UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the quarterly period ended June 30, 2024
or
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the transition period from ________ to ________.
Commission file number: 001-37497
LIVE OAK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
| North Carolina | 26-4596286 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
1741 Tiburon Drive Wilmington, North Carolina | 28403 | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(910) 790-5867
| (Registrant’s telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Voting Common Stock, no par value per share | LOB | New York Stock Exchange LLC | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | o | ||||||||
| Non-accelerated filer | o | Smaller reporting company | o | ||||||||
| Emerging growth company | o | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 5, 2024, there were 45,035,289 shares of the registrant’s voting common stock outstanding.
Live Oak Bancshares, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2024
TABLE OF CONTENTS
| Page | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Live Oak Bancshares, Inc.
Condensed Consolidated Balance Sheets
As of June 30, 2024 (unaudited) and December 31, 2023*
(Dollars in thousands)
| June 30, 2024 | December 31, 2023 | ||||||||||
| Assets | |||||||||||
| Cash and due from banks | $ | 615,449 | $ | 582,540 | |||||||
| Certificates of deposit with other banks | 250 | 250 | |||||||||
| Investment securities available-for-sale | 1,151,195 | 1,126,160 | |||||||||
| Loans held for sale | 363,632 | 387,037 | |||||||||
Loans and leases held for investment (includes $363,017 and $388,036 measured at fair value, respectively) | 9,172,134 | 8,633,847 | |||||||||
| Allowance for credit losses on loans and leases | (137,867) | (125,840) | |||||||||
| Net loans and leases | 9,034,267 | 8,508,007 | |||||||||
| Premises and equipment, net | 267,864 | 257,881 | |||||||||
| Foreclosed assets | 8,015 | 6,481 | |||||||||
Servicing assets (includes $51,303 and $48,186 measured at fair value, respectively) | 51,528 | 48,591 | |||||||||
| Other assets | 376,370 | 354,476 | |||||||||
| Total assets | $ | 11,868,570 | $ | 11,271,423 | |||||||
| Liabilities and shareholders’ equity | |||||||||||
| Liabilities | |||||||||||
| Deposits: | |||||||||||
| Noninterest-bearing | $ | 264,013 | $ | 259,270 | |||||||
| Interest-bearing | 10,443,018 | 10,015,749 | |||||||||
| Total deposits | 10,707,031 | 10,275,019 | |||||||||
| Borrowings | 117,745 | 23,354 | |||||||||
| Other liabilities | 82,745 | 70,384 | |||||||||
| Total liabilities | 10,907,521 | 10,368,757 | |||||||||
| Shareholders’ equity | |||||||||||
Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding at June 30, 2024 and December 31, 2023 | — | — | |||||||||
Class A common stock, no par value, 100,000,000 shares authorized, 45,003,856 and 44,617,673 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | 356,381 | 344,568 | |||||||||
Class B common stock, no par value, 10,000,000 shares authorized, none issued or outstanding at June 30, 2024 and December 31, 2023 | — | — | |||||||||
| Retained earnings | 695,172 | 642,817 | |||||||||
| Accumulated other comprehensive loss | (90,504) | (84,719) | |||||||||
| Total shareholders’ equity | 961,049 | 902,666 | |||||||||
| Total liabilities and shareholders’ equity | $ | 11,868,570 | $ | 11,271,423 | |||||||
*Derived from audited consolidated financial statements.
See Notes to Unaudited Condensed Consolidated Financial Statements
1
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Income
For the three and six months ended June 30, 2024 and 2023 (unaudited)
(Dollars in thousands, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Loans and fees on loans | $ | 181,840 | $ | 152,362 | $ | 357,850 | $ | 291,414 | |||||||||||||||
| Investment securities, taxable | 9,219 | 8,503 | 18,173 | 16,050 | |||||||||||||||||||
| Other interest earning assets | 7,389 | 8,847 | 14,845 | 13,664 | |||||||||||||||||||
| Total interest income | 198,448 | 169,712 | 390,868 | 321,128 | |||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Deposits | 105,358 | 85,003 | 207,356 | 152,598 | |||||||||||||||||||
| Borrowings | 1,770 | 407 | 2,081 | 2,211 | |||||||||||||||||||
| Total interest expense | 107,128 | 85,410 | 209,437 | 154,809 | |||||||||||||||||||
| Net interest income | 91,320 | 84,302 | 181,431 | 166,319 | |||||||||||||||||||
| Provision for credit losses | 11,765 | 13,028 | 28,129 | 32,049 | |||||||||||||||||||
| Net interest income after provision for credit losses | 79,555 | 71,274 | 153,302 | 134,270 | |||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||
| Loan servicing revenue | 7,347 | 6,687 | 14,971 | 13,067 | |||||||||||||||||||
| Loan servicing asset revaluation | (2,878) | (2,831) | (5,622) | (2,475) | |||||||||||||||||||
| Net gains on sales of loans | 14,395 | 10,804 | 25,897 | 20,979 | |||||||||||||||||||
| Net gain (loss) on loans accounted for under the fair value option | 172 | 1,728 | (47) | (2,801) | |||||||||||||||||||
| Equity method investments (loss) income | (1,767) | (2,055) | (6,789) | (5,007) | |||||||||||||||||||
| Equity security investments gains (losses), net | 161 | 121 | (368) | 198 | |||||||||||||||||||
| Lease income | 2,423 | 2,535 | 4,876 | 5,070 | |||||||||||||||||||
| Management fee income | 3,271 | 3,266 | 6,542 | 6,738 | |||||||||||||||||||
| Other noninterest income | 11,035 | 3,901 | 20,796 | 7,966 | |||||||||||||||||||
| Total noninterest income | 34,159 | 24,156 | 60,256 | 43,735 | |||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||
| Salaries and employee benefits | 46,255 | 43,066 | 93,530 | 87,831 | |||||||||||||||||||
| Travel expense | 2,328 | 2,770 | 4,766 | 5,181 | |||||||||||||||||||
| Professional services expense | 3,061 | 1,996 | 4,939 | 2,923 | |||||||||||||||||||
| Advertising and marketing expense | 3,004 | 3,009 | 6,696 | 6,612 | |||||||||||||||||||
| Occupancy expense | 2,388 | 2,205 | 4,635 | 4,130 | |||||||||||||||||||
| Technology expense | 7,996 | 8,005 | 15,719 | 15,734 | |||||||||||||||||||
| Equipment expense | 3,511 | 4,023 | 6,585 | 7,841 | |||||||||||||||||||
| Other loan origination and maintenance expense | 3,659 | 3,442 | 7,570 | 7,369 | |||||||||||||||||||
| Renewable energy tax credit investment impairment (recovery) | 170 | — | (757) | 69 | |||||||||||||||||||
| FDIC insurance | 2,649 | 5,061 | 5,849 | 8,464 | |||||||||||||||||||
| Other expense | 2,635 | 2,880 | 5,861 | 9,265 | |||||||||||||||||||
| Total noninterest expense | 77,656 | 76,457 | 155,393 | 155,419 | |||||||||||||||||||
| Income before taxes | 36,058 | 18,973 | 58,165 | 22,586 | |||||||||||||||||||
| Income tax expense | 9,095 | 1,429 | 3,616 | 4,644 | |||||||||||||||||||
| Net income | $ | 26,963 | $ | 17,544 | $ | 54,549 | $ | 17,942 | |||||||||||||||
| Basic earnings per share | $ | 0.60 | $ | 0.40 | $ | 1.22 | $ | 0.41 | |||||||||||||||
| Diluted earnings per share | $ | 0.59 | $ | 0.39 | $ | 1.20 | $ | 0.40 | |||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
2
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Comprehensive Income
For the three and six months ended June 30, 2024 and 2023 (unaudited)
(Dollars in thousands)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income | $ | 26,963 | $ | 17,544 | $ | 54,549 | $ | 17,942 | |||||||||||||||
| Other comprehensive income (loss) before tax: | |||||||||||||||||||||||
| Net unrealized gain (loss) on investment securities available-for-sale during the period | 964 | (17,348) | (7,612) | (6,916) | |||||||||||||||||||
| Reclassification adjustment for gain on sale of securities available-for-sale included in net income | — | — | — | — | |||||||||||||||||||
| Other comprehensive income (loss) before tax | 964 | (17,348) | (7,612) | (6,916) | |||||||||||||||||||
| Income tax (expense) benefit | (231) | 4,163 | 1,827 | 1,654 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | 733 | (13,185) | (5,785) | (5,262) | |||||||||||||||||||
| Total comprehensive income | $ | 27,696 | $ | 4,359 | $ | 48,764 | $ | 12,680 | |||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
3
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
For the three and six months ended June 30, 2024 and 2023 (unaudited)
(Dollars in thousands)
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| Common stock | Retained earnings | Accumulated other comprehensive (loss) income | Total equity | ||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Class A | Class B | ||||||||||||||||||||||||||||||||||
Balance at March 31, 2024 | 44,938,673 | — | $ | 349,648 | $ | 669,307 | $ | (91,237) | $ | 927,718 | |||||||||||||||||||||||||
| Net income | — | — | — | 26,963 | — | 26,963 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 733 | 733 | |||||||||||||||||||||||||||||
| Issuance of restricted stock | 45,613 | — | — | — | — | — | |||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock and other | — | — | (337) | — | — | (337) | |||||||||||||||||||||||||||||
| Stock option exercises | 19,570 | — | 277 | — | — | 277 | |||||||||||||||||||||||||||||
| Restricted stock compensation expense | — | — | 6,793 | — | — | 6,793 | |||||||||||||||||||||||||||||
| Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense | — | — | — | 252 | — | 252 | |||||||||||||||||||||||||||||
Cash dividends ($0.03 per share) | — | — | — | (1,350) | — | (1,350) | |||||||||||||||||||||||||||||
Balance at June 30, 2024 | 45,003,856 | — | $ | 356,381 | $ | 695,172 | $ | (90,504) | $ | 961,049 | |||||||||||||||||||||||||
Balance at March 31, 2023 | 44,290,840 | — | $ | 334,672 | $ | 572,530 | $ | (84,395) | $ | 822,807 | |||||||||||||||||||||||||
| Net income | — | — | — | 17,544 | — | 17,544 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (13,185) | (13,185) | |||||||||||||||||||||||||||||
| Issuance of restricted stock | 38,145 | — | — | — | — | — | |||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock and other | — | — | (249) | — | — | (249) | |||||||||||||||||||||||||||||
| Stock option exercises | 22,730 | — | 297 | — | — | 297 | |||||||||||||||||||||||||||||
| Stock option compensation expense | — | — | 4 | — | — | 4 | |||||||||||||||||||||||||||||
| Restricted stock compensation expense | — | — | 6,308 | — | — | 6,308 | |||||||||||||||||||||||||||||
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense | — | — | — | 292 | — | 292 | |||||||||||||||||||||||||||||
Cash dividends ($0.03 per share) | — | — | — | (1,330) | — | (1,330) | |||||||||||||||||||||||||||||
Balance at June 30, 2023 | 44,351,715 | — | $ | 341,032 | $ | 589,036 | $ | (97,580) | $ | 832,488 | |||||||||||||||||||||||||
4
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued)
For the three and six months ended June 30, 2024 and 2023 (unaudited)
(Dollars in thousands)
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| Common stock | Retained earnings | Accumulated other comprehensive income (loss) | Total equity | ||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Class A | Class B | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2023 | 44,617,673 | — | $ | 344,568 | $ | 642,817 | $ | (84,719) | $ | 902,666 | |||||||||||||||||||||||||
| Net income | — | — | — | 54,549 | — | 54,549 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (5,785) | (5,785) | |||||||||||||||||||||||||||||
| Issuance of restricted stock | 169,283 | — | — | — | — | — | |||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock and other | — | — | (3,394) | — | — | (3,394) | |||||||||||||||||||||||||||||
| Employee stock purchase program | 18,485 | — | 702 | — | — | 702 | |||||||||||||||||||||||||||||
| Stock option exercises | 198,415 | — | 1,406 | — | — | 1,406 | |||||||||||||||||||||||||||||
| Stock option based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Restricted stock compensation expense | — | — | 13,099 | — | — | 13,099 | |||||||||||||||||||||||||||||
| Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense | — | — | — | 501 | — | 501 | |||||||||||||||||||||||||||||
Cash dividends ($0.06 per share) | — | — | — | (2,695) | — | (2,695) | |||||||||||||||||||||||||||||
Balance at June 30, 2024 | 45,003,856 | — | $ | 356,381 | $ | 695,172 | $ | (90,504) | $ | 961,049 | |||||||||||||||||||||||||
Balance at December 31, 2022 | 44,061,244 | — | $ | 330,854 | $ | 572,497 | $ | (92,318) | $ | 811,033 | |||||||||||||||||||||||||
| Net income | — | — | — | 17,942 | — | 17,942 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (5,262) | (5,262) | |||||||||||||||||||||||||||||
| Issuance of restricted stock | 201,019 | — | — | — | — | — | |||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock and other | — | — | (3,602) | — | — | (3,602) | |||||||||||||||||||||||||||||
| Employee stock purchase program | 31,059 | — | 631 | — | — | 631 | |||||||||||||||||||||||||||||
| Stock option exercises | 58,393 | — | 664 | — | — | 664 | |||||||||||||||||||||||||||||
| Stock option based compensation expense | — | — | 137 | — | — | 137 | |||||||||||||||||||||||||||||
| Restricted stock compensation expense | — | — | 12,348 | — | — | 12,348 | |||||||||||||||||||||||||||||
Adoption of ASU 2022-02 | — | — | — | 676 | — | 676 | |||||||||||||||||||||||||||||
| Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense | — | — | — | 578 | — | 578 | |||||||||||||||||||||||||||||
Cash dividends ($0.06 per share) | — | — | — | (2,657) | — | (2,657) | |||||||||||||||||||||||||||||
Balance at June 30, 2023 | 44,351,715 | — | $ | 341,032 | $ | 589,036 | $ | (97,580) | $ | 832,488 | |||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
5
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2024 and 2023 (unaudited)
(Dollars in thousands)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | 54,549 | $ | 17,942 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 10,324 | 10,447 | |||||||||
| Provision for credit losses | 28,129 | 32,049 | |||||||||
| (Accretion) amortization of (discount) premium on securities, net | (497) | 132 | |||||||||
| Deferred tax benefit | (278) | (9,723) | |||||||||
| Originations of loans held for sale | (467,005) | (425,441) | |||||||||
| Proceeds from sales of loans held for sale | 577,817 | 649,306 | |||||||||
| Net gains on sale of loans held for sale | (25,897) | (20,979) | |||||||||
| Net loss on sale of foreclosed assets | 9 | — | |||||||||
| Net loss on loans accounted for under fair value option | 47 | 2,801 | |||||||||
| Net change in servicing assets | (2,937) | (4,719) | |||||||||
| Net gain on disposal of long-lived asset | (6,663) | — | |||||||||
| Net loss on disposal of property and equipment | 177 | 402 | |||||||||
| Equity method investments loss (income) | 6,789 | 5,007 | |||||||||
| Equity security investments losses (gains), net | 368 | (198) | |||||||||
| Gain on equity warrant assets | (6,246) | — | |||||||||
| Renewable energy tax credit investment (recovery) impairment | (757) | 69 | |||||||||
| Stock option compensation expense | — | 137 | |||||||||
| Restricted stock compensation expense | 13,099 | 12,348 | |||||||||
| Stock based compensation excess tax benefit (deficiency) | 988 | (574) | |||||||||
| Lease right-of-use assets and liabilities, net | 195 | (30) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Other assets | (13,536) | 20,429 | |||||||||
| Other liabilities | 6,094 | 5,533 | |||||||||
| Net cash provided by operating activities | 174,769 | 294,938 | |||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of investment securities available-for-sale | (109,829) | (174,710) | |||||||||
| Proceeds from maturities, calls, and principal paydown of investment securities available-for-sale | 77,679 | 49,235 | |||||||||
| Proceeds from SBA reimbursement/sale of foreclosed assets, net | 583 | — | |||||||||
| Loan and lease originations and principal collections, net | (613,385) | (689,804) | |||||||||
| Proceeds from sale of long-lived asset | 22,641 | — | |||||||||
| Purchases of equity security investments | (3,676) | (1,206) | |||||||||
| Purchases of equity method investments | (1,872) | (4,323) | |||||||||
| Proceeds from equity security investment | 957 | — | |||||||||
| Proceeds from equity method investments | 524 | — | |||||||||
| Proceeds from sale of premises and equipment | 978 | — | |||||||||
| Purchases of premises and equipment, net | (38,882) | (16,968) | |||||||||
| Net cash used by investing activities | (664,282) | (837,776) | |||||||||
6
Live Oak Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
For the six months ended June 30, 2024 and 2023 (unaudited)
(Dollars in thousands)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from financing activities | |||||||||||
| Net increase in deposits | $ | 432,012 | $ | 994,183 | |||||||
| Proceeds from borrowings | 99,462 | 2,906,039 | |||||||||
| Repayment of borrowings | (5,071) | (2,960,925) | |||||||||
| Stock option exercises | 1,406 | 664 | |||||||||
| Employee stock purchase program | 702 | 631 | |||||||||
| Withholding cash issued in lieu of restricted stock and other | (3,394) | (3,602) | |||||||||
| Shareholder dividend distributions | (2,695) | (2,657) | |||||||||
| Net cash provided by financing activities | 522,422 | 934,333 | |||||||||
| Net increase in cash and cash equivalents | 32,909 | 391,495 | |||||||||
| Cash and cash equivalents, beginning | 582,540 | 416,636 | |||||||||
| Cash and cash equivalents, ending | $ | 615,449 | $ | 808,131 | |||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Interest paid | $ | 209,811 | $ | 153,724 | |||||||
| Income tax paid, net | 22,888 | 5,233 | |||||||||
| Supplemental disclosures of noncash investing and financing activities | |||||||||||
| Unrealized holding losses on investment securities available-for-sale, net of taxes | $ | (5,785) | $ | (5,262) | |||||||
Transfers from loans and leases to foreclosed real estate and other repossessions or SBA receivable | 2,125 | 14,908 | |||||||||
| Transfer from premises and equipment, net to other assets | 18,540 | — | |||||||||
| Transfer of loans held for sale to loans and leases held for investment | 108,048 | 56,852 | |||||||||
| Transfer of loans and leases held for investment to loans held for sale | 178,482 | 284,081 | |||||||||
Transfer from retained earnings to other assets for pro rata portion of equity method investee stock compensation expense | 501 | 578 | |||||||||
| Accrued premises and equipment additions | 1,193 | — | |||||||||
| Equity method investment commitments | 1,508 | 7,721 | |||||||||
| Equity security investment commitments | 1,000 | — | |||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements
7
Note 1. Basis of Presentation
Nature of Operations
Live Oak Bancshares, Inc. (collectively with its subsidiaries including Live Oak Banking Company, the “Company”) is a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the State of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was organized and incorporated under the laws of the State of North Carolina on February 25, 2008 and commenced operations on May 12, 2008. The Bank specializes in providing lending and deposit related services to small businesses nationwide. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S. Department of Agriculture’s (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs. These loans are to small businesses and professionals with what the Bank believes are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals.
The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions, Inc. (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”), and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors with on-site dining. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds focused on providing venture capital to new and emerging financial technology companies.
The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. TLH holds land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.
The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing rights along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its Fintech segment.
8
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
General
In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024. The Condensed Consolidated Balance Sheet as of December 31, 2023 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, 2023, filed with the Securities Exchange Commission (“SEC”) on February 22, 2024 (SEC File No. 001-37497) (the “2023 Form 10-K”). 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 2023 Form 10-K. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2023 Form 10-K.
The preparation of financial statements in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, share and per share data or where otherwise indicated.
Business Segments
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two reportable operating segments: Banking and Fintech, as discussed more fully in Note 11. Segments.
Changes in Accounting Estimates
During the second quarter of 2024, the Company made enhancements to the qualitative framework of the allowance for credit losses. The enhanced framework leverages quantifiable credit risk metrics as well as current and forecasted economic conditions to determine possible portfolio outcomes that are not captured in quantitatively modeled results. The framework continues to consider risk factors which include, but are not limited to, changes in lending policies, economic and business conditions, nature and volume of portfolio, volume and severity of past due loans, value of underlying collateral, concentrations, and prepayment speeds. The result of these changes was not material.
