Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
Nature of Operations
Live Oak Bancshares, Inc. (the “Company” or “LOB”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending services to small businesses nationwide in targeted industries, which we refer to as verticals. 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) Loan Program and to a lesser extent by the U.S. Department of Agriculture ("USDA") Rural Energy for America Program ("REAP") and Business & Industry ("B&I") loan programs. On July 28, 2015 the Company completed its initial public offering with a secondary offering completed in August of 2017. In 2010, the Bank formed Live Oak Number One, Inc., a wholly-owned subsidiary, to hold properties foreclosed on by the Bank.
In addition to the Bank, the Company owns Live Oak Grove, LLC, opened in September 2015 for the purpose of providing Company employees and business visitors an on-site restaurant location; Government Loan Solutions, Inc. (“GLS”), a management and technology consulting firm that specializes in the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan program and USDA-guaranteed loans; and 504 Fund Advisors, LLC (“504FA”), formed to serve as the investment adviser to the 504 Fund, a closed-end mutual fund organized to invest in SBA section 504 loans.
The Company acquired control over 504FA, previously carried as an equity method investment, on February 2, 2015 by increasing its ownership from
50.0%
to
91.3%
. The acquisition of an additional
41.3%
of ownership occurred in exchange for contingent consideration estimated to total $
170 thousand
. Transactions in the third quarter of 2015 and first quarter of 2016 increased the Company’s ownership to
92.9%
. On September 1, 2016, the Company acquired the remaining
7.1%
ownership from a third party investor in exchange for contingent consideration estimated to total $
24 thousand
.
In August 2016, the Company formed Live Oak Ventures, Inc. for the purpose of investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.
In November 2016, the Company formed Live Oak Clean Energy Financing LLC for the purpose of providing financing to entities for renewable energy applications.
On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"),
two
nationwide title agencies under common control based in Tampa, Florida. See Note 4. Business Combination for a further discussion of this transaction.
The Company earns revenue primarily from the sale of SBA and USDA-guaranteed loans and net interest income. Income from the sale of loans is comprised of net gains on the sale of loans, revenues on the servicing of sold loans and valuation of loan servicing rights. Offsetting these revenues are the cost of funding sources, provision for loan and lease losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.
General
In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the
nine
months ended
September 30, 2017
are not necessarily indicative of the results of operations that may be expected for the year ending
December 31, 2017
. The consolidated balance sheet as of
December 31, 2016
has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
, filed with the Securities Exchange Commission on March 9, 2017 (SEC File No. 001-37497) (the "2016 Annual Report"). A summary description of the significant accounting policies followed by the Company is set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2016 Annual Report. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes in the Company's 2016 Annual Report.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Amounts in all tables in the Notes to Unaudited Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Business Segments
Management has determined that the Company has
one
significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment.
Equipment Leasing
The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment.
Direct Financing Leases
Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally
4
-
6
years which is consistent with the useful life of the equipment with no residual value. As of
September 30, 2017
the Company had net investments in direct financing lease receivables of $
1.1 million
.
Operating Leases
The term of each operating lease is generally
10
years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for
two
additional terms or purchase the equipment at the then current fair market value.
Rental revenue from operating leases is recognized over a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives and residual values are generally
15
years and
30%
, respectively; however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.
If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to direct operating expenses at the time the costs are incurred.
As of
September 30, 2017
the Company had a net investment of $
47.5 million
in assets included in premises and equipment that are subject to operating leases.
A maturity analysis of future minimum lease payments under non-cancelable operating leases is as follows:
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
As of September 30, 2017
|
|
Amount
|
2017
|
|
$
|
463
|
|
2018
|
|
3,204
|
|
2019
|
|
3,214
|
|
2020
|
|
3,233
|
|
2021
|
|
3,254
|
|
Thereafter
|
|
19,625
|
|
Total
|
|
$
|
32,993
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Impairment of Long-Lived Assets
The Company evaluates the carrying value of rental equipment and identifiable definite lived intangible assets for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. A key element in determining the recoverability of long-lived assets is the Company’s outlook as to the future market conditions for its rental equipment. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value. The Company determines fair value based upon the condition of the rental equipment and the projected net cash flows from its rental and sale considering current market conditions. Goodwill and identifiable indefinite lived assets are evaluated for potential impairment annually or when circumstances indicate potential impairment may have occurred. Impairment losses, if any, are determined based upon the excess of carrying value over the estimated fair value of the asset. There have been no impairments of long-lived assets.
Change in Accounting Estimate
During 2017, the Company assessed its estimate of the useful lives of the Company’s aircraft transportation. The Company revised its original useful life estimate of
20
years and currently estimates that its aircraft transportation will have a useful life of
10
years. The effects of reflecting this change in accounting estimate on the 2017 consolidated financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2017
|
|
Nine months ended
September 30, 2017
|
Decrease in:
|
|
|
|
|
Net income
|
|
$
|
202
|
|
|
$
|
692
|
|
Basic EPS
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
Diluted EPS
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
Reclassifications
Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications.
Note 2. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). This standard is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The Company's revenue is comprised of loan servicing revenue, net gains on sales of loans and net interest income on financial assets and financial liabilities, all of which are explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company's revenue streams included in non-interest income that are within the scope of the guidance are primarily related to sales of foreclosed assets, construction supervision fees, title insurance income and trust fiduciary fees. The Company does not expect the adoption of ASU 2014-09 to have a material effect on the consolidated financial statements. The Company expects to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for the Company on January 1, 2019. The impact of this standard will depend on the Company's lease portfolio at the time of the adoption and the Company is currently assessing the effect that the adoption of this standard will have on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for share-based payment transactions for items including income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 was effective and adopted by the Company on January 1, 2017. Starting in the first quarter of 2017, stock-based compensation excess tax benefits or deficiencies are reflected in the Consolidated Statements of Income as a component of the income tax expense, where as they previously were recognized in equity. Additionally, the Consolidated Statements of Cash
Flows now present excess tax benefits as an operating activity while any cash paid in lieu of shares for tax-withholding being classified as a financing activity. There were no excess tax benefits in the prior period presented for reclassification. Finally, the Company will continue to incorporate actual forfeitures as they occur in the accrual of compensation expense. As a result of the adoption of ASU 2016-09, the Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 was adjusted as follows: a
$1.1 million
increase to net cash provided by operating activities and a
$4.8 million
increase to net cash used in financing activities. The adoption of ASU 2016-09 further resulted in a $
0.03
increase in basic and diluted EPS for the nine months ended
September 30, 2017
. See Note 9 for information regarding the additional impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance replaces the incurred loss impairment methodology in current standards with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016-13 on the financial statements. In that regard, a cross-functional working group has been formed, under the direction of the Company's Chief Financial Officer and Chief Credit Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. The Company is currently developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. The Company is also currently evaluating selected third-party vendor solutions to assist in the application of the ASU 2016-13. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, the impact of adoption is expected to be significantly influenced by the composition, characteristics and quality of loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company on January 1, 2018. The Company does not expect this amendment to have a material effect on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 removes Step 2 from the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 will be effective for the Company on January 1, 2020, with early adoption permitted for interim or annual impairment tests performed after January 1, 2017. ASU 2017-04 is not expected to have a material impact on its consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. ASU 2017-05 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting" ("ASU 2017-09"). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award should be accounted for as a modification. This guidance indicates modification accounting is required when the fair value, vesting conditions, or classification of the award changes. ASU 2017-09 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"). ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 will be effective for the Company on January 1, 2019 and is not expected to have a significant impact on its consolidated financial statements.
Note 3. Earnings Per Share
Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then be shared in the net income of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
12,862
|
|
|
$
|
3,479
|
|
|
$
|
28,769
|
|
|
$
|
8,293
|
|
Weighted-average basic shares outstanding
|
37,366,041
|
|
|
34,206,943
|
|
|
35,485,371
|
|
|
34,191,014
|
|
Basic earnings per share
|
$
|
0.34
|
|
|
$
|
0.10
|
|
|
$
|
0.81
|
|
|
$
|
0.24
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net income available to common shareholders, for diluted earnings per share
|
$
|
12,862
|
|
|
$
|
3,479
|
|
|
$
|
28,769
|
|
|
$
|
8,293
|
|
Total weighted-average basic shares outstanding
|
37,366,041
|
|
|
34,206,943
|
|
|
35,485,371
|
|
|
34,191,014
|
|
Add effect of dilutive stock options and restricted stock grants
|
1,278,636
|
|
|
794,874
|
|
|
1,244,683
|
|
|
812,408
|
|
Total weighted-average diluted shares outstanding
|
38,644,677
|
|
|
35,001,817
|
|
|
36,730,054
|
|
|
35,003,422
|
|
Diluted earnings per share
|
$
|
0.33
|
|
|
$
|
0.10
|
|
|
$
|
0.78
|
|
|
$
|
0.24
|
|
Anti-dilutive shares
|
243,199
|
|
|
1,778,995
|
|
|
250,698
|
|
|
1,778,995
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 4. Business Combination
On February 1, 2017, the Company completed its acquisition of Reltco Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"),
two
nationwide title agencies under common control based in Tampa, Florida. The acquisition continues the Company's growth strategy, including vertically integrating with complementary services to deliver a high-quality customer experience with speed.
On the acquisition date, the fair value of Reltco included $
5.8 million
in assets and $
4.7 million
in liabilities. The total acquisition gross consideration at the time of the transaction, including earn-out contingent consideration was approximately $
15.8 million
. The acquisition was valued at $
12.7 million
after consideration of the applicable fair value adjustments to the earn-out, resulting in the Company paying $
7.8 million
in cash and issuing
27,724
shares of its common stock at closing in addition to an earn-out of up to
184,012
shares of its stock and $
3.8 million
in cash, in exchange for all of the outstanding shares of Reltco. The earn-out was recorded as a $
4.3 million
contingent liability on the acquisition date and is earned proportionally based on the ratio of the new subsidiary's actual future aggregate net income after tax divided by a target net income after tax of approximately $
6.0 million
over the
four
year earn-out period. Fair value measurement of the earn-out was calculated using the Monte Carlo Simulation. The Monte Carlo Simulation simulates
100,000
trials to assess the expected market price as of the earn-out measurement date at the end of each of the next
four
years based on the Cox, Ross & Rubinstein option pricing methodology. The Monte Carlo Simulation utilized various assumptions that include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of
30.00%
over
four
years and a dividend yield of
0.40%
.
The merger was accounted for in accordance with the acquisition method of accounting, and the identifiable assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date separately from goodwill. The estimated fair values of assets acquired and liabilities assumed are based on the information available at the date of the acquisition. Management continues to evaluate these fair values, which are subject to revision as additional information becomes available. During the one year measurement period, contingent consideration is recorded at fair value based on the terms of the purchase agreement with subsequent quarterly changes in fair value recorded through earnings. For the
nine
months ended
September 30, 2017
the Company recorded expense of $
350 thousand
, related to the increased fair value of contingent consideration using the Monte Carlo Simulation. There was
no
expense recorded for this contingent consideration during the three months ended September 30, 2017. The assumptions utilized include a risk free rate of return through the end of each measurement period equivalent to that of a U.S. Treasury, expected volatility of
30.00%
over the remaining
3.25
years and a dividend yield of
0.51%
.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following table summarizes the allocation of the purchase price on the date of acquisition to assets acquired and the liabilities assumed based on their estimated fair values:
|
|
|
|
|
Fair value of assets acquired
|
|
Cash
|
$
|
102
|
|
Accounts receivable
|
159
|
|
Intangible assets
|
5,505
|
|
Total assets acquired
|
5,766
|
|
Fair value of liabilities assumed
|
|
Contingent consideration
|
4,300
|
|
Accounts payable and other liabilities
|
381
|
|
Total liabilities assumed
|
4,681
|
|
Net assets acquired
|
$
|
1,085
|
|
Purchase price
|
|
Common shares issued
|
27,724
|
|
Purchase price per share of the Company’s common stock
|
$
|
20.38
|
|
Company common stock issued
|
565
|
|
Cash
|
7,798
|
|
Total purchase price
|
8,363
|
|
Goodwill
|
$
|
7,278
|
|
Goodwill recorded represents future revenues and efficiencies gained through the Reltco acquisition. Goodwill in this transaction is expected to be deductible for income tax purposes. Intangible assets consist of trade names of $
1.2 million
, customer relationships of $
3.9 million
, and non-compete agreements of $
405 thousand
. The trade names have indefinite lives and the customer relationships and non-compete agreements range from
five
to
eight
years.
