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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

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

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-accelerated Filer   x  (Do not check if smaller reporting company)    Smaller Reporting Company   ¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of November 12, 2015, there were approximately 29,447,381 shares of the registrant’s voting common stock outstanding and approximately 4,723,530 shares of the registrant’s non-voting common stock outstanding.

 

 

 


Table of Contents

Live Oak Bancshares, Inc. and Subsidiaries

Form 10-Q

For the Quarterly Period Ended September 30, 2015

TABLE OF CONTENTS

 

         Page  
  PART I. FINANCIAL INFORMATION   
Item 1.   Financial Statements (Unaudited)      1   
  Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014      1   
  Consolidated Statements of Income for Three and Nine Months Ended September 30, 2015 and 2014      2   
 

Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2015 and 2014

     3   
  Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014      4   
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014      5   
  Notes to Unaudited Consolidated Financial Statements      7   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      59   
Item 4.   Controls and Procedures      59   
  PART II. OTHER INFORMATION   
Item 1.   Legal Proceedings      60   
Item 1 A.   Risk Factors      60   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      60   
Item 3.   Defaults Upon Senior Securities      60   
Item 4.   Mine Safety Disclosures      60   
Item 5.   Other Information      60   
Item 6.   Exhibits      60   
  Signatures      61   


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Consolidated Balance Sheets

As of September 30, 2015 (unaudited) and December 31, 2014*

(Dollars in thousands)

 

     September 30,
2015
    December 31,
2014*
 

Assets

    

Cash and due from banks

   $ 129,881      $ 29,902   

Certificates of deposit with other banks

     10,000        10,000   

Investment securities available-for-sale

     51,628        49,318   

Loans held for sale

     443,871        295,180   

Loans held for investment

     259,552        203,936   

Allowance for loan losses

     (6,153     (4,407
  

 

 

   

 

 

 

Net loans

     253,399        199,529   

Premises and equipment, net

     62,641        35,279   

Foreclosed assets

     48        371   

Servicing assets

     40,590        34,999   

Investments in non-consolidated affiliates

     —          6,345   

Other assets

     20,708        12,392   
  

 

 

   

 

 

 

Total assets

   $ 1,012,766      $ 673,315   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 20,365      $ 14,728   

Interest-bearing

     742,263        507,352   
  

 

 

   

 

 

 

Total deposits

     762,628        522,080   

Short term borrowings

     —          6,100   

Long term borrowings

     42,079        41,849   

Other liabilities

     13,963        11,472   
  

 

 

   

 

 

 

Total liabilities

     818,670        581,501   
  

 

 

   

 

 

 

Shareholders’ equity

    

Non-cumulative perpetual preferred stock (Series A), 6,800 shares authorized, issued and outstanding

     —          —     

Preferred stock, no par value, 1,000,000 authorized, none issued or outstanding at September 30, 2015 and December 31, 2014

     —          —     

Class A common stock, no par value, 100,000,000 shares authorized, 29,443,970 and 23,896,400, shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

     136,852        48,657   

Class B common stock, no par value, 10,000,000 shares authorized, 4,723,530 shares issued and outstanding at September 30, 2015 and December 31, 2014

     50,015        50,015   

Retained earnings (accumulated deficit)

     7,108        (6,943

Accumulated other comprehensive income

     87        85   
  

 

 

   

 

 

 

Total shareholders’ equity attributed to Live Oak Bancshares, Inc.

     194,062        91,814   
  

 

 

   

 

 

 

Noncontrolling interest

     34        —     
  

 

 

   

 

 

 

Total equity

     194,096        91,814   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,012,766      $ 673,315   
  

 

 

   

 

 

 

 

* Derived from audited consolidated financial statements.

See Notes to Consolidated Financial Statements

 

1


Table of Contents

Live Oak Bancshares, Inc.

Consolidated Statements of Income

For the three and nine months ended September 30, 2015 and 2014 (unaudited)

(Dollars in thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015      2014     2015     2014  

Interest income

         

Loans and fees on loans

   $ 8,704       $ 5,189      $ 22,811      $ 14,040   

Investment securities, taxable

     211         93        587        292   

Other interest earning assets

     84         38        220        102   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     8,999         5,320        23,618        14,434   

Interest expense

         

Deposits

     1,997         1,172        5,274        3,401   

Borrowings

     395         254        1,280        611   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     2,392         1,426        6,554        4,012   

Net interest income

     6,607         3,894        17,064        10,422   
  

 

 

    

 

 

   

 

 

   

 

 

 

Provision for loan losses

     1,212         512        2,339        1,411   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     5,395         3,382        14,725        9,011   
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest income

         

Loan servicing revenue and revaluation

     1,566         3,230        7,444        9,515   

Net gains on sales of loans

     15,424         13,108        46,604        35,465   

Equity in loss of non-consolidated affiliates

     —           (177     (26     (2,379

Gain on sale of investment in non-consolidated affiliate

     —           —          3,782        —     

Gain on sale of investment securities available-for-sale

     12         —          12        —     

Other noninterest income

     768         342        2,144        1,215   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

     17,770         16,503        59,960        43,816   
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest expense

         

Salaries and employee benefits

     9,949         6,120        27,623        21,828   

Travel expense

     2,180         1,791        5,852        3,879   

Professional services expense

     597         1,758        2,129        3,364   

Advertising and marketing expense

     1,051         763        3,177        2,283   

Occupancy expense

     699         518        1,887        1,384   

Data processing expense

     773         730        2,388        1,787   

Equipment expense

     584         433        1,338        999   

Other expense

     2,206         1,154        5,132        3,726   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

     18,039         13,267        49,526        39,250   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before taxes

     5,126         6,618        25,159        13,577   

Income tax expense

     2,228         5,977        10,272        5,977   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     2,898         641        14,887        7,600   

Net loss attributable to noncontrolling interest

     3         —          23        —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Live Oak Bancshares, Inc.

   $ 2,901       $ 641      $ 14,910      $ 7,600   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.09       $ 0.03      $ 0.50      $ 0.34   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.09       $ 0.02      $ 0.48      $ 0.33   
  

 

 

    

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

2


Table of Contents

Live Oak Bancshares, Inc.

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2015 and 2014 (unaudited)

(Dollars in thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Net income

   $ 2,898      $ 641      $ 14,887      $ 7,600   

Other comprehensive income (loss) before tax:

        

Net unrealized gain (loss) on investment securities arising during the period

     151        (11     15        192   

Reclassification adjustment for (gain) loss on sale of securities available-for-sale included in net income

     (12     —          (12     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before tax

     139        (11     3        192   

Income tax expense

     (53     —          (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     86        (11     2        192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 2,984      $ 630      $ 14,889      $ 7,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

3


Table of Contents

Live Oak Bancshares, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the nine months ended September 30, 2015 and 2014 (unaudited)

(Dollars in thousands, except per share data)

 

     Common stock     Retained
earnings
(accumulated
deficit)
    Accumulated
other
comprehensive
income (loss)
    Non-
controlling
interest
    Total
equity
 
   Shares                 
   Class A      Class B      Amount          
                                              

Balance at December 31, 2013

     20,318,330         —         $ 18,319      $ 30,262      $ (191   $ —        $ 48,390   

Net income

     —           —           —          7,600        —          —          7,600   

Other comprehensive income

     —           —           —          —          192        —          192   

Reclass from redeemable equity securities

     —           —           3,605        —          —          —          3,605   

Sales of common stock

     45,440         —           200        —          —          —          200   

Stock option exercises

     191,660         —           177        —          —          —          177   

Issuance of common stock grants

     685,700         —           2,992        —          —          —          2,992   

Common stock issued in private placement, net of offering cost

     2,324,770         4,723,530         74,631        —          —          —          74,631   

Debt conversion to common stock

     287,020         —           3,052        —          —          —          3,052   

Stock option based compensation expense

     —           —           112        —          —          —          112   

Reclassification adjustment for change in taxable status

     —           —           (5,123     5,123        —          —          —     

Restricted stock expense

     —           —           143        —          —          —          143   

Dividends (distributions to shareholders)

     —           —           —          (44,150     —          —          (44,150
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

     23,852,920         4,723,530       $ 98,108      $ (1,165   $ 1      $ —        $ 96,944   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

     23,896,400         4,723,530       $ 98,672      $ (6,943   $ 85      $ —        $ 91,814   

Net income (loss)

     —           —           —          14,910        —          (23     14,887   

Other comprehensive income

     —           —           —          —          2        —          2   

Consolidation of investment with non-controlling interest

     —           —           —          —          —          35        35   

Stock option exercises

     47,570         —           215        —          —          —          215   

Stock option based compensation expense

     —           —           726        —          —          —          726   

Restricted stock expense

     —           —           83        —          —          —          83   

Capital contribution from non-controlling interest

     —           —           —          —          —          22        22   

Issuance of common stock in connection with initial public offering, net of issue costs

     5,500,000         —           87,171        —          —          —          87,171   

Dividends (distributions to shareholders)

     —           —           —          (859     —          —          (859
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

     29,443,970         4,723,530       $ 186,867      $ 7,108      $ 87      $ 34      $ 194,096   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

4


Table of Contents

Live Oak Bancshares, Inc.

