Log in
E-mail
Password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

MarketScreener Homepage  >  Equities  >  Nasdaq  >  Live Oak Bancshares, Inc.    LOB

LIVE OAK BANCSHARES, INC.

(LOB)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryAll NewsPress ReleasesOfficial PublicationsSector news

LIVE OAK BANCSHARES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

share with twitter share with LinkedIn share with facebook
08/05/2020 | 05:14pm EDT
The following presents management's discussion and analysis of the financial
condition and results of operations of Live Oak Bancshares, Inc. (the "Company"
or "LOB"). This discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this quarterly report on Form
10-Q and with the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (the "2019 Annual Report"). 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
Company's financial condition, results of operations, plans, objectives, future
performance or business. They usually can be identified by the use of
forward-looking terminology, such as "believes," "expects," or "are expected
to," "plans," "projects," "goals," "estimates," "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 quarterly report on Form 10-Q. When
considering these forward-looking statements, you should keep in mind these
risks and uncertainties, as well as any cautionary statements 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 quarterly
report on Form 10-Q 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 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 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 potential 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;

• 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;


                                       38
--------------------------------------------------------------------------------

• fluctuations in markets for equity, fixed-income, commercial paper and other

      securities, which could affect availability, market liquidity levels, and
      pricing;

• the effects of competition from other commercial banks, non-bank lenders,

consumer finance companies, credit unions, securities brokerage firms,

insurance companies, money market and mutual funds, and other financial

institutions operating in the Company's market area and elsewhere, including

institutions operating regionally, nationally and internationally, together

      with such competitors offering banking products and services by mail,
      telephone and the Internet;


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

• changes in governmental monetary and fiscal policies as well as other

legislative and regulatory changes, including with respect to SBA or USDA

      lending programs and investment tax credits;


  • 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;

• other risk factors listed from time to time in reports that the Company

files with the SEC, including in the Company's 2019 Annual 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.

Nature of Operations

LOB is a bank holding company headquartered in Wilmington, North Carolina
incorporated under the laws of North Carolina in December 2008. The Company
conducts business operations primarily through its commercial bank subsidiary,
Live Oak Banking Company (the "Bank"). The Bank was incorporated in February
2008 as a North Carolina-chartered commercial bank. The Bank specializes in
providing lending services to small businesses nationwide. The Bank identifies
and grows within selected industry sectors, or verticals, by leveraging
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 ("USDA") Rural Energy for America Program ("REAP"), Water and
Environmental Program ("WEP") and Business & Industry ("B&I") loan programs.


                                       39
--------------------------------------------------------------------------------




Effective July 29, 2016, the Company elected to become a "financial holding
company" within the meaning of the Bank Holding Company Act. A financial holding
company, and the nonbank companies under its control, are permitted to engage in
activities considered financial in nature or incidental to financial
activities. For the Company to become and remain eligible for financial holding
company status, it and the Bank must meet certain criteria, including capital,
management and Community Reinvestment Act ("CRA") requirements. The failure to
meet such criteria could, depending on which requirements were not met, result
in the Company facing restrictions on new financial activities or acquisitions
or being required to discontinue existing activities that are not otherwise
permissible for bank holding companies.



In 2018, the Company formed Canapi Advisors, LLC for the purpose of providing
investment advisory services to a series of new funds focused on providing
venture capital to new and emerging financial technology companies. In 2019,
Live Oak Clean Energy Financing LLC ("LOCEF") became a subsidiary of the
Bank. LOCEF was formed in November 2016 as a subsidiary of the Company for the
purpose of providing financing to entities for renewable energy applications. In
2018, the Bank formed Live Oak Private Wealth, LLC, a registered investment
advisor that provides high-net-worth individuals and families with strategic
wealth and investment management services, and on April 1, 2020, it acquired
Jolley Asset Management, LLC to broaden service offerings for existing
high-net-worth individuals and families, attract new clients from an expanded
footprint and benefit from economies of scale. In 2017, the Bank entered into a
joint venture, Apiture LLC ("Apiture"), with First Data Corporation for the
purpose of creating next generation technology for financial institutions.  In
addition to the Bank, the Company owns Live Oak Ventures, Inc., formed in August
2016 for the purpose of investing in businesses that align with the Company's
strategic initiative to be a leader in financial technology; Live Oak Grove,
LLC, formed in February 2015 for the purpose of providing Company employees and
business visitors an on-site restaurant location; and Government Loan Solutions,
Inc. ("GLS"), a management and technology consulting firm that specializes in
the settlement, accounting, and securitization processes for government
guaranteed loans, including loans originated under the SBA 7(a) loan program and
USDA-guaranteed loans. In 2019, 504 Fund Advisors, LLC ("504FA") exited as the
advisor to The 504 Fund, and the Company dissolved this legal entity.

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. The Company
elects to account for certain loans under the fair value option with interest
reported in interest income and changes in fair value reported in the net (loss)
gain on loans accounted for under the fair value option line item of the
consolidated statements of income. Income from the sale of loans is comprised of
loan servicing revenue and revaluation of related servicing assets along with
net gains on sales of loans. Offsetting these revenues are the cost of funding
sources, provision for 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.

Recent Developments


The COVID-19 pandemic in the United States continues to have a complex and
significant adverse impact on the economy, the banking industry and the Company,
all subject to a high degree of uncertainty. While it is still not possible to
know the full universe or extent of these impacts as of the date of this filing,
we are disclosing potentially material items of which we are currently aware.

                                       40

--------------------------------------------------------------------------------

Financial position and results of operations


Relating to our June 30, 2020 financial condition and results of operations,
COVID-19 had a significant impact on the allowance for credit losses ("ACL") on
loans and leases, loans carried at fair value, loan servicing asset revaluation,
net gains on sales of loans and net interest income. While the Company has not
yet experienced any charge-offs related to COVID-19, the ACL and loan fair value
calculation and resulting provision for loan and lease credit losses and net
loss on loans accounted for under the fair value option were significantly
impacted by changes in forecasted economic conditions. Given that forecasted
economic scenarios continued to be negative with substantial uncertainty since
the pandemic was declared in early March combined with effects surfacing in
certain pandemic-at-risk verticals and the risk that payments being made by the
SBA for borrowers under its programs may be skewing actual indications of
ability to repay, the need for additional credit related reserves increased
significantly by the end of the second quarter. Refer to the discussion of the
ACL and loans at fair value in Notes 5 and 9, respectively, of the unaudited
condensed consolidated financial statements as well as further discussion below
in MD&A. Also impacted by deteriorating market conditions was the Company's
valuation of the loan servicing asset as discussed in Note 7 of the unaudited
condensed consolidated financial statements and net gains on sales of loans,
both of which are further discussed below in MD&A. The secondary market improved
at the end of the second quarter which offset earlier negative COVID-19
adjustments for loans carried at fair value and the loan servicing asset
valuation. In the second quarter the net interest margin was negatively impacted
by significant rate cuts in response to stimulus efforts combined with
heightened levels of liquidity at the Company as a part of pandemic
preparedness, while the Paycheck Protection Program (the "PPP") lending had a
positive impact on net interest margin, as discussed more fully below in
MD&A. Should economic conditions worsen, the Company could experience further
increases in the required ACL and negative fair value marks and record
additional credit or market related loss expense. It is also possible that the
Company's asset quality measures could worsen at future measurement periods if
the effects of COVID-19 are prolonged.

