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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2022

or

☐

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             .

Commission file number: 001-37497

LIVE OAK BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

North Carolina

26-4596286

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

1741 Tiburon Drive

Wilmington, North Carolina

28403

(Address of principal executive offices)

(Zip Code)

(910) 790-5867

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

 

Large accelerated filer

 

☒

 

Accelerated filer

 

☐

Non-accelerated filer

 

☐

 

Smaller reporting company

 

☐

 

 

 

 

Emerging growth company

 

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Voting Common Stock, no par value per share

LOB

The NASDAQ Stock Market LLC

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of August 2, 2022, there were 43,873,173 shares of the registrant’s voting common stock outstanding.

 

 

 

 

 

Live Oak Bancshares, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2022

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (Unaudited)

 

1

 

 

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

 

1

 

 

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and 2021

 

2

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021

 

3

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

Item 2.

 

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

 

35

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

55

Item 4.

 

Controls and Procedures

 

56

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

57

Item 1A.

 

Risk Factors

 

57

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

Item 3.

 

Defaults Upon Senior Securities

 

57

Item 4.

 

Mine Safety Disclosures

 

57

Item 5.

 

Other Information

 

57

Item 6.

 

Exhibits

 

58

 

 

Index to Exhibits

 

58

 

 

Signatures

 

59

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Live Oak Bancshares, Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2022 (unaudited) and December 31, 2021*

(Dollars in thousands)

 

 

 

June 30,

2022

 

 

December 31,

2021

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

580,493

 

 

$

187,203

 

Federal funds sold

 

 

51,694

 

 

 

16,547

 

Certificates of deposit with other banks

 

 

4,250

 

 

 

4,750

 

Investment securities available-for-sale

 

 

927,968

 

 

 

906,052

 

Loans held for sale (includes $23,452 and $25,310 measured at fair value,

   respectively)

 

 

1,199,734

 

 

 

1,116,519

 

Loans and leases held for investment (includes $530,644 and $645,201 measured

   at fair value, respectively)

 

 

5,860,209

 

 

 

5,521,262

 

Allowance for credit losses on loans and leases

 

 

(65,863

)

 

 

(63,584

)

Net loans and leases

 

 

5,794,346

 

 

 

5,457,678

 

Premises and equipment, net

 

 

257,926

 

 

 

240,196

 

Foreclosed assets

 

 

191

 

 

 

620

 

Servicing assets

 

 

28,661

 

 

 

33,574

 

Other assets

 

 

275,634

 

 

 

250,254

 

Total assets

 

$

9,120,897

 

 

$

8,213,393

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

119,371

 

 

$

89,279

 

Interest-bearing

 

 

8,036,373

 

 

 

7,022,765

 

Total deposits

 

 

8,155,744

 

 

 

7,112,044

 

Borrowings

 

 

86,209

 

 

 

318,289

 

Other liabilities

 

 

87,282

 

 

 

67,927

 

Total liabilities

 

 

8,329,235

 

 

 

7,498,260

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding

   at June 30, 2022 and December 31, 2021

 

 

—

 

 

 

—

 

Class A common stock, no par value, 100,000,000 shares authorized, 43,854,011

   and 43,494,046 shares issued and outstanding at June 30, 2022 and

   December 31, 2021, respectively

 

 

320,924

 

 

 

310,970

 

Class B common stock, no par value, 10,000,000 shares authorized, none issued or

   outstanding at June 30, 2022 and 125,024 shares issued and outstanding at

   December 31, 2021

 

 

—

 

 

 

1,324

 

Retained earnings

 

 

530,021

 

 

 

400,893

 

Accumulated other comprehensive (loss) income

 

 

(59,283

)

 

 

1,946

 

Total shareholders’ equity

 

 

791,662

 

 

 

715,133

 

Total liabilities and shareholders’ equity

 

$

9,120,897

 

 

$

8,213,393

 

 

*

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, 2022 and 2021 (unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and fees on loans

 

$

94,157

 

 

$

84,780

 

 

$

183,355

 

 

$

169,773

 

Investment securities, taxable

 

 

4,046

 

 

 

2,975

 

 

 

7,445

 

 

 

5,904

 

Other interest earning assets

 

 

1,044

 

 

 

244

 

 

 

1,229

 

 

 

547

 

Total interest income

 

 

99,247

 

 

 

87,999

 

 

 

192,029

 

 

 

176,224

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

18,777

 

 

 

14,820

 

 

 

33,125

 

 

 

31,764

 

Borrowings

 

 

536

 

 

 

1,717

 

 

 

1,191

 

 

 

3,048

 

Total interest expense

 

 

19,313

 

 

 

16,537

 

 

 

34,316

 

 

 

34,812

 

Net interest income

 

 

79,934

 

 

 

71,462

 

 

 

157,713

 

 

 

141,412

 

Provision for loan and lease credit losses

 

 

5,267

 

 

 

7,846

 

 

 

7,103

 

 

 

6,973

 

Net interest income after provision for

   loan and lease credit losses

 

 

74,667

 

 

 

63,616

 

 

 

150,610

 

 

 

134,439

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

 

6,477

 

 

 

6,218

 

 

 

12,833

 

 

 

12,652

 

Loan servicing asset revaluation

 

 

(8,668

)

 

 

(3,181

)

 

 

(10,237

)

 

 

(1,688

)

Net gains on sales of loans

 

 

5,630

 

 

 

16,234

 

 

 

26,607

 

 

 

28,163

 

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

   option

 

 

(4,461

)

 

 

1,135

 

 

 

(3,945

)

 

 

5,353

 

Equity method investments income (loss)

 

 

119,056

 

 

 

(2,278

)

 

 

116,932

 

 

 

(3,435

)

Equity security investments gains (losses), net

 

 

1,655

 

 

 

44,253

 

 

 

1,611

 

 

 

44,358

 

Lease income

 

 

2,510

 

 

 

2,616

 

 

 

5,013

 

 

 

5,215

 

Management fee income

 

 

2,558

 

 

 

1,473

 

 

 

4,046

 

 

 

3,407

 

Other noninterest income

 

 

3,772

 

 

 

3,641

 

 

 

8,337

 

 

 

7,143

 

Total noninterest income

 

 

128,529

 

 

 

70,111

 

 

 

161,197

 

 

 

101,168

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

46,276

 

 

 

32,900

 

 

 

84,783

 

 

 

64,266

 

Travel expense

 

 

2,358

 

 

 

1,549

 

 

 

4,255

 

 

 

2,208

 

Professional services expense

 

 

3,988

 

 

 

3,329

 

 

 

6,779

 

 

 

7,160

 

Advertising and marketing expense

 

 

2,301

 

 

 

875

 

 

 

4,030

 

 

 

1,527

 

Occupancy expense

 

 

2,773

 

 

 

2,224

 

 

 

5,100

 

 

 

4,336

 

Technology expense

 

 

5,762

 

 

 

5,131

 

 

 

11,815

 

 

 

10,009

 

Equipment expense

 

 

3,784

 

 

 

3,721

 

 

 

7,600

 

 

 

7,422

 

Other loan origination and maintenance expense

 

 

3,022

 

 

 

3,307

 

 

 

6,135

 

 

 

6,634

 

Renewable energy tax credit investment impairment

 

 

50

 

 

 

—

 

 

 

50

 

 

 

3,127

 

FDIC insurance

 

 

2,164

 

 

 

1,704

 

 

 

4,136

 

 

 

3,469

 

Contributions and donations

 

 

5,515

 

 

 

686

 

 

 

6,238

 

 

 

1,480

 

Other expense

 

 

2,886

 

 

 

2,132

 

 

 

5,672

 

 

 

4,192

 

Total noninterest expense

 

 

80,879

 

 

 

57,558

 

 

 

146,593

 

 

 

115,830

 

Income before taxes

 

 

122,317

 

 

 

76,169

 

 

 

165,214

 

 

 

119,777

 

Income tax expense

 

 

25,278

 

 

 

12,587

 

 

 

33,666

 

 

 

16,768

 

Net income

 

$

97,039

 

 

$

63,582

 

 

$

131,548

 

 

$

103,009

 

Basic earnings per share

 

$

2.22

 

 

$

1.48

 

 

$

3.01

 

 

$

2.40

 

Diluted earnings per share

 

$

2.16

 

 

$

1.41

 

 

$

2.92

 

 

$

2.29

 

 

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, 2022 and 2021 (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

97,039

 

 

$

63,582

 

 

$

131,548

 

 

$

103,009

 

Other comprehensive (loss) income before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on investment securities

   arising during the period

 

 

(29,967

)

 

 

5,257

 

 

 

(80,561

)

 

 

(11,031

)

Reclassification adjustment for gain on sale of

   securities available-for-sale included in net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other comprehensive (loss) income before tax

 

 

(29,967

)

 

 

5,257

 

 

 

(80,561

)

 

 

(11,031

)

Income tax benefit (expense)

 

 

7,190

 

 

 

(1,262

)

 

 

19,332

 

 

 

2,647

 

Other comprehensive (loss) income, net of tax

 

 

(22,777

)

 

 

3,995

 

 

 

(61,229

)

 

 

(8,384

)

Total comprehensive income

 

$

74,262

 

 

$

67,577

 

 

$

70,319

 

 

$

94,625

 

 

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, 2022 and 2021 (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

Common stock

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Retained

 

 

comprehensive

 

 

Total

 

 

 

Class A

 

 

Class B

 

 

Amount

 

 

earnings

 

 

income (loss)

 

 

equity

 

Balance at March 31, 2022

 

 

43,787,660

 

 

 

—

 

 

$

315,607

 

 

$

434,226

 

 

$

(36,506

)

 

$

713,327

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

97,039

 

 

 

—

 

 

 

97,039

 

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(22,777

)

 

 

(22,777

)

Issuance of restricted stock

 

 

17,156

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Tax withholding related to vesting of

   restricted stock and other

 

 

—

 

 

 

—

 

 

 

(197

)

 

 

—

 

 

 

—

 

 

 

(197

)

Stock option exercises

 

 

49,195

 

 

 

—

 

 

 

434

 

 

 

—

 

 

 

—

 

 

 

434

 

Stock option compensation expense

 

 

—

 

 

 

—

 

 

 

234

 

 

 

—

 

 

 

—

 

 

 

234

 

Restricted stock compensation expense

 

 

—

 

 

 

—

 

 

 

4,846

 

 

 

—

 

 

 

—

 

 

 

4,846

 

Transfer from retained earnings to other assets

   for pro rata portion of equity method

   investee stock compensation expense

 

 

—

 

 

 

—

 

 

 

—

 

 

 

71

 

 

 

—

 

 

 

71

 

Cash dividends ($0.03 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,315

)

 

 

—

 

 

 

(1,315

)

Balance at June 30, 2022

 

 

43,854,011

 

 

 

—

 

 

$

320,924

 

 

$

530,021

 

 

$

(59,283

)

 

$

791,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2021

 

 

42,259,091

 

 

 

692,253

 

 

$

305,855

 

 

$

275,377

 

 

$

9,128

 

 

$

590,360

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

63,582

 

 

 

—

 

 

 

63,582

 

Other comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,995

 

 

 

3,995

 

Issuance of restricted stock

 

 

124,607

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Tax withholding related to vesting of

   restricted stock and other

 

 

—

 

 

 

—

 

 

 

(5,713

)

 

 

—

 

 

 

—

 

 

 

(5,713

)

Stock option exercises

 

 

188,509

 

 

 

—

 

 

 

951

 

 

 

—

 

 

 

—

 

 

 

951

 

Stock option compensation expense

 

 

—

 

 

 

—

 

 

 

353

 

 

 

—

 

 

 

—

 

 

 

353

 

Restricted stock compensation expense

 

 

—

 

 

 

—

 

 

 

3,767

 

 

 

—

 

 

 

—

 

 

 

3,767

 

Non-voting common stock converted to

   voting common stock in private sale

 

 

181,926

 

 

 

(181,926

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Transfer from retained earnings to other assets

   for pro rata portion of equity method

   investee stock compensation expense

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,349

 

 

 

—

 

 

 

1,349

 

Cash dividends ($0.03 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,297

)

 

 

—

 

 

 

(1,297

)

Balance at June 30, 2021

 

 

42,754,133

 

 

 

510,327

 

 

$

305,213

 

 

$

339,011

 

 

$

13,123

 

 

$

657,347

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

4

 

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued)

For the three and six months ended June 30, 2022 and 2021 (unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

 

 

 

Common stock

 

 

 

 

 

 

Accumulated

other

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Retained

 

 

comprehensive

 

 

Total

 

 

 

Class A

 

 

Class B

 

 

Amount

 

 

earnings

 

 

income (loss)

 

 

equity

 

Balance at December 31, 2021

 

 

43,494,046

 

 

 

125,024

 

 

$

312,294

 

 

$

400,893

 

 

$

1,946

 

 

$

715,133

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

131,548

 

 

 

—

 

 

 

131,548

 

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(61,229

)

 

 

(61,229

)

Issuance of restricted stock

 

 

112,693

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Tax withholding related to vesting of

   restricted stock and other

 

 

—

 

 

 

—

 

 

 

(3,091

)

 

 

—

 

 

 

—

 

 

 

(3,091

)

Employee stock purchase program

 

 

11,119

 

 

 

—

 

 

 

534

 

 

 

—

 

 

 

—

 

 

 

534

 

Stock option exercises

 

 

111,129

 

 

 

—

 

 

 

1,153

 

 

 

—

 

 

 

—

 

 

 

1,153

 

Stock option compensation expense

 

 

—

 

 

 

—

 

 

 

625

 

 

 

—

 

 

 

—

 

 

 

625

 

Restricted stock compensation expense

 

 

—

 

 

 

—

 

 

 

9,409

 

 

 

—

 

 

 

—

 

 

 

9,409

 

Non-voting common stock converted to

   voting common stock in private sale

 

 

125,024

 

 

 

(125,024

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Transfer from retained earnings to other

   assets for pro rata portion of equity method

   investee stock compensation expense

 

 

—

 

 

 

—

 

 

 

—

 

 

 

207

 

 

 

—

 

 

 

207

 

Cash dividends ($0.06 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,627

)

 

 

—

 

 

 

(2,627

)

Balance at June 30, 2022

 

 

43,854,011

 

 

 

—

 

 

$

320,924

 

 

$

530,021

 

 

$

(59,283

)

 

$

791,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

41,344,689

 

 

 

1,107,757

 

 

$

310,619

 

 

$

235,724

 

 

$

21,507

 

 

$

567,850

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

103,009

 

 

 

—

 

 

 

103,009

 

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(8,384

)

 

 

(8,384

)

Issuance of restricted stock

 

 

416,823

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Tax withholding related to vesting of

   restricted stock and other

 

 

—

 

 

 

—

 

 

 

(17,000

)

 

 

—

 

 

 

—

 

 

 

(17,000

)

Employee stock purchase program

 

 

5,686

 

 

 

—

 

 

 

296

 

 

 

—

 

 

 

—

 

 

 

296

 

Stock option exercises

 

 

389,505

 

 

 

—

 

 

 

2,164

 

 

 

—

 

 

 

—

 

 

 

2,164

 

Stock option compensation expense

 

 

—

 

 

 

—

 

 

 

697

 

 

 

—

 

 

 

—

 

 

 

697

 

Restricted stock compensation expense

 

 

—

 

 

 

—

 

 

 

8,437

 

 

 

—

 

 

 

—

 

 

 

8,437

 

Non-voting common stock converted to

   voting common stock in private sale

 

 

597,430

 

 

 

(597,430

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Transfer from retained earnings to other

   assets for pro rata portion of equity method

   investee stock compensation expense

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,857

 

 

 

—

 

 

 

2,857

 

Cash dividends ($0.06 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,579

)

 

 

—

 

 

 

(2,579

)

Balance at June 30, 2021

 

 

42,754,133

 

 

 

510,327

 

 

$

305,213

 

 

$

339,011

 

 

$

13,123

 

 

$

657,347

 

 

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, 2022 and 2021 (unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

131,548

 

 

$

103,009

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,553

 

 

 

10,566

 

Provision for loan and lease credit losses

 

 

7,103

 

 

 

6,973

 

Amortization of premium on securities, net of accretion

 

 

2,378

 

 

 

3,489

 

Deferred tax expense

 

 

17,439

 

 

 

6,481

 

Originations of loans held for sale

 

 

(495,699

)

 

 

(654,707

)

Proceeds from sales of loans held for sale

 

 

529,989

 

 

 

456,873

 

Net gains on sale of loans held for sale

 

 

(26,607

)

 

 

(28,163

)

Net loss (gain) on sale of foreclosed assets

 

 

41

 

 

 

(100

)

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

 

 

3,945

 

 

 

(5,353

)

Net decrease (increase)  in servicing assets

 

 

4,913

 

 

 

(3,048

)

Net gain on disposal of long-lived asset

 

 

—

 

 

 

(114

)

Net loss (gain) on disposal of property and equipment

 

 

22

 

 

 

(48

)

Impairment on premises and equipment, net

 

 

—

 

 

 

904

 

Equity method investments (income) loss

 

 

(116,932

)

 

 

3,435

 

Equity security investments (gains) losses, net

 

 

(1,611

)

 

 

(44,358

)

Renewable energy tax credit investment impairment

 

 

50

 

 

 

3,127

 

Stock option compensation expense

 

 

625

 

 

 

697

 

Restricted stock compensation expense

 

 

9,409

 

 

 

8,437

 

Stock based compensation excess tax benefit

 

 

1,106

 

 

 

8,430

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Lease right-of-use assets and liabilities, net

 

 

569

 

 

 

(2

)

Other assets

 

 

(11,017

)

 

 

4,626

 

Other liabilities

 

 

9,847

 

 

 

(185

)

Net cash provided (used) by operating activities

 

 

77,671

 

 

 

(119,031

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of securities available-for-sale

 

 

(200,285

)

 

 

(212,935

)

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

   securities available-for-sale

 

 

95,429

 

 

 

130,617

 

Proceeds from SBA reimbursement/sale of foreclosed assets, net

 

 

333

 

 

 

3,141

 

Maturities of certificates of deposits with other banks

 

 

500

 

 

 

500

 

Loan and lease originations and principal collections, net

 

 

(449,892

)

 

 

38,141

 

Proceeds from sale of long-lived asset

 

 

—

 

 

 

8,988

 

Proceeds from sale of equity security investment

 

 

—

 

 

 

15,000

 

Proceeds from sale of equity method investment

 

 

125,321

 

 

 

—

 

Proceeds from sale of premises and equipment

 

 

2

 

 

 

84

 

Purchases of premises and equipment, net

 

 

(28,231

)

 

 

(1,232

)

Net cash used by investing activities

 

 

(456,823

)

 

 

(17,696

)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

6

 

Live Oak Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

For the six months ended June 30, 2022 and 2021 (unaudited)

(Dollars in thousands)

 

 

Six Months Ended

June 30,

 

 

 

2022

 

 

2021

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net increase in deposits

 

$

1,043,700

 

 

$

808,005

 

Proceeds from borrowings

 

 

12,051

 

 

 

594,791

 

Repayment of borrowings

 

 

(244,131

)

 

 

(1,128,446

)

Stock option exercises

 

 

1,153

 

 

 

2,164

 

Employee stock purchase program

 

 

534

 

 

 

296

 

Withholding cash issued in lieu of restricted stock and other

 

 

(3,091

)

 

 

(17,000

)

Shareholder dividend distributions

 

 

(2,627

)

 

 

(2,579

)

Net cash provided by financing activities

 

 

807,589

 

 

 

257,231

 

Net increase in cash and cash equivalents

 

 

428,437

 

 

 

120,504

 

Cash and cash equivalents, beginning

 

 

203,750

 

 

 

318,320

 

Cash and cash equivalents, ending

 

$

632,187

 

 

$

438,824

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

34,850

 

 

$

35,687

 

Income tax paid, net

 

 

6,778

 

 

 

9,043

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash operating, investing, and financing activities

 

 

 

 

 

 

 

 

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

 

$

(61,229

)

 

$

(8,384

)

Transfers from loans and leases to foreclosed real estate and other

   repossessions or SBA receivable

 

 

11,278

 

 

 

9,837

 

Net transfers between foreclosed real estate and SBA receivable

 

 

55

 

 

 

150

 

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

 

 

88,915

 

 

 

434,322

 

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

 

 

227,705

 

 

 

156,698

 

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

   method investee stock compensation expense

 

 

207

 

 

 

2,857

 

Recording of secured borrowing

 

 

—

 

 

 

3,993

 

Equity method investment commitments

 

 

10,566

 

 

 

—

 

Equity security investment commitments

 

 

415

 

 

 

2,250

 

 

 

 

 

 

 

 

 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

 

7

 

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 lending and deposit related services to small businesses nationwide. The Bank identifies and extends lending to credit-worthy borrowers both within specific industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the Small Business Administration (“SBA”) under the 7(a) Loan Program and the U.S. Department of Agriculture’s ("USDA") Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”) and Business & Industry ("B&I") loan programs.  

The Company’s wholly owned subsidiaries include 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”).

 

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”), and Live Oak Private Wealth, LLC (“Live Oak Private Wealth”).  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.  During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth.  JAM was previously a wholly owned subsidiary of Live Oak Private Wealth.

 

GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.  Canapi Advisors provides investment advisory services to a series of funds focused on providing venture capital to new and emerging financial technology companies.

The Company generates revenue primarily from net interest income and secondarily through the origination and sale of government guaranteed loans.  Income from the retention of loans is comprised of interest income.   Income from the sale of loans is comprised of net gains on sales of loans along with loan servicing revenue and revaluation of related servicing assets. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.  The Company also has less routinely generated gains and losses arising from its financial technology investments in its fintech segment.

General

In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all intercompany transactions have been eliminated in consolidation. Results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2022. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2021 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, 2021, filed with the Securities Exchange Commission on February 24, 2022 (SEC File No. 001-37497) (the "2021 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 2021 Form 10-K. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes in the Company's 2021 Form 10-K.

8

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

Amounts in all tables in the Notes to Unaudited Condensed Consolidated Financial Statements have been presented in thousands, except percentage, time period, 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. In determining the appropriateness of a segment definition, the Company considers the criteria of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting.

Reclassifications

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

Note 2. Recent Accounting Pronouncements

In 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. The amendments are effective for and can be adopted by the Company as of March 12, 2020, through December 31, 2022. The Company does not expect this standard will have a material impact on its consolidated financial statements.  To address the discontinuance of LIBOR, the Company has stopped originating variable LIBOR-based loans effective December 31, 2021 and has started to negotiate loans using the preferred replacement index, the Secured Overnight Financing Rate (“SOFR”) or a relevant duration U.S. Treasury rate. For currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis. The Company expects to complete all transitions by the second quarter of 2023 or at the next repricing date if later in 2023.

