 

 

(3,825

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,579

 

 

 

13,579

 

Issuance of restricted stock

 

 

29,389

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

 

 

 

 

 

 

(109

)

 

 

 

 

 

 

 

 

(109

)

Employee stock purchase program

 

 

25,161

 

 

 

 

 

 

232

 

 

 

 

 

 

 

 

 

232

 

Stock option exercises

 

 

64,181

 

 

 

 

 

 

406

 

 

 

 

 

 

 

 

 

406

 

Stock option based compensation expense

 

 

 

 

 

 

 

 

772

 

 

 

 

 

 

 

 

 

772

 

Restricted stock expense

 

 

 

 

 

 

 

 

5,475

 

 

 

 

 

 

 

 

 

5,475

 

Issuance of common stock in connection with

   acquisition of wholly-owned subsidiary

 

 

89,927

 

 

 

 

 

 

1,122

 

 

 

 

 

 

 

 

 

1,122

 

Non-voting common stock converted to

   voting common stock in private sale

 

 

200,000

 

 

 

(200,000

)

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change for

   Accounting Standards Update 2016-13

 

 

 

 

 

 

 

 

 

 

 

822

 

 

 

 

 

 

822

 

Cash dividends ($0.06 per share)

 

 

 

 

 

 

 

 

 

 

 

(2,425

)

 

 

 

 

 

(2,425

)

Balance at June 30, 2020

 

 

37,810,101

 

 

 

2,715,531

 

 

$

348,295

 

 

$

174,837

 

 

$

25,303

 

 

$

548,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

35,512,262

 

 

 

4,643,530

 

 

$

328,113

 

 

$

167,124

 

 

$

(1,677

)

 

$

493,560

 

Net income

 

 

 

 

 

 

 

 

 

 

 

7,307

 

 

 

 

 

 

7,307

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,554

 

 

 

14,554

 

Issuance of restricted stock

 

 

21,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Withholding cash issued in lieu of

   restricted stock issuance

 

 

 

 

 

 

 

 

(86

)

 

 

 

 

 

 

 

 

(86

)

Employee stock purchase program

 

 

14,059

 

 

 

 

 

 

182

 

 

 

 

 

 

 

 

 

182

 

Stock option exercises

 

 

29,579

 

 

 

 

 

 

172

 

 

 

 

 

 

 

 

 

172

 

Stock option based compensation expense

 

 

 

 

 

 

 

 

870

 

 

 

 

 

 

 

 

 

870

 

Restricted stock expense

 

 

 

 

 

 

 

 

4,904

 

 

 

 

 

 

 

 

 

4,904

 

Cumulative effect of accounting change for

   Accounting Standards Update 2016-02

 

 

 

 

 

 

 

 

 

 

 

(66

)

 

 

 

 

 

(66

)

Cash dividends ($0.06 per share)

 

 

 

 

 

 

 

 

 

 

 

(2,411

)

 

 

 

 

 

(2,411

)

Balance at June 30, 2019

 

 

35,577,386

 

 

 

4,643,530

 

 

$

334,155

 

 

$

171,954

 

 

$

12,877

 

 

$

518,986

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

5


 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2020 and 2019 (unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,825

)

 

$

7,307

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,194

 

 

 

9,101

 

Provision for loan and lease credit losses

 

 

21,750

 

 

 

6,443

 

Amortization of premium on securities, net of accretion

 

 

636

 

 

 

254

 

Deferred tax benefit

 

 

(11,164

)

 

 

(417

)

Originations of loans held for sale

 

 

(483,741

)

 

 

(455,456

)

Proceeds from sales of loans held for sale

 

 

391,706

 

 

 

168,981

 

Net gains on sale of loans held for sale

 

 

(21,807

)

 

 

(10,213

)

Net (gain) loss on sale of foreclosed assets

 

 

(10

)

 

 

4

 

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

 

 

11,727

 

 

 

(4,874

)

Net decrease in servicing assets

 

 

1,531

 

 

 

5,954

 

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

 

 

(655

)

 

 

(5

)

Net gain on disposal of long-lived asset

 

 

 

 

 

(357

)

Net loss on disposal of property and equipment

 

 

38

 

 

 

109

 

Equity method investments (income) loss

 

 

4,721

 

 

 

3,750

 

Equity security investments (gains) losses, net

 

 

(97

)

 

 

(135

)

Renewable energy tax credit investment impairment

 

 

 

 

 

602

 

Stock option based compensation expense

 

 

772

 

 

 

870

 

Restricted stock expense

 

 

5,475

 

 

 

4,904

 

Stock based compensation expense tax shortfall

 

 

(93

)

 

 

(76

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Lease right-of-use assets and liabilities, net

 

 

1

 

 

 

102

 

Other assets

 

 

(24,383

)

 

 

10,089

 

Other liabilities

 

 

16,886

 

 

 

154

 

Net cash used by operating activities

 

 

(79,338

)

 

 

(252,909

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of securities available-for-sale

 

 

(292,825

)

 

 

(205,829

)

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

   securities available-for-sale

 

 

70,962

 

 

 

28,945

 

Proceeds from SBA reimbursement/sale of foreclosed assets

 

 

2,026

 

 

 

393

 

Business combination, net of cash acquired

 

 

(895

)

 

 

 

Loan and lease originations and principal collections, net

 

 

(1,937,416

)

 

 

(256,823

)

Proceeds from sale of long-lived asset

 

 

 

 

 

10,895

 

Purchases of premises and equipment, net

 

 

(1,196

)

 

 

(27,823

)

Net cash used by investing activities

 

 

(2,159,344

)

 

 

(450,242

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

6


 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the six months ended June 30, 2020 and 2019 (unaudited)

(Dollars in thousands)

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

$

1,646,312

 

 

$

566,698

 

Proceeds from borrowings

 

 

1,781,966

 

 

 

 

Repayment of borrowings

 

 

(60,951

)

 

 

(98

)

Stock option exercises

 

 

406

 

 

 

172

 

Employee stock purchase program

 

 

232

 

 

 

182

 

Withholding cash issued in lieu of restricted stock

 

 

(109

)

 

 

(86

)

Shareholder dividend distributions

 

 

(2,425

)

 

 

(2,411

)

Net cash provided by financing activities

 

 

3,365,431

 

 

 

564,457

 

Net increase (decrease) in cash and cash equivalents

 

 

1,126,749

 

 

 

(138,694

)

Cash and cash equivalents, beginning

 

 

221,397

 

 

 

319,311

 

Cash and cash equivalents, ending

 

$

1,348,146

 

 

$

180,617

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

49,397

 

 

$

39,391

 

Income tax paid (received)

 

 

460

 

 

 

(12,439

)

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash operating, investing, and financing activities

 

 

 

 

 

 

 

 

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

 

$

13,579

 

 

$

14,554

 

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

 

 

2,034

 

 

 

5,058

 

Net transfers between foreclosed real estate and SBA receivable

 

 

30

 

 

 

(289

)

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

 

 

 

 

 

2,241

 

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

 

 

98,002

 

 

 

146,305

 

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

 

 

22,948

 

 

 

23,321

 

Business combination:

 

 

 

 

 

 

 

 

Assets acquired (excluding goodwill)

 

 

2,523

 

 

 

 

Liabilities assumed

 

 

2,074

 

 

 

 

Goodwill recorded

 

 

1,797

 

 

 

 

 

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

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

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

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

Live Oak Number One, Inc. holds properties foreclosed on by the Bank. GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.  LOCEF provides financing to entities for renewable energy applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth, LLC and JAM provide high-net-worth individuals and families with strategic wealth and investment management services. Canapi provides investment advisory services to a series of new funds focused on providing venture capital to new and emerging financial technology companies.

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

The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans.  Income from the retention of loans is comprised of interest income.  The Company elects to account for certain loans under the fair value option with interest reported in interest income and changes in fair value reported in the net (loss) gain on loans accounted for under the fair value option line item of the consolidated statements of income.  Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

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 six months ended June 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020. The condensed consolidated balance sheet as of December 31, 2019 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, 2019, filed with the Securities Exchange Commission on February 27, 2020 (SEC File No. 001-37497) (the "2019 Annual Report"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2019 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 2019 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.  Current period reclassifications were primarily related to fair value presentation requirements for loans in which the fair value option had previously been elected and included a reclassification of amounts representing the credit component of the fair value discount that was previously reported as a component of the allowance for credit losses on loans and leases to be netted directly against loans and leases held for investment on the Company’s consolidated balance sheet.  Amounts reclassified from the allowance for credit losses on loans and leases to net directly against total loans and leases held for investment was $20.0 million, as of December 31, 2019. In addition, the change in the credit component of the fair value discount was previously reported in the provision for loan and lease credit losses while the change in the liquidity component of the fair value discount was previously reported in the loan servicing asset revaluation in the consolidated statements of income, but both have now been reclassified to net (loss) gain on loans accounted for under the fair value option.  Amounts reclassified from the provision for loan and lease credit losses and the loan servicing asset revaluation to net (loss) gain on loans accounted for under the fair value option were $(51) thousand and $2.8 million, respectively, for the three months ended June 30, 2019, and $(238) thousand and $4.6 million, respectively for the six months ended June 30, 2019.

