Organization and Summary of Significant Accounting Policies (Policies) |
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Organization Consolidation And Presentation Of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basis of Presentation |
Basis of Presentation Dollar amounts in all tables in the Notes to Consolidated Financial Statements have been presented in thousands, except percentage, time period, stock option, share and per share data. The accounting and reporting policies of the Company and the Bank follow United States generally accepted accounting principles and general practices within the financial services industry. The following is a description of the significant accounting and reporting policies the Company follows in preparing and presenting its consolidated financial statements. The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. |
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Consolidation Policy |
Consolidation Policy The consolidated financial statements include the financial statements of the Company and wholly owned subsidiaries of Live Oak Banking Company, Live Oak Number One, Inc., GLS, 504FA, Grove, Live Oak Ventures, LOCEF, Reltco, Live Oak Private Wealth, LLC and Canapi. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements. If an entity is not a variable interest entity, the Company also evaluates arrangements in which there is a general partner or managing member to determine whether consolidation is appropriate. Unconsolidated investments where we have the ability to exercise significant influence over the operating and financial policies of the respective investee are accounted for using the equity method of accounting; those that are not consolidated or accounted for using the equity method of accounting are accounted for under equity security or fair value accounting. For these investments accounted for under the equity method, the Company records its investment in non-consolidated affiliates and the portion of income or loss in equity in income of non-consolidated affiliates. The Company periodically evaluates these investments for impairment. |
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Variable Interest Entity |
Variable Interest Entities Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity's net asset value. The primary beneficiary consolidates the variable interest entity ("VIE"). The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. The Company has a limited interest in a partnership that owns and operates a solar renewable energy project which is accounted for as an equity method investment. Over the course of the investment, the Company will receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized. This entity meets the criteria of a VIE; however, the Company is not the primary beneficiary of this entity, as the general partner has both the power to direct the activities that most significantly impact the economic performance of the entities and the obligation to absorb losses or the right to receive benefits that could be significant to the entity. While the partnership agreement allows the Company to remove the general partner, this right is not deemed to be substantive as the general partner can only be removed for cause. The Company’s investments in the unconsolidated VIE is carried in other assets on the consolidated balance sheet and the Company’s unfunded capital and other commitments related to the unconsolidated VIE is carried in other liabilities on the consolidated balance sheet. The Company’s maximum exposure to loss from this unconsolidated VIE includes the investment recorded on the Company’s consolidated balance sheet, net of unfunded capital commitments and any impairment recognized, and previously recorded tax credits which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level. While the Company believes the potential for losses from this investment is remote, the maximum exposure was determined by assuming a scenario where related tax credits were recaptured. The following table provides a summary of the tax advantaged VIE that the Company has not consolidated as of December 31, 2019 and 2018:
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Business Combinations |
Business Combinations Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. Under the acquisition method, identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date are measured at their fair values as of that date, and are recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statements of comprehensive income from the date of acquisition. Any measurement-period adjustments are recorded in the period the adjustment is identified. |
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Business Segments |
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 one significant operating segment, which is providing a lending platform for small businesses nationwide. In determining the appropriateness of segment definition, the Company considers the materiality of a potential segment, the components of the business about which financial information is available, and components for which management regularly evaluates relative to resource allocation and performance assessment. |
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Initial and Secondary Public Offerings |
Initial and Secondary Public Offerings In April 2015, the Company filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission (SEC). This Registration Statement was declared effective by the SEC on July 22, 2015. In reliance on that Registration Statement, the Company issued 5,500,000 shares of voting common stock, par value, at $17.00 per share, in exchange for total proceeds of $87.2 million, net of issue costs.In August 2017, the Company completed a secondary offering by issuing 5,175,000 shares of voting common stock, par value, at $23.00 per share, in exchange for total proceeds of $113.1 million, net of issuance costs. The secondary offering was made pursuant to a prospectus supplement dated August 8, 2017 and an accompanying prospectus dated July 28, 2017, pursuant to the Company’s shelf registration statement on Form S-3 that was filed with the Securities and Exchange Commission and became effective on July 28, 2017. |
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Use of Estimates |
Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses, valuations of servicing assets, restricted stock unit awards with market price conditions and income taxes. In addition, the 2017 gain on contribution to equity method investment of $68.0 million was based on management's estimates, including projected cash flows of the entity, and was inherently subjective by its nature. Change in Accounting Estimate During 2017, the Company assessed its estimate of the useful lives of the Company’s aircraft transportation. The Company revised its original useful life estimate of 20 years and currently estimates that its aircraft transportation will have a useful life of 10 years. The effects of reflecting this change in accounting estimate on the 2017 consolidated financial statements are as follows:
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Cash and Cash Equivalents |
Cash and Cash Equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “cash and due from banks” and “federal funds sold.” Cash and cash equivalents have initial maturity of three months or less. To comply with banking regulations, the Company is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was approximately $1.0 million and $1.7 million for the years ended December 31, 2019 and 2018, respectively. Certificates of Deposit with other Banks Certificates of deposit with other banks have maturities ranging from November 2020 through November 2023 and bear interest at rates ranging from 0.20% to 3.55%. All investments in certificates of deposit are with FDIC insured financial institutions and none exceed the maximum insurable amount of $250 thousand. |
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Investments |
Investments Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held-to-maturity or trading, are classified as “available-for-sale” and recorded at fair value. Unrealized gains and losses for available-for-sale investment securities are excluded from earnings and reported in other comprehensive income. The Company’s entire portfolio for the periods presented is classified as available-for-sale. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sales of securities are typically recorded on the trade date and are determined using the specific identification method. Other Other investments are generally non-marketable equity investments and are included in the other assets line on the consolidated balance sheet while the impact is largely reflected in the equity method investments income (loss) and equity security investments gains (losses), net line items on the consolidated statements of income. The Company generally accounts for other investments either under the equity method or the provisions of Accounting Standards Update 2016-01 “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), beginning in 2018. Investments through which there is significant influence but not control over the investee are accounted for under the equity method. Investments through which the Company is not able to exercise significant influence over the investee are accounted for under ASU 2016-01 whereby investments are measured at fair value with changes in fair value recognized in net income, unless those investments have no readily determinable fair value. Investments without a readily determinable fair value are measured at cost minus impairment, if any, plus or minus changes in value resulting from observable price changes arising from orderly transactions. During the third quarter of 2019, the Company recorded a gain of $3.7 million resulting from an observable price change arising from orderly transactions for one of its non-marketable equity investments. For periods ending prior to January 1, 2018, the Company recognized gains and losses in earnings only when equity securities were sold, based on the difference between the sale proceeds and the cost of the securities, and for other than temporary impairment losses. Impairment At each reporting date, the Company evaluates each investment in a loss position for other than temporary impairment (“OTTI”). The Company evaluates declines in market value below cost for debt securities by assessing the likelihood of selling the security prior to recovering its cost basis. If the Company intends to sell the debt security or it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its cost basis, the Company will write down the security to fair value with the full charge recorded in earnings. If the Company does not intend to sell the debt security and it is not more-likely-than-not that the Company will be required to sell the debt security prior to recovery, the security will not be considered other-than-temporarily impaired unless there are credit losses associated with the security. In that case: (1) where credit losses exist, the portion of the impairment related to those credit losses should be recognized in earnings; (2) any remaining difference between the fair value and the cost basis should be recognized as part of other comprehensive income. For equity securities, any OTTI is recognized with the full charge recorded in earnings. To determine whether an impairment of equity securities is OTTI, the Company considers whether it has the ability and intent to hold the investment until there is a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. In determining whether OTTI exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Federal Home Loan Bank Stock Membership in the Federal Home Loan Bank of Atlanta (“FHLB”) requires ownership of FHLB stock. FHLB stock is restricted because it may only be sold to the FHLB and all sales must be at par. FHLB stock is carried at cost minus impairment, if any, and is recorded within other assets in the consolidated balance sheets. FHLB stock was $3.3 million and $3.1 million at December 31, 2019 and 2018, respectively. |
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Loans Held For Sale |