In March 2022, the FASB issued ASU No. 2022-02 “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Additionally, for public business entities, ASU 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, Financial Instruments – Credit Losses – Measured at Amortized Cost. The amendments in this standard will be effective for the Company on January 1, 2023. The Company does not believe this standard will have a material impact on its 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 amendments in this standard will be effective for the Company on January 1, 2024. The Company does not believe this standard will have a material impact on its consolidated financial statements.

9

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 3. Earnings Per Share

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

 

 

 

Three Months Ended

June 30,

 

 

 

Six Months Ended

June 30,

 

 

 

2022

 

 

2021

 

 

 

2022

 

 

2021

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

97,039

 

 

$

63,582

 

 

 

$

131,548

 

 

$

103,009

 

Weighted-average basic shares outstanding

 

 

43,824,707

 

 

 

43,173,312

 

 

 

 

43,763,681

 

 

 

42,924,844

 

Basic earnings per share

 

$

2.22

 

 

$

1.48

 

 

 

$

3.01

 

 

$

2.40

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, for diluted earnings per share

 

$

97,039

 

 

$

63,582

 

 

 

$

131,548

 

 

$

103,009

 

Total weighted-average basic shares outstanding

 

 

43,824,707

 

 

 

43,173,312

 

 

 

 

43,763,681

 

 

 

42,924,844

 

Add effect of dilutive stock options and restricted stock grants

 

 

978,571

 

 

 

1,889,080

 

 

 

 

1,252,082

 

 

 

1,956,158

 

Total weighted-average diluted shares outstanding

 

 

44,803,278

 

 

 

45,062,392

 

 

 

 

45,015,763

 

 

 

44,881,002

 

Diluted earnings per share

 

$

2.16

 

 

$

1.41

 

 

 

$

2.92

 

 

$

2.29

 

Anti-dilutive shares

 

 

869,753

 

 

 

9,319

 

 

 

 

869,753

 

 

 

9,319

 

 

Note 4. Securities

Available-for-Sale

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

 

June 30, 2022

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

US government agencies

 

$

17,446

 

 

$

12

 

 

$

71

 

 

$

17,387

 

Mortgage-backed securities

 

 

982,788

 

 

 

503

 

 

 

78,365

 

 

 

904,926

 

Municipal bonds

 

 

3,235

 

 

 

—

 

 

 

70

 

 

 

3,165

 

Other debt securities

 

 

2,500

 

 

 

—

 

 

 

10

 

 

 

2,490

 

Total

 

$

1,005,969

 

 

$

515

 

 

$

78,516

 

 

$

927,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US government agencies

 

$

10,444

 

 

$

193

 

 

$

—

 

 

$

10,637

 

Mortgage-backed securities

 

 

887,302

 

 

 

14,246

 

 

 

12,209

 

 

 

889,339

 

Municipal bonds

 

 

3,246

 

 

 

333

 

 

 

3

 

 

 

3,576

 

Other debt securities

 

 

2,500

 

 

 

—

 

 

 

—

 

 

 

2,500

 

Total

 

$

903,492

 

 

$

14,772

 

 

$

12,212

 

 

$

906,052

 

 

During the three months ended June 30, 2022, nine mortgage-backed securities totaling $18.8 million were settled. During the three months ended June 30, 2021, one US government agency matured at $5.0 million and four mortgage-backed securities totaling $10.4 million were settled.

 

During the six months ended June 30, 2022, eighteen mortgage-backed securities totaling $32.7 million were settled. During the six months ended June 30, 2021, one US government agency matured at $5.0 million and six mortgage-backed securities totaling $16.9 million were settled.

Accrued interest receivable on available-for-sale securities totaled $2.3 million and $1.9 million at June 30, 2022 and December 31, 2021, respectively, and is included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

10

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

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, 2022

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

US government agencies

 

$

9,375

 

 

$

71

 

 

$

—

 

 

$

—

 

 

$

9,375

 

 

$

71

 

Mortgage-backed securities

 

 

637,947

 

 

 

44,226

 

 

 

216,231

 

 

 

34,139

 

 

 

854,178

 

 

 

78,365

 

Municipal bonds

 

 

3,072

 

 

 

64

 

 

 

93

 

 

 

6

 

 

 

3,165

 

 

 

70

 

Other debt securities

 

 

490

 

 

 

10

 

 

 

—

 

 

 

—

 

 

 

490

 

 

 

10

 

Total

 

$

650,884

 

 

$

44,371

 

 

$

216,324

 

 

$

34,145

 

 

$

867,208

 

 

$

78,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2021

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Mortgage-backed securities

 

$

479,322

 

 

$

8,503

 

 

$

110,633

 

 

$

3,706

 

 

$

589,955

 

 

$

12,209

 

Municipal bonds

 

 

—

 

 

 

—

 

 

 

96

 

 

 

3

 

 

 

96

 

 

 

3

 

Total

 

$

479,322

 

 

$

8,503

 

 

$

110,729

 

 

$

3,709

 

 

$

590,051

 

 

$

12,212

 

 

Management evaluates available-for-sale debt securities to determine whether the unrealized loss is due to credit-related factors or non-credit-related factors. The evaluation considers the extent to which the security’s fair value is less than cost, the financial condition and near-term prospects of the issuer, and intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2022, there were seventy-three mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months. There were three US government agency securities, two hundred eighty-seven mortgage-backed securities, one municipal bond, and one other debt security in unrealized loss positions for less than 12 months. Unrealized losses at December 31, 2021 were comprised of thirty-one mortgage-backed securities and one municipal bond in unrealized loss positions for greater than 12 months, and one hundred forty-two 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 marketability of the securities or the issuer’s ability to honor redemption obligations and the Company has the intent and ability to hold the securities for a sufficient period of time to recover unrealized losses, none of the 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, 2022 and December 31, 2021 were backed by U.S. government sponsored enterprises (“GSEs”).

11

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following is a summary of investment securities by maturity:

 

 

 

June 30, 2022

 

 

 

Available-for-Sale

 

 

 

Amortized

cost

 

 

Fair

value

 

US government agencies

 

 

 

 

 

 

 

 

Within one year

 

$

7,503

 

 

$

7,502

 

One to five years

 

 

9,943

 

 

 

9,885

 

Total

 

 

17,446

 

 

 

17,387

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

One to five years

 

 

121,946

 

 

 

117,826

 

Five to ten years

 

 

224,820

 

 

 

206,806

 

After 10 years

 

 

636,022

 

 

 

580,294

 

Total

 

 

982,788

 

 

 

904,926

 

Municipal bonds

 

 

 

 

 

 

 

 

Five to ten years

 

 

3,136

 

 

 

3,072

 

After 10 years

 

 

99

 

 

 

93

 

Total

 

 

3,235

 

 

 

3,165

 

Other debt securities

 

 

 

 

 

 

 

 

Within one year

 

 

500

 

 

 

490

 

One to five years

 

 

2,000

 

 

 

2,000

 

Total

 

 

2,500

 

 

 

2,490

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,005,969

 

 

$

927,968

 

 

Mortgage-backed securities are included in maturity categories based on their contractual maturity date. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

There were no securities pledged at June 30, 2022 or December 31, 2021.

Other

Other investments, largely comprised of non-marketable equity investments, are generally accounted for under 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.


12

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Equity Method Accounting

The carrying amount and ownership percentage of each equity investment over which the Company has significant influence at June 30, 2022 and December 31, 2021 is reflected in the following table:

 

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

Amount

 

 

Ownership %

 

 

Amount

 

 

Ownership %

 

Apiture, Inc.

 

$

63,402

 

 

 

40.3

%

 

$

52,323

 

 

 

39.1

%

Canapi Ventures SBIC Fund, LP (1) (4)

 

 

19,435

 

 

 

2.9

%

 

 

19,431

 

 

 

2.9

%

Canapi Ventures Fund, LP (2) (4)

 

 

2,407

 

 

 

1.5

%

 

 

2,402

 

 

 

1.5

%

Canapi Ventures Fund II, LP (3) (4)

 

 

7,500

 

 

 

1.7

%

 

 

—

 

 

N/A

 

Other fintech investments in private companies (5)

 

 

248

 

 

Various

 

 

 

5,330

 

 

Various

 

Other (6)

 

 

12,284

 

 

Various

 

 

 

4,664

 

 

Various

 

Total

 

$

105,276

 

 

 

 

 

 

$

84,150

 

 

 

 

 

 

(1)

Includes unfunded commitments of $5.8 million and $6.8 million as of June 30, 2022 and December 31, 2021, respectively.

(2)

Includes unfunded commitments of $652 thousand and $770 thousand as of June 30, 2022 and December 31, 2021, respectively.

(3)

Includes unfunded commitments of $7.1 million as of June 30, 2022. There were no unfunded commitments as of December 31, 2021.

(4)

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

(5)

As of June 30, 2022, other fintech investments include Payrailz, LLC and Kwipped, Inc. As of December 31, 2021, other fintech investments include Finxact, Inc., Payrailz, LLC and Kwipped, Inc. On April 1, 2022, the Company sold its investment in Finxact, Inc. resulting in a pre-tax gain of $120.5 million.  Investees are accounted for under equity method due to the Company's ability to exercise significant influence through executive management's board involvement.

(6)

Other includes affordable housing and solar income tax credit projects. Includes unfunded commitments of $3.5 million as of June 30, 2022. There were no unfunded commitments as of December 31, 2021.

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, 2022 and as of and for the six months ended June 30, 2022 and 2021 is reflected in the following table:

 

 

 

 

 

 

 

As of and for the six month period ended

 

 

 

Cumulative Adjustments

 

 

June 30, 2022

 

 

June 30, 2021

 

Carrying value (1)

 

 

 

 

 

$

72,760

 

 

$

62,341

 

Carrying value adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Impairment

 

$

—

 

 

 

—

 

 

 

—

 

Upward changes for observable prices (2)

 

 

49,961

 

 

 

1,492

 

 

 

30,197

 

Downward changes for observable prices

 

 

(86

)

 

 

—

 

 

 

—

 

Net upward change

 

$

49,875

 

 

$

1,492

 

 

$

30,197

 

 

(1)

Includes $3.2 million and $2.1 million in unfunded commitments as of June 30, 2022, and June 30, 2021, respectively.

(2)

Excludes $13.9 million in realized cash gains for the sale of an investment in the second quarter of 2021.

For the three and six months ended June 30, 2022, the Company recognized unrealized gains on all equity securities held at the reporting date of $1.5 million and $1.4 million, respectively. For the three and six months ended June 30, 2021, the Company recognized unrealized gains on all equity securities held at the reporting date of $30.2 million.

 


13

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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

The following tables present total loans and leases 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 Option1

 

 

Total Loans and Leases

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

1,232,869

 

 

$

5,399

 

 

$

13,240

 

 

$

18,639

 

 

$

1,251,508

 

 

$

210,986

 

 

$

1,462,494

 

Specialty Lending

 

 

1,122,411

 

 

 

554

 

 

 

166

 

 

 

720

 

 

 

1,123,131

 

 

 

56,441

 

 

 

1,179,572

 

Paycheck Protection Program

 

 

63,851

 

 

 

14

 

 

 

10

 

 

 

24

 

 

 

63,875

 

 

 

—

 

 

 

63,875

 

Total

 

 

2,419,131

 

 

 

5,967

 

 

 

13,416

 

 

 

19,383

 

 

 

2,438,514

 

 

 

267,427

 

 

 

2,705,941

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

323,530

 

 

 

—

 

 

 

1,366

 

 

 

1,366

 

 

 

324,896

 

 

 

—

 

 

 

324,896

 

Specialty Lending

 

 

98,298

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

98,298

 

 

 

—

 

 

 

98,298

 

Total

 

 

421,828

 

 

 

—

 

 

 

1,366

 

 

 

1,366

 

 

 

423,194

 

 

 

—

 

 

 

423,194

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1,722,856

 

 

 

7,609

 

 

 

1,204

 

 

 

8,813

 

 

 

1,731,669

 

 

 

199,197

 

 

 

1,930,866

 

Specialty Lending

 

 

365,214

 

 

 

—

 

 

 

1,631

 

 

 

1,631

 

 

 

366,845

 

 

 

19,879

 

 

 

386,724

 

Total

 

 

2,088,070

 

 

 

7,609

 

 

 

2,835

 

 

 

10,444

 

 

 

2,098,514

 

 

 

219,076

 

 

 

2,317,590

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

371,299

 

 

 

—

 

 

 

1,917

 

 

 

1,917

 

 

 

373,216

 

 

 

44,141

 

 

 

417,357

 

Total

 

 

371,299

 

 

 

—

 

 

 

1,917

 

 

 

1,917

 

 

 

373,216

 

 

 

44,141

 

 

 

417,357

 

Total

 

$

5,300,328

 

 

$

13,576

 

 

$

19,534

 

 

$

33,110

 

 

$

5,333,438

 

 

$

530,644

 

 

$

5,864,082

 

Net deferred fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,873

)

Loans and Leases, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,860,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed Balance

 

$

1,903,647

 

 

$

11,105

 

 

$

14,428

 

 

$

25,533

 

 

$

1,929,180

 

 

$

58,045

 

 

$

1,987,225

 

% Guaranteed

 

 

35.9

%

 

 

81.8

%

 

 

73.9

%

 

 

77.1

%

 

 

36.2

%

 

 

10.9

%

 

 

33.9

%

 

14

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Current or Less than 30 Days Past Due

 

 

30-89 Days

Past Due

 

 

90 Days or More Past Due

 

 

Total Past Due

 

 

Total Carried at Amortized Cost

 

 

Loans Accounted for Under the Fair Value Option1

 

 

Total Loans and Leases

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

1,103,915

 

 

$

13,171

 

 

$

7,320

 

 

$

20,491

 

 

$

1,124,406

 

 

$

248,806

 

 

$

1,373,212

 

Specialty Lending

 

 

875,367

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

875,367

 

 

 

64,525

 

 

 

939,892

 

Paycheck Protection Program

 

 

266,893

 

 

 

68

 

 

 

1,414

 

 

 

1,482

 

 

 

268,375

 

 

 

—

 

 

 

268,375

 

Total

 

 

2,246,175

 

 

 

13,239

 

 

 

8,734

 

 

 

21,973

 

 

 

2,268,148

 

 

 

313,331

 

 

 

2,581,479

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

275,786

 

 

 

—

 

 

 

1,366

 

 

 

1,366

 

 

 

277,152

 

 

 

—

 

 

 

277,152

 

Specialty Lending

 

 

82,014

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

82,014

 

 

 

—

 

 

 

82,014

 

Total

 

 

357,800

 

 

 

—

 

 

 

1,366

 

 

 

1,366

 

 

 

359,166

 

 

 

—

 

 

 

359,166

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1,577,765

 

 

 

5,802

 

 

 

10,761

 

 

 

16,563

 

 

 

1,594,328

 

 

 

250,856

 

 

 

1,845,184

 

Specialty Lending

 

 

285,373

 

 

 

—

 

 

 

2,315

 

 

 

2,315

 

 

 

287,688

 

 

 

19,481

 

 

 

307,169

 

Total

 

 

1,863,138

 

 

 

5,802

 

 

 

13,076

 

 

 

18,878

 

 

 

1,882,016

 

 

 

270,337

 

 

 

2,152,353

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

362,881

 

 

 

7,399

 

 

 

2,055

 

 

 

9,454

 

 

 

372,335

 

 

 

61,533

 

 

 

433,868

 

Total

 

 

362,881

 

 

 

7,399

 

 

 

2,055

 

 

 

9,454

 

 

 

372,335

 

 

 

61,533

 

 

 

433,868

 

Total

 

$

4,829,994

 

 

$

26,440

 

 

$

25,231

 

 

$

51,671

 

 

$

4,881,665

 

 

$

645,201

 

 

$

5,526,866

 

Net deferred fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,604

)

Loans and Leases, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

5,521,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed Balance

 

$

2,037,509

 

 

$

18,421

 

 

$

16,440

 

 

$

34,861

 

 

$

2,072,370

 

 

$

77,722

 

 

$

2,150,092

 

% Guaranteed

 

 

42.2

%

 

 

69.7

%

 

 

65.2

%

 

 

67.5

%

 

 

42.5

%

 

 

12.0

%

 

 

38.9

%

         

(1)

The Company measures the carrying value of the retained portion of certain loans sold at fair value under FASB ASC Subtopic 825-10, Financial Instruments: Overall. See Note 9. Fair Value of Financial Instruments for additional information.

 


15

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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 2021 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Revolving Loans Amortized Cost Basis

 

 

Revolving Loans Converted to Term

 

 

Total1

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

$

518,034

 

 

$

1,108,441

 

 

$

754,628

 

 

$

486,036

 

 

$

237,809

 

 

$

245,570

 

 

$

59,148

 

 

$

373

 

 

$

3,410,039

 

   Risk Grade 5

 

 

3,925

 

 

 

8,839

 

 

 

39,239

 

 

 

44,173

 

 

 

41,524

 

 

 

46,087

 

 

 

2,755

 

 

 

—

 

 

 

186,542

 

   Risk Grades 6 - 8

 

 

1,055

 

 

 

2,147

 

 

 

12,473

 

 

 

23,155

 

 

 

13,046

 

 

 

30,637

 

 

 

2,021

 

 

 

174

 

 

 

84,708

 

Total

 

 

523,014

 

 

 

1,119,427

 

 

 

806,340

 

 

 

553,364

 

 

 

292,379

 

 

 

322,294

 

 

 

63,924

 

 

 

547

 

 

 

3,681,289

 

Specialty Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

318,872

 

 

 

626,731

 

 

 

228,784

 

 

 

66,903

 

 

 

32,854

 

 

 

26,602

 

 

 

157,375

 

 

 

5,279

 

 

 

1,463,400

 

   Risk Grade 5

 

 

—

 

 

 

23,832

 

 

 

31,290

 

 

 

21,965

 

 

 

9,830

 

 

 

10,817

 

 

 

9,348

 

 

 

—

 

 

 

107,082

 

   Risk Grades 6 - 8

 

 

—

 

 

 

4,398

 

 

 

17

 

 

 

2,993

 

 

 

8,728

 

 

 

1,631

 

 

 

25

 

 

 

—

 

 

 

17,792

 

Total

 

 

318,872

 

 

 

654,961

 

 

 

260,091

 

 

 

91,861

 

 

 

51,412

 

 

 

39,050

 

 

 

166,748

 

 

 

5,279

 

 

 

1,588,274

 

Paycheck Protection

   Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

—

 

 

 

51,883

 

 

 

11,992

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

63,875

 

   Risk Grade 5

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

   Risk Grades 6 - 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

—

 

 

 

51,883

 

 

 

11,992

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

63,875

 

Total

 

$

841,886

 

 

$

1,826,271

 

 

$

1,078,423

 

 

$

645,225

 

 

$

343,791

 

 

$

361,344

 

 

$

230,672

 

 

$

5,826

 

 

$

5,333,438

 

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving Loans Amortized Cost Basis

 

 

Revolving Loans Converted to Term

 

 

Total1

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

$

1,051,775

 

 

$

853,250

 

 

$

522,407

 

 

$

285,397

 

 

$

188,858

 

 

$

116,645

 

 

$

46,356

 

 

$

1,771

 

 

$

3,066,459

 

   Risk Grade 5

 

 

7,838

 

 

 

19,651

 

 

 

65,715

 

 

 

60,615

 

 

 

37,661

 

 

 

13,933

 

 

 

5,066

 

 

 

195

 

 

 

210,674

 

   Risk Grades 6 - 8

 

 

2,517

 

 

 

8,667

 

 

 

27,696

 

 

 

14,545

 

 

 

14,193

 

 

 

21,239

 

 

 

1,457

 

 

 

774

 

 

 

91,088

 

Total

 

 

1,062,130

 

 

 

881,568

 

 

 

615,818

 

 

 

360,557

 

 

 

240,712

 

 

 

151,817

 

 

 

52,879

 

 

 

2,740

 

 

 

3,368,221

 

Specialty Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

644,851

 

 

 

238,409

 

 

 

73,978

 

 

 

42,452

 

 

 

38,703

 

 

 

—

 

 

 

133,889

 

 

 

1,816

 

 

 

1,174,098

 

   Risk Grade 5

 

 

2,250

 

 

 

17,677

 

 

 

5,497

 

 

 

10,415

 

 

 

17,104

 

 

 

—

 

 

 

2,953

 

 

 

848

 

 

 

56,744

 

   Risk Grades 6 - 8

 

 

—

 

 

 

17

 

 

 

3,166

 

 

 

8,654

 

 

 

—

 

 

 

2,315

 

 

 

75

 

 

 

 

 

 

 

14,227

 

Total

 

 

647,101

 

 

 

256,103

 

 

 

82,641

 

 

 

61,521

 

 

 

55,807

 

 

 

2,315

 

 

 

136,917

 

 

 

2,664

 

 

 

1,245,069

 

Paycheck Protection Program

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Risk Grades 1 - 4

 

 

204,803

 

 

 

63,572

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

268,375

 

   Risk Grade 5

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

   Risk Grades 6 - 8

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

204,803

 

 

 

63,572

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

268,375

 

Total

 

$

1,914,034

 

 

$

1,201,243

 

 

$

698,459

 

 

$

422,078

 

 

$

296,519

 

 

$

154,132

 

 

$

189,796

 

 

$

5,404

 

 

$

4,881,665

 

            

16

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

(1)

 Excludes $530.6 million and $645.2 million of loans accounted for under the fair value option as of June 30, 2022 and December 31, 2021, respectively.    

The following tables present guaranteed and unguaranteed loan and lease balances by asset quality indicator:

 

June 30, 2022

 

Loan and Lease

Balance1

 

 

Guaranteed Balance

 

 

Unguaranteed Balance

 

 

% Guaranteed

 

Risk Grades 1 - 4

 

$

4,937,314

 

 

$

1,732,613

 

 

$

3,204,701

 

 

 

35.1

%

Risk Grade 5

 

 

293,624

 

 

 

127,695

 

 

 

165,929

 

 

 

43.5

 

Risk Grades 6 - 8

 

 

102,500

 

 

 

68,872

 

 

 

33,628

 

 

 

67.2

 

Total

 

$

5,333,438

 

 

$

1,929,180

 

 

$

3,404,258

 

 

 

36.2

%

 

December 31, 2021

 

Loan and Lease

Balance1

 

 

Guaranteed Balance

 

 

Unguaranteed Balance

 

 

% Guaranteed

 

Risk Grades 1 - 4

 

$

4,508,932

 

 

$

1,875,152

 

 

$

2,633,780

 

 

 

41.6

%

Risk Grade 5

 

 

267,418

 

 

 

134,221

 

 

 

133,197

 

 

 

50.2

 

Risk Grades 6 - 8

 

 

105,315

 

 

 

62,997

 

 

 

42,318

 

 

 

59.8

 

Total

 

$

4,881,665

 

 

$

2,072,370

 

 

$

2,809,295

 

 

 

42.5

%

(1)

Excludes $530.6 million and $645.2 million of loans accounted for under the fair value option as of June 30, 2022 and December 31, 2021, respectively.    