9


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

 

 

As Reported

 

 

Reclassifications

 

 

As Reclassified

 

Consolidated Statement of Income for the three months ended

   June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease credit losses

 

$

3,463

 

 

$

(51

)

 

$

3,412

 

Net interest income after provision for loan and lease credit losses

 

 

30,472

 

 

 

51

 

 

 

30,523

 

Loan servicing asset revaluation

 

 

(403

)

 

 

(2,842

)

 

 

(3,245

)

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

 

 

 

 

 

2,791

 

 

 

2,791

 

Total noninterest income

 

 

14,701

 

 

 

(51

)

 

 

14,650

 

Net income

 

 

4,935

 

 

 

 

 

 

4,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Income for the six months ended

   June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease credit losses

 

$

6,205

 

 

$

238

 

 

$

6,443

 

Net interest income after provision for loan and lease credit losses

 

 

58,335

 

 

 

(238

)

 

 

58,097

 

Loan servicing asset revaluation

 

 

(2,649

)

 

 

(4,636

)

 

 

(7,285

)

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

 

 

 

 

 

4,874

 

 

 

4,874

 

Total noninterest income

 

 

27,728

 

 

 

238

 

 

 

27,966

 

Net income

 

 

7,307

 

 

 

 

 

 

7,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows for the six months ended

   June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan and lease credit losses

 

$

6,205

 

 

$

238

 

 

$

6,443

 

Net decrease in servicing assets

 

 

5,954

 

 

 

 

 

 

5,954

 

Change in discount on unguaranteed loans

 

 

(3,431

)

 

 

3,431

 

 

 

 

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

 

 

 

 

 

(4,874

)

 

 

(4,874

)

Net cash used by operating activities

 

 

(251,704

)

 

 

(1,205

)

 

 

(252,909

)

Loan and lease originations and principal collections, net

 

 

(258,028

)

 

 

1,205

 

 

 

(256,823

)

Net cash used by investing activities

 

 

(451,447

)

 

 

1,205

 

 

 

(450,242

)

 

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

 

10


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Adoption of New Accounting Standard

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

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

Allowance for Credit Losses – Loans and Leases Held for Investment

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

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

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

Loans or leases that do not share risk characteristics are evaluated on an individual basis and are excluded from the pooled evaluation. This generally occurs when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan or lease agreement. The Company has determined that loans and leases meeting the criteria defined below must be reviewed quarterly to determine if they should be evaluated for expected credit losses on an individual basis.

 

All commercial loans and leases classified substandard or worse.

 

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

 

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

11


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

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

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

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

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

Allowance for Credit Losses – Off-Balance Sheet Credit Exposures

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

Allowance for Credit Losses – Available-for-Sale Securities

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

12


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Common Stock

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

Business Combination

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

 

Note 2. Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain fair value disclosure requirements on fair value measurements. The Company adopted the standard on January 1, 2020 with no material effect on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted the standard on January 1, 2020 with no material effect on its consolidated financial statements.

In March 2019, the FASB issued ASU No. 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 certain transition disclosures. The Company adopted the standard on January 1, 2020 with no 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 Company adopted the standard on January 1, 2020 with no material effect on its consolidated financial statements.

13


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

In January 2020, the FASB issued ASU No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”).  ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments in this standard will be effective for the Company on January 1, 2021. The Company does not expect this standard to have a material effect on its consolidated financial statements.

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

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

Note 3. Earnings Per Share

Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then be shared in the net income of the Company.

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,777

 

 

$

4,935

 

 

$

(3,825

)

 

$

7,307

 

Weighted-average basic shares outstanding

 

 

40,506,671

 

 

 

40,196,662

 

 

 

40,420,425

 

 

 

40,178,491

 

Basic earnings (loss) per share

 

$

0.09

 

 

$

0.12

 

 

$

(0.10

)

 

$

0.18

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

3,777

 

 

$

4,935

 

 

$

(3,825

)

 

$

7,307

 

Total weighted-average basic shares outstanding

 

 

40,506,671

 

 

 

40,196,662

 

 

 

40,420,425

 

 

 

40,178,491

 

Add effect of dilutive stock options and restricted stock

   grants

 

 

615,354

 

 

 

801,879

 

 

 

677,612

 

 

 

801,879

 

Total weighted-average diluted shares outstanding

 

 

41,122,025

 

 

 

40,998,541

 

 

 

41,098,037

 

 

 

40,980,370

 

Diluted earnings (loss) per share

 

$

0.09

 

 

$

0.12

 

 

$

(0.10

)

 

$

0.18

 

Anti-dilutive shares

 

 

2,077,886

 

 

 

1,578,197

 

 

 

2,077,886

 

 

 

1,578,197

 

 

14


 

 

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:

 

June 30, 2020

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Allowance for Credit Losses

 

 

Fair

Value

 

US treasury securities

 

$

4,997

 

 

$

21

 

 

$

 

 

$

 

 

$

5,018

 

US government agencies

 

 

19,942

 

 

 

652

 

 

 

 

 

 

 

 

 

20,594

 

Mortgage-backed securities

 

 

718,285

 

 

 

32,329

 

 

 

65

 

 

 

 

 

 

750,549

 

Municipal bonds

 

 

3,277

 

 

 

362

 

 

 

6

 

 

 

 

 

 

3,633

 

Total

 

$

746,501

 

 

$

33,364

 

 

$

71

 

 

$

 

 

$

779,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

4,988

 

 

$

27

 

 

$

 

 

$

 

 

$

5,015

 

US government agencies

 

 

22,444

 

 

 

335

 

 

 

 

 

 

 

 

 

22,779

 

Mortgage-backed securities

 

 

488,694

 

 

 

15,530

 

 

 

927

 

 

 

 

 

 

503,297

 

Municipal bonds

 

 

8,493

 

 

 

469

 

 

 

8

 

 

 

 

 

 

8,954

 

Total

 

$

524,619

 

 

$

16,361

 

 

$

935

 

 

$

 

 

$

540,045

 

 

During the three months ended June 30, 2020, 1 US government agency matured at $2.5 million, 11 mortgage-backed securities totaling $9.6 million were sold resulting in a net gain of $114 thousand, and 2 municipal bonds totaling $5.2 million were sold resulting in a net gain of $620 thousand. There were 0 sales of securities during the three months ended June 30, 2019.

 

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

 

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

The following tables show debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

June 30, 2020

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Mortgage-backed securities

 

$

14,345

 

 

$

41

 

 

$

2,627

 

 

$

24

 

 

$

16,972

 

 

$

65

 

Municipal bonds

 

 

 

 

 

 

 

 

94

 

 

 

6

 

 

 

94

 

 

 

6

 

Total

 

$

14,345

 

 

$

41

 

 

$

2,721

 

 

$

30

 

 

$

17,066

 

 

$

71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2019

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Mortgage-backed securities

 

$

42,835

 

 

$

460

 

 

$

36,518

 

 

$

467

 

 

$

79,353

 

 

$

927

 

Municipal bonds

 

 

 

 

 

 

 

 

92

 

 

 

8

 

 

 

92

 

 

 

8

 

Total

 

$

42,835

 

 

$

460

 

 

$

36,610

 

 

$

475

 

 

$

79,445

 

 

$

935

 

 

15


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

At June 30, 2020, there were 4 mortgage-backed securities and 1 municipal bond in unrealized loss positions for greater than 12 months and 5 mortgage-backed securities in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2019 were comprised of NaN mortgage-backed securities and 1 municipal bond in unrealized loss positions for greater than 12 months and 20 mortgage-backed securities in unrealized loss positions for less than 12 months.

These unrealized losses are primarily the result of non-credit related volatility in the market and 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, NaN of the losses have been recognized in the Company’s consolidated statements of income.

All mortgage-backed securities in the Company’s portfolio at June 30, 2020 and December 31, 2019 were backed by U.S. government sponsored enterprises (“GSEs”).

The following is a summary of investment securities by maturity:

 

 

 

June 30, 2020

 

 

 

Amortized

cost

 

 

Fair

value

 

US treasury securities

 

 

 

 

 

 

 

 

Within one year

 

$

4,997

 

 

$

5,018

 

Total

 

 

4,997

 

 

 

5,018

 

US government agencies

 

 

 

 

 

 

 

 

Within one year

 

 

9,503

 

 

 

9,644

 

One to five years

 

 

7,518

 

 

 

7,832

 

Five to ten years

 

 

2,921

 

 

 

3,118

 

Total

 

 

19,942

 

 

 

20,594

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

One to five years

 

 

2,501

 

 

 

2,709

 

Five to ten years

 

 

217,499

 

 

 

236,085

 

After 10 years

 

 

498,285

 

 

 

511,755

 

Total

 

 

718,285

 

 

 

750,549

 

Municipal bonds

 

 

 

 

 

 

 

 

After 10 years

 

 

3,277

 

 

 

3,633

 

Total

 

 

3,277

 

 

 

3,633

 

 

 

 

 

 

 

 

 

 

Total

 

$

746,501

 

 

$

779,794

 

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 0 securities pledged at June 30, 2020 or December 31, 2019.

 

 


16


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 5. Loans and Leases Held for Investment and Credit Quality

As described in Note 1. Basis of Presentation, loan and lease classes were changed during the current period. Small Business Banking includes loans to customers in verticals that generally have traditional loan structures. Specialty Lending includes loans to customers in verticals that generally have atypical ownership structures as well as complex collateral arrangements, underwriting requirements, and servicing needs. Paycheck Protection Program includes all loans originated under the CARES Act’s economic relief program and carry a 100% government guarantee.