Loans Held For Sale Management designates loans as held for sale ("HFS") based on its intent to sell guaranteed portions in the SBA and USDA Secondary Market and unguaranteed portions to participant banks and credit unions. Salability requirements of the guaranteed portion include, but are not limited to, full disbursement of the loan commitment amount. Loans originated and intended for sale are carried at the lower of cost or estimated fair value on a loan-by-loan basis. The cost basis of loans held for sale includes the deferral of loan origination fees and costs. Deferred fees and costs are accreted and amortized for loans classified held for sale until the sale occurs. At loan settlement, the pro-rata portion, based on the percent of the total loan sold, of the remaining deferred fees and costs are recognized as an adjustment to the gain on sale. As part of the Company’s management of the loans held in the portfolio, the Company will occasionally transfer loans from held for investment to held for sale. Upon transfer, any associated allowance for loan and lease loss is released and the carrying value of the loans is adjusted to the estimated fair value. The loans are subsequently accounted for at the lower of cost or fair value, with valuation changes recorded in other noninterest income. Gains or losses on the sale of these loans are also recorded in noninterest income. In certain circumstances, loans designated as held for sale may later be transferred back to the held for investment loan and lease portfolio based upon the Company’s intent and ability to hold the loans for the foreseeable future. The Company transfers these loans to loans and leases held for investment at the lower of cost or fair value and establishes a related allowance for loan and lease loss. In accordance with SBA and USDA regulation, the Bank is required to retain 10% and 5% of the principal balance of any SBA 7(a) or USDA loan, respectively, comprised of unguaranteed dollars. With written consent from the SBA, the Bank may sell down to a 5% exposure comprised of unguaranteed dollars. The gain on sale recognized in income is the sum of the premium on the guaranteed loan and the fair value of the servicing assets recognized, less the discount recorded on the unguaranteed portion of the loan retained, and any fair value fluctuations in exchange-traded interest rate futures contracts, also defined as interest rate lock commitments. The following summarizes the activity pertaining to loans held for sale for the years ended December 31, 2019 and 2018:
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Loans Held for Investment |
Loans and Leases Held for Investment Loans and leases receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are classified as held for investment ("HFI") and reported at their outstanding principal amount adjusted for any charge-offs, the allowance for loan and lease losses, and any deferred fees or costs on originated loans and leases and unamortized premium or discount on purchased loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Discounts and premiums on any purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Loans and leases designated as held for investment include those identified as more beneficial to hold for the long term as well as the required retention amount defined by the SBA and USDA. Loans and leases held for investment also consist of certain guaranteed and unguaranteed credits including those designated as troubled debt restructurings, nonaccrual, non-marketable, and risk grade 5 or worse as defined by internal risk rating metrics. Interest income on loans and leases is recognized as earned on a daily accrual basis. The accrual of interest on loans and leases is discontinued when principal or interest is past due 90 days or the loan or lease is determined to be impaired. Impaired loans and leases, or portions thereof, are charged off when deemed uncollectible. |
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Equipment Leasing |
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 leased out under operating leases while leases of equipment outside of the renewable energy vertical are generally direct financing leases. Accordingly, leased assets under operating leases are included in premises and equipment while leased assets under direct financing leases are included in loans and leases held for investment. Direct Financing Leases Interest income on direct financing leases is recognized when earned. Unearned interest is recognized over the lease term on a basis which results in a constant rate of return on the unrecovered lease investment. The term of each lease is generally 3-7 years which is consistent with the useful life of the equipment with no residual value. 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 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 direct operating expenses at the time the costs are incurred. |
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Allowance for Loan Losses |
Allowance for Loan and Lease Losses The allowance for loan and lease losses is established as losses are estimated to have occurred through a provision for loan and lease losses charged to earnings. Loan or lease losses are charged against the allowance when management believes the un-collectibility of a loan or lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan and lease losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of loans or leases in light of historical experience, the nature and volume of the loan and lease portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. Factors considered by management in determining impairment include payment status and other circumstances impacting the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all circumstances surrounding the loan or lease and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a credit-by-credit basis by either the present value of expected future cash flows discounted at the loan or lease's effective interest rate, the loan or lease’s obtainable market price, or the fair value of the collateral, if the loan or lease is collateral dependent, except for large groups of smaller balance homogeneous loans or leases which may be collectively evaluated for impairment. Prior to December 31, 2018, smaller balance loan or lease relationships collectively evaluated for impairment are generally comprised of credits with unguaranteed exposure of less than $100,000 using a methodology based on historical specific reserves on similar sized loans or leases. Loans or leases classified as troubled debt restructured (“TDR”) are considered impaired. Loans or leases that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan or lease is accounted for as a TDR if the Company, for reasons related to the borrower’s financial difficulties, restructures a loan or lease, and grants a concession to the borrower that it would not otherwise grant. A TDR typically involves a modification of terms such as a reduction of the interest rate below the current market rate for a loan or lease with similar risk characteristics or the waiving of certain financial covenants without corresponding offsetting compensation or additional support. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans or leases. Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans or leases is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when the loan or lease becomes ninety days past due. Past due status of loans and leases is determined based on contractual terms. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized on the cash-basis or cost-recovery method, as appropriate. Cash payments of interest on nonaccrual loans or leases will be applied to the principal balance of the loan or lease. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan or lease is returned to accrual status. Interest accruals are resumed on nonaccrual loans or leases only when it is brought current with respect to interest and principal and when, in the judgment of management, the loans or leases are estimated to be fully collectible as to all principal and interest. Management’s judgment is based on an assessment of the borrower’s financial condition and a recent history of payment performance. |
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Foreclosed Assets |
Foreclosed Assets Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of carrying amount or fair value less anticipated cost to sell at the date of foreclosure, establishing a new cost basis. Any write down at the time of transfer to foreclosed assets is charged to the allowance for loan and lease losses. After foreclosure, valuations are periodically performed by management, and the real estate is carried at the lower of the carrying amount or fair value, less cost to sell. Subsequent write downs are charged to other loan origination and maintenance expense. Costs relating to improvement of the property are capitalized while holding costs of the property are charged to other loan origination and maintenance expense in the period incurred. |
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Premises and Equipment |
Premises and Equipment All premises and equipment, excluding land, are carried at cost, less accumulated depreciation. Land is carried at cost. Additions and major replacements or improvements which extend useful lives of property or equipment are capitalized. Maintenance, repairs, and minor improvements are expensed as incurred. Upon retirement or other disposition of the assets, the cost and related depreciation are derecognized and any resulting gain or loss is reflected in income. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Depreciation is computed by the straight-line method over the following estimated useful lives:
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Servicing Assets |
Servicing Assets All sales of loans are executed on a servicing retained basis. The standard SBA loan sale agreement is structured to provide the Company with a “servicing spread” paid from a portion of the interest cash flow of the loan. SBA regulations require the Bank to retain a portion of the cash flow from the interest payments received for a sold loan. The SBA retention requirement is at least 100 basis points in servicing spread while the Company's standard USDA loan sale agreement specifies a servicing spread of 40 basis points. The portion of the servicing spread that exceeds adequate compensation for the servicing function is recognized as a servicing asset. Industry practice recognizes adequate compensation for servicing SBA and USDA loans as 40 basis points. The fair value of the servicing asset is measured at the discounted present value of the excess servicing spread over the expected life of the related loan using appropriate discount rates and assumptions based on industry statistics for prepayment speeds. Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets and are carried at fair value. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of loans, a portion of the cost of originating the loan is allocated to the servicing right based on fair value. Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. 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. Capitalized servicing rights are carried at fair value as of the reporting date. Changes to fair value are reported in loan servicing asset revaluation. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The Company’s investment in a loan is allocated between the retained portion of the loan, the servicing asset, and the sold portion of the loan on the date the loan is sold. The carrying value of the retained portion of the loan is discounted based in part on the estimates derived from the Company’s comparable nonguaranteed loan sales. |
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Derivatives Financial Instruments |
Derivative Financial Instruments Interest Rate Futures Contracts The Company uses exchange-traded interest rate futures contracts to manage interest rate risk that may impact expected gains arising from future secondary market loan sales. Upon entering into a futures contract, the Company is required to pledge to the counterparty an amount of cash equal to a certain percentage of the contract amount, also known as an initial margin deposit. Subsequent payments, known as variation margin, are made or received by the Company each day to settle the daily fluctuations in the fair value of the underlying contract. As of December 31, 2019 and 2018, the cash margin balances were $2.7 million and $1.0 million, respectively. Investments in these derivative contracts are subject to risks that can result in a loss of all or part of an investment. Credit risk is considered low because the counterparties are futures exchanges. The Company has not designated any derivative as a hedging instrument under applicable accounting guidance. Changes in fair value of the derivative contracts is recorded as a component of "net gains on sales of loans" on the consolidated statement of income. The Company recognized a loss of $3.0 million, a loss of $68 thousand and a gain of $117 thousand on the derivative contracts for the years ended December 31, 2019, 2018 and 2017, respectively. The total notional amount of derivative contracts outstanding was $20.4 million, $40.3 million and $29.9 million as of December 31, 2019, 2018 and 2017, respectively. The fair value of the derivative contracts on the balance sheet date is zero due to the daily cash settlement of contracts.
