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LOB Live Oak Bancshares

Filed: 5 May 21, 5:08pm

 

 

 

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 March 31, 2021

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 May 4, 2021, there were 42,594,817 shares of the registrant’s voting common stock outstanding and 510,327 shares of the registrant’s non-voting common stock outstanding.

 

 


 

 

 

Live Oak Bancshares, Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2021

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (Unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

 

1

 

 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020

 

2

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2021 and 2020

 

3

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2021 and 2020

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020

 

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

 

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

 

33

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

52

Item 4.

 

Controls and Procedures

 

53

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

54

Item 1A.

 

Risk Factors

 

54

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

54

Item 3.

 

Defaults Upon Senior Securities

 

54

Item 4.

 

Mine Safety Disclosures

 

54

Item 5.

 

Other Information

 

54

Item 6.

 

Exhibits

 

55

 

 

Index to Exhibits

 

55

 

 

Signatures

 

56

 

 

 

 


 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of March 31, 2021 (unaudited) and December 31, 2020*

(Dollars in thousands)

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

630,081

 

 

$

297,167

 

Federal funds sold

 

 

5,461

 

 

 

21,153

 

Certificates of deposit with other banks

 

 

6,500

 

 

 

6,500

 

Investment securities available-for-sale

 

 

775,177

 

 

 

750,098

 

Loans held for sale (includes $35,936 and $36,111 measured at fair value,

   respectively)

 

 

1,076,741

 

 

 

1,175,470

 

Loans and leases held for investment (includes $790,797 and $815,374 measured

   at fair value, respectively)

 

 

5,456,754

 

 

 

5,144,930

 

Allowance for credit losses on loans and leases

 

 

(52,417

)

 

 

(52,306

)

Net loans and leases

 

 

5,404,337

 

 

 

5,092,624

 

Premises and equipment, net

 

 

253,774

 

 

 

259,267

 

Foreclosed assets

 

 

4,185

 

 

 

4,155

 

Servicing assets

 

 

37,744

 

 

 

33,918

 

Other assets

 

 

223,875

 

 

 

231,951

 

Total assets

 

$

8,417,875

 

 

$

7,872,303

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

75,794

 

 

$

75,287

 

Interest-bearing

 

 

6,240,210

 

 

 

5,637,541

 

Total deposits

 

 

6,316,004

 

 

 

5,712,828

 

Borrowings

 

 

1,465,961

 

 

 

1,542,093

 

Other liabilities

 

 

45,550

 

 

 

49,532

 

Total liabilities

 

 

7,827,515

 

 

 

7,304,453

 

Shareholders’ equity

 

 

 

 

 

 

 

 

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

   at March 31, 2021 and December 31, 2020

 

 

 

 

 

 

Class A common stock, no par value, 100,000,000 shares authorized, 42,259,091

   and 41,344,689 shares issued and outstanding at March 31, 2021 and

   December 31, 2020, respectively

 

 

298,525

 

 

 

298,890

 

Class B common stock, no par value, 10,000,000 shares authorized, 692,253 and

   1,107,757 shares issued and outstanding at March 31, 2021 and

   December 31, 2020, respectively

 

 

7,330

 

 

 

11,729

 

Retained earnings

 

 

275,377

 

 

 

235,724

 

Accumulated other comprehensive income

 

 

9,128

 

 

 

21,507

 

Total shareholders’ equity

 

 

590,360

 

 

 

567,850

 

Total liabilities and shareholders’ equity

 

$

8,417,875

 

 

$

7,872,303

 

 

*

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 months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Interest income

 

 

 

 

 

 

 

 

Loans and fees on loans

 

$

84,993

 

 

$

58,961

 

Investment securities, taxable

 

 

2,929

 

 

 

3,762

 

Other interest earning assets

 

 

303

 

 

 

750

 

Total interest income

 

 

88,225

 

 

 

63,473

 

Interest expense

 

 

 

 

 

 

 

 

Deposits

 

 

16,944

 

 

 

23,255

 

Borrowings

 

 

1,331

 

 

 

57

 

Total interest expense

 

 

18,275

 

 

 

23,312

 

Net interest income

 

 

69,950

 

 

 

40,161

 

(Recovery of) provision for loan and lease credit losses

 

 

(873

)

 

 

11,792

 

Net interest income after (recovery of) provision for loan

   and lease credit losses

 

 

70,823

 

 

 

28,369

 

Noninterest income

 

 

 

 

 

 

 

 

Loan servicing revenue

 

 

6,434

 

 

 

6,422

 

Loan servicing asset revaluation

 

 

1,493

 

 

 

(4,692

)

Net gains on sales of loans

 

 

11,929

 

 

 

11,112

 

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

   option

 

 

4,218

 

 

 

(10,638

)

Equity method investments income (loss)

 

 

(1,157

)

 

 

(2,478

)

Equity security investments gains (losses), net

 

 

105

 

 

 

(64

)

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

 

 

 

 

 

(79

)

Lease income

 

 

2,599

 

 

 

2,624

 

Management fee income

 

 

1,934

 

 

 

1,644

 

Other noninterest income

 

 

3,502

 

 

 

1,891

 

Total noninterest income

 

 

31,057

 

 

 

5,742

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

31,366

 

 

 

28,063

 

Travel expense

 

 

659

 

 

 

1,781

 

Professional services expense

 

 

3,831

 

 

 

1,937

 

Advertising and marketing expense

 

 

652

 

 

 

1,361

 

Occupancy expense

 

 

2,112

 

 

 

2,421

 

Data processing expense

 

 

3,894

 

 

 

3,157

 

Equipment expense

 

 

4,354

 

 

 

4,635

 

Other loan origination and maintenance expense

 

 

3,327

 

 

 

2,456

 

Renewable energy tax credit investment impairment

 

 

3,127

 

 

 

 

FDIC insurance

 

 

1,765

 

 

 

1,510

 

Other expense

 

 

3,185

 

 

 

2,170

 

Total noninterest expense

 

 

58,272

 

 

 

49,491

 

Income (loss) before taxes

 

 

43,608

 

 

 

(15,380

)

Income tax expense (benefit)

 

 

4,181

 

 

 

(7,778

)

Net income (loss)

 

$

39,427

 

 

$

(7,602

)

Basic earnings (loss) per share

 

$

0.92

 

 

$

(0.19

)

Diluted earnings (loss) per share

 

$

0.88

 

 

$

(0.19

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

2


 

 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Net income (loss)

 

$

39,427

 

 

$

(7,602

)

Other comprehensive (loss) income before tax:

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on investment securities

   arising during the period

 

 

(16,288

)

 

 

7,849

 

Reclassification adjustment for loss on sale of

   securities available-for-sale included in net income

 

 

 

 

 

79

 

Other comprehensive (loss) income before tax

 

 

(16,288

)

 

 

7,928

 

Income tax benefit (expense)

 

 

3,909

 

 

 

(1,903

)

Other comprehensive (loss) income, net of tax

 

 

(12,379

)

 

 

6,025

 

Total comprehensive income (loss)

 

$

27,048

 

 

$

(1,577

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

3


 

 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

For the three months ended March 31, 2021 and 2020 (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 December 31, 2020

 

 

41,344,689

 

 

 

1,107,757

 

 

$

310,619

 

 

$

235,724

 

 

$

21,507

 

 

$

567,850

 

Net income

 

 

 

 

 

 

 

 

 

 

 

39,427

 

 

 

 

 

 

39,427

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,379

)

 

 

(12,379

)

Issuance of restricted stock

 

 

292,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax withholding related to vesting of

   restricted stock and other

 

 

 

 

 

 

 

 

(11,287

)

 

 

 

 

 

 

 

 

(11,287

)

Employee stock purchase program

 

 

5,686

 

 

 

 

 

 

296

 

 

 

 

 

 

 

 

 

296

 

Stock option exercises

 

 

200,996

 

 

 

 

 

 

1,213

 

 

 

 

 

 

 

 

 

1,213

 

Stock option based compensation expense

 

 

 

 

 

 

 

 

344

 

 

 

 

 

 

 

 

 

344

 

Restricted stock expense

 

 

 

 

 

 

 

 

4,670

 

 

 

 

 

 

 

 

 

4,670

 

Non-voting common stock converted to

   voting common stock in private sale

 

 

415,504

 

 

 

(415,504

)

 

 

 

 

 

 

 

 

 

 

 

 

Transfer from retained earnings to other assets

   for pro rata portion of equity method

   investee stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,508

 

 

 

 

 

 

1,508

 

Cash dividends ($0.03 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,282

)

 

 

 

 

 

(1,282

)

Balance at March 31, 2021

 

 

42,259,091

 

 

 

692,253

 

 

$

305,855

 

 

$

275,377

 

 

$

9,128

 

 

$

590,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

37,401,443

 

 

 

2,915,531

 

 

$

340,397

 

 

$

180,265

 

 

$

11,724

 

 

$

532,386

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,602

)

 

 

 

 

 

(7,602

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,025

 

 

 

6,025

 

Issuance of restricted stock

 

 

7,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax withholding related to vesting of

   restricted stock and other

 

 

 

 

 

 

 

 

(48

)

 

 

 

 

 

 

 

 

(48

)

Employee stock purchase program

 

 

25,161

 

 

 

 

 

 

232

 

 

 

 

 

 

 

 

 

232

 

Stock option exercises

 

 

30,642

 

 

 

 

 

 

258

 

 

 

 

 

 

 

 

 

258

 

Stock option based compensation expense

 

 

 

 

 

 

 

 

366

 

 

 

 

 

 

 

 

 

366

 

Restricted stock expense

 

 

 

 

 

 

 

 

2,542

 

 

 

 

 

 

 

 

 

2,542

 

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 ($0.03 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,209

)

 

 

 

 

 

(1,209

)

Balance at March 31, 2020

 

 

37,664,670

 

 

 

2,715,531

 

 

$

343,747

 

 

$

172,276

 

 

$

17,749

 

 

$

533,772

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

4


 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

39,427

 

 

$

(7,602

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,265

 

 

 

5,621

 

(Recovery of) provision for loan and lease credit losses

 

 

(873

)

 

 

11,792

 

Amortization of premium on securities, net of accretion

 

 

1,817

 

 

 

269

 

Deferred tax (benefit) expense

 

 

(3,984

)

 

 

1,264

 

Originations of loans held for sale

 

 

(253,588

)

 

 

(274,678

)

Proceeds from sales of loans held for sale

 

 

182,685

 

 

 

203,340

 

Net gains on sale of loans held for sale

 

 

(11,929

)

 

 

(11,112

)

Net loss on sale of foreclosed assets

 

 

24

 

 

 

49

 

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

 

 

(4,218

)

 

 

10,638

 

Net (increase) decrease in servicing assets

 

 

(3,826

)

 

 

1,833

 

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

 

 

 

 

 

79

 

Net gain on disposal of long-lived asset

 

 

(114

)

 

 

 

Net (gain) loss on disposal of property and equipment

 

 

(48

)

 

 

38

 

Impairment on premises and equipment, net

 

 

904

 

 

 

 

Equity method investments (income) loss

 

 

1,157

 

 

 

2,478

 

Equity security investments (gains) losses, net

 

 

(105

)

 

 

64

 

Renewable energy tax credit investment impairment

 

 

3,127

 

 

 

 

Stock option based compensation expense

 

 

344

 

 

 

366

 

Restricted stock expense

 

 

4,670

 

 

 

2,542

 

Stock based compensation excess tax benefit (shortfall)

 

 

5,152

 

 

 

(34

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Lease right-of-use assets and liabilities, net

 

 

(1

)

 

 

(12

)

Other assets

 

 

855

 

 

 

(31,905

)

Other liabilities

 

 

(5,406

)

 

 

(6,493

)

Net cash used by operating activities

 

 

(38,665

)

 

 

(91,463

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of securities available-for-sale

 

 

(108,223

)

 

 

(52,757

)

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

   securities available-for-sale

 

 

65,039

 

 

 

26,214

 

Proceeds from SBA reimbursement/sale of foreclosed assets

 

 

152

 

 

 

613

 

Loan and lease originations and principal collections, net

 

 

(119,970

)

 

 

(152,616

)

Proceeds from sale of long-lived asset

 

 

8,988

 

 

 

 

Proceeds from sale of premises and equipment

 

 

84

 

 

 

 

Purchases of premises and equipment, net

 

 

(674

)

 

 

(737

)

Net cash used by investing activities

 

 

(154,604

)

 

 

(179,283

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

5


 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the three months ended March 31, 2021 and 2020 (unaudited)

(Dollars in thousands)

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

$

603,176

 

 

$

412,421

 

Proceeds from borrowings

 

 

498,666

 

 

 

50,000

 

Repayment of borrowings

 

 

(580,291

)

 

 

(2

)

Stock option exercises

 

 

1,213

 

 

 

258

 

Employee stock purchase program

 

 

296

 

 

 

232

 

Withholding cash issued in lieu of restricted stock

 

 

(11,287

)

 

 

(48

)

Shareholder dividend distributions

 

 

(1,282

)

 

 

(1,209

)

Net cash provided by financing activities

 

 

510,491

 

 

 

461,652

 

Net increase in cash and cash equivalents

 

 

317,222

 

 

 

190,906

 

Cash and cash equivalents, beginning

 

 

318,320

 

 

 

221,397

 

Cash and cash equivalents, ending

 

$

635,542

 

 

$

412,303

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

18,469

 

 

$

23,858

 

Income tax paid, net

 

 

354

 

 

 

362

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash operating, investing, and financing activities

 

 

 

 

 

 

 

 

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

 

$

(12,379

)

 

$

6,025

 

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

 

 

402

 

 

 

1,764

 

Net transfers between foreclosed real estate and SBA receivable

 

 

196

 

 

 

30

 

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

 

 

176,285

 

 

 

35,233

 

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

 

 

24,260

 

 

 

2,949

 

Transfer from retained earnings to other assets for pro rata portion of equity

   method investee stock compensation expense

 

 

1,508

 

 

 

 

Recording of secured borrowing

 

 

5,493

 

 

 

 

Equity security investment commitments

 

 

1,500

 

 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

6


 

 

 

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 the state of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”).  The Bank was 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 lending and deposit related services to small businesses nationwide. The Bank identifies and extends 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’s ("USDA") Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”) and Business & Industry ("B&I") loan programs.  