During the third quarter of 2023, the Company changed the valuation techniques used to estimate the fair value of servicing rights and loans measured at fair value as a result of rising interest rates and their impacts on market conditions. The changes included aligning our net servicing income and loan fair value estimates with changes in forward interest rate curves. Loan fair value estimates were also revised to utilize market participant credit loss information. These revisions provide estimates that the Company believes are more representative of fair value while transitioning from unobservable inputs to those that are more observable. These estimate changes were implemented as of July 1, 2023 and resulted in one-time adjustments to increase the estimated value of the servicing asset by $13.7 million and loans measured at fair value by $1.3 million. This adjustment also increased noninterest income by a corresponding $15.0 million.
These refinements have been accounted for as changes in accounting estimates under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 250, Accounting Changes and Error Corrections, with prospective application beginning in the period of change.
Long-Lived Asset Reclassified to Held for Sale
During the second quarter of 2024, the Company sold an aircraft that was previously reclassified as held for sale. The $6.7 million gain on the sale of the aircraft is reflected in other income on the Condensed Consolidated Statements of Income.
9
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
During the first quarter of 2024, the Company determined that retention of an idle building and accompanying land adjacent to its main campus was not best suited to serve future expansion plans. As a result of this determination, the Company entered into a purchase and sale agreement with a third party with expected total proceeds, net of estimated expenses, of $20.9 million. Accordingly, the $18.5 million carrying amount of the building and land, was considered held for sale, and reclassified from premises and equipment, net to other assets in the Unaudited Condensed Consolidated Balance Sheet. Any gain associated with the sale of the building will be recorded at the time of the sale.
Note 2. Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In December 2022, ASU 2022-06 “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” was issued deferring the sunset date of Topic 848. As subsequently amended, the guidance in the ASU can be applied by the Company through December 31, 2024. To address the discontinuance of LIBOR, the Company stopped originating variable LIBOR-based loans effective December 31, 2021 and started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. As of March 31, 2024, the Company had transitioned all its LIBOR-based loan exposure to an alternative index. The application of the standard did not have a material effect on the Consolidated Financial Statements.
In June 2022, the FASB issued ASU No. 2022-03 “Fair Value Measurement (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Restrictions” (“ASU 2022-03”). ASU 2022-03 indicates a contractual sale restriction on equity securities should not be considered in measuring fair value, however, disclosure should be made about such restrictions. The Company adopted the standard on January 1, 2024 with no material effect on its Consolidated Financial Statements.
In March 2023, the FASB issued ASU No. 2023-02 “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method” (“ASU 2023-02”). ASU 2023-02 permits companies to account for tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The Company adopted the standard on January 1, 2024 with no material effect on its Consolidated Financial Statements.
In October 2023, the FASB issued ASU No. 2023-06 “Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” (“ASU 2023-06”). ASU 2023-06 amends the ASC to incorporate certain disclosure requirements from SEC Release No. 33-10532 - Disclosure Update and Simplification that was issued in 2018. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company does not believe this standard will have a material impact on its Consolidated Financial Statements.
In November 2023, the FASB issued ASU No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this standard will be effective for the Company for the fiscal year ended December 31, 2024 and subsequent interim periods. The amendments will be applied retrospectively to all prior periods in the Consolidated Financial Statements. The Company is currently evaluating the impact the amendments will have on the Consolidated Financial Statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 requires enhanced income tax disclosures primarily related to the rate reconciliation and income taxes paid information to provide more transparency by requiring (i) consistent categories and greater disaggregation of information in the rate reconciliation table and (ii) income taxes paid, net of refunds, to be disaggregated by jurisdiction based on an established threshold. The amendments in this standard will be effective for the Company on January 1, 2025. The Company is currently evaluating the impact the amendments will have the Consolidated Financial Statements and related disclosures.
10
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
In March 2024, the FASB issued ASU 2024-01 “Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards” (“ASU 2024-01”). ASU 2024-01 adds an illustrative example to clarify how an entity should determine whether a profits interest or similar award is within the scope of ASC 718. The amendments in this standard will be effective for the Company on January 1, 2025. The Company does not believe this standard will have a material impact on its Consolidated Financial Statements.
In March 2024, the FASB issued ASU 2024-02 “Codification Improvements - Amendments to Remove References to the Concepts Statements” (“ASU 2024-02”). ASU 2024-02 removes references to various Concepts Statements in the Codification. The amendments in this standard will be effective for the Company on January 1, 2025. The Company does not believe this standard will have a material impact on its Consolidated Financial Statements.
Note 3. Earnings Per Share
Basic and diluted earnings per share are computed based on the weighted-average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then share in the net income of the Company.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Basic earnings per share: | |||||||||||||||||||||||
| Net income | $ | 26,963 | $ | 17,544 | $ | 54,549 | $ | 17,942 | |||||||||||||||
| Weighted-average basic shares outstanding | 44,974,942 | 44,327,474 | 44,868,625 | 44,242,785 | |||||||||||||||||||
| Basic earnings per share | $ | 0.60 | $ | 0.40 | $ | 1.22 | $ | 0.41 | |||||||||||||||
| Diluted earnings per share: | |||||||||||||||||||||||
| Net income, for diluted earnings per share | $ | 26,963 | $ | 17,544 | $ | 54,549 | $ | 17,942 | |||||||||||||||
| Total weighted-average basic shares outstanding | 44,974,942 | 44,327,474 | 44,868,625 | 44,242,785 | |||||||||||||||||||
| Add effect of dilutive stock options and restricted stock grants | 550,140 | 507,615 | 714,521 | 657,538 | |||||||||||||||||||
| Total weighted-average diluted shares outstanding | 45,525,082 | 44,835,089 | 45,583,146 | 44,900,323 | |||||||||||||||||||
| Diluted earnings per share | $ | 0.59 | $ | 0.39 | $ | 1.20 | $ | 0.40 | |||||||||||||||
| Anti-dilutive stock options and restricted shares | 945,063 | 2,096,220 | 702,331 | 2,096,220 | |||||||||||||||||||
Note 4. Securities
Available-for-Sale
The carrying amount of securities and their approximate fair values are reflected in the following table:
| June 30, 2024 | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||
| U.S. government agencies | $ | 12,088 | $ | — | $ | 316 | $ | 11,772 | ||||||||||||||||||
| Mortgage-backed securities | 1,255,002 | 670 | 119,242 | 1,136,430 | ||||||||||||||||||||||
| Municipal bonds | 3,189 | — | 196 | 2,993 | ||||||||||||||||||||||
| Total | $ | 1,270,279 | $ | 670 | $ | 119,754 | $ | 1,151,195 | ||||||||||||||||||
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| December 31, 2023 | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||
| U.S. government agencies | $ | 17,809 | $ | 2 | $ | 282 | $ | 17,529 | ||||||||||||||||||
| Mortgage-backed securities | 1,216,624 | 466 | 111,498 | 1,105,592 | ||||||||||||||||||||||
| Municipal bonds | 3,200 | — | 161 | 3,039 | ||||||||||||||||||||||
| Total | $ | 1,237,633 | $ | 468 | $ | 111,941 | $ | 1,126,160 | ||||||||||||||||||
During the three months ended June 30, 2024, one security totaling $155 thousand was settled and one security totaling $3.0 million matured. During the six months ended June 30, 2024, two securities totaling $14.8 million were settled, one security totaling $2.5 million was called and one security totaling $3.0 million matured. During the three and six months ended June 30, 2023, two mortgage-backed securities totaling $2.7 million were settled.
Accrued interest receivable on available-for-sale securities totaled $3.7 million and $3.3 million at June 30, 2024 and December 31, 2023, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.
The following tables show debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||
| June 30, 2024 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||
| U.S. government agencies | $ | — | $ | — | $ | 11,772 | $ | 316 | $ | 11,772 | $ | 316 | ||||||||||||||||||||||||||
| Mortgage-backed securities | 141,956 | 1,556 | 945,975 | 117,686 | 1,087,931 | 119,242 | ||||||||||||||||||||||||||||||||
| Municipal bonds | — | 2,993 | 196 | 2,993 | 196 | |||||||||||||||||||||||||||||||||
| Total | $ | 141,956 | $ | 1,556 | $ | 960,740 | $ | 118,198 | $ | 1,102,696 | $ | 119,754 | ||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||
| December 31, 2023 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||
| U.S. government agencies | $ | — | $ | — | $ | 15,057 | $ | 282 | $ | 15,057 | $ | 282 | ||||||||||||||||||||||||||
| Mortgage-backed securities | 138,823 | 3,431 | 886,699 | 108,067 | 1,025,522 | 111,498 | ||||||||||||||||||||||||||||||||
| Municipal bonds | — | — | 3,039 | 161 | 3,039 | 161 | ||||||||||||||||||||||||||||||||
| Total | $ | 138,823 | $ | 3,431 | $ | 904,795 | $ | 108,510 | $ | 1,043,618 | $ | 111,941 | ||||||||||||||||||||||||||
At June 30, 2024, there were 423 mortgage-backed securities, four U.S. government agencies and two municipal bonds in unrealized loss positions for greater than 12 months. There were 39 mortgage-backed securities in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2023 were comprised of 409 mortgage-backed securities, five U.S. government agencies and two municipal bonds in unrealized loss positions for greater than 12 months and 27 mortgage-backed securities in unrealized loss positions for less than 12 months.
These unrealized losses are primarily the result of non-credit-related volatility in the market and market interest rates. Since none of the unrealized losses relate to the issuers' ability to honor redemption obligations, and the Company does not intend to sell the related securities and does not believe it is more likely than not that it will be required to sell the securities before recovery of amortized cost, none of the losses have been recognized in the Company’s Unaudited Condensed Consolidated Statements of Income.
All mortgage-backed securities in the Company’s portfolio at June 30, 2024 and December 31, 2023 were backed by U.S. government sponsored enterprises (“GSEs”).
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The following is a summary of investment securities by maturity:
| June 30, 2024 | |||||||||||
| Available-for-Sale | |||||||||||
| Amortized Cost | Fair Value | ||||||||||
| U.S. government agencies | |||||||||||
| Within one year | $ | 4,000 | $ | 3,924 | |||||||
| One to five years | 8,088 | 7,848 | |||||||||
| Total | 12,088 | 11,772 | |||||||||
| Mortgage-backed securities | |||||||||||
| Within one year | 19,240 | 19,038 | |||||||||
| One to five years | 176,763 | 166,444 | |||||||||
| Five to 10 years | 221,724 | 196,487 | |||||||||
| After 10 years | 837,275 | 754,461 | |||||||||
| Total | 1,255,002 | 1,136,430 | |||||||||
| Municipal bonds | |||||||||||
| Five to 10 years | 3,092 | 2,908 | |||||||||
| After 10 years | 97 | 85 | |||||||||
| Total | 3,189 | 2,993 | |||||||||
| Total | $ | 1,270,279 | $ | 1,151,195 | |||||||
The table above reflects contractual maturities. Actual results will differ as the loans underlying the mortgage-backed securities may prepay sooner than scheduled.
There were no investment securities pledged at June 30, 2024 or December 31, 2023.
Equity Investments
Equity investments, largely comprised of non-marketable equity investments, are generally accounted for under either the equity method or equity security accounting and are included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The below tables provide additional information related to investments accounted for under these two methods.
13
Equity Method Accounting
The carrying amount and ownership percentage of each equity method investment at June 30, 2024 and December 31, 2023 is reflected in the following table:
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Amount | Ownership % | Amount | Ownership % | ||||||||||||||||||||
| Apiture, Inc. | $ | 56,802 | 40.4 | % | $ | 60,682 | 40.4 | % | |||||||||||||||
Canapi Ventures SBIC Fund, LP (1) (5) | 16,380 | 2.9 | 18,190 | 2.9 | |||||||||||||||||||
Canapi Ventures Fund, LP (2) (5) | 1,980 | 1.5 | 2,267 | 1.5 | |||||||||||||||||||
Canapi Ventures Fund II, LP (3) (5) | 7,175 | 1.6 | 7,232 | 1.6 | |||||||||||||||||||
Canapi Ventures SBIC Fund II, LP (4) (5) | 7,551 | 2.9 | 7,611 | 2.9 | |||||||||||||||||||
Other (6) | 24,639 | Various | 22,932 | Various | |||||||||||||||||||
| Total | $ | 114,527 | $ | 118,914 | |||||||||||||||||||
| (1) | Includes unfunded commitments of $4.8 million and $5.0 million as of June 30, 2024 and December 31, 2023, respectively. | ||||
| (2) | Includes unfunded commitments of $536 thousand and $559 thousand as of June 30, 2024 and December 31, 2023, respectively. | ||||
| (3) | Includes unfunded commitments of $6.2 million and $6.3 million as of June 30, 2024 and December 31, 2023, respectively. | ||||
| (4) | Includes unfunded commitments of $7.0 million and $7.1 million as of June 30, 2024 and December 31, 2023, respectively. | ||||
| (5) | Investee is accounted for under equity method due to the Company's participation as an investment advisor. | ||||
| (6) | As of June 30, 2024, and December 31, 2023 Other investments include low income housing tax credit (“LIHTC”) in Estrella Landing Apartments LLC (“Estrella Landing”), in which the Company holds a 99.9% limited member interest. Also included in Other investments are solar income tax credit investments in Green Sun Tenant LLC (“Green Sun”), SVA 2021-2 TE Holdco LLC (“Sun Vest”), EG5 CSP1 Holding LLC (“HEP”) and HRE Lessee I, LLC ("Heelstone"), which the Company holds a 99.0% limited member interest in all investments. Also included are Cape Fear Collective Impact Opportunity 1 LLC (“Cape Fear Collective”), Cape Fear Collective Impact Opportunity 2 LLC (“Cape Fear Collective 2”) and OTR Fund I, LLC ("OTR") which the Company holds 91.0%, 32.3%, and 5.9% of limited member interests, respectively. As of June 30, 2024, Other investments also includes Capitala SBIC Fund VI, LP which the Company holds less than 1% limited partner interest, but does maintain potential participation through a lending relationship, with an unfunded commitment of $750 thousand. As of June 30, 2024, and December 31, 2023, there was an unfunded commitment of $6.4 million and $7.7 million, respectively, for Estrella Landing. | ||||
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Equity Security Accounting
The carrying amount of the Company’s investments in non-marketable equity securities with no readily determinable fair value and amounts recognized in earnings on a cumulative basis as of June 30, 2024 and as of and for the six months ended June 30, 2024 and 2023 is reflected in the following table:
As of and for the six month period ended | |||||||||||||||||
| Cumulative Adjustments | June 30, 2024 | June 30, 2023 | |||||||||||||||
Carrying value (1) | $ | 80,467 | $ | 77,586 | |||||||||||||
| Carrying value adjustments: | |||||||||||||||||
| Impairment | $ | — | — | — | |||||||||||||
Upward changes for observable prices (2) | 50,548 | 56 | — | ||||||||||||||
| Downward changes for observable prices | (1,980) | (369) | — | ||||||||||||||
| Net upward (downward) change | $ | 48,568 | $ | (313) | $ | — | |||||||||||
| (1) | Includes $2.7 million and $2.8 million in unfunded commitments as of June 30, 2024, and June 30, 2023, respectively. | ||||
| (2) | Cumulative adjustments excludes $13.9 million in realized gains for sale of an investment in the second quarter of 2021. | ||||
For the three and six months ended June 30, 2024, the Company recognized unrealized gains (losses) on all equity securities held at the reporting date of $31 thousand and $(269) thousand, respectively. For the three and six months ended June 30, 2023, the Company recognized unrealized losses on all equity securities held at the reporting date of $20 thousand and $4 thousand, respectively.
Variable Interest Entities
Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in the fair value of an entity's net asset value (a “VIE”). The primary beneficiary consolidates the VIE. The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.
Solar Renewable Energy Tax Credit Investments
The Company has equity interests in several limited liability companies that own and operate solar renewable energy projects which are accounted for as equity method investments. Over the course of the investments, the Company will receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized.
Affordable Housing
The Company has an equity investment in a limited liability company LIHTC that qualifies as an affordable housing project, managed by an unrelated general partner. The Company accounts for the investment under the proportional amortization method. Under this method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance as a component of income tax expense. The Company also has equity interests in two limited liability companies that invest in the acquisition, rehabilitation, or new construction of local qualified housing projects which are accounted for as equity method investments.
15
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Canapi Funds
The Company’s limited partnership investments in the Canapi Funds focus on providing venture capital to new and emerging financial technology companies. After the initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down.
Non-marketable and Other Equity Investments
The Company also has limited interests in several non-marketable funds, including Small Business Investment Company (“SBIC”) and venture capital funds, which are generally accounted for as equity security investments. After the initial commitment and over the course of the investment period, the Company will make capital contributions and receive profit and return of capital distributions as a result of fund performance until the funds wind down. While the partnership agreements allow the Company to remove the general partner, this right is not deemed to be substantive as the general partner can only be removed for cause. All investments are generally non-redeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement.
All above investments meet the criteria of a VIE, however, the Company is not the primary beneficiary of the entities, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities.
The Company’s investment in the unconsolidated VIEs are carried in other assets and the Company’s unfunded capital and other commitments related to the unconsolidated VIEs are carried in other liabilities on the Unaudited Condensed Consolidated Balance Sheets.
The Company’s maximum exposure to loss from unconsolidated VIEs includes the investment recorded on the Company’s Unaudited Condensed Consolidated Balance Sheets. For solar tax credit investments, the balance sheet figures are net of any impairment recognized, and includes previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes the potential for loss from these investments is remote, the maximum exposure for solar tax credit investments was determined by assuming a scenario where related tax credits were recaptured.