Equity Warrant Assets In connection with negotiated credit facilities and certain other services, the Company may obtain equity warrant assets giving the Company the right to acquire stock in private companies in certain verticals. These assets are held for prospective investment gains and are not used to hedge any economic risks. Further, the Company does not use other derivative instruments to hedge economic risks stemming from equity warrant assets. Equity warrant assets in certain private client companies are recorded as derivatives when they contain net settlement terms and other qualifying criteria under Accounting Standards Codification 815. Equity warrant assets entitle the Company to purchase a specific number of shares of stock at a specific price within a specific time period, generally 10 years. Certain equity warrant assets contain contingent provisions, which adjust the underlying number of shares or purchase price upon the occurrence of certain future events to prevent dilution of the Company’s implied ownership represented by the warrants. Certain warrant agreements contain net share settlement provisions, which permit the receipt of, upon exercise, a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a “cashless” exercise). These equity warrant assets are recorded at fair value and are classified as derivative assets, a component of other assets, on the consolidated balance sheet at the time they are obtained. The grant date fair values of equity warrant assets classified as derivatives received in connection with the issuance of a credit facility are deemed to be loan fees and recognized as an adjustment of loan yield through loan interest income. Similar to other loan fees, the yield adjustment related to grant date fair value of warrants is recognized over the life of that credit facility. Any changes in fair value from the grant date fair value of equity warrant assets classified as derivatives will be recognized as increases or decreases to other assets on the consolidated balance sheet and as net gains or losses on derivative instruments, in other noninterest income, a component of consolidated net income. When a portfolio company is acquired, the Company may exercise these equity warrant assets for shares or cash.
The fair value of equity warrant assets classified as derivatives is reviewed quarterly using a Black-Scholes option pricing model.
For those equity warrant assets that do not contain net share settlement provisions, the Company considers these to be equity investments without readily determinable market values and records the asset at cost. |
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Goodwill and Intangible Assets |
Goodwill and Intangible Assets Goodwill is the purchase premium after adjusting for the fair value of net assets acquired. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or when events or circumstances indicate a potential impairment, at the related reporting unit level. The goodwill impairment test involves comparing the fair value of the reporting unit with its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired; however, if the carrying value of the reporting unit exceeds its fair value, an impairment charge must be recorded. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit. An impairment loss establishes a new basis in the goodwill and subsequent reversals of goodwill impairment losses are not permitted under applicable accounting guidance. For intangible assets subject to amortization, the recoverability test is performed when a triggering event occurs and an impairment loss is recognized if the carrying value of the intangible asset is not recoverable and exceeds fair value. The carrying value of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. Intangible assets deemed to have indefinite useful lives are not subject to amortization. An impairment loss is recognized if the carrying value of the intangible asset with an indefinite life exceeds its fair value. Intangibles subject to amortization related to the Reltco acquisition at December 31, 2017 included non-compete agreements with former employees amortized over five years and customer relationships amortized over eight years. The Reltco trade name had a carrying amount of $480 thousand as of December 31, 2017, and was the only indefinite-lived intangible asset. On August 1, 2018, the Company financed the sale of its entire interest in Reltco, and as a result had no intangible assets as of December 31, 2019 and 2018.