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2015 and 2014 (unaudited)

(Dollars in thousands)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash flows from operating activities

    

Net income

   $ 14,887      $ 7,600   

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

    

Depreciation and amortization

     1,917        1,612   

Provision for loan losses

     2,339        1,411   

Amortization of premium on securities, net of accretion

     36        69   

Amortization (accretion) of discount (premium) on unguaranteed loans, net

     1,650        (376

Deferred tax expense

     936        3,253   

Originations of loans held for sale

     (740,378     (531,717

Proceeds from sales of loans held for sale

     508,322        391,626   

Net loss on sale of foreclosed assets

     12        —     

Net increase in servicing assets

     (5,591     (6,046

Net gains on sale of loans held for sale

     (46,604     (35,465

Gain on sale of securities available-for-sale

     (12     —     

Gain on sale of investment in non-consolidated affiliate

     (3,782     —     

Net loss (gain) on disposal of premises and equipment

     16        (256

Stock option based compensation expense

     726        112   

Restricted stock expense

     83        143   

Stock grants

     —          2,992   

Equity in loss of non-consolidated affiliates

     26        2,379   

Changes in assets and liabilities:

    

Accounts receivable and other assets

     (2,269     (2,620

Accrued expenses and other liabilities

     2,025        12,198   
  

 

 

   

 

 

 

Net cash used by operating activities

     (265,661     (153,085
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of securities available-for-sale

     (15,437     (31,482

Proceeds from sales, maturities, calls, and principal paydowns of securities available-for-sale

     13,106        1,875   

Proceeds from sale of foreclosed assets

     352        —     

Investment in certificates of deposit

     —          (9,250

Investments in non-consolidated affiliates

     —          (6,114

Proceeds from sale of investment in non-consolidated affiliate

     9,896        —     

Capital investments in non-consolidated affiliates

     —          (500

Net cash acquired in consolidation of equity method investment

     319        —     

Capital contribution from non-controlling interest

     22        —     

Loan originations and principal collections, net

     66,835        53,415   

Proceeds from sale of premises and equipment

     —          2,200   

Purchases of premises and equipment, net

     (29,295     (11,303
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     45,798        (1,159
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

5


Table of Contents

Live Oak Bancshares, Inc.

Consolidated Statements of Cash Flows (Continued)

For the nine months ended September 30, 2015 and 2014 (unaudited)

(Dollars in thousands)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash flows from financing activities

    

Net increase in deposits

     240,548        85,990   

Proceeds from long term borrowings

     12,960        20,305   

Repayment of long term borrowings

     (12,730     (2,447

Proceeds from short term borrowings

     —          15,066   

Repayment of short term borrowings

     (6,100     —     

Stock option exercises

     215        177   

Sale of common stock, net

     87,171        74,831   

Shareholder dividend distributions

     (2,222     (38,280
  

 

 

   

 

 

 

Net cash provided by financing activities

     319,842        155,642   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     99,979        1,398   

Cash and cash equivalents, beginning

     29,902        37,244   
  

 

 

   

 

 

 

Cash and cash equivalents, ending

   $ 129,881      $ 38,642   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Interest paid

   $ 6,501      $ 3,970   

Income tax

     11,312        3,253   

Supplemental disclosures of noncash operating, investing, and financing activities

    

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

   $ 2      $ 192   

Conversion of convertible subordinated debt into common stock

     —          3,052   

Transfers from loans to foreclosed real estate and other repossessions

     700        327   

Transfers from foreclosed real estate to SBA receivable

     659        289   

Transfers of loans accounted for as secured borrowing collateral to other assets

     4,575        —     

Transfer of loans held for sale to loans held for investment

     7,410        8,937   

Transfer of loans held for investment to loans held for sale

     2,129        16,428   

Contingent consideration in acquisition of controlling interest in equity method of investment

     170        —     

Non-cash dividend

     —          9,514   

See Notes to Consolidated Financial Statements

 

6


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

Nature of Operations

Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was established in May 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending services to small businesses nationwide in targeted industries. The Bank identifies and grows within credit-worthy industries through expertise within those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) program. In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank. On July 23, 2015 the Company closed on its initial public offering.

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

The Company acquired control over 504FA, previously carried as an equity method investment, on February 2, 2015 by increasing its ownership from 50.0% to 91.3%. The acquisition of an additional 41.3% of ownership occurred in exchange for contingent consideration estimated to total $170 thousand. Transactions in the third quarter of 2015 increased the Company’s ownership to 92.4%. With 7.6% of ownership remaining with a third party investor, amounts of earnings and equity in 504FA attributable to the third party investor are now disclosed in the Company’s consolidated financial statements as related to a noncontrolling interest.

The Company earns revenue primarily from the sale of SBA-guaranteed loans. This income is comprised of net gains on the sale of loans, revenues on the servicing of sold loans and valuation of loan servicing rights. Net interest income is another contributor to earnings. Offsetting these revenues are the cost of funding sources, provision for loan 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.

General

In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the nine months ended September 30, 2015 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2015. The consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated financial statements contained in the Company’s registration statement on Form S-1 (File No. 333-205126), as amended. 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 registration statement on Form S-1, as amended.

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 Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data.

Stock Split

On September 23, 2014, the Board of Directors declared a ten-for-one stock split of the Company’s Class A and Class B common shares, which was effected in the form of a common stock dividend distributed on October 10, 2014. Except for the amount of authorized shares, all references to share and per share amounts in the consolidated financial statements and accompanying notes to the consolidated financial statements have been retroactively restated to reflect the stock split.

 

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Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 1. Basis of Presentation (Continued)

 

Business Segments

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

Reclassifications

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

Note 2 - Recent Accounting Pronouncements

In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”). ASU 2015-01 eliminated from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both unusual in nature and infrequently occurring. The guidance will be effective for the Company for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect this guidance to have a material effect on its consolidated financial statements.

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 amended the consolidation requirements in Accounting Standards Codification (“ASC”) 810 Consolidation. The amendments change the consolidation analysis required under U.S. GAAP, and modify how variable interests held by a reporting entity’s related parties affect its consolidation conclusions. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 addresses accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service, (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 will be effective for the Company on January 1, 2016 and is not expected to have a significant impact on its consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent) (a Consensus of the Emerging Issues Task Force).” The new guidance eliminates the requirement to classify in the fair value hierarchy any investments for which fair value is measured at net asset value per share using the practical expedient. This guidance is effective for interim and annual periods beginning after December 15, 2015. The adoption of this guidance is not expected to be material to the consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that adjustments to provisional amounts that are identified during the measurement period of a business combination be recognized in the reporting period in which the adjustment amounts are determined. Furthermore, the income statement effects of such adjustments, if any, must be calculated as if the accounting had been completed at the acquisition date. The portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Under previous guidance, adjustments to provisional amounts identified during the measurement period are to be recognized retrospectively. ASU 2015-16 will be effective for the Company on January 1, 2016 and is not expected to have a significant impact on the consolidated financial statements.

 

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Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 3. Earnings Per Share

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Basic earnings per share:

           

Net income available to common shareholders

   $ 2,901       $ 641       $ 14,910       $ 7,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average basic shares outstanding

     32,824,587         25,632,505         30,037,436         22,412,646   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.09       $ 0.03       $ 0.50       $ 0.34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

           

Net income available to common shareholders, for diluted earnings per share

   $ 2,901       $ 641       $ 14,910       $ 7,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average basic shares outstanding

     32,824,587         25,632,505         30,037,436         22,412,646   

Add effect of dilutive stock options and restricted stock grants

     1,092,695         603,195         892,794         286,789   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average diluted shares outstanding

     33,917,282         26,235,700         30,930,230         22,699,435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.09       $ 0.02       $ 0.48       $ 0.33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive shares

     1,391,828         328,210         1,562,168         328,210   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pro forma earnings per share

Because the Company was not a taxable entity prior to August 3, 2014, pro forma amounts for income tax expense and basic and diluted earnings per share have been presented below assuming the Company’s effective tax rate of 38.5% for the three and nine months ended September 30, 2014.

 

     Three Months Ended      Nine Months Ended  

Pro forma net income available to common shareholders, after tax

   $ 4,071       $ 8,349   
  

 

 

    

 

 

 

Pro forma basic earnings per share

   $ 0.16       $ 0.37   
  

 

 

    

 

 

 

Pro forma diluted earnings per share

   $ 0.16       $ 0.37   
  

 

 

    

 

 

 

 

9


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 4. Securities

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

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

September 30, 2015

           

US government agencies

   $ 26,987       $ 226       $ —         $ 27,213   

Residential mortgage-backed securities

     22,570         32         136         22,466   

Mutual fund

     1,930         19         —           1,949   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 51,487       $ 277       $ 136       $ 51,628   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

US government agencies

   $ 35,207       $ 127       $ 25       $ 35,309   

Residential mortgage-backed securities

     13,973         92         56         14,009   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 49,180       $ 219       $ 81       $ 49,318   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended September 30, 2015, the Company sold three US government agency securities for $8.3 million at a gain of $12 thousand and purchased four mortgage-backed securities totaling $9.5 million in a transaction designed to enhance cashflow and yield. In addition, during the first and second quarters of 2015, the Company sold six mortgage-backed securities at their carrying amount for $3.4 million in an odd-lot consolidation and purchased two mortgage-backed securities for $4.0 million for the purpose of complying with the Community Reinvestment Act. The Company also invested $1.9 million in the 504 Fund mutual fund. The investment in this mutual fund was purchased at current market value (190,380.762 shares at $9.98 per share). During the nine months ending September 30, 2015, there was $30 thousand of dividend reinvestment in the 504 Fund mutual fund as well. There were no calls or maturities of securities during the three and nine months ending September 30, 2015.