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The following table provides a summary of the VIEs that the Company has not consolidated as of June 30, 2024 and December 31, 2023:
| June 30, 2024 | Investment Carrying Amount | Maximum Exposure to Loss | Liability Recognized | Classification | |||||||||||||||||||
| Solar tax credit investments | $ | 7,196 | $ | 39,994 | $ | 1,008 | Other assets (1) | ||||||||||||||||
| Affordable housing | 15,411 | 16,235 | 6,444 | Other assets & other liabilities (2) | |||||||||||||||||||
| Canapi Funds | 33,086 | 33,086 | 18,528 | Other assets & other liabilities | |||||||||||||||||||
| Non-marketable and other equity investments | 9,775 | 9,775 | 3,445 | Other assets & other liabilities | |||||||||||||||||||
| December 31, 2023 | Investment Carrying Amount | Maximum Exposure to Loss | Liability Recognized | Classification | |||||||||||||||||||
| Solar tax credit investments | $ | 6,714 | $ | 48,869 | $ | — | Other assets (3) | ||||||||||||||||
| Affordable housing | 15,611 | 15,611 | 7,715 | Other assets & other liabilities (4) | |||||||||||||||||||
| Canapi Funds | 35,300 | 35,300 | 18,930 | Other assets & other liabilities | |||||||||||||||||||
| Non-marketable and other equity investments | 8,840 | 8,840 | 2,321 | Other assets & other liabilities | |||||||||||||||||||
| (1) | Maximum exposure to loss represents $7.2 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $32.8 million. | ||||
| (2) | Maximum exposure to loss represents $15.4 million of investments and a scenario in which related tax credits are recaptured, collectively totaling $824 thousand. | ||||
| (3) | Maximum exposure to loss represents $6.7 million of current investments and a scenario in which related tax credits are recaptured, collectively totaling $42.2 million. | ||||
| (4) | Maximum exposure to loss represents $15.6 million of investments. As there are no tax credits allocated in 2023, there is no increase to the maximum exposure to loss related to recaptured tax credits on the $8.8 million LIHTC investment as of December 31, 2023. | ||||
17
Note 5. Loans and Leases Held for Investment and Credit Quality
The following tables present total loans and leases held for investment and an aging analysis for the Company’s portfolio segments. Loans and leases are considered past due if the required principal and interest payments have not been received as of the date such payments were due.
| Current or Less than 30 Days Past Due | 30-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Total Carried at Amortized Cost | Loans Accounted for Under the Fair Value Option (1) | Total Loans and Leases | ||||||||||||||||||||||||||||||||||||||
| June 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | $ | 2,102,720 | $ | 19,773 | $ | 65,790 | $ | 85,563 | $ | 2,188,283 | $ | 139,107 | $ | 2,327,390 | ||||||||||||||||||||||||||||||
| Specialty Lending | 1,173,583 | 9,031 | — | 9,031 | 1,182,614 | 5,098 | 1,187,712 | |||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | 877,681 | 263 | 11,030 | 11,293 | 888,974 | 45,525 | 934,499 | |||||||||||||||||||||||||||||||||||||
| Paycheck Protection Program | 4,064 | — | — | — | 4,064 | — | 4,064 | |||||||||||||||||||||||||||||||||||||
| Total | 4,158,048 | 29,067 | 76,820 | 105,887 | 4,263,935 | 189,730 | 4,453,665 | |||||||||||||||||||||||||||||||||||||
| Construction & Development | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 424,463 | 6,179 | 2,468 | 8,647 | 433,110 | — | 433,110 | |||||||||||||||||||||||||||||||||||||
| Specialty Lending | 40,295 | — | — | — | 40,295 | — | 40,295 | |||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | 11,001 | — | — | — | 11,001 | — | 11,001 | |||||||||||||||||||||||||||||||||||||
| Total | 475,759 | 6,179 | 2,468 | 8,647 | 484,406 | — | 484,406 | |||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 2,569,139 | 15,584 | 28,525 | 44,109 | 2,613,248 | 117,191 | 2,730,439 | |||||||||||||||||||||||||||||||||||||
| Specialty Lending | 688,585 | 8,500 | — | 8,500 | 697,085 | — | 697,085 | |||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | 191,465 | 1,008 | 3,072 | 4,080 | 195,545 | 20,680 | 216,225 | |||||||||||||||||||||||||||||||||||||
| Total | 3,449,189 | 25,092 | 31,597 | 56,689 | 3,505,878 | 137,871 | 3,643,749 | |||||||||||||||||||||||||||||||||||||
| Commercial Land | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 574,748 | 1,066 | 1,864 | 2,930 | 577,678 | 35,416 | 613,094 | |||||||||||||||||||||||||||||||||||||
| Total | 574,748 | 1,066 | 1,864 | 2,930 | 577,678 | 35,416 | 613,094 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 8,657,744 | $ | 61,404 | $ | 112,749 | $ | 174,153 | $ | 8,831,897 | $ | 363,017 | $ | 9,194,914 | ||||||||||||||||||||||||||||||
| Retained Loan Discount and Net Deferred Costs | $ | (22,780) | ||||||||||||||||||||||||||||||||||||||||||
| Loans and Leases, Net | $ | 9,172,134 | ||||||||||||||||||||||||||||||||||||||||||
| Guaranteed Balance | $ | 2,911,202 | $ | 30,122 | $ | 93,956 | $ | 124,078 | $ | 3,035,280 | $ | 76,644 | $ | 3,111,924 | ||||||||||||||||||||||||||||||
| % Guaranteed | 33.6% | 49.1% | 83.3% | 71.2% | 34.4% | 21.1% | 33.8% | |||||||||||||||||||||||||||||||||||||
18
| Current or Less than 30 Days Past Due | 30-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Total Carried at Amortized Cost | Loans Accounted for Under the Fair Value Option (1) | Total Loans and Leases | ||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | $ | 2,075,227 | $ | 16,570 | $ | 33,366 | $ | 49,936 | $ | 2,125,163 | $ | 151,887 | $ | 2,277,050 | ||||||||||||||||||||||||||||||
| Specialty Lending | 1,131,493 | — | — | — | 1,131,493 | 7,829 | 1,139,322 | |||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | 842,907 | 2,806 | 4,044 | 6,850 | 849,757 | 46,185 | 895,942 | |||||||||||||||||||||||||||||||||||||
| Paycheck Protection Program | 5,595 | — | — | — | 5,595 | — | 5,595 | |||||||||||||||||||||||||||||||||||||
| Total | 4,055,222 | 19,376 | 37,410 | 56,786 | 4,112,008 | 205,901 | 4,317,909 | |||||||||||||||||||||||||||||||||||||
| Construction & Development | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 413,349 | 1,745 | — | 1,745 | 415,094 | — | 415,094 | |||||||||||||||||||||||||||||||||||||
| Specialty Lending | 47,419 | — | — | — | 47,419 | — | 47,419 | |||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | 7,541 | — | — | — | 7,541 | — | 7,541 | |||||||||||||||||||||||||||||||||||||
| Total | 468,309 | 1,745 | — | 1,745 | 470,054 | — | 470,054 | |||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 2,414,677 | 18,589 | 32,310 | 50,899 | 2,465,576 | 127,358 | 2,592,934 | |||||||||||||||||||||||||||||||||||||
| Specialty Lending | 511,712 | — | 12,032 | 12,032 | 523,744 | — | 523,744 | |||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | 158,613 | — | 3,072 | 3,072 | 161,685 | 17,751 | 179,436 | |||||||||||||||||||||||||||||||||||||
| Total | 3,085,002 | 18,589 | 47,414 | 66,003 | 3,151,005 | 145,109 | 3,296,114 | |||||||||||||||||||||||||||||||||||||
| Commercial Land | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 531,331 | 1,521 | 1,910 | 3,431 | 534,762 | 37,026 | 571,788 | |||||||||||||||||||||||||||||||||||||
| Total | 531,331 | 1,521 | 1,910 | 3,431 | 534,762 | 37,026 | 571,788 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 8,139,864 | $ | 41,231 | $ | 86,734 | $ | 127,965 | $ | 8,267,829 | $ | 388,036 | $ | 8,655,865 | ||||||||||||||||||||||||||||||
| Retained Loan Discount and Net Deferred Costs | $ | (22,018) | ||||||||||||||||||||||||||||||||||||||||||
| Loans and Leases, Net | $ | 8,633,847 | ||||||||||||||||||||||||||||||||||||||||||
| Guaranteed Balance | $ | 2,877,105 | $ | 29,183 | $ | 61,107 | $ | 90,290 | $ | 2,967,395 | $ | 66,299 | $ | 3,033,694 | ||||||||||||||||||||||||||||||
| % Guaranteed | 35.3% | 70.8% | 70.5% | 70.6% | 35.9% | 17.1% | 35.0% | |||||||||||||||||||||||||||||||||||||
| (1) | Retained portions of government guaranteed loans sold prior to January 1, 2021 are carried at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall. See Note 9. Fair Value of Financial Instruments for additional information. | ||||
19
Credit Quality Indicators
The following tables present asset quality indicators by portfolio class and origination year. See Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2023 Form 10-K for additional discussion around the asset quality indicators that the Company uses to manage and monitor credit risk.
| Term Loans and Leases Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 1 - 4 | $ | 436,371 | $ | 1,062,992 | $ | 1,408,497 | $ | 1,143,701 | $ | 593,527 | $ | 570,458 | $ | 78,309 | $ | 11,321 | $ | 5,305,176 | ||||||||||||||||||||||||||||||||||||||
| Risk Grade 5 | 6,609 | 25,034 | 71,269 | 70,034 | 32,410 | 102,040 | 9,889 | 999 | 318,284 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 6 - 8 | — | 12,251 | 53,912 | 43,325 | 31,135 | 44,121 | 3,945 | 170 | 188,859 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 442,980 | 1,100,277 | 1,533,678 | 1,257,060 | 657,072 | 716,619 | 92,143 | 12,490 | 5,812,319 | |||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Lending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 1 - 4 | 300,133 | 540,753 | 274,606 | 191,067 | 25,755 | 2,524 | 235,376 | 123,107 | 1,693,321 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grade 5 | — | 11,402 | 72,552 | 35,664 | 36,225 | 7,886 | 33,564 | 5,854 | 203,147 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 6 - 8 | — | 1,146 | — | 12,252 | — | — | 3,352 | 6,776 | 23,526 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 300,133 | 553,301 | 347,158 | 238,983 | 61,980 | 10,410 | 272,292 | 135,737 | 1,919,994 | |||||||||||||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 1-4 | 75,942 | 404,239 | 210,587 | 94,360 | 42,211 | 73,019 | 15,058 | — | 915,416 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grade 5 | — | — | 17,868 | 108,517 | — | 26,016 | — | — | 152,401 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 6 - 8 | — | — | 4,024 | 7,471 | 16,208 | — | — | — | 27,703 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 75,942 | 404,239 | 232,479 | 210,348 | 58,419 | 99,035 | 15,058 | — | 1,095,520 | |||||||||||||||||||||||||||||||||||||||||||||||
| Paycheck Protection Program | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 1 - 4 | — | — | — | 2,260 | 1,804 | — | — | — | 4,064 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | — | — | — | 2,260 | 1,804 | — | — | — | 4,064 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 819,055 | $ | 2,057,817 | $ | 2,113,315 | $ | 1,708,651 | $ | 779,275 | $ | 826,064 | $ | 379,493 | $ | 148,227 | $ | 8,831,897 | ||||||||||||||||||||||||||||||||||||||
| Year-To-Date Gross Charge-offs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | $ | — | $ | 1,110 | $ | 4,818 | $ | 3,464 | $ | 53 | $ | 1,681 | $ | 899 | $ | 170 | $ | 12,195 | ||||||||||||||||||||||||||||||||||||||
| Total | $ | — | $ | 1,110 | $ | 4,818 | $ | 3,464 | $ | 53 | $ | 1,681 | $ | 899 | $ | 170 | $ | 12,195 | ||||||||||||||||||||||||||||||||||||||
20
| Term Loans and Leases Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 1 - 4 | $ | 990,349 | $ | 1,470,824 | $ | 1,255,664 | $ | 660,926 | $ | 363,377 | $ | 296,132 | $ | 63,963 | $ | 11,047 | $ | 5,112,282 | ||||||||||||||||||||||||||||||||||||||
| Risk Grade 5 | 7,744 | 72,913 | 60,115 | 37,390 | 42,095 | 50,705 | 7,174 | 1,407 | 279,543 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 6 - 8 | 2,286 | 31,487 | 29,636 | 35,611 | 18,429 | 28,700 | 2,621 | — | 148,770 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 1,000,379 | 1,575,224 | 1,345,415 | 733,927 | 423,901 | 375,537 | 73,758 | 12,454 | 5,540,595 | |||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Lending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 1 - 4 | 640,596 | 337,880 | 226,170 | 21,286 | 9,103 | 112 | 210,460 | 58,441 | 1,504,048 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grade 5 | 8,858 | 52,767 | 35,453 | 43,080 | 9,223 | — | 20,547 | 5,417 | 175,345 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 6 - 8 | — | — | 12,032 | — | — | — | 7,203 | 4,028 | 23,263 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 649,454 | 390,647 | 273,655 | 64,366 | 18,326 | 112 | 238,210 | 67,886 | 1,702,656 | |||||||||||||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 1 - 4 | 386,421 | 223,309 | 120,917 | 41,919 | 50,035 | 23,308 | 14,818 | — | 860,727 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grade 5 | — | — | 104,371 | 13,485 | 7,827 | 18,627 | — | — | 144,310 | |||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 6 - 8 | — | 4,024 | 6,303 | 3,619 | — | — | — | — | 13,946 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 386,421 | 227,333 | 231,591 | 59,023 | 57,862 | 41,935 | 14,818 | — | 1,018,983 | |||||||||||||||||||||||||||||||||||||||||||||||
| Paycheck Protection Program | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk Grades 1 - 4 | — | — | 2,831 | 2,764 | — | — | — | — | 5,595 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | — | — | 2,831 | 2,764 | — | — | — | — | 5,595 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,036,254 | $ | 2,193,204 | $ | 1,853,492 | $ | 860,080 | $ | 500,089 | $ | 417,584 | $ | 326,786 | $ | 80,340 | $ | 8,267,829 | ||||||||||||||||||||||||||||||||||||||
| Current Period Gross Charge-offs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | $ | — | $ | 5,621 | $ | 6,435 | $ | 1,058 | $ | 1,225 | $ | 525 | $ | 1,097 | $ | — | $ | 15,961 | ||||||||||||||||||||||||||||||||||||||
| Specialty Lending | — | — | — | — | — | — | 7,966 | — | 7,966 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | — | $ | 5,621 | $ | 6,435 | $ | 1,058 | $ | 1,225 | $ | 525 | $ | 9,063 | $ | — | $ | 23,927 | ||||||||||||||||||||||||||||||||||||||
| (1) | Excludes $363.0 million and $388.0 million of loans accounted for under the fair value option as of June 30, 2024 and December 31, 2023, respectively. | ||||
The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator:
| June 30, 2024 | Loan and Lease Balance (1) | Guaranteed Balance | Unguaranteed Balance | % Guaranteed | ||||||||||||||||||||||
| Risk Grades 1 - 4 | $ | 7,917,977 | $ | 2,624,641 | $ | 5,293,336 | 33.1 | % | ||||||||||||||||||
| Risk Grade 5 | 673,832 | 249,640 | 424,192 | 37.0 | ||||||||||||||||||||||
| Risk Grades 6 - 8 | 240,088 | 160,999 | 79,089 | 67.1 | ||||||||||||||||||||||
| Total | $ | 8,831,897 | $ | 3,035,280 | $ | 5,796,617 | 34.4 | % | ||||||||||||||||||
21
| December 31, 2023 | Loan and Lease Balance (1) | Guaranteed Balance | Unguaranteed Balance | % Guaranteed | ||||||||||||||||||||||
| Risk Grades 1 - 4 | $ | 7,482,652 | $ | 2,622,558 | $ | 4,860,094 | 35.0 | % | ||||||||||||||||||
| Risk Grade 5 | 599,198 | 234,845 | 364,353 | 39.2 | ||||||||||||||||||||||
| Risk Grades 6 - 8 | 185,979 | 109,992 | 75,987 | 59.1 | ||||||||||||||||||||||
| Total | $ | 8,267,829 | $ | 2,967,395 | $ | 5,300,434 | 35.9 | % | ||||||||||||||||||
| (1) | Excludes $363.0 million and $388.0 million of loans accounted for under the fair value option as of June 30, 2024 and December 31, 2023, respectively. | ||||
Nonaccrual Loans and Leases
As of June 30, 2024 and December 31, 2023 there were no loans greater than 90 days past due and still accruing. There was no interest income recognized on nonaccrual loans and leases during the three and six months ended June 30, 2024 and 2023. Accrued interest receivable on loans totaled $70.2 million and $63.5 million at June 30, 2024 and December 31, 2023, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Nonaccrual loans and leases held for investment as of June 30, 2024 and December 31, 2023 are as follows:
| June 30, 2024 | Loan and Lease Balance (1) | Guaranteed Balance | Unguaranteed Balance | Unguaranteed Exposure with No ACL | ||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||
| Small Business Banking | $ | 71,734 | $ | 62,734 | $ | 9,000 | $ | 403 | ||||||||||||||||||
| Energy & Infrastructure | 11,030 | 7,141 | 3,889 | 2,178 | ||||||||||||||||||||||
| Total | 82,764 | 69,875 | 12,889 | 2,581 | ||||||||||||||||||||||
| Construction & Development | ||||||||||||||||||||||||||
| Small Business Banking | 2,467 | 2,263 | 204 | — | ||||||||||||||||||||||
| Total | 2,467 | 2,263 | 204 | — | ||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||
| Small Business Banking | 45,868 | 34,795 | 11,073 | 4,909 | ||||||||||||||||||||||
| Specialty Lending | 11,499 | — | 11,499 | 11,499 | ||||||||||||||||||||||
| Energy & Infrastructure | 11,378 | 10,275 | 1,103 | 831 | ||||||||||||||||||||||
| Total | 68,745 | 45,070 | 23,675 | 17,239 | ||||||||||||||||||||||
| Commercial Land | ||||||||||||||||||||||||||
| Small Business Banking | 6,116 | 5,544 | 572 | 183 | ||||||||||||||||||||||
| Total | 6,116 | 5,544 | 572 | 183 | ||||||||||||||||||||||
| Total | $ | 160,092 | $ | 122,752 | $ | 37,340 | $ | 20,003 | ||||||||||||||||||
22
| December 31, 2023 | Loan and Lease Balance (1) | Guaranteed Balance | Unguaranteed Balance | Unguaranteed Exposure with No ACL | ||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||
| Small Business Banking | $ | 47,558 | $ | 39,018 | $ | 8,540 | $ | 407 | ||||||||||||||||||
| Energy & Infrastructure | 6,850 | 2,794 | 4,056 | 2,546 | ||||||||||||||||||||||
| Total | 54,408 | 41,812 | 12,596 | 2,953 | ||||||||||||||||||||||
| Construction & Development | ||||||||||||||||||||||||||
| Small Business Banking | 1,745 | 1,309 | 436 | — | ||||||||||||||||||||||
| Total | 1,745 | 1,309 | 436 | — | ||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||
| Small Business Banking | 57,140 | 44,426 | 12,714 | 8,199 | ||||||||||||||||||||||
| Specialty Lending | 12,032 | — | 12,032 | 12,032 | ||||||||||||||||||||||
| Energy & Infrastructure | 3,072 | 2,799 | 273 | — | ||||||||||||||||||||||
| Total | 72,244 | 47,225 | 25,019 | 20,231 | ||||||||||||||||||||||
| Commercial Land | ||||||||||||||||||||||||||
| Small Business Banking | 6,566 | 5,332 | 1,234 | 194 | ||||||||||||||||||||||
| Total | 6,566 | 5,332 | 1,234 | 194 | ||||||||||||||||||||||
| Total | $ | 134,963 | $ | 95,678 | $ | 39,285 | $ | 23,378 | ||||||||||||||||||
| (1) | Excludes loans accounted for under the fair value option. See Note 9. Fair Value of Financial Instruments for additional information. | ||||
23
When a loan or lease is placed on nonaccrual status, any accrued interest is reversed from loan interest income. The following table summarizes the amount of accrued interest reversed during the periods presented:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Commercial & Industrial | $ | 364 | $ | 833 | $ | 974 | $ | 1,697 | ||||||||||||||||||
| Commercial Real Estate | 219 | 285 | 338 | 871 | ||||||||||||||||||||||
| Commercial Land | 52 | — | 52 | — | ||||||||||||||||||||||
| Construction & Development | — | — | 30 | 56 | ||||||||||||||||||||||
| Total | $ | 635 | $ | 1,118 | $ | 1,394 | $ | 2,624 | ||||||||||||||||||
The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of June 30, 2024 and December 31, 2023:
| Total Collateral-Dependent Loans | Unguaranteed Portion | |||||||||||||||||||||||||||||||||||||||||||
| June 30, 2024 | Real Estate | Business Assets | Other | Real Estate | Business Assets | Other | Allowance for Credit Losses | |||||||||||||||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | $ | 2,722 | $ | 13,841 | $ | — | $ | 418 | $ | 4,734 | $ | — | $ | 3,172 | ||||||||||||||||||||||||||||||
| Energy & Infrastructure | — | 3,022 | — | — | 227 | — | 62 | |||||||||||||||||||||||||||||||||||||
| Total | 2,722 | 16,863 | — | 418 | 4,961 | — | 3,234 | |||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 22,510 | — | — | 4,533 | — | — | 142 | |||||||||||||||||||||||||||||||||||||
| Total | 22,510 | — | — | 4,533 | — | — | 142 | |||||||||||||||||||||||||||||||||||||
| Commercial Land | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 3,742 | — | — | 2,240 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total | 3,742 | — | — | 2,240 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total | $ | 28,974 | $ | 16,863 | $ | — | $ | 7,191 | $ | 4,961 | $ | — | $ | 3,376 | ||||||||||||||||||||||||||||||
| Total Collateral-Dependent Loans | Unguaranteed Portion | |||||||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | Real Estate | Business Assets | Other | Real Estate | Business Assets | Other | Allowance for Credit Losses | |||||||||||||||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | $ | 2,737 | $ | 2,426 | $ | — | $ | 421 | $ | 547 | $ | — | $ | 277 | ||||||||||||||||||||||||||||||
| Specialty Lending | — | 4,711 | — | — | 4,711 | — | — | |||||||||||||||||||||||||||||||||||||
| Energy & Infrastructure | — | 3,022 | — | — | 227 | — | — | |||||||||||||||||||||||||||||||||||||
| Total | 2,737 | 10,159 | — | 421 | 5,485 | — | 277 | |||||||||||||||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 21,211 | — | — | 6,298 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total | 21,211 | — | — | 6,298 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Commercial Land | ||||||||||||||||||||||||||||||||||||||||||||
| Small Business Banking | 1,735 | — | — | 200 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total | 1,735 | — | — | 200 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total | $ | 25,683 | $ | 10,159 | $ | — | $ | 6,919 | $ | 5,485 | $ | — | $ | 277 | ||||||||||||||||||||||||||||||
24
Allowance for Credit Losses - Loans and Leases
See Note 1. Organization and Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements in the Company’s 2023 Form 10-K for a description of the methodologies used to estimate the ACL.