Nonaccrual Loans and Leases

As of June 30, 2022 and December 31, 2021 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, 2022 and 2021. Nonaccrual loans and leases are generally included in the held for investment portfolio. Accrued interest receivable on loans totaled $33.1 million and $31.0 million at June 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021 are as follows:

 

June 30, 2022

 

Loan and Lease

Balance1

 

 

Guaranteed

Balance

 

 

Unguaranteed Balance

 

 

Unguaranteed

Exposure with No ACL

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

19,763

 

 

$

16,542

 

 

$

3,221

 

 

$

407

 

Specialty Lending

 

 

166

 

 

 

166

 

 

 

—

 

 

 

—

 

Payroll Protection Program

 

 

24

 

 

 

24

 

 

 

—

 

 

 

—

 

Total

 

 

19,953

 

 

 

16,732

 

 

 

3,221

 

 

 

407

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1,366

 

 

 

1,201

 

 

 

165

 

 

 

—

 

Total

 

 

1,366

 

 

 

1,201

 

 

 

165

 

 

 

—

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

17,708

 

 

 

11,925

 

 

 

5,783

 

 

 

3,519

 

Specialty Lending

 

 

1,631

 

 

 

—

 

 

 

1,631

 

 

 

1,631

 

Total

 

 

19,339

 

 

 

11,925

 

 

 

7,414

 

 

 

5,150

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

5,110

 

 

 

3,936

 

 

 

1,174

 

 

 

196

 

Total

 

 

5,110

 

 

 

3,936

 

 

 

1,174

 

 

 

196

 

Total

 

$

45,768

 

 

$

33,794

 

 

$

11,974

 

 

$

5,753

 

 

 

17

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

December 31, 2021

 

Loan and Lease

Balance1

 

 

Guaranteed

Balance

 

 

Unguaranteed Balance

 

 

Unguaranteed

Exposure with No ACL

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

16,911

 

 

$

13,981

 

 

$

2,930

 

 

$

—

 

Payroll Protection Program

 

 

1,482

 

 

 

1,482

 

 

 

—

 

 

 

—

 

Total

 

 

18,393

 

 

 

15,463

 

 

 

2,930

 

 

 

—

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

3,884

 

 

 

1,201

 

 

 

2,683

 

 

 

—

 

Total

 

 

3,884

 

 

 

1,201

 

 

 

2,683

 

 

 

—

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

12,410

 

 

 

5,226

 

 

 

7,184

 

 

 

5,169

 

Specialty Lending

 

 

2,315

 

 

 

507

 

 

 

1,808

 

 

 

1,808

 

Total

 

 

14,725

 

 

 

5,733

 

 

 

8,992

 

 

 

6,977

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

5,531

 

 

 

4,148

 

 

 

1,383

 

 

 

—

 

Total

 

 

5,531

 

 

 

4,148

 

 

 

1,383

 

 

 

—

 

Total

 

$

42,533

 

 

$

26,545

 

 

$

15,988

 

 

$

6,977

 

(1)

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

 

The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses, as of June 30, 2022 and December 31, 2021:

 

 

 

Total Collateral Dependent Loans

 

 

Unguaranteed Portion

 

June 30, 2022

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Allowance for Credit Losses

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

2,730

 

 

$

9,770

 

 

$

25

 

 

$

414

 

 

$

2,061

 

 

$

25

 

 

$

1,631

 

Total

 

 

2,730

 

 

 

9,770

 

 

 

25

 

 

 

414

 

 

 

2,061

 

 

 

25

 

 

 

1,631

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1,354

 

 

 

—

 

 

 

—

 

 

 

153

 

 

 

—

 

 

 

—

 

 

 

56

 

Total

 

 

1,354

 

 

 

—

 

 

 

—

 

 

 

153

 

 

 

—

 

 

 

—

 

 

 

56

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

836

 

 

 

1,192

 

 

 

39

 

 

 

194

 

 

 

18

 

 

 

9

 

 

 

73

 

Total

 

 

836

 

 

 

1,192

 

 

 

39

 

 

 

194

 

 

 

18

 

 

 

9

 

 

 

73

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

1,922

 

 

 

—

 

 

 

—

 

 

 

382

 

 

 

—

 

 

 

—

 

 

 

61

 

Total

 

 

1,922

 

 

 

—

 

 

 

—

 

 

 

382

 

 

 

—

 

 

 

—

 

 

 

61

 

Total

 

$

6,842

 

 

$

10,962

 

 

$

64

 

 

$

1,143

 

 

$

2,079

 

 

$

34

 

 

$

1,821

 

 

18

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Total Collateral Dependent Loans

 

 

Unguaranteed Portion

 

December 31, 2021

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Real Estate

 

 

Business Assets

 

 

Other

 

 

Allowance for Credit Losses

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

$

698

 

 

$

7,475

 

 

$

—

 

 

$

152

 

 

$

449

 

 

$

—

 

 

$

235

 

Total

 

 

698

 

 

 

7,475

 

 

 

—

 

 

 

152

 

 

 

449

 

 

 

—

 

 

 

235

 

Construction & Development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Lending

 

 

3,858

 

 

 

—

 

 

 

—

 

 

 

2,657

 

 

 

—

 

 

 

—

 

 

 

57

 

Total

 

 

3,858

 

 

 

—

 

 

 

—

 

 

 

2,657

 

 

 

—

 

 

 

—

 

 

 

57

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

5,172

 

 

 

700

 

 

 

64

 

 

 

4,038

 

 

 

14

 

 

 

13

 

 

 

65

 

Specialty Lending

 

 

512

 

 

 

—

 

 

 

—

 

 

 

6

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

5,684

 

 

 

700

 

 

 

64

 

 

 

4,044

 

 

 

14

 

 

 

13

 

 

 

65

 

Commercial Land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

5,541

 

 

 

—

 

 

 

—

 

 

 

1,393

 

 

 

—

 

 

 

—

 

 

 

601

 

Total

 

 

5,541

 

 

 

—

 

 

 

—

 

 

 

1,393

 

 

 

—

 

 

 

—

 

 

 

601

 

Total

 

$

15,781

 

 

$

8,175

 

 

$

64

 

 

$

8,246

 

 

$

463

 

 

$

13

 

 

$

958

 

 

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 2021 Form 10-K for a description of the methodologies used to estimate the allowance for credit losses (“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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

34,162

 

 

$

4,102

 

 

$

21,614

 

 

$

3,180

 

 

$

63,058

 

Charge offs

 

 

(1,812

)

 

 

—

 

 

 

(433

)

 

 

(318

)

 

 

(2,563

)

Recoveries

 

 

35

 

 

 

—

 

 

 

66

 

 

 

—

 

 

 

101

 

Provision

 

 

8,793

 

 

 

(598

)

 

 

(3,407

)

 

 

479

 

 

 

5,267

 

Ending Balance

 

$

41,178

 

 

$

3,504

 

 

$

17,840

 

 

$

3,341

 

 

$

65,863

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

26,577

 

 

$

5,887

 

 

$

18,646

 

 

$

1,307

 

 

$

52,417

 

Charge offs

 

 

(225

)

 

 

(262

)

 

 

(2,173

)

 

 

—

 

 

 

(2,660

)

Recoveries

 

 

137

 

 

 

—

 

 

 

108

 

 

 

—

 

 

 

245

 

Provision

 

 

950

 

 

 

607

 

 

 

5,582

 

 

 

707

 

 

 

7,846

 

Ending Balance

 

$

27,439

 

 

$

6,232

 

 

$

22,163

 

 

$

2,014

 

 

$

57,848

 

19

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Six Months Ended

 

Commercial

& Industrial

 

 

Construction &

Development

 

 

Commercial

Real Estate

 

 

Commercial

Land

 

 

Total

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

37,770

 

 

$

3,435

 

 

$

19,068

 

 

$

3,311

 

 

$

63,584

 

Charge offs

 

 

(4,635

)

 

 

—

 

 

 

(433

)

 

 

(652

)

 

 

(5,720

)

Recoveries

 

 

180

 

 

 

—

 

 

 

716

 

 

 

—

 

 

 

896

 

Provision

 

 

7,863

 

 

 

69

 

 

 

(1,511

)

 

 

682

 

 

 

7,103

 

Ending Balance

 

$

41,178

 

 

$

3,504

 

 

$

17,840

 

 

$

3,341

 

 

$

65,863

 

June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

26,941

 

 

$

5,663

 

 

$

18,148

 

 

$

1,554

 

 

$

52,306

 

Charge offs

 

 

(377

)

 

 

(262

)

 

 

(2,690

)

 

 

(12

)

 

 

(3,341

)

Recoveries

 

 

146

 

 

 

—

 

 

 

1,764

 

 

 

—

 

 

 

1,910

 

Provision

 

 

729

 

 

 

831

 

 

 

4,941

 

 

 

472

 

 

 

6,973

 

Ending Balance

 

$

27,439

 

 

$

6,232

 

 

$

22,163

 

 

$

2,014

 

 

$

57,848

 

 

During the three and six months ended June 30, 2022, the ACL increased primarily as a result of charge-offs that contributed to increased loss given default rates. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.

 

During the three and six month periods ended June 30, 2021, increases to the ACL were primarily related to the severity of forecasted unemployment rates and ongoing developments as a result of the COVID-19 pandemic. Additionally, the provision expense was impacted by loan and lease growth and net charge-offs during the period. Loss rates are adjusted for twelve month forecasted unemployment followed by a twelve-month straight-line reversion period.

The following tables represent the types of loans modified as troubled debt restructurings (“TDRs”) during the periods presented:

 

 

Three Months Ended June 30, 2022

 

 

 

Interest Only

 

 

Payment Deferral

 

 

Extend Amortization

 

 

Other

 

 

Total TDRs(1)

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Lending

 

 

—

 

 

$

—

 

 

 

1

 

 

$

734

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

 

1

 

 

$

734

 

Total

 

 

—

 

 

 

—

 

 

 

1

 

 

 

734

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1

 

 

 

734

 

Total

 

 

—

 

 

$

—

 

 

 

1

 

 

$

734

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

 

1

 

 

$

734

 

(1)

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

 

 

Six Months Ended June 30, 2022

 

 

 

Interest Only

 

 

Payment Deferral

 

 

 

 

Extend Amortization

 

 

Other(1)

 

 

Total TDRs(2)

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

—

 

 

$

—

 

 

 

3

 

 

$

3,119

 

 

 

 

 

2

 

 

$

1,528

 

 

 

1

 

 

$

527

 

 

 

6

 

 

$

5,174

 

Specialty Lending

 

 

—

 

 

 

—

 

 

 

1

 

 

 

734

 

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1

 

 

 

734

 

Total

 

 

—

 

 

 

—

 

 

 

4

 

 

 

3,853

 

 

 

 

 

2

 

 

 

1,528

 

 

 

1

 

 

 

527

 

 

 

7

 

 

 

5,908

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

1

 

 

 

4,847

 

 

 

—

 

 

 

—

 

 

 

1

 

 

 

4,847

 

Total

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

1

 

 

 

4,847

 

 

 

—

 

 

 

—

 

 

 

1

 

 

 

4,847

 

Total

 

 

—

 

 

$

—

 

 

 

4

 

 

$

3,853

 

 

 

 

 

3

 

 

$

6,375

 

 

 

1

 

 

$

527

 

 

 

8

 

 

$

10,755

 

(1)

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

20

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

(2)

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

 

 

 

Three Months Ended June 30, 2021

 

 

 

Interest Only

 

 

Payment Deferral

 

 

Extend Amortization

 

 

Other

 

 

Total TDRs(1)

 

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

—

 

 

$

—

 

 

 

2

 

 

$

2,887

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

 

2

 

 

$

2,887

 

Total

 

 

—

 

 

 

—

 

 

 

2

 

 

 

2,887

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2

 

 

 

2,887

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

—

 

 

 

—

 

 

 

3

 

 

 

3,732

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3

 

 

 

3,732

 

Total

 

 

—

 

 

 

—

 

 

 

3

 

 

 

3,732

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3

 

 

 

3,732

 

Total

 

 

—

 

 

$

—

 

 

 

5

 

 

$

6,619

 

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

 

5

 

 

$

6,619

 

(1)

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

 

 

Six Months Ended June 30, 2021

 

 

 

Interest Only

 

 

 

 

Payment Deferral

 

 

Extend Amortization

 

 

 

 

Other(1)

 

 

 

 

Total TDRs(2)

 

 

 

Number of

Loans

 

 

 

 

Recorded investment at period end

 

 

 

 

Number of

Loans

 

 

 

 

Recorded investment at period end

 

 

Number of

Loans

 

 

Recorded investment at period end

 

 

 

 

Number of

Loans

 

 

 

 

Recorded investment at period end

 

 

 

 

Number of

Loans

 

 

 

 

Recorded investment at period end

 

Commercial & Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

—

 

 

 

 

$

—

 

 

 

 

 

3

 

 

 

 

$

6,097

 

 

 

—

 

 

$

—

 

 

 

 

 

—

 

 

 

 

$

—

 

 

 

 

 

3

 

 

 

 

$

6,097

 

Total

 

 

—

 

 

 

 

 

—

 

 

 

 

 

3

 

 

 

 

 

6,097

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

 

 

 

 

—

 

 

 

 

 

3

 

 

 

 

 

6,097

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Banking

 

 

—

 

 

 

 

 

—

 

 

 

 

 

4

 

 

 

 

 

3,782

 

 

 

—

 

 

 

—

 

 

 

 

 

1

 

 

 

 

 

3,124

 

 

 

 

 

5

 

 

 

 

 

6,906

 

Total

 

 

—

 

 

 

 

 

—

 

 

 

 

 

4

 

 

 

 

 

3,782

 

 

 

—

 

 

 

—

 

 

 

 

 

1

 

 

 

 

 

3,124

 

 

 

 

 

5

 

 

 

 

 

6,906

 

Total

 

 

—

 

 

 

 

$

—

 

 

 

 

 

7

 

 

 

 

$

9,879

 

 

 

—

 

 

$

—

 

 

 

 

 

1

 

 

 

 

$

3,124

 

 

 

 

 

8

 

 

 

 

$

13,003

 

(1)   Includes one small business banking loan with extend amortization and a rate concession TDR.

(2)

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

Concessions made to improve a loan and lease’s performance have varying degrees of success. Two TDRs that were modified within the twelve months ended June 30, 2022 subsequently defaulted during the three months ended June 30, 2022. The two TDR defaults were Commercial & Industrial Small Business Banking loans. One of the defaults had previously been modified to extend amortization and had a recorded investment of $349 thousand at June 30, 2022. The second default had previously been modified for a payment deferral and had a recorded investment of $2.1 million at June 30, 2022. There was one TDR that was modified within the twelve months ended June 30, 2022 that subsequently defaulted during the six months ended June 30, 2022. The TDR had previously been modified for a payment deferral and had a recorded investment of $633 thousand at June 30, 2022.

No TDRs that were modified within the twelve months ended June 30, 2021 subsequently defaulted during the three months ended June 30, 2021. One TDR that was modified within the twelve months ended June 30, 2021 subsequently defaulted during the six months ended June 30, 2021. The TDR that defaulted was a Commercial Real Estate Small Business Banking loan that had previously been modified for a payment deferral and had a recorded investment of $50 thousand at June 30, 2021.

21

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 6. Leases

Lessor Equipment Leasing

The Company purchases new equipment for the purpose of leasing such equipment to customers within its verticals. Equipment purchased to fulfill commitments to commercial renewable energy projects is rented out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases.  Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment 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, 2022

 

 

December 31, 2021

 

Gross direct finance lease payments receivable

 

$

5,490

 

 

$

7,333

 

Less – unearned interest

 

 

(662

)

 

 

(998

)

Net investment in direct financing leases

 

$

4,828

 

 

$

6,335

 

 

Future minimum lease payments under finance leases are as follows:

 

As of June 30, 2022

 

Amount

 

2022

 

$

517

 

2023

 

 

2,182

 

2024

 

 

1,570

 

2025

 

 

1,104

 

2026

 

 

117

 

Total

 

$

5,490

 

Interest income of $93 thousand and $172 thousand was recognized in the three months ended June 30, 2022 and 2021, respectively. Interest income of $208 thousand and $358 thousand was recognized in the six months ended June 30, 2022 and 2021, 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.

22

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

As of June 30, 2022 and December 31, 2021, the Company had a net investment of $119.1 million and $123.9 million, respectively, in assets included in premises and equipment that are subject to operating leases. Of the net investment, the gross balance of the assets was $163.4 million as of June 30, 2022 and December 31, 2021 and accumulated depreciation was $44.3 million and $39.5 million as of June 30, 2022 and December 31, 2021, respectively. Depreciation expense recognized on these assets for the three months ended June 30, 2022 and 2021 was $2.4 million. Depreciation expense recognized on these assets for the six months ended June 30, 2022 and 2021 was $4.8 million and $4.9 million, respectively.

 

Lease income of $2.4 million was recognized in the three months ended June 30, 2022 and 2021. Lease income of $4.7 million and $4.8 million was recognized in the six months ended June 30, 2022 and 2021, respectively.

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

 

As of June 30, 2022

 

Amount

 

2022

 

$

4,001

 

2023

 

 

9,075

 

2024

 

 

8,808

 

2025

 

 

8,935

 

2026

 

 

8,923

 

Thereafter

 

 

22,253

 

Total

 

$

61,995

 

 

Note 7. Servicing Assets

Loans serviced for others are not included in the accompanying Unaudited Condensed Consolidated Balance Sheets. The unpaid principal balances of loans serviced for others requiring recognition of a servicing asset were $2.26 billion and $2.29 billion at June 30, 2022 and December 31, 2021, respectively. The unpaid principal balance for all loans serviced for others was $3.33 billion and $3.30 billion at June 30, 2022 and December 31, 2021, respectively.

The following summarizes the activity pertaining to servicing rights:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

36,286

 

 

$

37,744

 

 

$

33,574

 

 

$

33,918

 

Additions, net

 

 

1,043

 

 

 

2,403

 

 

 

5,324

 

 

 

4,736

 

Fair value changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due to changes in valuation inputs or assumptions

 

 

(5,436

)

 

 

(59

)

 

 

(4,048

)

 

 

2,887

 

Decay due to increases in principal paydowns or runoff

 

 

(3,232

)

 

 

(3,122

)

 

 

(6,189

)

 

 

(4,575

)

Balance at end of period

 

$

28,661

 

 

$

36,966

 

 

$

28,661

 

 

$

36,966

 

 

The fair value of servicing rights was determined using a weighted average discount rate of 16.2% on June 30, 2022 and 9.6% on June 30, 2021. The fair value of servicing rights was determined using a weighted average prepayment speed of 15.9% on June 30, 2022 and 17.5% on June 30, 2021, with the actual rate depending on the stratification of the specific right. Changes to fair value are reported in loan servicing asset revaluation within the Unaudited Condensed Consolidated Statements of Income.

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

23

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 8. Borrowings

Total outstanding borrowings consisted of the following:

 

 

 

June 30,

2022

 

 

December 31,

2021

 

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.

 

$

38,006

 

 

$

42,734

 

In April 2020, the Company entered into the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF"). Under the PPPLF, advances must be secured by pledges of loans to small businesses originated by the Company under the U.S. Small Business Administration's 7(a) loan program titled the Paycheck Protection Program. The PPPLF accrues interest at thirty-five basis points and matures at various dates equal to the maturity date of the PPPLF collateral pledged to secure the advance, ranging from February 9, 2026 to April 14, 2026, and will be accelerated on and to the extent of any 7(a) loan forgiveness reimbursement by the SBA for any PPPLF collateral or the date of purchase by the SBA from the borrower of any PPPLF collateral. On the maturity date of each advance, the Company shall repay the advance plus accrued interest. This $48.2 million borrowing was fully advanced at June 30, 2022.

 

 

48,201

 

 

 

267,550

 

In September 2020, the Company renewed a $50.0 million revolving line of credit originally issued in 2017 with a third party correspondent bank. Subsequently on October 20, 2021, the Company renewed and increased the revolving line of credit from $50.0 million to $100.0 million and increased the term from 12 months to 36 months. The line of credit is unsecured and accrues interest at 30-day SOFR plus 1.25%, with an interest rate cap of 4.25% and an interest rate floor of 2.75%.  Payments are interest only with all principal and accrued interest due at maturity on October 10, 2024. The terms of this loan require the Company to maintain minimum capital and debt service coverage ratios. The Company paid the Lender a non-refundable $750 thousand loan origination fee upon signing of the Note that will be amortized into interest expense over the life of the loan.  The Company made an advance of $8.0 million on December 20, 2021 and $12.0 million on March 16, 2022. The Company paid down this balance in full on May 20, 2022 and there is $100.0 million of available credit remaining at June 30, 2022.

 

 

—

 

 

 

8,000

 

Other short term debt (1)

 

 

2

 

 

 

5

 

Total borrowings

 

$

86,209

 

 

$

318,289

 

 

(1)

Includes finance leases.

 

The Company may purchase federal funds through unsecured federal funds lines of credit with various correspondent banks, which totaled $167.5 million of available funding as of June 30, 2022 and December 31, 2021. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. These lines of credit are payable on demand and bear interest based upon the daily federal funds rate. The Company had no outstanding balances on the lines of credit as of June 30, 2022 and December 31, 2021.

The Company has entered into a repurchase agreement with a third party for an amount up to $5.0 million as of June 30, 2022 and December 31, 2021.  At the time the Company enters into a transaction with the third party, the Company must transfer securities or other assets against the funds received.  The terms of the agreement are set at market conditions at the time the Company enters into such transaction. The Company had no outstanding balance on the repurchase agreement as of June 30, 2022 and December 31, 2021.

24

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

On June 18, 2018, the Company entered into a borrowing agreement with the Federal Home Loan Bank of Atlanta. These borrowings must be secured with eligible collateral approved by the Federal Home Loan Bank of Atlanta. At June 30, 2022 and December 31, 2021, the Company had approximately $2.13 billion and $2.02 billion, respectively, in borrowing capacity available under these agreements.  There are no advances outstanding and no collateral pledged as of June 30, 2022 and December 31, 2021.