While there are current signs of recovery in the secondary market pricing, the
income from gain on sale of loans in future periods could be reduced due to
COVID-19. Impacts began to be felt in the latter part of March and early April
with loan sales executed at that time as secondary markets conditions began to
weaken. At this time, the Company is unable to project the materiality of such
an impact but recognizes the breadth of the economic impact is likely to impact
gains in future periods.

Interest income could be further reduced due to COVID-19. In keeping with
guidance from banking regulators, the Company has and continues to actively work
with COVID-19 affected borrowers to help defer their payments, interest, and
fees. In addition to regulatory relief on deferrals from banking regulators, six
months of payment relief are also available from the SBA for certain loans
guaranteed by that agency.  While interest and fees will still accrue to
interest, should eventual credit losses on these loans with deferred payments
emerge, interest income and fees accrued would need to be reversed. In such a
scenario, interest income in future periods could be negatively impacted. At
this time, we are unable to project the materiality of such an impact, but
recognize the breadth of the economic impact may affect our borrowers' ability
to repay in future periods.

Capital and liquidity

As of June 30, 2020, all of the Company's capital ratios, and the Bank's capital
ratios, were in excess of all regulatory requirements. While the Company
believes that capital is sufficient to withstand an extended economic recession
brought about by COVID-19, reported and regulatory capital ratios could be
adversely impacted by further credit losses. The Company relies on cash on hand
as well as dividends from the Bank to service any debt at the Company. If our
capital deteriorates such that the Bank is unable to pay dividends to the
Company for an extended period of time, the Company may not be able to service
its debt.

The Company maintains access to multiple sources of liquidity. Wholesale funding
markets have remained open to the Company, but rates for short term funding have
recently been volatile and the secondary market for guaranteed loans has shown
reactionary and varying responses to the changing economic environment. In
addition to increased levels of loan sales, the Company also increased its
levels of deposits and borrowings in the first half of the year, as discussed
further in MD&A. If funding costs are elevated for an extended period of time,
it could have an adverse effect on the Company's net interest margin. If an
extended recession causes large numbers of the Company's deposit customers to
withdraw their funds, the Company might become more reliant on volatile or more
expensive sources of funding.

                                       41
--------------------------------------------------------------------------------




The Federal Reserve has created the Paycheck Protection Program Liquidity
Facility ("PPPLF") to help provide financing for the origination of PPP
loans. The PPPLF extends loans to banks that have loaned money to small
businesses under the PPP, discussed in more detail below. Amounts borrowed are
non-recourse and have a 100% advance rate equal to the principal amount of PPP
loans pledged as security. In addition, loans financed under the PPPLF have a
neutral impact on regulatory leverage capital ratios. The maturity date of a
borrowing under the PPPLF is equal to the maturity date of the PPP loan pledged
to secure the borrowing and would be accelerated (i) if the underlying PPP loan
goes into default and is transferred to the SBA to realize on the SBA guarantee
or (ii) to the extent that any loan forgiveness reimbursement is received from
the SBA. Borrowings under the PPPLF bear interest at a rate of 0.35%, and there
are no fees paid by the Company. As of June 30, 2020, the Company had borrowed
$1.72 billion from the PPPLF.

Lending operations and accommodations to borrowers


With the passage of the PPP, administered by the SBA, the Company has actively
interpreted and implemented new loan programs and systems using its technology
platform while participating in assisting its customers and other small
businesses in need of resources through the program. PPP loans earn interest at
1% and currently have a two-year or five-year contractual term depending on the
origination date. For the earlier loans with a two-year term there is an option
to extend to five years if requested by the borrower and approved by the lender.
The Company expects that some portion of these loans will ultimately be forgiven
by the SBA in accordance with the terms of the program. As of June 30, 2020, the
Company has secured funding from the SBA for 10,847 PPP loans representing $1.74
billion in originations. Loans funded through the PPP are fully guaranteed by
the SBA, subject to the terms and conditions of the program. Should those
circumstances change, the Company could be required to record additional credit
loss expense through earnings.

With the passage of the Coronavirus Aid, Relief, and Economic Security Act
(CARES Act) on March 27, 2020, the SBA will be making six months of principal
and interest payments on all fully disbursed SBA 7(a) and SBA Express loans in
regular servicing status that close by September 27, 2020. In addition, with
regulatory guidance to work with borrowers during this unprecedented situation,
the Company has also mobilized to provide a payment deferral program when needed
by customers that are adversely affected by the pandemic. Depending on the
demonstrated need of the client, the Company is deferring either the full loan
payment or the principal component of the loan payment for 60 or 90 days. In
accordance with interagency guidance issued in March 2020, these short-term
deferrals are not considered troubled debt restructurings. At June 30, 2020 the
Company estimated that as a percentage to total loans and leases at amortized
cost, excluding PPP, 60% of its loans were receiving the six months of payments
from the SBA and that 9% of its loans had a payment deferral in place.

On June 5, 2020, the Paycheck Protection Program Flexibility Act (the "new Act")
was signed into law, and made significant changes to the PPP to provide
additional relief for small businesses. The new Act increased flexibility for
small businesses that have been unable to rehire employees due to lack of
employee availability, or have been unable to operate as normal due to COVID-19
related restrictions. It extended the period that businesses have to use PPP
funds to qualify for loan forgiveness to 24 weeks, up from 8 weeks under the
original rules. The new Act also relaxed the requirements that loan recipients
must adhere to in order to qualify for loan forgiveness. In addition, the new
Act extended the payment deferral period for PPP loans until the date when the
amount of loan forgiveness is determined and remitted to the lender. For PPP
recipients who do not apply for forgiveness, the loan deferral period is 10
months after the applicable forgiveness period ends.

Credit


While all industries have and will continue to experience adverse impacts as a
result of COVID-19, the Company has exposures in the following verticals
considered to be "at-risk" of significant impact as of June 30, 2020: hotels,
wine and craft beverage, educational services, entertainment centers, fitness
centers, and quick service restaurants each comprising $178.9 million or 8.1%,
$101.6 million or 4.6%, $80.4 million or 3.6%, $56.8 million or 2.6%, $22.8
million or 1.0%, and $12.3 million or 0.6% of total unguaranteed loans and
leases (all at amortized cost, inclusive of loans carried at fair value),
respectively.

The Company continues to work with customers directly affected by COVID-19 and
is prepared to offer short-term assistance in accordance with regulatory
guidelines. As a result of the uncertain economic environment caused by
COVID-19, the Company is engaging in more frequent communication with borrowers
to better understand their situation and the challenges faced and circumstances
evolve, which the Company anticipates will allow it to respond proactively as
needs and issues arise.

                                       42
--------------------------------------------------------------------------------



Results of Operations

Performance Summary

Three months ended June 30, 2020 compared with three months ended June 30, 2019

For the three months ended June 30, 2020, the Company reported net earnings of $3.8 million, or $0.09 per diluted share, compared to net earnings of $4.9 million, or $0.12 per diluted share, for the second quarter of 2019. This decrease in net income was largely due to continued risks and uncertainties related to the COVID-19 pandemic with significant impacts to the Company's credit reserves and fair value adjustments, as outlined below:

• The provision for loan and lease credit losses increased $6.5 million, or

      191.9%; and



• The net loss on loans accounted for under the fair value option increased

$3.8 million, or 139.0%.