The following table details activity in the ACL by portfolio segment allowance for the periods presented:
| Three Months Ended | Commercial & Industrial | Construction & Development | Commercial Real Estate | Commercial Land | Total | |||||||||||||||||||||||||||
| June 30, 2024 | ||||||||||||||||||||||||||||||||
| Beginning Balance | $ | 98,552 | $ | 4,292 | $ | 31,369 | $ | 4,828 | $ | 139,041 | ||||||||||||||||||||||
| Charge offs | (8,415) | (35) | (105) | (8) | (8,563) | |||||||||||||||||||||||||||
| Recoveries | 57 | — | 253 | — | 310 | |||||||||||||||||||||||||||
| Provision (Recovery) | 17,972 | (563) | (7,977) | (2,353) | 7,079 | |||||||||||||||||||||||||||
| Ending Balance | $ | 108,166 | $ | 3,694 | $ | 23,540 | $ | 2,467 | $ | 137,867 | ||||||||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||||||||||||||
| Beginning Balance | $ | 72,058 | $ | 6,954 | $ | 25,062 | $ | 4,168 | $ | 108,242 | ||||||||||||||||||||||
| Charge offs | (2,198) | — | (278) | — | (2,476) | |||||||||||||||||||||||||||
| Recoveries | 558 | — | 764 | — | 1,322 | |||||||||||||||||||||||||||
| Provision (Recovery) | 8,989 | (526) | 4,360 | 205 | 13,028 | |||||||||||||||||||||||||||
| Ending Balance | $ | 79,407 | $ | 6,428 | $ | 29,908 | $ | 4,373 | $ | 120,116 | ||||||||||||||||||||||
| Six Months Ended | Commercial & Industrial | Construction & Development | Commercial Real Estate | Commercial Land | Total | |||||||||||||||||||||||||||
| June 30, 2024 | ||||||||||||||||||||||||||||||||
| Beginning Balance | $ | 87,581 | $ | 4,717 | $ | 28,864 | $ | 4,678 | $ | 125,840 | ||||||||||||||||||||||
| Charge offs | (11,744) | (338) | (105) | (8) | (12,195) | |||||||||||||||||||||||||||
| Recoveries | 512 | — | 267 | — | 779 | |||||||||||||||||||||||||||
| Provision (Recoveries) | 31,817 | (685) | (5,486) | (2,203) | 23,443 | |||||||||||||||||||||||||||
| Ending Balance | $ | 108,166 | $ | 3,694 | $ | 23,540 | $ | 2,467 | $ | 137,867 | ||||||||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||||||||||||||
| Beginning Balance | $ | 64,995 | $ | 5,101 | $ | 22,901 | $ | 3,569 | $ | 96,566 | ||||||||||||||||||||||
| Adoption of ASU 2022-02 | (25) | (166) | (83) | (402) | (676) | |||||||||||||||||||||||||||
| Charge offs | (8,476) | — | (692) | — | (9,168) | |||||||||||||||||||||||||||
| Recoveries | 581 | — | 764 | — | 1,345 | |||||||||||||||||||||||||||
| Provision | 22,332 | 1,493 | 7,018 | 1,206 | 32,049 | |||||||||||||||||||||||||||
| Ending Balance | $ | 79,407 | $ | 6,428 | $ | 29,908 | $ | 4,373 | $ | 120,116 | ||||||||||||||||||||||
During the three months ended June 30, 2024, the ACL decreased primarily as a result of a decrease in specific reserves on loans individually evaluated for impairment. During the six months ended June 30, 2024, the ACL increased as a result of loan growth and changes in the macroeconomic outlook. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.
During the three and six months ended June 30, 2023, the ACL increased as a result of continued loan growth, combined with portfolio trends and changes in the macroeconomic outlook. Additionally, during the first quarter of 2023, certain assumptions were refined, drawing more heavily on internal data, in the calculations of PD, LGD, and prepayment rates. These refinements increased the ACL by $1.5 million during the six months ended June 30, 2023. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.
25
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Loan Modifications for Borrowers Experiencing Financial Difficulty
The Company may agree to modify the contractual terms of a loan to a borrower experiencing financial difficulty as a part of ongoing loss mitigation strategies. These modifications may result in an interest rate reduction, term extension, an other-than-insignificant payment delay, or a combination thereof. The Company typically does not offer principal forgiveness.
The following tables summarize the amortized cost basis of loans that were modified during the three and six months ended June 30, 2024 and June 30, 2023, respectively:
| Three Months Ended June 30, 2024 | Other-Than-Insignificant Payment Delay | Term Extension | Interest Rate Reduction | Combination - Term Extension & Payment Delay | % of Total Class of Financing Receivable | |||||||||||||||||||||||||||
| Small Business Banking | $ | 6,459 | $ | — | $ | — | $ | — | 0.11 | % | ||||||||||||||||||||||
| Specialty Lending | 2,333 | — | — | — | 0.12 | |||||||||||||||||||||||||||
| Total | $ | 8,792 | $ | — | $ | — | $ | — | 0.23 | % | ||||||||||||||||||||||
| Six Months Ended June 30, 2024 | Other-Than-Insignificant Payment Delay | Term Extension | Interest Rate Reduction | Combination - Term Extension & Payment Delay | % of Total Class of Financing Receivable | |||||||||||||||||||||||||||
| Small Business Banking | $ | 6,459 | $ | — | $ | — | $ | — | 0.11 | % | ||||||||||||||||||||||
| Specialty Lending | 2,333 | — | — | — | 0.12 | |||||||||||||||||||||||||||
| Total | $ | 8,792 | $ | — | $ | — | $ | — | 0.23 | % | ||||||||||||||||||||||
| Three Months Ended June 30, 2023 | Other-Than-Insignificant Payment Delay | Term Extension | Interest Rate Reduction | Combination - Term Extension & Payment Delay | % of Total Class of Financing Receivable | |||||||||||||||||||||||||||
| Small Business Banking | $ | — | $ | — | $ | — | $ | 361 | 0.01 | % | ||||||||||||||||||||||
| Specialty Lending | — | 4,427 | — | — | 0.26 | |||||||||||||||||||||||||||
| Total | $ | — | $ | 4,427 | $ | — | $ | 361 | 0.27 | % | ||||||||||||||||||||||
| Six Months Ended June 30, 2023 | Other-Than-Insignificant Payment Delay | Term Extension | Interest Rate Reduction | Combination - Term Extension & Payment Delay | % of Total Class of Financing Receivable | |||||||||||||||||||||||||||
| Small Business Banking | $ | — | $ | — | $ | 3,436 | $ | 361 | 0.08 | % | ||||||||||||||||||||||
| Specialty Lending | — | 244 | — | 4,183 | 0.26 | % | ||||||||||||||||||||||||||
| Energy & Infrastructure | — | 13,517 | — | — | 2.14 | % | ||||||||||||||||||||||||||
| Total | $ | — | $ | 13,761 | $ | 3,436 | $ | 4,544 | 2.48 | % | ||||||||||||||||||||||
As of June 30, 2024, the Company had no commitments to lend additional funds to these borrowers.
The following table presents an aging analysis of loans that were modified within the twelve months ended June 30, 2024:
| Current | 30-89 Days Past Due | 90 Days or More Past Due | Total Past Due | |||||||||||||||||||||||
| Small Business Banking | $ | 21,518 | $ | — | $ | — | $ | — | ||||||||||||||||||
| Specialty Lending | 2,333 | — | — | — | ||||||||||||||||||||||
| Total | $ | 23,851 | $ | — | $ | — | $ | — | ||||||||||||||||||
26
There was no financial impacts related to the loan modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2024.
The following tables summarize the financial impacts of loan modifications made to borrowers experiencing financial difficulty during the prior periods presented:
| Three Months Ended June 30, 2023 | |||||||||||
| Weighted Average Interest Rate Reduction | Weighted Average Term Extension (in Months) | ||||||||||
| Small Business Banking | — | % | 161 | ||||||||
| Specialty Lending | — | 72 | |||||||||
| Six Months Ended June 30, 2023 | |||||||||||
| Weighted Average Interest Rate Reduction | Weighted Average Term Extension (in Months) | ||||||||||
| Small Business Banking | 1.45 | % | 161 | ||||||||
| Specialty Lending | — | 72 | |||||||||
| Energy & Infrastructure | — | 12 | |||||||||
Additionally, there were no loans that were modified within the twelve months ended June 30, 2024 that subsequently defaulted during the periods presented.
The Company’s ACL is estimated using lifetime historical loan performance adjusted to reflect current conditions and reasonable and supportable forecasts. Upon determination that a modified loan, or portion of a modified loan, has subsequently been deemed uncollectible, the uncollectible portion is written off. The amortized cost basis is reduced by the uncollectible amount and the ACL is adjusted by the same amount. As a result, the impact of loss mitigation strategies is captured in the estimates of PD and LGD.
Note 6. Leases
Lessor Equipment Leasing
The Company may purchase 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, net while leased assets under direct financing leases are included in loans and leases held for investment in the accompanying Unaudited Condensed Consolidated Balance Sheets.
Direct Financing Leases
Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3 to 7 years which is consistent with the useful life of the equipment with no residual value. The net investment in direct finance leases included in loans and leases held for investment are as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Gross direct finance lease payments receivable | $ | 1,684 | $ | 2,335 | |||||||
| Less – unearned interest | (145) | (218) | |||||||||
| Net investment in direct financing leases | $ | 1,539 | $ | 2,117 | |||||||
27
Future minimum lease payments to be received under finance leases are as follows:
As of June 30, 2024 | Amount | |||||||
| 2024 | $ | 599 | ||||||
| 2025 | 968 | |||||||
| 2026 | 117 | |||||||
| Total | $ | 1,684 | ||||||
Interest income of $48 thousand and $66 thousand was recognized in the three months ended June 30, 2024 and 2023, respectively. Interest income of $66 thousand and $139 thousand was recognized in the six months ended June 30, 2024 and 2023, respectively.
Operating Leases
The term of each operating lease is generally 10 to 15 years. The Company retains ownership of the equipment and associated tax benefits such as investment tax credits and accelerated depreciation. At the end of the lease term, the lessee has the option to renew the lease for two additional terms or purchase the equipment at the then-current fair market value.
Rental revenue from operating leases is recognized on a straight-line basis over the term of the lease. Rental equipment is recorded at cost and depreciated to an estimated residual value on a straight-line basis over the estimated useful life. The useful lives generally range from 20 to 25 years and residual values generally range from 20% to 50%, however, they are subject to periodic evaluation. Changes in useful lives or residual values will impact depreciation expense and any gain or loss from the sale of used equipment. The estimated useful lives and residual values of the Company's leasing equipment are based on industry disposal experience and the Company's expectations for future sale prices.
If the Company decides to sell or otherwise dispose of rental equipment, it is carried at the lower of cost or fair value less costs to sell or dispose. Repair and maintenance costs that do not extend the lives of the rental equipment are charged to equipment expense at the time the costs are incurred.
As of June 30, 2024 and December 31, 2023, the Company had a net investment of $98.3 million and $104.0 million, respectively, in assets included in premises and equipment, net that are subject to operating leases. Of the net investment, the gross balance of the assets was $160.7 million and $162.3 million as of June 30, 2024 and December 31, 2023, respectively. Accumulated depreciation was $62.4 million and $58.3 million as of June 30, 2024 and December 31, 2023, respectively. Depreciation expense recognized on these assets was $2.4 million for the three months ended June 30, 2024 and 2023. Depreciation expense recognized on these assets was $4.7 million and $4.8 million for the six months ended June 30, 2024 and 2023, respectively.
Lease income of $2.3 million and $2.4 million was recognized in the three months ended June 30, 2024 and 2023, respectively. Lease income of $4.7 million and $4.8 million was recognized in the six months ended June 30, 2024 and 2023, respectively.
A maturity analysis of future minimum lease payments to be received under non-cancelable operating leases is as follows:
As of June 30, 2024 | Amount | |||||||
| 2024 | $ | 4,981 | ||||||
| 2025 | 8,741 | |||||||
| 2026 | 8,721 | |||||||
| 2027 | 8,483 | |||||||
| 2028 | 3,837 | |||||||
| Thereafter | 9,708 | |||||||
| Total | $ | 44,471 | ||||||
28
Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 7. Servicing Assets
Loans serviced for others are not included in the accompanying Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balance of loans serviced for others requiring recognition of a servicing asset was $3.26 billion and $3.09 billion at June 30, 2024 and December 31, 2023, respectively. The unpaid principal balance for all loans serviced for others was $4.29 billion and $4.24 billion at June 30, 2024 and December 31, 2023, respectively.
The following table summarizes the activity pertaining to servicing rights measured at fair value:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Balance at beginning of period | $ | 48,962 | $ | 29,357 | $ | 48,186 | $ | 26,323 | |||||||||||||||
| Additions, net | 5,218 | 4,516 | 8,739 | 7,194 | |||||||||||||||||||
| Fair value changes: | |||||||||||||||||||||||
| Due to changes in valuation inputs or assumptions | 701 | (501) | 922 | 2,123 | |||||||||||||||||||
| Decay due to increases in principal paydowns or runoff | (3,578) | (2,330) | (6,544) | (4,598) | |||||||||||||||||||
| Balance at end of period | $ | 51,303 | $ | 31,042 | $ | 51,303 | $ | 31,042 | |||||||||||||||
See Note 9. Fair Value of Financial Instruments for further details about servicing assets measured at fair value.
The fair value of servicing rights was determined using a weighted average discount rate of 14.5% on June 30, 2024 and 17.3% on June 30, 2023. The fair value of servicing rights was determined using a weighted average prepayment speed of 15.7% on June 30, 2024 and 15.8% on June 30, 2023, with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the Unaudited Condensed Consolidated Statements of Income.
As of June 30, 2024, the Company had servicing assets related to conventional commercial loans carried at amortized cost of $225 thousand.
29
Note 8. Borrowings
Total outstanding borrowings consisted of the following:
| June 30, 2024 | December 31, 2023 | |||||||||||||
| Borrowings | ||||||||||||||
In March 2021, the Company entered into a 60-month term loan agreement of $50.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 2.95% with a monthly payment sufficient to fully amortize the loan, with all remaining unpaid principal and interest due at maturity on March 30, 2026. The Company paid the Lender a non-refundable $325 thousand loan origination fee upon signing of the Note that is presented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan. | $ | 18,310 | $ | 23,354 | ||||||||||
In March 2024, the Company entered into a 60-month term loan agreement of $100.0 million with a third party correspondent bank. The loan accrues interest at a fixed rate of 5.95% with monthly interest payments until maturity on March 28, 2029, and $33.0 million of principal to be paid in year 4, and $67.0 million of principal to be paid in year 5. The Company paid the Lender a non-refundable $600 thousand loan origination fee upon signing of the Note that is represented as a direct deduction from the carrying amount of the loan and will be amortized into interest expense over the life of the loan. | 99,435 | — | ||||||||||||
| Total borrowings | $ | 117,745 | $ | 23,354 | ||||||||||
As of June 30, 2024 and December 31, 2023, the Company’s unused borrowing capacity was $3.62 billion and $3.68 billion, respectively, based upon securities and loans identified as available for collateral. Unused borrowing capacity consists of access through the Federal Reserve Bank's discount window, available lines of credit with the Federal Home Loan Bank and other correspondent banks, access to a repurchase agreement, and the Federal Reserve Bank's Bank Term Funding Program which ended March 11, 2024. If additional collateral is available, the Company's aggregate borrowing capacity with all of the above sources is $6.29 billion and $6.28 billion as of June 30, 2024 and December 31, 2023, respectively.
Note 9. Fair Value of Financial Instruments
Fair Value Hierarchy
There are three levels of inputs in the fair value hierarchy that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
Recurring Fair Value
The table below provides a rollforward of the Level 3 equity warrant asset fair values:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| Equity Warrant Assets | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
| Balance at beginning of period | $ | 8,700 | $ | 2,187 | $ | 2,874 | $ | 2,210 | ||||||||||||||||||
| New equity warrant assets | 123 | 91 | 493 | 244 | ||||||||||||||||||||||
| Changes in fair value, net | 585 | 194 | 6,246 | 18 | ||||||||||||||||||||||
| Settlements | (2,001) | (221) | (2,206) | (221) | ||||||||||||||||||||||
| Balance at end of period | $ | 7,407 | $ | 2,251 | $ | 7,407 | $ | 2,251 | ||||||||||||||||||
30
The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.
| June 30, 2024 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||||||||
| US government agencies | $ | 11,772 | $ | — | $ | 11,772 | $ | — | ||||||||||||||||||
| Mortgage-backed securities | 1,136,430 | — | 1,136,430 | — | ||||||||||||||||||||||
Municipal bonds (1) | 2,993 | — | 2,908 | 85 | ||||||||||||||||||||||
| Loans held for investment | 363,017 | — | — | 363,017 | ||||||||||||||||||||||
Servicing assets (2) | 51,303 | — | — | 51,303 | ||||||||||||||||||||||
| Mutual fund | 1,011 | — | 1,011 | — | ||||||||||||||||||||||
| Equity warrant assets | 7,407 | — | — | 7,407 | ||||||||||||||||||||||
| Total assets at fair value | $ | 1,573,933 | $ | — | $ | 1,152,121 | $ | 421,812 | ||||||||||||||||||
| December 31, 2023 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||||||||
| US government agencies | $ | 17,529 | $ | — | $ | 17,529 | $ | — | ||||||||||||||||||
| Mortgage-backed securities | 1,105,592 | — | 1,105,592 | — | ||||||||||||||||||||||
Municipal bonds (1) | 3,039 | — | 2,954 | 85 | ||||||||||||||||||||||
| Loans held for investment | 388,036 | — | — | 388,036 | ||||||||||||||||||||||
Servicing assets (2) | 48,186 | — | — | 48,186 | ||||||||||||||||||||||
| Mutual fund | 1,645 | — | 1,645 | — | ||||||||||||||||||||||
| Equity warrant assets | 2,874 | — | — | 2,874 | ||||||||||||||||||||||
| Total assets at fair value | $ | 1,566,901 | $ | — | $ | 1,127,720 | $ | 439,181 | ||||||||||||||||||
| (1) | During the three and six months ended June 30, 2024 there was no level 3 fair value adjustment gain or loss. During the three and six months ended June 30, 2023, the Company recorded a level 3 fair value adjustment gain of $1 thousand and loss of $9 thousand, respectively. | ||||
| (2) | See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. | ||||
For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities that are measured at fair value on a recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2023 Form 10-K. Additionally, see Note 1. Basis of Presentation of the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for information related to changes in valuation techniques for the Company's loan servicing assets and loans accounted for under the fair value option.
Fair Value Option
Until the first quarter of 2021, the Company had historically elected to account for retained participating interests of all government guaranteed loans under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon fair value election. Not electing fair value generally results in a larger discount being recorded on the date of the sale. This discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Management made this change of election in alignment with its ongoing effort to reduce volatility and drive more predictable revenue. In accordance with GAAP, any loans for which fair value was previously elected continue to be measured as such.
There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest at June 30, 2024 or December 31, 2023. The unpaid principal balance of unguaranteed exposure for nonaccruals was $11.3 million and $9.1 million at June 30, 2024 and December 31, 2023, respectively.
31
The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at June 30, 2024 and December 31, 2023.
| June 30, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Loans | Nonaccruals | 90 Days or More Past Due | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Carrying Amount | Unpaid Principal Balance | Difference | Fair Value Carrying Amount | Unpaid Principal Balance | Difference | Fair Value Carrying Amount | Unpaid Principal Balance | Difference | |||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Option Elections | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for investment | $ | 363,017 | $ | 381,283 | $ | (18,266) | $ | 61,160 | $ | 63,489 | $ | (2,329) | $ | 50,735 | $ | 52,788 | $ | (2,053) | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Loans | Nonaccruals | 90 Days or More Past Due | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Carrying Amount | Unpaid Principal Balance | Difference | Fair Value Carrying Amount | Unpaid Principal Balance | Difference | Fair Value Carrying Amount | Unpaid Principal Balance | Difference | |||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Option Elections | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for investment | $ | 388,036 | $ | 407,544 | $ | (19,508) | $ | 48,474 | $ | 50,749 | $ | (2,275) | $ | 36,490 | $ | 37,939 | $ | (1,449) | |||||||||||||||||||||||||||||||||||
The following table presents the net gains (losses) from changes in fair value.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Gains (Losses) on Loans Accounted for under the Fair Value Option | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Loans held for investment | $ | 172 | $ | 1,728 | $ | (47) | $ | (2,801) | |||||||||||||||
Losses related to borrower-specific credit risk were $0 for the three and six months ended June 30, 2024, respectively, and $291 thousand and $3.5 million for the three and six months ended June 30, 2023, respectively.