The Company recorded merger expenses of $
766 thousand
during the
nine
month period ended
September 30, 2017
.
No
merger expenses were recorded during the three month period ended
September 30, 2017
. The company recorded
$52 thousand
and $
62 thousand
in merger expenses during the
three and nine
months period ended
September 30, 2016
.
The following pro forma financial information for the quarters ended
September 30, 2017
and
2016
reflects the Company's estimated consolidated pro forma results of operations as if the Reltco acquisition occurred on January 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue (net interest income and noninterest income)
|
$
|
46,085
|
|
|
$
|
40,627
|
|
|
$
|
133,306
|
|
|
$
|
106,960
|
|
Net income available to common stockholders
|
12,862
|
|
|
4,183
|
|
|
28,807
|
|
|
9,952
|
|
Basic earnings per share
|
0.34
|
|
|
0.12
|
|
|
0.81
|
|
|
0.29
|
|
Diluted earnings per share
|
0.33
|
|
|
0.12
|
|
|
0.78
|
|
|
0.28
|
|
Note 5. Investment Securities
The carrying amount of investment securities and their approximate fair values are reflected in the following table:
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
September 30, 2017
|
|
|
|
|
|
|
|
US government agencies
|
$
|
17,829
|
|
|
$
|
11
|
|
|
$
|
35
|
|
|
$
|
17,805
|
|
Residential mortgage-backed securities
|
57,685
|
|
|
—
|
|
|
936
|
|
|
56,749
|
|
Mutual fund
|
2,070
|
|
|
—
|
|
|
49
|
|
|
2,021
|
|
Total
|
$
|
77,584
|
|
|
$
|
11
|
|
|
$
|
1,020
|
|
|
$
|
76,575
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
US government agencies
|
$
|
17,803
|
|
|
$
|
52
|
|
|
$
|
32
|
|
|
$
|
17,823
|
|
Residential mortgage-backed securities
|
52,301
|
|
|
3
|
|
|
1,031
|
|
|
51,273
|
|
Mutual fund
|
2,012
|
|
|
—
|
|
|
52
|
|
|
1,960
|
|
Total
|
$
|
72,116
|
|
|
$
|
55
|
|
|
$
|
1,115
|
|
|
$
|
71,056
|
|
There were
no
sales of securities during the
three and nine
months ended
September 30, 2017
.The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
September 30, 2017
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
US government agencies
|
$
|
4,996
|
|
|
$
|
16
|
|
|
$
|
1,496
|
|
|
$
|
19
|
|
|
$
|
6,492
|
|
|
$
|
35
|
|
Residential mortgage-backed securities
|
28,397
|
|
|
461
|
|
|
21,767
|
|
|
475
|
|
|
50,164
|
|
|
936
|
|
Mutual fund
|
2,021
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
2,021
|
|
|
49
|
|
Total
|
$
|
35,414
|
|
|
$
|
526
|
|
|
$
|
23,263
|
|
|
$
|
494
|
|
|
$
|
58,677
|
|
|
$
|
1,020
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
December 31, 2016
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
US government agencies
|
$
|
6,508
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,508
|
|
|
$
|
32
|
|
Residential mortgage-backed securities
|
49,109
|
|
|
1,017
|
|
|
1,635
|
|
|
14
|
|
|
50,744
|
|
|
1,031
|
|
Mutual fund
|
1,960
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
1,960
|
|
|
52
|
|
Total
|
$
|
57,577
|
|
|
$
|
1,101
|
|
|
$
|
1,635
|
|
|
$
|
14
|
|
|
$
|
59,212
|
|
|
$
|
1,115
|
|
At
September 30, 2017
, there were
twelve
residential mortgage-backed securities and
one
US government agency security in unrealized loss positions for greater than 12 months and
fourteen
residential mortgage-backed securities,
two
US government agency securities and the 504 Fund mutual fund investment in an unrealized loss position for less than 12 months. Unrealized losses at
December 31, 2016
were comprised of
two
residential mortgage-backed securities in unrealized loss positions for greater than 12 months and
three
US government agency securities,
twenty-two
residential mortgage-backed securities and the 504 Fund mutual fund investment 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 and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses,
none
of the securities are deemed to be other than temporarily impaired.
All residential mortgage-backed securities in the Company’s portfolio at
September 30, 2017
and
December 31, 2016
were backed by US government sponsored enterprises (“GSEs”).
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following is a summary of investment securities by maturity:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Available-for-Sale
|
|
Amortized
cost
|
|
Fair
value
|
US government agencies
|
|
|
|
Within one year
|
$
|
11,302
|
|
|
$
|
11,312
|
|
One to five years
|
6,527
|
|
|
6,492
|
|
Total
|
17,829
|
|
|
17,804
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
|
Five to ten years
|
7,264
|
|
|
7,200
|
|
After 10 years
|
50,421
|
|
|
49,550
|
|
Total
|
57,685
|
|
|
56,750
|
|
|
|
|
|
Total
|
$
|
75,514
|
|
|
$
|
74,554
|
|
The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may repay sooner than scheduled. This table excludes the 504 Fund mutual fund investment.
At
December 31, 2016
, an investment security with a fair market value of $
1.5 million
was pledged to secure a line of credit with the Company’s correspondent bank. At
September 30, 2017
, the security pledged to secure a line of credit with the Company's correspondent bank was released. At
September 30, 2017
and
December 31, 2016
, an investment security with a fair market value of $
100 thousand
was pledged to the Ohio State Treasurer to allow the Company's trust department to conduct business in the state of Ohio and investment securities with a fair market value of $
2.5 million
and $
1.2 million
, respectively, were pledged to the Company's trust department for uninsured trust assets held by the trust department.
Note 6
. Loans and Leases Held for Investment and Allowance for Loan and Lease Losses
Loan and Lease Portfolio Segments
The following describes the risk characteristics relevant to each of the portfolio segments. Each loan and lease category is assigned a risk grade during the origination and closing process based on criteria described later in this section.
Commercial and Industrial
Commercial and industrial loans (C&I) receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of the Bank’s C&I loans generally comes from the generation of cash flow as the result of the borrower’s business operations. This business cycle itself brings a certain level of risk to the portfolio. In some instances, these loans may carry a higher degree of risk due to a variety of reasons – illiquid collateral, specialized equipment, highly depreciable assets, uncollectable accounts receivable, revolving balances, or simply being unsecured. As a result of these characteristics, the SBA guarantee on these loans is an important factor in mitigating risk.
Construction and Development
Construction and development loans are for the purpose of acquisition and development of land to be improved through the construction of commercial buildings. Such loans are usually paid off through the conversion to permanent financing for the long-term benefit of the borrower’s ongoing operations. At the completion of the project, if the loan is converted to permanent financing or if scheduled loan amortization begins, it is then reclassified to the “Commercial Real Estate” segment. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Commercial Real Estate
Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Such repayment of commercial real estate loans is commonly derived from the successful ongoing operations of the business occupying the property. These typically include small businesses and professional practices.
Commercial Land
Commercial land loans are extensions of credit secured by farmland. Such loans are often for land improvements related to agricultural endeavors that may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loans amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies.
Each of the loan types referenced in the sections above is further segmented into verticals in which the Bank chooses to operate. The Bank chooses to finance businesses operating in specific industries because of certain similarities. The similarities range from historical default and loss characteristics to business operations. However, there are differences that create the necessity to underwrite these loans according to varying criteria and guidelines. When underwriting a loan, the Bank considers numerous factors such as cash flow coverage, the credit scores of the guarantors, revenue growth, practice ownership experience and debt service capacity. Minimum guidelines have been set with regard to these various factors and deviations from those guidelines require compensating strengths when considering a proposed loan.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Loans and leases consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Commercial & Industrial
|
|
|
|
Agriculture
|
$
|
2,698
|
|
|
$
|
1,714
|
|
Death Care Management
|
12,101
|
|
|
9,684
|
|
Healthcare
|
41,454
|
|
|
37,270
|
|
Independent Pharmacies
|
97,171
|
|
|
83,677
|
|
Registered Investment Advisors
|
91,241
|
|
|
68,335
|
|
Veterinary Industry
|
45,570
|
|
|
38,930
|
|
Other Industries
|
142,115
|
|
|
94,836
|
|
Total
|
432,350
|
|
|
334,446
|
|
Construction & Development
|
|
|
|
Agriculture
|
34,636
|
|
|
32,372
|
|
Death Care Management
|
4,744
|
|
|
3,956
|
|
Healthcare
|
46,814
|
|
|
30,467
|
|
Independent Pharmacies
|
1,696
|
|
|
2,013
|
|
Registered Investment Advisors
|
329
|
|
|
294
|
|
Veterinary Industry
|
13,265
|
|
|
11,514
|
|
Other Industries
|
45,052
|
|
|
31,715
|
|
Total
|
146,536
|
|
|
112,331
|
|
Commercial Real Estate
|
|
|
|
Agriculture
|
14,689
|
|
|
5,591
|
|
Death Care Management
|
61,462
|
|
|
52,510
|
|
Healthcare
|
121,331
|
|
|
114,281
|
|
Independent Pharmacies
|
18,508
|
|
|
15,151
|
|
Registered Investment Advisors
|
13,550
|
|
|
11,462
|
|
Veterinary Industry
|
110,028
|
|
|
102,906
|
|
Other Industries
|
106,418
|
|
|
46,245
|
|
Total
|
445,986
|
|
|
348,146
|
|
Commercial Land
|
|
|
|
Agriculture
|
146,814
|
|
|
113,569
|
|
Total
|
146,814
|
|
|
113,569
|
|
Total Loans and Leases
1
|
1,171,686
|
|
|
908,492
|
|
Net Deferred Costs
|
8,038
|
|
|
7,648
|
|
Discount on SBA 7(a) and USDA Unguaranteed
2
|
(9,837
|
)
|
|
(8,574
|
)
|
Loans and Leases, Net of Unearned
|
$
|
1,169,887
|
|
|
$
|
907,566
|
|
|
|
1
|
Total loans and leases include $
40.4 million
and $
37.7 million
of U.S. government guaranteed loans as of
September 30, 2017
and
December 31, 2016
, 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.
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Credit Risk Profile
The Bank uses internal loan and lease reviews to assess the performance of individual loans and leases by industry segment. An independent review of the loan and lease portfolio is performed annually by an external firm. The goal of the Bank’s annual review of select borrowers' financial performance is to validate the adequacy of the risk grade assigned.
The Bank uses a grading system to rank the quality of each loan and lease. The grade is periodically evaluated and adjusted as performance dictates. Loan and lease grades 1 through 4 are passing grades and grade 5 is special mention. Collectively, grades 6 through 8 represent classified loans and leases in the Bank’s portfolio. The following guidelines govern the assignment of these risk grades:
Exceptional (1 Rated): These loans and leases are of the highest quality, with strong, well-documented sources of repayment. Debt service coverage (“DSC”) is over
1.75
X 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 (2 Rated): These loans and leases are of good quality, with good, well-documented sources of repayment. DSC is over
1.25
X 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 (3 rated): These loans and leases are of acceptable quality, with acceptable sources of repayment. DSC of over
1.00
X 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 (4 rated): These loans and leases are considered very weak pass. These loans and leases 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 and leases that may be put in this category include start-up loans and leases and loans and leases with less than
1
:1 cash flow coverage with other sources of repayment.