As of October 31, 2017, it was determined that impairment existed at the Reltco reporting unit and impairment charges of $3.6 million were recorded. There was no impairment charge for the year ended December 31, 2019. Impairment related charges for the years ended December 31, 2018 and 2017 are reflected in a separate line in the income statement and are comprised of the following components:
See Note 2. Title Insurance Business for further discussion related to impairment of Reltco. |
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Long-Lived Assets Impairment Evaluation |
Long-Lived Assets Impairment Evaluation The Company evaluates the carrying value of rental equipment and identifiable definite lived intangible assets for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. A key element in determining the recoverability of long-lived assets is the Company’s outlook as to the future market conditions for its rental equipment. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value. The Company determines fair value based upon the condition of the rental equipment and the projected net cash flows from its rental and sale considering current market conditions. During the years ended December 31, 2019, 2018 and 2017, there were no impairments of long-lived assets. Long -Lived Asset Reclassified to Held for Sale During the fourth quarter of 2018, the Company determined that retention of one of its aircraft was ineffective in serving the needs of an expanding nationwide customer base. As a result of this determination, the Company began marketing the aircraft for sale. In December 2018, the Company received a non-binding letter of intent to purchase from a third party with expected total proceeds, net of estimated expenses, of $10.9 million. The sale closed in the first quarter of 2019. The carrying amount of the aircraft of $10.5 million is reflected in the 2018 consolidated balance sheet in the "Other assets" line item. A $357 thousand gain associated with the sale of the aircraft was recorded upon consummation of the sale in the first quarter of 2019 and is reflected in the 2019 consolidated statement of income in the “Other noninterest income” line item. |
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Common Stock |
Common Stock On June 11, 2014, the Company amended its Articles of Incorporation to create two classes of common stock. These two classes are identified as Class A and Class B for Voting Common Stock and Non-Voting Common Stock, respectively, in the accompanying consolidated balance sheet and statement of changes in shareholders’ equity. Voting and Non-Voting Common Stock holders have identical rights and privileges, with the exception that Non-Voting Common shares have no voting power unless circumstances arise where instances creating the Non-Voting Common Shares are modified in any way that negatively impact rights of holder. Stock splits or dividends of Voting and Non-Voting Common Shares shall be in like stock (voting for voting and non-voting for non-voting). Any number of Non-Voting Common Stock may be converted to an equal number of Voting Common Stock at the option of the holder; provided that holder is not the initial transferee or an affiliate of initial transferee. During 2019, 1,727,999 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) in connection with private sales. This conversion decreased the value of Class B common stock (non-voting) and increased the value of Class A common stock (voting) by $18.3 million. |
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Advertising Expense |
Advertising Expense Marketing costs are recognized in the month the event or advertisement takes place. These costs are included in advertising and marketing expense as presented in the consolidated statements of income. |
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Income Taxes |
Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding deferred tax assets and liabilities related to business combinations or components of other comprehensive income). Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The effect of a change in tax rates on deferred assets and liabilities is recognized in income taxes during the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the expected amount more likely than not to be realized. Realization of deferred tax assets is dependent upon the level of historical income, prudent and feasible tax planning strategies, reversals of deferred tax liabilities and estimates of future taxable income. The Company uses the flow-through method of accounting on investments that generate investment tax credits. Under this method, investment tax credits are recognized as a reduction to income tax expense immediately in the period that the credit is generated, to the extent permitted by tax law. In accounting for any temporary difference that arise, the Company has elected the income statement method whereby deferred taxes are adjusted through income tax expense. The Company evaluates uncertain tax positions at the end of each reporting period. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit recognized in the financial statements from any such position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Any interest and/or penalties related to income taxes are reported as a component of income tax expense. |
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Comprehensive Income |
Comprehensive Income Annual comprehensive income reflects the change in the Company’s equity during the year arising from transactions and events other than investment by and distributions to shareholders. The only components of other comprehensive income consist of realized and unrealized gains and losses related to investment securities. |
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Stock Compensation Plans |
Stock Compensation Plans The Company recognizes compensation cost based on the fair value of the equity or liability instruments issued. The expense measures the cost of employee services received in exchange for stock options and restricted stock based on the grant-date fair value of the award and recognizes the cost over the vesting period for all awards within an individual grant, including ones with graded vesting features. The fair value of the restricted stock awards or units with a market price condition and implied service period are calculated using the Monte Carlo Simulation method. The impact of forfeitures on stock-based compensation expense is recognized as forfeitures occur. See Note 14. Benefit Plans for further discussion and detail. |
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Fair Value of Financial Instruments |
Fair Value of Financial Instruments GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy established per GAAP which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. See Note 12. Fair Value of Financial Instruments for further discussion and detail. |
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Earnings Per Share |
Earnings Per Share Basic and diluted earnings per share are computed based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur, upon the exercise of stock options or upon the vesting of restricted stock grants, any of which would result in the issuance of common stock that would then be shared in the net income of the Company.