The following tables summarize the activity pertaining to loans accounted for under the fair value option:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Loans held for investment | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Balance at beginning of period | $ | 379,222 | $ | 466,950 | $ | 388,036 | $ | 494,458 | |||||||||||||||
| Repurchases | 4,247 | 4,063 | 12,812 | 15,897 | |||||||||||||||||||
| Fair value changes | 172 | 1,728 | (47) | (2,801) | |||||||||||||||||||
| Settlements | (20,624) | (30,960) | (37,784) | (65,773) | |||||||||||||||||||
| Balance at end of period | $ | 363,017 | $ | 441,781 | $ | 363,017 | $ | 441,781 | |||||||||||||||
Non-Recurring Fair Value
The tables below present the recorded amount of assets measured at fair value on a non-recurring basis. The Company has no liabilities recorded at fair value on a non-recurring basis.
| June 30, 2024 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Collateral-dependent loans | $ | 2,476 | $ | — | $ | — | $ | 2,476 | ||||||||||||||||||
| Foreclosed assets | 5,936 | — | — | 5,936 | ||||||||||||||||||||||
| Total assets at fair value | $ | 8,412 | $ | — | $ | — | $ | 8,412 | ||||||||||||||||||
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| December 31, 2023 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| Collateral-dependent loans | $ | 4,503 | $ | — | $ | — | $ | 4,503 | ||||||||||||||||||
| Foreclosed assets | 6,481 | — | — | 6,481 | ||||||||||||||||||||||
| Total assets at fair value | $ | 10,984 | $ | — | $ | — | $ | 10,984 | ||||||||||||||||||
For additional information on the valuation techniques and significant inputs for Level 2 and Level 3 assets that are measured at fair value on a non-recurring basis, see Note 10. Fair Value of Financial Instruments in the Company’s 2023 Form 10-K.
Level 3 Analysis
For Level 3 assets measured at fair value on a recurring or non-recurring basis as of June 30, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows:
| June 30, 2024 | ||||||||||||||||||||||||||||||||
Level 3 Assets with Significant Unobservable Inputs | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range | Weighted Average (1) | |||||||||||||||||||||||||||
| Recurring fair value | ||||||||||||||||||||||||||||||||
| Municipal bond | $ | 85 | Discounted expected cash flows | Discount rate | 7.0 | % | N/A | |||||||||||||||||||||||||
| Prepayment speed | 5.0 | % | N/A | |||||||||||||||||||||||||||||
| Loans held for investment | $ | 363,017 | Discounted expected cash flows | Loss rate | 0.0 % - 6.3 % | 1.1 | % | |||||||||||||||||||||||||
| Discount rate | 7.1 % - 18.0 % | 10.0 | % | |||||||||||||||||||||||||||||
| Prepayment speed | 14.4 % - 30.5 % | 16.5 | % | |||||||||||||||||||||||||||||
| Servicing assets | $ | 51,303 | Discounted expected cash flows | Discount rate | 14.5 | % | 14.5 | % | ||||||||||||||||||||||||
| Prepayment speed | 11.8 % - 18.3 % | 15.7 | % | |||||||||||||||||||||||||||||
| Equity warrant assets | $ | 7,407 | Black-Scholes option pricing model | Volatility | 13.1 % - 90.0 % | 31.8 | % | |||||||||||||||||||||||||
| Risk-free interest rate | 4.3 % | 4.3 | % | |||||||||||||||||||||||||||||
| Marketability discount | 5.0 % - 25.0 % | 11.3 | % | |||||||||||||||||||||||||||||
| Remaining life | 3.4 - 12.0 years | 5.4 years | ||||||||||||||||||||||||||||||
| Non-recurring fair value | ||||||||||||||||||||||||||||||||
| Collateral-dependent loans | $ | 2,476 | Discounted appraisals | Appraisal adjustments (2) | 10.0 % - 94.6 % | 49.8 | % | |||||||||||||||||||||||||
| Foreclosed assets | $ | 5,936 | Discounted appraisals | Appraisal adjustments (2) | 10.0 % | 10.0 | % | |||||||||||||||||||||||||
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| December 31, 2023 | ||||||||||||||||||||||||||||||||
Level 3 Assets with Significant Unobservable Inputs | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range | Weighted Average (1) | |||||||||||||||||||||||||||
| Recurring fair value | ||||||||||||||||||||||||||||||||
| Municipal bond | $ | 85 | Discounted expected cash flows | Discount rate | 7.0 | % | N/A | |||||||||||||||||||||||||
| Prepayment speed | 5.0 | % | N/A | |||||||||||||||||||||||||||||
Loans held for investment | $ | 388,036 | Discounted expected cash flows | Loss rate | 0.0 % - 7.4 % | 1.2 | % | |||||||||||||||||||||||||
| Discount rate | 6.7 % - 18.0 % | 9.6 | % | |||||||||||||||||||||||||||||
| Prepayment speed | 14.0% - 30.3% | 16.0 | % | |||||||||||||||||||||||||||||
| Servicing assets | $ | 48,186 | Discounted expected cash flows | Discount rate | 14.5 | % | 14.5 | % | ||||||||||||||||||||||||
| Prepayment speed | 11.8% - 17.8% | 15.3 | % | |||||||||||||||||||||||||||||
| Equity warrant assets | $ | 2,874 | Black-Scholes option pricing model | Volatility | 26.9 % - 90.0 % | 35.8 | % | |||||||||||||||||||||||||
| Risk-free interest rate | 3.8 % - 3.9 % | 3.9 | % | |||||||||||||||||||||||||||||
| Marketability discount | 20.0% - 25.0% | 22.7 | % | |||||||||||||||||||||||||||||
| Remaining life | 3.9 - 10 years | 7.6 years | ||||||||||||||||||||||||||||||
| Non-recurring fair value | ||||||||||||||||||||||||||||||||
Collateral-dependent loans | $ | 4,503 | Discounted appraisals | Appraisal adjustments (2) | 10.0 % - 70.0 % | 38.7 | % | |||||||||||||||||||||||||
| Foreclosed assets | $ | 6,481 | Discounted appraisals | Appraisal adjustments (2) | 10.0% - 17.4% | 10.4 | % | |||||||||||||||||||||||||
| (1) | Weighted averages are determined by the relative fair value of the instruments or the relative contribution to the instruments fair value. | ||||
| (2) | Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and other qualitative adjustments. | ||||
Estimated Fair Value of Other Financial Instruments
GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Unaudited Condensed Consolidated Balance Sheets.
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The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:
| June 30, 2024 | 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 | $ | 615,449 | $ | 615,449 | $ | — | $ | — | $ | 615,449 | ||||||||||||||||||||||
| Certificates of deposit with other banks | 250 | 250 | — | — | 250 | |||||||||||||||||||||||||||
| Loans held for sale | 363,632 | — | — | 387,415 | 387,415 | |||||||||||||||||||||||||||
| Loans and leases held for investment, net of allowance for credit losses on loans and leases | 8,671,250 | — | — | 8,978,176 | 8,978,176 | |||||||||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||||||||||||||
| Deposits | 10,707,031 | — | 10,444,354 | — | 10,444,354 | |||||||||||||||||||||||||||
| Borrowings | 117,745 | — | — | 125,320 | 125,320 | |||||||||||||||||||||||||||
| December 31, 2023 | 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 | $ | 582,540 | $ | 582,540 | $ | — | $ | — | $ | 582,540 | ||||||||||||||||||||||
| Certificates of deposit with other banks | 250 | 250 | — | — | 250 | |||||||||||||||||||||||||||
| Loans held for sale | 387,037 | — | — | 402,096 | 402,096 | |||||||||||||||||||||||||||
| Loans and leases held for investment, net of allowance for credit losses on loans and leases | 8,119,971 | — | — | 8,600,046 | 8,600,046 | |||||||||||||||||||||||||||
| Financial liabilities | ||||||||||||||||||||||||||||||||
| Deposits | 10,275,019 | — | 10,080,182 | — | 10,080,182 | |||||||||||||||||||||||||||
| Borrowings | 23,354 | — | — | 22,844 | 22,844 | |||||||||||||||||||||||||||
Note 10. Commitments and Contingencies
Litigation
In the normal course of business, the Company is involved in various legal proceedings. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.
Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.
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The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments is as follows:
| June 30, 2024 | December 31, 2023 | ||||||||||
Commitments to extend credit (1) | $ | 3,264,580 | $ | 2,921,978 | |||||||
| Standby letters of credit | 5,821 | 20,487 | |||||||||
| Airplane purchase agreement commitments | — | 9,000 | |||||||||
| Total unfunded off-balance-sheet credit risk | $ | 3,270,401 | $ | 2,951,465 | |||||||
| (1) | Includes unfunded overdraft protection. | ||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties. Commitment letters are issued after approval of the loan by the Credit Department and generally expire ninety days after issuance.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary.
The allowance for off-balance-sheet credit exposures was $10.4 million and $4.8 million at June 30, 2024 and December 31, 2023, respectively. During the three and six months ended June 30, 2024, the Company recorded $4.7 million and $5.6 million, respectively, in expense related to the allowance for off-balance sheet credit exposures. During the three and six months ended June 30, 2023, the Company recorded $482 thousand and $3.2 million, respectively, in expense related to the allowance for off-balance sheet credit exposures. Beginning in the second quarter of 2024, this expense was classified in the provision for credit losses. This expense has historically been classified in other expense and that classification remains unchanged for prior periods.
Other Commitments
The Company is in the final phase of constructing a new facility to accommodate expansion of its main campus. The total estimated cost to complete the construction program is approximately $38.9 million. At June 30, 2024, the Company has paid and was committed to approximately $37.5 million of the total estimated amount.
As of June 30, 2024 and December 31, 2023, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $29.4 million and $29.0 million, respectively.
Concentrations of Credit Risk
The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company generally does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $20.0 million, except for thirty-four relationships that have a retained unguaranteed exposure of $1.30 billion of which $811.8 million of the unguaranteed exposure has been disbursed.
Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $44.5 million, of which no relationships exceed $20.0 million.
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Live Oak Bancshares, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company from time-to-time may have cash and cash equivalents on deposit with other financial institutions that exceed federally-insured limits.
Geographic Concentrations
The following table presents the geographic concentration of the Company's loan and lease portfolio at June 30, 2024:
| % of Total | |||||
Geographic Regions (1) | |||||
| Midwest | 12.6 | % | |||
| Northeast | 17.7 | ||||
| Southeast | 31.8 | ||||
| Southwest | 12.1 | ||||
| West | 25.8 | ||||
| Total | 100.0 | % | |||
| (1) | Concentrations are stated as a percentage of total unguaranteed loans held for investment. Midwest consists of ND, SD, NE, KS, MN, IA,WI, MO, IL, IN, MI and OH. Northeast consists of MD, DE, PA, NJ, NY, CT, RI, MA, VT, ME and NH. Southeast consists of AR, LA, MS, TN, AL, GA, FL, SC, KY, NC, VA, WV, DC, PR and VI. Southwest consists of AZ, NM, TX and OK. West consists of WA, OR, CA, NV, ID, MT, WY, CO, UT, AK and HI. | ||||
Note 11. Segments
The Company's management reporting process measures the performance of its operating segments based on internal operating structure, which is subject to change from time-to-time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below:
Banking - This segment specializes in providing financing services to small businesses nationwide in targeted industries and deposit-related services to small businesses, consumers and other customers nationwide. The primary source of revenue for this segment is net interest income and secondarily the origination and sale of government guaranteed loans.
Fintech - This segment is involved in making strategic investments into emerging financial technology companies. The primary sources of revenue for this segment are principally gains and losses on equity method and equity security investments and management fees. The Fintech segment is comprised of the Company's direct wholly owned subsidiaries Live Oak Ventures and Canapi Advisors, and the investments held by those entities, as well as the Bank's investment in Apiture.
37
The following tables provide financial information for the Company's segments. The information provided under the caption “Other” represents operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company, other non-bank subsidiaries and elimination adjustments to reconcile the results of the operating segments to the Unaudited Condensed Consolidated Financial Statements prepared in conformity with GAAP.
| Banking | Fintech | Other | Consolidated | ||||||||||||||||||||
As of and for the three months ended June 30, 2024 | |||||||||||||||||||||||
| Interest income | $ | 198,368 | $ | 4 | $ | 76 | $ | 198,448 | |||||||||||||||
| Interest expense | 105,358 | — | 1,770 | 107,128 | |||||||||||||||||||
| Net interest income (loss) | 93,010 | 4 | (1,694) | 91,320 | |||||||||||||||||||
| Provision for credit losses | 11,765 | — | — | 11,765 | |||||||||||||||||||
| Noninterest income | 32,189 | 1,164 | 806 | 34,159 | |||||||||||||||||||
| Noninterest expense | 73,049 | 2,721 | 1,886 | 77,656 | |||||||||||||||||||
| Income tax expense (benefit) | 10,195 | (374) | (726) | 9,095 | |||||||||||||||||||
| Net income (loss) | $ | 30,190 | $ | (1,179) | $ | (2,048) | $ | 26,963 | |||||||||||||||
| Total assets | $ | 11,730,203 | $ | 137,029 | $ | 1,338 | $ | 11,868,570 | |||||||||||||||
As of and for the three months ended June 30, 2023 | |||||||||||||||||||||||
| Interest income | $ | 169,586 | $ | 8 | $ | 118 | $ | 169,712 | |||||||||||||||
| Interest expense | 85,103 | — | 307 | 85,410 | |||||||||||||||||||
| Net interest income (loss) | 84,483 | 8 | (189) | 84,302 | |||||||||||||||||||
| Provision for credit losses | 13,028 | — | — | 13,028 | |||||||||||||||||||
| Noninterest income | 21,488 | 1,998 | 670 | 24,156 | |||||||||||||||||||
| Noninterest expense | 71,916 | 2,707 | 1,834 | 76,457 | |||||||||||||||||||
| Income tax expense (benefit) | 1,404 | 26 | (1) | 1,429 | |||||||||||||||||||
| Net income (loss) | $ | 19,623 | $ | (727) | $ | (1,352) | $ | 17,544 | |||||||||||||||
| Total assets | $ | 10,642,872 | $ | 124,459 | $ | 51,865 | $ | 10,819,196 | |||||||||||||||
38
| Banking | Fintech | Other | Consolidated | ||||||||||||||||||||
| As of and for the six months ended June 30, 2024 | |||||||||||||||||||||||
| Interest income | $ | 390,637 | $ | 27 | $ | 204 | $ | 390,868 | |||||||||||||||
| Interest expense | 207,356 | — | 2,081 | 209,437 | |||||||||||||||||||
| Net interest income (loss) | 183,281 | 27 | (1,877) | 181,431 | |||||||||||||||||||
| Provision for credit losses | 28,129 | — | — | 28,129 | |||||||||||||||||||
| Noninterest income | 57,340 | 1,625 | 1,291 | 60,256 | |||||||||||||||||||
| Noninterest expense | 146,134 | 5,071 | 4,188 | 155,393 | |||||||||||||||||||
| Income tax expense (benefit) | 6,461 | (868) | (1,977) | 3,616 | |||||||||||||||||||
| Net income (loss) | $ | 59,897 | $ | (2,551) | $ | (2,797) | $ | 54,549 | |||||||||||||||
| Total assets | $ | 11,730,203 | $ | 137,029 | $ | 1,338 | $ | 11,868,570 | |||||||||||||||
| As of and for the six months ended June 30, 2023 | |||||||||||||||||||||||
| Interest income | $ | 320,855 | $ | 20 | $ | 253 | $ | 321,128 | |||||||||||||||
| Interest expense | 154,180 | — | 629 | 154,809 | |||||||||||||||||||
| Net interest income (loss) | 166,675 | 20 | (376) | 166,319 | |||||||||||||||||||
| Provision for credit losses | 32,049 | — | — | 32,049 | |||||||||||||||||||
| Noninterest income | 38,485 | 4,037 | 1,213 | 43,735 | |||||||||||||||||||
| Noninterest expense | 146,399 | 4,963 | 4,057 | 155,419 | |||||||||||||||||||
| Income tax expense (benefit) | 4,701 | 182 | (239) | 4,644 | |||||||||||||||||||
| Net income (loss) | $ | 22,011 | $ | (1,088) | $ | (2,981) | $ | 17,942 | |||||||||||||||
| Total assets | $ | 10,642,872 | $ | 124,459 | $ | 51,865 | $ | 10,819,196 | |||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following presents management’s discussion and analysis of the financial condition and results of operations of Live Oak Bancshares, Inc. (individually, “Bancshares” and collectively with its subsidiaries including Live Oak Banking Company, the “Company”). This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Form 10-K”). Results of operations for the periods included in this quarterly report on Form 10-Q are not necessarily indicative of results to be obtained during any future period.
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements generally relate to the financial condition, results of operations, plans, objectives, future performance or business of Live Oak Bancshares, Inc. (the “Company”). They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this Report. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this Report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:
•deterioration in the financial condition of borrowers resulting in significant increases in the Company’s provision for credit losses and other adverse impacts to results of operations and financial condition;
•changes in Small Business Administration (“SBA”) rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of Live Oak Banking Company (the “Bank”) as an SBA Preferred Lender;
•changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture (“USDA”);
•changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities;
•the failure of assumptions underlying the establishment of reserves for possible credit losses;
•changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
•adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;
•the impacts of global health crises and pandemics, such as the Coronavirus Disease 2019 (“COVID-19”) pandemic, on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;
40
•a reduction in or the termination of the Company’s ability to use the technology-based platform that is critical to the success of the Company’s business model or to develop a next-generation banking platform, including a failure in or a breach of the Company’s operational or security systems or those of its third party service providers;
•technological risks and developments, including cyber threats, attacks, or events;
•changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including reductions in rates of business formation and growth, demand for the Company’s products and services, commercial and residential real estate development and prices, premiums paid in the secondary market for the sale of loans, and valuation of servicing rights;
•changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
•fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;
•the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and mutual funds, and other financial institutions operating in the Company’s market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;
•the Company's ability to attract and retain key personnel;
•changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes, including with respect to SBA or USDA lending programs and investment tax credits;
•a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget;
•changes in political and economic conditions, including any prolonged U.S. government shutdown;
•the impact of heightened regulatory scrutiny of financial products and services, primarily led by the Consumer Financial Protection Bureau and various state agencies;
•the Company's ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result;
•operational, compliance and other factors, including conditions in local areas in which the Company conducts business such as inclement weather or a reduction in the availability of services or products for which loan proceeds will be used, that could prevent or delay closing and funding loans before they can be sold in the secondary market;
•the effect of any mergers, acquisitions or other transactions, to which the Company or the Bank may from time to time be a party, including management’s ability to successfully integrate any businesses acquired;
•adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions;
•other risk factors listed from time to time in reports that the Company files with the SEC, including those described under “Risk Factors” in this Report; and
•the Company’s success at managing the risks involved in the foregoing.
41
Except as otherwise disclosed, forward-looking statements do not reflect: (i) the effect of any acquisitions, divestitures or similar transactions that have not been previously disclosed; (ii) any changes in laws, regulations or regulatory interpretations; or (iii) any change in current dividend or repurchase strategies, in each case after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Amounts in all tables in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) have been presented in thousands, except percentage, time period, stock option, share and per share data or where otherwise indicated.
Nature of Operations
Bancshares is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina incorporated under the laws of the state of North Carolina in December 2008. The Company conducts business operations primarily through its commercial bank subsidiary, Live Oak Banking Company (the “Bank”). The Bank was incorporated in February 2008 as a North Carolina-chartered commercial bank. The Bank specializes in providing lending and deposit related services to small businesses nationwide. A significant portion of the loans originated by the Bank are guaranteed by the SBA under the 7(a) Loan Program and the U.S. Department of Agriculture’s (“USDA”) Rural Energy for America Program (“REAP”), Water and Environmental Program (“WEP”), Business & Industry (“B&I”) and Community Facilities loan programs. These loans are to small businesses and professionals with what the Bank believes are lower risk characteristics. Industries, or “verticals,” on which the Bank focuses its lending efforts are carefully selected. The Bank also lends more broadly to select borrowers outside of those verticals.
The Company’s wholly owned material subsidiaries are the Bank, Government Loan Solutions (“GLS”), Live Oak Grove, LLC (“Grove”), Live Oak Ventures, Inc. (“Live Oak Ventures”) and Canapi Advisors, LLC (“Canapi Advisors”). GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors with on-site dining. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology. Canapi Advisors provides investment advisory services to a series of funds (the “Canapi Funds”) focused on providing venture capital to new and emerging financial technology companies.