Special mention (5 rated): These loans and leases are considered as emerging problems, with potentially unsatisfactory characteristics. These loans and leases require greater management attention. A loan or lease 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 and leases 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 and leases graded Doubtful have inherent weaknesses that make collection or liquidation in full questionable. Loans and leases graded Doubtful must be placed on non-accrual status.
Loss (8 rated): Loss rated loans and leases 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.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following tables summarize the risk grades of each category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grades
1 - 4
|
|
Risk Grade
5
|
|
Risk Grades
6 - 8
|
|
Total
|
September 30, 2017
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
Agriculture
|
$
|
2,470
|
|
|
$
|
228
|
|
|
$
|
—
|
|
|
$
|
2,698
|
|
Death Care Management
|
11,976
|
|
|
118
|
|
|
7
|
|
|
12,101
|
|
Healthcare
|
32,350
|
|
|
1,716
|
|
|
7,388
|
|
|
41,454
|
|
Independent Pharmacies
|
87,173
|
|
|
6,523
|
|
|
3,475
|
|
|
97,171
|
|
Registered Investment Advisors
|
87,940
|
|
|
2,566
|
|
|
735
|
|
|
91,241
|
|
Veterinary Industry
|
41,738
|
|
|
1,833
|
|
|
1,999
|
|
|
45,570
|
|
Other Industries
|
142,096
|
|
|
19
|
|
|
—
|
|
|
142,115
|
|
Total
|
405,743
|
|
|
13,003
|
|
|
13,604
|
|
|
432,350
|
|
Construction & Development
|
|
|
|
|
|
|
|
Agriculture
|
34,636
|
|
|
—
|
|
|
—
|
|
|
34,636
|
|
Death Care Management
|
4,744
|
|
|
—
|
|
|
—
|
|
|
4,744
|
|
Healthcare
|
44,937
|
|
|
704
|
|
|
1,173
|
|
|
46,814
|
|
Independent Pharmacies
|
1,696
|
|
|
—
|
|
|
—
|
|
|
1,696
|
|
Registered Investment Advisors
|
329
|
|
|
—
|
|
|
—
|
|
|
329
|
|
Veterinary Industry
|
13,265
|
|
|
—
|
|
|
—
|
|
|
13,265
|
|
Other Industries
|
45,052
|
|
|
—
|
|
|
—
|
|
|
45,052
|
|
Total
|
144,659
|
|
|
704
|
|
|
1,173
|
|
|
146,536
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
Agriculture
|
14,689
|
|
|
—
|
|
|
—
|
|
|
14,689
|
|
Death Care Management
|
54,684
|
|
|
4,288
|
|
|
2,490
|
|
|
61,462
|
|
Healthcare
|
111,943
|
|
|
5,050
|
|
|
4,338
|
|
|
121,331
|
|
Independent Pharmacies
|
15,043
|
|
|
1,843
|
|
|
1,622
|
|
|
18,508
|
|
Registered Investment Advisors
|
13,406
|
|
|
144
|
|
|
—
|
|
|
13,550
|
|
Veterinary Industry
|
95,055
|
|
|
2,680
|
|
|
12,293
|
|
|
110,028
|
|
Other Industries
|
105,738
|
|
|
680
|
|
|
—
|
|
|
106,418
|
|
Total
|
410,558
|
|
|
14,685
|
|
|
20,743
|
|
|
445,986
|
|
Commercial Land
|
|
|
|
|
|
|
|
Agriculture
|
144,687
|
|
|
2,104
|
|
|
23
|
|
|
146,814
|
|
Total
|
144,687
|
|
|
2,104
|
|
|
23
|
|
|
146,814
|
|
Total
1
|
$
|
1,105,647
|
|
|
$
|
30,496
|
|
|
$
|
35,543
|
|
|
$
|
1,171,686
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grades
1 - 4
|
|
Risk Grade
5
|
|
Risk Grades
6 - 8
|
|
Total
|
December 31, 2016
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
Agriculture
|
$
|
1,656
|
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
1,714
|
|
Death Care Management
|
9,452
|
|
|
121
|
|
|
111
|
|
|
9,684
|
|
Healthcare
|
28,723
|
|
|
681
|
|
|
7,866
|
|
|
37,270
|
|
Independent Pharmacies
|
73,948
|
|
|
6,542
|
|
|
3,187
|
|
|
83,677
|
|
Registered Investment Advisors
|
65,297
|
|
|
2,246
|
|
|
792
|
|
|
68,335
|
|
Veterinary Industry
|
34,407
|
|
|
1,967
|
|
|
2,556
|
|
|
38,930
|
|
Other Industries
|
94,736
|
|
|
100
|
|
|
—
|
|
|
94,836
|
|
Total
|
308,219
|
|
|
11,715
|
|
|
14,512
|
|
|
334,446
|
|
Construction & Development
|
|
|
|
|
|
|
|
Agriculture
|
32,061
|
|
|
—
|
|
|
311
|
|
|
32,372
|
|
Death Care Management
|
3,956
|
|
|
—
|
|
|
—
|
|
|
3,956
|
|
Healthcare
|
30,467
|
|
|
—
|
|
|
—
|
|
|
30,467
|
|
Independent Pharmacies
|
2,013
|
|
|
—
|
|
|
—
|
|
|
2,013
|
|
Registered Investment Advisors
|
294
|
|
|
—
|
|
|
—
|
|
|
294
|
|
Veterinary Industry
|
9,725
|
|
|
1,789
|
|
|
—
|
|
|
11,514
|
|
Other Industries
|
31,715
|
|
|
—
|
|
|
—
|
|
|
31,715
|
|
Total
|
110,231
|
|
|
1,789
|
|
|
311
|
|
|
112,331
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
Agriculture
|
5,591
|
|
|
—
|
|
|
—
|
|
|
5,591
|
|
Death Care Management
|
46,427
|
|
|
4,314
|
|
|
1,769
|
|
|
52,510
|
|
Healthcare
|
103,097
|
|
|
7,142
|
|
|
4,042
|
|
|
114,281
|
|
Independent Pharmacies
|
12,654
|
|
|
1,968
|
|
|
529
|
|
|
15,151
|
|
Registered Investment Advisors
|
11,462
|
|
|
—
|
|
|
—
|
|
|
11,462
|
|
Veterinary Industry
|
88,168
|
|
|
3,995
|
|
|
10,743
|
|
|
102,906
|
|
Other Industries
|
46,245
|
|
|
—
|
|
|
—
|
|
|
46,245
|
|
Total
|
313,644
|
|
|
17,419
|
|
|
17,083
|
|
|
348,146
|
|
Commercial Land
|
|
|
|
|
|
|
|
Agriculture
|
112,333
|
|
|
1,138
|
|
|
98
|
|
|
113,569
|
|
Total
|
112,333
|
|
|
1,138
|
|
|
98
|
|
|
113,569
|
|
Total
1
|
$
|
844,427
|
|
|
$
|
32,061
|
|
|
$
|
32,004
|
|
|
$
|
908,492
|
|
|
|
1
|
Total loans and leases include $
40.4 million
of U.S. government guaranteed loans as of
September 30, 2017
, segregated by risk grade as follows: Risk Grades 1 – 4 = $
12.1 million
, Risk Grade 5 = $
3.7 million
, Risk Grades 6 – 8 = $
24.6 million
. As of
December 31, 2016
, total loans and leases include $
37.7 million
of U.S. government guaranteed loans, segregated by risk grade as follows: Risk Grades 1 – 4 = $
8.7 million
, Risk Grade 5 = $
7.7 million
, Risk Grades 6 – 8 = $
21.3 million
.
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Past Due Loans and Leases
Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans and leases less than 30 days past due and accruing are included within current loans and leases shown below. The following tables show an age analysis of past due loans and leases as of the dates presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 30
Days Past
Due & Not
Accruing
|
|
30-89 Days
Past Due
& Accruing
|
|
30-89 Days
Past Due &
Not Accruing
|
|
Greater
Than 90
Days Past
Due
|
|
Total Not
Accruing
& Past Due
|
|
Current
|
|
Total Loans and Leases
|
|
90
Days or More
Past Due &
Still Accruing
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,698
|
|
|
$
|
2,698
|
|
|
$
|
—
|
|
Death Care Management
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,101
|
|
|
12,101
|
|
|
—
|
|
Healthcare
|
535
|
|
|
76
|
|
|
16
|
|
|
6,152
|
|
|
6,779
|
|
|
34,675
|
|
|
41,454
|
|
|
—
|
|
Independent Pharmacies
|
331
|
|
|
44
|
|
|
—
|
|
|
2,274
|
|
|
2,649
|
|
|
94,522
|
|
|
97,171
|
|
|
—
|
|
Registered Investment Advisors
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
91,241
|
|
|
91,241
|
|
|
—
|
|
Veterinary Industry
|
224
|
|
|
29
|
|
|
536
|
|
|
796
|
|
|
1,585
|
|
|
43,985
|
|
|
45,570
|
|
|
—
|
|
Other Industries
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
142,115
|
|
|
142,115
|
|
|
—
|
|
Total
|
1,090
|
|
|
149
|
|
|
552
|
|
|
9,222
|
|
|
11,013
|
|
|
421,337
|
|
|
432,350
|
|
|
—
|
|
Construction & Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,636
|
|
|
34,636
|
|
|
—
|
|
Death Care Management
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,744
|
|
|
4,744
|
|
|
—
|
|
Healthcare
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,814
|
|
|
46,814
|
|
|
—
|
|
Independent Pharmacies
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,696
|
|
|
1,696
|
|
|
—
|
|
Registered Investment Advisors
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
329
|
|
|
329
|
|
|
—
|
|
Veterinary Industry
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,265
|
|
|
13,265
|
|
|
—
|
|
Other Industries
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,052
|
|
|
45,052
|
|
|
—
|
|
Total
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
146,536
|
|
|
146,536
|
|
|
—
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,689
|
|
|
14,689
|
|
|
—
|
|
Death Care Management
|
—
|
|
|
298
|
|
|
174
|
|
|
1,402
|
|
|
1,874
|
|
|
59,588
|
|
|
61,462
|
|
|
—
|
|
Healthcare
|
40
|
|
|
—
|
|
|
2,679
|
|
|
829
|
|
|
3,548
|
|
|
117,783
|
|
|
121,331
|
|
|
—
|
|
Independent Pharmacies
|
—
|
|
|
—
|
|
|
—
|
|
|
1,622
|
|
|
1,622
|
|
|
16,886
|
|
|
18,508
|
|
|
—
|
|
Registered Investment Advisors
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,550
|
|
|
13,550
|
|
|
—
|
|
Veterinary Industry
|
1,906
|
|
|
3,915
|
|
|
132
|
|
|
2,749
|
|
|
8,702
|
|
|
101,326
|
|
|
110,028
|
|
|
—
|
|
Other Industries
|
—
|
|
|
7,750
|
|
|
—
|
|
|
—
|
|
|
7,750
|
|
|
98,668
|
|
|
106,418
|
|
|
—
|
|
Total
|
1,946
|
|
|
11,963
|
|
|
2,985
|
|
|
6,602
|
|
|
23,496
|
|
|
422,490
|
|
|
445,986
|
|
|
—
|
|
Commercial Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
146,791
|
|
|
146,814
|
|
|
—
|
|
Total
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
146,791
|
|
|
146,814
|
|
|
—
|
|
Total
1
|
$
|
3,059
|
|
|
$
|
12,112
|
|
|
$
|
3,537
|
|
|
$
|
15,824
|
|
|
$
|
34,532
|
|
|
$
|
1,137,154
|
|
|
$
|
1,171,686
|
|
|
$
|
—
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 30
Days Past
Due & Not
Accruing
|
|
30-89 Days
Past Due
& Accruing
|
|
30-89 Days
Past Due &
Not Accruing
|
|
Greater
Than 90
Days
Past Due
|
|
Total Not
Accruing
& Past Due
|
|
Current
|
|
Total Loans and Leases
|
|
90
Days or More
Past Due &
Still Accruing
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,714
|
|
|
$
|
1,714
|
|
|
$
|
—
|
|
Death Care Management
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,684
|
|
|
9,684
|
|
|
—
|
|
Healthcare
|
—
|
|
|
272
|
|
|
496
|
|
|
5,920
|
|
|
6,688
|
|
|
30,582
|
|
|
37,270
|
|
|
—
|
|
Independent Pharmacies
|
42
|
|
|
293
|
|
|
408
|
|
|
2,349
|
|
|
3,092
|
|
|
80,585
|
|
|
83,677
|
|
|
—
|
|
Registered Investment Advisors
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
68,335
|
|
|
68,335
|
|
|
—
|
|
Veterinary Industry
|
32
|
|
|
151
|
|
|
646
|
|
|
1,441
|
|
|
2,270
|
|
|
36,660
|
|
|
38,930
|
|
|
—
|
|
Other Industries