The Company may borrow funds through the Federal Reserve Bank’s discount window. These borrowings are secured by a blanket floating lien on qualifying loans with a balance of $2.63 billion and $2.44 billion as of June 30, 2022 and December 31, 2021, respectively.  At June 30, 2022 and December 31, 2021, the Company had approximately $2.22 billion and $2.04 billion, respectively, in borrowing capacity available under these arrangements with no outstanding balance as of June 30, 2022 and December 31, 2021.

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

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

2,328

 

 

$

1,314

 

 

$

1,672

 

 

$

908

 

Issuances

 

 

48

 

 

 

16

 

 

 

704

 

 

 

37

 

Net gains on derivative instruments

 

 

46

 

 

 

385

 

 

 

46

 

 

 

770

 

Settlements

 

 

—

 

 

 

(135

)

 

 

—

 

 

 

(135

)

Balance at end of period

 

$

2,422

 

 

$

1,580

 

 

$

2,422

 

 

$

1,580

 

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

 

June 30, 2022

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US government agencies

 

$

17,387

 

 

$

—

 

 

$

17,387

 

 

$

—

 

Mortgage-backed securities

 

 

904,926

 

 

 

—

 

 

 

904,926

 

 

 

—

 

Municipal bonds(1)

 

 

3,165

 

 

 

—

 

 

 

3,072

 

 

 

93

 

Other debt securities(2)

 

 

2,490

 

 

 

—

 

 

 

2,000

 

 

 

490

 

Loans held for sale

 

 

23,452

 

 

 

—

 

 

 

—

 

 

 

23,452

 

Loans held for investment

 

 

530,644

 

 

 

—

 

 

 

—

 

 

 

530,644

 

Servicing assets(3)

 

 

28,661

 

 

 

—

 

 

 

—

 

 

 

28,661

 

Mutual fund

 

 

2,321

 

 

 

—

 

 

 

2,321

 

 

 

—

 

Equity warrant assets

 

 

2,422

 

 

 

—

 

 

 

—

 

 

 

2,422

 

Total assets at fair value

 

$

1,515,468

 

 

$

—

 

 

$

929,706

 

 

$

585,762

 

 

25

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

December 31, 2021

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Investment securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US government agencies

 

$

10,637

 

 

$

—

 

 

$

10,637

 

 

$

—

 

Mortgage-backed securities

 

 

889,339

 

 

 

—

 

 

 

889,339

 

 

 

—

 

Municipal bonds(1)

 

 

3,576

 

 

 

—

 

 

 

3,480

 

 

 

96

 

Other debt securities(2)

 

 

2,500

 

 

 

—

 

 

 

2,500

 

 

 

—

 

Loans held for sale

 

 

25,310

 

 

 

—

 

 

 

—

 

 

 

25,310

 

Loans held for investment

 

 

645,201

 

 

 

—

 

 

 

—

 

 

 

645,201

 

Servicing assets(3)

 

 

33,574

 

 

 

—

 

 

 

—

 

 

 

33,574

 

Mutual fund

 

 

2,379

 

 

 

—

 

 

 

2,379

 

 

 

—

 

Equity warrant assets

 

 

1,672

 

 

 

—

 

 

 

—

 

 

 

1,672

 

Total assets at fair value

 

$

1,614,188

 

 

$

—

 

 

$

908,335

 

 

$

705,853

 

 

(1)

During the three and six months ended June 30, 2022, the Company recorded a fair value adjustment loss of $1 thousand and $3 thousand, respectively. During the three and six months ended June 30, 2021, the Company recorded no fair value adjustment gain/loss.

(2)

During the three and six months ended June 30, 2022 the Company recorded a fair value adjustment loss of $10 thousand. During the three and six months ended June 30, 2021, the Company recorded no fair value adjustment gain/loss.

(3)

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 2021 Form 10-K.

Fair Value Option

The Company has 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. Beginning in the first quarter of 2021, the Company chose not to elect fair value for all retained participating interests arising from new government guaranteed loan sales.  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 will 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, 2022 or December 31, 2021. The unpaid principal balance of unguaranteed exposure for nonaccruals was $4.6 million and $6.9 million at June 30, 2022 and December 31, 2021, respectively.

26

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following tables provide more information about the fair value carrying amount and the unpaid principal outstanding of loans accounted for under the fair value option at June 30, 2022 and December 31, 2021.

 

 

 

June 30, 2022

 

 

 

Total Loans

 

 

Nonaccruals

 

 

90 Days or More Past Due

 

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

Fair Value Option Elections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

23,452

 

 

$

25,200

 

 

$

(1,748

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Loans held for investment

 

 

530,644

 

 

 

553,437

 

 

 

(22,793

)

 

 

31,510

 

 

 

34,101

 

 

 

(2,591

)

 

 

16,733

 

 

 

18,282

 

 

 

(1,549

)

 

 

$

554,096

 

 

$

578,637

 

 

$

(24,541

)

 

$

31,510

 

 

$

34,101

 

 

$

(2,591

)

 

$

16,733

 

 

$

18,282

 

 

$

(1,549

)

 

 

 

December 31, 2021

 

 

 

Total Loans

 

 

Nonaccruals

 

 

90 Days or More Past Due

 

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

 

Fair Value Carrying Amount

 

 

Unpaid Principal Balance

 

 

Difference

 

Fair Value Option Elections

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

25,310

 

 

$

26,831

 

 

$

(1,521

)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Loans held for investment

 

 

645,201

 

 

 

666,066

 

 

 

(20,865

)

 

 

38,262

 

 

 

42,841

 

 

 

(4,579

)

 

 

24,057

 

 

 

25,633

 

 

 

(1,576

)

 

 

$

670,511

 

 

$

692,897

 

 

$

(22,386

)

 

$

38,262

 

 

$

42,841

 

 

$

(4,579

)

 

$

24,057

 

 

$

25,633

 

 

$

(1,576

)

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

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Loans held for sale

 

$

(56

)

 

$

428

 

 

$

(226

)

 

$

464

 

Loans held for investment

 

 

(4,405

)

 

 

707

 

 

 

(3,719

)

 

 

4,889

 

 

 

$

(4,461

)

 

$

1,135

 

 

$

(3,945

)

 

$

5,353

 

Losses related to borrower-specific credit risk were $711 thousand and $2.8 million for the three and six months ended June 30, 2022, respectively, and $484 thousand and $293 thousand for the three and six months ended June 30, 2021, 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 sale

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

25,056

 

 

$

35,936

 

 

$

25,310

 

 

$

36,111

 

Repurchases

 

 

—

 

 

 

—

 

 

 

65

 

 

 

—

 

Fair value changes

 

 

(56

)

 

 

428

 

 

 

(226

)

 

 

464

 

Sales

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Settlements

 

 

(1,548

)

 

 

(7,316

)

 

 

(1,697

)

 

 

(7,527

)

Balance at end of period

 

$

23,452

 

 

$

29,048

 

 

$

23,452

 

 

$

29,048

 

 

27

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Loans held for investment

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

600,571

 

 

$

790,797

 

 

$

645,201

 

 

$

815,374

 

Repurchases

 

 

1,380

 

 

 

16,215

 

 

 

2,905

 

 

 

21,785

 

Fair value changes

 

 

(4,405

)

 

 

707

 

 

 

(3,719

)

 

 

4,889

 

Settlements

 

 

(66,902

)

 

 

(64,493

)

 

 

(113,743

)

 

 

(98,822

)

Balance at end of period

 

$

530,644

 

 

$

743,226

 

 

$

530,644

 

 

$

743,226

 

Non-Recurring Fair Value

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

 

June 30, 2022

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Collateral-dependent loans

 

$

989

 

 

$

—

 

 

$

—

 

 

$

989

 

Foreclosed assets

 

 

191

 

 

 

—

 

 

 

—

 

 

 

191

 

Total assets at fair value

 

$

1,180

 

 

$

—

 

 

$

—

 

 

$

1,180

 

 

December 31, 2021

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Collateral-dependent loans

 

$

1,567

 

 

$

—

 

 

$

—

 

 

$

1,567

 

Foreclosed assets

 

 

620

 

 

 

—

 

 

 

—

 

 

 

620

 

Total assets at fair value

 

$

2,187

 

 

$

—

 

 

$

—

 

 

$

2,187

 

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 2021 Form 10-K.


28

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Level 3 Analysis

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2022 and December 31, 2021 the significant unobservable inputs used in the fair value measurements were as follows:

June 30, 2022

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

 

Recurring fair value

 

 

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

$

93

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

5.6%

5.0%

 

Other debt security

 

$

490

 

 

Discounted expected cash flows

 

Discount rate

 

6.3%

 

Loans held for sale

 

$

23,452

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

14.5% to 20.1%

WAVG 17.5%

 

Loans held for

   investment

 

$

530,644

 

 

Discounted expected cash flows

Discounted appraisals

 

Loss rate

 

Discount rate

Prepayment speed

Appraisal adjustments

 

0% to 70.6%

(WAVG 1.6%)

14.5% to 20.1%

WAVG 17.5%

10.0% to 63.0%

 

Equity warrant assets

 

$

2,422

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

25.9% to 84.2%

3.0%

20.0%

3 - 10 years

 

Non-recurring fair value

 

 

 

 

 

 

 

 

 

 

 

 

Collateral-dependent

   loans

 

$

989

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 99.0%

 

Foreclosed assets

 

$

191

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

 

10.0

%

 

 

December 31, 2021

Level 3 Assets with Significant

Unobservable Inputs

 

Fair Value

 

 

Valuation Technique

 

Significant

Unobservable

Inputs

 

Range

Recurring fair value

 

 

 

 

 

 

 

 

 

 

Municipal bond

 

$

96

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

4.8%

5.0%

Loans held for sale

 

$

25,310

 

 

Discounted expected cash flows

 

Discount rate

Prepayment speed

 

6.2% to 21.9%

WAVG 17.4%

Loans held for

   investment

 

$

645,201

 

 

Discounted expected cash flows

Discounted appraisals

 

Loss rate

 

Discount rate

Prepayment speed

Appraisal adjustments

 

0.0% to 70.2%

(WAVG 1.5%)

6.2% to 21.9%

WAVG 17.4%

10.0% to 85.0%

Equity warrant assets

 

$

1,672

 

 

Black-Scholes option pricing model

 

Volatility

Risk-free interest rate

Marketability discount

Remaining life

 

26.2% to 88.2%

1.3% to 1.5%

20.0%

4 - 10 years

Non-recurring fair value

 

 

 

 

 

 

 

 

 

 

Collateral-dependent

   loans

 

$

1,567

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

10.0% to 99.0%

Foreclosed assets

 

$

620

 

 

Discounted appraisals

 

Appraisal adjustments (1)

 

9.0% to 10.0%

(1)

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

29

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Estimated Fair Value of Other Financial Instruments

GAAP also requires disclosure of the fair value of financial instruments carried at book value on the Unaudited Condensed Consolidated Balance Sheets.  

The carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis are as follows:

 

June 30, 2022

 

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

 

$

580,493

 

 

$

580,493

 

 

$

—

 

 

$

—

 

 

$

580,493

 

Federal funds sold

 

 

51,694

 

 

 

51,694

 

 

 

—

 

 

 

—

 

 

 

51,694

 

Certificates of deposit with other banks

 

 

4,250

 

 

 

4,257

 

 

 

—

 

 

 

—

 

 

 

4,257

 

Loans held for sale

 

 

1,176,282

 

 

 

—

 

 

 

—

 

 

 

1,199,307

 

 

 

1,199,307

 

Loans and leases held for investment, net

   of allowance for credit losses on loans

   and leases

 

 

5,263,702

 

 

 

—

 

 

 

—

 

 

 

5,216,334

 

 

 

5,216,334

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

8,155,744

 

 

 

—

 

 

 

7,635,057

 

 

 

—

 

 

 

7,635,057

 

Borrowings

 

 

86,209

 

 

 

—

 

 

 

—

 

 

 

81,403

 

 

 

81,403

 

 

December 31, 2021

 

Carrying

Amount

 

 

Quoted Price

In Active

Markets for

Identical Assets

/Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

Fair

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

187,203

 

 

$

187,203

 

 

$

—

 

 

$

—

 

 

$

187,203

 

Federal funds sold

 

 

16,547

 

 

 

16,547

 

 

 

—

 

 

 

—

 

 

 

16,547

 

Certificates of deposit with other banks

 

 

4,750

 

 

 

4,930

 

 

 

—

 

 

 

—

 

 

 

4,930

 

Loans held for sale

 

 

1,091,209

 

 

 

—

 

 

 

—

 

 

 

1,197,307

 

 

 

1,197,307

 

Loans and leases held for investment, net

   of allowance for credit losses on loans

   and leases

 

 

4,812,477

 

 

 

—

 

 

 

—

 

 

 

4,958,875

 

 

 

4,958,875

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

7,112,044

 

 

 

—

 

 

 

6,942,512

 

 

 

—

 

 

 

6,942,512

 

Borrowings

 

 

318,289

 

 

 

—

 

 

 

—

 

 

 

312,036

 

 

 

312,036

 

 

30

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Note 10. Commitments and Contingencies

Litigation

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

On March 12, 2021, a purported class action was filed against the Company in the United States District Court for the Eastern District of North Carolina, Joseph McAlear, individually and on behalf of all others similarly situated v. Live Oak Bancshares, Inc. et al.  The complaint alleged the existence of an agreement between the Company, nCino, Inc. and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees.  The complaint alleged violations of Section 1 of the federal Sherman Act (15 U.S.C. § 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes.  The plaintiff sought monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest. On October 12, 2021, the Company reached an agreement to settle the case with a proposed class of all persons (with certain exclusions) employed by the Company or its wholly-owned subsidiary, Live Oak Banking Company, Apiture, Inc. or nCino, Inc. in North Carolina at any time from January 27, 2017, through March 31, 2021.  In the agreement, the Company agreed to pay $3.9 million.  On October 13, 2021, the plaintiff filed a motion for preliminary approval of the settlement, which the court granted by order entered on November 23, 2021.  After class-wide noticing, the plaintiff filed a motion for final approval on March 28, 2022, which the court granted by order entered on April 28, 2022.  Pursuant to the terms of the settlement, the settlement became effective on June 11, 2022.

Financial Instruments with Off-Balance-Sheet Risk

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

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

 

 

 

June 30,

2022

 

 

December 31,

2021

 

Commitments to extend credit

 

$

2,867,217

 

 

$

2,634,387

 

Standby letters of credit

 

 

25,319

 

 

 

10,753

 

Total unfunded off-balance-sheet credit risk

 

$

2,892,536

 

 

$

2,645,140

 

 

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 balance of the allowance for off-balance sheet credit exposures was $874 thousand and $739 thousand at June 30, 2022 and December 31, 2021, respectively.

31

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

As of June 30, 2022 and December 31, 2021, the Company recorded unfunded commitments to provide capital contributions for on-balance-sheet investments in the amount of $20.1 million and $10.4 million, respectively. 

Concentrations of Credit Risk

The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company does not have a significant number of credits to any single borrower or group of related borrowers whereby their retained unguaranteed exposure exceeds $20.0 million, except for twenty-two relationships that have a retained unguaranteed exposure of $641.8 million of which $377.7 million of the unguaranteed exposure has been disbursed.

Additionally, the Company has future minimum lease payments receivable under non-cancelable operating leases totaling $62.0 million, of which no relationships exceed $20.0 million.

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

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.

 

32

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

99,215

 

 

$

36

 

 

$

(4

)

 

$

99,247

 

Interest expense

 

18,850

 

 

 

—

 

 

 

463

 

 

 

19,313

 

Net interest income (loss)

 

80,365

 

 

 

36

 

 

 

(467

)

 

 

79,934

 

Provision for loan and lease credit losses

 

5,267

 

 

 

—

 

 

 

—

 

 

 

5,267

 

Noninterest income

 

5,168

 

 

 

122,661

 

 

 

700

 

 

 

128,529

 

Noninterest expense

 

76,779

 

 

 

2,146

 

 

 

1,954

 

 

 

80,879

 

Income tax (benefit) expense

 

(268

)

 

 

25,868

 

 

 

(322

)

 

 

25,278

 

Net income (loss)

$

3,755

 

 

$

94,683

 

 

$

(1,399

)

 

$

97,039

 

Total assets

$

8,963,851

 

 

$

158,930

 

 

$

(1,884

)

 

$

9,120,897

 

As of and for the three months ended

   June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

87,974

 

 

$

7

 

 

$

18

 

 

$

87,999

 

Interest expense

 

16,135

 

 

 

—

 

 

 

402

 

 

 

16,537

 

Net interest income (loss)

 

71,839

 

 

 

7

 

 

 

(384

)

 

 

71,462

 

Provision for loan and lease credit losses

 

7,846

 

 

 

—

 

 

 

—

 

 

 

7,846

 

Noninterest income

 

26,810

 

 

 

42,648

 

 

 

653

 

 

 

70,111

 

Noninterest expense

 

50,829

 

 

 

1,112

 

 

 

5,617

 

 

 

57,558

 

Income tax expense (benefit)

 

5,130

 

 

 

10,209

 

 

 

(2,752

)

 

 

12,587

 

Net income (loss)

$

34,844

 

 

$

31,334

 

 

$

(2,596

)

 

$

63,582

 

Total assets

$

8,092,506

 

 

$

136,104

 

 

$

14,576

 

 

$

8,243,186

 

 


33

 

 

Live Oak Bancshares, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Banking

 

 

Fintech

 

 

Other

 

 

Consolidated

 

As of and for the six months ended

   June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

191,961

 

 

$

72

 

 

$

(4

)

 

$

192,029

 

Interest expense

 

33,380

 

 

 

—

 

 

 

936

 

 

 

34,316

 

Net interest income (loss)

 

158,581

 

 

 

72

 

 

 

(940

)

 

 

157,713

 

Provision for loan and lease credit losses

 

7,103

 

 

 

—

 

 

 

—

 

 

 

7,103

 

Noninterest income

 

37,103

 

 

 

122,898

 

 

 

1,196

 

 

 

161,197

 

Noninterest expense

 

138,178

 

 

 

4,314

 

 

 

4,101

 

 

 

146,593

 

Income tax expense (benefit)

 

8,808

 

 

 

25,722

 

 

 

(864

)

 

 

33,666

 

Net income (loss)

$

41,595

 

 

$

92,934

 

 

$

(2,981

)

 

$

131,548

 

Total assets

$

8,963,851

 

 

$

158,930

 

 

$

(1,884

)

 

$

9,120,897

 

As of and for the six months ended

   June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

176,073

 

 

$

129

 

 

$

22

 

 

$

176,224

 

Interest expense

 

34,300

 

 

 

—

 

 

 

512

 

 

 

34,812

 

Net interest income (loss)

 

141,773

 

 

 

129

 

 

 

(490

)

 

 

141,412

 

Provision for loan and lease credit losses

 

6,973

 

 

 

—

 

 

 

—

 

 

 

6,973

 

Noninterest income

 

57,334

 

 

 

42,644

 

 

 

1,190

 

 

 

101,168

 

Noninterest expense

 

106,454

 

 

 

2,132

 

 

 

7,244

 

 

 

115,830

 

Income tax expense (benefit)

 

9,780

 

 

 

10,214

 

 

 

(3,226

)

 

 

16,768

 

Net income (loss)

$

75,900

 

 

$

30,427

 

 

$

(3,318

)

 

$

103,009

 

Total assets

$

8,092,506

 

 

$

136,104

 

 

$

14,576

 

 

$

8,243,186

 

 

 

34

 

 

 

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, 2021 (the "2021 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 loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

the continuing impacts of the Coronavirus Disease 2019 (“COVID-19”) pandemic on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior;

 

•

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

35

 

 

 

 

•

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 service providers operating in the Company’s market area and elsewhere, including providers operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet;

 

•

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

 

•

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

 

•

changes in political and economic conditions;

 

•

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.

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.

36

 

 

 

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. The Bank identifies and extends lending to credit-worthy borrowers within specified industries, also called verticals, through expertise within those industries, and more broadly to select borrowers outside of those industries. A significant portion of the loans originated by the Bank are guaranteed by the SBA under the 7(a) Loan Program and the U.S. Department of Agriculture’s ("USDA") Rural Energy for America Program ("REAP"), Water and Environmental Program (“WEP”) and Business & Industry ("B&I") loan programs.

 

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

 

The Bank’s wholly owned subsidiaries are Live Oak Number One, Inc., Live Oak Clean Energy Financing LLC (“LOCEF”) and Live Oak Private Wealth, LLC (“Live Oak Private Wealth”).  Live Oak Number One, Inc. holds properties foreclosed on by the Bank. LOCEF provides financing to entities for renewable energy applications and became a wholly owned subsidiary of the Bank during the first quarter of 2019. Live Oak Private Wealth provides high-net-worth individuals and families with strategic wealth and investment management services.  During the first quarter of 2022, Jolley Asset Management, LLC (“JAM”) was merged into Live Oak Private Wealth.  JAM was previously a wholly owned subsidiary of Live Oak Private Wealth.

 

GLS is a management and technology consulting firm that advises and offers solutions and services to participants in the government guaranteed lending sector. GLS primarily provides services in connection with the settlement, accounting, and securitization processes for government guaranteed loans, including loans originated under the SBA 7(a) loan programs and USDA guaranteed loans. The Grove provides Company employees and business visitors an on-site restaurant location. Live Oak Ventures’ purpose is investing in businesses that align with the Company's strategic initiative to be a leader in financial technology.  Canapi 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 Company generates revenue primarily from net interest income and secondarily through origination and sale of government guaranteed loans.  Income from the retention of loans is comprised principally of interest income.   Income from the sale of loans is comprised of net gains on sales of loans along with loan servicing revenue and revaluation of related servicing assets. Offsetting these revenues are the cost of funding sources, provision for loan and lease credit losses, any costs related to foreclosed assets and other operating costs such as salaries and employee benefits, travel, professional services, advertising and marketing and tax expense.  The Company also has less routinely generated gains and losses arising from its financial technology investments in its fintech segment, as discussed more fully later in this section entitled “Results of Segment Operations.”

Results of Operations

Performance Summary

Three months ended June 30, 2022 compared with three months ended June 30, 2021

For the three months ended June 30, 2022, the Company reported net income of $97.0 million, or $2.16 per diluted share, compared to net income of $63.6 million, or $1.41 per diluted share, for the second quarter of 2021.  