The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), Live Oak Private Wealth, LLC (“Live Oak Private Wealth”) and Tiburon Land Holdings, LLC (“TLH”). Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services. TLH holds land adjacent to the Bank's headquarters consisting of wetlands and other protected property for the use and enjoyment of the Bank's employees and customers.
The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans. Income from the retention of loans is comprised principally of interest income. Income from the sale of loans is comprised of loan servicing revenue and revaluation of related servicing assets along with net gains on sales of loans. Offsetting these revenues are the cost of funding sources, provision for credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense. The Company also has less routinely generated gains and losses arising from its financial technology investments predominantly in its Fintech segment, as discussed more fully later in this section under the caption “Results of Segment Operations.”
42
Results of Operations
Performance Summary
Three months ended June 30, 2024 compared with three months ended June 30, 2023
For the three months ended June 30, 2024, the Company reported net income of $27.0 million, or $0.59 per diluted share, compared to net income of $17.5 million, or $0.39 per diluted share, for the second quarter of 2023.
The increase in net income was principally due to the following items:
•Increase in net interest income of $7.0 million, or 8.3%, driven by increases in loan volumes, partially mitigated by a decrease in net interest margin arising from an increase in interest-bearing deposits and borrowings combined with the increase in average cost of funds outpacing the increase in average yield on interest-earning assets; and
•Increased other noninterest income of $7.1 million, largely related to a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024.
The key factor partially offsetting the increase in net income for the second quarter of 2024 was increased income tax expense of $7.7 million, primarily the result of the combination of increased pretax income and lower levels of anticipated investment tax credits in 2024 as compared to the prior year.
Six months ended June 30, 2024 compared with six months ended June 30, 2023
For the six months ended June 30, 2024, the Company reported net income of $54.5 million, or $1.20 per diluted share, compared to net income of $17.9 million, or $0.40 per diluted share, for the first half of 2023.
The increase in net income was largely due to the following items:
•Increase in net interest income of $15.1 million, or 9.1%, principally the result of the above discussed drivers of the quarter over quarter increase;
•Increased net gains on sales of loans of $4.9 million, or 23.4%, principally the result of higher loan sale volumes combined with improving premiums in the first half of 2024; and
•Increased other noninterest income of $12.8 million, largely related to above mentioned gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024 combined with the $5.7 million first quarter of 2024 gain arising from the increased fair value of a certain equity warrant asset.
The key factor partially offsetting the increase in net income for the first half of 2024 was increased salaries and employee benefits of $5.7 million.
Net Interest Income and Margin
Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” As a bank without a branch network, the Bank gathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.
43
Three months ended June 30, 2024 compared with three months ended June 30, 2023
For the three months ended June 30, 2024, net interest income increased $7.0 million, or 8.3%, to $91.3 million compared to $84.3 million for the three months ended June 30, 2023. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $930.3 million, or 9.1%, to $11.20 billion for the second quarter of 2024, compared to $10.27 billion for the second quarter of 2023, while the yield on average interest-earning assets increased 49 basis points to 7.12%. The cost of funds on interest-bearing liabilities for the second quarter of 2024 increased 56 basis points to 4.15% and the average balance of interest-bearing liabilities increased by $859.8 million, or 9.0%, over the second quarter of 2023. The increase in cost of funds was partially driven by a full quarter’s worth of interest expense on the $100.0 million incremental borrowing added in late first quarter of 2024.
As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $28.7 million outpacing growth in interest expense of $21.7 million for the second quarter of 2024 compared to the second quarter of 2023. The net interest margin decreased from 3.29% for the second quarter of 2023 to 3.28% for the second quarter of 2024.
Six months ended June 30, 2024 compared with six months ended June 30, 2023
For the six months ended June 30, 2024, net interest income increased $15.1 million, or 9.1%, to $181.4 million compared to $166.3 million for the six months ended June 30, 2023. This increase was principally due to the growth in the held for investment loan and lease portfolio outpacing growth in interest-bearing liabilities offset by an increase in average cost of funds which exceeded the increase in average yield on interest-earning assets. Average interest-earning assets increased by $1.05 billion, or 10.5%, to $11.05 billion for the first half of 2024, compared to $9.99 billion for the first half of 2023, while the yield on average interest-earning assets increased 63 basis points to 7.11%. The cost of funds on interest-bearing liabilities for the first half of 2024 increased 75 basis points to 4.11%, and the average balance of interest-bearing liabilities increased by $959.6 million, or 10.3%, over the first half of 2023. The increase in cost of funds was largely influenced by repricing of short-term certificates of deposit with the average cost of funds increasing from 3.02% for the first half of 2023 to 4.12% for the first half of 2024.
The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth as well as maintenance of the Company's target liquidity profile. As indicated in the rate/volume analysis below, the overall increase discussed above is reflected in increased interest income of $69.7 million outpacing growth in interest expense of $54.6 million for the first half of 2024 compared to the first half of 2023. The net interest margin decreased from 3.36% for the first half of 2023 to 3.30% for the first half of 2024.
During the six months ended June 30, 2024 and in July 2024, the Federal Reserve decided to maintain the federal funds upper target rate at 5.5%. In June 2024, the Federal Reserve released its most current federal funds target rate midpoint projections which implied an increase of the median Federal Funds rate to 5.1% by the end of 2024 and a decrease of approximately 100 basis points to 4.1% by the end of 2025. There can be no assurance that any further increases or decreases in the Federal Funds rate will occur, and if they do, the amount and timing of actual adjustments are subject to change. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.
44
Average Balances and Yields. The following table presents information regarding average balances for assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amount of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented and annualizing that result. Loan fees are included in interest income on loans.
| Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | ||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Interest-earning balances in other banks | $ | 555,570 | $ | 7,389 | 5.35 | % | $ | 731,427 | $ | 8,847 | 4.85 | % | |||||||||||||||||||||||
| Investment securities | 1,263,675 | 9,219 | 2.93 | 1,252,320 | 8,503 | 2.72 | |||||||||||||||||||||||||||||
| Loans held for sale | 387,824 | 9,329 | 9.67 | 516,378 | 12,153 | 9.44 | |||||||||||||||||||||||||||||
Loans and leases held for investment (1) | 8,997,164 | 172,511 | 7.71 | 7,773,816 | 140,209 | 7.23 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 11,204,233 | 198,448 | 7.12 | 10,273,941 | 169,712 | 6.63 | |||||||||||||||||||||||||||||
Less: Allowance for credit losses on loans and leases | (136,668) | (108,552) | |||||||||||||||||||||||||||||||||
| Noninterest-earning assets | 562,488 | 499,661 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 11,630,053 | $ | 10,665,050 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Interest-bearing checking | $ | 304,505 | $ | 4,267 | 5.64 | % | $ | 300,046 | $ | 3,968 | 5.30 | % | |||||||||||||||||||||||
| Savings | 4,804,037 | 48,617 | 4.07 | 4,277,850 | 41,930 | 3.93 | |||||||||||||||||||||||||||||
| Money market accounts | 128,625 | 186 | 0.58 | 121,382 | 184 | 0.61 | |||||||||||||||||||||||||||||
| Certificates of deposit | 5,032,856 | 52,288 | 4.18 | 4,792,289 | 38,921 | 3.26 | |||||||||||||||||||||||||||||
| Total deposits | 10,270,023 | 105,358 | 4.13 | 9,491,567 | 85,003 | 3.59 | |||||||||||||||||||||||||||||
| Borrowings | 119,321 | 1,770 | 5.97 | 37,997 | 407 | 4.30 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 10,389,344 | 107,128 | 4.15 | 9,529,564 | 85,410 | 3.59 | |||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 223,026 | 205,741 | |||||||||||||||||||||||||||||||||
| Noninterest-bearing liabilities | 70,667 | 80,427 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 947,016 | 849,318 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 11,630,053 | $ | 10,665,050 | |||||||||||||||||||||||||||||||
Net interest income and interest rate spread | $ | 91,320 | 2.97 | % | $ | 84,302 | 3.04 | % | |||||||||||||||||||||||||||
| Net interest margin | 3.28 | % | 3.29 | % | |||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 107.84 | % | 107.81 | % | |||||||||||||||||||||||||||||||
| (1) | Average loan and lease balances include non-accruing loans and leases. | ||||
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| Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||
Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | ||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Interest-earning balances in other banks | $ | 550,608 | $ | 14,845 | 5.42 | % | $ | 530,205 | $ | 12,040 | 4.58 | % | |||||||||||||||||||||||
| Federal funds sold | — | — | — | 69,629 | 1,624 | 4.70 | |||||||||||||||||||||||||||||
| Investment securities | 1,252,268 | 18,173 | 2.92 | 1,220,028 | 16,050 | 2.65 | |||||||||||||||||||||||||||||
| Loans held for sale | 370,662 | 17,683 | 9.59 | 538,385 | 24,139 | 9.04 | |||||||||||||||||||||||||||||
Loans and leases held for investment (1) | 8,875,186 | 340,167 | 7.71 | 7,636,343 | 267,275 | 7.06 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 11,048,724 | 390,868 | 7.11 | 9,994,590 | 321,128 | 6.48 | |||||||||||||||||||||||||||||
Less: Allowance for credit losses on loans and leases | (131,057) | (101,457) | |||||||||||||||||||||||||||||||||
| Noninterest-earning assets | 554,961 | 496,925 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 11,472,628 | $ | 10,390,058 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Interest-bearing checking | $ | 302,285 | $ | 8,450 | 5.62 | % | $ | 161,626 | $ | 4,239 | 5.29 | % | |||||||||||||||||||||||
| Savings | 4,678,214 | 94,788 | 4.07 | 4,242,763 | 78,181 | 3.72 | |||||||||||||||||||||||||||||
| Money market accounts | 126,971 | 373 | 0.59 | 117,753 | 321 | 0.55 | |||||||||||||||||||||||||||||
| Certificates of deposit | 5,063,704 | 103,745 | 4.12 | 4,664,536 | 69,857 | 3.02 | |||||||||||||||||||||||||||||
| Total deposits | 10,171,174 | 207,356 | 4.10 | 9,186,678 | 152,598 | 3.35 | |||||||||||||||||||||||||||||
| Borrowings | 73,047 | 2,081 | 5.73 | 97,920 | 2,211 | 4.55 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 10,244,221 | 209,437 | 4.11 | 9,284,598 | 154,809 | 3.36 | |||||||||||||||||||||||||||||
| Noninterest-bearing deposits | 218,298 | 191,489 | |||||||||||||||||||||||||||||||||
| Noninterest-bearing liabilities | 74,305 | 72,467 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 935,804 | 841,504 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 11,472,628 | $ | 10,390,058 | |||||||||||||||||||||||||||||||
Net interest income and interest rate spread | $ | 181,431 | 3.00 | % | $ | 166,319 | 3.12 | % | |||||||||||||||||||||||||||
| Net interest margin | 3.30 | % | 3.36 | % | |||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 107.85 | % | 107.65 | % | |||||||||||||||||||||||||||||||
| (1) | Average loan and lease balances include non-accruing loans and leases. | ||||
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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, increases or decreases attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2024 vs. 2023 | 2024 vs. 2023 | ||||||||||||||||||||||||||||||||||
| Increase (Decrease) Due to | Increase (Decrease) Due to | ||||||||||||||||||||||||||||||||||
| Rate | Volume | Total | Rate | Volume | Total | ||||||||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||||||||
| Interest-earning balances in other banks | $ | 775 | $ | (2,233) | $ | (1,458) | $ | 2,298 | $ | 507 | $ | 2,805 | |||||||||||||||||||||||
| Federal funds sold | — | — | — | — | (1,624) | (1,624) | |||||||||||||||||||||||||||||
| Investment securities | 636 | 80 | 716 | 1,677 | 446 | 2,123 | |||||||||||||||||||||||||||||
| Loans held for sale | 235 | (3,059) | (2,824) | 1,305 | (7,761) | (6,456) | |||||||||||||||||||||||||||||
| Loans and leases held for investment | 9,542 | 22,760 | 32,302 | 27,471 | 45,421 | 72,892 | |||||||||||||||||||||||||||||
| Total interest income | 11,188 | 17,548 | 28,736 | 32,751 | 36,989 | 69,740 | |||||||||||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||||||||
| Interest-bearing checking | 238 | 61 | 299 | 400 | 3,811 | 4,211 | |||||||||||||||||||||||||||||
| Savings | 1,446 | 5,241 | 6,687 | 8,184 | 8,423 | 16,607 | |||||||||||||||||||||||||||||
| Money market accounts | (9) | 11 | 2 | 26 | 26 | 52 | |||||||||||||||||||||||||||||
| Certificates of deposit | 11,140 | 2,227 | 13,367 | 26,810 | 7,078 | 33,888 | |||||||||||||||||||||||||||||
| Borrowings | 324 | 1,039 | 1,363 | 505 | (635) | (130) | |||||||||||||||||||||||||||||
| Total interest expense | 13,139 | 8,579 | 21,718 | 35,925 | 18,703 | 54,628 | |||||||||||||||||||||||||||||
| Net interest income | $ | (1,951) | $ | 8,969 | $ | 7,018 | $ | (3,174) | $ | 18,286 | $ | 15,112 | |||||||||||||||||||||||
Provision for Credit Losses
The provision for credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the allowance for credit losses (“ACL”) on loans and leases at a level that the Company believes is appropriate in relation to the estimated losses inherent in the loan and lease portfolio.
Losses inherent in loan relationships are mitigated if a portion of the loan is guaranteed by the SBA or USDA. Typical SBA 7(a) and USDA guarantees range from 50% to 90% depending on loan size and type, which serve to reduce the risk profile of these loans. The Company believes that its focus on compliance with regulations and guidance from the SBA and USDA are key factors to managing this risk.
For the second quarter of 2024, there was a provision for credit losses of $11.8 million compared to $13.0 million for the same period in 2023, a decrease of $1.3 million. For the first six months of 2024, there was a provision for credit losses of $28.1 million compared to $32.0 million for the same period in 2023, a decrease of $3.9 million. The decrease in provision expense as compared to the second quarter and first six months of 2023 was primarily the result of decreased specific reserves required for loans individually evaluated for impairment.
Beginning in the second quarter of 2024 and prospectively, the reserve for unfunded commitments was classified in the provision for credit losses. This expense has historically been classified in other expense and that classification remains unchanged for prior periods. The reclassification to provision aligns with industry practices. See Note 10. Commitments and Contingencies in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements for the amount of expense recognized in comparative periods.
Loans and leases held for investment at historical cost were $8.81 billion as of June 30, 2024, increasing by $1.41 billion, or 19.1%, compared to June 30, 2023.
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Net charge-offs for loans and leases carried at historical cost were $8.3 million, or 0.38% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2024, compared to net charge-offs of $1.2 million, or 0.06%, for the three months ended June 30, 2023, an increase of $7.1 million, or 615.2%. The increase in net charge-offs compared to the second quarter of 2023 was primarily related to the confirmation of impairments identified in the first quarter of 2024, largely concentrated to the Company's Small Business Banking class. For the six months ended June 30, 2024, net charge-offs totaled $11.4 million compared to $7.8 million for the six months ended June 30, 2023, an increase of $3.6 million, or 45.9%. Net charge-offs are a key element of historical experience in the Company's estimation of the allowance for credit losses on loans and leases.
In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $9.6 million and $8.6 million accounted for under the fair value option at June 30, 2024 and 2023, respectively, totaled $37.3 million, which was 0.42% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2024, compared to $44.9 million, or 0.61% of loans and leases held for investment carried at historical cost at June 30, 2023.
Noninterest Income
Noninterest income is principally comprised of net gains from the sale of SBA and USDA-guaranteed loans along with loan servicing revenue and related revaluation of the servicing asset. Revenue from the sale of loans depends upon the volume, maturity structure and rates of underlying loans as well as the pricing and availability of funds in the secondary markets prevailing in the period between completed loan funding and closing of sale. In addition, the loan servicing revaluation is significantly impacted by changes in market rates and other underlying assumptions such as prepayment speeds and default rates. Net gain (loss) on loans accounted for under the fair value option is also significantly impacted by changes in market rates, prepayment speeds and inherent credit risk. Other less consistent elements of noninterest income include gains and losses on investments.
The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.
| Three Months Ended June 30, | 2024/2023 Increase (Decrease) | ||||||||||||||||||||||
| 2024 | 2023 | Amount | Percent | ||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||
| Loan servicing revenue | $ | 7,347 | $ | 6,687 | $ | 660 | 9.9 | % | |||||||||||||||
| Loan servicing asset revaluation | (2,878) | (2,831) | (47) | (1.7) | |||||||||||||||||||
| Net gains on sales of loans | 14,395 | 10,804 | 3,591 | 33.2 | |||||||||||||||||||
Net gain on loans accounted for under the fair value option | 172 | 1,728 | (1,556) | (90.0) | |||||||||||||||||||
| Equity method investments (loss) income | (1,767) | (2,055) | 288 | 14.0 | |||||||||||||||||||
| Equity security investments gains (losses), net | 161 | 121 | 40 | 33.1 | |||||||||||||||||||
| Lease income | 2,423 | 2,535 | (112) | (4.4) | |||||||||||||||||||
| Management fee income | 3,271 | 3,266 | 5 | 0.2 | |||||||||||||||||||
| Other noninterest income | 11,035 | 3,901 | 7,134 | 182.9 | |||||||||||||||||||
| Total noninterest income | $ | 34,159 | $ | 24,156 | $ | 10,003 | 41.4 | % | |||||||||||||||
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| Six Months Ended June 30, | 2024/2023 Increase (Decrease) | ||||||||||||||||||||||
| 2024 | 2023 | Amount | Percent | ||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||
| Loan servicing revenue | $ | 14,971 | $ | 13,067 | $ | 1,904 | 14.6 | % | |||||||||||||||
| Loan servicing asset revaluation | (5,622) | (2,475) | (3,147) | (127.2) | |||||||||||||||||||
| Net gains on sales of loans | 25,897 | 20,979 | 4,918 | 23.4 | |||||||||||||||||||
Net loss on loans accounted for under the fair value option | (47) | (2,801) | 2,754 | 98.3 | |||||||||||||||||||
| Equity method investments (loss) income | (6,789) | (5,007) | (1,782) | (35.6) | |||||||||||||||||||
| Equity security investments gains (losses), net | (368) | 198 | (566) | (285.9) | |||||||||||||||||||
| Lease income | 4,876 | 5,070 | (194) | (3.8) | |||||||||||||||||||
| Management fee income | 6,542 | 6,738 | (196) | (2.9) | |||||||||||||||||||
| Other noninterest income | 20,796 | 7,966 | 12,830 | 161.1 | |||||||||||||||||||
| Total noninterest income | $ | 60,256 | $ | 43,735 | $ | 16,521 | 37.8 | % | |||||||||||||||
For the three months ended June 30, 2024, noninterest income increased by $10.0 million, or 41.4%, compared to the three months ended June 30, 2023. The increase over the prior year is primarily a result of higher net gains on sales of loans of $3.6 million combined with increased other noninterest income of $7.1 million, largely related to a $6.7 million gain arising from the sale of one of the Company’s aircraft in the second quarter of 2024.
For the six months ended June 30, 2024, noninterest income increased by $16.5 million, or 37.8%, compared to the six months ended June 30, 2023. The increase over the prior year is primarily a result of of higher net gains on sales of loans of $4.9 million combined with a $2.8 million decrease in the net loss on loans accounted for under the fair value option and increased other noninterest income of $12.8 million. The increase in other noninterest income was largely related to the above mentioned gain arising from the sale of one of the Company’s aircraft combined with the $5.7 million first quarter of 2024 gain arising from the increased fair value of a certain equity warrant asset. Partially offsetting the increase over the prior year to date period was higher losses of $3.1 million related to the servicing asset revaluation.