Outside of the continued effects of COVID-19, which was intensified by the
adoption of new current expected credit losses model ("CECL") in the first
quarter of 2020, salaries and employee benefits increased $8.8 million, or
40.0%, as the Company continued to invest in its workforce to support growth and
a variety of initiatives including $7.2 million in expense for a performance
bonus pool that was available to all employees other than executive officers.

The primary factors partially offsetting the decrease in net income for the three months ended June 30, 2020 were:

• Increase in net interest income of $7.0 million, or 20.5%, predominately

      driven by significant growth in total loan and lease portfolios which was
      accentuated by the origination of $1.74 billion in PPP loans during the
      second quarter of 2020;



• Net gains on sales of loans increased $4.7 million, or 77.8%, due largely to

a higher volume of loans sold in the second quarter of 2020. The volume in

guaranteed loan sales in the second quarter of 2020 increased to $154.5

      million, in line with the Company's balance sheet strategy, compared to
      $71.9 million in the second quarter of 2019; and



• Other noninterest income increased $3.6 million, or 410.0%, primarily as the

      result of $2.5 million in revenue resulting from the sale of services from
      co-developed technology for processing PPP loans.

Six months ended June 30, 2020 compared with six months ended June 30, 2019


For the six months ended June 30, 2020, the Company reported a net loss of $3.8
million, or $(0.10) per diluted share, as compared to net earnings of $7.3
million, or $0.18 per diluted share, for the six months ended June 30,
2019. This decrease in net income was largely the due to continuation of the
above-mentioned risks and uncertainties related to the COVID-19 pandemic during
the first half of 2020, as reflected below:

• The provision for loan and lease credit losses increased $15.3 million, or

      237.6%; and



• The net loss on loans accounted for under the fair value option increased

$16.6 million, or 340.6%.



Outside of COVID-19 effects on the first half of 2020, salaries and employee
benefits increased $15.0 million, or 34.2%, as the Company continued to invest
in its workforce to support growth and a variety of initiatives, as discussed
more fully above.

The primary factors partially offsetting the net loss for the six months ended June 30, 2020 were:

• Increase in net interest income of $16.5 million, or 25.6%, predominately

      driven by significant growth in total loan and lease portfolios which was
      accentuated by the origination of $1.74 billion in PPP loans during the
      second quarter of 2020;



• Net gains on sales of loans increased $11.6 million, or 113.5% largely due

to higher sale volumes in the first quarter to strengthen the Company's

capital and liquidity profile in preparation for pandemic uncertainties. The

      volume in guaranteed loan sales in the first half of 2020 increased to
      $317.3 million compared to $134.9 million in the first half of 2019;




                                       43
--------------------------------------------------------------------------------

• Other noninterest income increased $2.7 million, or 79.3%, primarily as the

      result of $2.5 million in revenue resulting from the sale of services from
      co-developed technology for processing PPP loans; and

• Income tax benefit increased $7.3 million primarily as a result of a $3.7

million estimated benefit related to the enactment of the CARES Act which

allows the carryback of certain net operating losses for five years combined

      with the Company's overall net pretax loss in the first half of 2020.

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 it incurs on
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.

Three months ended June 30, 2020 compared with three months ended June 30, 2019


For the three months ended June 30, 2020, net interest income increased $7.0
million, or 20.5%, to $40.9 million compared to $33.9 million for the three
months ended June 30, 2019. The increase was principally due to the significant
growth in the held for investment loan and lease portfolio reflecting the
Company's ongoing initiative to grow recurring revenue sources and strengthen
liquidity. This increase over the prior year was primarily a product of the
aforementioned origination of $1.74 billion in PPP loans in the second quarter
of 2020 with $8.7 million in interest income coming from recognition of net
deferred fees combined with a 1% annualized interest rate. Accordingly, average
interest earning assets increased by $2.73 billion, or 74.6%, to $6.40 billion
for the three months ended June 30, 2020, compared to $3.66 billion for the
three months ended June 30, 2019, while the yield on average interest earning
assets decreased 185 basis points to 4.19%. The cost of funds on interest
bearing liabilities for the three months ended June 30, 2020 decreased 76 basis
points to 1.65%, and the average balance of interest bearing liabilities
increased by $2.78 billion, or 78.8%, over the same period in 2019. The increase
in average interest bearing liabilities was largely driven by strategically
heightened levels of liquidity related to COVID-19 risks and uncertainties and
funding for PPP loans. As indicated in the rate/volume table below, increased
interest earning asset volume more than offset lower yields outpacing the higher
volume and lower levels of cost declines for interest bearing liabilities,
resulting in increased interest income of $11.7 million and increased interest
expense of $4.7 million for the three months ended June 30, 2020 compared to the
three months ended June 30, 2019. For the three months ended June 30, 2019
compared to the three months ended June 30, 2020, net interest margin decreased
from 3.71% to 2.56%, respectively, principally due to the Company's interest
earning assets repricing more rapidly from lower fed funds rates than its
interest bearing liabilities, combined with above mentioned impacts of PPP
related activities and heightened liquidity.

Six Months Ended June 30, 2020 compared with six months ended June 30, 2019


For the six months ended June 30, 2020, net interest income increased $16.5
million, or 25.6%, to $81.1 million compared to $64.5 million for the six months
ended June 30, 2019. This increase was principally due to the significant growth
in the combined held for sale and held for investment loan and lease portfolios
along with higher investment security holdings reflecting the Company's ongoing
initiative to grow recurring revenue sources and strengthen liquidity. This
increase over the first half of 2019 was also enhanced by the above mentioned
origination of PPP loans in the second quarter. Accordingly, average interest
earning assets increased by $1.93 billion, or 54.7%, to $5.47 billion for the
six months ended June 30, 2020, compared to $3.53 billion for the six months
ended June 30, 2019, while the yield on average interest earning assets
decreased 122 basis points to 4.78%. The cost of funds on interest bearing
liabilities for the six months ended June 30, 2020 decreased 54 basis points to
1.85%, and the average balance of interest bearing liabilities increased by
$1.93 billion, or 56.5%, over the same period in 2019. The increase in average
interest bearing liabilities was also largely impacted by strategically
heightened levels of liquidity in the first half of 2020 related to COVID-19
risks and uncertainties and funding sources for PPP loans. As indicated in the
rate/volume table below, the increase in interest earning assets and
corresponding yields outpaced the higher volume and decreased cost of interest
bearing liabilities, resulting in increased interest income of $25.2 million and
increased interest expense of $8.7 million for the six months ended June 30,
2020 compared to the six months ended June 30, 2019. For the six months ended
June 30, 2019 compared to the six months ended June 30, 2020, net interest
margin decreased from 3.68% to 2.97%, respectively, principally due to lower fed
funds rates impacting the yield on interest earning assets more rapidly than the
cost of interest bearing liabilities in the first half of 2020, combined with
the above mentioned impacts of PPP related activities and heightened levels of
liquidity.