The following tables present total loans and leases and an aging analysis for the Company’s portfolio segments. Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

 

 

 

Current or Less than 30 Days Past Due

 

 

30-89 Days

Past Due

 

 

90 Days or More Past Due

 

 

Total Past Due

 

 

Total Carried at Amortized Cost1

 

 

Loans Accounted for Under the Fair Value Option2

 

 

Total Loans and Leases

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

405,176

 

 

$

1,908

 

 

$

4,028

 

 

$

5,936

 

 

$

411,112

 

 

$

298,349

 

 

$

709,461

 

Specialty Lending

 

 

208,564

 

 

 

437

 

 

 

155

 

 

 

592

 

 

 

209,156

 

 

 

70,612

 

 

 

279,768

 

Paycheck Protection Program

 

 

1,738,441

 

 

 

 

 

 

 

 

 

 

 

 

1,738,441

 

 

 

 

 

 

1,738,441

 

Total

 

 

2,352,181

 

 

 

2,345

 

 

 

4,183

 

 

 

6,528

 

 

 

2,358,709

 

 

 

368,961

 

 

 

2,727,670

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

250,479

 

 

 

 

 

 

 

 

 

 

 

 

250,479

 

 

 

 

 

 

250,479

 

Specialty Lending

 

 

61,577

 

 

 

3,715

 

 

 

 

 

 

3,715

 

 

 

65,292

 

 

 

 

 

 

65,292

 

Total

 

 

312,056

 

 

 

3,715

 

 

 

 

 

 

3,715

 

 

 

315,771

 

 

 

 

 

 

315,771

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

666,543

 

 

 

 

 

 

8,089

 

 

 

8,089

 

 

 

674,632

 

 

 

331,152

 

 

 

1,005,784

 

Specialty Lending

 

 

192,690

 

 

 

5,525

 

 

 

1,849

 

 

 

7,374

 

 

 

200,064

 

 

 

24,006

 

 

 

224,070

 

Total

 

 

859,233

 

 

 

5,525

 

 

 

9,938

 

 

 

15,463

 

 

 

874,696

 

 

 

355,158

 

 

 

1,229,854

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

302,989

 

 

 

2,111

 

 

 

2,168

 

 

 

4,279

 

 

 

307,268

 

 

 

110,483

 

 

 

417,751

 

Total

 

 

302,989

 

 

 

2,111

 

 

 

2,168

 

 

 

4,279

 

 

 

307,268

 

 

 

110,483

 

 

 

417,751

 

Total

 

$

3,826,459

 

 

$

13,696

 

 

$

16,289

 

 

$

29,985

 

 

$

3,856,444

 

 

$

834,602

 

 

$

4,691,046

 

Net Deferred (Fees) Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(40,990

)

Loan and Leases, Net of unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,650,056

 

17


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Current or Less than 30 Days Past Due

 

 

30-89 Days

Past Due

 

 

90 Days or More Past Due

 

 

Total Past Due

 

 

Total Carried at Amortized Cost1

 

 

Loans Accounted for Under the Fair Value Option2

 

 

Total Loans and Leases

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

374,283

 

 

$

7,363

 

 

$

4,577

 

 

$

11,940

 

 

$

386,223

 

 

$

275,269

 

 

$

661,492

 

Specialty Lending

 

 

166,710

 

 

 

532

 

 

 

776

 

 

 

1,308

 

 

 

168,018

 

 

 

58,044

 

 

 

226,062

 

Total

 

 

540,993

 

 

 

7,895

 

 

 

5,353

 

 

 

13,248

 

 

 

554,241

 

 

 

333,313

 

 

 

887,554

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

302,470

 

 

 

 

 

 

 

 

 

 

 

 

302,470

 

 

 

 

 

 

302,470

 

Specialty Lending

 

 

44,848

 

 

 

 

 

 

 

 

 

 

 

 

44,848

 

 

 

 

 

 

44,848

 

Total

 

 

347,318

 

 

 

 

 

 

 

 

 

 

 

 

347,318

 

 

 

 

 

 

347,318

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

525,858

 

 

 

7,210

 

 

 

5,586

 

 

 

12,796

 

 

 

538,654

 

 

 

358,359

 

 

 

897,013

 

Specialty Lending

 

 

121,191

 

 

 

1,849

 

 

 

 

 

 

1,849

 

 

 

123,040

 

 

 

27,291

 

 

 

150,331

 

Total

 

 

647,049

 

 

 

9,059

 

 

 

5,586

 

 

 

14,645

 

 

 

661,694

 

 

 

385,650

 

 

 

1,047,344

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

234,133

 

 

 

 

 

 

 

 

 

 

 

 

234,133

 

 

 

105,557

 

 

 

339,690

 

Total

 

 

234,133

 

 

 

 

 

 

 

 

 

 

 

 

234,133

 

 

 

105,557

 

 

 

339,690

 

Total

 

$

1,769,493

 

 

$

16,954

 

 

$

10,939

 

 

$

27,893

 

 

$

1,797,386

 

 

$

824,520

 

 

$

2,621,906

 

Net Deferred (Fees) Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,380

 

Loan and Leases, Net of unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,627,286

 

 

1

Total loans and leases include $2.47 billion of U.S. government guaranteed loans as of June 30, 2020, of which $11.1 million is 90 days or more past due, $3.5 million is past due 30-89 days and $2.46 billion are current.  Total loans and leases include $622.6 million of U.S. government guaranteed loans as of December 31, 2019, of which $6.4 million is 90 days or more past due, $13.6 million is past due 30-89 days and $602.6 million are current.

2

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

 

18


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Credit Quality Indicators

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

 

 

 

Term Loans and Leases Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Revolving Loans Amortized Cost Basis

 

 

Revolving Loans Converted to Term

 

 

Total1,2

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

$

152,493

 

 

$

485,989

 

 

$

316,738

 

 

$

280,574

 

 

$

178,817

 

 

$

71,894

 

 

$

32,064

 

 

$

622

 

 

$

1,519,191

 

   Risk Grade 5

 

 

582

 

 

 

11,182

 

 

 

24,647

 

 

 

19,148

 

 

 

17,308

 

 

 

4,497

 

 

 

5,070

 

 

 

71

 

 

 

82,505

 

   Risk Grades 6 - 8

 

 

 

 

 

3,270

 

 

 

7,619

 

 

 

12,389

 

 

 

7,929

 

 

 

9,972

 

 

 

442

 

 

 

175

 

 

 

41,796

 

Total

 

 

153,075

 

 

 

500,441

 

 

 

349,004

 

 

 

312,111

 

 

 

204,054

 

 

 

86,363

 

 

 

37,576

 

 

 

868

 

 

 

1,643,492

 

Specialty Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

105,105

 

 

 

107,475

 

 

 

61,902

 

 

 

82,857

 

 

 

7,339

 

 

 

37,008

 

 

 

49,857

 

 

 

332

 

 

 

451,875

 

   Risk Grade 5

 

 

 

 

 

 

 

 

2,946

 

 

 

 

 

 

8,479

 

 

 

 

 

 

480

 

 

 

 

 

 

11,905

 

   Risk Grades 6 - 8

 

 

 

 

 

 

 

 

8,715

 

 

 

155

 

 

 

1,849

 

 

 

 

 

 

12

 

 

 

 

 

 

10,731

 

Total

 

 

105,105

 

 

 

107,475

 

 

 

73,563

 

 

 

83,012

 

 

 

17,667

 

 

 

37,008

 

 

 

50,349

 

 

 

332

 

 

 

474,511

 

Payroll Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

1,738,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,738,441

 

   Risk Grade 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 6 - 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,738,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,738,441

 

Total

 

$

1,996,621

 

 

$

607,916

 

 

$

422,567

 

 

$

395,123

 

 

$

221,721

 

 

$

123,371

 

 

$

87,925

 

 

$

1,200

 

 

$

3,856,444

 

 

 

 

 

 

 

 

 

Total1,2

 

December 31, 2019

 

 

 

 

Small Business Banking

 

 

 

 

   Risk Grades 1 - 4

 

$

1,361,220

 

   Risk Grade 5

 

 

63,015

 

   Risk Grades 6 - 8

 

 

37,249

 

Total

 

 

1,461,484

 

Specialty Lending

 

 

 

 

   Risk Grades 1 - 4

 

 

307,098

 

   Risk Grade 5

 

 

26,497

 

   Risk Grades 6 - 8

 

 

2,307

 

Total

 

 

335,902

 

Total

 

$

1,797,386

 

 

1

Total loans and leases include $2.47 billion of U.S. government guaranteed loans as of June 30, 2020, segregated by risk grade as follows: Risk Grades 1 – 4 = $2.39 billion, Risk Grade 5 = $46.0 million, Risk Grades 6 – 8 = $33.0 million. As of December 31, 2019, total loans and leases include $622.6 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $556.8 million, Risk Grade 5 = $42.7 million, Risk Grades 6 – 8 = $23.1 million. Total loans and leases exclude loans accounted for under the fair value option.

2

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

19


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Nonaccrual Loans and Leases

As of June 30, 2020 and December 31, 2019 there were 0 loans greater than 90 days past due and still accruing. There was 0 interest income recognized on nonaccrual loans and leases during the three and six month periods ended June 30, 2020 or June 30, 2019. All nonaccrual loans and leases are included in the held for investment portfolio. Accrued interest receivable on loans totaled $27.2 million and $19.8 million at June 30, 2020 and December 31, 2019, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets.

Nonaccrual loans and leases as of June 30, 2020 and December 31, 2019 are as follows:

 

June 30, 2020

 

Loan

Balance1

 

 

Guaranteed

Balance

 

 

Unguaranteed Balance

 

 

Unguaranteed

Exposure with No ACL

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

13,777

 

 

$

11,844

 

 

$

1,933

 

 

$

 

Specialty Lending

 

 

155

 

 

 

155

 

 

 

 

 

 

 

Total

 

 

13,932

 

 

 

11,999

 

 

 

1,933

 

 

 

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Lending

 

 

3,715

 

 

 

 

 

 

3,715

 

 

 

3,715

 

Total

 

 

3,715

 

 

 

 

 

 

3,715

 

 

 

3,715

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

11,501

 

 

 

6,654

 

 

 

4,847

 

 

 

1,841

 

Specialty Lending

 

 

6,849

 

 

 

5,137

 

 

 

1,712

 

 

 

 

Total

 

 

18,350

 

 

 

11,791

 

 

 

6,559

 

 

 

1,841

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

4,278

 

 

 

3,363

 

 

 

915

 

 

 

32

 

Total

 

 

4,278

 

 

 

3,363

 

 

 

915

 

 

 

32

 

Total

 

$

40,275

 

 

$

27,153

 

 

$

13,122

 

 

$

5,588

 

 

 

December 31, 2019

 

Loan

Balance1

 

 

Guaranteed

Balance

 

 

Unguaranteed Balance

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

6,162

 

 

$

5,399

 

 

$

763

 

Specialty Lending

 

 

776

 

 

 

157

 

 

 

619

 

Total

 

 

6,938

 

 

 

5,556

 

 

 

1,382

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

8,245

 

 

 

4,130

 

 

 

4,115

 

Total

 

 

8,245

 

 

 

4,130

 

 

 

4,115

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

6,756

 

 

 

5,028

 

 

 

1,728

 

Total

 

 

6,756

 

 

 

5,028

 

 

 

1,728

 

Total

 

$

21,939

 