During the three months and nine months ended September 30, 2014, there were purchases of five US government agency securities for $29.9 million as part of a strategic investment plan to utilize excess cash from the $74.6 million private placement capital raise that took place in August 2014 and one mortgage-backed security purchased for $1.6 million for the purpose of complying with the Community Reinvestment Act. There were no calls, sales or maturities of securities during the three and nine months ended September 30, 2014.

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

 

     Less Than 12 Months      12 Months or More      Total  
September 30, 2015    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Residential mortgage-backed securities

   $ 14,453       $ 114       $ 3,269       $ 22       $ 17,722       $ 136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,453       $ 114       $ 3,269       $ 22       $ 17,722       $ 136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less Than 12 Months      12 Months or More      Total  
December 31, 2014    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

US government agencies

   $ —         $ —         $ 1,224       $ 25       $ 1,224       $ 25   

Residential mortgage-backed securities

     2,234         4         5,158         52         7,392         56   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,234       $ 4       $ 6,382       $ 77       $ 8,616       $ 81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 4. Securities (Continued)

 

At September 30, 2015, there were three mortgage-backed securities in unrealized loss positions for greater than 12 months and nine mortgage-backed securities in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2014, were comprised of six securities, consisting of one US government agency security and five mortgage-backed securities, in unrealized loss positions for greater than 12 months and one mortgage-backed security in an unrealized loss position for less than 12 months.

These unrealized losses are primarily the result of volatility in the market and are related to market interest rates. Since none of the unrealized losses relate to marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.

All residential mortgage-backed securities in the Company’s portfolio at September 30, 2015 and December 31, 2014 were backed by US government sponsored enterprises (“GSEs”).

The following is a summary of investment securities by maturity:

 

     September 30, 2015
Available-for-sale
 
     Amortized
cost
     Fair
value
 

One to five years

   $ 26,987       $ 27,213   

Five to ten years

     10,052         10,057   

After 10 years

     12,518         12,409   
  

 

 

    

 

 

 
   $ 49,557       $ 49,679   
  

 

 

    

 

 

 

The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled. This table excludes the 504 Fund mutual fund investment.

At September 30, 2015 and December 31, 2014, investment securities with a fair market value of $1.3 million were pledged to secure a line of credit with the Company’s correspondent bank.

 

11


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 5. Loans and Allowance for Loan Losses

Loan Portfolio Segments

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

Commercial and Industrial

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

Construction and Development

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

Owner Occupied Commercial Real Estate

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

Commercial Land

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

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

 

12


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

Loans consist of the following:

 

     September 30,
2015
    December 31,
2014
 

Commercial & Industrial

    

Agriculture

   $ 30      $ —     

Death Care Management

     4,831        3,603   

Healthcare

     13,563        12,319   

Independent Pharmacies

     41,123        34,079   

Registered Investment Advisors

     16,304        9,660   

Veterinary Industry

     20,985        20,902   

Other Industries

     1,216        494   
  

 

 

   

 

 

 

Total

     98,052        81,057   

Construction & Development

    

Agriculture

     12,233        3,910   

Death Care Management

     991        92   

Healthcare

     7,722        2,957   

Independent Pharmacies

     687        215   

Registered Investment Advisors

     75        —     

Veterinary Industry

     3,038        2,207   

Other Industries

     679        145   
  

 

 

   

 

 

 

Total

     25,425        9,526   

Owner Occupied Commercial Real Estate

    

Agriculture

     125        259   

Death Care Management

     19,575        18,879   

Healthcare

     33,342        26,173   

Independent Pharmacies

     5,752        4,750   

Registered Investment Advisors

     2,981        2,161   

Veterinary Industry

     61,092        57,934   

Other Industries

     3,585        1,464   
  

 

 

   

 

 

 

Total

     126,452        111,620   

Commercial Land

    

Agriculture

     9,354        1,248   
  

 

 

   

 

 

 

Total

     9,354        1,248   

Total Loans 1

     259,283        203,451   

Net Deferred Costs

     2,685        2,060   

Discount on SBA 7(a) Unguaranteed 2

     (2,416     (1,575
  

 

 

   

 

 

 

Loans, Net of Unearned

   $ 259,552      $ 203,936   
  

 

 

   

 

 

 

 

1  Total loans include $21.8 million and $21.3 million of U.S. government guaranteed loans as of September 30, 2015 and December 31, 2014, respectively.
2  The Company measures the carrying value of the retained portion of loans sold at fair value under ASC Subtopic 825-10. The value of these retained loan balances is discounted based on the estimates derived from comparable unguaranteed loan sales.

 

13


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

Credit Risk Profile

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

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

Exceptional Loans (1 Rated): These loans are of the highest quality, with strong, well-documented sources of repayment. Debt service coverage (“DSC”) is over 1.75X based on historical results. Secondary source of repayment is strong, with a loan to value (“LTV”) of 65% or less if secured solely by commercial real estate (“CRE”). Discounted collateral coverage from all sources should exceed 125%. Guarantors have credit scores above 740.

Quality Loans (2 Rated): These loans are of good quality, with good, well-documented sources of repayment. DSC is over 1.25X based on historical or pro-forma results. Secondary source of repayment is good, with a LTV of 75% or less if secured solely by CRE. Discounted collateral coverage should exceed 100%. Guarantors have credit scores above 700.

Acceptable Loans (3 rated): These loans are of acceptable quality, with acceptable sources of repayment. DSC of over 1.00X based on historical or pro-forma results. Companies that do not meet these credit metrics must be evaluated to determine if they should be graded below this level.

Acceptable Loans (4 rated): These loans are considered very weak pass. These loans are riskier than a 3-rated credit, but due to various mitigating factors are not considered a Special Mention or worse. The mitigating factors must clearly be identified to offset further downgrade. Examples of loans that may be put in this category include start-up loans and loans with less than 1:1 cash flow coverage with other sources of repayment.

Special mention (5 rated): These loans are considered as emerging problems, with potentially unsatisfactory characteristics. These loans require greater management attention. A loan may be put into this category if the Bank is unable to obtain financial reporting from a company to fully evaluate its position.

Substandard (6 rated): Loans graded Substandard are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. They typically have unsatisfactory characteristics causing more than acceptable levels of risk, and have one or more well-defined weaknesses that could jeopardize the repayment of the debt.

Doubtful (7 rated): Loans graded Doubtful have inherent weaknesses that make collection or liquidation in full questionable. Loans graded Doubtful must be placed on non-accrual status.

Loss (8 rated): Loss rated loans are considered uncollectible and of such little value that their continuance as an active Bank asset is not warranted. The asset should be charged off, even though partial recovery may be possible in the future.

 

14


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

The following tables summarize the risk grades of each category:

 

     Risk Grades
1 - 4
     Risk Grade
5
     Risk Grades
6 - 8
     Total1  

September 30, 2015

           

Commercial & Industrial

           

Agriculture

   $ 30       $ —         $ —         $ 30   

Death Care Management

     4,727         104         —           4,831   

Healthcare

     8,007         556         5,000         13,563   

Independent Pharmacies

     34,795         2,173         4,155         41,123   

Registered Investment Advisors

     15,952         352         —           16,304   

Veterinary Industry

     15,873         566         4,546         20,985   

Other Industries

     1,070         146         —           1,216   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     80,454         3,897         13,701         98,052   

Construction & Development

           

Agriculture

     12,141         92         —           12,233   

Death Care Management

     991         —           —           991   

Healthcare

     7,722         —           —           7,722   

Independent Pharmacies

     687         —           —           687   

Registered Investment Advisors

     75         —           —           75   

Veterinary Industry

     3,038         —           —           3,038   

Other Industries

     679         —           —           679   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     25,333         92        —           25,425   

Owner Occupied Commercial Real Estate

           

Agriculture

     125         —           —           125   

Death Care Management

     17,041         832         1,702         19,575   

Healthcare

     28,804         1,716         2,822         33,342   

Independent Pharmacies

     5,355         397         —           5,752   

Registered Investment Advisors

     2,981         —           —           2,981   

Veterinary Industry

     43,754         2,690         14,648         61,092   

Other Industries

     3,585         —           —           3,585   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     101,645         5,635         19,172         126,452   

Commercial Land

           

Agriculture

     9,354         —           —           9,354   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,354         —           —           9,354   

Total

   $ 216,786       $ 9,624       $ 32,873       $ 259,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

 

     Risk Grades
1 - 4
     Risk Grade
5
     Risk Grades
6 - 8
     Total1  

December 31, 2014

           

Commercial & Industrial

           

Death Care Management

   $ 3,603       $ —         $ —         $ 3,603   

Healthcare

     6,995         538         4,786         12,319   

Independent Pharmacies

     27,673         2,726         3,680         34,079   

Registered Investment Advisors

     9,660         —           —           9,660   

Veterinary Industry

     15,513         1,121         4,268         20,902   

Other Industries

     333         161         —           494   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     63,777         4,546         12,734         81,057   

Construction & Development

           

Agriculture

     3,910         —           —           3,910   

Death Care Management

     92         —           —           92   

Healthcare

     2,957         —           —           2,957   

Independent Pharmacies

     215         —           —           215   

Veterinary Industry

     2,207         —           —           2,207   

Other Industries

     145         —           —           145   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,526         —           —           9,526   

Owner Occupied Commercial Real Estate

           

Agriculture

     259         —           —           259   

Death Care Management

     16,519         639         1,721         18,879   

Healthcare

     22,778         938         2,457         26,173   

Independent Pharmacies

     4,709         41         —           4,750   

Registered Investment Advisors

     2,161         —           —           2,161   

Veterinary Industry

     40,281         3,601         14,052         57,934   

Other Industries

     1,176         —           288         1,464   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     87,883         5,219         18,518         111,620   

Commercial Land

           

Agriculture

     1,248         —           —           1,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,248         —           —           1,248   

Total

   $ 162,434       $ 9,765       $ 31,252       $ 203,451   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1  Total loans include $21.8 million of U.S. government guaranteed loans as of September 30, 2015, segregated by risk grade as follows: Risk Grades 1 – 4 = $0, Risk Grade 5 = $1.1 million, Risk Grades 6 – 8 = $20.7 million. As of December 31, 2014 total loans include $21.3 million of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $0, Risk Grade 5 = $1.1 million, Risk Grades 6 – 8 = $20.2 million.