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

 

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 Number One, Inc. holds properties foreclosed on by the Bank. 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 its wholly owned subsidiary, Jolley Asset Management, LLC (“JAM”), provide high-net-worth individuals and families with strategic wealth and investment management services.  

 

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.  Canapi provides investment advisory services to a series of funds focused on providing venture capital to new and emerging financial technology companies.

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 has historically elected 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 gain (loss) on loans accounted for under the fair value option line item of the consolidated statements of income.  During the first quarter of 2021, the Company chose not to elect fair value for all retained participating interests arising from new government guaranteed loan sales.  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.  The Company also has less routinely generated gains and losses arising from its financial technology investments in its fintech segment.  

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 three months ended March 31, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2020 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, 2020, filed with the Securities Exchange Commission on February 25, 2021 (SEC File No. 001-37497) (the "2020 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 2020 Annual Report. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2020 Annual Report.

7


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

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

Business Segments

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two significant operating segments: Banking and Fintech, as discussed more fully in Note 12. Segments. In determining the appropriateness of segment definition, the Company considers the criteria of ASC 280, Segment Reporting.

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.

Reclassifications

Certain reclassifications have been made to the prior period’s condensed 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.

 

Note 2. Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies accounting for income taxes by removing specific technical exceptions in ASC 740 related to the incremental approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted the standard on January 1, 2021 with no material effect on its 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 Company adopted the standard on January 1, 2021 with no material effect on its 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.

8


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed 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 share in the net income of the Company.

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

39,427

 

 

$

(7,602

)

Weighted-average basic shares outstanding

 

 

42,673,615

 

 

 

40,334,179

 

Basic earnings (loss) per share

 

$

0.92

 

 

$

(0.19

)

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

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

 

$

39,427

 

 

$

(7,602

)

Total weighted-average basic shares outstanding

 

 

42,673,615

 

 

 

40,334,179

 

Add effect of dilutive stock options and restricted stock grants

 

 

2,023,235

 

 

 

739,870

 

Total weighted-average diluted shares outstanding

 

 

44,696,850

 

 

 

41,074,049

 

Diluted earnings (loss) per share

 

$

0.88

 

 

$

(0.19

)

Anti-dilutive shares

 

 

 

 

 

1,839,601

 

 

On April 6, 2021, 178 thousand restricted stock unit awards with market price conditions vested as the Company's share price satisfied applicable target price criteria.  After net settlement for related tax withholding, the Company issued approximately 99 thousand shares.

9


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 4. Securities

Available-for-Sale

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

 

March 31, 2021

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

US government agencies

 

$

15,442

 

 

$

387

 

 

$

 

 

$

15,829

 

Mortgage-backed securities

 

 

744,462

 

 

 

20,208

 

 

 

8,895

 

 

 

755,775

 

Municipal bonds

 

 

3,262

 

 

 

315

 

 

 

4

 

 

 

3,573

 

Total

 

$

763,166

 

 

$

20,910

 

 

$

8,899

 

 

$

775,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US government agencies

 

$

15,440

 

 

$

479

 

 

$

 

 

$

15,919

 

Mortgage-backed securities

 

 

703,092

 

 

 

28,302

 

 

 

940

 

 

 

730,454

 

Municipal bonds

 

 

3,267

 

 

 

462

 

 

 

4

 

 

 

3,725

 

Total

 

$

721,799

 

 

$

29,243

 

 

$

944

 

 

$

750,098

 

 

During the three months ended March 31, 2021, 2 mortgage-backed securities totaling $6.5 million were paid off.  During the three months ended March 31, 2020, 2 mortgage-backed securities totaling $4.5 million were sold resulting in a net loss of $79 thousand.

Accrued interest receivable on available-for-sale securities totaled $1.9 million and $1.8 million at March 31, 2021 and December 31, 2020, respectively, and is included in other assets in the accompanying Unaudited 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

 

March 31, 2021

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Mortgage-backed securities

 

$

357,905

 

 

$

8,892

 

 

$

650

 

 

$

3

 

 

$

358,555

 

 

$

8,895

 

Municipal bonds

 

 

 

 

 

 

 

 

96

 

 

 

4

 

 

 

96

 

 

 

4

 

Total

 

$

357,905

 

 

$

8,892

 

 

$

746

 

 

$

7

 

 

$

358,651

 

 

$

8,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2020

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Mortgage-backed securities

 

$

156,904

 

 

$

917

 

 

$

1,853

 

 

$

23

 

 

$

158,757

 

 

$

940

 

Municipal bonds

 

 

 

 

 

 

 

 

96

 

 

 

4

 

 

 

96

 

 

 

4

 

Total

 

$

156,904

 

 

$

917

 

 

$

1,949

 

 

$

27

 

 

$

158,853

 

 

$

944

 

 

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 March 31, 2021, there were 2 mortgage-backed securities and 1 municipal bond in unrealized loss positions for greater than 12 months and NaN mortgage-backed securities in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2020 were comprised of 3 mortgage-backed securities and 1 municipal bond in unrealized loss positions for greater than 12 months and NaN mortgage-backed securities in unrealized loss positions for less than 12 months.

10


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 Unaudited Condensed Consolidated Statements of Income.

All mortgage-backed securities in the Company’s portfolio at March 31, 2021 and December 31, 2020 were backed by U.S. government sponsored enterprises (“GSEs”).

The following is a summary of investment securities by maturity:

 

 

 

March 31, 2021

 

 

 

Available-for-Sale

 

 

 

Amortized

cost

 

 

Fair

value

 

US government agencies

 

 

 

 

 

 

 

 

Within one year

 

$

5,000

 

 

$

5,007

 

One to five years

 

 

7,513

 

 

 

7,737

 

Five to ten years

 

 

2,929

 

 

 

3,085

 

Total

 

 

15,442

 

 

 

15,829

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

One to five years

 

 

10,248

 

 

 

10,848

 

Five to ten years

 

 

227,756

 

 

 

237,693

 

After 10 years

 

 

506,458

 

 

 

507,234

 

Total

 

 

744,462

 

 

 

755,775

 

Municipal bonds

 

 

 

 

 

 

 

 

After 10 years

 

 

3,262

 

 

 

3,573

 

Total

 

 

3,262

 

 

 

3,573

 

 

 

 

 

 

 

 

 

 

Total

 

$

763,166

 

 

$

775,177

 

 

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 March 31, 2021 or December 31, 2020.

Other

Other investments, largely comprised of non-marketable equity investments, are generally accounted for under the equity method or equity security accounting.  The below tables provide additional information related to investments accounted for under these two methods.


11


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Equity Method Accounting

The carrying amount and ownership percentage of each equity investment over which the Company has significant influence at March 31, 2021 and December 31, 2020 is reflected in the following table:

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Amount

 

 

Ownership %

 

 

Amount

 

 

Ownership %

 

Apiture, Inc.

 

$

53,927

 

 

 

39.1

%

 

$

53,344

 

 

 

39.1

%

Canapi Ventures SBIC Fund, LP (1) (3)

 

 

15,530

 

 

 

2.9

%

 

 

14,843

 

 

 

3.1

%

Canapi Ventures Fund, LP (2) (3)

 

 

1,780

 

 

 

1.5

%

 

 

1,686

 

 

 

1.5

%

Other fintech investments in private companies (4)

 

 

6,237

 

 

Various

 

 

 

1,634

 

 

Various

 

Other (5)

 

 

3,273

 

 

Various

 

 

 

6,421

 

 

Various

 

Total

 

$

80,747

 

 

 

 

 

 

$

77,928

 

 

 

 

 

 

(1)

Includes unfunded commitments of $9.4 million and $11.3 million as of March 31, 2021 and December 31, 2020, respectively.

(2)

Includes unfunded commitments of $1.0 million as of March 31, 2021 and December 31, 2020.  

(3)

Investee is accounted for under equity method due to the Company's participation as an investment advisor.

(4)

Other fintech investments include Finxact, Inc., Payrailz, Inc. and Kwipped, Inc.

(5)

Includes unfunded commitments of $2.9 million at December 31, 2020.

Equity Security Accounting

The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings for the three months ended March 31, 2021, and on a cumulative basis is reflected in the following table:

 

 

 

As of and for the three month period ended March 31, 2021

 

 

 

 

 

 

 

Amount

 

 

Cumulative Adjustments

 

Carrying value (1)

 

$

32,527

 

 

 

 

 

Carrying value adjustments:

 

 

 

 

 

 

 

 

Impairment

 

 

 

 

$

 

Upward changes for observable prices

 

 

 

 

 

18,272

 

Downward changes for observable prices

 

 

 

 

 

(86

)

Net upward change

 

$

 

 

$

18,186

 

 

(1)

Includes $2.0 million in unfunded commitments.

 


12


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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

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

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

762,178

 

 

$

 

 

$

12,545

 

 

$

12,545

 

 

$

774,723

 

 

$

299,291

 

 

$

1,074,014

 

Specialty Lending

 

 

431,358

 

 

 

 

 

 

 

 

 

 

 

 

431,358

 

 

 

73,751

 

 

 

505,109

 

Paycheck Protection Program

 

 

1,478,995

 

 

 

 

 

 

 

 

 

 

 

 

1,478,995

 

 

 

 

 

 

1,478,995

 

Total

 

 

2,672,531

 

 

 

 

 

 

12,545

 

 

 

12,545

 

 

 

2,685,076

 

 

 

373,042

 

 

 

3,058,118

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

204,996

 

 

 

1,629

 

 

 

 

 

 

1,629

 

 

 

206,625

 

 

 

 

 

 

206,625

 

Specialty Lending

 

 

77,792

 

 

 

 

 

 

3,723

 

 

 

3,723

 

 

 

81,515

 

 

 

 

 

 

81,515

 

Total

 

 

282,788

 

 

 

1,629

 

 

 

3,723

 

 

 

5,352

 

 

 

288,140

 

 

 

 

 

 

288,140

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1,176,005

 

 

 

 

 

 

11,854

 

 

 

11,854

 

 

 

1,187,859

 

 

 

313,466

 

 

 

1,501,325

 

Specialty Lending

 

 

173,531

 

 

 

 

 

 

6,606

 

 

 

6,606

 

 

 

180,137

 

 

 

19,776

 

 

 

199,913

 

Total

 

 

1,349,536

 

 

 

 

 

 

18,460

 

 

 

18,460

 

 

 

1,367,996

 

 

 

333,242

 

 

 

1,701,238

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

346,206

 

 

 

2,325

 

 

 

2,055

 

 

 

4,380

 

 

 

350,586

 

 

 

84,513

 

 

 

435,099

 

Total

 

 

346,206

 

 

 

2,325

 

 

 

2,055

 

 

 

4,380

 

 

 

350,586

 

 

 

84,513

 

 

 

435,099

 

Total

 

$

4,651,061

 

 

$

3,954

 

 

$

36,783

 

 

$

40,737

 

 

$

4,691,798

 

 

$

790,797

 

 

$

5,482,595

 

Net deferred (fees) costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(25,841

)

Loan and Leases, Net of unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,456,754

 

13


 

 

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, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

695,090

 

 

$

10,341

 

 

$

10,765

 

 

$

21,106

 

 

$

716,196

 

 

$

308,341

 

 

$

1,024,537

 

Specialty Lending

 

 

341,952

 

 

 

337

 

 

 

 

 

 

337

 

 

 

342,289

 

 

 

71,090

 

 

 

413,379

 

Paycheck Protection Program

 

 

1,528,180

 

 

 

 

 

 

 

 

 

 

 

 

1,528,180

 

 

 

 

 

 

1,528,180

 

Total

 

 

2,565,222

 

 

 

10,678

 

 

 

10,765

 

 

 

21,443

 

 

 

2,586,665

 

 

 

379,431

 

 

 

2,966,096

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

183,087

 

 

 

 

 

 

 

 

 

 

 

 

183,087

 

 

 

 

 

 

183,087

 

Specialty Lending

 

 

88,890

 

 

 

 

 

 

3,723

 

 

 

3,723

 

 

 

92,613

 

 

 

 

 

 

92,613

 

Total

 

 

271,977

 

 

 

 

 

 

3,723

 

 

 

3,723

 

 

 

275,700

 

 

 

 

 

 

275,700

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

987,358

 

 

 

3,730

 

 

 

8,609

 

 

 

12,339

 

 

 

999,697

 

 

 

321,352

 

 

 

1,321,049

 

Specialty Lending

 

 

148,264

 

 

 

5,374

 

 

 

1,693

 

 

 

7,067

 

 

 

155,331

 

 

 

20,317

 

 

 

175,648

 

Total

 

 

1,135,622

 

 

 

9,104

 

 

 

10,302

 

 

 

19,406

 

 

 

1,155,028

 

 

 

341,669

 

 

 

1,496,697

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

329,638

 

 

 

 

 

 

2,243

 

 

 

2,243

 

 

 

331,881

 

 

 

94,274

 

 

 

426,155

 

Total

 

 

329,638

 

 

 

 

 

 

2,243

 

 

 

2,243

 

 

 

331,881

 

 

 

94,274

 

 

 

426,155

 

Total

 

$

4,302,459

 

 

$

19,782

 

 

$

27,033

 

 

$

46,815

 

 

$

4,349,274

 

 

$

815,374

 

 

$

5,164,648

 

Net deferred (fees) costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(19,718

)

Loan and Leases, Net of unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,144,930

 

 

(1)

Total loans and leases include $2.75 billion of U.S. government guaranteed loans as of March 31, 2021, of which $19.2 million is 90 days or more past due, $1.2 million is past due 30-89 days and $2.73 billion are current.  Total loans and leases include $2.61 billion of U.S. government guaranteed loans as of December 31, 2020, of which $12.9 million is 90 days or more past due, $16.7 million is past due 30-89 days and $2.58 billion 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.