 

$

14,714

 

 

$

7,225

 

1

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

 

20


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of June 30, 2020:

 

 

 

Total Collateral Dependent Loans

 

 

Unguaranteed Portion

 

June 30, 2020

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Allowance for Credit Losses

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

2,468

 

 

$

5,401

 

 

$

207

 

 

$

572

 

 

$

136

 

 

$

75

 

 

$

161

 

Specialty Lending

 

 

 

 

 

163

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

8

 

Total

 

 

2,468

 

 

 

5,564

 

 

 

207

 

 

 

572

 

 

 

144

 

 

 

75

 

 

 

169

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

8,857

 

 

 

 

 

 

 

 

 

3,457

 

 

 

 

 

 

 

 

 

183

 

Specialty Lending

 

 

1,869

 

 

 

 

 

 

 

 

 

483

 

 

 

 

 

 

 

 

 

3

 

Total

 

 

10,726

 

 

 

 

 

 

 

 

 

3,940

 

 

 

 

 

 

 

 

 

186

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

4,299

 

 

 

 

 

 

 

 

 

934

 

 

 

 

 

 

 

 

 

314

 

Total

 

 

4,299

 

 

 

 

 

 

 

 

 

934

 

 

 

 

 

 

 

 

 

314

 

Total

 

$

17,493

 

 

$

5,564

 

 

$

207

 

 

$

5,446

 

 

$

144

 

 

$

75

 

 

$

669

 

Allowance for Credit Losses - Loans and Leases

On January 1, 2020 the Company adopted ASC 326.  Upon adoption, the Company maintains the ACL at levels management believes represents the future expected credit losses in the loan and lease portfolios as of the balance sheet date.  See Note 1. Basis of Presentation for additional information around the Company’s methodology for estimating the ACL.  See Note 1. Organization and Summary of Significant Accounting Policies and Note 5. Loans and Leases Held for Investment and Credit Quality in the Company’s 2019 Form 10-K for additional information related to the Company’s methodology for estimating the prior period allowance for credit losses under ASC 310.

The following table details activity in the ACL by portfolio segment allowance for the periods presented:

 

Three Months Ended

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4,823

 

 

$

13,110

 

 

$

16,337

 

 

$

1,636

 

 

$

35,906

 

Charge offs

 

 

 

 

 

 

 

 

(1,825

)

 

 

 

 

 

(1,825

)

Recoveries

 

 

 

 

 

15

 

 

 

29

 

 

 

 

 

 

44

 

Provision

 

 

38

 

 

 

2,972

 

 

 

6,962

 

 

 

(14

)

 

 

9,958

 

Ending Balance

 

$

4,861

 

 

$

16,097

 

 

$

21,503

 

 

$

1,622

 

 

$

44,083

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,236

 

 

$

5,379

 

 

$

8,282

 

 

$

1,653

 

 

$

17,550

 

Charge offs

 

 

 

 

 

 

 

 

(145

)

 

 

(24

)

 

 

(169

)

Recoveries

 

 

 

 

 

6

 

 

 

42

 

 

 

 

 

 

48

 

Provision

 

 

688

 

 

 

1,463

 

 

 

1,162

 

 

 

99

 

 

 

3,412

 

Ending Balance

 

$

2,924

 

 

$

6,848

 

 

$

9,341

 

 

$

1,728

 

 

$

20,841

 

 

21


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Six Months Ended

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance, prior to adoption of ASC 326

 

$

2,732

 

 

$

8,427

 

 

$

15,757

 

 

$

1,318

 

 

$

28,234

 

Impact of adopting ASC 326

 

 

1,131

 

 

 

1,916

 

 

 

(4,561

)

 

 

193

 

 

 

(1,321

)

Charge offs

 

 

 

 

 

(109

)

 

 

(4,170

)

 

 

(408

)

 

 

(4,687

)

Recoveries

 

 

 

 

 

43

 

 

 

64

 

 

 

 

 

 

107

 

Provision

 

 

998

 

 

 

5,820

 

 

 

14,413

 

 

 

519

 

 

 

21,750

 

Ending Balance

 

$

4,861

 

 

$

16,097

 

 

$

21,503

 

 

$

1,622

 

 

$

44,083

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,042

 

 

$

5,259

 

 

$

6,524

 

 

$

607

 

 

$

14,432

 

Charge offs

 

 

 

 

 

 

 

 

(145

)

 

 

(24

)

 

 

(169

)

Recoveries

 

 

 

 

 

14

 

 

 

121

 

 

 

 

 

 

135

 

Provision

 

 

882

 

 

 

1,575

 

 

 

2,841

 

 

 

1,145

 

 

 

6,443

 

Ending Balance

 

$

2,924

 

 

$

6,848

 

 

$

9,341

 

 

$

1,728

 

 

$

20,841

 

 

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

 

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

 

 

 

Three Months Ended June 30, 2020

 

 

 

Extended Amortization

 

 

Payment Deferral

 

 

Total TDRs

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

$

 

 

 

3

 

 

$

439

 

 

 

3

 

 

$

439

 

Total

 

 

 

 

 

 

 

 

3

 

 

 

439

 

 

 

3

 

 

 

439

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1

 

 

 

4,921

 

 

 

 

 

 

 

 

 

1

 

 

 

4,921

 

Total

 

 

1

 

 

 

4,921

 

 

 

 

 

 

 

 

 

1

 

 

 

4,921

 

Total

 

 

1

 

 

$

4,921

 

 

 

3

 

 

$

439

 

 

 

4

 

 

$

5,360

 

 

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

 

 

 

Six Months Ended June 30, 2020

 

 

 

Extended Amortization

 

 

Payment Deferral

 

 

Total TDRs

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

$

 

 

 

5

 

 

$

1,882

 

 

 

5

 

 

$

1,882

 

Specialty Lending

 

 

1

 

 

 

224

 

 

 

 

 

 

 

 

 

1

 

 

 

224

 

Total

 

 

1

 

 

 

224

 

 

 

5

 

 

 

1,882

 

 

 

6

 

 

 

2,106

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

1

 

 

 

3,412

 

 

 

1

 

 

 

3,412

 

Total

 

 

 

 

 

 

 

 

1

 

 

 

3,412

 

 

 

1

 

 

 

3,412

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1

 

 

 

4,921

 

 

 

 

 

 

 

 

 

1

 

 

 

4,921

 

Total

 

 

1

 

 

 

4,921

 

 

 

 

 

 

 

 

 

1

 

 

 

4,921

 

Total

 

 

2

 

 

$

5,145

 

 

 

6

 

 

$

5,294

 

 

 

8

 

 

$

10,439

 

22


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Six Months Ended June 30, 2019

 

 

 

Extended Amortization

 

 

Payment Deferral

 

 

Total TDRs

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

$

 

 

 

1

 

 

$

1,853

 

 

 

1

 

 

$

1,853

 

Total

 

 

 

 

 

 

 

 

1

 

 

 

1,853

 

 

 

1

 

 

 

1,853

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1

 

 

 

3,475

 

 

 

 

 

 

 

 

 

1

 

 

 

3,475

 

Total

 

 

1

 

 

 

3,475

 

 

 

 

 

 

 

 

 

1

 

 

 

3,475

 

Total

 

 

1

 

 

$

3,475

 

 

 

1

 

 

$

1,853

 

 

 

2

 

 

$

5,328

 

 

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

 

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

 

December 31, 2019

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

& Industrial

 

 

Commercial

Land

 

 

Total1,2

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases individually evaluated for

   impairment

 

$

17

 

 

$

2,067

 

 

$

3,989

 

 

$

748

 

 

$

6,821

 

Loans and leases collectively evaluated for

   impairment

 

 

2,715

 

 

 

6,360

 

 

 

11,768

 

 

 

570

 

 

 

21,413

 

Total allowance for loan and lease losses

 

$

2,732

 

 

$

8,427

 

 

$

15,757

 

 

$

1,318

 

 

$

28,234

 

Loans and leases receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and leases individually evaluated for

   impairment

 

$

719

 

 

$

25,389

 

 

$

14,052

 

 

$

17,347

 

 

$

57,507

 

Loans and leases collectively evaluated for

    impairment

 

 

346,599

 

 

 

636,305

 

 

 

540,189

 

 

 

216,786

 

 

 

1,739,879

 

Total loans and leases receivable

 

$

347,318

 

 

$

661,694

 

 

$

554,241

 

 

$

234,133

 

 

$

1,797,386

 

 

1

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

2

Loans and leases receivable exclude $824.5 million of loans accounted for under the fair value option.

 

23


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

December 31, 2019

 

Recorded

Investment

 

 

Guaranteed

Balance

 

 

Unguaranteed

Exposure

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

11,612

 

 

$

7,841

 

 

$

3,771

 

Specialty Lending

 

 

2,440

 

 

 

157

 

 

 

2,283

 

Total

 

 

14,052

 

 

 

7,998

 

 

 

6,054

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

719

 

 

 

530

 

 

 

189

 

Total

 

 

719

 

 

 

530

 

 

 

189

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

23,473

 

 

 

13,198

 

 

 

10,275

 

Specialty Lending

 

 

1,916

 

 

 

1,387

 

 

 

529

 

Total

 

 

25,389

 

 

 

14,585

 

 

 

10,804

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

17,347

 

 

 

12,898

 

 

 

4,449

 

Total

 

 

17,347

 

 

 

12,898

 

 

 

4,449

 

Total

 

$

57,507

 

 

$

36,011

 

 

$

21,496

 

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

 

 

December 31, 2019

 

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

With a

Recorded

Allowance

 

 

With No

Recorded

Allowance

 

 

Total

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

Recorded

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

11,607

 

 

$

5

 

 

$

11,612

 

 

$

12,577

 

 

$

1,967

 

Specialty Lending

 

 

2,440

 

 

 

 

 

 

2,440

 

 

 

2,307

 

 

 

2,022

 

Total

 

 

14,047

 

 

 

5

 

 

 

14,052

 

 

 

14,884

 

 

 

3,989

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

719

 

 

 

 

 

 

719

 

 

