10-Q 1 d97780d10q.htm FORM 10-Q Form 10-Q
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 June 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  ¨    NO  x

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 September 2, 2015, there were approximately 29,442,615 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 June 30, 2015

TABLE OF CONTENTS

 

         Page  
  PART I. FINANCIAL INFORMATION   
Item 1.  

Financial Statements (Unaudited)

     1   
 

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

     1   
 

Consolidated Statements of Income for Three and Six Months Ended June 30, 2015 and 2014

     2   
 

Consolidated Statements of Comprehensive Income for the Three and Six Months ended June 30, 2015 and 2014

     3   
 

Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2015 and 2014

     4   
 

Consolidated Statements of Cash Flows for the Six Months Ended June 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

     42   
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 June 30, 2015 (unaudited) and December 31, 2014*

 

(Dollars in thousands)

 

     June 30,
2015
    December 31,
2014*
 

Assets

    

Cash and due from banks

   $ 131,487      $ 29,902   

Certificates of deposit with other banks

     10,000        10,000   

Investment securities available-for-sale

     50,719        49,318   

Loans held for sale

     356,481        295,180   

Loans held for investment

     237,612        203,936   

Allowance for loan losses

     (5,183     (4,407
  

 

 

   

 

 

 

Net loans

     232,429        199,529   

Premises and equipment, net

     57,310        35,279   

Foreclosed assets

     34        371   

Servicing assets

     39,983        34,999   

Investments in non-consolidated affiliates

     —          6,345   

Other assets

     20,972        12,392   
  

 

 

   

 

 

 

Total assets

   $ 899,415      $ 673,315   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 15,749      $ 14,728   

Interest-bearing

     711,597        507,352   
  

 

 

   

 

 

 

Total deposits

     727,346        522,080   

Short term borrowings

     —          6,100   

Long term borrowings

     54,490        41,849   

Other liabilities

     14,198        11,472   
  

 

 

   

 

 

 

Total liabilities

     796,034        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 June 30, 2015 and December 31, 2014

     —          —     

Class A common stock, no par value, 100,000,000 shares authorized, 23,931,330 and 23,896,400, shares issued and outstanding at June 30, 2015 and December 31, 2014

     49,122        48,657   

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

     50,015        50,015   

Retained earnings (accumulated deficit)

     4,206        (6,943

Accumulated other comprehensive income

     1        85   
  

 

 

   

 

 

 

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

     103,344        91,814   
  

 

 

   

 

 

 

Noncontrolling interest

     37        —     
  

 

 

   

 

 

 

Total equity

     103,381        91,814   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 899,415      $ 673,315   
  

 

 

   

 

 

 

 

* Derived from audited financial statements.

 

See Notes to Consolidated Financial Statements   1  


Table of Contents

 

Live Oak Bancshares, Inc.

Consolidated Statements of Income

For the three and six months ended June 30, 2015 and 2014 (unaudited)

 

(Dollars in thousands, except per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015      2014     2015     2014  

Interest income

         

Loans and fees on loans

   $ 7,391       $ 4,762      $ 14,107      $ 8,851   

Investment securities, taxable

     200         99        376        199   

Other interest earning assets

     70         41        136        64   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     7,661         4,902        14,619        9,114   

Interest expense

         

Deposits

     1,801         1,131        3,277        2,229   

Borrowings

     444         204        885        357   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     2,245         1,335        4,162        2,586   

Net interest income

     5,416         3,567        10,457        6,528   
  

 

 

    

 

 

   

 

 

   

 

 

 

Provision for loan losses

     50         475        1,127        899   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     5,366         3,092        9,330        5,629   
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest income

         

Loan servicing revenue and revaluation

     1,772         3,585        5,878        6,285   

Net gains on sales of loans

     15,719         12,326        31,180        22,357   

Equity in loss of non-consolidated affiliates

     —           (1,208     (26     (2,202

Gain on sale of investment in non-consolidated affiliate

     —           —          3,782        —     

Other noninterest income

     644         405        1,376        873   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

     18,135         15,108        42,190        27,313   
  

 

 

    

 

 

   

 

 

   

 

 

 

Noninterest expense

         

Salaries and employee benefits

     9,319         6,007        17,674        15,708   

Travel expense

     2,212         1,338        3,672        2,088   

Professional services expense

     624         671        1,532        1,606   

Advertising and marketing expense

     1,118         722        2,126        1,520   

Occupancy expense

     731         429        1,188        866   

Data processing expense

     722         628        1,615        1,057   

Equipment expense

     350         313        754        566   

Other expense

     1,724         1,431        2,927        2,572   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

     16,800         11,539        31,488        25,983   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before taxes

     6,701         6,661        20,032        6,959   

Income tax expense

     2,766         —          8,044        —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     3,935         6,661        11,988        6,959   

Net loss attributable to noncontrolling interest

     —           —          20        —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Live Oak Bancshares, Inc.

   $ 3,935       $ 6,661      $ 12,008      $ 6,959   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.14       $ 0.31      $ 0.42      $ 0.33   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.13       $ 0.31      $ 0.41      $ 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 six months ended June 30, 2015 and 2014 (unaudited)

 

(Dollars in thousands)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015     2014      2015     2014  

Net income

   $ 3,935      $ 6,661       $ 11,988      $ 6,959   

Other comprehensive income (loss) before tax:

         

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

     (339     98         (136     203   

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

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss) before tax

     (339     98         (136     203   

Income tax expense

     131        —           52        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (208     98         (84     203   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 3,727      $ 6,759       $ 11,904      $ 7,162   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

See Notes to Consolidated Financial Statements   3  


Table of Contents

 

Live Oak Bancshares, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the six months ended June 30, 2015 and 2014 (unaudited)

 

(Dollars in thousands, except per share data)

 

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

Balance at December 31, 2013

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

Net income

    —          —          —          6,959        —          —          6,959   

Other comprehensive income

    —          —          —          —          203        —          203   

Sales of common stock

    45,440        —          200        —          —          —          200   

Stock option exercises

    174,990        —          152        —          —          —          152   

Issuance of common stock grants

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

Stock option based compensation expense

    —          —          79        —          —          —          79   

Restricted stock expense

    —          —          162        —          —          —          162   

Dividends (distributions to shareholders)

    —          —          —          (18,173     —          —          (18,173
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

    21,224,460        —        $ 21,904      $ 19,048      $ 12      $ —        $ 40,964   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

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

Net income (loss)

    —          —          —          12,008        —          (20     11,988   

Other comprehensive loss

    —          —          —          —          (84     —          (84

Consolidation of investment with non-controlling interest

    —          —          —          —          —          35        35   

Stock option exercises

    34,930        —          154        —          —          —          154   

Stock option based compensation expense

    —          —          295        —          —          —          295   

Restricted stock expense

    —          —          16        —          —          —          16   

Capital contribution from non-controlling interest

    —          —          —          —          —          22        22   

Dividends (distributions to shareholders)

    —          —          —          (859     —          —          (859
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

    23,931,330        4,723,530      $ 99,137      $ 4,206      $ 1      $ 37      $ 103,381   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Notes to Consolidated Financial Statements   4  


Table of Contents

 

Live Oak Bancshares, Inc.