 

14


 

 

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 2020 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving Loans Amortized Cost Basis

 

 

Revolving Loans Converted to Term

 

 

Total1,2

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

$

174,311

 

 

$

799,012

 

 

$

491,138

 

 

$

277,191

 

 

$

242,859

 

 

$

198,955

 

 

$

36,619

 

 

$

1,794

 

 

$

2,221,879

 

   Risk Grade 5

 

 

 

 

 

19,387

 

 

 

76,377

 

 

 

70,633

 

 

 

42,121

 

 

 

14,779

 

 

 

1,682

 

 

 

434

 

 

 

225,413

 

   Risk Grades 6 - 8

 

 

 

 

 

92

 

 

 

13,899

 

 

 

14,572

 

 

 

23,664

 

 

 

19,073

 

 

 

1,002

 

 

 

199

 

 

 

72,501

 

Total

 

 

174,311

 

 

 

818,491

 

 

 

581,414

 

 

 

362,396

 

 

 

308,644

 

 

 

232,807

 

 

 

39,303

 

 

 

2,427

 

 

 

2,519,793

 

Specialty Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

118,627

 

 

 

295,067

 

 

 

95,893

 

 

 

44,784

 

 

 

41,547

 

 

 

 

 

 

52,833

 

 

 

929

 

 

 

649,680

 

   Risk Grade 5

 

 

250

 

 

 

7,674

 

 

 

6,832

 

 

 

967

 

 

 

11,368

 

 

 

 

 

 

2,160

 

 

 

 

 

 

29,251

 

   Risk Grades 6 - 8

 

 

 

 

 

 

 

 

 

 

 

8,636

 

 

 

 

 

 

5,307

 

 

 

136

 

 

 

 

 

 

14,079

 

Total

 

 

118,877

 

 

 

302,741

 

 

 

102,725

 

 

 

54,387

 

 

 

52,915

 

 

 

5,307

 

 

 

55,129

 

 

 

929

 

 

 

693,010

 

Paycheck Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

507,428

 

 

 

971,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,478,995

 

   Risk Grade 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 6 - 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

507,428

 

 

 

971,567

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,478,995

 

Total

 

$

800,616

 

 

$

2,092,799

 

 

$

684,139

 

 

$

416,783

 

 

$

361,559

 

 

$

238,114

 

 

$

94,432

 

 

$

3,356

 

 

$

4,691,798

 

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Revolving Loans Amortized Cost Basis

 

 

Revolving Loans Converted to Term

 

 

Total1,2

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

$

724,506

 

 

$

475,593

 

 

$

287,712

 

 

$

230,653

 

 

$

159,877

 

 

$

59,065

 

 

$

32,373

 

 

$

1,392

 

 

$

1,971,171

 

   Risk Grade 5

 

 

16,080

 

 

 

59,595

 

 

 

62,857

 

 

 

44,478

 

 

 

11,203

 

 

 

3,666

 

 

 

2,131

 

 

 

212

 

 

 

200,222

 

   Risk Grades 6 - 8

 

 

81

 

 

 

8,976

 

 

 

14,639

 

 

 

15,090

 

 

 

11,424

 

 

 

8,418

 

 

 

631

 

 

 

209

 

 

 

59,468

 

Total

 

 

740,667

 

 

 

544,164

 

 

 

365,208

 

 

 

290,221

 

 

 

182,504

 

 

 

71,149

 

 

 

35,135

 

 

 

1,813

 

 

 

2,230,861

 

Specialty Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

296,537

 

 

 

96,553

 

 

 

48,930

 

 

 

40,626

 

 

 

 

 

 

 

 

 

55,229

 

 

 

632

 

 

 

538,507

 

   Risk Grade 5

 

 

7,672

 

 

 

6,379

 

 

 

2,752

 

 

 

18,718

 

 

 

 

 

 

 

 

 

1,711

 

 

 

 

 

 

37,232

 

   Risk Grades 6 - 8

 

 

 

 

 

 

 

 

8,635

 

 

 

 

 

 

5,782

 

 

 

 

 

 

77

 

 

 

 

 

 

14,494

 

Total

 

 

304,209

 

 

 

102,932

 

 

 

60,317

 

 

 

59,344

 

 

 

5,782

 

 

 

 

 

 

57,017

 

 

 

632

 

 

 

590,233

 

Paycheck Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

1,528,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,528,180

 

   Risk Grade 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 6 - 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,528,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,528,180

 

Total

 

$

2,573,056

 

 

$

647,096

 

 

$

425,525

 

 

$

349,565

 

 

$

188,286

 

 

$

71,149

 

 

$

92,152

 

 

$

2,445

 

 

$

4,349,274

 

 

15


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

(1)

Total loans and leases include $2.75 billion of U.S. government guaranteed loans as of March 31, 2021, segregated by risk grade as follows: Risk Grades 1 – 4 = $2.57 billion, Risk Grade 5 = $141.1 million, Risk Grades 6 – 8 = $47.6 million. As of December 31, 2020, total loans and leases include $2.61 billion of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $2.44 billion, Risk Grade 5 = $128.0 million, Risk Grades 6 – 8 = $40.9 million. Total loans and leases exclude loans accounted for under the fair value option.

(2)

Excludes $790.8 million and $815.4 million of loans accounted for under the fair value option as of March 31, 2021 and December 31, 2020, respectively.    

Nonaccrual Loans and Leases

As of March 31, 2021 and December 31, 2020 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 months ended March 31, 2021 and 2020. Nonaccrual loans and leases are generally included in the held for investment portfolio. Accrued interest receivable on loans totaled $38.1 million and $41.0 million at March 31, 2021 and December 31, 2020, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

Nonaccrual loans and leases held for investment as of March 31, 2021 and December 31, 2020 are as follows:

 

March 31, 2021

 

Loan and Lease

Balance1

 

 

Guaranteed

Balance

 

 

Unguaranteed Balance

 

 

Unguaranteed

Exposure with No ACL

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

23,249

 

 

$

15,612

 

 

$

7,637

 

 

$

271

 

Total

 

 

23,249

 

 

 

15,612

 

 

 

7,637

 

 

 

271

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Lending

 

 

3,723

 

 

 

 

 

 

3,723

 

 

 

3,723

 

Total

 

 

3,723

 

 

 

 

 

 

3,723

 

 

 

3,723

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

21,738

 

 

 

10,409

 

 

 

11,329

 

 

 

6,054

 

Specialty Lending

 

 

6,606

 

 

 

5,071

 

 

 

1,535

 

 

 

1,228

 

Total

 

 

28,344

 

 

 

15,480

 

 

 

12,864

 

 

 

7,282

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

2,055

 

 

 

1,541

 

 

 

514

 

 

 

 

Total

 

 

2,055

 

 

 

1,541

 

 

 

514

 

 

 

 

Total

 

$

57,371

 

 

$

32,633

 

 

$

24,738

 

 

$

11,276

 

 

 

December 31, 2020

 

Loan and Lease

Balance1

 

 

Guaranteed

Balance

 

 

Unguaranteed Balance

 

 

Unguaranteed

Exposure with No ACL

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

17,992

 

 

$

12,046

 

 

$

5,946

 

 

$

 

Total

 

 

17,992

 

 

 

12,046

 

 

 

5,946

 

 

 

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Lending

 

 

3,723

 

 

 

 

 

 

3,723

 

 

 

3,723

 

Total

 

 

3,723

 

 

 

 

 

 

3,723

 

 

 

3,723

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

15,085

 

 

 

6,725

 

 

 

8,360

 

 

 

5,327

 

Specialty Lending

 

 

7,068

 

 

 

5,533

 

 

 

1,535

 

 

 

 

Total

 

 

22,153

 

 

 

12,258

 

 

 

9,895

 

 

 

5,327

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

2,242

 

 

 

1,728

 

 

 

514

 

 

 

 

Total

 

 

2,242

 

 

 

1,728

 

 

 

514

 

 

 

 

Total

 

$

46,110

 

 

$

26,032

 

 

$

20,078

 

 

$

9,050

 

16


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

(1)

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

 

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 March 31, 2021 and December 31, 2020:

 

 

 

Total Collateral Dependent Loans

 

 

Unguaranteed Portion

 

March 31, 2021

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Allowance for Credit Losses

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

2,779

 

 

$

4,010

 

 

$

1,615

 

 

$

2,031

 

 

$

120

 

 

$

338

 

 

$

495

 

Total

 

 

2,779

 

 

 

4,010

 

 

 

1,615

 

 

 

2,031

 

 

 

120

 

 

 

338

 

 

 

495

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Lending

 

 

3,767

 

 

 

 

 

 

 

 

 

3,767

 

 

 

 

 

 

 

 

 

 

Total

 

 

3,767

 

 

 

 

 

 

 

 

 

3,767

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

18,800

 

 

 

251

 

 

 

330

 

 

 

10,407

 

 

 

9

 

 

 

338

 

 

 

296

 

Specialty Lending

 

 

6,617

 

 

 

 

 

 

 

 

 

1,546

 

 

 

 

 

 

 

 

 

23

 

Total

 

 

25,417

 

 

 

251

 

 

 

330

 

 

 

11,953

 

 

 

9

 

 

 

338

 

 

 

319

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

2,075

 

 

 

 

 

 

 

 

 

534

 

 

 

 

 

 

 

 

 

309

 

Total

 

 

2,075

 

 

 

 

 

 

 

 

 

534

 

 

 

 

 

 

 

 

 

309

 

Total

 

$

34,038

 

 

$

4,261

 

 

$

1,945

 

 

$

18,285

 

 

$

129

 

 

$

676

 

 

$

1,123

 

 

 

 

Total Collateral Dependent Loans

 

 

Unguaranteed Portion

 

December 31, 2020

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Allowance for Credit Losses

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

1,279

 

 

$

9,440

 

 

$

197

 

 

$

531

 

 

$

4,077

 

 

$

66

 

 

$

1,281

 

Total

 

 

1,279

 

 

 

9,440

 

 

 

197

 

 

 

531

 

 

 

4,077

 

 

 

66

 

 

 

1,281

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Lending

 

 

3,767

 

 

 

 

 

 

 

 

 

3,767

 

 

 

 

 

 

 

 

 

 

Total

 

 

3,767

 

 

 

 

 

 

 

 

 

3,767

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

11,568

 

 

 

258

 

 

 

332

 

 

 

6,873

 

 

 

9

 

 

 

335

 

 

 

175

 

Specialty Lending

 

 

13,196

 

 

 

 

 

 

 

 

 

7,663

 

 

 

 

 

 

 

 

 

23

 

Total

 

 

24,764

 

 

 

258

 

 

 

332

 

 

 

14,536

 

 

 

9

 

 

 

335

 

 

 

198

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

2,263

 

 

 

 

 

 

 

 

 

534

 

 

 

 

 

 

 

 

 

302

 

Total

 

 

2,263

 

 

 

 

 

 

 

 

 

534

 

 

 

 

 

 

 

 

 

302

 

Total

 

$

32,073

 

 

$

9,698

 

 

$

529

 

 

$

19,368

 

 

$

4,086

 

 

$

401

 

 

$

1,781

 

 


17


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Allowance for Credit Losses - Loans and Leases

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

 

Three Months Ended

 

Commercial

& Industrial

 

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

Land

 

 

Total

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

26,941

 

 

$

5,663

 

 

$

18,148

 

 

$

1,554

 

 

$

52,306

 

Charge offs

 

 

(152

)

 

 

 

 

 

(517

)

 

 

(12

)

 

 

(681

)

Recoveries

 

 

9

 

 

 

 

 

 

1,656

 

 

 

 

 

 

1,665

 

Provision

 

 

(221

)

 

 

224

 

 

 

(641

)

 

 

(235

)

 

 

(873

)

Ending Balance

 

$

26,577

 

 

$

5,887

 

 

$

18,646

 

 

$

1,307

 

 

$

52,417

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance, prior to adoption of ASC 326

 

$

15,757

 

 

$

2,732

 

 

$

8,427

 

 

$

1,318

 

 

$

28,234

 

Impact of adopting ASC 326

 

 

(4,561

)

 

 

1,131

 

 

 

1,916

 

 

 

193

 

 

 

(1,321

)

Charge offs

 

 

(2,345

)

 

 

 

 

 

(109

)

 

 

(408

)

 

 

(2,862

)

Recoveries

 

 

35

 

 

 

 

 

 

28

 

 

 

 

 

 

63

 

Provision

 

 

7,451

 

 

 

960

 

 

 

2,848

 

 

 

533

 

 

 

11,792

 

Ending Balance

 

$

16,337

 

 

$

4,823

 

 

$

13,110

 

 

$

1,636

 

 

$

35,906

 

 

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

 

 

Three Months Ended March 31, 2021

 

 

 

Interest Only

 

 

Payment Deferral

 

 

Extend Amortization

 

 

Other(1)

 

 

Total TDRs(2)

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

$

 

 

 

1

 

 

$

3,269

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

1

 

 

$

3,269

 

Total

 

 

 

 

 

 

 

 

1

 

 

 

3,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

3,269

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

1

 

 

 

629

 

 

 

 

 

 

 

 

 

1

 

 

 

3,141

 

 

 

2

 

 

 

3,770

 

Total

 

 

 

 

 

 

 

 

1

 

 

 

629

 

 

 

 

 

 

 

 

 

1

 

 

 

3,141

 

 

 

2

 

 

 

3,770

 

Total

 

 

 

 

$

 

 

 

2

 

 

$

3,898

 

 

 

 

 

$

 

 

 

1

 

 

$

3,141

 

 

 

3

 

 

$

7,039

 

 

(1)

Includes one small business banking with extend amortization and a rate concession TDR.

(2)

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


18


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

Interest Only

 

 

Payment Deferral

 

 

Extend Amortization

 

 

Other

 

 

Total TDRs(1)

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

$

 

 

 

2

 

 

$

1,487

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

2

 

 

$

1,487

 

Specialty Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

973

 

 

 

 

 

 

 

 

 

1

 

 

 

973

 

Total

 

 

 

 

 

 

 

 

2

 

 

 

1,487

 

 

 

1

 

 

 

973

 

 

 

 

 

 

 

 

 

3

 

 

 

2,460

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

1

 

 

 

3,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

3,589

 

Total

 

 

 

 

 

 

 

 

1

 

 

 

3,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

3,589

 

Total

 

 

 

 

$

 

 

 

3

 

 

$

5,076

 

 

 

1

 

 

$

973

 

 

 

 

 

$

 

 

 

4

 

 

$

6,049

 

(1)

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

NaN TDR that was modified within the twelve months ended March 31, 2021 subsequently defaulted during the three months ended March 31, 2021. The TDR that defaulted was a Commercial Real Estate Small Business Banking loan that had previously been modified for a payment deferral and had a recorded investment of $629 thousand at March 31, 2021. NaN TDRs that were modified within the twelve months ended March 31, 2020 subsequently defaulted during the three months ended   March 31, 2020.  