 

706

 

 

 

17

 

Total

 

 

719

 

 

 

 

 

 

719

 

 

 

706

 

 

 

17

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

21,370

 

 

 

2,103

 

 

 

23,473

 

 

 

23,996

 

 

 

2,055

 

Specialty Lending

 

 

1,916

 

 

 

 

 

 

1,916

 

 

 

1,849

 

 

 

12

 

Total

 

 

23,286

 

 

 

2,103

 

 

 

25,389

 

 

 

25,845

 

 

 

2,067

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

17,347

 

 

 

 

 

 

17,347

 

 

 

17,399

 

 

 

748

 

Total

 

 

17,347

 

 

 

 

 

 

17,347

 

 

 

17,399

 

 

 

748

 

Total Impaired Loans and Leases

 

$

55,399

 

 

$

2,108

 

 

$

57,507

 

 

$

58,834

 

 

$

6,821

 

 

24


 

 

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

June 30, 2019

 

 

 

Average

Balance

 

 

Interest

Income

Recognized

 

Commercial & Industrial

 

 

 

 

 

 

 

 

Small Business Banking

 

$

7,135

 

 

$

24

 

Specialty Lending

 

 

765

 

 

 

7

 

Total

 

 

7,900

 

 

 

31

 

Commercial Real Estate

 

 

 

 

 

 

 

 

Small Business Banking

 

 

15,945

 

 

 

167

 

Specialty Lending

 

 

1,588

 

 

 

 

Total

 

 

17,533

 

 

 

167

 

Commercial Land

 

 

 

 

 

 

 

 

Small Business Banking

 

 

18,940

 

 

 

236

 

Total

 

 

18,940

 

 

 

236

 

Total

 

$

44,373

 

 

$

434

 

 

 

 

Six Months Ended

June 30, 2019

 

 

 

Average

Balance

 

 

Interest

Income

Recognized

 

Commercial & Industrial

 

 

 

 

 

 

 

 

Small Business Banking

 

$

7,196

 

 

$

54

 

Specialty Lending

 

 

763

 

 

 

24

 

Total

 

 

7,959

 

 

 

78

 

Commercial Real Estate

 

 

 

 

 

 

 

 

Small Business Banking

 

 

16,000

 

 

 

309

 

Specialty Lending

 

 

1,588

 

 

 

 

Total

 

 

17,588

 

 

 

309

 

Commercial Land

 

 

 

 

 

 

 

 

Small Business Banking

 

 

19,000

 

 

 

432

 

Total

 

 

19,000

 

 

 

432

 

Total

 

$

44,547

 

 

$

819

 

 

25


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 6. Leases

Lessor Equipment Leasing

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

Direct Financing Leases

Interest income on direct financing leases is recognized when earned.  Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment.  The term of each lease is generally 3-7 years which is consistent with the useful life of the equipment with no residual value.  The gross lease payments receivable and the net investment included in accounts receivable for such leases are as follows:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Gross direct finance lease payments receivable

 

$

12,452

 

 

$

13,959

 

Less – unearned interest

 

 

(2,110

)

 

 

(2,562

)

Net investment in direct financing leases

 

$

10,342

 

 

$

11,397

 

 

Future minimum lease payments under finance leases are as follows:

 

As of June 30, 2020

 

Amount

 

2020

 

$

1,606

 

2021

 

 

3,100

 

2022

 

 

2,675

 

2023

 

 

2,233

 

2024

 

 

1,591

 

Thereafter

 

 

1,247

 

Total

 

$

12,452

 

 

Interest income of $212 thousand and $267 thousand was recognized in the three months ended June 30, 2020 and 2019, respectively. Interest income of $445 thousand and $501 thousand was recognized in the six months ended June 30, 2020 and 2019, respectively.

 

Operating Leases

The term of each operating lease is generally 10 to 15 years.  The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation.  At the end of the lease term, the lessee has the option to renew the lease for 2 additional terms or purchase the equipment at the then current fair market value.

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

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


26


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

As of June 30, 2020 and December 31, 2019, the Company had a net investment of $139.4 million and $144.3 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 $164.3 million as of June 30, 2020 and December 31, 2019 and accumulated depreciation was $24.9 million and $20.0 million as of June 30, 2020 and December 31, 2019, respectively. Depreciation expense recognized on these assets for the three months ended June 30, 2020 and 2019 was $2.4 million. Depreciation expense recognized on these assets for the six months ended June 30, 2020 and 2019 was $4.9 million and $4.8 million, respectively.

 

Lease income of $2.4 million was recognized in the three months ended June 30, 2020 and 2019. Lease income of $4.8 million and $4.7 million was recognized in the six months ended June 30, 2020 and 2019, respectively.

 

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

 

As of June 30, 2020

 

Amount

 

2020

 

$

4,010

 

2021

 

 

9,052

 

2022

 

 

9,044

 

2023

 

 

9,075

 

2024

 

 

8,808

 

Thereafter

 

 

40,110

 

Total

 

$

80,099

 

 

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying condensed consolidated balance sheets. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $2.25 billion and $2.26 billion at June 30, 2020 and December 31, 2019, respectively. The unpaid principal balance for all loans serviced for others was $3.07 billion and $2.97 billion at June 30, 2020 and December 31, 2019, respectively.

The following summarizes the activity pertaining to servicing rights:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Balance at beginning of period

 

$

33,532

 

 

$

44,324

 

 

$

35,365

 

 

$

47,641

 

Additions, net

 

 

1,873

 

 

 

608

 

 

 

4,732

 

 

 

1,331

 

Fair value changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due to changes in valuation inputs or assumptions

 

 

(123

)

 

 

260

 

 

 

(2,162

)

 

 

(489

)

Decay due to increases in principal paydowns or runoff

 

 

(1,448

)

 

 

(3,505

)

 

 

(4,101

)

 

 

(6,796

)

Balance at end of period

 

$

33,834

 

 

$

41,687

 

 

$

33,834

 

 

$

41,687

 

 

The fair value of servicing rights was determined using a weighted average discount rate of 13.4% on June 30, 2020 and 2019. The fair value of servicing rights was determined using a weighted average prepayment speed of 18.7% on June 30, 2020 and 14.1% on June 30, 2019, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income.

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

27


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 8. Borrowings

Total outstanding borrowings consisted of the following:

 

 

 

June 30,

2020

 

 

December 31,

2019

 

Borrowings

 

 

 

 

 

 

 

 

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

 

$

5,000

 

 

$

 

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

 

 

1,716,018

 

 

 

 

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

 

 

11

 

 

 

14

 

Total borrowings

 

$

1,721,029

 

 

$

14

 

 

The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $72.5 million as of June 30, 2020 and December 31, 2019. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had 0 outstanding balances on the lines of credit as of June 30, 2020 and December 31, 2019.

The Company has entered into a repurchase agreement with a third party for $5.0 million as of June 30, 2020 and December 31, 2019.  At the time the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received.  The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had 0 outstanding balance on the repurchase agreement as of June 30, 2020 and December 31, 2019.

On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of Atlanta. These borrowings must be secured with eligible collateral approved by the Federal Home Loan Bank of Atlanta. At June 30, 2020 and December 31, 2019, the Company had approximately $1.30 billion and $1.14 billion, respectively, in borrowing capacity available under these agreements.  There is no collateral pledged and no advances outstanding as of June 30, 2020 and December 31, 2019.

The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $1.40 billion and $526.8 million as of June 30, 2020 and December 31, 2019, respectively.  At June 30, 2020 and December 31, 2019, the Company had approximately $1.03 billion and $294.5 million, respectively, in borrowing capacity available under these arrangements with 0 outstanding balance as of June 30, 2020 and December 31, 2019.

 

28


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 9. Fair Value of Financial Instruments

Fair Value Hierarchy

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

Recurring Fair Value

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

Investment securities: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include 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.

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

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

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

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

29


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

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

 

June 30, 2020

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

5,018

 

 

$

 

 

$

5,018

 

 

$

 

US government agencies

 

 

20,594

 

 

 

 

 

 

20,594

 

 

 

 

Mortgage-backed securities

 

 

750,549

 

 

 

 

 

 

750,549

 

 

 

 

Municipal bonds1

 

 

3,633

 

 

 

 

 

 

3,539

 

 

 

94

 

Loans held for sale

 

 

32,071

 

 

 

 

 

 

 

 

 

32,071

 

Loans held for investment

 

 

834,602

 

 

 

 

 

 

 

 

 

834,602

 

Servicing assets2

 

 

33,834

 

 

 

 

 

 

 

 

 

33,834

 

Mutual fund

 

 

2,303

 

 

 

 

 

 

2,303

 

 

 

 

Equity warrant assets3

 

 

855

 

 

 

 

 

 

 

 

 

855

 

Total assets at fair value

 

$

1,683,459

 

 

$

 

 

$

782,003

 

 

$

901,456

 

 

December 31, 2019

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US treasury securities

 

$

5,015

 

 

$

 

 

$

5,015

 

 

$

 

US government agencies

 

 

22,779

 

 

 

 

 

 

22,779

 

 

 

 

Mortgage-backed securities

 

 

503,297

 

 

 

 

 

 

503,297

 

 

 

 

Municipal bonds1

 

 

8,954

 

 

 

 

 

 

8,862

 

 

 

92

 

Loans held for sale

 

 

16,198

 

 

 

 

 

 

 

 

 

16,198

 

Loans held for investment

 

 

824,520

 

 

 

 

 

 

 

 

 

824,520

 

Servicing assets2

 

 

35,365

 

 

 

 

 

 

 

 

 

35,365

 

Mutual fund

 

 

2,206

 

 

 

 

 

 

2,206

 

 

 

 

Equity warrant assets3

 

 

570

 

 

 

 

 

 

 

 

 

570

 

Total assets at fair value

 

$

1,418,904

 

 

$

 

 

$

542,159

 

 

$

876,745

 

 

1

During the three and six months ended June 30, 2020, the Company recorded a fair value adjustment gain of $1 thousand and $2 thousand, respectively. During the six months ended June 30, 2019, the Company sold $900 thousand of a municipal bond to a third party and recorded a fair value adjustment loss of $7 thousand. During the three months ended June 30, 2019, the Company recorded 0 fair value adjustment.