The increase in net income was largely due to the following items:

 

•

Increase in equity method investment income of $121.3 million, largely driven by a $120.5 million gain related to the Company’s sale of its investment in Finxact, Inc. (“Finxact”); and

 

 

•

Increase in net interest income of $8.5 million, or 11.9%, predominately from increases in both average yield and volume for the total loan and lease portfolio outpacing moderate growth in interest-bearing liabilities combined with an increase in average cost of funds.

37

 

 

 

Key factors partially offsetting the increase in net income for the second quarter of 2022 were:

 

•

Decreased equity security investment gains of $42.6 million, due to the Company’s $44.1 million second quarter of 2021 fair value gain from its investment in Greenlight Financial Technologies, Inc. (“Greenlight”);

 

 

•

Decreased net gains on sales of loans of $10.6 million, or 65.3%, combined with an increased loss on loan servicing asset revaluation of $5.5 million, or 172.5%, and a net loss on loans accounted for under the fair value option increasing by $5.6 million, or 493.0%, all principally the result of negative market pricing influenced by heightened interest rates and broader movements in market conditions in the second quarter of 2022;

 

 

•

Increased noninterest expense of $23.3 million, or 40.5%, principally comprised of salaries and employee benefits up $13.4 million, or 40.7%, and contributions and donations up $4.8 million, or 703.9%; and

 

 

•

Increased income tax expense of $12.7 million primarily due the above discussed increase in net income.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

For the six months ended June 30, 2022, the Company reported a net income of $131.5 million, or $2.92 per diluted share, as compared to net income of $103.0 million, or $2.29 per diluted share, for the six months ended June 30, 2021. This increase in net income was largely due to the following items:

 

•

Increase in equity method investment income of $120.4 million due to the above mentioned second quarter 2022 Finxact gain of $120.5 million; and

 

 

•

Increase in net interest income of $16.3 million, or 11.5%, predominately from increases in both average yield and volume for the total loan and lease portfolio outpacing moderate growth in interest-bearing liabilities combined with a decrease in average cost of funds.

 

Key factors partially offsetting the increase in net income for the first half of 2022 were:

 

•

Decreased equity security investment gains of $42.7 million, due to the above mentioned second quarter of 2021 fair value gain of $44.1 million in Greenlight;

 

 

•

Increased loss on loan servicing asset revaluation of $8.5 million, or 506.5%, and a net loss on loans accounted for under the fair value option increasing by $9.3 million, or 173.7%, also principally the result of negative market pricing market conditions referenced above;

 

 

•

Increased noninterest expense of $30.8 million, or 26.6%, principally comprised of salaries and employee benefits up $20.5 million, or 31.9%, travel expense up $2.0 million, or 92.7%, advertising and marketing expense up $2.5 million, or 163.9% and contributions and donations up $4.8 million, or 321.5%; all partially offset by decreased impairment charges of $3.1 million related to renewable energy tax credits during the three months ended March 31, 2021; and 

 

 

•

Increased income tax expense of $16.9 million primarily due the above discussed increase in net income.

Net Interest Income and Margin

Net interest income represents the difference between the income that the Company earns on interest-earning assets and the cost of interest-bearing liabilities. The Company’s net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that the Company earns or pays on them, respectively. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” As a bank without a branch network, the Bank gathers deposits over the Internet and in the community in which it is headquartered. Due to the nature of a branchless bank and the relatively low overhead required for deposit gathering, the rates that the Bank offers are generally above the industry average.

38

 

 

 

Three months ended June 30, 2022 compared with three months ended June 30, 2021

For the three months ended June 30, 2022, net interest income increased $8.5 million, or 11.9%, to $79.9 million compared to $71.5 million for the three months ended June 30, 2021. This increase was principally due to growth in both average yield and volume for the total loan and lease portfolio outpacing moderate growth in interest-bearing liabilities combined with an increase in average cost of funds.  This increase over the prior year was significantly higher when excluding the effects of declining levels of Paycheck Protection Program (“PPP”) loan net interest income for the compared period, which has been declining over time as PPP loans are paid down.  Excluding PPP loan impacts of $1.2 million, comprised of amortization of net deferred fees combined with a 1% annualized interest rate less the related interest expense from funding activity, net interest income increased by $20.1 million.   Average interest-earning assets increased by $356.8 million, or 4.5%, to $8.25 billion for the three months ended June 30, 2022, compared to $7.89 billion for the three months ended June 30, 2021, while the yield on average interest-earning assets increased thirty-five basis points to 4.83%. The cost of funds on interest-bearing liabilities for the three months ended June 30, 2022, increased thirteen basis points to 0.99% while the average balance of interest-bearing liabilities increased by $120.6 million, or 1.6%, over the three months ended June 30, 2021. The increase in average interest-bearing liabilities was largely driven by funding for significant loan originations and growth.  This increase was muted by a $1.24 billion reduction in average borrowings largely related to PPPLF repayments since June 30, 2021.  As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $11.2 million outpacing growth in interest expense of $2.8 million for the second quarter of 2022 compared to the second quarter of 2021.  For the three months ended June 30, 2021 compared to the three months ended June 30, 2022, net interest margin increased from 3.63% to 3.89%.  As of June 30, 2022, the Company had $61.4 million in PPP loan balances on its books which includes $1.6 million in net deferred fees remaining to be recognized into future interest income.  The Company expects to recognize most of the remaining net deferred fees for PPP loans in 2022.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

For the six months ended June 30, 2022, net interest income increased $16.3 million, or 11.5%, to $157.7 million compared to $141.4 million for the six months ended June 30, 2021. This increase was principally due to growth in both average yield and volume for the total loan and lease portfolio outpacing growth in interest-bearing liabilities combined with a decrease in average cost of funds. This increase over the prior year was significantly higher when excluding the effects of declining levels of PPP loan net interest income for the compared period.  Excluding PPP loan impacts of $5.3 million as defined above, net interest income increased by $42.7 million.   Average interest-earning assets increased by $384.1 million, or 5.0%, to $8.05 billion for the six months ended June 30, 2022, compared to $7.67 billion for the six months ended June 30, 2021, while the yield on average interest-earning assets increased seventeen basis points to 4.81%. The cost of funds on interest-bearing liabilities for the six months ended June 30, 2022, decreased four basis points to 0.90% while the average balance of interest-bearing liabilities increased by $169.0 million, or 2.3%, over the six months ended June 30, 2021. The increase in average interest-bearing liabilities was also largely driven by funding for significant loan originations and growth.  This increase was muted by a $1.20 billion reduction in average borrowings largely related to PPPLF repayments since June 30, 2021.  As indicated in the rate/volume table below, the overall increase discussed above is reflected in increased interest income of $15.8 million as compared to a decrease in interest expense of $496 thousand for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.  For the six months ended June 30, 2021 compared to the six months ended June 30, 2022, net interest margin increased from 3.72% to 3.95%.  

During the first half of 2022, the Federal Reserve increased the federal funds target rate by 150 basis points.  Subsequently on July 27, 2022 the Federal Reserve further increased the target federal funds rate by 75 basis points and indicates that it anticipates ongoing increases will be appropriate. There can be no assurance that any increases in the federal funds rate will occur, and if they do, the amount and timing of actual increases are subject to change.  See Item 3. Quantitative and Qualitative Disclosures About Market Risk for information about the Company’s sensitivity to interest rates.  

39

 

 

 

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

 

 

 

Three Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning balances in other banks

 

$

328,014

 

 

$

848

 

 

 

1.04

%

 

$

514,232

 

 

$

234

 

 

 

0.18

%

Federal funds sold

 

 

78,216

 

 

 

196

 

 

 

1.01

 

 

 

29,199

 

 

 

10

 

 

 

0.14

 

Investment securities

 

 

915,106

 

 

 

4,046

 

 

 

1.77

 

 

 

764,017

 

 

 

2,975

 

 

 

1.56

 

Loans held for sale

 

 

1,119,094

 

 

 

15,969

 

 

 

5.72

 

 

 

1,134,259

 

 

 

15,216

 

 

 

5.38

 

Loans and leases held for

   investment(1)

 

 

5,805,907

 

 

 

78,188

 

 

 

5.40

 

 

 

5,447,839

 

 

 

69,564

 

 

 

5.12

 

Total interest-earning assets

 

 

8,246,337

 

 

 

99,247

 

 

 

4.83

 

 

 

7,889,546

 

 

 

87,999

 

 

 

4.47

 

Less: Allowance for credit losses on loans

   and leases

 

 

(62,566

)

 

 

 

 

 

 

 

 

 

 

(51,994

)

 

 

 

 

 

 

 

 

Noninterest-earning assets

 

 

644,495

 

 

 

 

 

 

 

 

 

 

 

623,895

 

 

 

 

 

 

 

 

 

Total assets

 

$

8,828,266

 

 

 

 

 

 

 

 

 

 

$

8,461,447

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

 

$

—

 

 

$

—

 

 

 

—

%

 

$

60,439

 

 

$

86

 

 

 

0.57

%

Savings

 

 

3,894,177

 

 

 

7,538

 

 

 

0.78

 

 

 

3,101,733

 

 

 

4,309

 

 

 

0.56

 

Money market accounts

 

 

93,072

 

 

 

56

 

 

 

0.24

 

 

 

104,826

 

 

 

82

 

 

 

0.31

 

Certificates of deposit

 

 

3,714,882

 

 

 

11,183

 

 

 

1.21

 

 

 

3,078,789

 

 

 

10,343

 

 

 

1.35

 

Total deposits

 

 

7,702,131

 

 

 

18,777

 

 

 

0.98

 

 

 

6,345,787

 

 

 

14,820

 

 

 

0.94

 

Borrowings

 

 

132,969

 

 

 

536

 

 

 

1.62

 

 

 

1,368,742

 

 

 

1,717

 

 

 

0.50

 

Total interest-bearing liabilities

 

 

7,835,100

 

 

 

19,313

 

 

 

0.99

 

 

 

7,714,529

 

 

 

16,537

 

 

 

0.86

 

Noninterest-bearing deposits

 

 

96,123

 

 

 

 

 

 

 

 

 

 

 

85,824

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities

 

 

55,725

 

 

 

 

 

 

 

 

 

 

 

45,309

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

841,318

 

 

 

 

 

 

 

 

 

 

 

615,785

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

8,828,266

 

 

 

 

 

 

 

 

 

 

$

8,461,447

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

79,934

 

 

 

3.84

%

 

 

 

 

 

$

71,462

 

 

 

3.61

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.89

%

 

 

 

 

 

 

 

 

 

 

3.63

%

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

105.25

%

 

 

 

 

 

 

 

 

 

 

102.27

%

(1)

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

 

40

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

 

Average

Balance

 

 

Interest

 

 

Average

Yield/Rate

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning balances in other banks

 

$

276,114

 

 

$

1,027

 

 

 

0.75

%

 

$

423,252

 

 

$

531

 

 

 

0.25

%

Federal funds sold

 

 

43,897

 

 

 

202

 

 

 

0.93

 

 

 

28,703

 

 

 

16

 

 

 

0.11

 

Investment securities

 

 

905,403

 

 

 

7,445

 

 

 

1.66

 

 

 

750,164

 

 

 

5,904

 

 

 

1.59

 

Loans held for sale

 

 

1,117,360

 

 

 

31,152

 

 

 

5.62

 

 

 

1,152,667

 

 

 

30,293

 

 

 

5.30

 

Loans and leases held for

   investment(1)

 

 

5,708,084

 

 

 

152,203

 

 

 

5.38

 

 

 

5,311,939

 

 

 

139,480

 

 

 

5.30

 

Total interest-earning assets

 

 

8,050,858

 

 

 

192,029

 

 

 

4.81

 

 

 

7,666,725

 

 

 

176,224

 

 

 

4.64

 

Less: Allowance for credit losses on loans

   and leases

 

 

(62,649

)

 

 

 

 

 

 

 

 

 

 

(52,155

)

 

 

 

 

 

 

 

 

Noninterest-earning assets

 

 

616,486

 

 

 

 

 

 

 

 

 

 

 

608,923

 

 

 

 

 

 

 

 

 

Total assets

 

$

8,604,695

 

 

 

 

 

 

 

 

 

 

$

8,223,493

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

 

$

—

 

 

$

—

 

 

 

—

%

 

$

154,698

 

 

$

442

 

 

 

0.58

%

Savings

 

 

3,750,838

 

 

 

12,378

 

 

 

0.67

 

 

 

2,731,224

 

 

 

7,821

 

 

 

0.58

 

Money market accounts

 

 

92,272

 

 

 

110

 

 

 

0.24

 

 

 

105,289

 

 

 

165

 

 

 

0.32

 

Certificates of deposit

 

 

3,633,547

 

 

 

20,637

 

 

 

1.15

 

 

 

3,114,979

 

 

 

23,336

 

 

 

1.51

 

Total deposits

 

 

7,476,657

 

 

 

33,125

 

 

 

0.89

 

 

 

6,106,190

 

 

 

31,764

 

 

 

1.05

 

Borrowings

 

 

197,369

 

 

 

1,191

 

 

 

1.22

 

 

 

1,398,793

 

 

 

3,048

 

 

 

0.44

 

Total interest-bearing liabilities

 

 

7,674,026

 

 

 

34,316

 

 

 

0.90

 

 

 

7,504,983

 

 

 

34,812

 

 

 

0.94

 

Noninterest-bearing deposits

 

 

91,373

 

 

 

 

 

 

 

 

 

 

 

83,336

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities

 

 

53,841

 

 

 

 

 

 

 

 

 

 

 

33,649

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

785,455

 

 

 

 

 

 

 

 

 

 

 

601,525

 

 

 

 

 

 

 

 

 

Total liabilities and

   shareholders' equity

 

$

8,604,695

 

 

 

 

 

 

 

 

 

 

$

8,223,493

 

 

 

 

 

 

 

 

 

Net interest income and interest

   rate spread

 

 

 

 

 

$

157,713

 

 

 

3.91

%

 

 

 

 

 

$

141,412

 

 

 

3.70

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.95

%

 

 

 

 

 

 

 

 

 

 

3.72

%

Ratio of average interest-earning

   assets to average interest-bearing

   liabilities

 

 

 

 

 

 

 

 

 

 

104.91

%

 

 

 

 

 

 

 

 

 

 

102.16

%

(1)

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

 

41

 

 

 

 

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,

 

 

 

2022 vs. 2021

 

 

2022 vs. 2021

 

 

 

Increase (Decrease) Due to

 

 

Increase (Decrease) Due to

 

 

 

Rate

 

 

Volume

 

 

Total

 

 

Rate

 

 

Volume

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning balances in other banks

 

$

897

 

 

$

(283

)

 

$

614

 

 

$

862

 

 

$

(366

)

 

$

496

 

Federal funds sold

 

 

116

 

 

 

70

 

 

 

186

 

 

 

147

 

 

 

39

 

 

 

186

 

Investment securities

 

 

443

 

 

 

628

 

 

 

1,071

 

 

 

292

 

 

 

1,249

 

 

 

1,541

 

Loans held for sale

 

 

963

 

 

 

(210

)

 

 

753

 

 

 

1,815

 

 

 

(956

)

 

 

859

 

Loans and leases held for investment

 

 

3,927

 

 

 

4,697

 

 

 

8,624

 

 

 

2,241

 

 

 

10,482

 

 

 

12,723

 

Total interest income

 

 

6,346

 

 

 

4,902

 

 

 

11,248

 

 

 

5,357

 

 

 

10,448

 

 

 

15,805

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

 

 

—

 

 

 

(86

)

 

 

(86

)

 

 

—

 

 

 

(442

)

 

 

(442

)

Savings

 

 

1,912

 

 

 

1,317

 

 

 

3,229

 

 

 

1,415

 

 

 

3,142

 

 

 

4,557

 

Money market accounts

 

 

(18

)

 

 

(8

)

 

 

(26

)

 

 

(37

)

 

 

(18

)

 

 

(55

)

Certificates of deposit

 

 

(1,186

)

 

 

2,026

 

 

 

840

 

 

 

(6,114

)

 

 

3,415

 

 

 

(2,699

)

Borrowings

 

 

2,085

 

 

 

(3,266

)

 

 

(1,181

)

 

 

3,077

 

 

 

(4,934

)

 

 

(1,857

)

Total interest expense

 

 

2,793

 

 

 

(17

)

 

 

2,776

 

 

 

(1,659

)

 

 

1,163

 

 

 

(496

)

Net interest income

 

$

3,553

 

 

$

4,919

 

 

$

8,472

 

 

$

7,016

 

 

$

9,285

 

 

$

16,301

 

 

Provision for Loan and Lease Credit Losses

The provision for loan and lease credit losses represents the amount necessary to be charged against the current period’s earnings to maintain the 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 2022, there was a provision for loan and lease credit losses of $5.3 million compared to $7.8 million for the same period in 2021, a decrease of $2.6 million.   For the first six months of 2022, there was a provision for loan and lease credit losses of $7.1 million compared to $7.0 million for the same period in 2021, an increase of $130 thousand.  The decrease in provision expense as compared to the second quarter of 2021 and nominal change from the first half of 2021 was primarily the result of significant improvement in forecasts related to employment and default expectations within industries previously impacted by COVID-19 which have continued to improve significantly over that experienced in 2021.

Loans and leases held for investment at historical cost were $5.33 billion as of June 30, 2022, increasing by $631.4 million, or 13.4%, compared to June 30, 2021.  Excluding PPP loans and net unearned fees on those loans, the balance in loans and leases held for investment at historical cost was $5.27 billion at June 30, 2022, an increase of $1.50 billion, or 39.7%, over June 30, 2021.

 

Net charge-offs for loans and leases carried at historical cost were $2.5 million, or 0.19% of average quarterly loans and leases held for investment, carried at historical cost, on an annualized basis, for the three months ended June 30, 2022, compared to net charge-offs of $2.4 million, or 0.21%, for the three months ended June 30, 2021.  For the six months ended June 30, 2022, net charge-offs totaled $4.8 million compared to $1.4 million for the six months ended June 30, 2021, an increase of $3.4 million, or 237.1%.  The increase in net charge-offs for the first half of 2022 was principally related to the expiration of government subsidies and the return to expected losses consistent with pre-covid historical experience.  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.  

 

42

 

 

 

 

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA, excluding $3.6 million and $5.5 million accounted for under the fair value option at June 30, 2022 and 2021, respectively, totaled $12.0 million, which was 0.22% of the held for investment loan and lease portfolio carried at historical cost at June 30, 2022, compared to $22.5 million, or 0.48% of loans and leases held for investment carried at historical cost at June 30, 2021.  Nonperforming loans and leases carried at historical cost which are not guaranteed by the SBA or USDA were 0.23% and 0.60% of the historical cost portion of the held for investment loan and lease portfolio, excluding PPP loans, at June 30, 2022 and 2021, respectively.

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 (loss) gain 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,

 

 

2022/2021 Increase (Decrease)

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

6,477

 

 

$

6,218

 

 

$

259

 

 

 

4.17

%

Loan servicing asset revaluation

 

 

(8,668

)

 

 

(3,181

)

 

 

(5,487

)

 

 

(172.49

)

Net gains on sales of loans

 

 

5,630

 

 

 

16,234

 

 

 

(10,604

)

 

 

(65.32

)

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

   value option

 

 

(4,461

)

 

 

1,135

 

 

 

(5,596

)

 

 

(493.04

)

Equity method investments income (loss)

 

 

119,056

 

 

 

(2,278

)

 

 

121,334

 

 

 

5,326.34

 

Equity security investments gains (losses), net

 

 

1,655

 

 

 

44,253

 

 

 

(42,598

)

 

 

(96.26

)

Lease income

 

 

2,510

 

 

 

2,616

 

 

 

(106

)

 

 

(4.05

)

Management fee income

 

 

2,558

 

 

 

1,473

 

 

 

1,085

 

 

 

73.66

 

Other noninterest income

 

 

3,772

 

 

 

3,641

 

 

 

131

 

 

 

3.60

 

Total noninterest income

 

$

128,529

 

 

$

70,111

 

 

$

58,418

 

 

 

83.32

%

 

 

 

Six Months Ended June 30,

 

 

2022/2021 Increase (Decrease)

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing revenue

 

$

12,833

 

 

$

12,652

 

 

$

181

 

 

 

1.43

%

Loan servicing asset revaluation

 

 

(10,237

)

 

 

(1,688

)

 

 

(8,549

)

 

 

(506.46

)

Net gains on sales of loans

 

 

26,607

 

 

 

28,163

 

 

 

(1,556

)

 

 

(5.52

)

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

   value option

 

 

(3,945

)

 

 

5,353

 

 

 

(9,298

)

 

 

(173.70

)

Equity method investments income (loss)

 

 

116,932

 

 

 

(3,435

)

 

 

120,367

 

 

 

3,504.13

 

Equity security investments gains (losses), net

 

 

1,611

 

 

 

44,358

 

 

 

(42,747

)

 

 

(96.37

)

Lease income

 

 

5,013

 

 

 

5,215

 

 

 

(202

)

 

 

(3.87

)

Management fee income

 

 

4,046

 

 

 

3,407

 

 

 

639

 

 

 

18.76

 

Other noninterest income

 

 

8,337

 

 

 

7,143

 

 

 

1,194

 

 

 

16.72

 

Total noninterest income

 

$

161,197

 

 

$

101,168

 

 

$

60,029

 

 

 

59.34

%

 

For the three months ended June 30, 2022, noninterest income increased by $58.4 million, or 83.3%, compared to the three months ended June 30, 2021.  The increase over the prior year is the result of the $120.5 million Finxact gain.  Partially offsetting the increase over the prior year was decreased equity security investment gains of $42.6 million, due to the second quarter of 2021 gain arising from Company’s investment in Greenlight, combined with decreased net gains on sales of loans of $10.6 million, increased loss on loan servicing asset revaluation of $5.5 million, and increased net loss on loans accounted for under the fair value option of $5.6 million.

43

 

 

 

For the six months ended June 30, 2022, noninterest income increased by $60.0 million, or 59.3%, compared to the six months ended June 30, 2021.  The increase over the first half of 2021 is also the result of the above mentioned Finxact gain partially offset by a decrease in equity security investment gains of $42.7 million related to Greenlight. Also partially offsetting the increase over the first half of 2021 was an increased loss on loan servicing asset revaluation of $8.5 million, and an increased net loss on loans accounted for under the fair value option of $9.3 million.