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
94,836
|
|
|
94,836
|
|
|
—
|
|
Total
|
74
|
|
|
716
|
|
|
1,550
|
|
|
9,710
|
|
|
12,050
|
|
|
322,396
|
|
|
334,446
|
|
|
—
|
|
Construction & Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
231
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
311
|
|
|
32,061
|
|
|
32,372
|
|
|
—
|
|
Death Care Management
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,956
|
|
|
3,956
|
|
|
—
|
|
Healthcare
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,467
|
|
|
30,467
|
|
|
—
|
|
Independent Pharmacies
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,013
|
|
|
2,013
|
|
|
—
|
|
Registered Investment Advisors
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
294
|
|
|
294
|
|
|
—
|
|
Veterinary Industry
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,514
|
|
|
11,514
|
|
|
—
|
|
Other Industries
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31,715
|
|
|
31,715
|
|
|
—
|
|
Total
|
231
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
311
|
|
|
112,020
|
|
|
112,331
|
|
|
—
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,591
|
|
|
5,591
|
|
|
—
|
|
Death Care Management
|
—
|
|
|
—
|
|
|
188
|
|
|
1,423
|
|
|
1,611
|
|
|
50,899
|
|
|
52,510
|
|
|
—
|
|
Healthcare
|
—
|
|
|
—
|
|
|
3,180
|
|
|
45
|
|
|
3,225
|
|
|
111,056
|
|
|
114,281
|
|
|
—
|
|
Independent Pharmacies
|
—
|
|
|
—
|
|
|
—
|
|
|
529
|
|
|
529
|
|
|
14,622
|
|
|
15,151
|
|
|
—
|
|
Registered Investment Advisors
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,462
|
|
|
11,462
|
|
|
—
|
|
Veterinary Industry
|
898
|
|
|
3,981
|
|
|
737
|
|
|
5,158
|
|
|
10,774
|
|
|
92,132
|
|
|
102,906
|
|
|
—
|
|
Other Industries
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46,245
|
|
|
46,245
|
|
|
—
|
|
Total
|
898
|
|
|
3,981
|
|
|
4,105
|
|
|
7,155
|
|
|
16,139
|
|
|
332,007
|
|
|
348,146
|
|
|
—
|
|
Commercial Land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
58
|
|
|
40
|
|
|
—
|
|
|
—
|
|
|
98
|
|
|
113,471
|
|
|
113,569
|
|
|
—
|
|
Total
|
58
|
|
|
40
|
|
|
—
|
|
|
—
|
|
|
98
|
|
|
113,471
|
|
|
113,569
|
|
|
—
|
|
Total
1
|
$
|
1,261
|
|
|
$
|
4,817
|
|
|
$
|
5,655
|
|
|
$
|
16,865
|
|
|
$
|
28,598
|
|
|
$
|
879,894
|
|
|
$
|
908,492
|
|
|
$
|
—
|
|
|
|
1
|
Total loans and leases include $
40.4 million
of U.S. government guaranteed loans as of
September 30, 2017
, of which $
14.3 million
is greater than 90 days past due, $
5.0 million
is 30-89 days past due and $
21.1 million
is included in current loans and leases as presented above. As of
December 31, 2016
, total loans and leases include $
37.7 million
of U.S. government guaranteed loans, of which $
13.7 million
is greater than 90 days past due, $
6.8 million
is 30-89 days past due and $
17.2 million
is included in current loans and leases as presented above.
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Nonaccrual Loans and Leases
Loans and leases that become 90 days delinquent, or in cases where there is evidence that the borrower’s ability to make the required payments is impaired, are placed in nonaccrual status and interest accrual is discontinued. If interest on nonaccrual loans and leases had been accrued in accordance with the original terms, interest income would have increased by approximately $
302 thousand
and $
165 thousand
for the three months ended
September 30, 2017
and
2016
, respectively, and for the
nine
months ended
September 30, 2017
and
2016
interest income would have increased approximately $
831 thousand
and $
451 thousand
, respectively. All nonaccrual loans and leases are included in the held for investment portfolio.
Nonaccrual loans and leases as of
September 30, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Loan and Lease Balance
|
|
Guaranteed
Balance
|
|
Unguaranteed
Exposure
|
Commercial & Industrial
|
|
|
|
|
|
Healthcare
|
$
|
6,703
|
|
|
$
|
5,712
|
|
|
$
|
991
|
|
Independent Pharmacies
|
2,605
|
|
|
2,253
|
|
|
352
|
|
Registered Investment Advisors
|
—
|
|
|
—
|
|
|
—
|
|
Veterinary Industry
|
1,556
|
|
|
1,517
|
|
|
39
|
|
Total
|
10,864
|
|
|
9,482
|
|
|
1,382
|
|
Commercial Real Estate
|
|
|
|
|
|
Death Care Management
|
1,576
|
|
|
1,246
|
|
|
330
|
|
Healthcare
|
3,548
|
|
|
2,749
|
|
|
799
|
|
Independent Pharmacies
|
1,622
|
|
|
1,622
|
|
|
—
|
|
Veterinary Industry
|
4,787
|
|
|
3,999
|
|
|
788
|
|
Total
|
11,533
|
|
|
9,616
|
|
|
1,917
|
|
Commercial Land
|
|
|
|
|
|
|
Agriculture
|
23
|
|
|
23
|
|
|
—
|
|
Total
|
23
|
|
|
23
|
|
|
—
|
|
Total
|
$
|
22,420
|
|
|
$
|
19,121
|
|
|
$
|
3,299
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Loan and Lease Balance
|
|
Guaranteed
Balance
|
|
Unguaranteed
Exposure
|
Commercial & Industrial
|
|
|
|
|
|
Healthcare
|
$
|
6,416
|
|
|
$
|
5,152
|
|
|
$
|
1,264
|
|
Independent Pharmacies
|
2,799
|
|
|
2,204
|
|
|
595
|
|
Veterinary Industry
|
2,119
|
|
|
2,079
|
|
|
40
|
|
Total
|
11,334
|
|
|
9,435
|
|
|
1,899
|
|
Construction & Development
|
|
|
|
|
|
Agriculture
|
231
|
|
|
173
|
|
|
58
|
|
Total
|
231
|
|
|
173
|
|
|
58
|
|
Commercial Real Estate
|
|
|
|
|
|
Death Care Management
|
1,611
|
|
|
1,263
|
|
|
348
|
|
Healthcare
|
3,225
|
|
|
2,731
|
|
|
494
|
|
Independent Pharmacies
|
529
|
|
|
—
|
|
|
529
|
|
Veterinary Industry
|
6,793
|
|
|
5,395
|
|
|
1,398
|
|
Total
|
12,158
|
|
|
9,389
|
|
|
2,769
|
|
Commercial Land
|
|
|
|
|
|
Agriculture
|
58
|
|
|
—
|
|
|
58
|
|
Total
|
58
|
|
|
—
|
|
|
58
|
|
Total
|
$
|
23,781
|
|
|
$
|
18,997
|
|
|
$
|
4,784
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Allowance for Loan and Lease Loss Methodology
The methodology and the estimation process for calculating the Allowance for Loan and Lease Losses (“ALLL”) is described below:
Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALLL, set forth in GAAP. The Company’s methodology for determining the ALLL is based on the requirements of GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALLL is determined by the sum of three separate components: (i) the impaired loan and lease component, which addresses specific reserves for impaired loans and leases; (ii) the general reserve component, which addresses reserves for pools of homogeneous loans and leases; and (iii) an unallocated reserve component (if any) based on management’s judgment and experience. The loan and lease pools and impaired loans and leases are mutually exclusive; any loan or lease that is impaired is excluded from its homogenous pool for purposes of that pool’s reserve calculation, regardless of the level of impairment.
The ALLL policy for pooled loans and leases is governed in accordance with banking regulatory guidance for homogenous pools of non-impaired loans and leases that have similar risk characteristics. The Company follows a consistent and structured approach for assessing the need for reserves within each individual loan and lease pool.
Loans and leases are considered impaired when, based on current information and events, it is probable that the creditor will be unable to collect all interest and principal payments due according to the originally contracted, or reasonably modified, terms of the loan or lease agreement. The Company has determined that loans and leases that meet the criteria defined below must be reviewed quarterly to determine if they are impaired.
|
|
•
|
All commercial loans and leases classified substandard or worse.
|
|
|
•
|
Any other delinquent loan or lease that is in a nonaccrual status, or any loan or lease that is delinquent more than 89 days and still accruing interest.
|
|
|
•
|
Any loan or lease which has been modified such that it meets the definition of a Troubled Debt Restructuring (TDR).
|
The Company’s policy for impaired loan and lease accounting subjects all loans and leases to impairment recognition; however, loan and lease relationships with unguaranteed credit exposure of less than
$100,000
are generally not evaluated on an individual basis for impairment and instead are evaluated collectively using a methodology based on historical specific reserves on similar sized loans and leases. Any loan or lease not meeting the above criteria and determined to be impaired is subjected to an impairment analysis, which is a calculation of the probable loss on the loan or lease. This portion is the loan's or lease’s “impairment,” and is established as a specific reserve against the loan or lease, or charged against the ALLL.
Individual specific reserve amounts imply probability of loss and may not be carried in the reserve indefinitely. When the amount of the actual loss becomes reasonably quantifiable, the amount of the loss is charged off against the ALLL, whether or not all liquidation and recovery efforts have been completed. If the total amount of the individual specific reserve that will eventually be charged off cannot yet be sufficiently quantified but some portion of the impairment can be viewed as a confirmed loss, then the confirmed loss portion should be charged off against the ALLL and the individual specific reserve reduced by a corresponding amount.
For impaired loans or leases, the reserve amount is calculated on a loan or lease-specific basis. The Company utilizes two methods of analyzing impaired loans and leases not guaranteed by the SBA:
|
|
•
|
The Fair Market Value of Collateral method utilizes the value at which the collateral could be sold considering the appraised value, appraisal discount rate, prior liens and selling costs. The amount of the reserve is the deficit of the estimated collateral value compared to the loan or lease balance.
|
|
|
•
|
The Present Value of Future Cash Flows method takes into account the amount and timing of cash flows and the effective interest rate used to discount the cash flows.