2

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

3

During the six months ended June 30 ,2020, the Company entered into equity warrant assets with a fair value of $179 thousand at the time of issuance and recorded net gains on derivative instruments of $106 thousand. During the three months ended June 30, 2020, the Company entered into equity warrant assets with a fair value of $15 thousand at the time of issuance and recorded net gains on derivative instruments of $138 thousand. During the six months ended June 30, 2019, the Company recorded net gains on derivative instruments of $193 thousand. During the three months ended June 30, 2019, the Company recorded net losses on derivative instruments of $62 thousand.

30


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Fair Value Option

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

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

 

 

 

June 30, 2020

 

 

 

Total Loans

 

 

Nonaccruals

 

 

90 Days or More Past Due

 

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

Fair Value Option Elections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

32,071

 

 

$

34,424

 

 

$

(2,353

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Loans held for investment

 

 

834,602

 

 

 

862,735

 

 

 

(28,133

)

 

 

46,221

 

 

 

50,536

 

 

 

(4,315

)

 

 

27,312

 

 

 

29,435

 

 

 

(2,123

)

 

 

$

866,673

 

 

$

897,159

 

 

$

(30,486

)

 

$

46,221

 

 

$

50,536

 

 

$

(4,315

)

 

$

27,312

 

 

$

29,435

 

 

$

(2,123

)

 

 

 

December 31, 2019

 

 

 

Total Loans

 

 

Nonaccruals

 

 

90 Days or More Past Due

 

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

Fair Value Option Elections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

16,198

 

 

$

17,230

 

 

$

(1,032

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Loans held for investment

 

 

824,520

 

 

��

842,456

 

 

 

(17,936

)

 

 

49,739

 

 

 

54,370

 

 

 

(4,631

)

 

 

26,644

 

 

 

28,137

 

 

 

(1,493

)

 

 

$

840,718

 

 

$

859,686

 

 

$

(18,968

)

 

$

49,739

 

 

$

54,370

 

 

$

(4,631

)

 

$

26,644

 

 

$

28,137

 

 

$

(1,493

)

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

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

   Option

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Loans held for sale

 

$

(106

)

 

$

822

 

 

$

14

 

 

$

471

 

Loans held for investment

 

 

(983

)

 

 

1,969

 

 

 

(11,741

)

 

 

4,403

 

 

 

$

(1,089

)

 

$

2,791

 

 

$

(11,727

)

 

$

4,874

 

 

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

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Loans held for sale

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Balance at beginning of period

 

$

19,151

 

 

$

25,293

 

 

$

16,198

 

 

$

17,745

 

Issuances

 

 

13,154

 

 

 

6,207

 

 

 

16,199

 

 

 

19,842

 

Fair value changes

 

 

(106

)

 

 

822

 

 

 

14

 

 

 

471

 

Sales

 

 

 

 

 

(5,644

)

 

 

 

 

 

(11,344

)

Settlements

 

 

(128

)

 

 

(75

)

 

 

(340

)

 

 

(111

)

Balance at end of period

 

$

32,071

 

 

$

26,603

 

 

$

32,071

 

 

$

26,603

 

 

31


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Loans held for investment

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Balance at beginning of period

 

$

831,426

 

 

$

868,654

 

 

$

824,520

 

 

$

885,527

 

Issuances

 

 

37,761

 

 

 

24,413

 

 

 

99,372

 

 

 

54,521

 

Fair value changes

 

 

(983

)

 

 

1,969

 

 

 

(11,741

)

 

 

4,403

 

Settlements

 

 

(33,602

)

 

 

(55,956

)

 

 

(77,549

)

 

 

(105,371

)

Balance at end of period

 

$

834,602

 

 

$

839,080

 

 

$

834,602

 

 

$

839,080

 

Non-recurring Fair Value

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

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

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

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.

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

 

June 30, 2020

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Collateral dependent loans

 

$

2,056

 

 

$

 

 

$

 

 

$

2,056

 

Foreclosed assets

 

 

5,660

 

 

 

 

 

 

 

 

 

5,660

 

Total assets at fair value

 

$

7,716

 

 

$

 

 

$

 

 

$

7,716

 

 

December 31, 2019

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Collateral dependent loans

 

$

1,245

 

 

$

 

 

$

 

 

$

1,245

 

Foreclosed assets

 

 

5,612

 

 

 

 

 

 

 

 

 

5,612

 

Equity security investment with a non-readily

   determinable fair value

 

 

8,738

 

 

 

8,738

 

 

 

 

 

 

 

Total assets at fair value

 

$

15,595

 

 

$

8,738

 

 

$

 

 

$

6,857

 

 

32


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2020 and December 31, 2019 the significant unobservable inputs used in the fair value measurements were as follows:

June 30, 2020

 

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Recurring fair value

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

$

94

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.1%

5.0%

Loans held for sale

 

$

32,071

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

5.1% to 21.1%

WAVG 18.6%

Loans held for

   investment

 

$

834,602

 

 

Discounted expected cash flows

Discounted appraisals

 

Loss rate

Discount rate

Prepayment speed

Appraisal adjustments

 

0.0% to 74.2% (WAVG 1.8%)

5.1% to 21.1%

WAVG 18.6%

10% to 45%

Equity warrant assets

 

$

855

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

25.8 to 84.9%

0.66%

20.0%

5-10 years

Non-recurring fair value

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   loans

 

$

2,056

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 55.0%

Foreclosed assets

 

$

5,660

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

4.0% to 14.5%

December 31, 2019

 

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Recurring fair value

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

$

92

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.6%

5.0%

Loans held for sale

 

$

16,198

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

7.7% to 21.4%

WAVG 13.1%

Loans held for

   investment

 

$

824,520

 

 

Discounted expected cash flows

Discounted appraisals

 

Loss rate

Discount rate

Prepayment speed

Appraisal adjustments

 

0.0% to 10.9% (WAVG 1.3%)

7.7% to 21.4%

WAVG 13.1%

10.0% to 70.0%

Equity warrant assets

 

$

570

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

21.0-75.0%

1.90%

20.0%

8-10 years

Non-recurring fair value

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   loans

 

$

1,245

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 57.0%

Foreclosed assets

 

$

5,612

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 37.0%

 

(1)

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

33


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of the fair value 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 not measured at fair value on a recurring or non-recurring basis are as follows:

 

June 30, 2020

 

Carrying

Amount

 

 

Quoted Price

In Active

Markets for

Identical Assets

/Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

Fair

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

1,256,958

 

 

$

1,256,958

 

 

$

 

 

$

 

 

$

1,256,958

 

Federal funds sold

 

 

91,188

 

 

 

91,188

 

 

 

 

 

 

 

 

 

91,188

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,753

 

 

 

 

 

 

 

 

 

7,753

 

Loans held for sale

 

 

944,523

 

 

 

 

 

 

 

 

 

1,022,635

 

 

 

1,022,635

 

Loans and leases, net of allowance for

   credit losses on loans and leases

 

 

3,771,371

 

 

 

 

 

 

 

 

 

3,928,595

 

 

 

3,928,595

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

5,873,292

 

 

 

 

 

 

5,935,529

 

 

 

 

 

 

5,935,529

 

Borrowings

 

 

1,721,029

 

 

 

 

 

 

 

 

 

1,718,449

 

 

 

1,718,449

 

 

December 31, 2019

 

Carrying

Amount

 

 

Quoted Price

In Active

Markets for

Identical Assets

/Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

Fair

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

124,610

 

 

$

124,610

 

 

$

 

 

$

 

 

$

124,610

 

Federal funds sold

 

 

96,787

 

 

 

96,787

 

 

 

 

 

 

 

 

 

96,787

 

Certificates of deposit with other banks

 

 

7,250

 

 

 

7,568

 

 

 

 

 

 

 

 

 

7,568

 

Loans held for sale

 

 

950,249

 

 

 

 

 

 

 

 

 

1,004,135

 

 

 

1,004,135

 

Loans and leases, net of allowance for

   credit losses on loans and leases

 

 

1,774,532

 

 

 

 

 

 

 

 

 

1,822,569

 

 

 

1,822,569

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

4,226,980

 

 

 

 

 

 

4,211,522

 

 

 

 

 

 

4,211,522

 

Borrowings

 

 

14

 

 

 

 

 

 

 

 

 

14

 

 

 

14

 

 

Note 10. Commitments and Contingencies

Litigation

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

Financial Instruments with Off-balance-sheet Risk

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

34


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

 

 

June 30,

2020

 

 

December 31,

2019

 

Commitments to extend credit

 

$

1,575,314

 

 

$

1,834,449

 

Standby letters of credit

 

 

26,997

 

 

 

25,532

 

Total unfunded off-balance-sheet credit risk

 

$

1,602,311

 

 

$

1,859,981

 

 

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 June 30, 2020 and December 31, 2019, the Company had unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $16.8 million and $16.9 million, respectively. 

Concentrations of Credit Risk

Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in Note 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 34 relationships that have a retained unguaranteed exposure of $422.3 million of which $248.4 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling $80.1 million, of which $57.4 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.

 


35


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 11. Stock Plans

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

There were 0 stock options granted during the three and six months ended June 30, 2020.

At June 30, 2020, unrecognized compensation costs relating to stock options amounted to $3.2 million which will be recognized over a weighted average period of 2.11 years.

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.

For the three months ended June 30, 2020, 58,348 RSUs were granted with a weighted average grant date fair value of $12.52. For the six months ended June 30, 2020, 541,679 RSUs were granted with a weighted average grant date fair value of $17.39. Of the RSUs granted in the six month period, 447,273 were awarded in connection with annual long term incentive stock compensation.

At June 30, 2020, unrecognized compensation costs relating to RSUs amounted to $15.9 million which will be recognized over a weighted average period of 4.61 years.

There were 0 Market RSUs granted during the three and six months ended June 30, 2020.