Consolidated Statements of Cash Flows

For the six months ended June 30, 2015 and 2014 (unaudited)

(Dollars in thousands)

 

     Six Months Ended June 30,  
     2015     2014  

Cash flows from operating activities

    

Net income

   $ 11,988      $ 6,959   

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

    

Depreciation and amortization

     1,021        987   

Provision for loan losses

     1,127        899   

Amortization of premium on securities, net of accretion

     24        42   

Amortization of discount on unguaranteed loans

     1,313        (131

Deferred tax expense

     847        —     

Originations of loans held for sale

     (472,413     (295,281

Proceeds from sales of loans held for sale

     318,125        208,838   

Net gains (losses) on sale of foreclosed assets

     7        —     

Net increase in servicing assets

     (4,984     (4,128

Net gains on sale of loans held for sale

     (31,180     (22,357

Gain on sale of investment in non-consolidated affiliate

     (3,782     —     

Net loss on disposal of premises and equipment

     16        —     

Stock option based compensation expense

     295        79   

Stock grants

     —          2,992   

Restricted stock expense

     16        162   

Equity in loss of non-consolidated affiliates

     26        2,202   

Changes in assets and liabilities:

    

Accounts receivable and other assets

     (3,192     (1,636

Accrued expenses and other liabilities

     2,402        8,266   
  

 

 

   

 

 

 

Net cash used by operating activities

     (178,344     (92,107
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of securities available-for-sale

     (5,925     —     

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

     4,364        1,203   

Proceeds from sale of foreclosed assets

     330        —     

Proceeds from sale of investment in non-consolidated affiliate

     9,896        —     

Capital investments in non-consolidated affiliates

     —          (250

Net cash acquired in consolidation of equity method investment

     319        —     

Capital contribution from non-controlling interest

     22        —     

Loan originations and principal collections, net

     84,252        43,090   

Purchases of premises and equipment, net

     (23,068     (8,603
  

 

 

   

 

 

 

Net cash provided by investing activities

     70,190        35,440   
  

 

 

   

 

 

 

 

See Notes to Consolidated Financial Statements   5  


Table of Contents

 

Live Oak Bancshares, Inc.

Consolidated Statements of Cash Flows (Continued)

For the six months ended June 30, 2015 and 2014 (unaudited)

(Dollars in thousands)

 

     Six Months Ended June 30,  
     2015     2014  

Cash flows from financing activities

    

Net increase in deposits

     205,266        69,937   

Proceeds from long term borrowings

     21,322        5,760   

Repayment of long term borrowings

     (8,681     (131

Proceeds from short term borrowings

     —          6,000   

Repayment of short term borrowings

     (6,100     —     

Stock option exercises

     154        152   

Sale of common stock, net

     —          200   

Shareholder dividend distributions

     (2,222     (8,086
  

 

 

   

 

 

 

Net cash provided by financing activities

     209,739        73,832   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     101,585        17,165   

Cash and cash equivalents, beginning

     29,902        37,244   
  

 

 

   

 

 

 

Cash and cash equivalents, ending

   $ 131,487      $ 54,409   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Interest paid

   $ 4,152      $ 2,561   

Income tax

     9,174        —     

Supplemental disclosures of noncash operating, investing, and financing activities

    

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

   $ (136   $ 203   

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

     4,575        —     

Dividends declared but not paid

     169        3,414   

Transfer of loans held for sale to loans held for investment

     7,400        12,052   

Transfer of loans held for investment to loans held for sale

     4,514        3,830   

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 our 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.

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, 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 programs 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. With 8.7% of ownership remaining with a third party investor, amounts of earnings and equity in 504FA are now disclosed in the Company’s 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 loan servicing revenue and revaluation and net gains on sales of loans. Net interest income is a secondary contributor to our 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 six months ended June 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. A description of the significant accounting policies followed by the Company are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s registration statement on Form S-1.

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.

All information in the Notes to Unaudited Consolidated Financial Statements has 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.

 

7


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.

Note 2 - Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“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 us on January 1, 2016 and is not expected to have a significant impact on our 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.

 

8


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
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Basic earnings per share:

           

Net income available to common shareholders

   $ 3,935       $ 6,661       $ 12,008       $ 6,959   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average basic shares outstanding

     28,636,182         21,202,728         28,628,177         20,790,765   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.14       $ 0.31       $ 0.42       $ 0.33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

           

Net income available to common shareholders, for diluted EPS

   $ 3,935       $ 6,661       $ 12,008       $ 6,959   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average basic shares outstanding

     28,636,182         21,202,728         28,628,177         20,790,765   

Add effect of dilutive stock options and restricted stock grants

     862,217         73,379         811,645         141,680   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total weighted-average diluted shares outstanding

     29,498,399         21,276,107         29,439,822         20,932,445   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.13       $ 0.31       $ 0.41       $ 0.33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive securities

     916,199         1,528,520         956,199         1,528,520   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 six months ended June 30, 2014.

 

    Three Months Ended     Six Months Ended  

Pro forma net income available to common shareholders, after tax

  $ 4,096      $ 4,280   
 

 

 

   

 

 

 

Pro forma basic earnings per share

  $ 0.19      $ 0.21   
 

 

 

   

 

 

 

Pro forma diluted earnings per share

  $ 0.19      $ 0.20   
 

 

 

   

 

 

 

 

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
 

June 30, 2015

           

US government agencies

   $ 35,229       $ 213       $ 18       $ 35,424   

Residential mortgage-backed securities

     13,574         22         205         13,391   

Mutual fund

     1,913         —           9         1,904   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 50,716       $ 235       $ 232       $ 50,719   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 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 totaling $4.0 million for the purpose of complying with the Community Reinvestment Act. In addition, during the first quarter of 2015, the Company 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. There were no calls or maturities during the three and six months ending June 30, 2015. There were no calls, purchases, sales or maturities of securities during the three and six months ended June 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  
June 30, 2015    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

US government agencies

   $ —         $ —         $ 1,231       $ 18       $ 1,231       $ 18   

Residential mortgage-backed securities

     7,451         161         3,346         44         10,797         205   

Mutual fund

     1,904         9         —           —           1,904         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,355       $ 170       $ 4,577       $ 62       $ 13,932       $ 232   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 June 30, 2015, there were four securities, consisting of one US government agency security and three residential mortgage-backed securities, in unrealized loss positions for greater than 12 months; and six securities, consisting of five mortgage-backed securities and the 504 Fund mutual fund, in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2014, were comprised of six securities, consisting of one US 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 June 30, 2015 and December 31, 2014 were backed by U.S. government sponsored enterprises (“GSEs”).