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following table details activity in the allowance for loan and lease losses by portfolio segment allowance for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
Construction &
Development
|
|
Commercial
Real Estate
|
|
Commercial
& Industrial
|
|
Commercial
Land
|
|
Total
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
$
|
1,603
|
|
|
$
|
7,494
|
|
|
$
|
8,351
|
|
|
$
|
2,112
|
|
|
$
|
19,560
|
|
Charge offs
|
—
|
|
|
(665
|
)
|
|
(343
|
)
|
|
—
|
|
|
(1,008
|
)
|
Recoveries
|
—
|
|
|
4
|
|
|
39
|
|
|
6
|
|
|
49
|
|
Provision
|
36
|
|
|
1,565
|
|
|
827
|
|
|
(2
|
)
|
|
2,426
|
|
Ending Balance
|
$
|
1,639
|
|
|
$
|
8,398
|
|
|
$
|
8,874
|
|
|
$
|
2,116
|
|
|
$
|
21,027
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
$
|
1,208
|
|
|
$
|
4,079
|
|
|
$
|
5,601
|
|
|
$
|
1,421
|
|
|
$
|
12,309
|
|
Charge offs
|
—
|
|
|
—
|
|
|
(939
|
)
|
|
—
|
|
|
(939
|
)
|
Recoveries
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
2
|
|
Provision
|
225
|
|
|
261
|
|
|
2,907
|
|
|
413
|
|
|
3,806
|
|
Ending Balance
|
$
|
1,433
|
|
|
$
|
4,341
|
|
|
$
|
7,570
|
|
|
$
|
1,834
|
|
|
$
|
15,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
Construction &
Development
|
|
Commercial
Real Estate
|
|
Commercial
& Industrial
|
|
Commercial
Land
|
|
Total
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
$
|
1,693
|
|
|
$
|
5,897
|
|
|
$
|
8,413
|
|
|
$
|
2,206
|
|
|
$
|
18,209
|
|
Charge offs
|
—
|
|
|
(952
|
)
|
|
(1,754
|
)
|
|
(35
|
)
|
|
(2,741
|
)
|
Recoveries
|
—
|
|
|
17
|
|
|
55
|
|
|
6
|
|
|
78
|
|
Provision
|
(54
|
)
|
|
3,436
|
|
|
2,160
|
|
|
(61
|
)
|
|
5,481
|
|
Ending Balance
|
$
|
1,639
|
|
|
$
|
8,398
|
|
|
$
|
8,874
|
|
|
$
|
2,116
|
|
|
$
|
21,027
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
$
|
1,064
|
|
|
$
|
2,486
|
|
|
$
|
2,766
|
|
|
$
|
1,099
|
|
|
$
|
7,415
|
|
Charge offs
|
—
|
|
|
(7
|
)
|
|
(1,307
|
)
|
|
(63
|
)
|
|
(1,377
|
)
|
Recoveries
|
—
|
|
|
4
|
|
|
444
|
|
|
—
|
|
|
448
|
|
Provision
|
369
|
|
|
1,858
|
|
|
5,667
|
|
|
798
|
|
|
8,692
|
|
Ending Balance
|
$
|
1,433
|
|
|
$
|
4,341
|
|
|
$
|
7,570
|
|
|
$
|
1,834
|
|
|
$
|
15,178
|
|
The following tables detail the recorded allowance for loan and lease losses and the investment in loans and leases related to each portfolio segment, disaggregated on the basis of impairment evaluation methodology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Construction &
Development
|
|
Commercial
Real Estate
|
|
Commercial
& Industrial
|
|
Commercial
Land
|
|
Total
|
Allowance for Loan and Lease Losses:
|
|
|
|
|
|
|
|
|
|
Loans and leases individually evaluated for impairment
|
$
|
53
|
|
|
$
|
1,610
|
|
|
$
|
1,290
|
|
|
$
|
—
|
|
|
$
|
2,953
|
|
Loans and leases collectively evaluated for impairment
2
|
1,586
|
|
|
6,788
|
|
|
7,584
|
|
|
2,116
|
|
|
18,074
|
|
Total allowance for loan and lease losses
|
$
|
1,639
|
|
|
$
|
8,398
|
|
|
$
|
8,874
|
|
|
$
|
2,116
|
|
|
$
|
21,027
|
|
Loans and leases receivable
1
:
|
|
|
|
|
|
|
|
|
|
Loans and leases individually evaluated for impairment
|
$
|
1,151
|
|
|
$
|
16,231
|
|
|
$
|
7,321
|
|
|
$
|
—
|
|
|
$
|
24,703
|
|
Loans and leases collectively evaluated for impairment
2
|
145,385
|
|
|
429,755
|
|
|
425,029
|
|
|
146,814
|
|
|
1,146,983
|
|
Total loans and leases receivable
|
$
|
146,536
|
|
|
$
|
445,986
|
|
|
$
|
432,350
|
|
|
$
|
146,814
|
|
|
$
|
1,171,686
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Construction &
Development
|
|
Commercial
Real Estate
|
|
Commercial
& Industrial
|
|
Commercial
Land
|
|
Total
|
Allowance for Loan and Lease Losses:
|
|
|
|
|
|
|
|
|
|
Loans and leases individually evaluated for impairment
|
$
|
—
|
|
|
$
|
1,496
|
|
|
$
|
1,458
|
|
|
$
|
—
|
|
|
$
|
2,954
|
|
Loans and leases collectively evaluated for impairment
2
|
1,693
|
|
|
4,401
|
|
|
6,955
|
|
|
2,206
|
|
|
15,255
|
|
Total allowance for loan and lease losses
|
$
|
1,693
|
|
|
$
|
5,897
|
|
|
$
|
8,413
|
|
|
$
|
2,206
|
|
|
$
|
18,209
|
|
Loans and leases receivable
1
:
|
|
|
|
|
|
|
|
|
|
Loans and leases individually evaluated for impairment
|
$
|
—
|
|
|
$
|
16,359
|
|
|
$
|
6,884
|
|
|
$
|
—
|
|
|
$
|
23,243
|
|
Loans and leases collectively evaluated for impairment
2
|
112,331
|
|
|
331,787
|
|
|
327,562
|
|
|
113,569
|
|
|
885,249
|
|
Total loans and leases receivable
|
$
|
112,331
|
|
|
$
|
348,146
|
|
|
$
|
334,446
|
|
|
$
|
113,569
|
|
|
$
|
908,492
|
|
|
|
1
|
Loans and leases receivable includes $
40.4 million
of U.S. government guaranteed loans as of
September 30, 2017
, of which $
24.7 million
are impaired. As of
December 31, 2016
, loans and leases receivable includes $
37.7 million
of U.S. government guaranteed loans, of which $
22.1 million
are considered impaired.
|
|
|
2
|
Included in loans and leases collectively evaluated for impairment are impaired loans and leases with individual unguaranteed exposure of less than $100 thousand. As of
September 30, 2017
, these balances totaled $
13.4 million
, of which $
12 million
are guaranteed by the U.S. government and $
1.4 million
are unguaranteed. As of
December 31, 2016
, these balances totaled $
12.3 million
, of which $
10.0 million
are guaranteed by the U.S. government and $
2.3 million
are unguaranteed.
The allowance for loan and lease losses associated with these loans and leases totaled $
417 thousand
and $
438 thousand
as of
September 30, 2017
and
December 31, 2016
, respectively.
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Loans and leases classified as impaired as of the dates presented are summarized in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Recorded
Investment
|
|
Guaranteed
Balance
|
|
Unguaranteed
Exposure
|
Commercial & Industrial
|
|
|
|
|
|
Death Care Management
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Healthcare
|
7,384
|
|
|
5,712
|
|
|
1,672
|
|
Independent Pharmacies
|
4,282
|
|
|
2,514
|
|
|
1,768
|
|
Registered Investment Advisors
|
743
|
|
|
—
|
|
|
743
|
|
Veterinary Industry
|
2,407
|
|
|
1,605
|
|
|
802
|
|
Total
|
14,824
|
|
|
9,831
|
|
|
4,993
|
|
Construction & Development
|
|
|
|
|
|
Healthcare
|
1,151
|
|
|
880
|
|
|
271
|
|
Total
|
1,151
|
|
|
880
|
|
|
271
|
|
Commercial Real Estate
|
|
|
|
|
|
Death Care Management
|
2,486
|
|
|
1,246
|
|
|
1,240
|
|
Healthcare
|
4,334
|
|
|
2,999
|
|
|
1,335
|
|
Independent Pharmacies
|
1,622
|
|
|
1,622
|
|
|
—
|
|
Veterinary Industry
|
13,700
|
|
|
8,051
|
|
|
5,649
|
|
Total
|
22,142
|
|
|
13,918
|
|
|
8,224
|
|
Commercial Land
|
|
|
|
|
|
Agriculture
|
23
|
|
|
23
|
|
|
—
|
|
Total
|
23
|
|
|
23
|
|
|
—
|
|
Total
|
$
|
38,140
|
|
|
$
|
24,652
|
|
|
$
|
13,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Recorded
Investment
|
|
Guaranteed
Balance
|
|
Unguaranteed
Exposure
|
Commercial & Industrial
|
|
|
|
|
|
Death Care Management
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
111
|
|
Healthcare
|
7,923
|
|
|
5,453
|
|
|
2,470
|
|
Independent Pharmacies
|
3,514
|
|
|
2,495
|
|
|
1,019
|
|
Registered Investment Advisors
|
796
|
|
|
—
|
|
|
796
|
|
Veterinary Industry
|
2,882
|
|
|
2,199
|
|
|
683
|
|
Total
|
15,226
|
|
|
10,147
|
|
|
5,079
|
|
Construction & Development
|
|
|
|
|
|
Agriculture
|
300
|
|
|
233
|
|
|
67
|
|
Total
|
300
|
|
|
233
|
|
|
67
|
|
Commercial Real Estate
|
|
|
|
|
|
Death Care Management
|
1,768
|
|
|
1,264
|
|
|
504
|
|
Healthcare
|
4,044
|
|
|
2,985
|
|
|
1,059
|
|
Independent Pharmacies
|
528
|
|
|
—
|
|
|
528
|
|
Veterinary Industry
|
13,561
|
|
|
7,518
|
|
|
6,043
|
|
Total
|
19,901
|
|
|
11,767
|
|
|
8,134
|
|
Commercial Land
|
|
|
|
|
|
Agriculture
|
91
|
|
|
—
|
|
|
91
|
|
Total
|
91
|
|
|
—
|
|
|
91
|
|
Total
|
$
|
35,518
|
|
|
$
|
22,147
|
|
|
$
|
13,371
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following table presents evaluated balances of loans and leases classified as impaired at the dates presented that carried an associated reserve as compared to those with no reserve. The recorded investment includes accrued interest and net deferred loan and lease fees or costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Recorded Investment
|
|
|
|
|
|
With a
Recorded
Allowance
|
|
With No
Recorded
Allowance
|
|
Total
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
Recorded
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
Death Care Management
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
—
|
|
Healthcare
|
6,675
|
|
|
709
|
|
|
7,384
|
|
|
8,034
|
|
|
681
|
|
Independent Pharmacies
|
2,622
|
|
|
1,660
|
|
|
4,282
|
|
|
4,697
|
|
|
76
|
|
Registered Investment Advisors
|
668
|
|
|
75
|
|
|
743
|
|
|
735
|
|
|
521
|
|
Veterinary Industry
|
2,033
|
|
|
374
|
|
|
2,407
|
|
|
2,800
|
|
|
173
|
|
Total
|
11,998
|
|
|
2,826
|
|
|
14,824
|
|
|
16,273
|
|
|
1,451
|
|
Construction & Development
|
|
|
|
|
|
|
|
|
|
Healthcare
|
1,151
|
|
|
—
|
|
|
1,151
|
|
|
1,173
|
|
|
53
|
|
Total
|
1,151
|
|
|
—
|
|
|
1,151
|
|
|
1,173
|
|
|
53
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
Death Care Management
|
1,867
|
|
|
619
|
|
|
2,486
|
|
|
2,625
|
|
|
187
|
|
Healthcare
|
3,759
|
|
|
575
|
|
|
4,334
|
|
|
4,352
|
|
|
261
|
|
Independent Pharmacies
|
1,622
|
|
|
—
|
|
|
1,622
|
|
|
2,163
|
|
|
9
|
|
Veterinary Industry
|
11,506
|
|
|
2,194
|
|
|
13,700
|
|
|
14,787
|
|
|
1,408
|
|
Total
|
18,754
|
|
|
3,388
|
|
|
22,142
|
|
|
23,927
|
|
|
1,865
|
|
Commercial Land
|
|
|
|
|
|
|
|
|
|
Agriculture
|
23
|
|
|
—
|
|
|
23
|
|
|
58
|
|
|
—
|
|
Total
|
23
|
|
|
—
|
|
|
23
|
|
|
58
|
|
|
—
|
|
Total Impaired Loans and Leases
|
$
|
31,926
|
|
|
$
|
6,214
|
|
|
$
|
38,140
|
|
|
$
|
41,431
|
|
|
$
|
3,369
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Recorded Investment
|
|
|
|
|
|
With a
Recorded
Allowance
|
|
With No
Recorded
Allowance
|
|
Total
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
Recorded
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
Death Care Management
|
$
|
8
|
|
|
$
|
103
|
|
|
$
|
111
|
|
|
$
|
111
|
|
|
$
|
1
|
|
Healthcare
|
7,259
|
|
|
664
|
|
|
7,923
|
|
|
8,120
|
|
|
778
|
|
Independent Pharmacies
|
3,184
|
|
|