 

16


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

Past Due Loans

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

 

     Less Than 30
Days Past
Due & Not
Accruing
     30-89 Days
Past Due
& Accruing
     30-89 Days
Past Due &
Not Accruing
     Greater
Than 90
Days Past
Due
     Total Not
Accruing
& Past Due
Loans
     Current
Loans
     Total Loans      Loans 90
Days or More
Past Due &
Still Accruing
 

September 30, 2015

                       

Commercial & Industrial

                       

Agriculture

   $ —         $ —         $ —         $ —         $ —         $ 30       $ 30       $ —     

Death Care Management

     —           —           —           —           —           4,831         4,831         —     

Healthcare

     —           277         —           2,321         2,598         10,965         13,563         —     

Independent Pharmacies

     313         615         —           1,170         2,098         39,025         41,123         —     

Registered Investment Advisors

     —           —           —           —           —           16,304         16,304         —     

Veterinary Industry

     114         110         646         2,257         3,127         17,858         20,985         —     

Other Industries

     —           —           —           —           —           1,216         1,216         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     427         1,002         646         5,748         7,823         90,229         98,052         —     

Construction & Development

                       

Agriculture

     —           —           —           —           —           12,233         12,233         —     

Death Care Management

     —           —           —           —           —           991         991         —     

Healthcare

     —           46         —           —           46         7,676         7,722         —     

Independent Pharmacies

     —           —           —           —           —           687         687         —     

Registered Investment Advisors

     —           —           —           —           —           75         75         —     

Veterinary Industry

     —           —           —           —           —           3,038         3,038         —     

Other Industries

     —           —           —           —           —           679         679         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           46         —           —           46         25,379         25,425         —     

Owner Occupied Commercial Real Estate

                       

Agriculture

     —           —           —           —           —           125         125         —     

Death Care Management

     1,479         —           —           —           1,479         18,096         19,575         —     

Healthcare

     —           —           —           2,308         2,308         31,034         33,342         —     

Independent Pharmacies

     —           —           —           —           —           5,752         5,752         —     

Registered Investment Advisors

     —           —           —           —           —           2,981         2,981         —     

Veterinary Industry

     2,959         5,279         165         4,651         13,054         48,038         61,092         —     

Other Industries

     —           —           —           —           —           3,585         3,585         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,438         5,279         165         6,959         16,841         109,611         126,452         —     

Commercial Land

                       

Agriculture

     —           —           —           —           —           9,354         9,354         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           —           —           —           9,354         9,354         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total1

   $ 4,865       $ 6,327       $ 811       $ 12,707       $ 24,710       $ 234,573       $ 259,283       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

 

     Less Than 30
Days Past
Due & Not
Accruing
     30-89 Days
Past Due
& Accruing
     30-89 Days
Past Due &
Not Accruing
     Greater
Than 90
Days
Past Due
     Total Not
Accruing
& Past Due
Loans
     Current
Loans
     Total Loans      Loans 90
Days or More
Past Due &
Still Accruing
 

December 31, 2014

                       

Commercial & Industrial

                       

Death Care Management

   $ —         $ —         $ —         $ —         $ —         $ 3,603       $ 3,603       $ —     

Healthcare

     —           1,059         232         2,420         3,711         8,608         12,319         —     

Independent Pharmacies

     —           98         —           1,224         1,322         32,757         34,079         —     

Registered Investment Advisors

     —           —           —           —           —           9,660         9,660         —     

Veterinary Industry

     1,025         276         4         2,228         3,533         17,369         20,902         —     

Other Industries

     —           —           —           —           —           494         494         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,025         1,433         236         5,872         8,566         72,491         81,057         —     

Construction & Development

                       

Agriculture

     —           —           —           —           —           3,910         3,910         —     

Death Care Management

     —           —           —           —           —           92         92         —     

Healthcare

     —           —           —           —           —           2,957         2,957         —     

Independent Pharmacies

     —           —           —           —           —           215         215         —     

Veterinary Industry

     —           —           —           —           —           2,207         2,207         —     

Other Industries

     —           —           —           —           —           145         145         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           —           —           —           9,526         9,526         —     

Owner Occupied Commercial Real Estate

                       

Agriculture

     —           —           —           —           —           259         259         —     

Death Care Management

     —           —           —           1,721         1,721         17,158         18,879         —     

Healthcare

     —           145         230         2,082         2,457         23,716         26,173         —     

Independent Pharmacies

     —           —           —           —           —           4,750         4,750         —     

Registered Investment Advisors

     —           —           —           —           —           2,161         2,161         —     

Veterinary Industry

     2,464         5,101         1,951         2,836         12,352         45,582         57,934         —     

Other Industries

     —           —           —           275         275         1,189         1,464         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,464         5,246         2,181         6,914         16,805         94,815         111,620         —     

Commercial Land

                       

Agriculture

     —           —           —           —           —           1,248         1,248         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           —           —           —           1,248         1,248         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total1

   $ 3,489       $ 6,679       $ 2,417       $ 12,786       $ 25,371       $ 178,080       $ 203,451       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1  Total loans include $21.8 million of U.S. government guaranteed loans as of September 30, 2015, of which $11.1 million is greater than 90 days past due, $3.1 million is 30-89 days past due and $7.6 million is included in current loans as presented above. As of December 31, 2014, total loans include $21.3 million of U.S. government guaranteed loans, of which $11.7 million is greater than 90 days past due, $3.5 million is 30-89 days past due and $6.1 million is included in current loans as presented above.

 

18


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

Nonaccrual Loans

Loans that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans had been accrued in accordance with the original terms, interest income would have increased by approximately $358 thousand and $56 thousand for the three months ended September 30, 2015 and 2014, respectively, and for the nine months ended September 30, 2015 and 2014 interest income would have increased approximately $665 thousand and $147 thousand, respectively. All nonaccrual loans are included in the held for investment portfolio.

Nonaccrual loans as of September 30, 2015 and December 31, 2014 are as follows:

 

September 30, 2015

   Loan
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

        

Healthcare

   $ 2,321       $ 2,136       $ 185   

Independent Pharmacies

     1,483         1,344         139   

Veterinary Industry

     3,017         2,979         38   
  

 

 

    

 

 

    

 

 

 

Total

     6,821         6,459         362   

Owner Occupied Commercial Real Estate

        

Death Care Management

     1,479         1,309         170   

Healthcare

     2,308         1,990         318   

Veterinary Industry

     7,775         6,063         1,712   
  

 

 

    

 

 

    

 

 

 

Total

     11,562         9,362         2,200   

Total

   $ 18,383       $ 15,821       $ 2,562   
  

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Loan
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

        

Healthcare

   $ 2,652       $ 2,368       $ 284   

Independent Pharmacies

     1,224         1,139         85   

Veterinary Industry

     3,257         3,113         144   
  

 

 

    

 

 

    

 

 

 

Total

     7,133         6,620         513   

Owner Occupied Commercial Real Estate

        

Death Care Management

     1,721         1,505         216   

Healthcare

     2,312         1,919         393   

Veterinary Industry

     7,251         5,236         2,015   

Other Industries

     275         275         —    
  

 

 

    

 

 

    

 

 

 

Total

     11,559         8,935         2,624   

Total

   $ 18,692       $ 15,555       $ 3,137   
  

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

Allowance for Loan Loss Methodology

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

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

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

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

 

    All commercial loans classified substandard or worse.

 

    Any other delinquent loan that is in a nonaccrual status, or any loan that is delinquent more than 89 days and still accruing interest.

 

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

Any loan determined to be impaired is subjected to an impairment analysis, which is a calculation of the probable loss on the loan. This portion is the loan’s “impairment,” and is established as a specific reserve against the loan, or charged against the ALL.