 

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

 

 

 

Three months ended June 30,

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Amount of loans and leases

   originated

 

$

959,635

 

 

$

1,153,693

 

 

$

865,063

 

 

$

1,180,219

 

Guaranteed portions

   of loans sold

 

 

68,818

 

 

 

130,858

 

 

 

219,703

 

 

 

136,747

 

Outstanding balance of

   guaranteed loans sold (1)

 

 

2,681,079

 

 

 

2,694,931

 

 

 

2,786,403

 

 

 

2,843,963

 

 

 

 

Six Months Ended June 30,

 

 

For years ended December 31,

 

 

 

2022

 

 

2021

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

Amount of loans and leases

   originated

 

$

1,824,698

 

 

$

2,333,912

 

 

$

4,480,725

 

 

$

4,450,198

 

 

$

2,001,886

 

 

$

1,765,680

 

Guaranteed portions of

   loans sold

 

 

288,521

 

 

 

267,605

 

 

 

668,462

 

 

 

542,596

 

 

 

340,374

 

 

 

945,178

 

Outstanding balance of

   guaranteed loans sold (1)

 

 

2,681,079

 

 

 

2,694,931

 

 

 

2,756,915

 

 

 

2,819,625

 

 

 

2,746,480

 

 

 

3,045,460

 

 

(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.

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, an inflation rate, ancillary income, prepayment speeds and default rates and losses, with the prepayment speed being one of the most sensitive assumptions.  For the three months ended June 30, 2022, there was a negative loan servicing revaluation adjustment of $8.7 million, compared to $3.2 million for the three months ended June 30, 2021, an increase in expense of $5.5 million, or 172.5%.  For the six months ended June 30, 2022 there was negative loan servicing revaluation adjustment of $10.2 million compared to $1.7 million for the six months ended June 30, 2021, an increase in expense of $8.5 million, or 506.5%.  The decrease in the valuation of the servicing asset for both comparative periods was principally the result of negative market pricing in the second quarter of 2022 influenced by heighted interest rates and broader movements in market conditions.  Increased prepayment speeds also contributed to lower valuations, to a lesser extent, when comparing year to date periods.

 

Net Gains on Sales of Loans: For the three months ended June 30, 2022, net gains on sales of loans decreased $10.6 million, or 65.3%, compared to the three months ended June 30, 2021. The volume of guaranteed loans sold decreased $62.1 million, or 47.4%, for the three months ended June 30, 2022 to $68.8 million from $130.9 million in the three months ended June 30, 2021.   For the six months ended June 30, 2022, net gains on sales of loans decreased $1.6 million, or 5.5%, compared to the six months ended June 30, 2021. For the six months ended June 30, 2022, the volume of guaranteed loans sold increased $20.9 million, or 7.8%, to $288.5 million from $267.6 million for the six months ended June 30, 2021.  The average net gain on loan sale premium decreased from 112% to 108% in the second quarters of 2021 and 2022, respectively, and decreased from 111% to 109% in the first halves of 2021 and 2022, respectively.  The decrease in net gains on sales of loans for both periods was the result of emerging negative market conditions in the second quarter of 2022, as discussed above.  Further exacerbating the decrease between comparative quarters was significantly lower sales volume in the second quarter of 2022 following a higher than normal sales volume in the first quarter of 2022. This decrease in sales volume was largely a product of expected negative premium changes occurring in the second quarter of 2022.

 

44

 

 

 

 

Net (Loss) Gain on Loans Accounted for Under the Fair Value Option:  For the three months ended June 30, 2022, the Company had a net loss on loans accounted for under the fair value option of $4.5 million compared to a net gain of $1.1 million for the second quarter of 2021, a negative change of $5.6 million, or 493.0%. For the six months ended June 30, 2022, the Company had a net loss on loans accounted for under the fair value option of $3.9 million compared to a net gain of $5.4 million for the same period of 2021, a negative change of $9.3 million, or 173.7%. The carrying amount of loans accounted for under the fair value option at June 30, 2022 and 2021 was $554.1 million ($23.5 million classified as held for sale and $530.6 million classified as held for investment) and $772.3 million ($29.0 million classified as held for sale and $743.2 million classified as held for investment), respectively, a decrease of $218.2 million, or 28.3%.  The decreased net gain on loans accounted for under the fair value option during second quarter and half of 2022 was largely the result of the same negative market conditions discussed above.

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,

 

 

2022/2021 Increase (Decrease)

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

46,276

 

 

$

32,900

 

 

$

13,376

 

 

 

40.66

%

Non-employee expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel expense

 

 

2,358

 

 

 

1,549

 

 

 

809

 

 

 

52.23

 

Professional services expense

 

 

3,988

 

 

 

3,329

 

 

 

659

 

 

 

19.80

 

Advertising and marketing expense

 

 

2,301

 

 

 

875

 

 

 

1,426

 

 

 

162.97

 

Occupancy expense

 

 

2,773

 

 

 

2,224

 

 

 

549

 

 

 

24.69

 

Technology expense

 

 

5,762

 

 

 

5,131

 

 

 

631

 

 

 

12.30

 

Equipment expense

 

 

3,784

 

 

 

3,721

 

 

 

63

 

 

 

1.69

 

Other loan origination and maintenance expense

 

 

3,022

 

 

 

3,307

 

 

 

(285

)

 

 

(8.62

)

Renewable energy tax credit investment impairment

 

 

50

 

 

 

—

 

 

 

50

 

 

 

100.00

 

FDIC insurance

 

 

2,164

 

 

 

1,704

 

 

 

460

 

 

 

27.00

 

Contributions and donations

 

 

5,515

 

 

 

686

 

 

 

4,829

 

 

 

703.94

 

Other expense

 

 

2,886

 

 

 

2,132

 

 

 

754

 

 

 

35.37

 

Total non-employee expenses

 

 

34,603

 

 

 

24,658

 

 

 

9,945

 

 

 

40.33

 

Total noninterest expense

 

$

80,879

 

 

$

57,558

 

 

$

23,321

 

 

 

40.52

%

 

 

 

Six Months Ended June 30,

 

 

2022/2021 Increase (Decrease)

 

 

 

2022

 

 

2021

 

 

Amount

 

 

Percent

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

84,783

 

 

$

64,266

 

 

$

20,517

 

 

 

31.93

%

Non-employee expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Travel expense

 

 

4,255

 

 

 

2,208

 

 

 

2,047

 

 

 

92.71

 

Professional services expense

 

 

6,779

 

 

 

7,160

 

 

 

(381

)

 

 

(5.32

)

Advertising and marketing expense

 

 

4,030

 

 

 

1,527

 

 

 

2,503

 

 

 

163.92

 

Occupancy expense

 

 

5,100

 

 

 

4,336

 

 

 

764

 

 

 

17.62

 

Technology expense

 

 

11,815

 

 

 

10,009

 

 

 

1,806

 

 

 

18.04

 

Equipment expense

 

 

7,600

 

 

 

7,422

 

 

 

178

 

 

 

2.40

 

Other loan origination and maintenance expense

 

 

6,135

 

 

 

6,634

 

 

 

(499

)

 

 

(7.52

)

Renewable energy tax credit investment impairment

 

 

50

 

 

 

3,127

 

 

 

(3,077

)

 

 

(98.40

)

FDIC insurance

 

 

4,136

 

 

 

3,469

 

 

 

667

 

 

 

19.23

 

Contributions and donations

 

 

6,238

 

 

 

1,480

 

 

 

4,758

 

 

 

321.49

 

Other expense

 

 

5,672

 

 

 

4,192

 

 

 

1,480

 

 

 

35.31

 

Total non-employee expenses

 

 

61,810

 

 

 

51,564

 

 

 

10,246

 

 

 

19.87

 

Total noninterest expense

 

$

146,593

 

 

$

115,830

 

 

$

30,763

 

 

 

26.56

%

 

45

 

 

 

 

Total noninterest expense for the three and six months ended June 30, 2022, increased $23.3 million, or 40.5%, and $30.8 million, or 26.6%, respectively, compared to the same periods in 2021. The increase in noninterest expense for the comparable three and six month periods was largely driven by various components, as discussed below.

Salaries and employee benefits: Total personnel expense for the three and six months ended June 30, 2022 increased by $13.4 million, or 40.7%, and $20.5 million, or 31.9%, respectively, compared to the same periods in 2021.  The increase in salaries and employee benefits was principally related to continued investment in human resources to support strategic and growth initiatives.  The second quarter of 2022 included an additional $7.5 million bonus accrual while the second quarter of 2021 included an additional $4.0 million bonus accrual, both related to earlier mentioned Finxact and Greenlight gains, respectively.  Total full-time equivalent employees increased from 701 at June 30, 2021, to 891 at June 30, 2022.  Salaries and employee benefits expense included $5.1 million and $10.0 million of stock-based compensation for the three and six months ended June 30, 2022, respectively, compared to $4.1 million and $9.1 million for the three and six months ended June 30, 2021, respectively.  Expenses related to the employee stock purchase program, stock grants, stock option compensation and restricted stock expense are all considered stock-based compensation.

Travel expense:  For the three and six months ended June 30, 2022, travel expenses increased $809 thousand, or 52.2%, and $2.0 million, or 92.7%, respectively, compared to the same periods in 2021.  Travel expenses increased primarily in relation to supporting both loan origination volume and the customer base as travel restrictions have eased combined with inflationary impacts on travel related costs.

Advertising and marketing expense: For the three and six months ended June 30, 2022, advertising and marketing expense increased $1.4 million, or 163.0%, and $2.5 million, or 163.9%, respectively, compared to the same periods in 2021.  Increases were largely driven by a continuation of renewed marketing events.

Technology expense: For the three and six months ended June 30, 2022, technology expense increased $631 thousand, or 12.3%, and $1.8 million, or 18.0%, respectively, compared to the same periods in 2021.    This increase was primarily related to enhanced investments in the Company’s technology resources.

Renewable energy tax credit investment impairment:  During the first quarter of 2021, the Company recognized $3.1 million in impairment charges related to a $3.9 million renewable energy tax credit investment that was fully funded. Investments of this type generate a return primarily through the realization of income tax credits and other benefits; accordingly, impairment of the investment amount is recognized in conjunction with the realization of related tax benefits.

Contributions and donations:  For the three and six months ended June 30, 2022, contributions and donations expense increased $4.8 million, or 703.9%, and $4.8 million, or 321.5%, respectively, compared to the same periods in 2021.    This increase was related to a special charitable donation during the second quarter of 2022 of $5.0 million made in connection with the earlier discussed Finxact gain.

Income Tax Expense

For the three months ended June 30, 2022, income tax expense was $25.3 million compared to $12.6 million for the second quarter of 2021, and the Company’s effective tax rates were 20.7% and 16.5%, respectively.  For the six months ended June 30, 2022, income tax expense was $33.7 million compared to $16.8 million for the first half of 2021, and the Company’s effective tax rates were 20.4% and 14.0%, respectively. The higher level of income tax expense for the second quarter and first half of 2022 compared to the comparative periods of 2021 was primarily from increased pretax income during the quarter, largely a product of the earlier discussed Finxact gain.  The effective tax rate for the second quarter and first half of 2022 was higher than comparative periods principally due to lower levels of expected renewable energy tax credits in 2022 combined with tax benefits arising from the vesting of stock unit awards which vested in 2021.

46

 

 

 

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,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Banking

 

$

3,755

 

 

$

34,844

 

 

$

41,595

 

 

$

75,900

 

Fintech

 

 

94,683

 

 

 

31,334

 

 

 

92,934

 

 

 

30,427

 

Other

 

 

(1,399

)

 

 

(2,596

)

 

 

(2,981

)

 

 

(3,318

)

Consolidated net income

 

$

97,039

 

 

$

63,582

 

 

$

131,548

 

 

$

103,009

 

Banking

For the three and six months ended June 30, 2022, net income decreased $31.1 million, or 89.2%, and $34.3 million, or 45.2%, respectively, compared to the same periods of 2021.  The decrease was principally due to lower levels of noninterest income arising from negative market pricing influenced by heightened interest rates and broader movements in market conditions in the second quarter of 2022.

For the three and six months ended June 30, 2022, net interest income increased $8.5 million, or 11.9%, and $16.8 million, or 11.9%, respectively, compared to the same periods of 2021.  See the analysis of net interest income included in the above section captioned “Net Interest Income and Margin” as it is predominantly related to the Banking segment.

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

 

For the three and six months ended June 30, 2022, noninterest income decreased $21.6, or 80.7%, and $20.2 million, or 35.3%, respectively, compared to the same periods of 2021.  The decrease for both comparative periods was principally driven by a decrease in net gains on sales of loans combined with an increase of losses in loan servicing asset revaluation and net losses arising from loans accounted for under the fair value option.  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, 2022, noninterest expense increased $26.0 million, or 51.1%, and $31.7 million, or 29.8%, respectively, compared to same periods of 2021.  See the analysis of these categories of noninterest expense included in the above section captioned “Noninterest Expense” for additional discussion.

For the three and six months ended June 30, 2022, income tax expense decreased $5.4 million, or 105.2%, and $972 thousand, or 9.9%, respectively, compared to the same periods of 2021. This decrease is a product of the above discussed decrease in Banking segment income for comparative periods.  

Fintech

For the three and six months ended June 30, 2022, net income increased by $63.3 million, or 202.2%, and $62.5 million, or 205.4%, respectively, compared to same periods of 2021.  The increase was principally due to the second quarter of 2022 equity method investment gain of $120.5 million from the sale of Finxact.  This increase was partially offset by the equity security investment gains arising from the second quarter of 2021 gain of $44.1 million arising from the Company’s investment in Greenlight.

For the three and six months ended June 30, 2022, noninterest expense increased $1.0 million and $2.2 million, respectively, compared to the same period of 2021.  This increase was largely due increased levels of salaries and benefits.

For the three and six months ended June 30, 2022, income tax expense increased $15.7 million, or 153.4%, and $15.5 million, or 151.8%, respectively, compared to the same periods of 2021. This increase is a product of the above discussed increase in Fintech segment income for comparative periods.  See the above section captioned “Income Tax Expense.”

 

47

 

 

 

 

Discussion and Analysis of Financial Condition

June 30, 2022 vs. December 31, 2021  

Total assets at June 30, 2022 were $9.12 billion, an increase of $907.5 million, or 11.0%, compared to total assets of $8.21 billion at December 31, 2021. The growth in total assets was principally driven by the following:

 

•

Cash and cash equivalents, comprised of cash and due from banks and federal funds sold was $632.2 million at June 30, 2022, an increase of $428.4 million, or 210.3%, compared to $203.8 million at December 31, 2021.  This change reflects increased liquidity planning levels in the current rising rate environment and proceeds arising from the Finxact sale combined with growing deposit levels.

 

•

Growth in total loans and leases held for investment and held for sale of $422.2 million resulting from strong origination activity in the first half of 2022 and holding loans available for sale for longer periods of time before sale, as discussed more fully below.  Total originations during the first half of 2022 were $1.82 billion.

Loans held for sale increased $83.2 million, or 7.5%, during the first six months of 2022, from $1.12 billion at December 31, 2021, to $1.20 billion at June 30, 2022. The increase was primarily the result of strong origination volumes during the first half of the year combined with intentionally holding loans available for sale for longer periods of time during the second quarter of 2022 due to recent circumstances negatively impacting gain on sale premiums.  See “Results of Operations” discussion of “Net Gains on Sales of Loans” for additional information.

Loans and leases held for investment increased $338.9 million, or 6.1%, during the first six months of 2022, from $5.52 billion at December 31, 2021, to $5.86 billion at June 30, 2022. The increase was primarily the result of the above-mentioned loan originations in 2022 combined with increased levels of loans retained as held for investment.  Excluding PPP loans, total loans and leases held for investment increased $539.5 million, or 10.3%, during the first six months of 2022.  All PPP loans are classified as held for investment.

 

Total deposits were $8.16 billion at June 30, 2022, an increase of $1.04 billion, or 14.7%, from $7.11 billion at December 31, 2021. The increase in deposits is largely driven by significant loan origination efforts.

 

Borrowings decreased to $86.2 million at June 30, 2022 from $318.3 million at December 31, 2021.  This decrease was related principally to net curtailments of borrowings through the PPPLF which decreased to $48.2 million at June 30, 2022 from $267.6 million at December 31, 2021. These PPPLF borrowings are used to help fund PPP loans.

 

Shareholders’ equity at June 30, 2022 was $791.7 million as compared to $715.1 million at December 31, 2021. The book value per share was $18.05 at June 30, 2022 compared to $16.39 at December 31, 2021. Average equity to average assets was 9.1% for the six months ended June 30, 2022 compared to 8.8% for the year ended December 31, 2021. The increase in shareholders’ equity for the first six months of 2022 was principally the result of $131.5 million in net income and stock-based compensation expense of $10.0 million, partially offset by other comprehensive loss associated with negative market impacts on the Company’s available-for-sale investment portfolio of $61.2 million.

Asset Quality

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

Nonperforming Assets

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

48

 

 

 

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

Nonperforming assets and TDRs, excluding loans measured at fair value, at June 30, 2022 were $88.8 million, which represented a $8.6 million, or 10.7%, increase from December 31, 2021. These nonperforming assets at June 30, 2022 were comprised of $45.8 million in nonaccrual loans and leases and $191 thousand in foreclosed assets. Of the $88.8 million of nonperforming assets and TDRs, $54.8 million carried a government guarantee, leaving an unguaranteed exposure of $34.0 million in total nonperforming assets and TDRs at June 30, 2022. This represents a decrease of $3.0 million, or 8.2%, from an unguaranteed exposure of $37.0 million at December 31, 2021.  

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

 

 

 

June 30, 2022 (1)

 

 

December 31, 2021 (1)

 

Nonaccrual loans and leases:

 

 

 

 

 

 

 

 

Total nonperforming loans and leases (all on nonaccrual)

 

$

45,768

 

 

$

42,533

 

Total accruing loans and leases past due 90 days or more

 

 

—

 

 

 

—

 

Foreclosed assets

 

 

191

 

 

 

620

 

Total troubled debt restructurings

 

 

66,638

 

 

 

55,273

 

Less nonaccrual troubled debt restructurings

 

 

(23,809

)

 

 

(18,210

)

Total performing troubled debt restructurings

 

 

42,829

 

 

 

37,063

 

Total nonperforming assets and troubled debt restructurings

 

$

88,788

 

 

$

80,216

 

Allowance for credit losses on loans and leases

 

$

65,863

 

 

$

63,584

 

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

   investment

 

 

0.86

%

 

 

0.87

%

Total nonperforming loans and leases to total assets

 

 

0.53

%

 

 

0.56

%

Total nonperforming assets and troubled debt restructurings to total

   assets

 

 

1.04

%

 

 

1.06

%

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

   investment

 

 

1.24

%

 

 

1.30

%

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

   and leases

 

 

143.91

%

 

 

149.49

%

 

(1)

Excludes loans measured at fair value.

 

49

 

 

 

 

 

 

June 30, 2022 (1)

 

 

December 31, 2021 (1)

 

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

 

 

 

 

 

 

 

 

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

   nonaccrual)

 

$

33,794

 

 

$

26,546

 

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

   U.S government

 

 

—

 

 

 

—

 

Foreclosed assets guaranteed by the U.S. government

 

 

162

 

 

 

490

 

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

 

 

36,712

 

 

 

26,954

 

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

   government

 

 

(15,842

)

 

 

(10,770

)

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

 

 

20,870

 

 

 

16,184

 

Total nonperforming assets and troubled debt restructurings guaranteed

   by the U.S. government

 

$

54,826

 

 

$

43,220

 

Allowance for credit losses on loans and leases

 

$

65,863

 

 

$

63,584

 

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

   total held for investment loans and leases

 

 

0.22

%

 

 

0.33

%

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

   total assets

 

 

0.14

%

 

 

0.21

%

Total nonperforming assets and troubled debt restructurings not guaranteed by

   the U.S. government to total assets

 

 

0.40

%

 

 

0.49

%

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

   and leases not guaranteed by the U.S government

 

 

550.05

%

 

 

397.73

%

 

(1)

Excludes loans measured at fair value.

Total nonperforming assets and TDRs, including loans measured at fair value, at June 30, 2022 were $148.7 million, which represented a $4.9 million, or 3.2%, decrease from December 31, 2021. These nonperforming assets at June 30, 2022 were comprised of $79.9 million in nonaccrual loans and leases and $191 thousand in foreclosed assets. Of the $148.7 million of nonperforming assets and TDRs, $102.7 million carried a government guarantee, leaving an unguaranteed exposure of $45.9 million in total nonperforming assets and TDRs at June 30, 2022. This represents a decrease of $6.6 million, or 12.6%, from an unguaranteed exposure of $52.5 million at December 31, 2021.

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 6.1% at June 30, 2022, compared to 6.0% at December 31, 2021. 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, 2022 and December 31, 2021 were 1.6% and 2.3%, respectively.

50

 

 

 

As of June 30, 2022, and December 31, 2021, potential problem (also referred to as criticized) and classified loans and leases, excluding loans measured at fair value, totaled $396.1 million and $372.7 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 2021 Form 10-K. At June 30, 2022, the portion of criticized and classified loans and leases guaranteed by the SBA or USDA totaled $196.6 million and total portfolio unguaranteed exposure risk was $199.6 million, or 5.9% of total held for investment unguaranteed exposure carried at historical cost. This compares to the December 31, 2021 portion of criticized and classified loans and leases guaranteed by the SBA or USDA which totaled $197.2 million and total portfolio unguaranteed exposure risk was $175.5 million, or 6.3% of total held for investment unguaranteed exposure carried at historical cost.  As of June 30, 2022, 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: Wine and Craft Beverage at 10.9%, Hotels at 9.8%, Educational Services at 9.0%, Senior Care at 8.6%, Healthcare at 7.7%, General Lending at 7.6%, Entertainment Centers at 6.0%, Agriculture at 4.7%, Veterinary at 4.6%, Fitness Centers at 4.4%, and Sponsor Finance at 4.4%. As of December 31, 2021, loans and leases carried at historical cost within the following verticals comprise the largest portion of the total potential problem and classified loans and leases: Educational Services at 16.1%, Wine and Craft Beverage at 13.7%, Hotels at 11.8%, Entertainment Centers at 10.4%, Healthcare at 9.0%, Fitness Centers at 5.3%, Self Storage at 4.8%, Agriculture at 4.5% and Veterinary at 4.4%. Other than Hotels and Sponsor Finance which are a part of the Company’s Specialty Lending division, all of the above listed verticals are within the Company’s Small Business Banking division.  The majority of the $23.4 million increase in potential problem and classified loans and leases in the first six months of 2022 was comprised of several relationships that did not have a government guarantee, largely related to some of the more recently matured verticals.  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, 2022, the Company had a total of $7.8 million in modified unguaranteed loans and leases on payment deferral with $258 thousand in accrued interest.