330
|
|
|
3,514
|
|
|
3,610
|
|
|
327
|
|
Registered Investment Advisors
|
796
|
|
|
—
|
|
|
796
|
|
|
792
|
|
|
514
|
|
Veterinary Industry
|
2,754
|
|
|
128
|
|
|
2,882
|
|
|
3,369
|
|
|
106
|
|
Total
|
14,001
|
|
|
1,225
|
|
|
15,226
|
|
|
16,002
|
|
|
1,726
|
|
Construction & Development
|
|
|
|
|
|
|
|
|
|
Agriculture
|
300
|
|
|
—
|
|
|
300
|
|
|
311
|
|
|
13
|
|
Total
|
300
|
|
|
—
|
|
|
300
|
|
|
311
|
|
|
13
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
Death Care Management
|
1,580
|
|
|
188
|
|
|
1,768
|
|
|
1,904
|
|
|
34
|
|
Healthcare
|
3,514
|
|
|
530
|
|
|
4,044
|
|
|
4,042
|
|
|
47
|
|
Independent Pharmacies
|
528
|
|
|
—
|
|
|
528
|
|
|
529
|
|
|
284
|
|
Veterinary Industry
|
11,193
|
|
|
2,368
|
|
|
13,561
|
|
|
14,283
|
|
|
1,273
|
|
Total
|
16,815
|
|
|
3,086
|
|
|
19,901
|
|
|
20,758
|
|
|
1,638
|
|
Commercial Land
|
|
|
|
|
|
|
|
|
|
Agriculture
|
91
|
|
|
—
|
|
|
91
|
|
|
161
|
|
|
15
|
|
Total
|
91
|
|
|
—
|
|
|
91
|
|
|
161
|
|
|
15
|
|
Total Impaired Loans and Leases
|
$
|
31,207
|
|
|
$
|
4,311
|
|
|
$
|
35,518
|
|
|
$
|
37,232
|
|
|
$
|
3,392
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following table presents the average recorded investment of impaired loans and leases for each period presented and interest income recognized during the period in which the loans and leases were considered impaired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30, 2017
|
|
Three months ended
September 30, 2016
|
|
Average
Balance
|
|
Interest
Income
Recognized
|
|
Average
Balance
|
|
Interest
Income
Recognized
|
Commercial & Industrial
|
|
|
|
|
|
|
|
Death Care Management
|
$
|
42
|
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
—
|
|
Healthcare
|
7,076
|
|
|
11
|
|
|
6,345
|
|
|
38
|
|
Independent Pharmacies
|
4,266
|
|
|
26
|
|
|
1,946
|
|
|
18
|
|
Registered Investment Advisors
|
894
|
|
|
14
|
|
|
742
|
|
|
7
|
|
Veterinary Industry
|
2,511
|
|
|
11
|
|
|
2,501
|
|
|
13
|
|
Total
|
14,789
|
|
|
63
|
|
|
11,543
|
|
|
76
|
|
Construction & Development
|
|
|
|
|
|
|
|
Healthcare
|
602
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Total
|
602
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
Death Care Management
|
2,512
|
|
|
13
|
|
|
1,801
|
|
|
2
|
|
Healthcare
|
3,079
|
|
|
11
|
|
|
1,012
|
|
|
12
|
|
Independent Pharmacies
|
1,985
|
|
|
—
|
|
|
551
|
|
|
2
|
|
Veterinary Industry
|
13,950
|
|
|
132
|
|
|
12,218
|
|
|
87
|
|
Total
|
21,526
|
|
|
156
|
|
|
15,582
|
|
|
103
|
|
Commercial Land
|
|
|
|
|
|
|
|
Agriculture
|
23
|
|
|
—
|
|
|
156
|
|
|
—
|
|
Total
|
23
|
|
|
—
|
|
|
156
|
|
|
—
|
|
Total
|
$
|
36,940
|
|
|
$
|
221
|
|
|
$
|
27,281
|
|
|
$
|
179
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2017
|
|
Nine months ended
September 30, 2016
|
|
Average
Balance
|
|
Interest
Income
Recognized
|
|
Average
Balance
|
|
Interest
Income
Recognized
|
Commercial & Industrial
|
|
|
|
|
|
|
|
Death Care Management
|
$
|
313
|
|
|
$
|
3
|
|
|
$
|
9
|
|
|
$
|
—
|
|
Healthcare
|
4,996
|
|
|
25
|
|
|
5,777
|
|
|
60
|
|
Independent Pharmacies
|
7,998
|
|
|
52
|
|
|
1,927
|
|
|
51
|
|
Registered Investment Advisors
|
1,438
|
|
|
28
|
|
|
588
|
|
|
13
|
|
Veterinary Industry
|
4,329
|
|
|
24
|
|
|
2,715
|
|
|
29
|
|
Total
|
19,074
|
|
|
132
|
|
|
11,016
|
|
|
153
|
|
Construction & Development
|
|
|
|
|
|
|
|
Healthcare
|
120
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Total
|
120
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
Death Care Management
|
2,030
|
|
|
30
|
|
|
1,811
|
|
|
5
|
|
Healthcare
|
2,940
|
|
|
24
|
|
|
1,013
|
|
|
27
|
|
Independent Pharmacies
|
149
|
|
|
—
|
|
|
551
|
|
|
2
|
|
Veterinary Industry
|
13,069
|
|
|
278
|
|
|
12,266
|
|
|
249
|
|
Total
|
18,188
|
|
|
332
|
|
|
15,641
|
|
|
283
|
|
Commercial Land
|
|
|
|
|
|
|
|
Agriculture
|
199
|
|
|
—
|
|
|
355
|
|
|
—
|
|
Total
|
199
|
|
|
—
|
|
|
355
|
|
|
—
|
|
Total
|
$
|
37,581
|
|
|
$
|
466
|
|
|
$
|
27,012
|
|
|
$
|
436
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The following tables present the types of TDRs that were made during the three and nine months ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2017
|
|
Three months ended September 30, 2016
|
|
All Restructurings
|
|
All Restructurings
|
|
Number of Loans
|
|
Pre-
modification
Recorded
Investment
|
|
Post-
modification
Recorded
Investment
|
|
Number of
Loans
|
|
Pre-
modification
Recorded
Investment
|
|
Post-
modification
Recorded
Investment
|
Payment Deferral and Extended Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
Independent Pharmacies
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Payment Deferral and Extended Amortization
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Payment Deferral
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
440
|
|
|
440
|
|
Veterinary Industry
|
2
|
|
|
559
|
|
|
559
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Payment Deferral
|
2
|
|
|
559
|
|
|
559
|
|
|
1
|
|
|
440
|
|
|
440
|
|
Total
|
2
|
|
|
$
|
559
|
|
|
$
|
559
|
|
|
1
|
|
|
$
|
440
|
|
|
$
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017
|
|
Nine months ended September 30, 2016
|
|
All Restructurings
|
|
All Restructurings
|
|
Number of
Loans
|
|
Pre-
modification
Recorded
Investment
|
|
Post-
modification
Recorded
Investment
|
|
Number of
Loans
|
|
Pre-
modification
Recorded
Investment
|
|
Post-
modification
Recorded
Investment
|
Payment Deferral and Extended Amortization
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
Independent Pharmacies
|
1
|
|
|
262
|
|
|
262
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Payment Deferral and Extended Amortization
|
1
|
|
|
262
|
|
|
262
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Payment Deferral
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
440
|
|
|
440
|
|
Veterinary Industry
|
2
|
|
|
559
|
|
|
559
|
|
|
1
|
|
|
420
|
|
|
420
|
|
Total Payment Deferral
|
2
|
|
|
559
|
|
|
559
|
|
|
2
|
|
|
860
|
|
|
860
|
|
Total
|
3
|
|
|
$
|
821
|
|
|
$
|
821
|
|
|
2
|
|
|
$
|
860
|
|
|
$
|
860
|
|
Concessions made to improve a loan and lease’s performance have varying degrees of success. No TDRS that were modified within the twelve months ended September 30, 2017 subsequently defaulted during the three or nine months ended September 30, 2017.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
As of
September 30, 2016
,
one
TDR that was modified within the twelve months ended
September 30, 2016
subsequently defaulted during the nine months ended September 30, 2016. This TDR was a commercial and industrial veterinary loan that was previously modified for payment deferral. The recorded investment for this TDR at
September 30, 2016
was $
311 thousand
.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 7
. Servicing Assets
Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $
2.36 billion
and $
2.22 billion
at
September 30, 2017
and
December 31, 2016
, respectively.
The following summarizes the activity pertaining to servicing rights:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
53,675
|
|
|
$
|
48,454
|
|
|
$
|
51,994
|
|
|
$
|
44,230
|
|
Additions, net
|
3,527
|
|
|
4,964
|
|
|
9,412
|
|
|
11,923
|
|
Fair value changes:
|
|
|
|
|
|
|
|
Due to changes in valuation inputs or assumptions
|
(789
|
)
|
|
(1,452
|
)
|
|
342
|
|
|
(821
|
)
|
Decay due to increases in principal paydowns or runoff
|
(3,021
|
)
|
|
(2,237
|
)
|
|
(8,356
|
)
|
|
(5,603
|
)
|
Balance at end of period
|
$
|
53,392
|
|
|
$
|
49,729
|
|
|
$
|
53,392
|
|
|
$
|
49,729
|
|
The fair value of servicing rights was determined using discount rates ranging from
10.1%
to
14.5%
on
September 30, 2017
and
8.1%
to
14.1%
on
September 30, 2016
. The fair value of servicing rights was determined using prepayment speeds ranging from
3.1%
to
10.0%
on
September 30, 2017
and
2.9%
to
9.8%
on
September 30, 2016
, depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the consolidated statements of income.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which results in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 8. Borrowings
Total outstanding long term borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Long term borrowings
|
|
|
|
On September 11, 2014, the Company financed the construction of an additional building located on the Company’s Tiburon Drive main campus with a $24 million construction line of credit with an unaffiliated commercial bank, secured by both properties at its Tiburon Drive main facility location. Payments were interest only through September 11, 2016 at a fixed rate of 3.95% for a term of 84 months. Monthly principal and interest payments of $146 thousand began in October 2016 with all principal and accrued interest due on September 11, 2021. The construction line is fully disbursed and there was no remaining available credit on this construction line at September 30, 2017.
|
$
|
23,195
|
|
|
$
|
23,864
|
|
On February 23, 2015, the Company transferred two related party loans to an unaffiliated commercial bank in exchange for $4.7 million. The exchange price equated to the unpaid principal balance plus accrued but uncollected interest at the time of transfer. The terms of the transfer agreement with the unaffiliated commercial bank identified the transaction as a secured borrowing for accounting purposes. Interest accrues at prime plus 1% with monthly principal and interest payments over a term of 60 months. The interest rate at September 30, 2017 is 5.25%. The maturity date is October 5, 2019. The pledged collateral is classified in other assets with a fair value of $3.7 million at September 30, 2017. Underlying loans carry a risk grade of 3 and are current with no delinquencies.
|
3,677
|
|
|
3,979
|
|
Total long term borrowings
|
$
|
26,872
|
|
|
$
|
27,843
|
|
The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled
$47.5 million
and
$26.5 million
as of
September 30, 2017
and
December 31, 2016
, respectively. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had
no
outstanding balances on the lines of credit as of
September 30, 2017
and
December 31, 2016
.