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

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

 

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

 

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

 

20


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

The following tables detail activity in the allowance for loan losses by portfolio segment allowance for the periods presented:

 

Three months ended:    Construction &
Development
     Owner
Occupied
Commercial
Real Estate
    Commercial
& Industrial
    Commercial
Land
     Total  

September 30, 2015

            

Beginning Balance

   $ 844       $ 2,346      $ 1,653      $ 340       $ 5,183   

Charge offs

     —           (7     (280     —           (287

Recoveries

     —           12        33        —           45   

Provision

     336         (260     830        306         1,212   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 1,180       $ 2,091      $ 2,236      $ 646       $ 6,153   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2014

            

Beginning Balance

   $ 300       $ 1,931      $ 1,312      $ 25      $ 3,568   

Charge offs

     —           (227     (294     —           (521

Recoveries

     —           5        13        —           18   

Provision

     159         316        (24     61         512   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 459       $ 2,025      $ 1,007      $ 86       $ 3,577   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

Nine months ended:    Construction &
Development
     Owner
Occupied
Commercial
Real Estate
    Commercial
& Industrial
    Commercial
Land
     Total  

September 30, 2015

            

Beginning Balance

   $ 586       $ 2,291      $ 1,369      $ 161       $ 4,407   

Charge offs

     —           (128     (638     —           (766

Recoveries

     —           100        73        —           173   

Provision

     594         (172     1,432        485         2,339   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 1,180       $ 2,091      $ 2,236      $ 646       $ 6,153   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

September 30, 2014

            

Beginning Balance

   $ 350       $ 1,511      $ 862      $ —         $ 2,723   

Charge offs

     —           (346     (302     —           (648

Recoveries

     —           72        19        —           91   

Provision

     109         788        428        86         1,411   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 459       $ 2,025      $ 1,007      $ 86       $ 3,577   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

 

September 30, 2015    Construction &
Development
     Owner
Occupied
Commercial
Real Estate
     Commercial
& Industrial
     Commercial
Land
     Total  

Allowance for Loan Losses:

              

Loans individually evaluated for impairment

   $ —         $ 1,032       $ 924       $ —         $ 1,956   

Loans collectively evaluated for impairment

     1,180         1,059         1,312         646         4,197   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 1,180       $ 2,091       $ 2,236       $ 646       $ 6,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable 1:

              

Loans individually evaluated for impairment

   $ —         $ 15,164       $ 9,824       $ —         $ 24,988   

Loans collectively evaluated for impairment

     25,425         111,288         88,228         9,354         234,295   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 25,425       $ 126,452       $ 98,052       $ 9,354       $ 259,283   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

December 31, 2014    Construction
&
Development
     Owner
Occupied
Commercial
Real Estate
     Commercial
& Industrial
     Commercial
Land
     Total  

Allowance for Loan Losses:

              

Loans individually evaluated for impairment

   $ —         $ 1,051       $ 676       $ —         $ 1,727   

Loans collectively evaluated for impairment

     586         1,240         693         161         2,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 586       $ 2,291       $ 1,369       $ 161       $ 4,407   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans Receivable 1:

              

Loans individually evaluated for impairment

   $ —         $ 15,018       $ 9,984       $ —         $ 25,002   

Loans collectively evaluated for impairment

     9,526         96,602         71,073         1,248         178,449   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 9,526       $ 111,620       $ 81,057       $ 1,248       $ 203,451   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1  Loans receivable includes $21.8 million of U.S. government guaranteed loans as of September 30, 2015, of which $19.5 million are included in loans individually evaluated for impairment and $2.3 million are included in loans collectively evaluated for impairment, as presented above. As of December 31, 2014, loans receivable includes $21.3 million of U.S. government guaranteed loans, of which $19.5 million are included in loans individually evaluated for impairment and $2.0 million are included in loans collectively evaluated for impairment, as presented above.

 

22


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

Loans individually evaluated for impairment as of the dates presented are summarized in the following tables.

 

September 30, 2015

   Recorded
Investment
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

        

Healthcare

   $ 4,155       $ 3,290       $ 865   

Independent Pharmacies

     2,279         1,679         600   

Veterinary Industry

     3,390         2,979         411   
  

 

 

    

 

 

    

 

 

 

Total

     9,824         7,948         1,876   

Owner Occupied Commercial Real Estate

        

Death Care Management

     1,477         1,309         168   

Healthcare

     2,498         1,990         508   

Veterinary Industry

     11,189         8,252         2,937   
  

 

 

    

 

 

    

 

 

 

Total

     15,164         11,551         3,613   

Total

   $ 24,988       $ 19,499       $ 5,489   
  

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Recorded
Investment
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

        

Healthcare

   $ 4,205       $ 3,540       $ 665   

Independent Pharmacies

     2,199         1,492         707   

Veterinary Industry

     3,580         3,113         467   
  

 

 

    

 

 

    

 

 

 

Total

     9,984         8,145         1,839   

Owner Occupied Commercial Real Estate

        

Death Care Management

     1,720         1,505         215   

Healthcare

     2,309         1,919         390   

Veterinary Industry

     10,715         7,456         3,259   

Other Industries

     274         274         —     
  

 

 

    

 

 

    

 

 

 

Total

     15,018         11,154         3,864   

Total

   $ 25,002       $ 19,299       $ 5,703   
  

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

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

 

     September 30, 2015  
     Recorded Investment                
     With a
Recorded
Allowance
     With No
Recorded
Allowance
     Total      Unpaid
Principal
Balance
     Related
Allowance
Recorded
 

Commercial & Industrial

              

Healthcare

   $ 4,152       $ 3       $ 4,155       $ 4,324       $ 483   

Independent Pharmacies

     2,091         188         2,279         2,668         335   

Veterinary Industry

     3,352         38         3,390         4,069         106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial & Industrial

     9,595         229         9,824         11,061         924   

Owner Occupied Commercial Real Estate

              

Death Care Management

     1,477         —           1,477         1,613         11   

Healthcare

     2,361         137         2,498         2,606         65   

Veterinary Industry

     10,743         446         11,189         12,042         956   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Owner Occupied Commercial Real Estate

     14,581         583         15,164         16,261         1,032   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 24,176       $ 812       $ 24,988       $ 27,322       $ 1,956   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
     Recorded Investment                
     With a
Recorded
Allowance
     With No
Recorded
Allowance
     Total      Unpaid
Principal
Balance
     Related
Allowance
Recorded
 

Commercial & Industrial

              

Healthcare

   $ 4,202       $ 3       $ 4,205       $ 4,854       $ 361   

Independent Pharmacies

     2,005         194         2,199         2,497         206   

Veterinary Industry

     3,540         40         3,580         4,062         109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial & Industrial

     9,747         237         9,984         11,413         676   

Owner Occupied Commercial Real Estate

              

Death Care Management

     1,720         —           1,720         1,856         20   

Healthcare

     2,268         41         2,309         2,413         82   

Veterinary Industry

     9,796         919         10,715         11,571         947   

Other Industries

     274         —           274         367         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Owner Occupied Commercial Real Estate

     14,058         960         15,018         16,207         1,051   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 23,805       $ 1,197       $ 25,002       $ 27,620       $ 1,727   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

     Three months ended
September 30, 2015
     Three months ended
September 30, 2014
 
     Average
Balance
     Interest
Income
Recognized
     Average
Balance
     Interest
Income
Recognized
 

Commercial & Industrial

           

Healthcare

   $ 3,460       $ 24       $ 2,783       $ —     

Independent Pharmacies

     2,395         13         818         5   

Veterinary Industry

     3,790         5         2,910         36   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial & Industrial

     9,645         42         6,511         41   

Owner Occupied Commercial Real Estate

           

Death Care Management

     1,412         —           —           —     

Healthcare

     2,474         —           2,426         —     

Veterinary Industry

     11,412         42         10,217         81   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Owner Occupied Commercial Real Estate

     15,298         42         12,643         81   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,943       $ 84       $ 19,154       $ 122   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine months ended
September 30, 2015
     Nine months ended
September 30, 2014
 
     Average
Balance
     Interest
Income
Recognized
     Average
Balance
     Interest
Income
Recognized
 

Commercial & Industrial

           

Healthcare

   $ 3,388       $ 72       $ 2,051       $ 1   

Independent Pharmacies

     2,524         38         361         8   

Veterinary Industry

     3,482         13         3,714         63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial & Industrial

     9,394         123         6,126         72   

Owner Occupied Commercial Real Estate

           

Death Care Management

     1,461         —           —           —     

Healthcare

     2,372         —           2,047         —     

Veterinary Industry

     11,357         132         10,971         252   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Owner Occupied Commercial Real Estate

     15,190         132         13,018         252   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,584       $ 255       $ 19,144       $ 324   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

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

 

     Three months ended September 30, 2015      Three months ended September 30, 2014  
     All Restructurings      All Restructurings  
     Number of
Loans
     Pre-
modification
Recorded
Investment
     Post-
modification
Recorded
Investment
     Number of
Loans
     Pre-
modification
Recorded
Investment
     Post-
modification
Recorded
Investment
 

Interest Only

                 

Commercial & Industrial

                 

Independent Pharmacies

     —         $ —         $ —           1       $ 144       $ 143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Only

     —           —           —           1         144         143   

Extended Amortization

                 

Commercial & Industrial

                 

Independent Pharmacies

     2         322         313         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Extended Amortization

     2         322         313         —           —           —     

Payment Deferral

                 

Owner Occupied Commercial Real Estate

                 

Deathcare Management

     —           —           —           1         353         217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Payment Deferral

     —           —           —           1         353         217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 322       $ 313         2       $ 497       $ 360   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine months ended September 30, 2015      Nine months ended September 30, 2014  
     All Restructurings      All Restructurings  
     Number of
Loans
     Pre-
modification
Recorded
Investment
     Post-
modification
Recorded
Investment
     Number of
Loans
     Pre-
modification
Recorded
Investment
     Post-
modification
Recorded
Investment
 

Interest Only

                 

Commercial & Industrial

                 

Healthcare

     3       $ 1,093       $ 1,093         —         $ —         $ —     

Independent Pharmacies

     —           —           —           1         144         143   

Owner Occupied Commercial Real Estate

                 

Healthcare

     1         95         95         —           —           —     

Veterinary Industry

     —           —           —           1         8         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Interest Only

     4         1,188         1,188         2         152         151   

Extended Amortization

                 

Commercial & Industrial

                 

Independent Pharmacies

     2         322         313         2         379         367   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Extended Amortization

     2         322         313         2         379         367   

Payment Deferral

                 

Commercial & Industrial

                 

Veterinary Industry

     —           —           —           3         219         216   

Owner Occupied Commercial Real Estate

                 

Deathcare Management

     —           —           —           1         353         217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Payment Deferral

     —           —           —           4         572         433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 1,510       $ 1,501         8       $ 1,103       $ 951   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 5. Loans and Allowance for Loan Losses (Continued)

 

Concessions made to improve a loan’s performance have varying degrees of success. No TDRs that were modified within the twelve months ended September 30, 2015 subsequently defaulted during the three and nine months ended September 30, 2015. During the three and nine months ended September 30, 2014, one TDR that was modified within the twelve months ended September 30, 2014 subsequently defaulted. This TDR was an owner occupied commercial real estate deathcare management loan that was previously modified for payment deferral. The recorded investment for this TDR at September 30, 2014 was $217 thousand.