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:

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Gross direct finance lease payments receivable

 

$

9,741

 

 

$

10,629

 

Less – unearned interest

 

 

(1,492

)

 

 

(1,685

)

Net investment in direct financing leases

 

$

8,249

 

 

$

8,944

 

 

Future minimum lease payments under finance leases are as follows:

 

As of March 31, 2021

 

Amount

 

2021

 

$

2,149

 

2022

 

 

2,620

 

2023

 

 

2,182

 

2024

 

 

1,570

 

2025

 

 

1,104

 

Thereafter

 

 

116

 

Total

 

$

9,741

 

19


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Interest income of $186 thousand and $233 thousand was recognized in the three months ended March 31, 2021 and 2020, 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.

As of March 31, 2021 and December 31, 2020, the Company had a net investment of $131.2 million and $134.5 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $163.4 million and $164.3 million as of March 31, 2021 and December 31, 2020 and accumulated depreciation was $32.2 million and $29.8 million as of March 31, 2021 and December 31, 2020, respectively. Depreciation expense recognized on these assets for the three months ended March 31, 2021 and 2020 was $2.4 million.  

 

Lease income of $2.4 million was recognized in the three months ended March 31, 2021 and 2020, respectively.  

 

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

 

As of March 31, 2021

 

Amount

 

2021

 

$

7,083

 

2022

 

 

9,044

 

2023

 

 

9,075

 

2024

 

 

8,808

 

2025

 

 

8,935

 

Thereafter

 

 

31,175

 

Total

 

$

74,120

 

 


20


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $2.24 billion and $2.21 billion at March 31, 2021 and December 31, 2020, respectively. The unpaid principal balance for all loans serviced for others was $3.22 billion and $3.21 billion at March 31, 2021 and December 31, 2020, respectively.

The following summarizes the activity pertaining to servicing rights:

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Balance at beginning of period

 

$

33,918

 

 

$

35,365

 

Additions, net

 

 

2,333

 

 

 

2,859

 

Fair value changes:

 

 

 

 

 

 

 

 

Due to changes in valuation inputs or assumptions

 

 

2,946

 

 

 

(2,039

)

Decay due to increases in principal paydowns or runoff

 

 

(1,453

)

 

 

(2,653

)

Balance at end of period

 

$

37,744

 

 

$

33,532

 

 

The fair value of servicing rights was determined using a weighted average discount rate of 8.8% on March 31, 2021 and 13.0% on March 31, 2020. The fair value of servicing rights was determined using a weighted average prepayment speed of 18.6% on March 31, 2021 and 17.9% on March 31, 2020, with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the Unaudited Condensed 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.

21


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 8. Borrowings

Total outstanding borrowings consisted of the following:

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Borrowings

 

 

 

 

 

 

 

 

In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank.  The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026.  The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan.

 

$

49,675

 

 

$

 

In September 2020, the Company renewed a $50.0 million revolving line of credit originally issued in 2017 with a third party correspondent bank.  The line of credit was unsecured and accrued interest at 30-day LIBOR plus 1.15% for a term of 13 months.  Payments were interest only with all principal and accrued interest due on October 10, 2021.  On March 31, 2021 the remaining outstanding balance of $14.5 million was paid in full and the revolving line was closed.  NaN available credit remains at March 31, 2021.

 

 

 

 

 

14,488

 

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 March 20, 2026, 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 $1.41 billion borrowing was fully advanced at March 31, 2021.

 

 

1,410,785

 

 

 

1,527,596

 

Other long term debt(1)

 

 

5,501

 

 

 

9

 

Total borrowings

 

$

1,465,961

 

 

$

1,542,093

 

 

(1)

Includes finance leases and loan participations accounted for as secured borrowings.

 

The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $167.5 million as of March 31, 2021 and December 31, 2020. 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 March 31, 2021 and December 31, 2020.

The Company has entered into a repurchase agreement with a third party for $5.0 million as of March 31, 2021 and December 31, 2020.  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 March 31, 2021 and December 31, 2020.

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 March 31, 2021 and December 31, 2020, the Company had approximately $1.96 billion and $2.01 billion, respectively, in borrowing capacity available under these agreements.  There is no collateral pledged and no advances outstanding as of March 31, 2021 and December 31, 2020.

22


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 $2.23 billion and $2.22 billion as of March 31, 2021 and December 31, 2020, respectively.  At March 31, 2021 and December 31, 2020, the Company had approximately $1.79 billion and $1.77 billion, respectively, in borrowing capacity available under these arrangements with 0 outstanding balance as of March 31, 2021 and December 31, 2020.

 

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. Due to the nature of the valuation inputs, loans held for sale are classified within Level 3 of the valuation hierarchy.

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. Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy.

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 below 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.

23


 

 

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 of 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.

 

March 31, 2021

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US government agencies

 

$

15,829

 

 

$

0

 

 

$

15,829

 

 

$

0

 

Mortgage-backed securities

 

 

755,775

 

 

 

0

 

 

 

755,775

 

 

 

0

 

Municipal bonds1

 

 

3,573

 

 

 

0

 

 

 

3,477

 

 

 

96

 

Loans held for sale

 

 

35,936

 

 

 

 

 

 

 

 

 

35,936

 

Loans held for investment

 

 

790,797

 

 

 

 

 

 

 

 

 

790,797

 

Servicing assets2

 

 

37,744

 

 

 

0

 

 

 

0

 

 

 

37,744

 

Mutual fund

 

 

2,331

 

 

 

0

 

 

 

2,331

 

 

 

0

 

Equity warrant assets3

 

 

1,314

 

 

 

0

 

 

 

0

 

 

 

1,314

 

Total assets at fair value

 

$

1,643,299

 

 

$

0

 

 

$

777,412

 

 

$

865,887

 

 

December 31, 2020

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US government agencies

 

$

15,919

 

 

$

0

 

 

$

15,919

 

 

$

0

 

Mortgage-backed securities

 

 

730,454

 

 

 

0

 

 

 

730,454

 

 

 

0

 

Municipal bonds1

 

 

3,725

 

 

 

0

 

 

 

3,629

 

 

 

96

 

Loans held for sale

 

 

36,111

 

 

 

 

 

 

 

 

 

36,111

 

Loans held for investment

 

 

815,374

 

 

 

 

 

 

 

 

 

815,374

 

Servicing assets2

 

 

33,918

 

 

 

0

 

 

 

0

 

 

 

33,918

 

Mutual fund

 

 

2,351

 

 

 

0

 

 

 

2,351

 

 

 

0

 

Equity warrant assets3

 

 

908

 

 

 

0

 

 

 

0

 

 

 

908

 

Total assets at fair value

 

$

1,638,760

 

 

$

0

 

 

$

752,353

 

 

$

886,407

 

 

(1)

During the three months ended March 31, 2021, the Company recorded 0 fair value adjustment gain/loss. During the three months ended March 31, 2020, the Company recorded a fair value adjustment gain of $1 thousand.

(2)

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

(3)

During the three months ended March 31, 2021, the Company entered into equity warrant assets with a fair value of $21 thousand at the time of issuance and recorded net gains on derivative instruments of $385 thousand. During the three months ended March 31, 2020, the Company entered into equity warrant assets with a fair value of $164 thousand at the time of issuance and recorded net losses on derivative instruments of $32 thousand.

Fair Value Option

Prior to January 1, 2021, the Company elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income on loans accounted for under the fair value option is recognized in loans and fees on loans on the Company’s Unaudited Condensed 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 March 31, 2021 or December 31, 2020. The unpaid principal balance of unguaranteed exposure for nonaccruals was $7.4 million and $6.9 million at March 31, 2021 and December 31, 2020, respectively.

24


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 March 31, 2021 and December 31, 2020.

 

 

March 31, 2021

 

 

 

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

 

$

35,936

 

 

$

37,923

 

 

$

(1,987

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Loans held for investment

 

 

790,797

 

 

 

814,729

 

 

 

(23,932

)

 

 

40,234

 

 

 

43,973

 

 

 

(3,739

)

 

 

26,249

 

 

 

29,089

 

 

 

(2,840

)

 

 

$

826,733

 

 

$

852,652

 

 

$

(25,919

)

 

$

40,234

 

 

$

43,973

 

 

$

(3,739

)

 

$

26,249

 

 

$

29,089

 

 

$

(2,840

)

 

 

 

December 31, 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

 

$

36,111

 

 

$

38,135

 

 

$

(2,024

)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Loans held for investment

 

 

815,374

 

 

 

845,082

 

 

 

(29,708

)

 

 

35,499

 

 

 

39,318

 

 

 

(3,819

)

 

 

25,532

 

 

 

28,741

 

 

 

(3,209

)

 

 

$

851,485

 

 

$

883,217

 

 

$

(31,732

)

 

$

35,499

 

 

$

39,318

 

 

$

(3,819

)

 

$

25,532

 

 

$

28,741

 

 

$

(3,209

)

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

 

 

 

Three Months Ended March 31,

 

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

   Option

 

2021

 

 

2020

 

Loans held for sale

 

$

36

 

 

$

120

 

Loans held for investment

 

 

4,182

 

 

 

(10,758

)

 

 

$

4,218

 

 

$

(10,638

)

Gains/(Losses) related to borrower-specific credit risk were $191 thousand for the three months ended March 31, 2021 and $(922) thousand for the three months ended March 31, 2020.

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

 

 

 

Three Months Ended March 31,

 

Loans held for sale

 

2021

 

 

2020

 

Balance at beginning of period

 

$

36,111

 

 

$

16,198

 

Issuances & repurchases

 

 

 

 

 

3,045

 

Fair value changes

 

 

36

 

 

 

120

 

Sales

 

 

 

 

 

 

Settlements

 

 

(211

)

 

 

(212

)

Balance at end of period

 

$

35,936

 

 

$

19,151

 

 

 

 

Three Months Ended March 31,

 

Loans held for investment

 

2021

 

 

2020

 

Balance at beginning of period

 

$

815,374

 

 

$

824,520

 

Issuances & repurchases

 

 

5,570

 

 

 

61,611

 

Fair value changes

 

 

4,184

 

 

 

(10,758

)

Settlements

 

 

(34,331

)

 

 

(43,947

)

Balance at end of period

 

$

790,797

 

 

$

831,426

 

25


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

In the first quarter of 2021 the Company chose not to elect the fair value for all retained participating interests arising from new government guaranteed loan sales. Not electing fair value generally result in a larger discount being recorded on the date of the sale. This discount will subsequently be accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with accounting standards, any loans for which fair value was previously elected will continue to be measured as such.

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. Loans with agreed upon sales prices are classified as Level 1.

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.

Long-lived asset held for sale: Long-lived assets held for sale are carried at the lower of carrying value or fair value less selling costs. Fair value is based upon an independent market valuation of the property. Given the lack of observable market prices for identical assets and market discounts applied to market prices, the Company generally classifies long-lived assets held for sale as nonrecurring Level 3.

Equity security investments with a non-readily determinable fair value: Equity security investments are 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 for an identical investment of the same issuer, the investment is generally classified as nonrecurring Level 1 within the valuation hierarchy. When an observable price change in an orderly transaction occurs for a similar investment of the same issuer, the investment is generally classified as nonrecurring Level 2 within the valuation hierarchy.

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

 

March 31, 2021

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Collateral dependent loans

 

$

6,935

 

 

$

 

 

$

 

 

$

6,935

 

Foreclosed assets

 

 

4,185

 

 

 

 

 

 

 

 

 

4,185

 

Total assets at fair value

 

$

11,120

 

 

$

 

 

$

 

 

$

11,120

 

 

December 31, 2020

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Collateral dependent loans

 

$

4,159

 

 

$

 

 

$

 

 

$

4,159

 

Foreclosed assets

 

 

4,155

 

 

 

 

 

 

 

 

 

4,155

 

Long-lived asset held for sale

 

 

8,874

 

 

 

8,874

 

 

 

 

 

 

 

Equity security investment with a non-readily

   determinable fair value

 

 

25,367

 

 

 

 

 

 

25,367

 

 

 

 

Total assets at fair value

 

$

42,555

 

 

$

8,874

 

 

$

25,367

 

 

$

8,314

 

 

26


 

 

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 March 31, 2021 and December 31, 2020 the significant unobservable inputs used in the fair value measurements were as follows:

March 31, 2021

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Recurring fair value

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

$

96

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.5%

5.0%

Loans held for sale

 

$

35,936

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

0.8% to 17.4%

WAVG 19.0%

Loans held for

   investment

 

$

790,797

 

 

Discounted expected cash flows

Discounted appraisals

 

Loss rate

Discount rate

Prepayment speed

Appraisal adjustments

 

0.0% to 76.3% (WAVG 1.2%)

0.8% to 17.4%

WAVG 19.0%

10.0% to 65.0%

Equity warrant assets

 

$

1,314

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

26.6% to 89.4%

0.92% to 1.74%

20.0%

4-10 years

Non-recurring fair value

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   loans

 

$

6,935

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 65.0%

Foreclosed assets

 

$

4,185

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

7.5% to 10.0%

December 31, 2020

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Recurring fair value

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

$

96

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.3%

5.0%

Loans held for sale

 

$

36,111

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.2% to 18.5%

WAVG 19.0%

Loans held for

   investment

 

$

815,374

 

 

Discounted expected cash flows

Discounted appraisals

 

Loss rate

Discount rate

Prepayment speed

Appraisal adjustments

 

0.0% to 73.2% (WAVG 1.5%)

4.2% to 18.5%

WAVG 19.0%

10.0% to 83.0%

Equity warrant assets

 

$

908

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

26.5-87.1%

0.36% to 0.93%

20.0%

5-10 years

Non-recurring fair value

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   loans

 

$

4,159

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 83.0%

Foreclosed assets

 

$

4,155

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 20.0%

 

(1)

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

27


 

 

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:

 

March 31, 2021

 

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

 

$

630,081

 

 

$

630,081

 

 

$

 

 

$

 

 

$

630,081

 

Federal funds sold

 

 

5,461

 

 

 

5,461

 

 

 

 

 

 

 

 

 

5,461

 

Certificates of deposit with other banks

 

 

6,500

 

 

 

6,839

 

 

 

 

 

 

 

 

 

6,839

 

Loans held for sale

 

 

1,040,805

 

 

 

 

 

 

 

 

 

1,136,156

 

 

 

1,136,156

 

Loans and leases, net of allowance for

   credit losses on loans and leases

 

 

4,613,540

 

 

 

 

 

 

 

 

 

4,722,518

 

 

 

4,722,518

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

6,316,004

 

 

 

 

 

 

6,227,312

 

 

 

 

 

 

6,227,312

 

Borrowings

 

 

1,465,961

 

 

 

 

 

 

 

 

 

1,451,459

 

 

 

1,451,459

 

 

December 31, 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

 

$

297,167

 

 

$

297,167

 

 

$

 

 

$

 

 

$

297,167

 

Federal funds sold

 

 

21,153

 

 

 

21,153

 

 

 

 

 

 

 

 

 

21,153

 

Certificates of deposit with other banks

 

 

6,500

 

 

 

6,906

 

 

 

 

 

 

 

 

 

6,906

 

Loans held for sale

 

 

1,139,359

 

 

 

 

 

 

 

 

 

1,235,122

 

 

 

1,235,122

 

Loans and leases, net of allowance for

   credit losses on loans and leases

 

 

4,277,250

 

 

 

 

 

 

 

 

 

4,366,489

 

 

 

4,366,489

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

5,712,828

 

 

 

 

 

 

5,711,781

 

 

 

 

 

 

5,711,781

 

Borrowings

 

 

1,542,093

 

 

 

 

 

 

 

 

 

1,542,171

 

 

 

1,542,171

 

 

28


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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.