The following is a summary of investment securities by maturity:

 

     June 30, 2015
Available for sale
 
     Amortized
cost
     Fair
value
 

One to five years

   $ 33,979       $ 34,193   

Five to ten years

     2,068         2,053   

After 10 years

     12,756         12,569   
  

 

 

    

 

 

 
   $ 48,803       $ 48,815   
  

 

 

    

 

 

 

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 540 Fund mutual fund investment.

At June 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 describe 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 - Death Care, Healthcare (medical, dental, ophthalmic), Pharmacy, Investment Advisors, Veterinary, Family Entertainment, Agriculture, Wine & Craft Beverages, Self-Storage and Hotels. Hotels is a new area of emphasis for which there was no loan activity as of June 30, 2015. The Bank chooses to finance businesses operating in these 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 and practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines requiring 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:

 

     June 30,
2015
     December 31,
2014
 

Commercial & Industrial

   $ 90,213       $ 81,057   

Death Care Management

     4,274         3,603   

Family Entertainment Centers

     488         333   

Healthcare

     12,464         12,319   

Independent Pharmacies

     37,379         34,079   

Registered Investment Advisors

     14,312         9,660   

Veterinary Industry

     21,070         20,902   

Wine & Craft Beverage

     75         —     

Other Industries

     151         161   

Construction & Development

     18,282         9,526   

Agriculture

     7,092         3,910   

Death Care Management

     484         92   

Family Entertainment Centers

     122         —     

Healthcare

     7,061         2,957   

Independent Pharmacies

     483         215   

Veterinary Industry

     2,698         2,207   

Wine & Craft Beverage

     159         —     

Other Industries

     183         145   

Owner Occupied Commercial Real Estate

     124,634         111,620   

Agriculture

     3,127         259   

Death Care Management

     19,510         18,879   

Family Entertainment Centers

     1,294         872   

Healthcare

     30,343         26,173   

Independent Pharmacies

     5,179         4,750   

Registered Investment Advisors

     2,463         2,161   

Self Storage

     167         —     

Veterinary Industry

     61,225         57,934   

Wine & Craft Beverage

     1,016         —     

Other Industries

     310         592   

Commercial Land

     4,264         1,248   

Agriculture

     4,264         1,248   

Total Loans 1

     237,393         203,451   

Net Deferred Costs

     2,491         2,060   

Discount on SBA 7(a) Unguaranteed 2

     (2,272      (1,575
  

 

 

    

 

 

 

Loans, Net of Unearned

   $ 237,612       $ 203,936   
  

 

 

    

 

 

 

 

1  Total loans include $21.8 million and $21.3 million of U.S. government guaranteed loans as of June 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  

June 30, 2015

           

Commercial & Industrial

   $ 73,965       $ 3,144       $ 13,104       $ 90,213   

Death Care Management

     4,170         104         —           4,274   

Family Entertainment Centers

     488         —           —           488   

Healthcare

     7,355         920         4,189         12,464   

Independent Pharmacies

     31,554         1,441         4,384         37,379   

Registered Investment Advisors

     14,312         —           —           14,312   

Veterinary Industry

     16,011         528         4,531         21,070   

Wine & Craft Beverage

     75         —           —           75   

Other Industries

     —           151         —           151   

Construction & Development

     18,282         —           —           18,282   

Agriculture

     7,092         —           —           7,092   

Death Care Management

     484         —           —           484   

Family Entertainment Centers

     122         —           —           122   

Healthcare

     7,061         —           —           7,061   

Independent Pharmacies

     483         —           —           483   

Veterinary Industry

     2,698         —           —           2,698   

Wine & Craft Beverage

     159         —           —           159   

Other Industries

     183         —           —           183   

Owner Occupied Commercial Real Estate

     99,812         4,679         20,143         124,634   

Agriculture

     3,127         —           —           3,127   

Death Care Management

     16,812         1,022         1,676         19,510   

Family Entertainment Centers

     1,294         —           —           1,294   

Healthcare

     26,060         1,725         2,558         30,343   

Independent Pharmacies

     4,987         192         —           5,179   

Registered Investment Advisors

     2,463         —           —           2,463   

Self Storage

     167         —           —           167   

Veterinary Industry

     43,586         1,740         15,899         61,225   

Wine & Craft Beverage

     1,016         —           —           1,016   

Other Industries

     300         —           10         310   

Commercial Land

     4,264         —           —           4,264   

Agriculture

     4,264         —           —           4,264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 196,323       $ 7,823       $ 33,247       $ 237,393   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

Death Care Management

     3,603         —           —           3,603   

Family Entertainment Centers

     333         —           —           333   

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

     —           161         —           161   

Construction & Development

     9,526         —           —           9,526   

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   

Owner Occupied Commercial Real Estate

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

Agriculture

     259         —           —           259   

Death Care Management

     16,519         639         1,721         18,879   

Family Entertainment Centers

     872         —           —           872   

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

     304         —           288         592   

Commercial Land

     1,248         —           —           1,248   

Agriculture

     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 June 30, 2015, segregated by risk grade as follows: Risk Grades 1 – 4 = $0, Risk Grade 5 = $378 thousand, Risk Grades 6 – 8 = $21.5 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. Also, 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
 

June 30, 2015

                       

Commercial & Industrial

   $ 779       $ 1,029       $ 281       $ 5,372       $ 7,461       $ 82,752       $ 90,213       $ —     

Death Care Management

     —           —           —           —           —           4,274         4,274         —     

Family Entertainment Centers

     —           —           —           —           —           488         488         —     

Healthcare

     —           346         135         1,626         2,107         10,357         12,464         —     

Independent Pharmacies

     —           631         140         1,541         2,312         35,067         37,379         —     

Registered Investment Advisors

     —           —           —           —           —           14,312         14,312         —     

Veterinary Industry

     779         52         6         2,205         3,042         18,028         21,070         —     

Wine & Craft Beverage

     —           —           —           —           —           75         75         —     

Other Industries

     —           —           —           —           —           151         151         —     