Note 6. Servicing Assets

Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others were $1.79 billion and $1.47 billion at September 30, 2015 and December 31, 2014, respectively.

The following summarizes the activity pertaining to servicing rights:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Balance at beginning of period

   $ 39,983       $ 33,181       $ 34,999       $ 29,053   

Additions, net

     3,613         2,902         10,322         7,653   

Changes in fair value

     (3,006      (984      (4,731      (1,607
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 40,590       $ 35,099       $ 40,590       $ 35,099   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of servicing rights was determined using discount rates ranging from 9.23% to 13.52% on September 30, 2015, and 6.45% to 12.52% on September 30, 2014. The fair value of servicing rights was determined using prepayment speeds ranging from 4.05% to 9.90% on September 30, 2015 and 1.89% to 9.24% on September 30, 2014, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing revenue and revaluation.

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

 

27


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 7. Borrowings

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

 

     September 30,
2015
     December 31,
2014
 

Short term borrowings

     

On September 18, 2014, the Company entered into a line of credit of $6.1 million with an unaffiliated commercial bank, secured by 1,900,000 shares of common stock of nCino, Inc., a former subsidiary of the Company. At December 31, 2014 there was $6.1 million advanced on the line of credit. Interest accrues at 30 day LIBOR (0.16% at December 31, 2014) plus 3.50% for a term of 12 months. Payments are interest only with all principal and accrued interest due on September 18, 2015. This loan was repaid in full on February 23, 2015.

   $ —        $ 6,100   
  

 

 

    

 

 

 

Total short term borrowings

   $ —        $ 6,100   
  

 

 

    

 

 

 

 

28


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 7. Borrowings (Continued)

 

     September 30,
2015
     December 31,
2014
 

Long term borrowings

     

In April 2011, the Company elected to participate in the U.S. Treasury’s Small Business Lending Fund program (“SBLF”) whereby the U.S. Treasury agreed to purchase $6.8 million in senior securities. During the initial interest period the applicable interest rate was set at 1.5%. For all remaining interest periods, which commenced on January 1, 2012, the interest rate is determined based on a formula which encompasses the percentage change in qualified lending as well as a non-qualifying portion percentage. This rate can range from 1.5% to 10.8%. At September 30, 2015 the interest rate was 1.50%. Interest is payable quarterly in arrears. With the approval of the Company’s regulator, the Company may exit the Small Business Lending Fund at any time simply by repaying the funding provided along with any accrued but unpaid interest. If the institution wishes to repay its SBLF funding in partial payments, each partial payment must be at least 25% of the original funding amount. All senior securities will mature on September 13, 2021 at which time all principal and accrued interest will be due.

   $ 6,800       $ 6,800   

On May 12, 2014, Independence Aviation financed the purchase of an airplane by entering into a promissory note with an unaffiliated commercial bank in the amount of $6 million which carries a fixed rate of 4.97% for a term of 59 months. Monthly payments are set at $48 thousand with all principal and accrued interest due on May 12, 2019.

     5,631         5,842   

On September 11, 2014, the Company financed the construction of an additional building located on the Company’s Tiburon Drive main campus for a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at its Tiburon Drive main facility location. Payments are interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments beginning in October 2016 will be $146 thousand with all principal and accrued interest due on September 11, 2021. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. The construction line is fully disbursed and there was no remaining available credit on this construction line at September 30, 2015.

     24,000         16,914   

 

29


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 7. Borrowings (Continued)

 

     September 30,
2015
     December 31,
2014
 

On September 18, 2014, the Company entered into a note payable revolving line of credit of $8.1 million with an unaffiliated commercial bank, with the first advance of $5 million on December 14, 2014. The note is unsecured and accrues interest at LIBOR plus 3.50% for a term of 36 months. The current rate is 3.693%. Payments are interest only with all principal and accrued interest due on September 18, 2017. There is no outstanding balance at September 30, 2015; therefore, there is $8.1 million of available credit on this note at September 30, 2015.

     —           5,000   

On August 1, 2014, the Company entered into a note payable line of credit of $15 million with an unaffiliated commercial bank, secured by 100% of Live Oak Banking Company’s outstanding common stock. Interest accrues at LIBOR plus 4.00% for a term of 36 months. Payments are interest only with all principal and accrued interest due on August 1, 2017. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios. This note was repaid in full on July 29, 2015.

     —           7,210   

On March 10, 2015, Independence Aviation refinanced an existing loan with Live Oak Banking Company and entered into a new loan with an unaffiliated commercial bank in the amount of $1.2 million which carries a fixed rate of 4.96% for a term of 51 months. Monthly payments are set at $9 thousand with all principal and accrued interest due on June 10, 2019.

     1,173         —    

On February 23, 2015 the Company transferred two related party loans to an unaffiliated commercial bank in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the unaffiliated commercial bank identified the transaction as a secured borrowing for accounting purposes. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at September 30, 2015 is 4.25%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $4.5 million at September 30, 2015. Underlying loans carry a risk grade of 3 and are current with no delinquencies. The terms of this loan require the Company to maintain minimum capital, liquidity and Texas ratios.

     4,475         —    

With the acquisition of GLS on September 1, 2013, the Company assumed the obligation to pay a former GLS partner $250 thousand at $10 thousand a month over a 24 month period. This obligation was paid in full on August 17, 2015.

     —           83   
  

 

 

    

 

 

 

Total long term borrowings

   $ 42,079       $ 41,849   
  

 

 

    

 

 

 

 

30


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

Note 8. Fair Value of Financial Instruments

Fair Value Hierarchy

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

Financial Instruments Measured at Fair Value

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

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

The Company invested $1.9 million in the 504 Fund mutual fund on March 31, 2015 and accordingly identified it as a Level 1 investment on that date. During the second quarter of 2015, the Company transferred this $1.9 million investment from Level 1 to Level 2, where it continues to be classified.

Impaired Loans: Impairment of a loan is based on the fair value of the collateral of the loan for collateral-dependent loans. Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. For non-collateral dependent loans, impairment is determined by the present value of expected future cash flows. Impaired loans classified as Level 3 are based on management’s judgment and estimation.

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

Foreclosed Assets: Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records foreclosed real estate as nonrecurring Level 3. Foreclosed assets classified as Level 3 are based on management’s judgment and estimation.

 

31


Table of Contents

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 8. Fair Value of Financial Instruments (Continued)

 

Recurring Fair Value

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

 

September 30, 2015

   Total      Level 1      Level 2      Level 3  

Investment securities available-for-sale

           

US government agencies

   $ 27,213       $ —        $ 27,213       $ —    

Residential mortgage-backed securities

     22,466         —          22,466         —    

Mutual fund

     1,949         —          1,949         —    

Servicing assets1

     40,590         —          —          40,590   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 92,218       $ —        $ 51,628       $ 40,590   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Total      Level 1      Level 2      Level 3  

Investment securities available-for-sale

           

US government agencies

   $ 35,309       $ —        $ 35,309       $ —    

Residential mortgage-backed securities

     14,009         —          14,009         —    

Servicing assets1

     34,999         —          —          34,999   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 84,317       $ —        $ 49,318       $ 34,999   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1  See Note 6 for a rollforward of recurring Level 3 fair values for servicing assets.

Non-recurring Fair Value

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

 

September 30, 2015

   Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 22,224       $ —        $ —        $ 22,224   

Foreclosed assets

     48         —          —          48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 22,272       $ —        $ —        $ 22,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 24,016       $ —        $ —        $ 24,016   

Foreclosed assets

     371         —          —          371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 24,387       $ —        $ —        $ 24,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2015 and December 31, 2014 the significant unobservable inputs used in the fair value measurements were as follows:

September 30, 2015

 

Level 3 Assets with Significant
Unobservable Inputs

   Fair Value      Valuation Technique    Significant
Unobservable
Inputs
  Range  

Impaired Loans

   $ 22,224       Discounted appraisals
Discounted expected cash flows
   Appraisal adjustments (1)
Interest rate & repayment term
   
 
 
 
10% to 20%
Weighted
average discount
rate 5.97%
  
  
  
  

Foreclosed Assets

   $ 48       Discounted appraisals    Appraisal adjustments (1)     10% to 20%   

 

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Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 8. Fair Value of Financial Instruments (Continued)

 

December 31, 2014

 

Level 3 Assets with Significant
Unobservable Inputs

   Fair Value      Valuation Technique    Significant
Unobservable
Inputs
  Range  

Impaired Loans

   $ 24,016       Discounted appraisals
Discounted expected cash flows
   Appraisal adjustments (1)
Interest rate & repayment term
   
 
 
 
10% to 20%
Weighted
average discount
rate 4.88%
  
  
  
  

Foreclosed Assets

   $ 371       Discounted appraisals    Appraisal adjustments (1)     10% to 20%   

 

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

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of fair value information about financial instruments carried at book value on the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments not measured at fair value on the balance sheets:

Cash and due from banks: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.