                                       44
--------------------------------------------------------------------------------




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

                                                              Three Months Ended June 30,
                                                  2020                                           2019
                                 Average                       Average          Average                       Average
                                 Balance       Interest       Yield/Rate        Balance       Interest       Yield/Rate
Interest earning assets:
Federal funds sold and
interest earning
  balances in other banks      $   711,916$   1,009             0.57 %   $   184,986$   1,108             2.40 %
Investment securities              556,014         3,786             2.73         566,159         4,116             2.92
Loans held for sale                921,956        13,115             5.71         839,724        14,333             6.85
Loans and leases held for
  investment(1)                  4,208,109        48,907             4.66       2,073,297        35,581             6.88
Total interest earning
assets                           6,397,995        66,817             4.19       3,664,166        55,138             6.04
Less: Allowance for credit
losses on loans
  and leases                       (35,875 )                                      (19,196 )
Non-interest earning assets        603,610                                        472,529
Total assets                   $ 6,965,730$ 4,117,499
Interest bearing
liabilities:
Interest bearing checking      $   462,977$     646             0.56 %   $         -     $       -                - %
Savings                          1,398,378         4,814             1.38         989,512         5,235             2.12
Money market accounts               82,908            89             0.43          85,982           161             0.75
Certificates of deposit          3,689,041        19,572             2.13       2,452,159        15,807             2.59
Total deposits                   5,633,304        25,121             1.79       3,527,653        21,203             2.41
Borrowings                         676,849           798             0.47           1,409             -                -
Total interest bearing
liabilities                      6,310,153        25,919             1.65       3,529,062        21,203             2.41
Non-interest bearing
deposits                            41,218                                         49,466
Non-interest bearing
liabilities                         50,554                                         26,580
Shareholders' equity               563,805                                        512,391
Total liabilities and
  shareholders' equity         $ 6,965,730$ 4,117,499
Net interest income and
interest
  rate spread                                  $  40,898             2.54 %                   $  33,935             3.63 %
Net interest margin                                                  2.56 %                                         3.71 %
Ratio of average
interest-earning
  assets to average
interest-bearing
  liabilities                                                      101.39 %                                       103.83 %

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

                                       45

--------------------------------------------------------------------------------



                                                               Six Months Ended June 30,
                                                  2020                                           2019
                                 Average                       Average          Average                       Average
                                 Balance       Interest       Yield/Rate        Balance       Interest       Yield/Rate
Interest earning assets:
Federal funds sold and
interest earning
  balances in other banks      $   470,901$   1,759             0.75 %   $   233,904$   2,747             2.37 %
Investment securities              546,110         7,548             2.77         514,038         7,433             2.92
Loans held for sale                963,359        28,980             6.03         794,919        26,934             6.83
Loans and leases held for
  investment(1)                  3,485,135        92,003             5.29       1,990,054        67,946             6.89
Total interest earning
assets                           5,465,505       130,290             4.78       3,532,915       105,060             6.00
Less: Allowance for credit
losses on loans
  and leases                       (31,439 )                                      (17,600 )
Non-interest earning assets        555,469                                        473,512
Total assets                   $ 5,989,535$ 3,988,827
Interest bearing
liabilities:
Interest bearing checking      $   231,489$     646             0.56 %   $        84     $       -                - %
Savings                          1,261,131         9,658             1.54         958,716        10,021             2.11
Money market accounts               80,265           189             0.47          84,648           269             0.64
Certificates of deposit          3,425,850        37,883             2.22       2,367,902        30,230             2.57
Total deposits                   4,998,735        48,376             1.94       3,411,350        40,520             2.40
Borrowings                         342,002           855             0.50           1,436             -                -
Total interest bearing
liabilities                      5,340,737        49,231             1.85       3,412,786        40,520             2.39
Non-interest bearing
deposits                            45,071                                         47,294
Non-interest bearing
liabilities                         52,024                                         20,548
Shareholders' equity               551,703                                        508,199
Total liabilities and
  shareholders' equity         $ 5,989,535$ 3,988,827
Net interest income and
interest
  rate spread                                  $  81,059             2.93 %                   $  64,540             3.61 %
Net interest margin                                                  2.97 %                                         3.68 %
Ratio of average
interest-earning
  assets to average
interest-bearing
  liabilities                                                      102.34 %                                       103.52 %

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

                                       46

--------------------------------------------------------------------------------




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,
                                        2020 vs. 2019                            2020 vs. 2019
                                  Increase (Decrease) Due to              Increase (Decrease) Due to
                                Rate         Volume       Total         Rate         Volume       Total
Interest income:
Federal funds sold and
interest
  earning balances in
other banks                  $   (2,050 )$  1,951$    (99 )$  (2,822 )$  1,834$   (988 )
Investment securities              (259 )        (71 )       (330 )        (339 )        454          115
Loans held for sale              (2,505 )      1,287       (1,218 )      (3,341 )      5,387        2,046
Loans and leases held for
investment                      (17,398 )     30,724       13,326       (21,200 )     45,257       24,057
Total interest income           (22,212 )     33,891       11,679       (27,702 )     52,932       25,230
Interest expense:
Interest bearing checking             -          646          646             -          646          646
Savings                          (2,206 )      1,785         (421 )      (3,101 )      2,738         (363 )
Money market accounts               (67 )         (5 )        (72 )         (68 )        (12 )        (80 )
Certificates of deposit          (3,503 )      7,268        3,765        (4,950 )     12,603        7,653
Borrowings                            2          796          798             4          851          855
Total interest expense           (5,774 )     10,490        4,716        (8,115 )     16,826        8,711
Net interest income          $  (16,438 )$ 23,401$  6,963$ (19,587 )$ 36,106$ 16,519

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 allowance
for credit losses ("ACL") on loans and leases at a level that 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. A typical SBA 7(a) loan carries a 75% guarantee
while USDA guarantees range from 50% to 90% depending on loan size, 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 2020, the provision for loan and lease credit losses
was $10.0 million compared to $3.4 million for the same period in 2019, an
increase of $6.5 million.  For the first half of 2020, the provision for loan
and lease credit losses was $21.8 million compared to $6.4 million for the same
period in 2019, an increase of $15.3 million.  The Company adopted the new
current expected credit losses ("CECL") standard effective January 1, 2020 and
accordingly determined to use forecasted levels of unemployment as a primary
economic variable in forecasting future expected losses. The majority of the
provision for the second quarter of 2020 was due to the effects of the COVID-19
pandemic, while approximately $15.5 million of the first half of 2020 provision
was estimated to be based upon the severity of ongoing developments resulting
from the COVID-19 pandemic.

Loans and leases held for investment at historical cost were $3.82 billion as of
June 30, 2020, increasing by $2.45 billion, or 178.7%, compared to June 30,
2019. This growth was largely fueled by $1.74 billion in PPP loan originations
in the second quarter of 2020. Excluding PPP loan originations and net unearned
fees on those loans, the balance in loans and leases held for investment at
historical cost was $2.13 billion at June 30, 2020, an increase of $758.2
million, or 55.4%, over June 30, 2019. This growth, outside of PPP activity in
the second quarter of 2020, was fueled by continued origination volumes combined
with retention of substantially more loans on the balance sheet.

                                       47

--------------------------------------------------------------------------------




Net charge-offs for loans and leases carried at historical cost were $1.8
million, or 0.21% of average quarterly loans and leases held for investment,
carried at historical cost, on an annualized basis, for the three months ended
June 30, 2020, compared to $121 thousand, or 0.04%, for the three months ended
June 30, 2019. Net charge-offs for loans and leases carried at historical cost
for the second quarter of 2020 was 0.25% of average quarterly loans and leases
held for investment, excluding PPP loans, on an annualized basis. For the six
months ended June 30, 2020, net charge-offs totaled $4.6 million compared to $34
thousand for the six months ended June 30, 2019, an increase of $4.5 million, or
13,370.6%. The increase in net charge-offs largely consisted of a number of
loans in the Government Contracting, Healthcare, Family Entertainment, and
Independent Pharmacies verticals. Net charge-offs are a key element of
historical experience in the Company's estimation of the allowance for credit
losses on loans and leases.