Construction & Development

     —           —           —           —           —           18,282         18,282         —     

Agriculture

     —           —           —           —           —           7,092         7,092         —     

Death Care Management

     —           —           —           —           —           484         484         —     

Family Entertainment Centers

     —           —           —           —           —           122         122         —     

Healthcare

     —           —           —           —           —           7,061         7,061         —     

Independent Pharmacies

     —           —           —           —           —           483         483         —     

Veterinary Industry

     —           —           —           —           —           2,698         2,698         —     

Wine & Craft Beverage

     —           —           —           —           —           159         159         —     

Other Industries

     —           —           —           —           —           183         183         —     

Owner Occupied Commercial Real Estate

     1,541         4,201         1,355         10,333         17,430         107,204         124,634         —     

Agriculture

     —           —           —           —           —           3,127         3,127         —     

Death Care Management

     —           —           —           1,677         1,677         17,833         19,510         —     

Family Entertainment Centers

     —           —           —           —           —           1,294         1,294         —     

Healthcare

     181         —           24         2,224         2,429         27,914         30,343         —     

Independent Pharmacies

     —           —           —           —           —           5,179         5,179         —     

Registered Investment Advisors

     —           —           —           —           —           2,463         2,463         —     

Self Storage

     —           —           —           —           —           167         167      

Veterinary Industry

     1,360         4,201         1,331         6,432         13,324         47,901         61,225         —     

Wine & Craft Beverage

     —           —           —           —           —           1,016         1,016         —     

Other Industries

     —           —           —           —           —           310         310         —     

Commercial Land

     —           —           —           —           —           4,264         4,264         —     

Agriculture

     —           —           —           —           —           4,264         4,264         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total1

   $ 2,320       $ 5,230       $ 1,636       $ 15,705       $ 24,891       $ 212,502       $ 237,393       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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

Death Care Management

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

Family Entertainment Centers

     —           —           —           —           —           333         333         —     

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

     —           —           —           —           —           161         161         —     

Construction & Development

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

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         —     

Owner Occupied Commercial Real Estate

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

Agriculture

     —           —           —           —           —           259         259         —     

Death Care Management

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

Family Entertainment Centers

     —           —           —           —           —           872         872         —     

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         317         592         —     

Commercial Land

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

Agriculture

     —           —           —           —           —           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 June 30, 2015, of which $14.1 million is greater than 90 days past due, $3.5 million is 30-89 days past due and $4.3 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 $102 thousand and $75 thousand for the three months ended June 30, 2015 and 2014, respectively and for the six months ended June 30, 2015 and 2014 would have increased approximately $261 thousand and $127 thousand, respectively. All nonaccrual loans are included in the held for investment portfolio.

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

 

June 30, 2015

   Loan
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

   $ 6,432       $ 5,931       $ 501   

Healthcare

     1,761         1,586         175   

Independent Pharmacies

     1,681         1,456         225   

Veterinary Industry

     2,990         2,889         101   

Owner Occupied Commercial Real Estate

     13,229         10,641         2,588   

Death Care Management

     1,677         1,469         208   

Healthcare

     2,429         1,918         511   

Veterinary Industry

     9,123         7,254         1,869   
  

 

 

    

 

 

    

 

 

 

Total

   $ 19,661       $ 16,572       $ 3,089   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

   Loan
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

   $ 7,133       $ 6,620       $ 513   

Healthcare

     2,652         2,368         284   

Independent Pharmacies

     1,224         1,139         85   

Veterinary Industry

     3,257         3,113         144   

Owner Occupied Commercial Real Estate

     11,559         8,935         2,624   

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

   $ 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 allowance for loan losses (“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 ALL 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  

June 30, 2015

          

Beginning Balance

   $ 755      $ 2,062      $ 2,063      $ 354      $ 5,234   

Charge offs

     —          (42     (186     —          (228

Recoveries

     —          87        40        —          127   

Provision

     89        239        (264     (14     50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2014

          

Beginning Balance

   $ 480      $ 1,921      $ 812      $ —        $ 3,213   

Charge offs

     —          (119     (8     —          (127

Recoveries

     —          5        2        —          7   

Provision

     (180     124        506        25        475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

June 30, 2015

           

Beginning Balance

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

Charge offs

     —          (121     (358     —           (479

Recoveries

     —          88        40        —           128   

Provision

     258        88        602        179         1,127   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

June 30, 2014

           

Beginning Balance

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

Charge offs

     —          (119     (8     —           (127

Recoveries

     —          67        6        —           73   

Provision

     (50     472        452        25         899   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending Balance

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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:

 

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

Allowance for Loan Losses:

              

Loans individually evaluated for impairment

   $ —         $ 1,092       $ 677       $ —         $ 1,769   

Loans collectively evaluated for impairment

     844         1,254         976         340         3,414   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable 1:

              

Loans individually evaluated for impairment

   $ —         $ 16,694       $ 9,023       $ —         $ 25,717   

Loans collectively evaluated for impairment

     18,282         107,940         81,190         4,264         211,676   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 18,282       $ 124,634       $ 90,213       $ 4,264       $ 237,393   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

   $ —         $ 16,551       $ 10,226       $ —         $ 26,777   

Loans collectively evaluated for impairment

     9,526         95,069         70,831         1,248         176,674   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015, of which $20.3 million are included in loans individually evaluated for impairment and $1.6 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.

 

June 30, 2015

   Unpaid
Principal
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

   $ 9,023       $ 7,434       $ 1,589   

Healthcare

     3,311         2,746         565   

Independent Pharmacies

     2,492         1,799         693   

Veterinary Industry

     3,220         2,889         331   

Owner Occupied Commercial Real Estate

     16,694         12,837         3,857   

Death Care Management

     1,677         1,469         208   

Healthcare

     2,429         1,919         510   

Veterinary Industry

     12,588         9,449         3,139   
  

 

 

    

 

 

    

 

 

 

Total

   $ 25,717       $ 20,271       $ 5,446   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

   Unpaid
Principal
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

   $ 10,226       $ 8,341       $ 1,885   

Healthcare

     4,217         3,540         677   

Independent Pharmacies

     2,203         1,492         711   

Veterinary Industry

     3,806         3,309         497   

Owner Occupied Commercial Real Estate

     16,551         11,155         5,396   

Death Care Management

     1,721         1,505         216   

Healthcare

     2,312         1,919         393   

Veterinary Industry

     12,243         7,456         4,787   

Other Industries

     275         275         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 26,777       $ 19,496       $ 7,281   
  

 

 

    

 

 

    

 

 

 

 

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, net deferred loan fees or costs and any non-accreted loan discount.