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, 2022, and December 31, 2021, Risk Grade 5 loans and leases, excluding loans measured at fair value, totaled $293.6 million and $267.4 million, respectively. The increase in Risk Grade 5 loans and leases, exclusive of loans measured at fair value, during the first half of 2022 was principally confined to eight verticals: Senior Care ($22.3 million or 85.2%), Venture Banking ($10.6 million or 40.4%), Rural Lending ($7.7 million or 29.3%), General Lending ($7.1 million or 27.1%), Sponsor Finance ($6.7 million or 25.6%), Solar Energy ($5.6 million or 21.4%), Agriculture ($4.8 million or 18.5%) and Bioenergy ($4.2 million or 15.7%).  Partially offsetting the above increases were declines in Risk Grade 5 loans principally concentrated in four verticals: Educational Services ($22.0 million or 83.9%), Entertainment Centers ($7.6 million or 29.1%), Hotels ($4.3 million or 16.6%) and Wine and Craft Beverage ($4.3 million or 16.4%).  Hotels, Sponsor Finance, Venture Banking, Solar Energy, Rural Lending and Bioenergy are a part of the Company’s Specialty Lending division with the remaining above listed verticals within the Company’s Small Business Banking division.

At June 30, 2022, approximately 98.8% of loans and leases classified as Risk Grade 5 are performing with only one relationship having payments past due more than 30 days.  While the level of nonperforming assets fluctuates in response to changing economic and market conditions, in light of the relative size and composition of the loan and lease portfolio and management’s degree of success in resolving problem assets, management believes that a proactive approach to early identification and intervention is critical to successfully managing a small business loan portfolio.  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, 2022, the Company had $23.3 million in unguaranteed loans on SBA payment assistance. Management monitors these borrowers closely and has observed financial conditions continuing to improve.  Management has also noted that most loans with expired government assistance have been able to resume making regular payments.

51

 

 

 

Allowance for Credit Losses on Loans and Leases

The ACL of $63.6 million at December 31, 2021, increased by $2.3 million, or 3.6%, to $65.9 million at June 30, 2022. The ACL as a percentage of loans and leases held for investment at historical cost amounted to 1.3% and 1.2% at December 31, 2021 and June 30, 2022, respectively. The increase in the ACL during the first half of 2022 was primarily due to overall growth in the loan and lease portfolio combined with increased loss given default during the second quarter arising from charge-off experience from one relationship.  See also the above section captioned “Provision for Loan and Lease Credit Losses” in “Results of Operations” for related information. The ACL for PPP  loans and leases was $2.4 million and $96 thousand  at December 31, 2021 and June 30, 2022, respectively.  

Actual past due held for investment loans and leases, inclusive of loans measured at fair value, have decreased by $27.5 million since December 31, 2021. Total loans and leases 90 or more days past due decreased $11.4 million, or 23.2%, compared to December 31, 2021.  This decrease was comprised of a $5.4 million decrease in unguaranteed exposure combined with a $6.0 million decrease in the guaranteed portion of past due loans compared to December 31, 2021.  At June 30, 2022 and December 31, 2021, total held for investment unguaranteed loans and leases past due as a percentage of total held for investment unguaranteed loans and leases, inclusive of loans measured at fair value, was 0.3% and 0.6%, respectively.  Total unguaranteed loans and leases past due were comprised of $7.6 million carried at historical cost, a decrease of $9.0 million, and $3.7 million measured at fair value, a decrease of $1.4 million, as of June 30, 2022 compared to December 31, 2021.  Management continues to actively monitor and work to improve asset quality. Management believes the ACL of $65.9 million at June 30, 2022 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 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. At June 30, 2022, the total amount of these four items was $4.05 billion, or 44.4% of total assets, an increase of $634.6 million from $3.42 billion, or 41.6% of total assets, at December 31, 2021.

Loans and other assets are funded 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 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, 2022, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $925.5 million available to pledge as collateral.

Contractual Obligations

The Company has entered into significant fixed and determinable contractual obligations for future payments. Other than 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, 2021. See the section titled “Liquidity Management” in Part II, Item 7 of the Company’s 2021 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. For more information, see Note 10. Commitments and Contingencies in the accompanying notes to unaudited condensed consolidated financial statements.

52

 

 

 

Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. As of June 30, 2022, the balance sheet’s total cumulative gap position was asset-sensitive at 5.7%.

The interest rate gap method, however, addresses only the magnitude of asset and liability repricing timing differences as of the report date and does not address earnings, market value, changes in account behaviors based on the interest rate environment, nor growth. Therefore, management 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 to measure interest rate risk.  As of June 30, 2022, the Company’s interest rate risk profile under the instantaneous parallel interest rate shock scenarios remained asset-sensitive. 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 adjusts 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. Regular, robust modeling of various interest rate outcomes allows the Company to properly 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; 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.

53

 

 

 

Capital amounts and ratios as of June 30, 2022 and December 31, 2021, 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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

828,942

 

 

 

13.14

%

 

$

283,874

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk-Weighted Assets)

 

 

895,677

 

 

 

14.20

 

 

 

504,666

 

 

 

8.00

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk-Weighted Assets)

 

 

828,942

 

 

 

13.14

 

 

 

378,499

 

 

 

6.00

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Assets)

 

 

828,942

 

 

 

9.44

 

 

 

351,419

 

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank - June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

687,823

 

 

 

11.39

%

 

$

271,856

 

 

 

4.50

%

 

$

392,681

 

 

 

6.50

%

Total Capital (to Risk-Weighted Assets)

 

 

754,558

 

 

 

12.49

 

 

 

483,300

 

 

 

8.00

 

 

 

604,125

 

 

 

10.00

 

Tier 1 Capital (to Risk-Weighted Assets)

 

 

687,823

 

 

 

11.39

 

 

 

362,475

 

 

 

6.00

 

 

 

483,300

 

 

 

8.00

 

Tier 1 Capital (to Average Assets)

 

 

687,823

 

 

 

7.90

 

 

 

348,418

 

 

 

4.00

 

 

 

435,522

 

 

 

5.00

 

Consolidated - December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

689,367

 

 

 

12.38

%

 

$

250,619

 

 

 

4.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk-Weighted Assets)

 

 

753,691

 

 

 

13.53

 

 

 

445,544

 

 

 

8.00

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk-Weighted Assets)

 

 

689,367

 

 

 

12.38

 

 

 

334,158

 

 

 

6.00

 

 

N/A

 

 

N/A

 

Tier 1 Capital (to Average Assets)

 

 

689,367

 

 

 

8.87

 

 

 

310,902

 

 

 

4.00

 

 

N/A

 

 

N/A

 

Bank - December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 (to Risk-Weighted Assets)

 

$

640,652

 

 

 

12.05

%

 

$

239,201

 

 

 

4.50

%

 

$

345,512

 

 

 

6.50

%

Total Capital (to Risk-Weighted Assets)

 

 

704,976

 

 

 

13.26

 

 

 

425,246

 

 

 

8.00

 

 

 

531,557

 

 

 

10.00

 

Tier 1 Capital (to Risk-Weighted Assets)

 

 

640,652

 

 

 

12.05

 

 

 

318,934

 

 

 

6.00

 

 

 

425,246

 

 

 

8.00

 

Tier 1 Capital (to Average Assets)

 

 

640,652

 

 

 

8.32

 

 

 

307,931

 

 

 

4.00

 

 

 

384,914

 

 

 

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, 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, 2021, 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; and

 

•

Valuation of servicing assets.

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

54

 

 

 

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 communicate, coordinate and control all aspects involving interest rate risk management. The Asset/Liability Committee, which includes three members of our board of directors, establishes and 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 5.7% as of June 30, 2022, indicating that, overall, assets will reprice before liabilities during the expected life of the instruments. Cumulative gap is a useful measure to monitor balance sheet match-funding, yet economic value of equity and net interest income simulations, discussed below, are more useful in understanding potential impacts to earnings from a change in interest rates.

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.

EVE and NII simulations are completed routinely 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. Regular, robust modeling of various interest rate outcomes allows the Company to properly assess and manage potential risks from various rate shifts.

 

55

 

 

 

 

The table below sets forth an approximation of the Company’s NII sensitivity exposure for the 12-month periods ending June 30, 2023 and 2024 and the Company’s EVE sensitivity at June 30, 2022. The simulation uses projected repricing of assets and liabilities at June 30, 2022 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, deposit betas and lags 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, approximate 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, 2023

 

12 Months Ending

June 30, 2024

 

As of

June 30, 2022

+400

 

10.1%

 

6.5%

 

(30.8)%

+300

 

7.5

 

4.8

 

(23.7)

+200

 

5.0

 

3.2

 

(16.1)

+100

 

2.5

 

1.6

 

(8.2)

-100

 

(2.4)

 

(1.5)

 

8.1

-200

 

(6.4)

 

(5.5)

 

19.1

 

Rates are increased instantaneously at the beginning of the projection. The Company is slightly asset sensitive in the initial year, as the Company’s large variable rate loan portfolio reprices the full amount of the assumed change in interest rates, while the large retail savings and short-term retail certificates of deposits portfolio will reprice with an assumed beta. Annually, the Company’s retail certificate of deposits portfolio has a significant maturity event in the first half of the year. The Company is slightly asset sensitive in the second year of the projection due to interest rates increasing or decreasing for the full year, the Company’s loan portfolio continuing to reprice, and also due to the other assumptions used in the analysis as noted previously. 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, 2022, 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, 2022, 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, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

56

 

 

 

PART II. OTHER INFORMATION

In the ordinary course of operations, the Company is at times involved in legal proceedings. In the opinion of management, as of June 30, 2022, there are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.  In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on its business, operating results or financial condition.

On March 12, 2021, a purported class action was filed against the Company in the United States District Court for the Eastern District of North Carolina, Joseph McAlear, individually and on behalf of all others similarly situated v. Live Oak Bancshares, Inc. et al.  The complaint alleged the existence of an agreement between the Company, nCino, Inc. and Apiture, LLC in which those companies purportedly sought to restrain the mobility of employees in violation of antitrust laws by agreeing not to solicit or hire each other’s employees.  The complaint alleged violations of Section 1 of the federal Sherman Act (15 U.S.C. § 1) and violations of Sections 75-1 and 75-2 of the North Carolina General Statutes.  The plaintiff sought monetary damages, including treble damages, entitlement to restitution, disgorgement, attorneys’ fees, and pre- and post-judgment interest. On October 12, 2021, the Company reached an agreement to settle the case with a proposed class of all persons (with certain exclusions) employed by the Company or its wholly-owned subsidiary, Live Oak Banking Company, Apiture, Inc. or nCino, Inc. in North Carolina at any time from January 27, 2017, through March 31, 2021.  In the agreement, the Company agreed to pay $3.9 million.  On October 13, 2021, the plaintiff filed a motion for preliminary approval of the settlement, which the court granted by order entered on November 23, 2021.  After class-wide noticing, the plaintiff filed a motion for final approval on March 28, 2022, which the court granted by order entered on April 28, 2022.  Pursuant to the terms of the settlement, the settlement became effective on June 11, 2022.

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, 2021.

 

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

On May 17, 2022, the Board of Directors of the Company authorized the repurchase of up to $50,000,000 in shares of the Company’s voting common stock from time to time through December 31, 2023 (the “Repurchase Program”).  The Repurchase Program enables the Company to acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms (including quantity, timing, and price) that management determines to be advisable. Actions in connection with the repurchase program will be subject to various factors, including the Company’s capital and liquidity positions, regulatory and accounting considerations, the Company’s financial and operational performance, alternative uses of capital, the trading price of the Company’s common stock, and market conditions. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be extended, modified, or discontinued at any time.  As of June 30, 2022, the Company had not made any purchases of shares under the Repurchase Program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

57

 

 

 

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

 

 

Amended and Restated Articles of Incorporation of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.1 of the registration statement on Form S-1, filed on June 19, 2015)

 3.2

 

 

Amended Bylaws of Live Oak Bancshares, Inc. (incorporated by reference to Exhibit 3.2 of the amended registration statement on Form S-1, filed on July 13, 2015)

 4.1

 

 

Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the registration statement on Form S-1, filed on June 19, 2015)

 4.2

 

 

Registration and Other Rights Agreement between Live Oak Bancshares, Inc. and Wellington purchasers (incorporated by reference to Exhibit 4.2 of the registration statement on Form S-1, filed on June 19, 2015)

10.1

 

 

Form of 2022 RSU Award Agreement for non-employee directors* #

10.2.1

 

 

Member Interest Letters, dated May 9, 2019 and September 7, 2019, as revised on February 14, 2022, from Canapi Ventures LOB SLP, LLC, to the Neil L. Underwood Revocable Trust * #

10.2.2

 

 

Member Interest Letter, dated May 5, 2022, from Canapi Ventures LOB SLP II, LLC, to the Neil L. Underwood Revocable Trust * #

31.1

 

 

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2

 

 

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32

 

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

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, 2022 and December 31, 2021; (ii) Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021; (v) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021; 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.

#

Denotes management contract or compensatory plan.

58

 

 

 

 

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 3, 2022

By:

/s/ William C. Losch III

 

 

William C. Losch III

 

 

Chief Financial Officer

 

 

59

Exhibit 10.1

 

LIVE OAK BANCSHARES, INC.

2015 OMNIBUS STOCK INCENTIVE PLAN

 

RESTRICTED STOCK UNIT AWARD AGREEMENT

THIS RESTRICTED STOCK UNIT AWARD AGREEMENT is made and entered into effective as of  May 17, 2022 (the “Date of Grant”), by and between LIVE OAK BANCSHARES, INC., a North Carolina corporation (the “Company”), and [NAME] (the “Grantee”).  This Agreement sets forth the terms and conditions associated with the Company’s award to Grantee of restricted stock units payable as described below in shares of Common Stock pursuant to the Company’s 2015 Omnibus Stock Incentive Plan (as amended from time to time, the “Plan”).  Capitalized terms not explicitly defined in this Agreement but defined in the Plan will have the meanings ascribed to them under the Plan.

NOW, THEREFORE, in consideration of the foregoing and Grantee’s continued provision of valuable services as a director of the Company, the parties hereto, intending to be legally bound, agree as follows:

1.Grant of Units.  Effective as of the Date of Grant, the Company grants the Grantee [####] Restricted Stock Units (the “Units”) subject to the provisions of this Agreement and the Plan.  Each Unit is subject to settlement into one share of Common Stock (a “Share”) that will be delivered to Grantee pursuant to this Agreement when and if such Unit becomes vested in accordance with this Agreement.

2.Condition to Grant of Units.  This award of Units is conditioned upon Grantee’s electronic acceptance of this Agreement through the online portal established by the Company’s equity plan administrator (i.e., Fidelity) within thirty (30) days of the Date of Grant (the “Acceptance Period”).  In the event Grantee fails to accept this Agreement through such online portal within the Acceptance Period, then this Agreement is void and the Units will not be issued.

3.Vesting.  The Units are unvested when granted and will vest May 1, 2023, subject to Grantee’s provision of Continuous Service to the Company through such date.  In addition, to the extent not previously forfeited, all unvested Units will vest immediately upon: (a) the consummation of a Corporate Transaction provided that Grantee provides Continuous Service to the Company through the date of such Corporate Transaction; (b) the termination of Grantee’s Continuous Service as a result of Grantee’s death; or (c) the termination of Grantee’s Continuous Service as a result of Grantee’s Disability.

4.Effect of Termination of Continuous Service.  Except as provided in Section 3 in connection with the termination of Grantee’s Continuous Service as a result of Grantee’s death or Disability, in the event of the termination of Grantee’s Continuous Service, all Units that are not vested will be immediately, automatically, and without consideration forfeited.  

5.Delivery of Shares to Settle Units.  When Units become vested as provided in Section 3, the vested Units will be settled by delivering to Grantee the number of Shares equal to the number of vested Units, subject to the following provisions.

(a)Delivery of the Shares will be made as soon as practicable after the date on which the Units vest, provided that the Company may provide for a reasonable delay in the delivery of the Shares to address tax and other administrative matters, and provided further that delivery of the Shares will occur no later than two and one-half months following the conclusion of the year in which the vesting occurs.

(b)Subject to the conditions described herein, as soon as practicable after the date on which the Units vest, the Company will, at its election, either: (i) issue a certificate representing the Shares deliverable pursuant to this Agreement; or (ii) not issue any certificate representing the Shares deliverable pursuant to this Agreement and instead document the Grantee’s interest in the Shares by registering such Shares with the Company’s transfer agent (or another custodian selected by the Company) in book­entry form in the Grantee’s name.  

(c)No Shares will be issued pursuant to this Agreement unless and until all then-applicable requirements imposed by U.S., foreign, and state securities and other laws, rules and regulations and by any regulatory agencies having jurisdiction, and by any exchanges upon which the Shares may be listed, have been fully met, and the Company may condition the issuance of Shares pursuant to this Agreement on the Grantee’s taking any reasonable action to meet those requirements.  The Company may impose such conditions on any Shares issuable pursuant to this Agreement as it may deem advisable, including, without limitation, restrictions under the Securities Act of 1933, as amended, under the requirements of any exchange upon which shares of the same class are then listed, and under any blue sky or other securities laws applicable to those shares.

6.Rights as a Shareholder.  The Units represent a right to payment from the Company if the conditions of the Agreement are met and do not give the Grantee ownership of any Common Stock prior to delivery as provided in Section 5.  Grantee will not have any rights and/or privileges of a stockholder of the Company with respect to the Units prior to such delivery, but Grantee will have all rights associated with the ownership of the Shares upon such delivery.

7.Non-Transferability of the Units.  The Units and the right to payment under this Agreement are not transferable, and may not be sold, exchanged, transferred, pledged, hypothecated, encumbered or otherwise disposed of except by the laws of descent or distribution, or as otherwise provided by the Plan.  Any purported transfer of the Units or the right to payment under this Agreement not in compliance with the preceding sentence is null and void and will not be given effect.  

8.Tax Consequences.  Grantee acknowledges that Grantee understands the federal, state, local, and foreign tax consequences of the award of the Units and the provisions of this Agreement.  Grantee is relying solely on the advice of Grantee’s own tax advisors and not on any statements or representations of the Company or any of its agents in connection with such tax consequences.  Grantee understands that Grantee (and not the Company nor any Related Entity) will be responsible for Grantee’s own tax liability that may arise as a result of the granting, vesting,

and/or settlement of the Units (or otherwise in connection with this Agreement).

9.Withholding Obligations.  As a condition to delivery of the Shares, the Grantee hereby authorizes the Company to withhold from the Shares deliverable under this Agreement a number of Shares with a Fair Market Value (measured as of the date tax withholding obligations are to be determined) equal to the federal, state, local and foreign tax withholding obligations of the Company or a Related Entity, if any.  In the event that the Administrator determines in its discretion that such withholding of Shares is not permitted pursuant to the Applicable Laws, the rules and regulations of any regulatory agencies having jurisdiction over the Company, or the rules of any exchanges upon which the Shares may be listed, then the Administrator may, in its discretion, make alternative arrangements for satisfying the Company’s (or a Related Entity’s) withholding obligations, utilizing any method permitted by the Plan, including but not limited to requiring Grantee to tender a cash payment or withholding from salary or other compensation payable to Grantee.

10.Application of Section 409A of the Code.  The parties intend that the delivery of Shares in respect of the Units provided under this Agreement satisfies, to the greatest extent possible, the exemption from the application of Section 409A of the Code and the regulations and other guidance thereunder and any state law of similar effect (collectively, “Section 409A”) provided under Treasury Regulations Section 1.409A-1(b)(4) (or any other applicable exemption), and this Agreement will be construed to the greatest extent possible as consistent with those provisions.  To the extent not so exempt, the delivery of Shares in respect of the Units provided under this Agreement will be conducted, and this Agreement will be construed, in a manner that complies with Section 409A and is consistent with the requirements for avoiding taxes or penalties under Section 409A.  The parties further intend that each installment of any payments provided for in this Agreement is a separate “payment” for purposes of Section 409A.  To the extent that (a) one or more of the payments received or to be received by Grantee pursuant to this Agreement would constitute deferred compensation subject to the requirements of Section 409A, and (b) Grantee is a “specified employee” within the meaning of Section 409A, then solely to the extent necessary to avoid the imposition of any additional taxes or penalties under Section 409A, the commencement of any payments under this Agreement will be deferred until the date that is six months following the Grantee’s termination of Continuous Service (or, if earlier, the date of death of the Grantee) and will instead be paid on the date that immediately follows the end of such six-month period (or death) or as soon as administratively practicable within thirty (30) days thereafter.  The Company makes no representations to Grantee regarding the compliance of this Agreement or the Units with Section 409A, and Grantee is solely responsible for the payment of any taxes or penalties arising under Section 409A(a)(1), or any state law of similar effect, with respect to the grant or vesting of the Units or the delivery of the Shares hereunder.

11.Adjustments.  All references to the number of Units will be appropriately adjusted to reflect any stock split, stock dividend, or other change in capitalization that may be made by the Company after the date of this Agreement, as provided in Section 13 of the Plan.

12.Electronic Delivery.  Grantee hereby consents to receive documents related to the Units and any other Awards granted under the Plan by electronic delivery and agrees to participate in the Plan through an online or electronic system established and maintained by the Company or another third party designated by the Company, and such consent shall remain in effect throughout

until withdrawn in writing by Grantee.

13.Data Privacy.  Grantee acknowledges that the Company holds certain personal information about him/her, including, but not limited to, name, home address and telephone number, date of birth, social security number or other identification number, salary, nationality, job title, details of the Units and any other entitlement to Shares awarded, cancelled, exercised, vested or unvested.  Grantee consents to the collection, use and transfer (including but not limited to transfers to parties assisting in the implementation, administration and management of the Plan), in electronic or other form, of such personal data for the purpose of implementing, administering, and managing Grantee’s participation in the Plan.

14.Binding Effect.  This Agreement is binding upon and inures to the benefit of Grantee and Grantee’s heirs, executors, and personal representatives, and the Company and its successors and assigns.  

15.Counterparts; Electronic Signatures.  This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together will constitute one and the same agreement.  Each party agrees that this Agreement may be executed by means of electronic signatures, and that electronic signatures (whether digital or encrypted) of the parties included in this Agreement are intended to authenticate this writing and to have the same force and effect as manual signatures.  For this purpose, electronic signature means any electronic sound, symbol, or process attached to or logically associated with a record and executed and adopted by a party with the intent to sign such record, including facsimile, signatures on scanned documents or email electronic signatures.

16.Notices.  Any notice, demand or request required or permitted to be given pursuant to the terms of this Agreement must be in writing and will be deemed given when delivered personally, one day after deposit with a recognized international delivery service (such as FedEx), or three days after deposit in the U.S. mail, first class, certified or registered, return receipt requested, with postage prepaid, in each case addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may designate by notifying the other in writing.