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Reclassifications |
Reclassifications Certain reclassifications have been made to the prior period’s consolidated financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications. |
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Revenue Recognition |
Revenue Recognition In addition to lending and related activities the Company offers various services to customers that generate revenue. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less. As of December 31, 2019 and 2018, remaining performance obligations consisted primarily of serviced based revenues for contracts with an original expected length of one year or less. Service based revenues are included in other noninterest income and consist of other recurring revenue streams from services provided by GLS to its clients for settlement, accounting and valuation for government guaranteed loan sales and holdings, fund investment advisory services performed by Canapi Advisors, investment management and financial planning services provided by Live Oak Private Wealth, and administration of trust assets held by the Company's trust department. Service Based Revenues GLS provides services when requested by clients. Each requested service represents a specific performance obligation with a transaction price outlined by GLS' fee schedule. Revenue is recognized as the requested services are completed and payment is generally received the following month. Canapi Advisors provides investment advisory services to two financial technology venture funds where its performance obligations are satisfied over time. Fund management fees are based upon the contractual terms of the limited partnership agreements and are recognized as earned over the specified contract period, which is generally equal to the life of the individual fund. Fund management fees are calculated as a percentage of committed capital, are collected in advance and received quarterly. Live Oak Private Wealth’s investment management and financial planning performance obligations are generally satisfied over time. Fees are recognized quarterly based on the quarter-end market value of the managed assets as valued by the custodian of the customer’s assets and the applicable fee rate. Payment is generally received in advance through a direct charge to customer’s accounts. The Company does not earn performance-based incentives from investment management and financial planning services. Contracts with customers may be terminated at any time by either party. The Company’s trust department ceased operations in the first quarter of 2019. Trust account administration performance obligations were generally satisfied over time and fees were recognized monthly, based on the month-end market value of assets in fiduciary accounts and the applicable fee rate. Fees were generally received after month-end through a direct charge to customers' accounts. The Company did not earn performance-based incentives from trust account administration services. |
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Accounting Change |
Accounting Change On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02 “Leases (Topic 842),” (“ASU 2016-02”) and all subsequent ASUs that modified Topic 842. The Company elected to apply certain practical expedients provided under ASU 2016-02 whereby the Company will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company has also applied the practical expedient to use hindsight in determining the lease term and in assessing impairment of the right-of-use assets. The Company does not apply the recognition and measurement requirements to any short-term leases (as defined by ASU 2016-02). The Company accounts for lease and non-lease components separately because such amounts are readily determinable under the lease contracts. The Company utilized the modified-retrospective transition approach prescribed by ASU 2018-11, “Leases (Topic 842) Targeted Improvements” (“ASU 2018-11”). The implementation of the new standard resulted in the Company recording $2.2 million of operating lease right-of-use ("ROU") assets, $2.4 million of operating lease liabilities and a cumulative effect adjustment to opening retained earnings of $66 thousand. The Company also recorded $18 thousand of finance ROU assets and finance lease liabilities. The Company determines if an arrangement is or contains a lease at inception. If it is determined to be or contain a lease, then the lease is classified as an operating or finance lease. ROU assets represent the Company's right to use an underlying asset for the lease term. Lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are measured on commencement date based on the present value of the lease payments over the lease term, discounted using the discount rate for the lease at commencement. The discount rate shall be the rate implicit in the lease, however, if that is not readily determinable, the Company will use its incremental borrowing rate. The ROU asset also includes any lease payments made before the commencement date and initial direct costs and excludes any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating leases are included in operating lease right-of-use assets and operating lease liabilities in the consolidated balance sheets. Finance leases are included in other assets and long term borrowings in the consolidated balance sheets. Lease expense for operating leases and finance leases is included in occupancy expense in the consolidated statements of income and interest expense for finance leases is included in other interest expense in the consolidated statements of income. See Note 6. Leases for further discussion and detail. In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 amends Accounting Standard Codification 718 to largely align accounting for share-based payment awards issued to employees and nonemployees. Under the new guidance, existing employee guidance will generally apply to nonemployee share-based transactions, except for specific guidance on inputs into option pricing models and the attribution of cost. The Company adopted the standard on January 1, 2019 with no material effect on its consolidated financial statements. |