 

Three months ended June 30, 2015:    Unpaid
Principal
Balance
     Recorded
Investment
     Total
Reserve
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans with no allowance

   $ 1,020       $ 1,008       $ —         $ 2,852       $ 7   

Commercial & Industrial

     331         327         —           1,622         5   

Healthcare

     97         95         —           352         1   

Independent Pharmacies

     191         190         —           1,150         2   

Veterinary Industry

     43         42         —           120         2   

Owner Occupied Commercial Real Estate

     689         681         —           1,230         2   

Healthcare

     166         164         —           143         —     

Veterinary Industry

     523         517         —           1,087         2   

Loans with an allowance

     24,697         24,649         1,769         24,533         87   

Commercial & Industrial

     8,693         8,686         677         8,313         38   

Healthcare

     3,213         3,215         298         2,968         24   

Independent Pharmacies

     2,303         2,299         345         2,601         11   

Veterinary Industry

     3,177         3,172         34         2,744         3   

Owner Occupied Commercial Real Estate

     16,004         15,963         1,092         16,220         49   

Death Care Management

     1,677         1,675         11         1,418         —     

Healthcare

     2,263         2,260         78         2,359         —     

Veterinary Industry

     12,064         12,028         1,003         12,443         49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,717       $ 25,657       $ 1,769       $ 27,385       $ 94   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Three months ended June 30, 2014:    Unpaid
Principal
Balance
     Recorded
Investment
     Total
Reserve
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans with no allowance

   $ 1,051       $ 1,037       $ —         $ 6,220       $ 8   

Commercial & Industrial

     211         208         —           3,690         3   

Healthcare

     91         89         —           705         1   

Veterinary Industry

     120         119         —           2,985         2   

Owner Occupied Commercial Real Estate

     840         829         —           2,530         5   

Veterinary Industry

     840         829         —           2,530         5   

Loans with an allowance

     17,397         17,560         436         11,774         101   

Commercial & Industrial

     6,374         6,462         245         3,444         24   

Healthcare

     2,148         2,183         8         2,831         —     

Independent Pharmacies

     372         371         137         —           17   

Veterinary Industry

     3,854         3,908         100         613         7   

Construction & Development

     1,996         1,997         12         2,952         32   

Veterinary Industry

     1,996         1,997         12         2,952         32   

Owner Occupied Commercial Real Estate

     9,027         9,101         179         5,378         45   

Healthcare

     1,127         1,152         2         1,054         —     

Veterinary Industry

     7,900         7,949         177         4,324         45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,448       $ 18,597       $ 436       $ 17,994       $ 109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

 

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

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

 

Six months ended June 30, 2015:    Unpaid
Principal
Balance
     Recorded
Investment
     Total
Reserve
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans with no allowance

   $ 1,020       $ 1,008       $ —         $ 2,428       $ 12   

Commercial & Industrial

     331         327         —           1,000         8   

Healthcare

     97         95         —           224         1   

Independent Pharmacies

     191         190         —           618         5   

Veterinary Industry

     43         42         —           158         2   

Owner Occupied Commercial Real Estate

     689         681         —           1,428         4   

Healthcare

     166         164         —           146         —     

Veterinary Industry

     523         517         —           1,282         4   

Loans with an allowance

     24,697         24,649         1,769         23,686         159   

Commercial & Industrial

     8,693         8,686         677         8,652         73   

Healthcare

     3,213         3,215         298         3,310         47   

Independent Pharmacies

     2,303         2,299         345         2,166         20   

Veterinary Industry

     3,177         3,172         34         3,176         6   

Owner Occupied Commercial Real Estate

     16,004         15,963         1,092         15,034         86   

Death Care Management

     1,677         1,675         11         1,475         —     

Healthcare

     2,263         2,260         78         2,173         —     

Veterinary Industry

     12,064         12,028         1,003         11,386         86   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,717       $ 25,657       $ 1,769       $ 26,114       $ 171   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014

   Unpaid
Principal
Balance
     Recorded
Investment
     Total
Reserve
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans with no allowance

   $ 1,213       $ 1,197       $ —         $ 1,998       $ 113   

Commercial & Industrial

     239         237         —           363         64   

Healthcare

     3         3         —           88         2   

Independent Pharmacies

     194         194         —           86         57   

Veterinary Industry

     42         40         —           189         5   

Owner Occupied Commercial Real Estate

     974         960         —           1,635         49   

Death Care Management

     —           —           —           66         —     

Healthcare

     41         41         —           147         —     

Veterinary Industry

     933         919         —           1,422         49   

Loans with an allowance

     25,564         23,805         1,727         20,076         361   

Commercial & Industrial

     9,987         9,747         676         6,583         97   

Healthcare

     4,214         4,202         361         3,333         38   

Independent Pharmacies

     2,009         2,005         206         621         17   

Veterinary Industry

     3,764         3,540         109         2,629         42   

Owner Occupied Commercial Real Estate

     15,577         14,058         1,051         13,493         264   

Death Care Management

     1,721         1,720         20         414         —     

Healthcare

     2,271         2,268         82         1,967         —     

Veterinary Industry

     11,310         9,796         947         11,036         264   

Other Industries

     275         274         2         76         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,777       $ 25,002       $ 1,727       $ 22,074       $ 474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

 

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

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

 

Six months ended June 30, 2014:    Unpaid
Principal
Balance
     Recorded
Investment
     Total
Reserve
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans with no allowance

   $ 1,051       $ 1,037       $ —         $ 3,680       $ 26   

Commercial & Industrial

     211         208         —           1,919         11   

Healthcare

     91         89         —           373         1   

Veterinary Industry

     120         119         —           1,546         10   

Owner Occupied Commercial Real Estate

     840         829         —           1,761         15   

Veterinary Industry

     840         829         —           1,761         15   

Loans with an allowance

     17,397         17,560         436         13,920         183   

Commercial & Industrial

     6,374         6,462         245         4,403         40   

Healthcare

     2,148         2,183         8         2,210         —     

Independent Pharmacies

     372         371         137         —           17   

Veterinary Industry

     3,854         3,908         100         2,193         23   

Construction & Development

     1,996         1,997         12         1,476         67   

Veterinary Industry

     1,996         1,997         12         1,476         67   

Owner Occupied Commercial Real Estate

     9,027         9,101         179         8,041         77   

Healthcare

     1,127         1,152         2         1,054         —     

Veterinary Industry

     7,900         7,949         177         6,987         77   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,448       $ 18,597       $ 436       $ 17,600       $ 209   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no new TDRs made during the three months ended June 3, 2015.