In addition, nonperforming loans and leases not guaranteed by the SBA or USDA,
excluding $6.4 million and $7.7 million accounted for under the fair value
option at June 30, 2020 and 2019, respectively, totaled $13.1 million, which was
0.34% of the held for investment loan and lease portfolio carried at historical
cost at June 30, 2020, compared to $6.5 million, or 0.48% of loans and leases
held for investment at June 30, 2019. Nonperforming loans and leases carried at
historical cost which are not guaranteed by the SBA or USDA were 0.62% of the
historical cost portion of the held for investment loan and lease portfolio,
excluding PPP loans, at June 30, 2020.

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 common elements of noninterest income include
nonrecurring 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,            2020/2019 Increase (Decrease)
                                             2020                 2019             Amount               Percent
Noninterest income
Loan servicing revenue                  $        6,691$        7,063$        (372 )                (5.27 )%
Loan servicing asset revaluation                (1,571 )             (3,245 )           1,674                  51.59
Net gains on sales of loans                     10,695                6,015             4,680                  77.81
Net (loss) gain on loans accounted
for under the fair
  value option                                  (1,089 )              2,791            (3,880 )              (139.02 )
Equity method investments income
(loss)                                          (2,243 )             (1,736 )            (507 )                29.21
Equity security investments gains
(losses), net                                      161                   32               129                 403.13

Gain on sale of investment securities

  available-for-sale, net                          734                    -               734                 100.00
Lease income                                     2,635                2,369               266                  11.23
Management fee income                            1,206                   91             1,115               1,225.27
Construction supervision fee income                684                  386               298                  77.20
Other noninterest income                         4,508                  884             3,624                 409.95
Total noninterest income                $       22,411$       14,650$       7,761                  52.98 %




                                       48
--------------------------------------------------------------------------------




                                           Six Months Ended June 30,             2020/2019 Increase (Decrease)
                                             2020               2019             Amount                Percent
Noninterest income
Loan servicing revenue                  $       13,113$    14,473$       (1,360 )                 (9.40 )%
Loan servicing asset revaluation                (6,263 )          (7,285 )            1,022                   14.03
Net gains on sales of loans                     21,807            10,213             11,594                  113.52
Net (loss) gain on loans accounted
for under the fair
  value option                                 (11,727 )           4,874            (16,601 )               (340.60 )
Equity method investments income
(loss)                                          (4,721 )          (3,750 )             (971 )                 25.89
Equity security investments gains
(losses), net                                       97               135                (38 )                (28.15 )

Gain on sale of investment securities

  available-for-sale, net                          655                 5                650               13,000.00
Lease income                                     5,259             4,694                565                   12.04
Management fee income                            2,850                91              2,759                3,031.87
Construction supervision fee income              1,074             1,165                (91 )                 (7.81 )
Other noninterest income                         6,009             3,351              2,658                   79.32
Total noninterest income                $       28,153$    27,966     $          187                    0.67 %




For the three months ended June 30, 2020, noninterest income increased by $7.8
million, or 53.0%, compared to the three months ended June 30, 2019. The
increase from the prior year is primarily the result of the aforementioned
increase in net gains on sales of loans combined with a $3.6 million increase in
other noninterest income largely comprised of $2.5 million in revenue resulting
from the sale of services from co-developed technology for processing PPP
loans. Other items contributing to the increase in noninterest income were a
lower net loss on the loan servicing asset revaluation of $1.7 million and
management fee income earned by Canapi Advisors, the Company's investment
advisor subsidiary, increasing by $1.1 million. Offsetting the increases in
noninterest income for the second quarter of 2020 was the aforementioned net
negative valuation adjustment related to loans measured at fair value which
increased by $3.9 million.



For the six months ended June 30, 2020, noninterest income increased by $187
thousand, or 0.7%, compared to the six months ended June 30, 2019. The slight
increase from the prior year is also primarily the result of the aforementioned
increase in net gains on sales of loans combined with a $2.7 million increase in
other noninterest income largely comprised of $2.5 million in revenue resulting
from the sale of services from co-developed technology for processing PPP
loans. Other items contributing to the increase in noninterest income were a
lower net loss on the loan servicing asset revaluation of $1.0 million and
management fee income earned by Canapi Advisors, the Company's investment
advisor subsidiary, increasing by $2.8 million. Offsetting the increases in
noninterest income for the first half of 2020 was the aforementioned net
negative valuation adjustment related to loans measured at fair value which
increased by $16.6 million and decreased loan servicing revenue of $1.4 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,

                                   2020                2019               2020                 2019

Amount of loans and leases

  originated                  $     2,175,055$     525,088$       500,634$     390,851
Guaranteed portions
  of loans sold                       154,980             71,934             162,297              62,940

Outstanding balance of

guaranteed loans sold (1) 2,840,429 2,870,108 2,761,015

           2,952,774





                                       49
--------------------------------------------------------------------------------





                        Six Months Ended June 30,                       For
years ended December 31,
                           2020             2019            2019            2018            2017            2016
Amount of loans and
leases
  originated          $    2,675,689$   915,939$ 2,001,886$ 1,765,680$ 1,934,238$ 1,537,010
Guaranteed portions
of
  loans sold                 317,277         134,874         340,374         945,178         787,926         761,933
Outstanding balance
of
  guaranteed loans
sold (1)                   2,840,429       2,870,108       2,746,840       3,045,460       2,680,641       2,278,618



(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 Revenue: While portions of the loans that the Bank originates are
sold and generate gain on sale revenue, servicing rights for those sold portions
are retained by the Bank. In exchange for continuing to service sold loans, the
Bank receives fee income represented in loan servicing revenue equivalent to
1.0% of the outstanding balance of SBA loans sold and 0.40% of the outstanding
balance of USDA loans sold. In addition, the standard cost (adequate
compensation) for servicing sold loans is approximately 0.40% of the balance of
the loans sold, which is included in the loan servicing revaluation
computations. Unrecognized servicing revenue above the standard cost to service
is reflected in a servicing asset recorded on the balance sheet. Revenues
associated with the servicing of loans are recognized over the expected life of
the loan through the income statement, and the servicing asset is reduced as
this revenue is recognized. For the quarter ended June 30, 2020, loan servicing
revenue decreased $372 thousand, or 5.27%, to $6.7 million as compared to the
quarter ended June 30, 2019. For the six months ended June 30, 2020, loan
servicing revenue decreased $1.4 million, or 9.4% to $13.1 million as compared
to the six months ended June 30, 2019.  The lower servicing revenue for the
second quarter and first half of 2020 has been a result of the declining balance
of the serviced portfolio. At June 30, 2020, the outstanding balance of
guaranteed loans sold in the secondary market was $2.84 billion compared to
$2.87 billion at June 30, 2019.

Loan Servicing Revaluation: The Company revalues its serviced loan portfolio at
least quarterly. The revaluation considers the amortization of the portfolio,
current market conditions for loan sale premiums, and current prepayment speeds.
For the three months ended June 30, 2020, there was a net negative loan
servicing revaluation adjustment of $1.6 million compared to a net negative
adjustment of $3.2 million for the three months ended June 30, 2019. For the six
months ended June 30, 2020, there was a net negative loan servicing revaluation
adjustment of $6.3 million compared to a net negative adjustment of $7.3 million
for the six months ended June 30, 2019.The lower revaluation amount for the
second quarter and first half of 2020 as compared to the corresponding period of
2019 was primarily a result of improving market conditions.