17.Choice of Law; Venue.  This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of North Carolina, without giving effect to the choice of law rules of any jurisdiction.  The parties agree that any litigation arising out of or related to the Units or this Agreement will be brought exclusively in any state or federal court in New Hanover County, North Carolina.  Each party (i) consents to the personal jurisdiction of said courts, (ii) waives any venue or inconvenient forum defense to any proceeding maintained in such courts, and (iii) agrees not to bring any proceeding arising out of or relating to this Agreement in any other court.  

18.Modification of Agreement; Waiver.  This Agreement may be modified, amended, suspended, or terminated, and any terms, representations or conditions may be waived, but only by a written instrument signed by each of the parties hereto, except as otherwise provided in the Plan.  No waiver hereunder will constitute a waiver with respect to any subsequent occurrence or other transaction hereunder or of any other provision hereof.

19.Severability.  The provisions of this Agreement are severable, and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, then the remaining provisions will nevertheless be binding and enforceable.

20.Entire Agreement.  This Agreement, along with the Plan, constitutes and embodies the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and there are no other agreements or understandings, written or oral, in effect between the parties hereto relating to the matters addressed herein.

21.Grantee’s Acknowledgements.  Grantee hereby acknowledges receipt of a copy of the Plan and the Company’s prospectus covering the Shares issued pursuant to the Plan (the “Prospectus”).  Grantee has read and understands the terms of this Agreement, the Plan, and the Prospectus.  The Units are subject to all the provisions of the Plan, the provisions of which are hereby made a part of this Agreement, and are further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan.  In the event of any conflict between the provisions of this Agreement and those of the Plan, the provisions of the Plan shall control.

[SIGNATURE PAGE FOLLOWS]


IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Grantee has hereunto set the Grantee’s hand and seal, all as of the day and year first above written.

 

COMPANY:

 

 

 

 

 

Live Oak Bancshares, Inc.

 

 

 

 

 

By:

 

 

 

 

 

 

Name:

Courtney C. Spencer

 

 

 

 

 

 

Title:

Chief Administrative Officer

 

 

 

 

 

 

Address:

1741 Tiburon Drive

 

 

 

Wilmington, NC 28403

 

 

 

 

 

GRANTEE:

 

 

 

[ELECTRONIC ACCEPTANCE]

 

 

 

 

 

 

 

Exhibit 10.2.1

 

MEMBER INTEREST LETTER

 

 

 

Canapi Ventures LOB SLP, LLC

1741 Tiburon Drive

Wilmington, NC 28403

 

 

May 9, 2019

 

Neil L Underwood Revocable Trust dated 5/4/2016

 

 

 

Dear Neil L Underwood Revocable Trust dated 5/4/2016:

 

Reference is made to the Amended and Restated Limited Liability Company Agreement

of Canapi Ventures LOB SLP, LLC (the “Special Limited Partner”) dated May 9, 2019, by and among Canapi LOB MM, LLC (the “Managing Member”) and the other Members set forth in the books and records of the Special Limited Partner (the “SLP Agreement”). All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the SLP Agreement. This letter agreement (this “Interest Letter”) shall constitute your Interest Letter for purposes of the SLP Agreement.

 

Pursuant to this Interest Letter and the Assignment and Admission Agreement to which this Interest Letter is attached as Annex, A, you are hereby admitted as a Foundation Member of the Special Limited Partner effective as of the date hereof (the “Date of Grant”). In consideration thereof, you agree to be bound by the terms of the SLP Agreement, a copy of which has been provided to you, and you further agree as follows:

 

1.   Your Capital Commitment in respect of Canapi Ventures Fund, L.P. (the

“Fund”) associated with your Class A Interest and your Profit Sharing Points in respect of the Fund associated with your Class B Interest are set forth on Annex A hereto. Such Class A Interest and Class B Interest are subject to adjustment as set forth in the SLP Agreement.

 

2.   Your Profit Sharing Points in respect of the Fund shall vest in accordance with Annex B.

 

3.   Any adjustment of the amounts or percentage referred to in paragraphs 1 and 2 above, after the date hereof, will be reflected only in the books and records of the Special Limited Partner, and this Interest Letter will not be restated to reflect such changes. Upon your request, the Managing Member will provide you with your current Capital Commitment, Unpaid Capital Commitment and Profit Sharing Points in respect of the Fund at such time.

 

 

 

 

4.   Your social security number or tax identification number, email notification information for purposes of Section 10.5 of the SLP Agreement and your Family Related Members, if any, are set forth on Annex C hereto.

 

5.   The foregoing represents your entire interest in the Special Limited Partner as of the date hereof.

 

6.   This Interest Letter may be amended only by mutual written consent.

 

7.   This Interest Letter represents a confidential arrangement between you and the Managing Member and you hereby agree not to disclose its specific terms to anyone. Your agreement to keep this Interest Letter confidential will not preclude disclosure to your attorney or tax or financial advisor, if any, or such other disclosure that may be required by law or judicial process. However, if you disclose this Interest Letter or its terms to such parties, you agree to instruct them not to disclose this Interest Letter or its terms to anyone else.

 

8.   This Interest Letter shall terminate, replace and supersede all prior oral and written agreements on the subject matter hereof, except any other Interest Letter received by you from the Managing Member, if applicable.

 

9.   This Interest Letter shall be governed and construed in accordance with the laws of the State of Delaware.

 

10. By executing this Interest Letter you hereby appoint the Managing Member, with full power of substitution, as your true and lawful representative and attorney-in-fact, and agent, to execute, acknowledge, verify, swear to, deliver, record and file, in your name, place and stead, the SLP Agreement, any amendments to the SLP Agreement (approved in accordance therewith), or any other agreement or instrument which the Managing Member deems appropriate solely to admit you as a Member of the Special Limited Partner. To the fullest extent permitted by law, this power of attorney is intended to secure an interest in property and your obligations under this Interest Letter and the SLP Agreement, is irrevocable and shall survive, and shall not be affected by, your subsequent death, disability, incapacity, incompetency, termination, bankruptcy, insolvency or dissolution.  This power of attorney will terminate upon your complete withdrawal from the Special Limited Partner. You acknowledge and agree that under the terms of the SLP Agreement you grant a further power of attorney to the Managing Member as provided for therein.

 

 

 

 

[Rest of page left blank intentionally]


 

 

 

Kindly acknowledge your agreement by signing and returning a copy of this Interest Letter whereupon it shall be a binding agreement between us.  Your signature page hereto shall also serve as a counterpart signature page to the SLP Agreement, and you are hereby admitted as a Member of the Special Limited Partner with respect to the Fund.

 

 

SPECIAL LIMITED PARTNER

Canapi Ventures LOB SLP, LLC

By: /s/ S. Brett Caines

Name: S. Brett Caines

Title: Chief Financial Officer

 

 

MEMBER:

Neil L. Underwood Revocable Trust dated 5/4/2016

/s/ Neil Underwood

Name: Neil Underwood

Title: Trustee


 

 

 

Annex A

 

 

Fund

Class A Interest

(Capital Commitment)

Class B Interest

(Profit Sharing Points)

Canapi Ventures Fund, L.P.

an amount equal to the lesser of

 

(i) 0.2450% of the Aggregate Commitments, and

 

(ii) $1,000,000

 

(such amount, the “Aggregate Investor Commitment”).

 

If the SBIC Fund is formed, then the Class A Interest will be apportioned between the Fund and the SBIC Fund based on their relative capital commitments.

2.75

 

 

“Fund Commitments” means the aggregate capital commitments of the partners to the Fund.

 

“SBIC Fund Commitments” means the aggregate capital commitments of the partners to the

SBIC Fund.

 

“Aggregate Commitments” means the sum of the Fund Commitments and the SBIC Fund

Commitments.

 

For example: Assuming your Aggregate Investor Commitment is the lesser of (i) 0.2450% of the

Aggregate Commitments and (ii) $1,000,000.

 

• If the Fund Commitments are $100,000,000 and the SBIC Fund Commitments are $0, your

Class A Interest will be $245,000.

 

• If the Fund Commitments are $100,000,000 and the SBIC Fund Commitments are

$400,000,000, then your Class A Interest will be $1,000,000, which amount will be further allocated (on a pro rata basis) between the Fund ($200,000) and the SBIC Fund ($800,000).


 

 

 

Annex B

 

Date

Fund Vested Percentage

Date of Grant

25%

1-year anniversary of Final Closing Date of the Fund

35%

2-year anniversary of Final Closing Date of the Fund

45%

3-year anniversary of Final Closing Date of the Fund

55%

4-year anniversary of Final Closing Date of the Fund

65%

5-year anniversary of Final Closing Date of the Fund

75%

6-year anniversary of Final Closing Date of the Fund

80%

7-year anniversary of Final Closing Date of the Fund

85%

8-year anniversary of Final Closing Date of the Fund

90%

9-year anniversary of Final Closing Date of the Fund

95%

On the distribution of Carried Interest Proceeds in respect of the Fund

100%

 

 

 

 

 


 

 

 

Annex C

 

Social Security Number or taxpayer identification number: XXX-XX-XXXX

 

Email Notification Address:

 

Family Related Members: None


 

 

 

MEMBER INTEREST LETTER

 

 

 

Canapi Ventures LOB SLP, LLC

1741 Tiburon Drive

Wilmington, NC 28403

 

 

September 4, 2019

 

 

Neil L Underwood Revocable Trust dated 5/4/2016

 

 

 

Dear Neil L Underwood Revocable Trust dated 5/4/2016:

 

Reference is made to the Amended and Restated Limited Liability Company Agreement of Canapi Ventures LOB SLP, LLC (the “Special Limited Partner”) dated April 26, 2019, by and among Canapi LOB MM, LLC (the “Managing Member”) and the other Members set forth in the books and records of the Special Limited Partner (the “SLP Agreement”). All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the SLP Agreement. This letter agreement (this “Interest Letter”) shall constitute your Interest Letter with respect to the Fund (as defined below) for purposes of the SLP Agreement.

 

The parties hereto agree as follows:

 

1. Your Profit Sharing Points in respect of Canapi Ventures SBIC Fund, L.P. (the “Fund”) associated with your Class B Interest are set forth on Annex A hereto. Such Class Class B Interest is subject to adjustment as set forth in the SLP Agreement.

 

      2. Your Profit Sharing Points in respect of the Fund shall vest in accordance with Annex B.

 

3. Any adjustment of the amounts or percentage referred to in paragraphs 1 and 2 above, after the date hereof, will be reflected only in the books and records of the Special Limited Partner, and this Interest Letter will not be restated to reflect such changes. Upon your request, the Managing Member will provide you with your current Profit Sharing Points in respect of the Fund at such time.

 

4. Your social security number or tax identification number, email notification information for purposes of Section 10.5 of the SLP Agreement and your Family Related Members, if any, are set forth on Annex C hereto.

 

5. The foregoing represents your entire Class B Interest in the Special

Limited Partner with respect to the Fund as of the date hereof.

 

2

 

 

 

 

 

6. This Interest Letter may be amended only by mutual written consent and any such amendment is subject to the prior written consent of the U.S. Small Business Administration (the “SBA”).

 

7. This Interest Letter represents a confidential arrangement between you and the Managing Member and you hereby agree not to disclose its specific terms to anyone. Your agreement to keep this Interest Letter confidential will not preclude disclosure to your attorney or tax or financial advisor, if any, or such other disclosure that may be required by law or judicial process. However, if you disclose this Interest Letter or its terms to such parties, you agree to instruct them not to disclose this Interest Letter or its terms to anyone else. Nothing herein shall prohibit disclosure of this Interest Letter to the SBA.

 

8. This Interest Letter shall terminate, replace and supersede all prior oral and written agreements solely with respect to your Class B Interest in the Fund, except any other Interest Letter received by you from the Managing Member, if applicable.

 

9. This Interest Letter shall be governed and construed in accordance with the laws of the State of Delaware.

 

10. By executing this Interest Letter you hereby appoint the Managing Member, with full power of substitution, as your true and lawful representative and attorney-in- fact, and agent, to execute, acknowledge, verify, swear to, deliver, record and file, in your name, place and stead, the SLP Agreement, any amendments to the SLP Agreement (approved in accordance therewith), or any other agreement or instrument which the Managing Member deems appropriate solely to admit you as a Member of the Special Limited Partner.   To the fullest extent permitted by law,  this power of attorney is intended to secure an interest in property and your obligations under this Interest Letter and the SLP Agreement, is irrevocable and shall survive, and shall not be affected by, your subsequent death, disability, incapacity, incompetency, termination, bankruptcy, insolvency or dissolution. This power of attorney will terminate upon your complete withdrawal from the Special Limited Partner. You acknowledge and agree that under the terms of the SLP Agreement you grant a further power of attorney to the Managing Member as provided for therein.

 

 

 

 

[Rest of page left blank intentionally]


 

 

 

Kindly acknowledge your agreement by signing and returning a copy of this Interest Letter whereupon it shall be a binding agreement between us.

 

 

SPECIAL LIMITED PARTNER

Canapi Ventures LOB SLP , LLC

By: Canapi LOB MM, LLC, its Managing Member

By: /s/ S. Brett Caines

Name: S. Brett Caines

Title: Chief Financial Officer

 

 

MEMBER:

Neil L. Underwood Revocable Trust dated 5/4/2016

/s/ Neil Underwood

Name: Neil Underwood

Title: Trustee

 


 

 

 

Annex A

 

Fund

Class B Interest

(Profit Sharing Points)

Canapi Ventures SBIC Fund, L.P.

2.75

 


 

 

 

Annex B

Date

Fund Vested Percentage

Date of Grant

25%

1-year anniversary of Final Closing Date of the Fund

35%

2-year anniversary of Final Closing Date of the Fund

45%

3-year anniversary of Final Closing Date of the Fund

55%

4-year anniversary of Final Closing Date of the Fund

65%

5-year anniversary of Final Closing Date of the Fund

75%

6-year anniversary of Final Closing Date of the Fund

80%

7-year anniversary of Final Closing Date of the Fund

85%

8-year anniversary of Final Closing Date of the Fund

90%

9-year anniversary of Final Closing Date of the Fund

95%

On the distribution of Carried Interest Proceeds in respect of the Fund

100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

Annex C

 

Social Security Number or taxpayer identification number: XXX-XX-XXXX

 

Email Notification Address:

 

Family Related Limited Partners: None


 

 

 

MEMBER INTEREST LETTER

 

 

 

Canapi Ventures LOB SLP, LLC

1741 Tiburon Drive

Wilmington, NC 28403

 

 

February 14, 2022

 

 

Neil L Underwood Revocable Trust dated 5/4/2016

 

 

 

Dear Neil L Underwood Revocable Trust dated 5/4/2016:

 

Kindly refer to Annex B for the revised vesting schedule for your Profit Share Points.


 

 

 

Kindly acknowledge your agreement by signing and returning a copy of this Revised Interest Letter whereupon it shall be a binding agreement between us.

 

 

SPECIAL LIMITED PARTNER

Canapi Ventures LOB SLP, LLC

By: /s/ William C. Losch, III

Name: William C. Losch, III

Title: Chief Financial Officer

 

 

MEMBER:

Neil L. Underwood Revocable Trust dated 5/4/2016

/s/ Neil Underwood

Name: Neil Underwood,

Title: Trustee


 

 

 

Annex B

The below Vesting Schedule applies to Canapi Ventures SBIC Fund, LP (“the SBIC Fund” and Canapi Ventures Fund, L.P. (the “Sibling Fund”) individually.  The “First Closing Dates of the Funds” are September 4, 2019 (the “SBIC Fund”) and March 1, 2019 (the “Sibling Fund”).

 

Date

Fund Vested Percentage

Date of Grant

25%

1-year anniversary of First Closing Date of the Fund

35%

2-year anniversary of First Closing Date of the Fund

45%

3-year anniversary of First Closing Date of the Fund

55%

4-year anniversary of First Closing Date of the Fund

65%

5-year anniversary of First Closing Date of the Fund

75%

6-year anniversary of First Closing Date of the Fund

80%

7-year anniversary of First Closing Date of the Fund

85%

8-year anniversary of First Closing Date of the Fund

90%

9-year anniversary of First Closing Date of the Fund

95%

On the distribution of Carried Interest Proceeds in respect of the Fund

100%

 

 

Exhibit 10.2.2

 

MEMBER INTEREST LETTER

 

 

 

Canapi Ventures LOB SLP II, LLC

1741 Tiburon Drive

Wilmington, NC 28403

 

 

May 5, 2022

 

Neil L Underwood Revocable Trust dated 5/4/2016

Attn: Neil Underwood

 

Dear Mr. Underwood:

 

Reference is made to the Amended and Restated Limited Liability Company Agreement of Canapi Ventures LOB SLP II, LLC (the “Special Limited Partner”) dated as of the date hereof, by and among Canapi LOB MM, LLC (the “Managing Member”) and the other Members set forth in the books and records of the Special Limited Partner (the “SLP Agreement”). All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the SLP Agreement.   This letter agreement (this “Interest Letter”) shall constitute your Interest Letter for purposes of the SLP Agreement.

 

Pursuant to this Interest Letter, you are hereby admitted as a Member of the Special Limited Partner effective as of the date hereof. In consideration thereof, you agree to be bound by the terms of the SLP Agreement, a copy of which has been provided to you, and you further agree as follows:

1.   Your Capital Commitment in respect of Canapi Ventures Fund II, L.P. (the “Fund”) associated with your Class A Interest and your Profit Sharing Points in respect of the Fund associated with your Class B Interest are set forth on Annex A hereto. Such Class A Interest and Class B Interest are subject to adjustment as set forth in the SLP Agreement.

 

2.   Your Profit Sharing Points in respect of the Fund shall vest in accordance with Annex B.

 

3.   Any adjustment of the amounts or percentage referred to in paragraphs 1 and 2 above, after the date hereof, will be reflected only in the books and records of the Special Limited Partner, and this Interest Letter will not be restated to reflect such changes. Upon your request, the Managing Member will provide you with your current Capital Commitment, Unpaid Capital Commitment and Profit Sharing Points in respect of the Fund at such time.

 

4.   Your   social   security   number   or   tax   identification   number,   email notification information for purposes of Section 10.5 of the SLP Agreement and your Family Related Members, if any, are set forth on Annex C hereto.

 

5.   The foregoing represents your entire interest in the Special Limited Partner with respect to the Funds as of the date hereof.

 

6.   This Interest Letter may be amended only by mutual written consent.

 

7.   This Interest Letter represents a confidential arrangement between you and the Managing Member and you hereby agree not to disclose its specific terms to anyone. Your agreement to keep this Interest Letter confidential will not preclude disclosure to your attorney or tax or financial advisor, if any, or such other disclosure that may be required by law or judicial process. However, if you disclose this Interest Letter or its terms to such parties, you agree to instruct them not to disclose this Interest Letter or its terms to anyone else.

 

8.   This Interest Letter shall terminate, replace and supersede all prior oral and written agreements on the subject matter hereof, except any other Interest Letter received by you from the Managing Member, if applicable.

 

9.   This Interest Letter shall be governed and construed in accordance with the laws of the State of Delaware.

 

10. By executing this Interest Letter you hereby appoint the Managing Member, with full power of substitution, as your true and lawful representative and attorney-in- fact, and agent, to execute, acknowledge, verify, swear to, deliver, record and file, in your name, place and stead, the SLP Agreement, any amendments to the SLP Agreement (approved in accordance therewith), or any other agreement  or instrument which the Managing  Member deems appropriate solely to admit you as a Member of the Special Limited Partner.   To the fullest extent permitted  by law, this power of attorney is intended to  secure an interest in property and your obligations under this Interest Letter and the SLP Agreement, is irrevocable and shall survive, and shall not be affected by, your subsequent death, disability, incapacity, incompetency, termination, bankruptcy, insolvency or dissolution. This power of attorney will terminate upon your complete withdrawal from the Special Limited Partner. You acknowledge and agree that under the terms of the SLP Agreement you grant a further power of attorney to the Managing Member as provided for therein.

 

 

 

 

[Rest of page left blank intentionally]


 

Kindly acknowledge your agreement by signing and returning a copy of this Interest Letter whereupon it shall be a binding agreement between us.  Your signature page hereto shall also serve as a counterpart signature page to the SLP Agreement, and you are hereby admitted as a Member of the Special Limited Partner with respect to the Fund.

 

 

SPECIAL LIMITED PARTNER

Canapi Ventures LOB SLP II, LLC

By: Canapi LOB MM, LLC, its Managing Member

By: /s/ William C. Losch, III

Name: William C. Losch, III

Title: Chief Financial Officer

 

 

MEMBER:

Neil L. Underwood Revocable Trust dated 5/4/2016

/s/ Neil Underwood

Neil Underwood, Trustee

 


 

Annex A

 

Fund

Class A Interest

(Capital Commitment)

Class B Interest

(Profit Sharing Points)

Canapi Ventures Fund II, L.P.

$2,000,000

3.25

 


 

Annex B

 

Date

Fund Vested Percentage

Initial Closing Date of the Fund

33%

1-year anniversary of Initial Closing Date of the Fund

43%

2-year anniversary of Initial Closing Date of the Fund

52%

3-year anniversary of Initial Closing Date of the Fund

62%

4-year anniversary of Initial Closing Date of the Fund

71%

5-year anniversary of Initial Closing Date of the Fund

81%

6-year anniversary of Initial Closing Date of the Fund

90%

7-year anniversary of Initial Closing Date of the Fund

100%

 


 

Annex C

 

Social Security Number or taxpayer identification number: XXX-XX-XXXX

 

Email Notification Address:

 

Family Related Limited Partners: None

 

 

 

Exhibit 31.1

Certification of Principal Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, James S. Mahan III, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Live Oak Bancshares, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 3, 2022

 

/s/  James S. Mahan III

 

 

James S. Mahan III

 

 

Chief Executive Officer

 

 

(principal executive officer)

 

 

 

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William C. Losch III, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Live Oak Bancshares, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 3, 2022

 

/s/  William C. Losch III

 

 

William C. Losch III

 

 

Chief Financial Officer

 

 

(principal financial officer)

 

 

 

Exhibit 32

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Live Oak Bancshares, Inc., a North Carolina corporation (the “Company”), does hereby certify that:

The Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 (the “Form 10-Q”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 3, 2022

 

/s/  James S. Mahan III

 

 

James S. Mahan III

 

 

Chief Executive Officer

 

 

(principal executive officer)

 

 

 

Date: August 3, 2022

 

/s/  William C. Losch III

 

 

William C. Losch III

 

 

Chief Financial Officer

 

 

(principal financial officer)

This certification is being furnished solely to accompany the Form 10-Q pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of the Form 10-Q, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.