The following tables reflects loan and lease production, sales of guaranteed loans and the aggregate balance in guaranteed loans sold. These components are key drivers of the Company's noninterest income.
| Three months ended June 30, | Three months ended March 31, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Amount of loans and leases originated | $ | 1,171,141 | $ | 861,033 | $ | 805,129 | $ | 1,030,882 | |||||||||||||||
| Guaranteed portions of loans sold | 250,466 | 245,074 | 186,654 | 167,826 | |||||||||||||||||||
Outstanding balance of guaranteed loans sold (1) | 3,177,629 | 2,808,200 | 3,057,641 | 2,695,757 | |||||||||||||||||||
| Six Months Ended June 30, | For years ended December 31, | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2023 | 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||
Amount of loans and leases originated | $ | 1,976,270 | $ | 1,891,915 | $ | 3,946,873 | $ | 4,007,621 | $ | 4,480,725 | $ | 4,450,198 | |||||||||||||||||||||||
Guaranteed portions of loans sold | 437,120 | 412,900 | 877,551 | 580,889 | 668,462 | 542,596 | |||||||||||||||||||||||||||||
Outstanding balance of guaranteed loans sold (1) | 3,177,629 | 2,808,200 | 2,986,959 | 2,668,110 | 2,756,915 | 2,819,625 | |||||||||||||||||||||||||||||
| (1) | This represents the outstanding principal balance of guaranteed loans serviced, as of the last day of the applicable period, which have been sold into the secondary market. | ||||
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Changes in various components of noninterest income are discussed in more detail below.
Loan Servicing Asset Revaluation: The Company revalues its serviced loan portfolio at least quarterly. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as adequate compensation for servicing, the discount rate, the custodial earnings rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speeds and default rates and losses, with prepayment speed and discount rate being the most sensitive assumptions. For the three months ended June 30, 2024, there was a net loss on loan servicing asset revaluation of $2.9 million, compared to a net loss of $2.8 million for the three months ended June 30, 2023. For the six months ended June 30, 2024, there was a net loss on loan servicing asset revaluation of $5.6 million compared to a net loss of $2.5 million for the six months ended June 30, 2023, resulting in a negative change of $3.1 million. The increase in the net loss in valuation of the servicing asset compared to the first half of 2023 was principally the result of the third quarter of 2023 change in valuation techniques used to estimate the fair value of servicing rights.
Net Gains on Sales of Loans: For the three months ended June 30, 2024, net gains on sales of loans increased $3.6 million, or 33.2%, compared to the three months ended June 30, 2023. The volume of guaranteed loans sold increased $5.4 million, or 2.2%, for the three months ended June 30, 2024 to $250.5 million from $245.1 million in the three months ended June 30, 2023. For the six months ended June 30, 2024, net gains on sales of loans increased $4.9 million, or 23.4%, compared to the six months ended June 30, 2023. For the six months ended June 30, 2024, the volume of guaranteed loans sold increased $24.2 million, or 5.9%, to $437.1 million from $412.9 million for the six months ended June 30, 2023. The average net gain on loan sale premium increased from 105% to 106% in the second quarters of 2023 and 2024, respectively, and remained relatively stable at 106% in the first half of both 2023 and 2024. The increase in net gains on sales of loans over the second quarter of 2023 was principally the result of higher premiums while the increase over the first half of 2023 was principally related to a higher loan sale volume combined with, to a lesser extent, improving premiums in the first half of 2024 .
Net Gain (Loss) on Loans Accounted for Under the Fair Value Option: For the three months ended June 30, 2024, the Company had a net gain on loans accounted for under the fair value option of $172 thousand compared to a net gain of $1.7 million for the second quarter of 2023, a negative change of $1.6 million, or 90.0%. For the six months ended June 30, 2024, the Company had a net loss on loans accounted for under the fair value option of $47 thousand compared to a net loss of $2.8 million for the same period of 2023, a positive change of $2.8 million, or 98.3%. The carrying amount of loans accounted for under the fair value option at June 30, 2024 and 2023 was $363.0 million (all classified as held for investment) and $441.8 million (all classified as held for investment), respectively, a decrease of $78.8 million, or 17.8%. The decrease in net loss in the valuation of loans accounted for under the fair value option in the first half of 2024 was largely the result of improvement in market conditions combined with the third quarter 2023 change in valuation techniques used to estimate the fair value of loans.
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Noninterest Expense
Noninterest expense comprises all operating costs of the Company, such as employee related costs, travel, professional services, advertising and marketing expenses, exclusive of interest and income tax expense.
The following table shows the components of noninterest expense and the related dollar and percentage changes for the periods presented.
| Three Months Ended June 30, | 2024/2023 Increase (Decrease) | ||||||||||||||||||||||
| 2024 | 2023 | Amount | Percent | ||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 46,255 | $ | 43,066 | $ | 3,189 | 7.4 | % | |||||||||||||||
| Non-employee expenses: | |||||||||||||||||||||||
| Travel expense | 2,328 | 2,770 | (442) | (16.0) | |||||||||||||||||||
| Professional services expense | 3,061 | 1,996 | 1,065 | 53.4 | |||||||||||||||||||
| Advertising and marketing expense | 3,004 | 3,009 | (5) | (0.2) | |||||||||||||||||||
| Occupancy expense | 2,388 | 2,205 | 183 | 8.3 | |||||||||||||||||||
| Technology expense | 7,996 | 8,005 | (9) | (0.1) | |||||||||||||||||||
| Equipment expense | 3,511 | 4,023 | (512) | (12.7) | |||||||||||||||||||
| Other loan origination and maintenance expense | 3,659 | 3,442 | 217 | 6.3 | |||||||||||||||||||
| Renewable energy tax credit investment impairment (recovery) | 170 | — | 170 | 100.0 | |||||||||||||||||||
| FDIC insurance | 2,649 | 5,061 | (2,412) | (47.7) | |||||||||||||||||||
| Other expense | 2,635 | 2,880 | (245) | (8.5) | |||||||||||||||||||
| Total non-employee expenses | 31,401 | 33,391 | (1,990) | (6.0) | |||||||||||||||||||
| Total noninterest expense | $ | 77,656 | $ | 76,457 | $ | 1,199 | 1.6 | % | |||||||||||||||
| Six Months Ended June 30, | 2024/2023 Increase (Decrease) | ||||||||||||||||||||||
| 2024 | 2023 | Amount | Percent | ||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 93,530 | $ | 87,831 | $ | 5,699 | 6.5 | % | |||||||||||||||
| Non-employee expenses: | |||||||||||||||||||||||
| Travel expense | 4,766 | 5,181 | (415) | (8.0) | |||||||||||||||||||
| Professional services expense | 4,939 | 2,923 | 2,016 | 69.0 | |||||||||||||||||||
| Advertising and marketing expense | 6,696 | 6,612 | 84 | 1.3 | |||||||||||||||||||
| Occupancy expense | 4,635 | 4,130 | 505 | 12.2 | |||||||||||||||||||
| Technology expense | 15,719 | 15,734 | (15) | (0.1) | |||||||||||||||||||
| Equipment expense | 6,585 | 7,841 | (1,256) | (16.0) | |||||||||||||||||||
| Other loan origination and maintenance expense | 7,570 | 7,369 | 201 | 2.7 | |||||||||||||||||||
| Renewable energy tax credit investment impairment (recovery) | (757) | 69 | (826) | (1,197.1) | |||||||||||||||||||
| FDIC insurance | 5,849 | 8,464 | (2,615) | (30.9) | |||||||||||||||||||
| Other expense | 5,861 | 9,265 | (3,404) | (36.7) | |||||||||||||||||||
| Total non-employee expenses | 61,863 | 67,588 | (5,725) | (8.5) | |||||||||||||||||||
| Total noninterest expense | $ | 155,393 | $ | 155,419 | $ | (26) | — | % | |||||||||||||||
Total noninterest expense for the three and six months ended June 30, 2024, increased $1.2 million, or 1.6%, and decreased $26 thousand, respectively, compared to the same periods in 2023. The changes within noninterest expense for the comparable three and six month periods was largely driven by various components, as discussed below.
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Salaries and employee benefits: Total personnel expense for the three and six months ended June 30, 2024 increased by $3.2 million, or 7.4%, and increased by $5.7 million, or 6.5%, respectively, compared to the same periods in 2023. The increase over both comparative periods of 2023 is principally related to continued investment in human resources to support strategic and growth initiatives. Total full-time equivalent employees increased from 984 at June 30, 2023, to 987 at June 30, 2024. Salaries and employee benefits expense included $6.8 million and $13.2 million of stock-based compensation for the three and six months ended June 30, 2024, respectively, compared to $6.3 million and $12.5 million for the three and six months ended June 30, 2023, respectively. Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.
Professional services expense: For the three and six months ended June 30, 2024, professional services expense increased $1.1 million, or 53.4%, and $2.0 million, or 69.0%, respectively, compared to the same periods in 2023. The increase compared to the prior periods was due to higher levels of legal fees partially offset by an insurance recovery of $1.3 million in the first quarter of 2023.
FDIC insurance: For the three and six months ended June 30, 2024, FDIC insurance decreased $2.4 million, or 47.7%, and $2.6 million, or 30.9%, respectively, compared to the same periods in 2023. This decrease is largely the the product of favorable changes in the Company’s FDIC assessment rates.
Other expense: For the six months ended June 30, 2024, other expense decreased $3.4 million, or 36.7%, compared to the same period in 2023. This decrease was largely related to reserves for unfunded commitments, historically being recorded in other expense. Beginning in the second quarter of 2024, this expense was classified in the provision for credit losses. See above section captioned “Provision for Credit Losses” for more information related to this change.
Income Tax Expense
For the three months ended June 30, 2024, income tax expense was $9.1 million compared to income tax expense of $1.4 million in the second quarter of 2023, and the Company’s effective tax rates were 25.2% and 7.5%, respectively. For the six months ended June 30, 2024, income tax expense was $3.6 million compared to $4.6 million for the first half of 2023, and the Company’s effective tax rates were 6.2% and 20.6%, respectively. The higher level of income tax expense for the second quarter of 2024 as compared to the second quarter of 2023 was primarily the result of the combination of increased pretax income and lower levels of anticipated investment tax credits in 2024 as compared to the prior year. The lower level of income tax expense in the first half of 2024 compared to the same period in 2023 was principally related to $10.6 million in increased levels of investment tax credits in the first quarter of 2024, arising from the Internal Revenue Service’s expansion of qualifying energy communities during that quarter in combination with discrete items in the first quarter of 2023 related to stock compensation.
Results of Segment Operations
The Company’s operations are managed along two primary operating segments Banking and Fintech. A description of each segment and the methodologies used to measure financial performance is described in Note 11. Segments in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements. Net income (loss) by operating segment is presented below:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Banking | $ | 30,190 | $ | 19,623 | $ | 59,897 | $ | 22,011 | |||||||||||||||
| Fintech | (1,179) | (727) | (2,551) | (1,088) | |||||||||||||||||||
| Other | (2,048) | (1,352) | (2,797) | (2,981) | |||||||||||||||||||
| Consolidated net income | $ | 26,963 | $ | 17,544 | $ | 54,549 | $ | 17,942 | |||||||||||||||
Banking
For the three and six months ended June 30, 2024, net income increased $10.6 million and $37.9 million, respectively, compared to the same periods of 2023. Key factors influencing these changes are discussed below.
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For the three and six months ended June 30, 2024, net interest income increased $8.5 million, or 10.1%, and $16.6 million, or 10.0%, respectively, compared to the same periods of 2023. See above section captioned “Net Interest Income and Margin” as it is principally related to the Banking segment.
The provision for credit losses for the three and six months ended June 30, 2024, decreased $1.3 million, or 9.7%, and $3.9 million, or 12.2%, respectively. See the analysis of provision for credit losses included in the above section captioned “Provision for Credit Losses” as it is entirely related to the Banking segment.
For the three and six months ended June 30, 2024, noninterest income increased $10.7 million, or 49.8%, and $18.9 million, or 49.0%, respectively, compared to the same periods of 2023. The increase for the three and six month comparative periods was principally driven by increased net gains on sales of loans combined with increased levels of other noninterest income. Also contributing to the comparative change over the first half of 2023 was decreased net losses on loans accounted for under the fair value option and higher levels of losses on the loan servicing asset revaluation. See the analysis of these categories of noninterest income included in the above section captioned “Noninterest Income” for additional discussion.
For the three and six months ended June 30, 2024, income tax expense increased $8.8 million and $1.8 million, respectively, compared to the same periods of 2023. The increase compared to the three months ended June 30, 2023 was largely the result of increased pretax income and lower levels of anticipated investment tax credits in 2024 as compared to the prior year. See the above section captioned “Income Tax Expense” for further discussion.
Fintech
For the three and six months ended June 30, 2024, net income decreased by $452 thousand and $1.5 million, respectively, compared to same periods of 2023. This decrease was largely related to increased equity method and equity security investment losses.
Discussion and Analysis of Financial Condition
June 30, 2024 vs. December 31, 2023
Total assets at June 30, 2024 were $11.87 billion, an increase of $597.1 million, or 5.3%, compared to total assets of $11.27 billion at December 31, 2023. The growth in total assets was principally driven by the growth in total loans and leases held for investment of $538.3 million, or 6.2%, during the first six months of 2024, from $8.63 billion at December 31, 2023, to $9.17 billion at June 30, 2024. This growth was a result of strong origination activity during the first six months of 2024 of $1.98 billion.
Total deposits were $10.71 billion at June 30, 2024, an increase of $432.0 million, or 4.2%, from $10.28 billion at December 31, 2023. The increase in total deposits from the prior period was to support growth in the loan and lease portfolio as well as the Company's targeted liquidity levels. At June 30, 2024, the Bank’s total uninsured deposits were approximately $1.56 billion, or 14.4%, of total deposits.
Borrowings increased to $117.7 million at June 30, 2024, from $23.4 million at December 31, 2023. This increase was principally due to entering into a new loan agreement in the first quarter of 2024 to strategically enhance Bank capital levels in order to accommodate future growth expectations. See Note 8. Borrowings in the accompanying Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of current sources of available debt capacity.
Regulatory Impact of Asset Growth
General. In the first quarter of 2023, the Company and the Bank each first exceeded $10 billion in total assets. As of June 30, 2024, the Company and the Bank each had total assets of $11.87 billion and $11.79 billion, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations impose various additional requirements on bank holding companies and banks with $10 billion or more in total consolidated assets. As a general matter, the Company and the Bank are not immediately subject to these additional requirements when they exceed $10 billion in assets; instead, the Company and the Bank will be subject to these various requirements over various dates, as described below.
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Consumer Financial Laws. Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has near-exclusive supervision authority, including examination authority, to assess compliance with federal consumer financial laws for a bank and its affiliates if the bank has total assets of more than $10 billion. This provision becomes applicable to a bank following the fourth consecutive quarter where the total assets of the bank, as reported in its quarterly Call Report, exceed $10 billion and afterwards remains applicable to the bank unless the bank has reported total assets of $10 billion or less in its quarterly Call Report for four consecutive quarters. This provision became applicable to the Bank in the first quarter of 2024.
Deposit Insurance Assessments. Also under the Dodd-Frank Act, the minimum ratio of net worth to insured deposits of the Deposit Insurance Fund administered by the FDIC was increased from 1.15 percent to 1.35 percent and the FDIC is required, in setting deposit insurance assessments, to offset the effect of the increase on institutions with assets of less than $10 billion, which results in institutions with assets greater than $10 billion paying higher assessments. In addition, following the fourth consecutive quarter where the total assets of a bank exceeds $10 billion, as reported in its quarterly Call Report, the FDIC utilizes a different method for determining deposit insurance assessments. This large bank method is based on a bank’s ability to withstand asset- and funding-related stress, its regulatory ratings, and potential losses to the FDIC in the event of the bank’s failure, subject to discretionary adjustments by the FDIC. Additionally, the large bank method captures risk mitigants such as the Bank's unique concentration of government guaranteed loans and its impact on our perceived loss severity measure which is generally favorable to the Bank's deposit insurance assessments. The Bank became subject to the large bank method for determining its deposit insurance assessments in the first quarter of 2024.
Volcker Rule. Under provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” certain limitations are placed on the ability of insured depository institutions and their affiliates to engage in sponsoring, investing in and transacting with certain investment funds, known as “covered funds” under the rule. There are a number of exclusions from the definition of “covered funds,” including for investments in Small Business Investment Companies, or SBICs, and certain qualifying venture capital funds. The Volcker Rule also places restrictions on proprietary trading, which could impact certain hedging activities.
Limits on Interchange Fees. The Durbin Amendment to the Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more, as of December 31 of the preceding calendar year, and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction to the sum of 21 cents and five basis points times the value of the transaction, plus up to one cent for fraud prevention costs. The Bank exceeded $10 billion in assets at December 31, 2023. This will trigger a reduction of annual pre-tax income from debit card interchange fees beginning July 1, 2024.
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Commercial Real Estate
Commercial real estate loans as indicated by the FDIC include loans secured by the following: construction, land development, multifamily property and nonfarm, nonresidential real property. The following table provides information with respect to commercial real estate loans as of June 30, 2024.
| Guaranteed | Unguaranteed | Total (1) | |||||||||||||||
| Held for Investment Loans: | |||||||||||||||||
| Owner Occupied | |||||||||||||||||
| Small Business Banking | $ | 1,167,856 | $ | 1,024,965 | $ | 2,192,821 | |||||||||||
| Specialty Lending | — | 7,678 | 7,678 | ||||||||||||||
| Energy & Infrastructure | 16,993 | 21,118 | 38,111 | ||||||||||||||
| Total | 1,184,849 | 1,053,761 | 2,238,610 | ||||||||||||||
| Non-Owner Occupied | |||||||||||||||||
| Small Business Banking | 369,438 | 471,484 | 840,922 | ||||||||||||||
| Specialty Lending | — | 728,668 | 728,668 | ||||||||||||||
| Energy & Infrastructure | 38,775 | 151,723 | 190,498 | ||||||||||||||
| Total | 408,213 | 1,351,875 | 1,760,088 | ||||||||||||||
| Total Held for Investment Commercial Real Estate | $ | 1,593,062 | $ | 2,405,636 | $ | 3,998,698 | |||||||||||
| Held for Sale Loans: | |||||||||||||||||
| Owner Occupied | |||||||||||||||||
| Small Business Banking | $ | 64,890 | $ | — | $ | 64,890 | |||||||||||
| Total | 64,890 | — | 64,890 | ||||||||||||||
| Non-Owner Occupied | |||||||||||||||||
| Small Business Banking | 135,253 | — | 135,253 | ||||||||||||||
| Total | 135,253 | — | 135,253 | ||||||||||||||
| Total Held for Sale Commercial Real Estate | $ | 200,143 | $ | — | $ | 200,143 | |||||||||||
| Total Commercial Real Estate Loans | $ | 1,793,205 | $ | 2,405,636 | $ | 4,198,841 | |||||||||||
| % of Total Commercial Real Estate Loans | 42.7 | % | 57.3 | % | 100.0 | % | |||||||||||
(1)Excludes retained loan discount and net deferred costs.
Asset Quality
Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Audit Committee of the Board of Directors.
Nonperforming Assets
The Bank places loans and leases on nonaccrual status when they become 90 days past due as to principal or interest payments, or prior to that if management has determined based upon current information available to them that the timely collection of principal or interest is not probable. When a loan or lease is placed on nonaccrual status, any interest previously accrued as income but not actually collected is reversed and recorded as a reduction of loan or lease interest and fee income. Typically, collections of interest and principal received on a nonaccrual loan or lease are applied to the outstanding principal as determined at the time of collection of the loan or lease.
Nonperforming assets, including loans measured at fair value, at June 30, 2024 were $231.6 million, which represented a $39.4 million, or 20.5%, increase from December 31, 2023. These nonperforming assets at June 30, 2024 were comprised of $223.6 million in nonaccrual loans and leases and $8.0 million in foreclosed assets. Of the $223.6 million of nonperforming assets, $179.8 million carried a government guarantee, leaving an unguaranteed exposure of $51.8 million in total nonperforming assets at June 30, 2024. This represents an increase of $646 thousand, or 1.3%, from an unguaranteed exposure of $51.2 million at December 31, 2023.
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The following table provides information with respect to nonperforming assets, excluding loans measured at fair value, at the dates indicated.