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Recent Accounting Pronouncements |
Recent Accounting Pronouncements The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This new guidance replaces the incurred loss impairment methodology in current standards with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was effective for the Company on January 1, 2020. Through the date of adoption, the Company’s cross-functional working group continued to meet in accordance with its implementation plan. During the parallel run process qualitative factors and the reasonable and supportable forecast were refined to ensure the assumptions were appropriate. Operational procedures and internal controls were designed and documented as parallel run results were evaluated. Lastly, an assessment of our third-party vendor’s modeling tool was completed while the Company completed parallel runs utilizing data from the third and fourth quarters of 2019. Management plans to estimate credit losses over a one-year forecast horizon and revert to long term historical loss experience on a straight-line basis over a one-year period. The duration of the forecast period, the method of reversion, and the duration of the reversion period will all be reevaluated at each reporting period to ensure those judgements are appropriate. Management will include forecasted levels of employment as the primary economic variable it believes to be most relevant based on the nature and composition of the loan portfolio. Management also plans to leverage economic projections from a reputable and independent third party to inform its reasonable and supportable forecasts over the forecast period. Based on the fourth quarter parallel run, review of the portfolio, including composition characteristics and quality of the underlying loans, and the prevailing economic conditions and forecasts as of the adoption date, the Company expects the adoption of ASU 2016-13 will result in an immaterial decrease to its loan and lease credit loss reserves of approximately $800 thousand to $1.4 million as well as an immaterial increase to reserves for off-balance sheet exposure of approximately $400 thousand to $800 thousand. The magnitude of this change is consistent with management’s expectations considering the age of the Bank and its commercial lending specialization. The adoption of ASU 2016-13 is not expected to have a significant impact on the allowance for expected credit losses for available-for-sale debt securities or other purchased financial assets. In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“ASU 2019-01”). ASU 2019-01 provides updates to Topic 842 including: (i) guidance on how to determine fair value of leased items for lessors who are not dealers or manufacturers, (ii) cash flow presentation for lessors of sales-type and direct financing leases and (iii) clarifies that certain transition disclosures. The amendments are effective for the Company on January 1, 2020. The Company does not expect these amendments to have a material effect on its consolidated financial statements. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”). ASU 2019-04 provides clarification and minor improvements related to ASU 2016-01 “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and ASU 2017-12 “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” The standard will be effective for the Company on January 1, 2020 with early adoption permitted. The Company does not expect this standard to have a material effect on its consolidated financial statements. In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief” (“ASU 2019-05”). ASU 2019-05 allows entities an option to irrevocably elect the fair value option for eligible instruments upon adoption of Topic 326. The amendments are effective for the Company on January 1, 2020. See discussion of ASU 2016-13 above for impact to the consolidated financial statements. In November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses” (“ASU 2019-11”). ASU 2019-11 addresses issues raised by stakeholders during the implementation of ASU 2016-13 including: (i) clarifying guidance on how to report expected recoveries for purchased financial assets with credit deterioration, (ii) providing transition relief for troubled debt restructurings, (iii) extending disclosure relief related to accrued interest receivables, (iv) clarifying practical expedients related to financial assets secured by collateral maintenance provisions and (v) reinforcing existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The amendments are effective for the Company on January 1, 2020. See discussion of ASU 2016-13 above for impact to the consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies accounting for income taxes by removing specific technical exceptions in ASC 740 related to the incremental approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The amendments are effective for the Company on January 1, 2021 with early adoption permitted. The Company does not expect these amendments to have a material effect on its consolidated financial statements. |