On March 12, 2021, a purported class action was filed against the Company in the United States District Court for the Eastern District of North Carolina, Joseph McAlear, individually and on behalf of all others similarly situated v. Live Oak Bancshares, Inc. et al.  The complaint alleges the existence of an agreement between the Company, nCino, Inc. and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees.  The complaint alleges violations of Section 1 of the federal Sherman Act (15 U.S.C. § 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes.  The plaintiff seeks monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest.  Given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, class certification and success on the merits, we cannot estimate the reasonably possible loss or range of loss that may result from this action.

Financial Instruments with Off-balance-sheet Risk

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

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

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Commitments to extend credit

 

$

2,526,132

 

 

$

2,054,910

 

Standby letters of credit

 

 

5,929

 

 

 

22,913

 

Total unfunded off-balance-sheet credit risk

 

$

2,532,061

 

 

$

2,077,823

 

 

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. Commitment letters are issued after approval of the loan by the Credit Department and generally expire ninety days after issuance.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.

As of March 31, 2021 and December 31, 2020, the Company had unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $12.4 million and $15.8 million, respectively. 

29


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 $15.0 million, except for 14 relationships that have a retained unguaranteed exposure of $321.2 million of which $132.2 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling $74.1 million, of which $22.4 million is due from one relationship.

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

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 may have 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 months ended March 31, 2021.

At March 31, 2021, unrecognized compensation costs relating to stock options amounted to $1.9 million which will be recognized over a weighted average period of 1.42 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.

For the quarter ended March 31, 2021, 397,500 Market RSUs met the performance stock price conditions for the $45.00, $48.00, and $50.00 stock price for twenty (20) consecutive trading days.  The remaining expense of $2.1 million was fully recognized due to the accelerated vesting.  The weighted average grant date fair value for the 397,500 vested Market RSUs was $7.89.

Remaining Market RSUs at March 31, 2021 have a restriction based on the passage of time, but also have a restriction based on market price criteria related to the Company’s share price closing at $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.

30


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

For the three months ended March 31, 2021, 792,893 RSUs were granted with a weighted average grant date fair value of $50.66. Of the RSUs granted in the three month period, 288,680 were awarded in connection with annual long term incentive stock compensation and 500,000 were awarded as a special retention RSU award.

At March 31, 2021, unrecognized compensation costs relating to RSUs amounted to $51.6 million which will be recognized over a weighted average period of 5.18 years.

There were 0 Market RSUs granted during the three months ended March 31, 2021.

At March 31, 2021, unrecognized compensation costs relating to Market RSUs amounted to $1.1 million which will be recognized over a weighted average period of 0.02 years.

Note 12. Segments

 

The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time to time.  Accordingly, the Company operates 2 reportable segments for management reporting purposes as discussed below:

 

Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans.

 

Fintech - This segment is involved in making strategic investments into emerging financial technology companies.  The primary sources of revenue for this segment are principally gains and losses on equity method and equity security investments and management fees.  The Fintech segment is comprised of the Company's wholly owned subsidiaries Live Oak Ventures, Canapi and the Bank's investment in Apiture.

 

The following tables provide financial information for the Company's segments. The information provided under the caption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company, other non-bank subsidiaries and elimination adjustments to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP.

 

 

Banking

 

 

Fintech

 

 

Other

 

 

Consolidated

 

Three months ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

88,099

 

 

$

122

 

 

$

4

 

 

$

88,225

 

Interest expense

 

18,165

 

 

 

 

 

 

110

 

 

 

18,275

 

Net interest income

 

69,934

 

 

 

122

 

 

 

(106

)

 

 

69,950

 

(Recovery of) provision for loan and lease credit

   losses

 

(873

)

 

 

 

 

 

 

 

 

(873

)

Noninterest income

 

30,524

 

 

 

(4

)

 

 

537

 

 

 

31,057

 

Noninterest expense

 

55,625

 

 

 

1,020

 

 

 

1,627

 

 

 

58,272

 

Income tax expense (benefit)

 

4,650

 

 

 

5

 

 

 

(474

)

 

 

4,181

 

Net income (loss)

$

41,056

 

 

$

(907

)

 

$

(722

)

 

$

39,427

 

Total assets

$

8,281,729

 

 

$

91,662

 

 

$

44,484

 

 

$

8,417,875

 

Three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

63,448

 

 

$

 

 

$

25

 

 

$

63,473

 

Interest expense

 

23,255

 

 

 

 

 

 

57

 

 

 

23,312

 

Net interest income

 

40,193

 

 

 

 

 

 

(32

)

 

 

40,161

 

Provision for loan and lease credit losses

 

11,792

 

 

 

 

 

 

 

 

 

11,792

 

Noninterest income

 

5,964

 

 

 

(880

)

 

 

658

 

 

 

5,742

 

Noninterest expense

 

46,687

 

 

 

1,490

 

 

 

1,314

 

 

 

49,491

 

Income tax benefit

 

(4,170

)

 

 

(244

)

 

 

(3,364

)

 

 

(7,778

)

Net (loss) income

$

(8,152

)

 

$

(2,126

)

 

$

2,676

 

 

$

(7,602

)

Total assets

$

5,133,447

 

 

$

84,366

 

 

$

55,756

 

 

$

5,273,569

 

31


 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Note 13. Subsequent Event

On April 27, 2021, the Company’s equity security investee, Greenlight Financial Technology, Inc. (“Greenlight”), announced the close of $260.0 million in newly issued shares in an orderly transaction.  As a result of this transaction the Company expects to recognize a pre-tax non-cash gain of approximately $6.9 million during the second quarter of 2021, arising from the increase in the observable fair market value of its investment in Greenlight.  In assessing the effect of transactions at Greenlight giving rise to this gain, the Company reevaluated its ownership percentage and other factors to reassess the existence of significant influence and determined that this investment should continue to be accounted for as an equity security investment.

 

32


 

 

 

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 unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 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 financial condition, results of operations, plans, objectives, future performance or business of Live Oak Bancshares, Inc. (the "Company"). They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this Report. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this Report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:

 

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

 

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

 

changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture (“USDA”);

 

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

 

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

 

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

 

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;

33


 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

changes in political and economic conditions, including as a result of the 2020 federal elections;

 

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 those described under “Risk Factors” in this 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.

34


 

 

Nature of Operations

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

 

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

 

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 Number One, Inc. holds properties foreclosed on by the Bank. 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 its wholly owned subsidiary, Jolley Asset Management, LLC (“JAM”), provide high-net-worth individuals and families with strategic wealth and investment management services.  

 

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.  Canapi provides investment advisory services to a series of funds focused on providing venture capital to new and emerging financial technology companies.

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 has historically elected 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 gain (loss) on loans accounted for under the fair value option line item of the consolidated statements of income.  During the first quarter of 2021, the Company chose not to elect fair value for all retained participating interests arising from new government guaranteed loan sales.  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.  The Company also has less routinely generated gains and losses arising from its financial technology investments in its fintech segment, as discussed more fully later in this section entitled “Results of Segment Operations”.

Recent Developments

Positive indications of recovery from the COVID-19 pandemic are beginning to appear in the United States; however, the fallout continues to have a complex and significant adverse impact on certain areas of the economy, the banking industry and the Company, all of which are subject to a high degree of uncertainty. This uncertainty is magnified with the risk of a resurgence of the virus or new variants.  While it is 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.

35


 

 

Financial position and results of operations

Relating to our March 31, 2021 financial condition and results of operations, improving conditions around COVID-19 had a material 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, largely due to improvement in economic forecasts and broader markets.  With improving forecasts related to employment and default expectations, the ACL and resulting recovery for loan and lease credit losses, while the loan fair value calculation and net gain on loans accounted for under the fair value option were positively affected.  With the ongoing monitoring of effects surfacing in certain pandemic-at-risk verticals combined with the risk that payment deferrals and those being made by the SBA for borrowers under its programs may be skewing actual indications of ability to repay, total credit related reserves continued to grow but at a slower pace due to the above mentioned continued improvement in economic forecasts during the first 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 improving market conditions was the Company’s valuation of the loan servicing asset as discussed in Note 7 of the notes to 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 continued to improve during the first quarter of 2021 which produced positive adjustments for loans carried at fair value and the loan servicing asset valuation.  The net interest margin was positively impacted by Paycheck Protection Program (“PPP”) lending as discussed more fully below in MD&A.  Should economic conditions worsen, the Company could experience significant levels of provision in the 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 there is a significant resurgence of COVID-19 cases or variants.

While there has been a recovery in secondary market pricing, the income from gain on sale of loans in future periods could be reduced due to COVID-19 and the termination of pandemic response programs.  At this time, the Company is unable to project the materiality of such impacts but anticipates that the breadth of the economic impact could impact gains in future periods.

Interest income could be further reduced due to COVID-19.  In accordance with guidance from banking regulators, the Company has worked and continues to work with COVID-19 affected borrowers to help defer their payments, interest, and fees.  In addition to regulatory relief on deferrals from banking regulators, payment relief has been available through the first quarter of 2021 from the SBA for certain loans guaranteed by that agency pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and subsequently by the below discussed Economic Aid Act.   While interest will still accrue to interest income, through GAAP accounting, should eventual credit losses on these loans with deferred payments emerge, interest income accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  As of March 31, 2021, the Company carried $4.3 million in accrued interest on outstanding loans with deferrals made to COVID-19 affected borrowers. At this time, the Company is unable to project the materiality of such an impact on future deferrals to COVID-19 borrowers, but recognizes the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Capital and liquidity

As of March 31, 2021, all of the Company’s capital ratios, and the Bank’s capital ratios, were in excess of all minimum regulatory requirements.  While the Company believes that capital is sufficient to withstand a double-dip economic recession brought about by a resurgence in 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 can be volatile and the secondary market for guaranteed loans has shown reactionary and varying responses to the changing economic environment.  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.

36


 

 

The Federal Reserve 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 March 31, 2021, the Company had outstanding borrowings of $1.41 billion from the PPPLF.

Lending operations and accommodations to borrowers

With the establishment of the PPP administered by the SBA, the Company has 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 agreed upon by the borrower and 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 March 31, 2021, the Company carried 9,046 PPP loans on its balance sheet representing a book balance of $1.45 billion, which includes $33.7 million in net deferred fees, to be amortized and recognized in interest income over the remaining lives of the loans.  The Company recognized $17.2 million of interest income in the first quarter of 2021 related to amortization of net PPP fees.  As of May 4, 2021, the Company has secured funding from the SBA for 3,870 new PPP loans representing approximately $541.0 million in aggregate year to date 2021 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 CARES Act on March 27, 2020, the SBA was making six months of principal and interest payments on all fully disbursed SBA 7(a) and SBA Express loans in regular servicing status that closed by September 25, 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 was 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 were not considered troubled debt restructurings.  After 60 or 90 days, borrowers may apply for an additional deferral.  In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as a troubled debt restructuring, nor are loans granted payment deferrals related to COVID-19 placed on non-accrual (provided the loans were not past due or on non-accrual status prior to the deferral). At March 31, 2021 and December 30, 2020, the Company estimated that as a percentage of total loans and leases at amortized cost, excluding PPP loans, 44% and 20%, respectively, of its loans were receiving the six months of payments from the SBA and that 2% and 11%, respectively, of its loans had a payment deferral in place.  The decrease in loans on payment deferral during the first quarter was largely a product of the Economic Aid Act introduced late in 2020, as discussed below.   The Company estimated that 20.5% of its loans and leases at amortized cost, excluding PPP loans, were receiving payments from the SBA and that 0.6%, had a payment deferral in place as of May 4, 2021.  On October 2, 2020, the SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers.  As of May 4, 2021, the Company has received $905.6 million in PPP loan forgiveness from 7,000, or 63% of total PPP loans originated by count.  

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.

On December 27, 2020 the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted which allows the SBA to make payments of up to $9,000 per month for up to six months of principal and interest payments on certain fully disbursed SBA 7(a) and SBA 504 loans in regular servicing status based upon the origination date.  In addition this legislation increased the 75% guarantee on many SBA 7(a) loans to 90%, among other things.