Net Gains on Sale of Loans: For the three months ended June 30, 2020, net gains
on sales of loans increased $4.7 million, or 77.8%, compared to the three months
ended June 30, 2019. For the three months ended June 30, 2020, the volume of
guaranteed loans sold increased $83.0 million, or 115.4%, to $155.0 million from
$71.9 million for the three months ended June 30, 2019. For the six months ended
June 30, 2020, net gains on sales of loans increased $11.6 million, or 113.5%,
compared to the six months ended June 30, 2019. For the six months ended June
30, 2020, the volume of guaranteed loans sold increased $182.4 million, or
135.2%, to $317.3 million from $134.9 million for the six months ended June 30,
2019. The average net gain on guaranteed loan sales decreased from $80.1
thousand to $66.8 thousand, per million sold, in the second quarters of 2019 and
2020, respectively, and decreased from $71.3 thousand to $65.2 thousand, per
million sold, in the first half of 2019 and 2020, respectively. With this
overall decrease in market value due to loan sales earlier in the second quarter
combined with the mix of loan sales, the increase in net gains on sales of loans
in the second quarter and second half of 2020 is due to a higher volume of loans
sold. Secondary market values continued to recover as the second quarter of 2020
progressed. The volume of sales in the first quarter of 2020 was heightened to
strengthen the Company's capital and liquidity profile in light of uncertain
market conditions while the second quarter of 2020 sales volume is in-line with
the Company's balance sheet strategy. Also enhancing the increase in net gains
on sale of loans in the second quarter of 2020 are $1.1 million in decreased
losses from fair value changes in exchange-traded interest rate futures
contracts. This decrease in volatility of exchange-traded interest rate futures
contracts was the product of the Company preemptively exiting such contracts in
the first quarter.

                                       50
--------------------------------------------------------------------------------




Net (Loss) Gain on Loans Accounted for Under the Fair Value Option: For the
three months ended June 30, 2020, the net loss on loans accounted for under the
fair value option increased $3.9 million, or 139.0%, compared to the three
months ended June 30, 2019. For the six months ended June 30, 2020, the net loss
on loans accounted for under the fair value option increased $16.6 million, or
340.6%, compared to the six months ended June 30, 2019. The carrying amount of
loans accounted for under the fair value option at June 30, 2020 and 2019 was
$866.7 million ($32.1 million classified as held for sale and $834.6 million
classified as held for investment) and $865.7 million ($26.6 million classified
as held for sale and $839.1 million classified as held for investment),
respectively, an increase of $990 thousand, or 0.1%. The first half of 2020 net
loss on loans accounted for under the fair value option was estimated to be
approximately $9.7 million related to the severity of ongoing developments of
the COVID-19 pandemic. The magnitude of COVID-19 related impacts on loan fair
value adjustments in the second quarter of 2020 was dampened by improving market
conditions for unguaranteed loans.

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,            2020/2019 Increase (Decrease)
                                             2020                 2019              Amount               Percent
Noninterest expense
Salaries and employee benefits          $       30,782$       21,990$        8,792                 39.98 %
Non-staff expenses:
Travel expense                                     364                1,541             (1,177 )              (76.38 )
Professional services expense                    1,385                1,621               (236 )              (14.56 )
Advertising and marketing expense                  624                1,665             (1,041 )              (62.52 )
Occupancy expense                                1,955                1,848                107                  5.79
Data processing expense                          2,764                1,947                817                 41.96
Equipment expense                                4,652                4,239                413                  9.74
Other loan origination and
maintenance expense                              2,492                1,708                784                 45.90
Renewable energy tax credit
investment impairment                                -                  602               (602 )             (100.00 )
FDIC insurance                                   1,721                  699              1,022                146.21
Other expense                                    1,361                1,716               (355 )              (20.69 )
Total non-staff expenses                        17,318               17,586               (268 )               (1.52 )
Total noninterest expense               $       48,100$       39,576$        8,524                 21.54 %




                                            Six Months Ended June 30,            2020/2019 Increase (Decrease)
                                            2020                2019              Amount               Percent
Noninterest expense
Salaries and employee benefits          $      58,845$      43,845$       15,000                 34.21 %
Non-staff expenses:
Travel expense                                  2,145               2,741               (596 )              (21.74 )
Professional services expense                   3,322               3,803               (481 )              (12.65 )
Advertising and marketing expense               1,985               3,029             (1,044 )              (34.47 )
Occupancy expense                               4,376               3,457                919                 26.58
Data processing expense                         5,921               4,346              1,575                 36.24
Equipment expense                               9,287               7,564              1,723                 22.78
Other loan origination and
maintenance expense                             4,948               3,347              1,601                 47.83
Renewable energy tax credit
investment impairment                               -                 602               (602 )             (100.00 )
FDIC insurance                                  3,231               1,334              1,897                142.20
Other expense                                   3,531               3,709               (178 )               (4.80 )
Total non-staff expenses                       38,746              33,932              4,814                 14.19
Total noninterest expense               $      97,591$      77,777$       19,814                 25.48 %




                                       51
--------------------------------------------------------------------------------




Total noninterest expense for the three and six months ended June 30, 2020
increased $8.5 million, or 21.5%, and $19.8 million, or 25.5%, respectively,
compared to the same periods in 2019. The increase in noninterest expense was
largely driven by salaries and employee benefits. Changes in various components
of noninterest expense are discussed below.

Salaries and employee benefits: Total personnel expense for the three and six
months ended June 30, 2020 increased by $8.8 million, or 40.0%, and $15.0
million, or 34.2%, respectively, compared to the same periods in 2019. While
personnel expense is carefully managed, this increase is principally due to the
Company's commitment to and investment in its workforce to support growth and a
variety of initiatives combined with $7.2 million in expense for a performance
bonus pool that was available to all employees other than executive officers.
Total full-time equivalent employees increased from 531 at June 30, 2019 to 640
at June 30, 2020. Salaries and employee benefits expense included $3.3 million
and $6.2 million of stock-based compensation for the three and six months ended
June 30, 2020, respectively, compared to $2.9 million and $5.8 million for the
three and six months ended June 30, 2019, respectively. Expenses related to the
employee stock purchase program, stock grants, stock option compensation and
restricted stock expense are all considered stock-based compensation.

Data processing expense: Total data processing expense for the three and six
months ended June 30, 2020 increased by $817 thousand, or 42.0%, and $1.6
million, or 36.2%, respectively, compared to the same periods in 2019. The
increase was predominantly driven by third party costs incurred in internal
software development and with additional software subscriptions to help maximize
operational efficiencies.



Equipment expense: For the three and six months ended June 30, 2020, equipment
expense increased $413 thousand, or 9.7%, and $1.7 million, or 22.8%,
respectively, compared to the same periods in 2019. Primary factors contributing
to this increase were the depreciation of technology and infrastructure
investments to support the Company's growth initiatives.



Other loan origination and maintenance expense: For the three and six months
ended June 30, 2020, other loan origination and maintenance expense increased
$784 thousand, or 45.9%, and $1.6 million, or 47.8%, respectively, compared to
the same periods in 2019 due to increased levels of SBA loans.



FDIC insurance: For the three and six months ended June 30, 2020, FDIC insurance
increased $1.0 million, or 146.2%, and $1.9 million, or 142.2%, respectively,
compared to the same periods in 2019 due to higher required premiums.