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

Three months ended June 30, 2014:

 

     Number of
Loans
     Loan
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

     2       $ 372       $ —         $ 372   

Independent Pharmacies

     2         372         —           372   

Extend Amortization

     2         372         —           372   

Owner Occupied Commercial Real Estate

     1         8         —           8   

Veterinary Industry

     1         8         —           8   

Interest Only

     1         8         —           8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

     3       $ 380       $ —         $ 380   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

 

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

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

 

Six months ended June 30, 2015:

 

     Number of
Loans
     Loan
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

     3       $ 133       $ —         $ 133   

Healthcare

     3         133         —           133   

Interest Only

     3         133         —           133   

Owner Occupied Commercial Real Estate

     1         24         —           24   

Healthcare

     1         24         —           24   

Interest Only

     1         24         —           24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

     4       $ 157       $ —         $ 157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2014:

 

     Number of
Loans
     Loan
Balance
     Guaranteed
Balance
     Unguaranteed
Exposure
 

Commercial & Industrial

     5       $ 588       $ —         $ 588   

Independent Pharmacies

     2         372         —           372   

Extend Amortization

     2         372         —           372   

Veterinary Industry

     3         216         —           216   

Payment Deferral

     3         216         —           216   

Owner Occupied Commercial Real Estate

     1         8         —           8   

Veterinary Industry

     1         8         —           8   

Interest Only

     1         8         —           8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

     6       $ 596       $ —         $ 596   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables represent the recorded investment in TDR loans entered into during the six months ended:

June 30, 2015

 

     Number of
Loans
     Pre-modification
Recorded

Investment
     Post-modification
Recorded
Investment
 

Commercial & Industrial

     3       $ 229       $ 133   

Healthcare

     3         229         133   

Interest Only

     3         229         133   

Owner Occupied Commercial Real Estate

     1         41         24   

Healthcare

     1         41         24   

Interest Only

     1         41         24   
  

 

 

    

 

 

    

 

 

 

Total Loans

     4       $ 270       $ 157   
  

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

 

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

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

 

June 30, 2014

 

     Number of
Loans
     Pre-modification
Recorded
Investment
     Post-modification
Recorded
Investment
 

Commercial & Industrial

     5       $ 598       $ 588   

Independent Pharmacies

     2         379         372   

Extend Amortization

     2         379         372   

Veterinary Industry

     3         219         216   

Payment Deferral

     3         219         216   

Owner Occupied Commercial Real Estate

     1         8         8   

Veterinary Industry

     1         8         8   

Payment Deferral

     1         8         8   
  

 

 

    

 

 

    

 

 

 

Total Loans

     6       $ 606       $ 596   
  

 

 

    

 

 

    

 

 

 

 

28


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. The following tables present loans that were modified as TDRs within the twelve months ending June 30, 2015 and 2014, for which there was a payment default during the subsequent months:

June 30, 2015

 

     Post-modification  
     Number of
Loans
     Recorded
Investment
 

Default (Charge-Off)

     

Owner Occupied Commercial Real Estate

     2       $ 1,675   

Death Care Management

     1         1,675   

Payment Deferral

     1         1,675   

Veterinary Industry

     1         —     

Interest Only

     1         —     

Default (Nonaccrual)

     

Commercial & Industrial

     4         272   

Healthcare

     3         133   

Interest Only

     3         133   

Independent Pharmacies

     1         139   

Interest Only

     1         139   

Owner Occupied Commercial Real Estate

     1         24   

Healthcare

     1         24   

Interest Only

     1         24   

No Defaults (paying as restructured)

     

Commercial & Industrial

     1         165   

Independent Pharmacies

     1         165   

Extend Amortization

     1         165   

Total Loans

     8         2,136   

Total TDRs paying as restructured

     1         165   
  

 

 

    

 

 

 

Total TDRs

     8       $ 2,136   
  

 

 

    

 

 

 

June 30, 2014

 

     Post-modification  
     Number of
Loans
     Recorded
Investment
 

No Defaults (paying as restructured)

     6       $ 596   

Commercial & Industrial

     5         588   

Independent Pharmacies

     2         372   

Extend Amortization

     2         372   

Veterinary Industry

     3         216   

Payment Deferral

     3         216   

Owner Occupied Commercial Real Estate

     1         8   

Veterinary Industry

     1         8   

Interest Only

     1         8   

Total Loans

     6         596   

Total TDRs paying as restructured

     6         596   
  

 

 

    

 

 

 

Total TDRs

     6       $ 596   
  

 

 

    

 

 

 

 

29


Table of Contents

 

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

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 $1.5 billion and $1.3 billion at June 30, 2015 and December 31, 2014, respectively.

The following summarizes the activity pertaining to servicing rights:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Balance at beginning of period

   $ 38,457       $ 30,518       $ 34,999       $ 29,053   

Additions, net

     3,373         2,666         6,709         4,751   

Changes in fair value

     (1,847      (3      (1,725      (623
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 39,983       $ 33,181       $ 39,983       $ 33,181   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of servicing rights was determined using discount rates ranging from 7.05% to 12.40% on June 30, 2015, and 7.46% to 13.27% on June 30, 2014. The fair value of servicing rights was determined using prepayment speeds ranging from 4.19% to 9.57% on June 30, 2015 and 4.53% to 8.79% on June 30, 2014, depending on the stratification of the specific right. Changes to fair value are reported in net gains on sales of loans.

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.

Note 7. Borrowings

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

 

     June 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   
  

 

 

    

 

 

 

 

30


Table of Contents

 

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 7. Borrowings (Continued)

 

     June 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 June 30, 2015 the interest rate was 1.50%. Interest is payable quarterly in arrears. With the approval of the Company’s regulator, we 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.

     5,702         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 June 30, 2015.

     24,000         16,914   

 

31


Table of Contents

 

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 7. Borrowings (Continued)

 

     June 30,
2015
     December 31,
2014
 

On September 18, 2014, the Company entered into a note payable 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. Payments are interest only with all principal and accrued interest due on September 18, 2017. There is $3.1 million of remaining available credit on this note at June 30, 2015.

     5,000         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. There is $7.8 million of remaining available credit on this line of credit at June 30, 2015.

     7,210         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.

     1,182         —     

On February 23, 2015 the Company transferred two related party loans to an unrelated third party financial institution 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 third party institution 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 maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $4.6 million at June 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.

     4,575         —     

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.

     21         83   
  

 

 

    

 

 

 

Total long term borrowings

   $ 54,490       $ 41,849   
  

 

 

    

 

 

 

 

32


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:

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

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.

 

33


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.