37


 

 

Credit

While most industries have and will continue to experience adverse impacts as a result of COVID-19, the Company has $451.9 million in total unguaranteed exposure in six verticals considered by management to be “at-risk” of significant impact: hotels, wine and craft beverage, educational services, entertainment centers, fitness centers, and quick service restaurants, each comprising $130.9 million or 4.8%, $112.2 million or 4.1%, $98.8 million or 3.6%, $54.6 million or 2.0%, $32.3 million or 1.2%, and $23.1 million or 0.8% of total unguaranteed loans and leases (all at amortized cost, inclusive of loans carried at fair value) as of March 31, 2021, 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 in an effort to better understand their situation and the challenges faced and circumstances evolve, which the Company anticipates will enable it to respond proactively as needs and issues arise.

Results of Operations

Performance Summary

Three months ended March 31, 2021 compared with three months ended March 31, 2020

For the three months ended March 31, 2021, the Company reported net income of $39.4 million, or $0.88 per diluted share, compared to net loss of $7.6 million, or $0.19 per diluted share, for the first quarter of 2020.  This increase in net income is largely due to the following items:

 

Increase in net interest income of $29.8 million, or 74.2%, predominately driven by significant growth in total loan and lease portfolios which was accentuated by the origination of $2.27 billion in PPP loans since the second quarter of 2020;

 

 

A decrease in the provision for loan and lease credit losses of $12.7 million, or 107.4%, resulting in a recovery for the quarter;

 

 

A net gain on the loan servicing asset revaluation of $1.5 million, increasing by $6.2 million, or 131.8%, compared to a net loss of $4.7 million for the first quarter of 2020; and

 

 

A net gain on loans accounted for under the fair value option of $4.2 million, increasing by $14.9 million, or 139.7%, compared to a net loss of $10.6 million for the first quarter of 2020.

Other key factors partially offsetting the increase net income for the first quarter of 2021 were:

 

An increase in salaries and employee benefits of $3.3 million, or 11.8%;

 

 

$3.1 million in impairment charges related to a $3.9 million renewable energy tax credit investment; and

 

 

Increased income tax expense of $12.0 million, or 153.8% primarily due to the above discussed increase in net income. 

Net Interest Income and Margin

Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, 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.

38


 

 

Three months ended March 31, 2021 compared with three months ended March 31, 2020

For the three months ended March 31, 2021, net interest income increased $29.8 million, or 74.2%, to $70.0 million compared to $40.2 million for the three months ended March 31, 2020. The increase was principally due to the significant growth in the held for investment loan and lease portfolios reflecting the Company's ongoing initiative to grow recurring revenue sources.  This increase over the prior year was further enhanced by the aforementioned origination of $2.27 billion in PPP loans since the second quarter of 2020 with $20.7 million in interest income coming from amortization of net deferred fees combined with a 1% annualized interest rate.  Accordingly, average interest earning assets increased by $2.91 billion, or 64.2%, to $7.44 billion for the three months ended March 31, 2021, compared to $4.53 billion for the three months ended March 31, 2020, while the yield on average interest earning assets decreased 81 basis points to 4.81%. The cost of funds on interest bearing liabilities for the three months ended March 31, 2021 decreased 112 basis points to 1.02%, and the average balance of interest bearing liabilities increased by $2.92 billion, or 66.8%, over the same period in 2020. The increase in average interest bearing liabilities was largely driven by funding for significant loan originations and growth from the prior year. As indicated in the rate/volume table below, increased interest earning asset volume more than offset lower yields, outpacing the higher volume and greater levels of cost declines of interest bearing liabilities, resulting in increases to interest income of $24.8 million and decreases to interest expense of $5.0 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.  For the three months ended March 31, 2020 compared to the three months ended March 31, 2021, net interest margin increased from 3.55% to 3.81%, respectively, due primarily to recognition of PPP related income, which is being accelerated with forgiveness efforts, in combination with significant loan portfolio growth, the maturity of longer term deposits which are repricing at lower rates and repricing of savings portfolio at lower rates.

39


 

 

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 March 31,

 

 

 

2021

 

 

2020

 

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning balances in other banks

 

$

331,260

 

 

$

297

 

 

 

0.36

%

 

$

157,136

 

 

$

532

 

 

 

1.36

%

Federal funds sold

 

 

28,202

 

 

 

6

 

 

 

0.09

 

 

 

72,750

 

 

 

218

 

 

 

1.20

 

Investment securities

 

 

736,158

 

 

 

2,929

 

 

 

1.61

 

 

 

536,206

 

 

 

3,762

 

 

 

2.81

 

Loans held for sale

 

 

1,158,844

 

 

 

15,077

 

 

 

5.28

 

 

 

1,016,542

 

 

 

15,865

 

 

 

6.26

 

Loans and leases held for

   investment(1)

 

 

5,186,963

 

 

 

69,916

 

 

 

5.47

 

 

 

2,750,268

 

 

 

43,096

 

 

 

6.29

 

Total interest earning assets

 

 

7,441,427

 

 

 

88,225

 

 

 

4.81

 

 

 

4,532,902

 

 

 

63,473

 

 

 

5.62

 

Less: Allowance for credit losses on loans

   and leases

 

 

(52,317

)

 

 

 

 

 

 

 

 

 

 

(27,003

)

 

 

 

 

 

 

 

 

Non-interest earning assets

 

 

593,573

 

 

 

 

 

 

 

 

 

 

 

507,441

 

 

 

 

 

 

 

 

 

Total assets

 

$

7,982,683

 

 

 

 

 

 

 

 

 

 

$

5,013,340

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

250,005

 

 

$

356

 

 

 

0.58

%

 

$

 

 

$

 

 

 

%

Savings

 

 

2,356,598

 

 

 

3,512

 

 

 

0.60

 

 

 

1,123,882

 

 

 

4,844

 

 

 

1.73

 

Money market accounts

 

 

105,753

 

 

 

83

 

 

 

0.32

 

 

 

77,622

 

 

 

100

 

 

 

0.52

 

Certificates of deposit

 

 

3,151,575

 

 

 

12,993

 

 

 

1.67

 

 

 

3,162,660

 

 

 

18,311

 

 

 

2.32

 

Total deposits

 

 

5,863,931

 

 

 

16,944

 

 

 

1.17

 

 

 

4,364,164

 

 

 

23,255

 

 

 

2.14

 

Borrowings

 

 

1,429,177

 

 

 

1,331

 

 

 

0.38

 

 

 

7,156

 

 

 

57

 

 

 

3.19

 

Total interest bearing liabilities

 

 

7,293,108

 

 

 

18,275

 

 

 

1.02

 

 

 

4,371,320

 

 

 

23,312

 

 

 

2.14

 

Non-interest bearing deposits

 

 

63,917

 

 

 

 

 

 

 

 

 

 

 

48,925

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities

 

 

39,155

 

 

 

 

 

 

 

 

 

 

 

53,494

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

586,503

 

 

 

 

 

 

 

 

 

 

 

539,601

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

7,982,683

 

 

 

 

 

 

 

 

 

 

$

5,013,340

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

69,950

 

 

 

3.79

%

 

 

 

 

 

$

40,161

 

 

 

3.48

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.81

%

 

 

 

 

 

 

 

 

 

 

3.55

%

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

102.03

%

 

 

 

 

 

 

 

 

 

 

103.70

%

(1)

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

40


 

 

 

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 March 31,

 

 

 

2021 vs. 2020

 

 

 

Increase (Decrease) Due to

 

 

 

Rate

 

 

Volume

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning balances in other banks

 

$

(608

)

 

$

373

 

 

$

(235

)

Federal funds sold

 

 

(141

)

 

 

(71

)

 

 

(212

)

Investment securities

 

 

(1,932

)

 

 

1,099

 

 

 

(833

)

Loans held for sale

 

 

(2,824

)

 

 

2,036

 

 

 

(788

)

Loans and leases held for investment

 

 

(8,694

)

 

 

35,514

 

 

 

26,820

 

Total interest income

 

 

(14,199

)

 

 

38,951

 

 

 

24,752

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

 

 

 

 

356

 

 

 

356

 

Savings

 

 

(4,907

)

 

 

3,575

 

 

 

(1,332

)

Money market accounts

 

 

(46

)

 

 

29

 

 

 

(17

)

Certificates of deposit

 

 

(5,263

)

 

 

(55

)

 

 

(5,318

)

Borrowings

 

 

(5,052

)

 

 

6,326

 

 

 

1,274

 

Total interest expense

 

 

(15,268

)

 

 

10,231

 

 

 

(5,037

)

Net interest income

 

$

1,069

 

 

$

28,720

 

 

$

29,789

 

 

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 first quarter of 2021, there was a recovery of loan and lease credit losses of $873 thousand compared to a provision of $11.8 million for the same period in 2020, a decrease in provision of $12.7 million.  The negative provision for the first quarter of 2021 was primarily the result of improved forecasts related to employment and default expectations as the economic outlook has improved significantly over that experienced in 2020, combined with the effects of a $1.7 million recovery from a previously charged-off hotel loan discussed below.

Loans and leases held for investment at historical cost were $4.67 billion as of March 31, 2021, increasing by $2.68 billion, or 134.9%, compared to March 31, 2020.  This growth was largely fueled by $2.27 billion in PPP loan originations since 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 $3.22 billion at March 31, 2021, an increase of $1.23 billion, or 62.2%, over March 31, 2020.  This growth, outside of PPP activity in the third quarter of 2020, was fueled by robust origination.

 

Net recoveries for loans and leases carried at historical cost were $984 thousand, or 0.09% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended March 31, 2021, compared to net charge-offs of $2.8 million, or 0.58%, for the three months ended March 31, 2020.  The decrease in charge-offs was primarily driven by a $1.7 million recovery of a previously charged-off hotel loan which paid off during the first quarter of 2021.  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.  

41


 

 

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $5.8 million and $8.2 million accounted for under the fair value option at March 31, 2021 and 2020, respectively, totaled $24.7 million, which was 0.53% of the held for investment loan and lease portfolio carried at historical cost at March 31, 2021, compared to $9.6 million, or 0.48% of loans and leases held for investment at March 31, 2020.  Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.77% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at March 31, 2021.

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 gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk.  Other less common elements of noninterest income include less routine 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 March 31,

 

 

2021/2020 Increase (Decrease)

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

6,434

 

 

$

6,422

 

 

$

12

 

 

 

0.19

%

Loan servicing asset revaluation

 

 

1,493

 

 

 

(4,692

)

 

 

6,185

 

 

 

131.82

 

Net gains on sales of loans

 

 

11,929

 

 

 

11,112

 

 

 

817

 

 

 

7.35

 

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

   value option

 

 

4,218

 

 

 

(10,638

)

 

 

14,856

 

 

 

139.65

 

Equity method investments income (loss)

 

 

(1,157

)

 

 

(2,478

)

 

 

1,321

 

 

 

53.31

 

Equity security investments gains (losses), net

 

 

105

 

 

 

(64

)

 

 

169

 

 

 

264.06

 

Loss on sale of investment securities

   available-for-sale, net

 

 

 

 

 

(79

)

 

 

79

 

 

 

100.00

 

Lease income

 

 

2,599

 

 

 

2,624

 

 

 

(25

)

 

 

(0.95

)

Management fee income

 

 

1,934

 

 

 

1,644

 

 

 

290

 

 

 

17.64

 

Other noninterest income

 

 

3,502

 

 

 

1,891

 

 

 

1,611

 

 

 

85.19

 

Total noninterest income

 

$

31,057

 

 

$

5,742

 

 

$

25,315

 

 

 

440.87

%

 

For the three months ended March 31, 2021, noninterest income increased by $25.3 million, or 440.9%, compared to the three months ended March 31, 2020.  The increase from the prior year is primarily the result of the aforementioned increase in net gains on loan servicing asset revaluation of $6.2 million combined with a net gain on loans accounted for under the fair value option of $14.9 million, both a product of improved market conditions compared to the impacts of COVID-19 in 2020.  

 

The following table reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold. These components are key drivers of the Company's noninterest income.

 

 

 

Three Months Ended March 31,

 

 

For years ended December 31,

 

 

 

2021

 

 

2020

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

Amount of loans and leases

   originated

 

$

1,180,219

 

 

$

500,634

 

 

$

4,450,198

 

 

$

2,001,886

 

 

$

1,765,680

 

 

$

1,934,238

 

Guaranteed portions of

   loans sold

 

 

136,747

 

 

 

162,297

 

 

 

542,596

 

 

 

340,374

 

 

 

945,178

 

 

 

787,926

 

Outstanding balance of

   guaranteed loans sold (1)

 

 

2,843,963

 

 

 

2,761,015

 

 

 

2,819,625

 

 

 

2,746,840

 

 

 

3,045,460

 

 

 

2,680,641

 

 

(1)

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

42


 

 

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

Loan Servicing Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The revaluation considers the amortization of the portfolio, current market conditions for loan sale premiums, and current prepayment speeds. For the three months ended March 31, 2021, there was a net positive loan servicing revaluation adjustment of $1.5 million compared to a net negative adjustment of $4.7 million for the three months ended March 31, 2020.  The net positive revaluation amount for the first quarter compared to the corresponding period of 2020 was primarily a result of improving market conditions and pricing for government guaranteed loans.  

 

Net Gains on Sale of Loans: For the three months ended March 31, 2021, net gains on sales of loans increased $817 thousand, or 7.4%, compared to the three months ended March 31, 2020. For the three months ended March 31, 2021, the volume of guaranteed loans sold decreased $25.6 million, or 18.7%, to $136.7 million from $162.3 million for the three months ended March 31, 2020.  The average net gain on guaranteed loan sales increased from $63.7 thousand to $83.9 thousand, per million sold, in the first quarters of 2020 and 2021, respectively.  With lower loan sale volume and higher premium levels in the secondary market in the first quarter of 2021 compared to the first quarter of 2020, the average net gain on guaranteed loan sales increased, largely as a result of the level of market improvement in premium levels. The magnitude of the increase in net gains on sale of loans was muted somewhat due the Company’s choice to not elect fair value for all retained participating interests arising from new government guaranteed loan sales beginning in the first quarter of 2021. Not electing fair value generally results in a larger discount, which will reduce the amount of gain recognized at the date of sale. This larger discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with accounting standards, any loans for which fair value was previously elected will continue to be measured as such.