Travel & Advertising and marketing expenses: For the three and six months ended
June 30, 2020, travel & advertising and marketing expenses in aggregate
decreased $2.2 million, or 69.2%, and $1.6 million, or 28.4%, respectively. This
decrease was the result of certain activities being paused due to the impact of
COVID-19.

Income Tax Expense

For the three months ended June 30, 2020, income tax expense increased by $812
thousand compared to the same period in 2019, and the Company's effective tax
rates were 28.1% and 11.8%, respectively. The increase in the second quarter of
2020 over the second quarter of 2019 is primarily due to the absence of expected
tax credits during 2020.

For the six months ended June 30, 2020, the Company had an income tax benefit of
$(6.3) million with an effective tax rate of (62.2)% while the first half of
2019 had income tax expense of $979 thousand with an effective tax rate of
11.8%. The negative effective tax rate during the first half of 2020 was a
result of a discrete, estimated income tax benefit of $3.7 million related to
the enactment of the CARES Act on March 27, 2020. The CARES Act allows taxpayers
to carryback certain net operating losses to each of the five taxable years
preceding the taxable year of such losses. As a result, the Company will be
allowed to carryback its 2018 net operating loss which had been utilized and
measured under the prior law using a 21% corporate income tax rate to pre-2018
taxable years during which the corporate income tax rate was 35%. The remaining
income tax benefit in the first half of 2020 was predominantly driven by the
Company's overall net pretax loss. Based upon current projections, the effective
tax rate for the remainder of 2020 is expected to be approximately 26.0% to
28.0%; however, there can be no assurance as to the actual amount because it
will be dependent upon the nature and amount of future income and expenses,
investments generating investment tax credits and transactions with discrete tax
effects.




                                       52
--------------------------------------------------------------------------------

Discussion and Analysis of Financial Condition

June 30, 2020 vs. December 31, 2019


Total assets at June 30, 2020 were $8.21 billion, an increase of $3.40 billion,
or 70.6%, compared to total assets of $4.81 billion at December 31, 2019. 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, increased $1.13 billion as a product of increased levels of

borrowings, deposits and loan sales arising from strategically heightened

levels of liquidity related to COVID-19 risks and uncertainties and funding

for PPP loans originated in the second quarter;

• Increased investment securities available-for-sale of $239.7 million. This

increase in investment securities was due to availability of excess surplus

liquidity, discussed above related to pandemic readiness, accelerating 2020

      investment growth in accordance with the Company's asset-liability and
      liquidity management plan; and

• Growth in loans and leases held for sale and held for investment of $2.03

      billion resulting from strong origination activity in the first half of
      2020, largely comprised of $1.74 billion in PPP loans.


Cash and cash equivalents, comprised of cash and due from banks and federal
funds sold, was $1.35 billion at June 30, 2020, an increase of $1.13 billion, or
508.9%, compared to $221.4 million at December 31, 2019. As mentioned above,
this increase reflects the impact of strategically heightened levels of
liquidity related to COVID-19 risks and uncertainties and funding for PPP loans
during the second quarter.

Total investment securities increased $239.7 million during the first six months
of 2020, from $540.0 million at December 31, 2019, to $779.8 million at June 30,
2020, an increase of 44.4%. The Company increased its investment securities
position during the first half of 2020 largely as a part of improving returns on
excess liquidity and meeting annual investment asset-liability plans, as
discussed above. At June 30, 2020, the investment portfolio was comprised of
U.S. treasury, U.S. government agency, U.S. government- sponsored entity
mortgage-backed securities and municipal bonds.

Loans and leases held for investment increased $2.02 billion, or 77.0%, during
the first six months of 2020, from $2.63 billion at December 31, 2019, to $4.65
billion at June 30, 2020. The increase was primarily the result of $1.74 billion
in PPP loan originations combined with $930.8 million in other loan originations
in the first half of 2020.

Premises and equipment, net, decreased $10.0 million, or 3.6%, during the first
six months of 2020 which was primarily driven by increased levels of
depreciation of facilities and infrastructure to accommodate Company growth and
solar panels to meet leasing obligations in prior periods.

Other assets increased $23.8 million, or 15.3%, from $156.1 million at December
31, 2019 to $180.0 million at June 30, 2020. This increase was due to a variety
of items, principally comprised of a $7.7 million increase in accrued interest
receivable driven by higher levels of interest earning assets combined with $4.6
million in increased receivables from the SBA for guarantee recoveries, $4.1
million in new intangibles added as a result of the acquisition of Jolley Asset
Management, LLC (as discussed more fully in Note 1. Basis of Presentation under
the subheading Business Combination), $2.5 million in additional receivables for
co-developed technology PPP loan processing services and $2.3 million in
capitalized software development and implementation costs.

Total deposits were $5.87 billion at June 30, 2020, an increase of $1.65 billion, or 38.9%, from $4.23 billion at December 31, 2019. The increase in deposits was largely driven by the planned origination of PPP loans and following the defensive strategy to build liquidity during the first quarter of 2020 due to the uncertainty of the effects of COVID-19.




Borrowings increased to $1.72 billion at June 30, 2020 from $14 thousand at
December 31, 2019. This increase was related to $1.72 billion in new borrowings
through the PPPLF in the second quarter of 2020. These PPPLF borrowings were
used to help fund PPP loans and complement the defensive strategy to build
liquidity which commenced in the first quarter of 2020 due to the uncertainty of
the effects of COVID-19.



Shareholders' equity at June 30, 2020 was $548.4 million as compared to $532.4
million at December 31, 2019. The book value per share was $13.53 at June 30,
2020 compared to $13.20 at December 31, 2019. Average equity to average assets
was 9.2% for the six months ended June 30, 2020 compared to 12.2% for the year
ended December 31, 2019. The increase in shareholders' equity was principally
the result of other comprehensive income of $13.6 million and stock-based
compensation expense of $6.2 million, partially offset by a net loss of $3.8
million and $2.4 million in dividends.

                                       53

--------------------------------------------------------------------------------




During the first half of 2020, 200,000 shares of Class B common stock
(non-voting) were converted to Class A common stock (voting) under a private
sale. The conversion decreased the value of Class B common stock (non-voting)
and increased the value of Class A common stock (voting) by $2.1 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.

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).

Total nonperforming assets and troubled debt restructurings, including loans
measured at fair value, at June 30, 2020 were $134.3 million, which represented
a $23.2 million, or 20.9%, increase from December 31, 2019. These nonperforming
assets, at June 30, 2020 were comprised of $90.1 million in nonaccrual loans and
leases and $5.7 million in foreclosed assets. Of the $134.3 million of
nonperforming assets and TDRs, $100.9 million carried an SBA guarantee, leaving
an unguaranteed exposure of $33.4 million in total nonperforming assets and TDRs
at June 30, 2020. This represents an increase of $6.2 million, or 22.8%, from an
unguaranteed exposure of $27.2 million at December 31, 2019.