Certificates of deposit with other banks: The fair value of certificates of deposit with other banks is estimated based on discounting cash flows using the rates currently offered for instruments of similar remaining maturities.

Loans held for sale: The fair values of loans held for sale are based on quoted market prices, where available, and determined by discounting estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans adjusted to reflect the inherent credit risk.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

Accrued Interest: The carrying amounts of accrued interest approximate fair value.

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

 

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Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 8. Fair Value of Financial Instruments (Continued)

 

Short and long term borrowings: The fair values of the Company’s short term borrowings approximate fair value while long term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental debt rates for similar types of debt arrangements.

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

 

September 30, 2015

   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

   $ 129,881       $ 129,881       $ —        $ —        $ 129,881   

Certificates of deposit with other banks

     10,000         9,984         —          —          9,984   

Investment securities, available-for-sale

     51,628         —          51,628         —          51,628   

Loans held for sale

     443,871         —          —          458,780         458,780   

Loans, net of allowance for loan losses

     253,399         —          —          247,906         247,906   

Servicing assets

     40,590         —          —          40,590         40,590   

Accrued interest receivable

     4,841         4,841         —          —          4,841   

Financial liabilities

              

Deposits

     762,628         —          754,715         —          754,715   

Accrued interest payable

     243         243         —          —          243   

Long term borrowings

     42,079         —          —          44,987         44,987   

December 31, 2014

   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

   $ 29,902       $ 29,902       $ —        $ —        $ 29,902   

Certificates of deposit with other banks

     10,000         9,861         —          —          9,861   

Investment securities, available-for-sale

     49,318         —          49,318         —          49,318   

Loans held for sale

     295,180         —          —          304,504         304,504   

Loans, net of allowance for loan losses

     199,529         —          —          194,007         194,007   

Servicing assets

     34,999         —          —          34,999         34,999   

Accrued interest receivable

     3,059         3,059         —          —          3,059   

Financial liabilities

              

Deposits

     522,080         —          522,058         —          522,058   

Accrued interest payable

     190         190         —          —          190   

Short term borrowings

     6,100         —          —          6,100         6,100   

Long term borrowings

     41,849         —          —          44,738         44,738   

 

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Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 9. Commitments and Contingencies

Litigation

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

Financial Instruments with Off-balance-sheet Risk

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

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

 

     September 30,
2015
     December 31,
2014
 

Commitments to extend credit

   $ 747,909       $ 537,951   

Plexus Capital - Fund II Investment Commitment

     100         100   

Plexus Capital - Fund III Investment Commitment

     300         350   
  

 

 

    

 

 

 

Total unfunded off-balance sheet credit risk

   $ 748,309       $ 538,401   
  

 

 

    

 

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. In 2012, the Company began issuing commitment letters after approval of the loan by the Credit Department. Commitment letters generally expire ninety days after issuance.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. There were no standby letters of credit for the periods presented.

Concentrations of Credit Risk

Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans and commitments to extend credit have been granted to customers in the independent pharmacy 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 exposure exceeds $2.0 million, except for one relationship that has a retained exposure of $2.8 million.

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

 

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Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 10. 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. The 2015 Omnibus Plan authorized awards covering a maximum of 4,300,000 common voting shares and has an expiration date of March 20, 2025. Options or restricted shares granted under this plan expire no more than 10 years from date of grant. Exercise prices under the plan are set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Options or restricted shares vest over a minimum of three years from the date of the grant.

Stock Options

Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the three months ended September 30, 2015 and 2014, the Company recognized $431 thousand and $33 thousand in compensation expense for stock options, respectively. For the nine months ended September 30, 2015 and 2014, the Company recognized $726 thousand and $112 thousand in compensation expense for stock options, respectively.

Stock option activity under the plan during the nine month periods ended September 30, 2015 and 2014 is summarized below.

 

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2014

     1,737,570       $ 5.51         

Exercised

     47,570         4.52         

Forfeited

     192,671         8.38         

Granted

     1,829,748         15.52         
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2015

     3,327,077       $ 10.86         9.16 years       $ 29,197,309   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2015

     158,950       $ 4.65         8.05 years       $ 2,382,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Terms
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2013

     225,000       $ 1.01         

Exercised

     191,660         0.92         

Forfeited

     170,590         4.40         

Granted

     1,874,820         5.48         
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2014

     1,737,570       $ 5.51         9.54 years       $ 8,902,969   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2014

     22,227       $ 1.52         7.04 years       $ 202,486   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 10. Stock Plans (Continued)

 

The following is a summary of non-vested stock option activity for the Company for the nine months ended September 30, 2015 and 2014.

 

     Shares      Weighted
Average
Grant Date
Fair Value
 

Non-vested at December 31, 2014

     1,704,230       $ 1.18   

Granted

     1,829,748         6.79   

Vested

     173,180         0.97   

Forfeited

     192,671         2.63   
  

 

 

    

 

 

 

Non-vested at September 30, 2015

     3,168,127       $ 4.35   
  

 

 

    

 

 

 

 

     Shares      Weighted
Average
Grant Date
Fair Value
 

Non-vested at December 31, 2013

     91,754       $ 0.44   

Granted

     1,874,820         1.13   

Vested

     80,641         0.44   

Forfeited

     170,590         0.58   
  

 

 

    

 

 

 

Non-vested at September 30, 2014

     1,715,343       $ 1.18   
  

 

 

    

 

 

 

The total intrinsic value of options exercised at September 30, 2015 and 2014 was $392 thousand and $771 thousand, respectively.

At September 30, 2015, unrecognized compensation costs relating to stock options amounted to $13.1 million which will be expensed over the next 7 years.

The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Weighted average assumptions used for options granted during 2015 were as follows: risk free rate of 1.96%, dividend yield of 1.00%, volatility of 43.38% and average life of 4-7 years.

 

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Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 10. Stock Plans (Continued)

 

Restricted Stock

Restricted stock activity under the plan during the first nine months of 2015 is summarized below.

 

     Shares      Weighted
Average Grant
Date Fair Value
 

Outstanding at December 31, 2014

     —        $ —    

Granted

     65,122         16.10   

Vested

     —          —    

Exercised

     —          —    

Forfeited

     607         10.63   
  

 

 

    

 

 

 

Non-vested at September 30, 2015

     64,515       $ 16.15   
  

 

 

    

 

 

 

For the three months ended September 30, 2015 and 2014, the Company recognized $67 thousand and a credit of ($19) thousand in compensation expense due to forfeited shares for restricted stock, respectively. For the nine months ended September 30, 2015 and 2014, the Company recognized $83 thousand and $143 thousand in compensation expense for restricted stock, respectively.

At September 30, 2015, unrecognized compensation costs relating to restricted stock amounted to $959 thousand which will be expensed over the next 3.75 years.

The fair value of each restricted stock unit is based on the market value of the Company’s stock on the date of the grant.

 

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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 LOB. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this quarterly report on Form 10-Q. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.

Important Note Regarding Forward-Looking Statements

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

 

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

 

    changes in SBA loan products, including specifically the Section 7(a) program, or changes in SBA standard operating procedures;

 

    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 losses;

 

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

 

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

 

    changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reduced rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development, real estate prices, 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;

 

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Table of Contents
    governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA lending programs;

 

    changes in political and economic conditions, including continuing political and economic effects of the global economic downturn and other major developments;

 

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

 

    the ability to comply with any requirements imposed on the Company or the Bank by respective regulators, and the potential negative consequences that may result;

 

    Operational, compliance and other factors, including conditions in local areas in which we conduct 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 that the Company or Bank acquire;

 

    other risk factors listed from time to time in reports that the Company files with the SEC, including in the Company’s registration statement on Form S-1 (File No. 333-205126), as amended; and

 

    the success at managing the risks involved in the foregoing.

Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and LOB 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company’s interim consolidated financial statements and accompanying notes. This section should be read in conjunction with the Company’s interim consolidated financial statements and accompanying notes included elsewhere in this report and with the consolidated financial statements for the year ended December 31, 2014 and accompanying notes and other detailed information appearing in the Company’s registration statement on Form S-1(File No. 333-205126), as amended, filed with the SEC.

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

Nature of Operations

Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was established in May 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending services to small businesses nationwide in targeted industries. The Bank identifies and grows within selected industry sectors, or verticals, by leveraging expertise within those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) program. In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.

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

The Company earns revenue primarily from the sale of SBA-guaranteed loans. This income is comprised of loan servicing revenue and revaluation and net gains on sales of loans. Net interest income is another contributor to earnings. Offsetting these revenues are the cost of funding sources, provision for loan losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.

On July 23, 2015 the Company closed on its initial public offering.

 

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Conversion from S Corporation to C Corporation

Effective August 3, 2014, the Company terminated its status as an “electing small business corporation,” or S corporation, under Subchapter S of the Internal Revenue Code of 1986, or the Code, and became a C corporation under the Code for income tax purposes. As a result of the conversion to a C corporation, the Company recorded a net deferred tax liability of $3.3 million on the balance sheet. Upon recognition of the deferred tax liability the Company also recorded an offsetting adjustment to income tax expense of $3.3 million, which decreased after-tax earnings and shareholders’ equity by the same amount.

Business Outlook

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

Third quarter 2015 results demonstrated solid underlying financial performance and growth momentum for the Company. Management is focused not only on building out existing verticals but incrementally adding new verticals to the loan portfolio. The Company expects to originate approximately $1.1 billion in loans for the year 2015. Personnel and travel expenses increased during the first nine months of 2015 primarily due to further investment to support the growing loan production as well as development of a new small loan platform and other infrastructure costs, and the Company expects noninterest expense to increase consistent with the growth stage of its lifecycle.