 

June 30, 2015

   Total      Level 1      Level 2      Level 3  

Investment securities available-for-sale

           

US government agencies

   $ 35,424       $ —         $ 35,424       $ —     

Residential mortgage-backed securities

     13,391         —           13,391         —     

Mutual fund

     1,904         —           1,904         —     

Servicing assets1

     39,983         —           —           39,983   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 90,702       $ —         $ 50,719       $ 39,983   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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.

 

June 30, 2015

   Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 22,991       $ —         $ —         $ 22,991   

Foreclosed assets

     34         —           —           34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 23,025       $ —         $ —         $ 23,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 June 30, 2015 and December 31, 2014 the significant unobservable inputs used in the fair value measurements were as follows:

June 30, 2015

 

Level 3 Assets with Significant
Unobservable Inputs

   Fair Value     

Valuation Technique

  

Significant

Unobservable

Inputs

   Range  

Impaired Loans

   $ 22,991       Discounted appraisals    Appraisal adjustments (1)      10% to 20%   
      Discounted expected cash flows    Interest rate & repayment term     

 

 

Weighted

Average discount

rate 4.86%

  

  

  

Foreclosed Assets

   $ 34       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    Appraisal adjustments (1)      10% to 20%   
      Discounted expected cash flows    Interest rate & repayment term     
 
 
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:

 

June 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)
     Ending
Balance
 

Financial assets

              

Cash and due from banks

   $ 131,487       $ 131,487       $ —         $ —         $ 131,487   

Certificates of deposit with other banks

     10,000         9,931         —           —           9,931   

Investment securities, available for sale

     50,719         —           50,719         —           50,719   

Loans held for sale

     356,481         —           —           367,504         367,504   

Loans, net of allowance for loan losses

     232,429         —           —           226,429         226,429   

Servicing assets

     39,983         —           —           39,983         39,983   

Accrued interest receivable

     4,228         4,228         —           —           4,228   

Financial liabilities

              

Deposits

     727,346         —           724,160         —           724,160   

Accrued interest payable

     201         201         —           —           201   

Long term borrowings

     54,490         —           —           57,372         57,372   

 

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)
     Ending
Balance
 

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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Table of Contents

 

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:

 

     June 30,
2015
     December 31,
2014
 

Commitments to extend credit

   $ 696,357       $ 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

   $ 696,757       $ 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.

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 June 30, 2015 and 2014, the Company recognized $177 thousand and $42 thousand in compensation expense for stock options, respectively. For the six months ended June 30, 2015 and 2014, the Company recognized $295 thousand and $79 thousand in compensation expense for stock options, respectively.

Stock option activity under the plan during the six month periods ended June 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

     34,930         4.40         

Forfeited

     66,319         4.88         

Granted

     636,505         11.70         
  

 

 

    

 

 

       

Outstanding at June 30, 2015

     2,272,826       $ 7.28         9.03 years       $ 15,277,131   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2015

     149,258       $ 3.76         8.20 years       $ 1,528,763   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Outstanding at December 31, 2013

     225,000       $ 1.01         

Exercised

     174,990         0.87         

Forfeited

     21,480         4.40         

Granted

     1,550,000           4.40         
  

 

 

    

 

 

       

Outstanding at June 30, 2014

     1,578,530       $ 4.31         9.66 years       $   1,442,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2014

     16,680       $ 1.50         6.91 years       $ 483,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 six months ended June 30, 2015.

 

     Shares      Weighted
Average
Grant Date
Fair Value
 

Non-vested at December 31, 2014

     1,704,230       $ 1.18   

Granted

     636,505         4.59   

Vested

     115,918         0.53   

Exercised

     34,930         0.58   

Forfeited

     66,319         0.83   
  

 

 

    

 

 

 

Non-vested at June 30, 2015

     2,123,568       $ 2.26   
  

 

 

    

 

 

 

 

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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 six months of 2015 is summarized below.

 

     Shares      Weighted
Average Grant
Date Fair Value
 

Outstanding at December 31, 2014

     —         $ —     

Granted

     9,243         10.63   

Vested

     —           —     

Excercised

     —           —     

Forfeited

     407         10.63   
  

 

 

    

 

 

 

Non-vested at June 30, 2015

     8,836       $ 10.63   
  

 

 

    

 

 

 

For the three months ended June 30, 2015 and 2014, the Company recognized $8 thousand and $19 thousand in compensation expense for restricted stock, respectively. For the six months ended June 30, 2015 and 2014, the Company recognized $16 thousand and $162 thousand in compensation expense for restricted stock, respectively.

At June 30, 2015, unrecognized compensation costs relating to stock options amounted to $4.4 million which will be expensed over the next 3.96 years. At June 30, 2015, unrecognized compensation costs relating to restricted stock amounted to $78 thousand which will be expensed over the next 1.29 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 1.65%, dividend yield of 1.75%, volatility of 43.61% and average life of 4-7 years.

Note 11. Subsequent Events

Management has evaluated subsequent events through the date the financial statements were available to be issued and determined that the following events required disclosure:

Initial Public Offering

During July 2015, the Company completed an initial public offering issuing 5,500,000 shares of voting common stock, no par value, at $17.00 per share for gross proceeds of $93.5 million. Net proceeds after underwriting discounts and estimated expenses were $87.2 million.

During August 2015 the Company repaid $12.2 million in long term borrowings consisting of $5.0 million bearing an interest rate of LIBOR plus 3.50% and $7.2 million bearing an interest rate of LIBOR plus 4.00%.

 

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Table of Contents

 

Live Oak Bancshares, Inc.

Notes to Unaudited Consolidated Financial Statements

 

Note 11. Subsequent Events (Continued)

 

Option Grants

Effective July 22, 2015 the Company issued 810,900 and 35,000 options vesting over seven and four years, respectively. Exercise price is $17.00 per share and weighted average grant date fair value using the Black-Scholes option-pricing model is $7.64 per share. Seven year vesting is to occur at 10% per year for the first five years and then 25% per year in years six and seven. Four year vesting is to occur at 25% per year. Unrecognized compensation expense associated with these grants is $6.5 million to be recognized over the next seven years.

Effective August 25, 2015, the Company issued 282,343 and 30,000 stock options vesting over seven and four years, respectively. The exercise price for these options is $19.15 per share, the closing price of the Company’s voting common stock on the date of grant. The weighted average grant date fair value of these options using the Black-Scholes option-pricing model is $8.96 per share. Seven year vesting is to occur at 10% per year for the first five years and then 25% per year in years six and seven. Four year vesting is to occur at 25% per year. Unrecognized compensation expense associated with this grant is $2.8 million to be recognized over the next seven years.