At June 30, 2020, unrecognized compensation costs relating to Market RSUs amounted to $8.0 million which will be recognized over a weighted average period of 2.91 years.

36


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 12. Significant Equity Method Investments

In accordance with Rule 10-01(b)(1) of Regulation S-X, the Company must assess whether any of its equity method investments are significant equity method investments. In evaluating the significance of these investments, the Company performed the income test and the investment test described in S-X 3-05 and S-X 1-02(w). Rule 10-01(b)(1) of Regulation S-X requires summarized financial information in a quarterly report if any of the two tests exceeds 20%. Under the income test, the Company’s proportionate share of its equity method investees' aggregated net losses exceeded the applicable threshold of 20% and is accordingly required to provide summarized financial information for these investees for all periods presented in this Form 10-Q.  

The following table provides summarized balance sheet information for the Company’s equity method investments as of June 30, 2020 and December 31, 2019. The Company’s equity method investments are included in the other assets line on the condensed consolidated balance sheets and are largely concentrated in new or emerging financial service technology companies.

 

 

June 30, 2020

 

 

December 31, 2019

 

Balance sheet data

 

 

 

 

 

 

 

 

Current assets

 

$

47,724

 

 

$

56,710

 

Noncurrent assets

 

 

175,022

 

 

 

162,304

 

Total assets

 

$

222,746

 

 

$

219,014

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

22,698

 

 

$

19,910

 

Noncurrent liabilities

 

 

451

 

 

 

683

 

Total liabilities

 

 

23,149

 

 

 

20,593

 

Equity interests

 

 

199,597

 

 

 

198,421

 

Total liabilities and equity

 

$

222,746

 

 

$

219,014

 

 

The following table provides summarized income statement information for the Company’s equity method investments for the three and six months ended June 30, 2020 and 2019.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Summary of operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

16,180

 

 

$

13,851

 

 

$

31,972

 

 

$

27,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(13,053

)

 

 

(6,100

)

 

 

(29,486

)

 

 

(13,220

)

 

 

 

37


 

 

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, 2019 (the "2019 Annual Report"). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.

Important Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this quarterly report on Form 10-Q. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this quarterly report on Form 10-Q are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:

 

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

 

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

 

changes in 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;

 

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

 

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

 

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

 

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

38


 

 

 

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

 

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

 

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

 

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

 

changes in political and economic conditions;

 

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

 

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

 

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

 

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

 

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

 

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

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

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

Nature of Operations

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


39


 

 

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

 

In 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 technology companies.  In 2019, Live Oak Clean Energy Financing LLC (“LOCEF”) became a subsidiary of the Bank.  LOCEF was formed in November 2016 as a subsidiary of the Company for the purpose of providing financing to entities for renewable energy applications. In 2018, the Bank formed Live Oak Private Wealth, LLC, a registered investment advisor that provides high-net-worth individuals and families with strategic wealth and investment management services, and on April 1, 2020, it acquired Jolley Asset Management, LLC to broaden service offerings for existing high-net-worth individuals and families, attract new clients from an expanded footprint and benefit from economies of scale.  In 2017, the Bank entered into a joint venture, Apiture LLC (“Apiture”), with First Data Corporation for the purpose of creating next generation technology for financial institutions.  In addition to the Bank, the Company owns Live Oak Ventures, Inc., formed in August 2016 for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology; Live Oak Grove, LLC, formed in February 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; and Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans. In 2019, 504 Fund Advisors, LLC (“504FA”) exited as the advisor to The 504 Fund, and the Company dissolved this legal entity.

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

Recent Developments

The COVID-19 pandemic in the United States continues to have a complex and significant adverse impact on the economy, the banking industry and the Company, all subject to a high degree of uncertainty. While it is still not possible to know the full universe or extent of these impacts as of the date of this filing, we are disclosing potentially material items of which we are currently aware.

40


 

 

Financial position and results of operations

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

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

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

Capital and liquidity

As of June 30, 2020, all of the Company’s capital ratios, and the Bank’s capital ratios, were in excess of all regulatory requirements.  While the Company believes that capital is sufficient to withstand an extended economic recession brought about by COVID-19, reported and regulatory capital ratios could be adversely impacted by further credit losses.  The Company relies on cash on hand as well as dividends from the Bank to service any debt at the Company.  If our capital deteriorates such that the Bank is unable to pay dividends to the Company for an extended period of time, the Company may not be able to service its debt.  

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

41


 

 

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

Lending operations and accommodations to borrowers

With the passage of the PPP, administered by the SBA, the Company has actively interpreted and implemented new loan programs and systems using its technology platform while participating in assisting its customers and other small businesses in need of resources through the program.  PPP loans earn interest at 1% and currently have a two-year or five-year contractual term depending on the origination date.  For the earlier loans with a two-year term there is an option to extend to five years if requested by the borrower and approved by the lender. The Company expects that some portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.  As of June 30, 2020, the Company has secured funding from the SBA for 10,847 PPP loans representing $1.74 billion in originations.  Loans funded through the PPP are fully guaranteed by the SBA, subject to the terms and conditions of the program. Should those circumstances change, the Company could be required to record additional credit loss expense through earnings.

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

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

Credit

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

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

42


 

 

Results of Operations

Performance Summary

Three months ended June 30, 2020 compared with three months ended June 30, 2019

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

 

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

 

 

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

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

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

 

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

 

 

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

 

 

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

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

For the six months ended June 30, 2020, the Company reported a net loss of $3.8 million, or $(0.10) per diluted share, as compared to net earnings of $7.3 million, or $0.18 per diluted share, for the six months ended June 30, 2019.  This decrease in net income was largely the due to continuation of the above-mentioned risks and uncertainties related to the COVID-19 pandemic during the first half of 2020, as reflected below:

 

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

 

 

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

Outside of COVID-19 effects on the first half of 2020, salaries and employee benefits increased $15.0 million, or 34.2%, as the Company continued to invest in its workforce to support growth and a variety of initiatives, as discussed more fully above.

The primary factors partially offsetting the net loss for the six months ended June 30, 2020 were:

 

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

 

 

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

 

43


 

 

 

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

 

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

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, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” As a bank without a branch network, the Bank gathers 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 June 30, 2020 compared with three months ended June 30, 2019

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

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

For the six months ended June 30, 2020, net interest income increased $16.5 million, or 25.6%, to $81.1 million compared to $64.5 million for the six months ended June 30, 2019. This increase was principally due to the significant growth in the combined held for sale and held for investment loan and lease portfolios along with higher investment security holdings reflecting the Company's ongoing initiative to grow recurring revenue sources and strengthen liquidity.  This increase over the first half of 2019 was also enhanced by the above mentioned origination of PPP loans in the second quarter.  Accordingly, average interest earning assets increased by $1.93 billion, or 54.7%, to $5.47 billion for the six months ended June 30, 2020, compared to $3.53 billion for the six months ended June 30, 2019, while the yield on average interest earning assets decreased 122 basis points to 4.78%. The cost of funds on interest bearing liabilities for the six months ended June 30, 2020 decreased 54 basis points to 1.85%, and the average balance of interest bearing liabilities increased by $1.93 billion, or 56.5%, over the same period in 2019. The increase in average interest bearing liabilities was also largely impacted by strategically heightened levels of liquidity in the first half of 2020 related to COVID-19 risks and uncertainties and funding sources for PPP loans. As indicated in the rate/volume table below, the increase in interest earning assets and corresponding yields outpaced the higher volume and decreased cost of interest bearing liabilities, resulting in increased interest income of $25.2 million and increased interest expense of $8.7 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.  For the six months ended June 30, 2019 compared to the six months ended June 30, 2020, net interest margin decreased from 3.68% to 2.97%, respectively, principally due to lower fed funds rates impacting the yield on interest earning assets more rapidly than the cost of interest bearing liabilities in the first half of 2020, combined with the above mentioned impacts of PPP related activities and heightened  levels of liquidity.

44


 

 

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

 

 

Three Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest earning

   balances in other banks

 

$

711,916

 

 

$

1,009

 

 

 

0.57

%

 

$

184,986

 

 

$

1,108

 

 

 

2.40

%

Investment securities

 

 

556,014

 

 

 

3,786

 

 

 

2.73

 

 

 

566,159

 

 

 

4,116

 

 

 

2.92

 

Loans held for sale

 

 

921,956

 

 

 

13,115

 

 

 

5.71

 

 

 

839,724

 

 

 

14,333

 

 

 

6.85

 

Loans and leases held for

   investment(1)

 

 

4,208,109

 

 

 

48,907

 

 

 

4.66

 

 

 

2,073,297

 

 

 

35,581

 

 

 

6.88

 

Total interest earning assets

 

 

6,397,995

 

 

 

66,817

 

 

 

4.19

 

 

 

3,664,166

 

 

 

55,138

 

 

 

6.04

 

Less: Allowance for credit losses on loans

   and leases

 

 

(35,875

)

 

 

 

 

 

 

 

 

 

 

(19,196

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

603,610

 

 

 

 

 

 

 

 

 

 

 

472,529

 

 

 

 

 

 

 

 

 

Total assets

 

$

6,965,730

 

 

 

 

 

 

 

 

 

 

$

4,117,499

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

462,977

 

 

$

646

 

 

 

0.56

%

 

$

 

 

$

 

 

 

%

Savings

 

 

1,398,378

 

 

 

4,814

 

 

 

1.38

 

 

 

989,512

 

 

 

5,235

 

 

 

2.12

 

Money market accounts

 

 

82,908

 

 

 

89

 

 

 

0.43

 

 

 

85,982

 

 

 

161

 

 

 

0.75

 

Certificates of deposit

 

 

3,689,041

 

 

 

19,572

 

 

 

2.13

 

 

 

2,452,159

 

 

 

15,807

 

 

 

2.59

 

Total deposits

 

 

5,633,304

 

 

 

25,121

 

 

 

1.79

 

 

 

3,527,653

 

 

 

21,203

 

 

 

2.41

 

Borrowings

 

 

676,849

 

 

 

798

 

 

 

0.47

 

 

 

1,409

 

 

 

 

 

 

 

Total interest bearing liabilities

 