During the first three quarters of 2015, the percentage of loans that the Company originated representing multi-advance loans increased, and the Company expects that percentage to continue on an upward trend over the next several quarters. The Company anticipates this trend will drive growth in the portfolio of loans held for sale, and a consequence of this growth will likely be an increase in the time period before gain-on-sale and servicing revenue on these loans can be realized. The Company expects a growing portfolio of loans held for sale to have a positive impact on net interest income and to partially offset the impact of the increased timing to the recognition of noninterest income. In addition, if loan production continues to increase with an increased focus on multi-advance loans, the Company also anticipates a decline over the next several quarters in the amount of loans sold as a percentage of the loans the Company originates.

Net gains on sale of loans is primarily driven by the volume of loans sold and the premium paid in the secondary market for these loans. During the third quarter of 2015, the average net gain on sale for loans sold decreased below prior quarters’ gains, which management believes was driven primarily by market conditions. There has been some stabilization in the market since the end of the third quarter, with average net gain on sale trending up from these lower levels. Market conditions indicate that trend will continue in the fourth quarter, though it is uncertain whether the premiums paid for loans that the Company sells will return to prior levels or, if so, when that may occur.

 

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Results of Operations

Performance Summary

Three months ended September 30, 2015 compared with three months ended September 30, 2014

For the three months ended September 30, 2015, the Company reported net income of $2.9 million, or $0.09 per diluted share, as compared to $641 thousand, or $0.02 per diluted share, for the three months ended September 30, 2014. This $2.3 million increase in quarterly net income is principally due to the following items:

 

    Increased net interest income of $2.7 million, or 69.7%, arising primarily from an increase in levels of loans held for sale related to originations in newer verticals that require a period of loan advances before being sold, which loans are sometimes referred to as “multi-advance loans” in this Report;

 

    Increased noninterest income of $1.3 million, or 7.7%, related principally to increased gains on sales of loans of $2.3 million, or 17.7%, partially offset by a $1.7 million, or 51.5%, decrease in loan servicing revenue and revaluation arising from increased negative servicing asset valuation adjustments of $2.0 million in the third quarter of 2015; and

 

    Decreased income tax expense of $3.7 million, or 62.7%. The higher level of income tax expense in the third quarter of 2014 was related to a one-time $3.3 million deferred tax liability recorded upon conversion from an S to C corporation.

Partially offsetting the above items which contributed to increased levels of net income was increased noninterest expense of $4.8 million, or 36.0%. The increased level of noninterest expense was principally driven by costs underlying increased loan production and the build out of new initiatives of the Company, including increased salaries of $3.8 million, or 62.6%, and travel expense of $389 thousand, or 21.7%.

Nine months ended September 30, 2015 compared with nine months ended September 30, 2014

For the nine months ended September 30, 2015, the Company reported net income of $14.9 million, or $0.48 per diluted share, as compared to $7.6 million, or $0.33 per diluted share, for the nine months ended September 30, 2014. This increase in net income is primarily attributable to the following items:

 

    Increased net interest income of $6.6 million, or 63.7%, arising primarily from an increase in levels of loans held for sale related to originations in newer verticals that require a period of loan advances before being sold; and

 

    Increased noninterest income of $16.1 million, or 36.8%, predominately comprised of $11.1 million, or 31.4%, growth in net gains on sale of loans, the absence of (i) $2.4 million in one-time losses on investments in non-consolidated affiliates and (ii) a one-time gain of $3.8 million related to the sale of an investment in nCino, Inc., a former subsidiary of the Company (“nCino”), partially offset by a $2.1 million, or 21.8%, decrease in loan servicing revenue and revaluation arising from increased negative servicing asset valuation adjustments of $3.1 million in the nine months ended September 30, 2015.

Partially offsetting the above items which contributed to increased levels of net income was increased noninterest expense of $10.3 million, or 26.2%. The increased level of noninterest expense was principally driven by costs underlying increased loan production and the build out of new initiatives of the Company, including increases to salaries of $5.8 million, or 26.5%, and to travel expense of $2.0 million, or 50.9%. Also partially offsetting the contributors to increased levels of net income was an increase to income tax expense of $4.3 million, or 71.9%, arising from the Company’s status as a C Corporation commencing on August 3, 2014.

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. 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 the Bank offer are generally above the industry average.

 

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Three months ended September 30, 2015 compared with three months ended September 30, 2014

For the three months ended September 30, 2015, net interest income increased $2.7 million, or 69.7%, to $6.6 million compared to the three months ended September 30, 2014. This increase was due to growth in average interest earning assets. Average interest earning assets increased by $349.1 million, or 70.7%, to $842.9 million for the three months ended September 30, 2015 compared to $493.9 million for the three months ended September 30, 2014, while the yield on average interest earning assets decreased slightly by three basis points to 4.24%. The cost of funds on interest bearing liabilities for the three months ended September 30, 2015 increased slightly by three basis points to 1.22%, and the average balance in interest bearing liabilities increased by $299.7 million, or 62.9%, over the same period. As indicated in the rate/volume table below, the slight increase in the cost of funds was outpaced by the effects of the increased volume of interest earning assets, resulting in increased interest income of $3.7 million and increased interest expense of $966 thousand for the three months ended September 30, 2015. For the three months ended September 30, 2015 compared to the three months ended September 30, 2014, net interest margin decreased from 3.13% to 3.11% due to the aforementioned effects.

Nine months ended September 30, 2015 compared with nine months ended September 30, 2014

For the nine months ended September 30, 2015, net interest income increased $6.6 million, or 63.7%, to $17.1 million compared to the nine months ended September 30, 2014. This increase was also due to growth in average interest earning assets. Average interest earning assets increased by $303.9 million, or 67.2%, to $756.5 million for the nine months ended September 30, 2015 compared to $452.5 million for the nine months ended September 30, 2014, while the yield on average interest earning assets decreased by nine basis points to 4.17%. The cost of funds on interest bearing liabilities for the nine months ended September 30, 2015 increased slightly by four basis points to 1.23%, and the average balance in interest bearing liabilities increased by $263.9 million, or 58.6% during the same period. As indicated in the rate/volume table below, the slight increase in the cost of funds was outpaced by the effects of the increased volume of interest earning assets, resulting in increased interest income of $9.2 million and increased interest expense of $2.5 million for the nine months ended September 30, 2015. For the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, net interest margin decreased from 3.08% to 3.02% due to the aforementioned effects.

 

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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. Loan fees are included in interest income on loans.

 

     Three Months Ended September 30,  
     2015     2014  
     Average
Balance
    Interest      Average
Yield/
Rate
    Average
Balance
    Interest      Average
Yield/
Rate
 

Interest earning assets:

              

Interest earning balances in other banks

   $ 110,425      $ 84         0.30   $ 70,155      $ 38         0.21

Investment securities

     60,192        211         1.39        21,655        93         1.70   

Loans held for sale

     428,940        5,622         5.20        229,634        2,990         5.17   

Loans held for investment(1)

     243,346        3,082         5.02        172,407        2,199         5.06   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest earning assets

     842,903        8,999         4.24        493,851        5,320         4.27   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Less: allowance for loan losses

     (5,202          (3,544     

Non-interest earning assets

     142,414             89,437        
  

 

 

        

 

 

      

Total assets

   $ 980,115           $ 579,744        
  

 

 

        

 

 

      

Interest bearing liabilities:

              

Money market accounts

   $ 376,495      $ 684         0.72   $ 217,532      $ 539         0.98

Certificates of deposit

     358,738        1,313         1.45        230,068        633         1.09   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total deposits

     735,233        1,997         1.08        447,600        1,172         1.04   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Small business lending fund

     6,800        26         1.52        6,800        26         1.52   

Notes payable to investors

     —         —          —         3,623        91         9.97   

Other borrowings

     34,612        369         4.23        18,877        137         2.88   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     776,645        2,392         1.22        476,900        1,426         1.19   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest bearing deposits

     14,086             10,746        

Non-interest bearing liabilities

     19,716             8,893        

Redeemable equity

     —              2,390        

Shareholders’ equity

     169,639             80,815        

Noncontrolling interest

     29             —         
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 980,115           $ 579,744        
  

 

 

        

 

 

      

Net interest income and interest rate spread

     $ 6,607         3.02     $ 3,894         3.08
    

 

 

    

 

 

     

 

 

    

 

 

 

Net interest margin

          3.11             3.13   
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

          108.53          103.55
       

 

 

        

 

 

 

 

(1)  Average loan balances include non-accruing loans.

 

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     Nine Months Ended September 30,  
     2015     2014  
     Average
Balance
    Interest      Average
Yield/
Rate
    Average
Balance
    Interest      Average
Yield/
Rate
 

Interest earning assets:

              

Interest earning balances in other banks

   $ 90,981      $ 220         0.32   $ 60,836      $ 102         0.22

Investment securities

     59,773        587         1.31        19,970        292         1.95   

Loans held for sale

     393,791        15,001         5.09        221,337        8,429         5.09   

Loans held for investment(1)

     211,906        7,810         4.93        150,398        5,611         4.99   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest earning assets

     756,451        23,618         4.17        452,541        14,434         4.26   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Less: allowance for loan losses

     (4,943          (3,160     

Non-interest earning assets

     117,186             83,720        
  

 

 

        

 

 

      

Total assets

   $ 868,694 &nb