Net Gain (Loss) on Loans Accounted for Under the Fair Value Option:  For the three months ended March 31, 2021, the net gain on loans accounted for under the fair value option increased $14.9 million, or 139.78%, compared to the three months ended March 31, 2020.  The carrying amount of loans accounted for under the fair value option at March 31, 2021 and 2020 was $826.7 million ($35.9 million classified as held for sale and $790.8 million classified as held for investment) and $850.6 million ($19.2 million classified as held for sale and $831.4 million classified as held for investment), respectively, a decrease of $23.8 million, or 2.8%.  The first quarter of 2020 net gain on loans accounted for under the fair value option was largely due to improving market conditions compared to COVID-19 pandemic economic impacts in the prior year.  

Noninterest Expense

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

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

 

 

 

Three Months Ended March 31,

 

 

2021/2020 Increase (Decrease)

 

 

 

2021

 

 

2020

 

 

Amount

 

 

Percent

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

31,366

 

 

$

28,063

 

 

$

3,303

 

 

 

11.77

%

Non-staff expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel expense

 

 

659

 

 

 

1,781

 

 

 

(1,122

)

 

 

(63.00

)

Professional services expense

 

 

3,831

 

 

 

1,937

 

 

 

1,894

 

 

 

97.78

 

Advertising and marketing expense

 

 

652

 

 

 

1,361

 

 

 

(709

)

 

 

(52.09

)

Occupancy expense

 

 

2,112

 

 

 

2,421

 

 

 

(309

)

 

 

(12.76

)

Data processing expense

 

 

3,894

 

 

 

3,157

 

 

 

737

 

 

 

23.34

 

Equipment expense

 

 

4,354

 

 

 

4,635

 

 

 

(281

)

 

 

(6.06

)

Other loan origination and maintenance expense

 

 

3,327

 

 

 

2,456

 

 

 

871

 

 

 

35.46

 

Renewable energy tax credit investment impairment

 

 

3,127

 

 

 

 

 

 

3,127

 

 

 

100.00

 

FDIC insurance

 

 

1,765

 

 

 

1,510

 

 

 

255

 

 

 

16.89

 

Other expense

 

 

3,185

 

 

 

2,170

 

 

 

1,015

 

 

 

46.77

 

Total non-staff expenses

 

 

26,906

 

 

 

21,428

 

 

 

5,478

 

 

 

25.56

 

Total noninterest expense

 

$

58,272

 

 

$

49,491

 

 

$

8,781

 

 

 

17.74

%

 

43


 

 

 

Total noninterest expense for the three months ended March 31, 2021 increased $8.8 million, or 17.7%, compared to the same period in 2020. The increase in noninterest expense for the comparable three month period was largely driven by salaries and employee benefits and renewable energy tax credit investment impairment.  Changes in various components of noninterest expense are discussed below.

Salaries and employee benefits: Total personnel expense for the three months ended March 31, 2021 increased by $3.3 million, or 11.8%, compared to the same period in 2020.  The quarter over quarter increase is principally due to the vesting of approximately 398 thousand restricted stock unit awards with market price conditions in the first quarter of 2021 that impacted both compensation expense and payroll tax expense by a combined $2.6 million. The first quarter of 2021 also included a severance payment of $750 thousand. In addition, the salary base grew from prior periods as the Company continued to expand its employee base consistent with strategic and growth initiatives. Total full-time equivalent employees increased from 622 at March 31, 2020 to 651 at March 31, 2021.  Salaries and employee benefits expense included $5.0 million and $2.9 million of stock-based compensation for the three months ended March 31, 2021 and 2020, respectively.  Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

 

Professional services expense:  Total professional services expense increased $1.9 million, or 97.8%, compared to the same period in 2020.  This increase was primarily driven by an increase in legal fees related to the previously disclosed letter the Company received in December 2020 and the resulting putative class action filed against the Company and other parties in March 2021 as described in Note 10. Commitments and Contingencies.

 

Renewable tax credit investment impairment:  The Company recognized $3.1 million in impairment charges related to a $3.9 million renewable energy tax credit investment that was fully funded during the quarter. Investments of this type generate a return primarily through the realization of income tax credits and other benefits; accordingly, impairment of the investment amount is recognized in conjunction with the realization of related tax benefits. This investment generated a federal investment tax credit of $3.4 million which is included in the Company’s estimated annual effective tax rate.

Results of Segment Operations

Three months ended March 31, 2021 compared with three months ended March 31, 2020

The Company’s operations are managed along two primary operating segments Banking and Fintech.  A description of each business and the methodologies used to measure financial performance is described in Note 12. Segments in the accompanying notes to the Unaudited Condensed Consolidated Financial Statements.  Net income (loss) by operating segment is presented below:

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Banking

 

$

41,056

 

 

$

(8,152

)

Fintech

 

 

(907

)

 

 

(2,126

)

Other

 

 

(722

)

 

 

2,676

 

Consolidated net income (loss)

 

$

39,427

 

 

$

(7,602

)

Banking

Net income increased $49.2 million, compared to the first quarter of 2020.  The increase was primarily the result of increased net interest income and a negative provision for loan and lease credit losses.  

Net interest income increased $29.7 million, or 74.0%, compared to the first quarter of 2020.  See the analysis of net interest income included in the above section captioned “Net Interest Income and Margin” as it is predominantly related to the Banking segment.

See the analysis of provision for loan and lease credit losses included in the above section captioned “Provision for Loan and Lease Credit Losses” as it is entirely related to the Banking segment.    

Noninterest income increased $24.6 million, compared to the first quarter of 2020.  This increase was largely comprised of a net positive increase in the loan servicing asset revaluation of $6.2 million, or 131.8% combined with an increase in the net gain on loans accounted for under the fair value option of $14.9 million, or 139.7%.  See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.

44


 

 

Noninterest expense increased $8.9 million, or 19.1% compared to the first quarter of 2020.  See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.

Income tax expense increased $8.8 million, or 211.5%, compared to the first quarter of 2020. See the below section captioned “Income Tax Expense.”

Fintech

Net loss decreased by $1.2 million, or 57.3%, compared to the first quarter of 2020.  The decrease was primarily the result of increased non-interest income.

Noninterest income increased $876 thousand compared to the first quarter of 2020, or 99.5%.  This increase was largely due to with an increase of $899 thousand in the Company’s pro rata portion of increased profitability in its Canapi Ventures Fund investments.

Noninterest expense decreased $470 thousand, or 31.5% compared to the first quarter of 2020.  This decrease was largely due to a reduction in expenses incurred by Canapi Advisors compared to the first quarter of 2020.

Income tax benefit decreased $249 thousand, or 102.0%, compared to the first quarter of 2020, consistent with the segment’s decrease in net loss before taxes.

Income Tax Expense

For the three months ended March 31, 2021, income tax expense increased by $12.0 million compared to the same period in 2020, and the Company’s effective tax rates were 9.6% and 50.6%, respectively.  The effective rate for the first quarter of 2021 is principally due to earlier discussed items related to renewable energy tax credit investments and an income tax benefit of $4.3 million arising from the vesting of approximately 398 thousand restricted stock unit awards with market price conditions, as the fair value of these awards exceeded the total compensation cost recognized by the Company for book purposes.   The negative effective rate during the first quarter of 2020 was partially a result of a discrete, estimated income tax benefit of $3.7 million related to the enactment of the CARES Act on March 27, 2020.  The CARES Act allows taxpayers to carryback certain net operating losses to each of the five taxable years preceding the taxable year of such losses.  As a result, the Company was allowed to carryback its 2018 net operating loss which had been utilized and measured under the prior law using a 21% corporate income tax rate to pre-2018 taxable years during which the corporate income tax rate was 35%.  The remaining income tax benefit in the first quarter of 2020 was predominantly driven by the Company’s overall net pretax loss. The increase from an income tax benefit in the first quarter of 2020 to income tax expense for the first quarter of 2021 is primarily due to a significant increase in income before taxes.  

Discussion and Analysis of Financial Condition

March 31, 2021 vs. December 31, 2020  

Total assets at March 31, 2021 were $8.42 billion, an increase of $545.6 million, or 6.82%, compared to total assets of $7.87 billion at December 31, 2020. The growth in total assets was principally driven by the following:

 

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold, was $635.5 million at March 31, 2021, an increase of $317.2 million, or 99.7%, compared to $318.3 million at December 31, 2020.  This increase reflects liquidity planning through increased levels of deposits for funding current and future originations; and

 

Growth in total loans and leases held for investment and held for sale of $213.1 million resulting from strong origination activity in the first quarter of 2021.  Total first quarter originations were $1.18 billion, comprised of $672.4 million in loans and leases exclusive of PPP and an additional $507.8 million in PPP loans.  

Total investment securities increased $25.1 million during the first three months of 2021, from $750.1 million at December 31, 2020, to $775.2 million at March 31, 2021, an increase of 3.3%.  The Company increased its investment securities position during the first three months of 2021 largely as a part of its annual investment asset-liability planning.  At March 31, 2021, the investment portfolio was comprised of U.S. government agency, U.S. government-sponsored entity mortgage-backed securities and municipal bonds.

45


 

 

Loans and leases held for sale decreased $98.7 million, or 8.4%, during the first three months of 2020, from $1.18 billion at December 31, 2020, to $1.08 billion at March 31, 2021. The decrease was primarily the result of strong loan sales in the first quarter of 2021.  

Loans and leases held for investment increased $311.8 million, or 6.1%, during the first three months of 2021, from $5.14 billion at December 31, 2020, to $5.46 billion at March 31, 2021. The increase was primarily the result of the above mentioned loan originations in 2021.  All PPP loans are classified as held for investment.

 

Total deposits were $6.32 billion at March 31, 2021, an increase of $603.2 million, or 10.6%, from $5.71 billion at December 31, 2020. The increase in deposits was largely driven by PPP and other significant loan origination efforts during the first quarter of 2020.

 

Borrowings decreased to $1.47 billion at March 31, 2021 from $1.54 billion at December 31, 2020.  This decrease was related principally to net curtailments of borrowings through the PPPLF in the first quarter of 2021 as PPP loan forgiveness outpaced new PPPLF advances. These PPPLF borrowings are used to help fund PPP loans.

 

Shareholders’ equity at March 31, 2021 was $590.4 million as compared to $567.9 million at December 31, 2020. The book value per share was $13.74 at March 31, 2021 compared to $13.38 at December 31, 2020. Average equity to average assets was 7.4% for the three months ended March 31, 2021 compared to 8.1% for the year ended December 31, 2020. The increase in shareholders’ equity for the first three months of 2021 was principally the result of net income of $39.4 million and stock-based compensation expense of $5.0 million, partially offset by other comprehensive income of $12.4 million and $11.3 million in cash paid in lieu of stock for employee tax obligations in settlement of vested stock grants, principally related to the approximately 398 thousand awards with market price conditions vesting the first quarter discussed earlier.

During the first three months of 2021, 415,504 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) under a private sale. The conversion decreased the value of Class B common stock (non-voting) and increased the value of Class A common stock (voting) by $4.4 million.

Asset Quality

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

Nonperforming Assets

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

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

Nonperforming assets and TDRs, excluding loans measured at fair value, at March 31, 2021 were $97.2 million, which represented a $14.7 million, or 17.9%, increase from December 31, 2020. These nonperforming assets, at March 31, 2021 were comprised of $57.4 million in nonaccrual loans and leases and $4.2 million in foreclosed assets. Of the $97.2 million of nonperforming assets and TDRs, $51.8 million carried an SBA guarantee, leaving an unguaranteed exposure of $45.4 million in total nonperforming assets and TDRs at March 31, 2021. This represents an increase of $6.1 million, or 15.4%, from an unguaranteed exposure of $39.3 million at December 31, 2020.  

46


 

 

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

 

 

 

March 31, 2021 (1)

 

 

December 31, 2020 (1)

 

Nonaccrual loans and leases:

 

 

 

 

 

 

 

 

Total nonperforming loans and leases (all on nonaccrual) (2)

 

$

57,371

 

 

$

46,110

 

Total accruing loans and leases past due 90 days or more

 

 

 

 

 

 

Foreclosed assets

 

 

4,185

 

 

 

4,155

 

Total troubled debt restructurings (3)

 

 

48,514

 

 

 

39,803

 

Less nonaccrual troubled debt restructurings

 

 

(12,853

)

 

 

(7,592

)

Total performing troubled debt restructurings (3)

 

 

35,661

 

 

 

32,211

 

Total nonperforming assets and troubled debt restructurings (2)(3)

 

$

97,217

 

 

$

82,476

 

Allowance for credit losses on loans and leases

 

$

52,417

 

 

$

52,306

 

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

   investment (2)

 

 

1.23

%

 

 

1.06

%

Total nonperforming loans and leases to total assets (2)

 

 

0.76

%

 

 

0.66

%

Total nonperforming assets and troubled debt restructurings to total

   assets (2) (3)

 

 

1.28

%

 

 

1.17

%

Allowance for credit losses on loans and leases to loans and leases held for

   investment

 

 

1.12

%

 

 

1.21

%

Allowance for credit losses on loans and leases to total nonperforming loans

   and leases (2)

 

 

91.36

%

 

 

113.44

%

 

(1)

Excludes loans measured at fair value.

(2)

The period ended December 31, 2020 excludes one $6.1 million hotel loan classified as held for sale.

(3)

The period ended March 31, 2021 and December 31, 2020 excludes one $5.1 million hotel loan classified as held for sale.