June 30, 2024 (1) | December 31, 2023 (1) | ||||||||||
| Nonaccrual loans and leases: | |||||||||||
| Total nonperforming loans and leases (all on nonaccrual) | $ | 160,092 | $ | 134,963 | |||||||
| Foreclosed assets | 8,015 | 6,481 | |||||||||
| Total nonperforming assets | $ | 168,107 | $ | 141,444 | |||||||
| Allowance for credit losses on loans and leases | $ | 137,867 | $ | 125,840 | |||||||
| Total nonperforming loans and leases to total loans and leases held for investment | 1.82 | % | 1.64 | % | |||||||
| Total nonperforming loans and leases to total assets | 1.39 | % | 1.24 | % | |||||||
| Allowance for credit losses on loans and leases to loans and leases held for investment | 1.57 | % | 1.53 | % | |||||||
| Allowance for credit losses on loans and leases to total nonperforming loans and leases | 86.12 | % | 93.24 | % | |||||||
| (1) | Excludes loans measured at fair value. | ||||
June 30, 2024 (1) | December 31, 2023 (1) | ||||||||||
| Nonaccrual loans and leases guaranteed by U.S. government: | |||||||||||
| Total nonperforming loans and leases guaranteed by the U.S government (all on nonaccrual) | $ | 122,752 | $ | 95,678 | |||||||
| Foreclosed assets guaranteed by the U.S. government | 4,858 | 3,670 | |||||||||
| Total nonperforming assets guaranteed by the U.S. government | $ | 127,610 | $ | 99,348 | |||||||
| Allowance for credit losses on loans and leases | $ | 137,867 | $ | 125,840 | |||||||
| Total nonperforming loans and leases not guaranteed by the U.S. government to total held for investment loans and leases | 0.42 | % | 0.48 | % | |||||||
| Total nonperforming loans and leases not guaranteed by the U.S. government to total assets | 0.32 | % | 0.36 | % | |||||||
| Allowance for credit losses on loans and leases to total nonperforming loans and leases not guaranteed by the U.S. government | 369.23 | % | 320.33 | % | |||||||
| (1) | Excludes loans measured at fair value. | ||||
Nonperforming assets, excluding loans measured at fair value, at June 30, 2024 were $168.1 million, which represented a $26.7 million, or 18.9%, increase from December 31, 2023. These nonperforming assets at June 30, 2024 were comprised of $160.1 million in nonaccrual loans and leases and $8.0 million in foreclosed assets. Of the $168.1 million of nonperforming assets, $127.6 million carried a government guarantee, leaving an unguaranteed exposure of $40.5 million in total nonperforming assets at June 30, 2024. This represents a decrease of $1.6 million, or 3.8%, from an unguaranteed exposure of $42.1 million at December 31, 2023.
See the below discussion related to the change in potential problem and impaired loans and leases for management’s overall observations regarding growth in total nonperforming loans and leases.
As a percentage of the Bank’s total capital, nonperforming loans and leases, excluding loans measured at fair value, represented 14.6% at both June 30, 2024 and December 31, 2023. Adjusting the ratio to include only the unguaranteed portion of nonperforming loans and leases at historical cost to reflect management’s belief that the greater magnitude of risk resides in this portion, the ratios at both June 30, 2024 and December 31, 2023 were 3.4% and 4.3%, respectively.
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As of June 30, 2024, and December 31, 2023, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $913.9 million and $785.2 million, respectively. The following is a discussion of these loans and leases. Risk Grades 5 through 8 represent the spectrum of criticized and classified loans and leases. For a complete description of the risk grading system, see Note 3. Loans and Leases Held for Investment and Credit Quality in the Company’s 2023 Form 10-K. At June 30, 2024, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $410.6 million and total portfolio unguaranteed exposure risk was $503.3 million, or 8.7% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2023 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $344.8 million and total portfolio unguaranteed exposure risk was $440.3 million, or 8.3% of total held for investment unguaranteed exposure carried at historical cost.
As of June 30, 2024 and December 31, 2023, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases:
| As of June 30, 2024 | As of December 31, 2023 | |||||||||||||||||||
| Vertical | % of Criticized and Classified Loans and Leases | Vertical | % of Criticized and Classified Loans and Leases | |||||||||||||||||
| Bioenergy | 13.4% | Senior Housing | 16.5% | |||||||||||||||||
| Senior Housing | 12.6% | Bioenergy | 14.4% | |||||||||||||||||
| General Lending | 11.9% | General Lending | 12.2% | |||||||||||||||||
| Search Fund Lending | 6.9% | Search Fund Lending | 8.6% | |||||||||||||||||
| Healthcare | 6.3% | Wine & Craft Beverage | 5.6% | |||||||||||||||||
| Sponsor Finance | 5.5% | Healthcare | 3.9% | |||||||||||||||||
| Wine & Craft Beverage | 4.5% | Hotels | 3.3% | |||||||||||||||||
| Senior Care | 3.2% | Self Storage | 3.3% | |||||||||||||||||
| Self Storage | 3.1% | Senior Care | 3.2% | |||||||||||||||||
| % of Total Criticized and Classified Loans | 67.4% | % of Total Criticized and Classified Loans | 71.0% | |||||||||||||||||
Of the above listed verticals, Senior Housing and Sponsor Finance are within the Company’s Specialty Lending division, Bioenergy and Hotels are within the Energy & Infrastructure division, and the remainder of the above listed verticals are within the Small Business Banking division. The majority of the $128.7 million increase in potential problem and classified loans and leases in the first six months of 2024 was comprised of increased levels of Risk Grade 5 loans and leases, as discussed below. The Company believes that its underwriting and credit quality standards have remained high and continues to consider changing economic conditions in a rising interest rate environment.
Loans and leases that experience insignificant payment delays and payment shortfalls are generally not individually evaluated for the purpose of estimating the allowance for credit losses. The Bank generally considers an “insignificant period of time” from payment delays to be a period of 90 days or less. The Bank would consider a modification for a customer experiencing what is expected to be a short-term event that has temporarily impacted cash flow. This could be due, among other reasons, to illness, weather, impact from a one-time expense, slower than expected start-up, construction issues or other short-term issues. Credit personnel will review the request to determine if the customer is stressed and how the event has impacted the ability of the customer to repay the loan or lease long term. At June 30, 2024, the Company had a total of $8.8 million in loans modified in 2024 to borrowers experiencing financial difficulties, all of which remained current with $8.8 million on principal payment deferral.
Management endeavors to be proactive in its approach to identify and resolve problem loans and leases and is focused on working with the borrowers and guarantors of these loans and leases to provide loan and lease modifications when warranted. Management implements a proactive approach to identifying and classifying loans and leases as special mention (also referred to as criticized), Risk Grade 5. At June 30, 2024, and December 31, 2023, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $673.8 million and $599.2 million, respectively, for a six month increase of $74.6 million. Relative to total held for investment unguaranteed exposure carried at historical cost at June 30, 2024 and December 31, 2023, unguaranteed Risk Grade 5 loans and leases increased to 7.3% from 6.9%, respectively.
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The largest year-to-date changes in Risk Grade 5 loans and leases carried at historical cost were within the following verticals:
The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first half of 2024 was principally confined to 14 verticals, as reflected above. Of the above listed verticals, Sponsor Finance, Senior Housing, and Asset-Based Lending are within the Company’s Specialty Lending division, Bioenergy is within the Energy & Infrastructure division, and the remainder of the above listed verticals are within the Small Business Banking division.
At June 30, 2024, approximately 95.9% of loans and leases classified as Risk Grade 5 are performing with no relationships having payments past due more than 30 days. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio. As government payment assistance began to expire toward the end of 2020, borrowers with continuing difficulties arising from the pandemic were provided additional relief through payment deferrals. At June 30, 2024, the Company had $8.0 million in unguaranteed loans on SBA payment assistance.
Allowance for Credit Losses on Loans and Leases
The ACL of $125.8 million at December 31, 2023, increased by $12.0 million, or 9.6%, to $137.9 million at June 30, 2024. The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.5% and 1.6% at December 31, 2023 and June 30, 2024, respectively. The increase in the ACL during the first six months of 2024 was primarily the result of unguaranteed loan growth. See also the above section captioned “Provision for Credit Losses” in “Results of Operations” for related information.
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Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have increased by $65.8 million since December 31, 2023. Total loans and leases 90 or more days past due increased $41.0 million, or 32.9%, compared to December 31, 2023. This increase was comprised of a $4.3 million decrease in unguaranteed exposure combined with an offsetting $45.3 million increase in the guaranteed portion of past due loans compared to December 31, 2023. At June 30, 2024 and December 31, 2023, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 1.1% and 0.8%, respectively. Total unguaranteed loans and leases past due were comprised of $50.0 million carried at historical cost, an increase of $12.4 million, and $14.7 million measured at fair value, an increase of $4.8 million, as of June 30, 2024 compared to December 31, 2023. Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $137.9 million at June 30, 2024 is appropriate in light of the risk inherent in the loan and lease portfolio. Management’s judgments are based on numerous assumptions about current and expected events that it believes to be reasonable, but which may or may not be valid. Accordingly, no assurance can be given that management’s ongoing evaluation of the loan and lease portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the ACL, thus adversely affecting the Company’s operating results. Additional information on the ACL is presented in Note 5. Loans and Leases Held for Investment and Credit Quality of the Unaudited Condensed Consolidated Financial Statements in this report.
Liquidity Management
Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Company’s customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit, FHLB advances and Federal Reserve Discount Window. A primary tool in the Company's liquidity management process is the utilization of an Outflow Coverage Ratio (“OCR”) model to stress outflows in various scenarios with targeted days of liquidity coverage. At June 30, 2024, the total amount of these four liquidity source items was $4.23 billion, or 35.7% of total assets, a decrease of 2.1% of total assets from $4.26 billion, or 37.8% of total assets, at December 31, 2023.
Loans and other assets are funded primarily by loan sales, wholesale deposits, and core deposits. To date, an increasing retail deposit base and a stable amount of brokered deposits have been adequate to meet loan obligations, while maintaining the desired level of immediate liquidity. The Company maintains an investment securities portfolio that is available for both immediate and secondary contingent liquidity purposes, whether via pledging to the Federal Home Loan Bank, Federal Reserve Bank, or through liquidation. Additionally, the Company maintains a guaranteed loan portfolio that is also a contingent liquidity source, whether via pledging to the Federal Reserve Discount Window or through liquidation.
At June 30, 2024, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $1.15 billion available to be pledged as collateral.
Contractual Obligations
The Company has entered into significant fixed and determinable contractual obligations for future payments. In March 2024, the Company entered into a $100.0 million term loan agreement with a third party correspondent bank. See Note 8. Borrowings in the accompanying notes to Unaudited Condensed Consolidated Financial Statements for more details. Other than the new borrowing previously mentioned and normal changes in the ordinary course of the Company’s operations, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2023. See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s 2023 Form 10-K for additional discussion of contractual obligations.
Off-Balance Sheet Arrangements
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of commitments to extend credit and standby letters of credit. As of December 31, 2023, there was one airplane purchase agreement commitment outstanding and during 2024 the airplane was placed in service. The Company is also in the process of constructing a new facility to accommodate expansion of its main campus. For more information, see Note 10. Commitments and Contingencies in the accompanying notes to Unaudited Condensed Consolidated Financial Statements.
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Asset/Liability Management and Interest Rate Sensitivity
One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure the repricing differences, or interest rate gaps, between interest-earning assets and interest-bearing liabilities, across various time periods. As of June 30, 2024, the balance sheet’s total cumulative gap position was 4.9%, meaning that over the entire life of the Company's assets and liabilities, more assets will reprice than liabilities. For further information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, or growth. Therefore, management also uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of instantaneous parallel interest rate shocks applied to a static balance sheet and non-parallel interest rate shocks applied to a dynamic balance sheet to measure interest rate risk. As of June 30, 2024, the Company’s interest rate risk profile is asset-sensitive under the instantaneous parallel interest rate shock scenarios applied to a static balance sheet. For more information, see Item 3. Quantitative and Qualitative Disclosures About Market Risk.
An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. The Company attempts to mitigate interest rate risk by match funding assets and liabilities with similar rate instruments. Asset/liability sensitivity is primarily derived from the prime-based loans that adjust as the prime interest rate changes, rates on cash accounts that adjust as the federal funds rate changes and the longer duration of indeterminate term deposits. Note that the Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability-sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.
Capital
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. The Company’s principal goals related to the maintenance of capital are the following: to provide adequate capital to support the Company’s risk profile consistent with the risk appetite approved by the Board of Directors; to provide financial flexibility to support future growth and client needs; to comply with relevant laws, regulations, and supervisory guidance; to achieve optimal ratings for the Company and its subsidiaries; and to provide a competitive return to shareholders. Management regularly monitors the capital position of the Company on both a consolidated and bank level basis. In this regard, management’s goal is to maintain capital at levels that are in excess of the regulatory “well capitalized” levels. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Common Equity Tier 1 Capital, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
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Capital amounts and ratios as of June 30, 2024, and December 31, 2023, are presented in the table below.
| Actual | Minimum Capital Requirement | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions (1) | |||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
| Consolidated - June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 1,023,186 | 11.85 | % | $ | 388,402 | 4.50 | % | N/A | N/A | |||||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | 1,131,574 | 13.11 | 690,492 | 8.00 | N/A | N/A | |||||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 1,023,186 | 11.85 | 517,869 | 6.00 | N/A | N/A | |||||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | 1,023,186 | 8.71 | 469,780 | 4.00 | N/A | N/A | |||||||||||||||||||||||||||||
| Bank - June 30, 2024 | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 988,720 | 11.84 | % | $ | 375,921 | 4.50 | % | $ | 542,997 | 6.50 | % | |||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | 1,093,684 | 13.09 | 668,304 | 8.00 | 835,380 | 10.00 | |||||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 988,720 | 11.84 | 501,228 | 6.00 | 668,304 | 8.00 | |||||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | 988,720 | 8.48 | 466,377 | 4.00 | 582,972 | 5.00 | |||||||||||||||||||||||||||||
| Consolidated - December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 960,433 | 11.73 | % | $ | 368,549 | 4.50 | % | N/A | N/A | |||||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | 1,063,157 | 12.98 | 655,198 | 8.00 | N/A | N/A | |||||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 960,433 | 11.73 | 491,399 | 6.00 | N/A | N/A | |||||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | 960,433 | 8.58 | 447,561 | 4.00 | N/A | N/A | |||||||||||||||||||||||||||||
| Bank - December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 (to Risk-Weighted Assets) | $ | 823,478 | 10.40 | % | $ | 356,426 | 4.50 | % | $ | 514,837 | 6.50 | % | |||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | 922,876 | 11.65 | 633,646 | 8.00 | 792,057 | 10.00 | |||||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | 823,478 | 10.40 | 475,234 | 6.00 | 633,646 | 8.00 | |||||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) | 823,478 | 7.41 | 444,480 | 4.00 | 555,600 | 5.00 | |||||||||||||||||||||||||||||
| (1) | Prompt corrective action provisions are not applicable at the bank holding company level. | ||||
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in accordance with GAAP requires the Company to make estimates and judgments that affect reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies, including those for the Company's critical accounting policies, as described in detail in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, are an integral part of the Company’s Consolidated Financial Statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and financial position. The Company’s most critical accounting policies and estimates are listed below. These estimates require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain.
•Allowance for credit losses;
•Valuation of loans accounted for under the fair value option;
•Valuation of servicing assets; and
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•Income taxes
Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, could have a material impact on the Company’s financial position, results of operations or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk is a significant market risk and can result from timing and volume differences in the repricing of rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of market yield curves. The Company manages the interest rate sensitivity of interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Management of interest rate risk is carried out primarily through strategies involving available-for-sale securities, loan and lease portfolio, and available funding sources.
The Company has an Asset/Liability Committee to support prudent oversight of interest rate risk management. The Asset/Liability Committee monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Adherence to relevant policies is monitored on an ongoing basis by the Asset/Liability Committee.
The Company has a total cumulative gap in interest-earning assets and interest-bearing liabilities of 4.9% as of June 30, 2024, indicating that, overall, over the expected life of the instruments, assets will reprice before liabilities.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The Company analyzes interest rate sensitivity position to manage the risk associated with interest rate movements through the use of two simulation models: economic value of equity (“EVE”) and net interest income (“NII”) simulations. These simulations project both short-term and long-term interest rate risk under a variety of instantaneous parallel rate shocks applied to a static balance sheet. The EVE simulation provides a long-term view of interest rate risk because it analyzes all of the Company’s future cash flows. EVE is defined as the present value of the Company’s assets, less the present value of its liabilities, adjusted for any off-balance sheet items. The results show a theoretical change in the economic value of shareholders’ equity as interest rates change. The NII simulation provides a short-term view of interest rate risk as it analyzes impact on net interest income over the next 12 and 24 months from instantaneous parallel rate shocks on a static balance sheet.
EVE and NII simulations are completed regularly and presented to the Asset/Liability Committee. The simulations provide an estimate of the impact of changes in interest rates on equity and net interest income under a range of assumptions. The numerous assumptions used in the simulation process are provided to the Asset/Liability Committee on at least an annual basis. Changes to these assumptions can significantly affect the results of the simulation. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.
Simulation analysis is only an estimate of interest rate risk exposure at a particular point in time. The Company regularly models various forecasted rate projections with non-parallel shifts that are reflective of potential current rate environment outcomes. Under these scenarios, the Company’s interest rate risk profile may increase in asset sensitivity, decrease in asset sensitivity, or depending on the scenario and timing of anticipated rate changes, may transition to a liability sensitive interest rate risk profile. The Company believes that regular modeling of various interest rate outcomes allows it to assess and manage potential risks from various rate shifts.
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The table below sets forth an approximation of the Company’s NII sensitivity exposure for the 12-month periods ending June 30, 2025 and 2026, and the Company’s EVE sensitivity at June 30, 2024. The simulation uses projected repricing of assets and liabilities at June 30, 2024, on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Critical model assumptions such as loan and investment prepayment rates, deposit decay rates, changes in deposit pricing, both in amount and timing, relative to changes in market rates (commonly referred to as deposit betas and lags, respectively) and assumed replacement pricing can have a significant impact on interest income simulation. A static balance sheet is maintained to remove volume considerations and to place the focal point on the rate sensitivity of the Company’s balance sheet. While management believes such assumptions to be reasonable, actual future activity may differ from the results shown below as it will include growth considerations, non-parallel rate movements, and management actions to mitigate the impacts of changing interest rates on the balance sheet’s earnings profile.
| Estimated Increase/Decrease in Net Interest Income | Estimated Percentage Change in EVE | |||||||||||||||||||
| Basis Point ("bp") Change in Interest Rates | 12 Months Ending June 30, 2025 | 12 Months Ending June 30, 2026 | As of June 30, 2024 | |||||||||||||||||
| +400 | 8.1 % | 6.6 % | (20.3 %) | |||||||||||||||||
| +300 | 6.2 | 5.0 | (15.2) | |||||||||||||||||
| +200 | 4.2 | 3.5 | (10.0) | |||||||||||||||||
| +100 | 2.2 | 1.8 | (4.8) | |||||||||||||||||
| -100 | (2.2) | (1.9) | 4.5 | |||||||||||||||||
| -200 | (4.3) | (3.7) | 8.7 | |||||||||||||||||
| -300 | (6.2) | (5.5) | 13.0 | |||||||||||||||||
Rates are increased instantaneously at the beginning of the projection. The Company's asset/liability profile is slightly asset sensitive in both years one and two from a net interest income perspective. The Company’s variable rate loan portfolio reprices the full amount of the assumed change in interest rates, while the retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta. Interest rates do not normally move all at once or evenly over time, but management believes that the analysis is useful to understanding the potential direction and magnitude of net interest income changes due to changing interest rates.
The EVE analysis shows that the Company would theoretically lose market value in a rising rate environment. The favorable EVE change resulting from the loan and lease portfolio in a rising rate analysis is more than offset by the devaluation of the interest-bearing liabilities. This is largely driven by the Company’s longer asset duration, primarily consisting of investments and loans, versus the shorter duration of its funding portfolio, primarily consisting of retail savings and short-term retail certificates of deposits. Increased fixed rate loan production since 2020, given the historical low market rate environment, has also been a significant driver in the model results.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), was carried out under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer as of June 30, 2024, the last day of the period covered by this Quarterly Report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2024, in ensuring that the information required to be disclosed in the reports the Company files or submits under the Exchange Act is (i) accumulated and communicated to management (including the Company’s Chief Executive Officer and Chief Financial Officer) as appropriate to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of operations, the Company is at times involved in legal proceedings. In the opinion of management, as of June 30, 2024, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
Item 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits.
Exhibits to this report are listed in the Index to Exhibits section of this report.
INDEX TO EXHIBITS
| Exhibit No. | Description of Exhibit | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 10.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101 | Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023; (ii) Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2024 and 2023; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2024 and 2023; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2024 and 2023; (v) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements* | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
*Indicates a document being filed with this Form 10-Q.
**Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Live Oak Bancshares, Inc. | ||||||||
| (Registrant) | ||||||||
Date: August 6, 2024 | By: | /s/ Walter J. Phifer | ||||||
| Walter J. Phifer | ||||||||
| Chief Financial Officer | ||||||||
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