 

6,310,153

 

 

 

25,919

 

 

 

1.65

 

 

 

3,529,062

 

 

 

21,203

 

 

 

2.41

 

Non-interest bearing deposits

 

 

41,218

 

 

 

 

 

 

 

 

 

 

 

49,466

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities

 

 

50,554

 

 

 

 

 

 

 

 

 

 

 

26,580

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

563,805

 

 

 

 

 

 

 

 

 

 

 

512,391

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

6,965,730

 

 

 

 

 

 

 

 

 

 

$

4,117,499

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

40,898

 

 

 

2.54

%

 

 

 

 

 

$

33,935

 

 

 

3.63

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.56

%

 

 

 

 

 

 

 

 

 

 

3.71

%

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

101.39

%

 

 

 

 

 

 

 

 

 

 

103.83

%

(1)

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

45


 

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest earning

   balances in other banks

 

$

470,901

 

 

$

1,759

 

 

 

0.75

%

 

$

233,904

 

 

$

2,747

 

 

 

2.37

%

Investment securities

 

 

546,110

 

 

 

7,548

 

 

 

2.77

 

 

 

514,038

 

 

 

7,433

 

 

 

2.92

 

Loans held for sale

 

 

963,359

 

 

 

28,980

 

 

 

6.03

 

 

 

794,919

 

 

 

26,934

 

 

 

6.83

 

Loans and leases held for

   investment(1)

 

 

3,485,135

 

 

 

92,003

 

 

 

5.29

 

 

 

1,990,054

 

 

 

67,946

 

 

 

6.89

 

Total interest earning assets

 

 

5,465,505

 

 

 

130,290

 

 

 

4.78

 

 

 

3,532,915

 

 

 

105,060

 

 

 

6.00

 

Less: Allowance for credit losses on loans

   and leases

 

 

(31,439

)

 

 

 

 

 

 

 

 

 

 

(17,600

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

555,469

 

 

 

 

 

 

 

 

 

 

 

473,512

 

 

 

 

 

 

 

 

 

Total assets

 

$

5,989,535

 

 

 

 

 

 

 

 

 

 

$

3,988,827

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

231,489

 

 

$

646

 

 

 

0.56

%

 

$

84

 

 

$

 

 

 

%

Savings

 

 

1,261,131

 

 

 

9,658

 

 

 

1.54

 

 

 

958,716

 

 

 

10,021

 

 

 

2.11

 

Money market accounts

 

 

80,265

 

 

 

189

 

 

 

0.47

 

 

 

84,648

 

 

 

269

 

 

 

0.64

 

Certificates of deposit

 

 

3,425,850

 

 

 

37,883

 

 

 

2.22

 

 

 

2,367,902

 

 

 

30,230

 

 

 

2.57

 

Total deposits

 

 

4,998,735

 

 

 

48,376

 

 

 

1.94

 

 

 

3,411,350

 

 

 

40,520

 

 

 

2.40

 

Borrowings

 

 

342,002

 

 

 

855

 

 

 

0.50

 

 

 

1,436

 

 

 

 

 

 

 

Total interest bearing liabilities

 

 

5,340,737

 

 

 

49,231

 

 

 

1.85

 

 

 

3,412,786

 

 

 

40,520

 

 

 

2.39

 

Non-interest bearing deposits

 

 

45,071

 

 

 

 

 

 

 

 

 

 

 

47,294

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities

 

 

52,024

 

 

 

 

 

 

 

 

 

 

 

20,548

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

551,703

 

 

 

 

 

 

 

 

 

 

 

508,199

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

5,989,535

 

 

 

 

 

 

 

 

 

 

$

3,988,827

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

81,059

 

 

 

2.93

%

 

 

 

 

 

$

64,540

 

 

 

3.61

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.97

%

 

 

 

 

 

 

 

 

 

 

3.68

%

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

102.34

%

 

 

 

 

 

 

 

 

 

 

103.52

%

(1)

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

46


 

 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020 vs. 2019

 

 

2020 vs. 2019

 

 

 

Increase (Decrease) Due to

 

 

Increase (Decrease) Due to

 

 

 

Rate

 

 

Volume

 

 

Total

 

 

Rate

 

 

Volume

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest

   earning balances in other banks

 

$

(2,050

)

 

$

1,951

 

 

$

(99

)

 

$

(2,822

)

 

$

1,834

 

 

$

(988

)

Investment securities

 

 

(259

)

 

 

(71

)

 

 

(330

)

 

 

(339

)

 

 

454

 

 

 

115

 

Loans held for sale

 

 

(2,505

)

 

 

1,287

 

 

 

(1,218

)

 

 

(3,341

)

 

 

5,387

 

 

 

2,046

 

Loans and leases held for investment

 

 

(17,398

)

 

 

30,724

 

 

 

13,326

 

 

 

(21,200

)

 

 

45,257

 

 

 

24,057

 

Total interest income

 

 

(22,212

)

 

 

33,891

 

 

 

11,679

 

 

 

(27,702

)

 

 

52,932

 

 

 

25,230

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

 

 

 

 

646

 

 

 

646

 

 

 

 

 

 

646

 

 

 

646

 

Savings

 

 

(2,206

)

 

 

1,785

 

 

 

(421

)

 

 

(3,101

)

 

 

2,738

 

 

 

(363

)

Money market accounts

 

 

(67

)

 

 

(5

)

 

 

(72

)

 

 

(68

)

 

 

(12

)

 

 

(80

)

Certificates of deposit

 

 

(3,503

)

 

 

7,268

 

 

 

3,765

 

 

 

(4,950

)

 

 

12,603

 

 

 

7,653

 

Borrowings

 

 

2

 

 

 

796

 

 

 

798

 

 

 

4

 

 

 

851

 

 

 

855

 

Total interest expense

 

 

(5,774

)

 

 

10,490

 

 

 

4,716

 

 

 

(8,115

)

 

 

16,826

 

 

 

8,711

 

Net interest income

 

$

(16,438

)

 

$

23,401

 

 

$

6,963

 

 

$

(19,587

)

 

$

36,106

 

 

$

16,519

 

 

Provision for Loan and Lease Credit Losses

The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for credit losses (“ACL”) on loans and leases at a level that is appropriate in relation to the estimated losses inherent in the loan and lease portfolio.

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 50% to 90% 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 second quarter of 2020, the provision for loan and lease credit losses was $10.0 million compared to $3.4 million for the same period in 2019, an increase of $6.5 million.  For the first half of 2020, the provision for loan and lease credit losses was $21.8 million compared to $6.4 million for the same period in 2019, an increase of $15.3 million.  The Company adopted the new current expected credit losses (“CECL”) standard effective January 1, 2020 and accordingly determined to use forecasted levels of unemployment as a primary economic variable in forecasting future expected losses.  The majority of the provision for the second quarter of 2020 was due to the effects of the COVID-19 pandemic, while approximately $15.5 million of the first half of 2020 provision was estimated to be based upon the severity of ongoing developments resulting from the COVID-19 pandemic.  

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

47


 

 

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

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

Noninterest Income

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

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

 

 

 

Three Months Ended June 30,

 

 

2020/2019 Increase (Decrease)

 

 

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

6,691

 

 

$

7,063

 

 

$

(372

)

 

 

(5.27

)%

Loan servicing asset revaluation

 

 

(1,571

)

 

 

(3,245

)

 

 

1,674

 

 

 

51.59

 

Net gains on sales of loans

 

 

10,695

 

 

 

6,015

 

 

 

4,680

 

 

 

77.81

 

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

   value option

 

 

(1,089

)

 

 

2,791

 

 

 

(3,880

)

 

 

(139.02

)

Equity method investments income (loss)

 

 

(2,243

)

 

 

(1,736

)

 

 

(507

)

 

 

29.21

 

Equity security investments gains (losses), net

 

 

161

 

 

 

32

 

 

 

129

 

 

 

403.13

 

Gain on sale of investment securities

   available-for-sale, net

 

 

734

 

 

 

 

 

 

734

 

 

 

100.00

 

Lease income

 

 

2,635

 

 

 

2,369

 

 

 

266

 

 

 

11.23

 

Management fee income

 

 

1,206

 

 

 

91

 

 

 

1,115

 

 

 

1,225.27

 

Construction supervision fee income

 

 

684

 

 

 

386

 

 

 

298

 

 

 

77.20

 

Other noninterest income

 

 

4,508

 

 

 

884

 

 

 

3,624

 

 

 

409.95

 

Total noninterest income

 

$

22,411

 

 

$

14,650

 

 

$

7,761

 

 

 

52.98

%

 

48


 

 

 

 

Six Months Ended June 30,

 

 

2020/2019 Increase (Decrease)

 

 

 

2020

 

 

2019

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

13,113

 

 

$

14,473

 

 

$

(1,360

)

 

 

(9.40

)%

Loan servicing asset revaluation

 

 

(6,263

)

 

 

(7,285

)

 

 

1,022

 

 

 

14.03

 

Net gains on sales of loans

 

 

21,807

 

 

 

10,213

 

 

 

11,594

 

 

 

113.52

 

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

   value option

 

 

(11,727

)

 

 

4,874

 

 

 

(16,601

)

 

 

(340.60

)

Equity method investments income (loss)

 

 

(4,721

)

 

 

(3,750

)

 

 

(971

)

 

 

25.89

 

Equity security investments gains (losses), net

 

 

97

 

 

 

135

 

 

 

(38

)

 

 

(28.15

)

Gain on sale of investment securities

   available-for-sale, net

 

 

655

 

 

 

5

 

 

 

650

 

 

 

13,000.00

 

Lease income

 

 

5,259

 

 

 

4,694

 

 

 

565

 

 

 

12.04

 

Management fee income

 

 

2,850

 

 

 

91

 

 

 

2,759

 

 

 

3,031.87

 

Construction supervision fee income

 

 

1,074

 

 

 

1,165

 

 

 

(91

)

 

 

(7.81

)

Other noninterest income

 

 

6,009

 

 

 

3,351

 

 

 

2,658

 

 

 

79.32

 

Total non