The Company has
$25 million
available in an unsecured line of credit with a correspondent bank as of September 30, 2017. The line was increased from
$8.1 million
to
$25 million
on April 18, 2017. At December 31, 2016, there was
$8.1 million
available on this unsecured line of credit. The term is
24 months
, maturing April 30, 2019, and interest accrues at Prime minus
0.50%
. Payments are interest only with all principal and accrued interest due on April 30, 2019. The terms of the loan require the Company to maintain minimum capital, liquidity and Texas ratios. There was
no
outstanding balance on this line of credit as of September 30, 2017 and December 31, 2016.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The Company has entered into a repurchase agreement with a third party for
$5 million
as of
September 30, 2017
and
December 31, 2016
. At the time the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received. The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had
no
outstanding balance on the repurchase agreement as of
September 30, 2017
and
December 31, 2016
.
The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of
$321.0 million
and
$281.3 million
as of
September 30, 2017
and
December 31, 2016
, respectively. At
September 30, 2017
and
December 31, 2016
, the Company had approximately
$175.0 million
and
$142.7 million
, respectively, in borrowing capacity available under these arrangements with
no
outstanding balance as of
September 30, 2017
and
December 31, 2016
.
Note 9. Income Taxes
The Company's effective tax rate is lower than the U.S. statutory rate primarily because of the anticipated effect of investment tax credits during 2017. The Company's effective tax rate in the future will depend on the actual investment tax credits earned as a part of its financing renewable energy applications.
In the first quarter of 2017, share based compensation expense excess tax benefits of $
874 thousand
were reflected in the consolidated statements of income as a component of the provision for income taxes as a result of the adoption of ASU 2016-09. Please refer to Note 2 for more details regarding the adoption of ASU 2016-09.
Note 10. Fair Value of Financial Instruments
Fair Value Hierarchy
There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
Financial Instruments Measured at Fair Value
The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the fair value hierarchy:
Investment securities:
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, discounted cash flow or at net asset value per share. Level 2 securities would include US government agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset backed mutual fund and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
Impaired loans
: Impairment of a loan is based on the fair value of the collateral of the loan for collateral-dependent loans. Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. For non-collateral dependent loans, impairment is determined by the present value of expected future cash flows. Impaired loans classified as Level 3 are based on management’s judgment and estimation.
Servicing assets:
Servicing rights do not trade in an active, open market with readily observable prices. While sales of servicing rights do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of servicing rights using discounted cash flow models incorporating numerous assumptions from the perspective of a market participant including servicing income, servicing costs, market discount rates and prepayment speeds. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the valuation hierarchy.
Foreclosed assets:
Foreclosed real estate is adjusted to fair value less selling costs upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Given the lack of observable market prices for identical properties and market discounts applied to appraised values, the Company generally classifies foreclosed assets as nonrecurring Level 3.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Contingent consideration liability:
Contingent consideration associated with the acquisition of Reltco will be adjusted to fair value quarterly until settled. The assumptions used to measure fair value are based on internal metrics that are unobservable and therefore the contingent consideration liability is classified within Level 3 of the valuation hierarchy.
Recurring Fair Value
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
US government agencies
|
$
|
17,804
|
|
|
$
|
—
|
|
|
$
|
17,804
|
|
|
$
|
—
|
|
Residential mortgage-backed securities
|
56,750
|
|
|
—
|
|
|
56,750
|
|
|
—
|
|
Mutual fund
|
2,021
|
|
|
—
|
|
|
2,021
|
|
|
—
|
|
Servicing assets
1
|
53,392
|
|
|
—
|
|
|
—
|
|
|
53,392
|
|
Total assets at fair value
|
$
|
129,967
|
|
|
$
|
—
|
|
|
$
|
76,575
|
|
|
$
|
53,392
|
|
|
|
|
|
|
|
|
|
Contingent consideration liability
2
|
$
|
4,650
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,650
|
|
Total liabilities at fair value
|
$
|
4,650
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Investment securities available-for-sale
|
|
|
|
|
|
|
|
US government agencies
|
$
|
17,823
|
|
|
$
|
—
|
|
|
$
|
17,823
|
|
|
$
|
—
|
|
Residential mortgage-backed securities
|
51,273
|
|
|
—
|
|
|
51,273
|
|
|
—
|
|
Mutual fund
|
1,960
|
|
|
—
|
|
|
1,960
|
|
|
—
|
|
Servicing assets
1
|
51,994
|
|
|
—
|
|
|
—
|
|
|
51,994
|
|
Total assets at fair value
|
$
|
123,050
|
|
|
$
|
—
|
|
|
$
|
71,056
|
|
|
$
|
51,994
|
|
|
|
1
|
See
Note 7
for a rollforward of recurring Level 3 fair values for servicing assets and various assumptions used in the fair value measurement.
|
|
|
2
|
See Note 4 for activity related to the recurring Level 3 fair value for the contingent consideration liability and various assumptions used in the fair value measurement.
|
Non-recurring Fair Value
The tables below present the recorded amount of assets and liabilities measured at fair value on a non-recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Impaired loans and leases
|
$
|
28,557
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,557
|
|
Foreclosed assets
|
2,231
|
|
|
—
|
|
|
—
|
|
|
2,231
|
|
Total assets at fair value
|
$
|
30,788
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Impaired loans and leases
|
$
|
27,815
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27,815
|
|
Foreclosed assets
|
1,648
|
|
|
—
|
|
|
—
|
|
|
1,648
|
|
Total assets at fair value
|
$
|
29,463
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29,463
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Level 3 Analysis
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of
September 30, 2017
and
December 31, 2016
the significant unobservable inputs used in the fair value measurements were as follows:
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets with Significant
Unobservable Inputs
|
|
Fair Value
|
|
Valuation Technique
|
|
Significant
Unobservable
Inputs
|
|
Range
|
Impaired Loans and Leases
|
|
$
|
28,557
|
|
|
Discounted appraisals
Discounted expected cash flows
|
|
Appraisal adjustments
(1)
Interest rate & repayment term
|
|
0% to 25% Weighted average discount rate 6.01%
|
Foreclosed Assets
|
|
$
|
2,231
|
|
|
Discounted appraisals
|
|
Appraisal adjustments
(1)
|
|
10% to 35%
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets with Significant
Unobservable Inputs
|
|
Fair Value
|
|
Valuation Technique
|
|
Significant
Unobservable
Inputs
|
|
Range
|
Impaired Loans and Leases
|
|
$
|
27,815
|
|
|
Discounted appraisals
Discounted expected cash flows
|
|
Appraisal adjustments
(1)
Interest rate & repayment term
|
|
0% to 25% Weighted average discount rate 5.28%
|
Foreclosed Assets
|
|
$
|
1,648
|
|
|
Discounted appraisals
|
|
Appraisal adjustments
(1)
|
|
10% to 35%
|
|
|
(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 consolidated 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 and leases held for investment
: 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 and leases are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans and leases with similar terms to borrowers of similar credit quality. Loan and lease 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.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
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.
Short and long term borrowings:
The fair values of the Company’s short term borrowings approximate fair value while long term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental debt rates for similar types of debt arrangements.
The carrying amounts and estimated fair values of the Company’s financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
Carrying
Amount
|
|
Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Fair
Value
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
260,907
|
|
|
$
|
260,907
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
260,907
|
|
Certificates of deposit with other banks
|
3,250
|
|
|
3,251
|
|
|
—
|
|
|
—
|
|
|
3,251
|
|
Investment securities, available-for-sale
|
76,575
|
|
|
—
|
|
|
76,575
|
|
|
—
|
|
|
76,575
|
|
Loans held for sale
|
692,586
|
|
|
—
|
|
|
—
|
|
|
770,923
|
|
|
770,923
|
|
Loans and leases, net of allowance for loan and lease losses
|
1,148,860
|
|
|
—
|
|
|
—
|
|
|
1,151,601
|
|
|
1,151,601
|
|
Servicing assets
|
53,392
|
|
|
—
|
|
|
—
|
|
|
53,392
|
|
|
53,392
|
|
Accrued interest receivable
|
9,669
|
|
|
9,669
|
|
|
—
|
|
|
—
|
|
|
9,669
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
2,012,891
|
|
|
—
|
|
|
1,996,493
|
|
|
—
|
|
|
1,996,493
|
|
Accrued interest payable
|
270
|
|
|
270
|
|
|
—
|
|
|
—
|
|
|
270
|
|
Long term borrowings
|
26,872
|
|
|
—
|
|
|
—
|
|
|
27,904
|
|
|
27,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Carrying
Amount
|
|
Quoted Price
In Active
Markets for
Identical Assets
/Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
Fair
Value
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
238,008
|
|
|
$
|
238,008
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
238,008
|
|
Certificates of deposit with other banks
|
7,250
|
|
|
7,236
|
|
|
—
|
|
|
—
|
|
|
7,236
|
|
Investment securities, available-for-sale
|
71,056
|
|
|
—
|
|
|
71,056
|
|
|
—
|
|
|
71,056
|
|
Loans held for sale
|
394,278
|
|
|
—
|
|
|
—
|
|
|
426,220
|
|
|
426,220
|
|
Loans and leases, net of allowance for loan and lease losses
|
889,357
|
|
|
—
|
|
|
—
|
|
|
873,158
|
|
|
873,158
|
|
Servicing assets
|
51,994
|
|
|
—
|
|
|
—
|
|
|
51,994
|
|
|
51,994
|
|
Accrued interest receivable
|
7,520
|
|
|
7,520
|
|
|
—
|
|
|
—
|
|
|
7,520
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
1,485,076
|
|
|
—
|
|
|
1,469,173
|
|
|
—
|
|
|
1,469,173
|
|
Accrued interest payable
|
319
|
|
|
319
|
|
|
—
|
|
|
—
|
|
|
319
|
|
Long term borrowings
|
27,843
|
|
|
—
|
|
|
—
|
|
|
29,559
|
|
|
29,559
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 11. Commitments and Contingencies
Litigation
In the normal course of business the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.
Financial Instruments with Off-balance-sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Commitments to extend credit
|
$
|
1,563,688
|
|
|
$
|
1,342,271
|
|
Standby letters of credit
|
1,861
|
|
|
343
|
|
Solar purchase commitments
|
182,610
|
|
|
—
|
|
Airplane purchase agreement commitments
|
—
|
|
|
21,500
|
|
Total unfunded off-balance-sheet credit risk
|
$
|
1,748,159
|
|
|
$
|
1,364,114
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. In 2012, the Company began issuing commitment letters after approval of the loan by the Credit Department. Commitment letters generally expire
ninety days
after issuance.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.