 

 

March 31, 2021 (1)

 

 

December 31, 2020 (1)

 

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

 

 

 

 

 

 

 

 

Total nonperforming loans and leases guaranteed by the U.S government (all on

   nonaccrual)

 

$

32,633

 

 

$

26,032

 

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

   U.S government

 

 

 

 

 

 

Foreclosed assets guaranteed by the U.S. government

 

 

3,244

 

 

 

3,220

 

Total troubled debt restructurings guaranteed by the U.S. government

 

 

23,110

 

 

 

18,160

 

Less nonaccrual troubled debt restructurings guaranteed by the U.S. government

 

 

(7,162

)

 

 

(4,271

)

Total performing troubled debt restructurings guaranteed by U.S. government

 

 

15,948

 

 

 

13,889

 

Total nonperforming assets and troubled debt restructurings guaranteed

   by the U.S. government

 

$

51,825

 

 

$

43,141

 

Allowance for credit losses on loans and leases

 

$

52,417

 

 

$

52,306

 

Total nonperforming loans and leases not guaranteed by the U.S. government to

   total held for investment loans and leases

 

 

0.53

%

 

 

0.46

%

Total nonperforming loans and leases not guaranteed by the U.S. government to

   total assets

 

 

0.33

%

 

 

0.29

%

Total nonperforming assets and troubled debt restructurings not guaranteed by

   the U.S. government to total assets

 

 

0.60

%

 

 

0.56

%

Allowance for credit losses on loans and leases to total nonperforming loans

   and leases not guaranteed by the U.S government

 

 

211.89

%

 

 

260.51

%

 

(1)

Excludes loans measured at fair value.

 

47


 

 

 

Total nonperforming assets and TDRs, including loans measured at fair value, at March 31, 2021 were $173.3 million, which represented a $20.1 million, or 13.1%, increase from December 31, 2020. These nonperforming assets, at March 31, 2021 were comprised of $101.3 million in nonaccrual loans and leases and $4.2 million in foreclosed assets. Of the $173.3 million of nonperforming assets and TDRs, $111.0 million carried an SBA guarantee, leaving an unguaranteed exposure of $62.3 million in total nonperforming assets and TDRs at March 31, 2021. This represents an increase of $6.7 million, or 12.2%, from an unguaranteed exposure of $55.5 million at December 31, 2020.  

 

See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming loans and leases.

As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 10.3% at March 31, 2021, compared to 8.8% at December 31, 2020. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at March 31, 2021 and December 31, 2020 were 4.4% and 3.8%, respectively.

As of March 31, 2021, and December 31, 2020, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $341.2 million and $311.4 million, respectively.  The following is a discussion of these loans and leases.  Risk Grades 5 through 8 represent the spectrum of criticized and classified loans and leases.  For a complete description of the risk grading system, see Note 5. Loans and Leases Held for Investment and Credit Quality in the Company’s 2020 Form 10-K. At March 31, 2021, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $188.7 million resulting in unguaranteed exposure risk of $152.5 million, or 7.9% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2020 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $168.9 million resulting in unguaranteed exposure risk of $142.5 million, or 8.2% of total held for investment unguaranteed exposure carried at historical cost. As of March 31, 2021, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Educational Services at 17.3%, Wine and Craft Beverage at 16.3%, Entertainment Centers at 13.6%, Hotels at 10.2%, Healthcare at 9.5%, Self Storage at 7.8%, Fitness Centers at 6.9%, and Veterinary at 4.3%.  As of December 31, 2020, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Educational Services at 15.3%, Wine and Craft Beverage at 14.3%, Hotels at 13.6%, Entertainment Centers at 12.5%, Healthcare at 10.3%, Fitness Centers at 7.2%, Self Storage at 6.4% and Veterinary at 4.5%.  Other than Hotels which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division.  During the first quarter of 2021 the amount of potential problem loans in the Hotel vertical decreased by $7.3 million principally as a result of one large hotel loan payoff.  The majority of the $29.8 million first quarter increase in potential problem and classified loans and leases was comprised of borrowers largely concentrated in the Company’s more mature verticals.  Furthermore, the Company believes that its underwriting and credit quality standards have continued to tighten with emphasis on new production in pandemic resilient verticals and increased monitoring of existing loans in pandemic susceptible verticals as the impacts and uncertainties COVID-19 continue to evolve.   With this emphasis, systemic issues  continued to appear within the Hotel, Wine and Craft Beverage, Fitness Centers, Educational Services, Entertainment Center and Quick Service Restaurants verticals due to stress related to the COVID-19 pandemic and have contributed to the increase in criticized and classified loans and leases.  

Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less, unless the borrower was not past due at the time of a modification as a part of a COVID-19 assistance program. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. In all cases, credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term.  At March 31, 2021, the Company had $62.3 million in modified unguaranteed loans and leases for borrowers impacted by the COVID-19 pandemic. These modifications were primarily short-term payment deferrals generally no more than six-months in duration and accordingly are not considered troubled debt restructurings.  As of May 4, 2021, the Company’s modified unguaranteed loans and leases for borrowers impacted by the COVID-19 pandemic was approximately $13.9 million, a decrease from March 31, 2021 due to borrowers beginning to emerge from deferral needs.  

48


 

 

Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted.  Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At March 31, 2021, and December 31, 2020, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $254.7 million and $237.5 million, respectively. The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first quarter of 2021 was principally confined to three verticals: Educational Services ($11.3 million or 65.9%), Wine and Craft Beverage ($11.0 million or 64.0%) and Entertainment Centers ($7.6 million or 43.9%).  Partially offsetting the above increases were declines in Risk Grade 5 loans principally concentrated in three verticals: Hotels ($6.9 million or 40.1%), Senior Care ($5.0 million or 29.1%) and Self Storage ($2.2 million or 12.7%).  Other than Hotels, which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division.  Lower levels of Risk Grade 5 loans in the Hotels are discussed above while the lower levels of loans in Senior Care and Self Storage were principally due to principally due to two previous Risk Grade 5 relationships continuing to experience stress and being downgraded to Risk Grade 6 during the first quarter.  

At March 31, 2021, approximately 100.0% of loans and leases classified as Risk Grade 5 are performing with only one relationship having payments past due more than 30 days.  While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio. In conjunction with this, management believes that volumes of delinquencies may not be an accurate depiction of the borrower’s repayment abilities under the current pandemic induced circumstances due to payments being made by the SBA on behalf of borrower with loans under its programs.   As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals.  Management monitors these borrowers closely and has observed financial conditions continuing to improve.  Management has also noted that most loans with expired government assistance have been able to resume making regular payments in early 2021.

Allowance for Credit Losses on Loans and Leases

See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 2020 Form 10-K for a description of the methodologies used to estimate the allowance for credit losses.

The ACL of $52.3 million at December 31, 2020 increased by $111 thousand, or 0.2%, to $52.4 million at March 31, 2021. The ACL, as a percentage of loans and leases held for investment at historical cost amounted to 1.1% at March 31, 2021 and 1.2% at December 31, 2020. Excluding PPP loans and related reserves, the ACL, as a percentage of loans and leases held for investment at historical cost amounted to 1.6% and 1.8% at March 31, 2021 and December 31, 2020, respectively.  The slight increase in the ACL during the first quarter was primarily due to impact of growth in loan and lease originations being largely mitigated by the effects of improved forecasts related to employment and default expectations as the economic outlook has continued to improve, combined with the effects of a $1.7 million recovery from a previously charged-off hotel loan, as addressed more fully in the Provision for Loan and Lease Credit Losses section of Results of Operations.

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have decreased by $12.1 million since December 31, 2020.   Total loans and leases 90 or more days past due increased $2.5 million, or 4.0%, compared to December 31, 2020.  The increase was comprised of a $3.9 million decrease in unguaranteed offset by a $6.4 million increase in the guaranteed portions of past due loans compared to December 31, 2020.  At March 31, 2021 and December 31, 2020, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 0.9% and 1.1%, respectively.  Total unguaranteed loans and leases past due were comprised of $18.9 million carried at historical cost, an decrease of $4.2 million, and $5.8 million measured at fair value, a decrease of $462 thousand as of March 31, 2021 compared to December 31, 2020.  Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $52.4 million at March 31, 2021 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid, including but not limited to factors related to the above mentioned SBA delinquency effect and pandemic-susceptible verticals. Accordingly, no assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the Notes to the Unaudited Condensed Consolidated Financial Statements in this report.  

49


 

 

Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At March 31, 2021, the total amount of these four items was $3.38 billion, or 40.1% of total assets, an increase of $322.5 million from $3.06 billion, or 38.8% of total assets, at December 31, 2020.

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

At March 31, 2021, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $775.2 million available as lendable collateral.

Contractual Obligations

The following table presents the Company’s significant fixed and determinable contractual obligations by payment date as of March 31, 2021. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities.

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than

One Year

 

 

One to

Three Years

 

 

Three to

Five Years

 

 

More than

Five Years

 

Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits without stated maturity

 

$

3,178,069

 

 

$

3,178,069

 

 

$

 

 

$

 

 

$

 

Time deposits

 

 

3,137,935

 

 

 

2,011,064

 

 

 

569,062

 

 

 

301,987

 

 

 

255,822

 

Borrowings

 

 

1,465,961

 

 

 

9,303

 

 

 

1,430,319

 

 

 

20,846

 

 

 

5,493

 

Operating lease obligations

 

 

3,295

 

 

 

744

 

 

 

1,102

 

 

 

257

 

 

 

1,192

 

Total

 

$

7,785,260

 

 

$

5,199,180

 

 

$

2,000,483

 

 

$

323,090

 

 

$

262,507

 

As of March 31, 2021, and December 31, 2020, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of $12.4 million and $15.8 million, respectively.

Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. As of March 31, 2021, the balance sheet’s total cumulative gap position was asset-sensitive at 2.7%.

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, nor growth. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to measure interest rate risk more accurately.  As of March 31, 2021, the Company’s interest rate risk profile under the earnings simulation model method remains asset-sensitive. An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk by match funding assets and liabilities with similar rate instruments. The quarterly revaluation adjustment to the servicing asset, however, adjusts in an opposite direction to interest rate changes. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes, rates on cash accounts that adjusts as the federal funds rate changes and the longer duration of indeterminate term deposits.

50


 

 

Capital

The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; provide financial flexibility to support future growth and client needs; comply with relevant laws, regulations, and supervisory guidance; achieve optimal credit ratings for the Company and its subsidiaries; and provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

Capital amounts and ratios as of March 31, 2021 and December 31, 2020, are presented in the table below.

 

 

 

Actual

 

 

Minimum Capital

Requirement

 

 

Minimum To Be

Well Capitalized

Under Prompt

Corrective Action

Provisions (1)

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Consolidated - March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

554,527

 

 

 

12.16

%

 

$

205,237

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk-Weighted Assets)

 

 

607,362

 

 

 

13.32

 

 

 

364,866

 

 

 

8.00

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk-Weighted Assets)

 

 

554,527

 

 

 

12.16

 

 

 

273,649

 

 

 

6.00

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Assets)

 

 

554,527

 

 

 

8.50

 

 

 

260,985

 

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank - March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

503,391

 

 

 

11.39

%

 

$

198,865

 

 

 

4.50

%

 

$

287,250

 

 

 

6.50

%

Total Capital (to Risk-Weighted Assets)

 

 

556,227

 

 

 

12.59

 

 

 

353,538

 

 

 

8.00

 

 

 

441,923

 

 

 

10.00

 

Tier 1 Capital (to Risk-Weighted Assets)

 

 

503,391

 

 

 

11.39

 

 

 

264,154

 

 

 

6.00

 

 

 

353,538

 

 

 

8.00

 

Tier 1 Capital (to Average Assets)

 

 

503,391

 

 

 

7.76

 

 

 

259,401

 

 

 

4.00

 

 

 

324,251

 

 

 

5.00

 

Consolidated - December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

521,568

 

 

 

12.15

%

 

$

193,172

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk-Weighted Assets)

 

 

574,621

 

 

 

13.39

 

 

 

343,417

 

 

 

8.00

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk-Weighted Assets)

 

 

521,568

 

 

 

12.15

 

 

 

257,563

 

 

 

6.00

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Assets)

 

 

521,568

 

 

 

8.40

 

 

 

248,417

 

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank - December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

470,069

 

 

 

11.25

%

 

$

188,012

 

 

 

4.50

%

 

$

271,573

 

 

 

6.50

%

Total Capital (to Risk-Weighted Assets)

 

 

522,305

 

 

 

12.50

 

 

 

334,243

 

 

 

8.00

 

 

 

417,804

 

 

 

10.00

 

Tier 1 Capital (to Risk-Weighted Assets)

 

 

470,069

 

 

 

11.25

 

 

 

250,683

 

 

 

6.00

 

 

 

334,243

 

 

 

8.00

 

Tier 1 Capital (to Average Assets)

 

 

470,069

 

 

 

7.60

 

 

 

247,288

 

 

 

4.00

 

 

 

309,110

 

 

 

5.00

 

 

(1)

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

Critical Accounting Policies and Estimates

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

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Accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, are an integral part of the Company’s consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. Management believes that the critical accounting policies and estimates listed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.

 

Determination of the allowance for credit losses on loans and leases;

 

Valuation of loans accounted for under the fair value option;

 

Valuation of servicing assets;

 

Valuation of equity security investments where no readily available market price exists;

 

Consideration of significant influence for certain relationships where we have equity interests;

 

Income taxes;

 

Restricted stock unit awards with market price conditions;

 

Valuation of foreclosed assets; and

 

Business combination and goodwill.

Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a material impact on the Company’s financial position, results of operations or liquidity.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management considers interest rate risk the most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of net interest income is largely dependent upon the effective management of interest rate risk.

The Company’s Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk. See “Asset/Liability Management and Interest Rate Sensitivity” in Item 2 of this Form 10-Q for further discussion.

The objective of asset/liability management is the maximization of net interest income within the Company’s risk guidelines. This objective is accomplished through management of the balance sheet composition, maturities, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.

To identify and manage its interest rate risk, the Company employs an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on contractual cash flows and repricing characteristics and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in each of the product lines offered by the Bank. Assumptions are inherently uncertain, and the measurement of net interest income or the impact of rate fluctuations on net interest income cannot be precisely predicted. Actual results may differ materially from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of March 31, 2021, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of March 31, 2021, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months period ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

In the ordinary course of operations, the Company is at times involved in legal proceedings. In the opinion of management, as of March 31, 2021, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.  In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on its business, operating results or financial condition.

On March 12, 2021, a purported class action was filed against the Company in the United States District Court for the Eastern District of North Carolina, Joseph McAlear, individually and on behalf of all others similarly situated v. Live Oak Bancshares, Inc. et al.  The complaint alleges the existence of an agreement between the Company, nCino, Inc. and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees.  The complaint alleges violations of Section 1 of the federal Sherman Act (15 U.S.C. § 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes.  The plaintiff seeks monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits.

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

INDEX TO EXHIBITS