Cash Dividend

On August 25, 2015, the Company declared a cash dividend of 1.0 cents per share to be paid on September 11, 2015.

 

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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 we believe are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to our 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 we 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 us at the time. We undertake 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 our business, management’s beliefs and assumptions made by management. These statements are not guarantees of our future performance and involve certain risks, uncertainties and assumptions (called Future Factors), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. Future Factors include, without limitation:

 

    deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;

 

    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 our ability to use the technology-based platform that is critical to the success of our business model;

 

    changes in financial market conditions, either internationally, nationally or locally in areas in which we conduct our operations, including, without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices;

 

    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, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds and other financial institutions operating in our 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;

 

    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;

 

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

 

    the effect of any mergers, acquisitions or other transactions, to which we or the Bank may from time to time be a party, including, without limitation, our ability to successfully integrate any businesses that we acquire; and

 

    our success at managing the risks involved in the foregoing.

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 filed on Form S-1 filed with the SEC and declared effective on July 22, 2015.

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 our 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, 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 programs 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 a secondary contributor to our 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.

Conversion from S Corporation to C Corporation

Effective August 3, 2014, we terminated our 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, we recorded a net deferred tax liability of $3.3 million on our balance sheet. Upon recognition of the deferred tax liability we also recorded an offsetting adjustment to income tax expense of $3.3 million, which decreased our after-tax earnings and shareholders’ equity by the same amount.

 

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Results of Operations

Performance Summary

For the three months ended June 30, 2015, we reported net income of $3.9 million, or $0.14 per diluted share, as compared to $6.7 million, or $.31 per diluted share, for the three months ended June 30, 2014. This quarterly decrease in net income is principally due to costs underlying increased loan production, including an increase in salaries of $3.3 million, or 55.1%, and travel expenses of $874 thousand, or 65.3%, combined with a $2.8 million tax provision for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014 during which we had no tax provision due to our operation as a pass through S Corporation. An additional factor contributing to the decline in net income for the second quarter of 2015 was a downward adjustment in the valuation of our servicing rights of $1.8 million compared to a $3 thousand valuation increase for the quarter ended June 30, 2014.

For the six months ended June 30, 2015, we reported net income of $12.0 million, or $0.41 per diluted share, as compared to $7.0 million, or $0.33 per diluted share, for the six months ended June 30, 2014. This increase in net income is primarily attributable to growth in loan production and revenues associated with growth in loans during the six months ended June 30, 2015 resulting in increased net interest income of $3.9 million, or 60.2%, and increased noninterest income of $14.9 million, or 54.5%, (predominately comprised of an $8.8 million or 39.5% growth in net gains on sale of loans) partially offset by increased noninterest expense of $5.5 million, or 21.2%, (composed principally of increases in salaries of $2.0 million and increased travel expenses of $1.6 million) and income tax expense of $8.0 million.

Net Interest Income and Margin

Net interest income, a secondary contributor to our earnings, represents the difference between the income that we earn on our interest-earning assets and the cost to us of our interest-bearing liabilities. Our net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that we earn or pay 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, we gather deposits over the Internet and in the community in which we are headquartered. Due to the nature of a branchless bank and our relatively low overhead required for deposit gathering, the rates we are able to offer are generally above the industry average.

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

For the three months ended June 30, 2015, net interest income increased $1.8 million, or 51.8%, to $5.4 million compared to the three months ended June 30, 2014. This increase was due to growth in average interest earning assets. Average interest earning assets increased by $282.7 million, or 61.9%, for the three months ended June 30, 2015 compared to $456.6 million for the three months ended June 30, 2014, while the related yield on average interest earning assets decreased by fifteen basis points to 4.16%. The corresponding cost of funds on interest bearing liabilities for the three months ended June 30, 2015 increased slightly by nine basis points to 1.25%, and the average balance in interest bearing liabilities increased by $256.5 million, or 55.6%, 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 $2.8 million and increased interest expense of $0.9 million for the three months ended June 30, 2015. For the three months ended June 30, 2015 compared to the three months ended June 30, 2014, our net interest margin decreased from 3.13% to 2.94% due to the aforementioned effects.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

For the six months ended June 30, 2015, net interest income increased $3.9 million, or 60.2%, to $10.5 million compared to the six months ended June 30, 2014. This increase was also due to growth in average interest earning assets. Average interest earning assets increased by $281.6 million, or 64.8%, for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, while the related yield on average interest earning assets decreased by eleven basis points to 4.12%. The corresponding cost of funds on interest bearing liabilities for the six months ended June 30, 2014 increased slightly by three basis points to 1.22%, and the average balance in interest

 

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bearing liabilities increased by $252.2 million, or 57.7% during the same period. As indicated in the rate volume table below, the slight drop in the cost of funds was outpaced by the effects of the increased volume of interest earning assets, resulting in increased interest income of $5.5 million and increased interest expense of $1.6 million for the six months ended June 30, 2015. For the six months ended June 30, 2015 compared to the six months ended June 30, 2014, our net interest margin decreased from 3.03% to 2.94% due to the aforementioned effects.

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

 

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

Interest earning assets:

              

Interest earning balances in other banks

   $ 80,169      $ 70         0.35   $ 59,642      $ 41         0.28

Investment securities

     60,201        200         1.33        18,824        99         2.11   

Loans held for sale

     364,504        4,526         4.98        241,178        3,095         5.15   

Loans held for investment

     234,479        2,865         4.90        136,967        1,667         4.88   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest earning assets

     739,353        7,661         4.16        456,611        4,902         4.31   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Less: allowance for loan losses

     (5,215          (3,194     

Non-interest earning assets

     109,580             80,917        
  

 

 

        

 

 

      

Total assets

   $ 843,718           $ 534,334        
  

 

 

        

 

 

      

Interest bearing liabilities:

              

Money market accounts

   $ 338,604      $ 639         0.76   $ 214,498      $ 561         1.05

Certificates of deposit

     324,337        1,162         1.44        226,302        570         1.01   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total deposits

     662,941        1,801         1.09        440,800        1,131         1.03   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Small business lending fund

     6,800        25         1.47        6,800        25         1.47   

Notes payable to investors

     —          —           —          3,623        91         10.03   

Other borrowings

     48,424        419         3.47        10,462        88         3.37   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     718,165        2,245         1.25        461,685        1,335         1.16   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Non-interest bearing deposits

     13,470             10,245        

Non-interest bearing liabilities

     16,920             8,431        

Redeemable equity

     —               3,605        

Shareholders’ equity

     95,137             50,368        

Noncontrolling interest

     26             —