As of September 30, 2017 and
December 31, 2016
, the Company had unfunded commitments to provide capital contributions for on-balance sheet investments in the amount of
$4.4 million
and $
4.9 million
, respectively.
Concentrations of Credit Risk
Although the Company is not subject to any geographic concentrations, a substantial amount of the Company’s loans, leases, and commitments to extend credit have been granted to customers in the agriculture, healthcare and veterinary verticals. The concentrations of credit by type of loan are set forth in
Note 6
. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $
5.0 million
, except for
seventeen
relationships that have a retained unguaranteed exposure of $
144.6 million
of which $
90.8 million
of the unguaranteed exposure has been disbursed.
Additionally, the Company has future minimum lease payments due under non-cancelable operating leases totaling
$33.0 million
, of which
$28.0 million
is due from two relationships.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
The Company from time-to-time may have cash and cash equivalents on deposit with financial institutions that exceed federally-insured limits.
Note 12. Stock Plans
On March 20, 2015, the Company adopted the 2015 Omnibus Stock Incentive Plan which replaced the previously existing Amended Incentive Stock Option Plan and Nonstatutory Stock Option Plan. Subsequently on May 24, 2016, the 2015 Omnibus Stock Incentive Plan was amended to authorize awards covering a maximum of
7,000,000
common voting shares and has an expiration date of
March 20, 2025
. Options or restricted shares granted under the Amended and Restated 2015 Omnibus Stock Incentive Plan (the "Plan") expire no more than
10 years
from the date of grant. Exercise prices under the Plan are set by the Board of Directors at the date of grant, but shall not be less than
100%
of fair market value of the related stock at the date of the grant. Options or restricted shares vest over a minimum of
three years
from the date of the grant.
Stock Options
Compensation cost relating to share-based payment transactions are recognized in the financial statements with measurement based upon the fair value of the equity or liability instruments issued. For the three months ended
September 30, 2017
and
2016
, the Company recognized $
536 thousand
and $
580 thousand
in compensation expense for stock options, respectively. For the
nine
months ended
September 30, 2017
and
2016
, the Company recognized $
1.4 million
and $
1.8 million
in compensation expense for stock options, respectively.
Stock option activity under the Plan during the
nine
month periods ended
September 30, 2017
and
2016
is summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2016
|
3,478,208
|
|
|
$
|
11.51
|
|
|
|
|
|
Exercised
|
76,285
|
|
|
7.89
|
|
|
|
|
|
Forfeited
|
203,671
|
|
|
14.12
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at September 30, 2017
|
3,198,252
|
|
|
$
|
11.43
|
|
|
7.31 years
|
|
$
|
38,411,802
|
|
Exercisable at September 30, 2017
|
703,425
|
|
|
$
|
10.41
|
|
|
7.06 years
|
|
$
|
9,171,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2015
|
3,546,992
|
|
|
$
|
11.17
|
|
|
|
|
|
Exercised
|
25,406
|
|
|
5.79
|
|
|
|
|
|
Forfeited
|
166,483
|
|
|
9.01
|
|
|
|
|
|
Granted
|
169,987
|
|
|
14.02
|
|
|
|
|
|
Outstanding at September 30, 2016
|
3,525,090
|
|
|
$
|
11.44
|
|
|
8.30 years
|
|
$
|
14,212,513
|
|
Exercisable at September 30, 2016
|
478,141
|
|
|
$
|
9.22
|
|
|
7.84 years
|
|
$
|
2,887,741
|
|
The following is a summary of non-vested stock option activity for the Company for the
nine
months ended
September 30, 2017
and
2016
.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2016
|
3,016,100
|
|
|
$
|
4.78
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
317,602
|
|
|
4.17
|
|
Forfeited
|
203,671
|
|
|
6.03
|
|
Non-vested at September 30, 2017
|
2,494,827
|
|
|
$
|
4.75
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Non-vested at December 31, 2015
|
3,393,441
|
|
|
$
|
4.56
|
|
Granted
|
169,987
|
|
|
6.58
|
|
Vested
|
349,996
|
|
|
4.22
|
|
Forfeited
|
166,483
|
|
|
3.13
|
|
Non-vested at September 30, 2016
|
3,046,949
|
|
|
$
|
4.79
|
|
The total intrinsic value of options exercised at
September 30, 2017
and
2016
was $
1.1 million
and $
223 thousand
, respectively.
At
September 30, 2017
, unrecognized compensation costs relating to stock options amounted to $
9.8 million
which will be recognized over a weighted average period of
2.93
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. There were
no
stock options granted during the
three and nine
months ended
September 30, 2017
.
Restricted Stock
Restricted stock awards are authorized in the form of restricted stock awards or units ("RSU"s) and restricted stock awards or units with a market price condition ("Market RSU"s).
RSUs have a restriction based on the passage of time and may also have a restriction based on a non-market-related performance criteria. The fair value of the RSUs is based on the closing price on the date of the grant.
Market RSUs also have a restriction based on the passage of time and non-market-related performance criteria, but also have a restriction based on market price criteria related to the Company’s share price closing at or above a specified price ranging from
$34.00
to
$38.00
per share for at least
twenty
(20) consecutive trading days at any time prior to expiration date. The amount of Market RSUs earned will not exceed
100%
of the Market RSUs awarded. The fair value of the Market RSUs and the implied service period is calculated using the Monte Carlo Simulation method.
RSU stock activity under the Plan during the first
nine
months of
2017
is summarized below.
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Grant
Date Fair Value
|
Non-vested at December 31, 2016
|
134,969
|
|
|
$
|
14.96
|
|
Granted
|
62,721
|
|
|
23.85
|
|
Vested
|
38,205
|
|
|
15.40
|
|
Forfeited
|
7,485
|
|
|
13.96
|
|
Non-vested at September 30, 2017
|
152,000
|
|
|
$
|
18.57
|
|
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
For the three months ended
September 30, 2017
and
2016
, the Company recognized $
191 thousand
and
$3.1 million
in compensation expense for RSUs, respectively. For the
nine
months ended
September 30, 2017
and
2016
, the Company recognized $
517 thousand
and $
5.3 million
in compensation expense for RSUs, respectively.
At
September 30, 2017
, unrecognized compensation costs relating to RSUs amounted to $
2.5 million
which will be recognized over a weighted average period of
4.55
years.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Market RSU stock activity under the Plan during the first
nine
months of
2017
is summarized below.
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average Grant
Date Fair Value
|
Non-vested at December 31, 2016
|
2,364,500
|
|
|
$
|
8.28
|
|
Granted
|
233,791
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
4,007
|
|
|
11.38
|
|
Non-vested at September 30, 2017
|
2,594,284
|
|
|
$
|
8.79
|
|
The compensation expense for Market RSUs is measured based on their grant date fair value as calculated using the Monte Carlo Simulation and is recognized on a straight-line basis over the average vesting period. The Monte Carlo Simulation used 100,000 simulation paths to assess the expected date of achieving the market price criteria.
Related to the
100,733
Market RSUs granted on January 31, 2017 and the
3,058
Market RSUs granted on May 8, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of
7.0 years
. The implied term of the restricted stock was
4.1 years
. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of
2.28%
, expected volatility of
30.00%
and a dividend yield of
0.39%
.
Related to the
130,000
Market RSUs granted on August 7, 2017, the share price simulation was based on the Cox, Ross & Rubinstein option pricing methodology for a period of
7.0 years
. The implied term of the restricted stock was
3.9 years
. The Monte Carlo Simulation used various assumptions that included a risk free rate of return of
2.07%
, expected volatility of
30.00%
and a dividend yield of
0.33%
.
For the three months ended
September 30, 2017
and
2016
, the Company recognized $
1.3 million
and $
346 thousand
in compensation expense for Market RSUs, respectively. For the
nine
months ended
September 30, 2017
and
2016
, the Company recognized $
3.7 million
and $
577 thousand
in compensation expense for Market RSUs, respectively.
All of the Company's Market RSUs had an effective grant date of May 24, 2016, November 30, 2016, January 31, 2017, May 8, 2017 and August 7, 2017
At
September 30, 2017
, unrecognized compensation costs relating to Market RSUs amounted to $
17.9 million
which will be recognized over a weighted average period of
3.27
years.
Employee Stock Purchase Plan
The Company adopted an Employee Stock Purchase Plan on October 8, 2014. On May 24, 2016, the plan was amended and the Amended and Restated Employee Stock Purchase Plan (the "ESPP") became effective within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended. Under the ESPP, eligible employees are able to purchase available shares with post-tax dollars as of the grant date. In order for employees to be eligible to participate in the ESPP they must be employed or on an authorized leave of absence from the Company or any subsidiary immediately prior to the grant date. ESPP stock purchases cannot exceed $
25 thousand
in fair market value per employee per calendar year. Options to purchase shares under the ESPP are granted at a
15%
discount to fair market value. Expense recognized in relation to the ESPP for the
nine
months ended
September 30, 2017
was $
79 thousand
. There were
no
ESPP purchases for the
nine
months ended
September 30, 2016
. For the three months ended
September 30, 2017
and
2016
, the Company recognized
$36 thousand
and
$0
expense, respectively.
Live Oak Bancshares, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 13. Subsequent Event
Management has evaluated subsequent events through the date the financial statements were available to be issued and determined that the following event required disclosure:
Unconsolidated Joint Venture
On October 1, 2017, the Company closed the digital banking joint venture between Live Oak Banking Company and First Data Corporation ("First Data"). The new company, named Apiture, combines First Data's and the Bank's digital banking platforms, products, services, and certain human resources used in the creation and delivery of technology solutions for financial institutions. The contributed assets of both the Company and First Data are considered businesses in accordance with relevant accounting standards. At closing both the Bank and First Data received equal voting interests in Apiture in exchange for their respective contributions. As a term of the closing agreements, First Data is entitled to a preference in Apiture's cash earnings for the remainder of calender 2017 and all of 2018, not to exceed
$18.0 million
and
$18.9 million
, respectively.
As a result of this transaction, the Company and First Data each have, directly or indirectly, equal voting interests in Apiture. In addition, the Company has analyzed the Contribution Agreement and determined that Apiture is not a variable interest entity. The Company also considered the partners' participating rights under the Contribution Agreement and determined that the joint venture partners have the ability to participate in major decisions, which equates to shared decision making. Accordingly, the Bank has significant influence but does not control the joint venture. Therefore, the joint venture will be accounted for as an equity method investment effective on October 1, 2017 (the date of the transaction). Under the equity method of accounting, the net equity investment of the Bank and the Bank's share of net income or loss from the unconsolidated entity will be reflected in the Company's consolidated balance sheets and the consolidated statements of income.
The preliminary estimated fair value of Apiture at the date of closing was approximately
$150 million
. Based on the aforementioned cash earnings preference to First Data during 2017 and 2018, the valuation of equity interests received in exchange for contributions by the two initial investors was unequal. As a consequence of this preference the preliminary initial economic interest in Apiture for First Data was equal to
54.7%
or
$82.0 million
, while the Company's preliminary initial economic interest in Apiture was equal to
45.3%
, or
$68.0 million
. As the Company had no carrying amount for its contribution in the formation of Apiture, the preliminary pre-tax results for this transaction as of the date of closing would be a
$68.0 million
equity method investment on the balance sheet and a one-time gain of the same amount on the income statement.
The Company is undertaking a comprehensive review of the preliminary fair value estimates to ensure they conform to the measurement and reporting requirements set forth in the accounting guidance for equity method investments and joint ventures, business combinations, and fair value measurements guidance. Determining the fair value of the joint venture and the partners' contributions to the joint venture are complex analyses that involve significant judgment regarding estimates and assumptions. Accordingly, the initial accounting for this transaction is still in process.