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



                                                                             December 31,
                                                    June 30, 2020 (1)          2019 (1)
Nonaccrual loans and leases:
Total nonperforming loans and leases (all on
nonaccrual)                                        $            40,275     $         21,937
Total accruing loans and leases past due 90 days
or more                                                              -                    -
Foreclosed assets                                                5,660      

5,612

Total troubled debt restructurings                              26,781      

16,566

Less nonaccrual troubled debt restructurings                    (7,477 )             (2,225 )
Total performing troubled debt restructurings                   19,304      

14,341

Total nonperforming assets and troubled debt
restructurings                                     $            65,239     $         41,890
Total nonperforming loans and leases to total
loans and leases held for
  investment                                                      1.06 %               1.22 %
Total nonperforming loans and leases to total
assets                                                            0.55 %               0.55 %
Total nonperforming assets and troubled debt
restructurings to total assets                                    0.89 %               1.05 %


                                       54
--------------------------------------------------------------------------------





                                                                             December 31,
                                                    June 30, 2020 (1)          2019 (1)
Nonaccrual loans and leases guaranteed by U.S.
government:
Total nonperforming loans and leases guaranteed
by the SBA (all on
  nonaccrual)                                      $            27,153     $         14,713
Total accruing loans and leases past due 90 days
or more guaranteed by the
  SBA                                                                -                    -
Foreclosed assets guaranteed by the SBA                          4,461      

4,492

Total troubled debt restructurings guaranteed by
the SBA                                                         18,147      

10,845

Less nonaccrual troubled debt restructurings
guaranteed by the SBA                                           (4,117 )               (385 )
Total performing troubled debt restructurings
guaranteed by SBA                                               14,030      

10,460

Total nonperforming assets and troubled debt
restructurings guaranteed
  by the SBA                                       $            45,644     $         29,665
Total nonperforming loans and leases not
guaranteed by the SBA to total
  loans and leases held for investment                            0.34 %               0.40 %
Total nonperforming loans and leases not
guaranteed by the SBA to total
  assets                                                          0.18 %               0.18 %
Total nonperforming assets and troubled debt
restructurings not
  guaranteed by the SBA to total assets                           0.27 %               0.31 %



(1) Excludes loans measured at fair value.





Nonperforming assets and TDRs, excluding loans measured at fair value, at June
30, 2020 were $65.2 million, which represented a $23.3 million, or 55.7%,
increase from December 31, 2019. These nonperforming assets, at June 30, 2020
were comprised of $40.3 million in nonaccrual loans and leases and $5.7 million
in foreclosed assets. Of the $65.2 million of nonperforming assets and TDRs,
$45.6 million carried an SBA guarantee, leaving an unguaranteed exposure of
$19.6 million in total nonperforming assets and TDRs at June 30, 2020. This
represents an increase of $7.4 million, or 60.3%, from an unguaranteed exposure
of $12.2 million at December 31, 2019.



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 8.1% at June 30, 2020,
compared to 4.4% at December 31, 2019. 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 June 30, 2020 and December 31, 2019 were 2.6% and 1.5%,
respectively.

                                       55
--------------------------------------------------------------------------------




As of June 30, 2020, and December 31, 2019, potential problem (also referred to
as criticized) and classified loans and leases, excluding loans measured at fair
value, totaled $146.9 million and $129.1 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. At June 30, 2020, the
portion of criticized and classified loans and leases guaranteed by the SBA or
USDA totaled $79.0 million resulting in unguaranteed exposure risk of $68.0
million, or 4.9% of total held for investment unguaranteed exposure carried at
historical cost. This compares to the December 31, 2019 portion of criticized
and classified loans and leases guaranteed by the SBA or USDA which totaled
$65.8 million resulting in unguaranteed exposure risk of $63.3 million, or 5.4%
of total held for investment unguaranteed exposure carried at historical
cost. As of June 30, 2020, 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: Healthcare at 20.8%, Wine and Craft
Beverage at 15.1%, Hotels at 13.0%, Entertainment Centers at 9.6%, Veterinary at
9.2%, Self Storage at 5.8% and Educational Services at 5.0%. As of
December 31, 2019, 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: Healthcare at 20.8%, Hotels at 14.7%, Wine and
Craft Beverage at 14.3%, Self Storage at 8.4%, Veterinary at 7.1%,
Government Contracting at 6.1%, and Educational Services at 5.7%. Other than
Hotels and Government Contracting 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. Two previously impaired Government Contracting
relationships were charged off in the first half of 2020 which resulted in a
reduction in impaired loans for this vertical. The majority of the increase in
potential problem and classified loans and leases was comprised of a relatively
small number of borrowers largely concentrated in the Company's more mature
verticals. Furthermore, the Company believes that its underwriting and credit
quality standards have continued to tighten with emphasis on new production in
pandemic resilient verticals and increased monitoring of existing loans in
pandemic susceptible verticals as the impacts and uncertainties COVID-19
continue to evolve.  With this emphasis, systemic issues which began to emerge
during the latter part of 2019 related to higher than expected levels of
competition in the Wine and Craft Beverage and Entertainment Center verticals
combined with pandemic susceptibility continue to contribute to the increase in
criticized and classified loans and leases.

The Bank does not classify loans and leases that experience insignificant
payment delays and payment shortfalls as impaired. The Bank generally considers
an "insignificant period of time" from payment delays to be a period of 90 days
or less, unless the borrower was not past due at the time of a modification as a
part of a COVID-19 assistance program. In such instances this time period could
extend to a period of three months 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. In all cases,
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. To date, the only types of short-term modifications the
Bank has given are payment deferral and interest only extensions. The Bank does
not typically alter the rate or lengthen the amortization of the note due to
insignificant payment delays. Short term modifications are not classified as
TDRs, because they do not meet the definition set by the applicable accounting
standards and the Federal Deposit Insurance Corporation.

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, 2020, and December 31, 2019, Risk Grade 5
loans and leases, excluding loans measured at fair value, totaled $94.4 million
and $89.5 million, respectively. The increase in Risk Grade 5 loans and leases,
exclusive of loans measured at fair value, during the first half of 2020 was
principally confined to five verticals: Entertainment Centers ($9.2 million or
187.7%), Senior Care ($4.0 million or 82.6%), Healthcare ($4.0 million or
81.5%), Veterinary ($3.6 million or 74.2%), General Lending Solutions ($1.4
million or 29.4%), and Funeral Home & Cemetery ($1.1 million or 21.9%). Largely
offsetting the increase in the above Risk Grade 5 loans and leases were
decreases in Hotels ($10.5 million or 213.3%) Government Contracting ($3.8
million or 78.4%) and Self Storage ($2.1 million or 43.3%). Other than Hotels
and Government Contracting 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 decrease in Hotels was due to two relationships
moving to risk grade 6 (substandard) while the decrease in Government
Contracting was due to loan paydowns which moved loans back to pass grades, and
the decrease in Self Storage was due to one relationship being upgraded to a
risk grade 4 (acceptable). At June 30, 2020, approximately 100.0% of loans and
leases classified as Risk Grade 5 are performing with no current 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. In conjunction with this, management
believes that volumes of delinquencies may be not be an accurate depiction of
the borrower's repayment abilities under the current pandemic induced
circumstances due to payments being made by the SBA on behalf of borrower with
loans under its programs. This payment assistance commenced in the first quarter
and will continue for six months.

                                       56

--------------------------------------------------------------------------------

Allowance for Credit Losses on Loans and Leases


The allowance for credit losses ("ACL") on loans and leases is a valuation
account that is deducted from, or added to, the amortized cost basis of loans
and leases to present a net amount expected to be collected. The ACL excludes
loans held for sale and loans accounted for under the fair value option. Loans
and leases are charged-off against the ACL when management believes the
uncollectibility of a loan or lease balance is confirmed. Expected recoveries do
not exceed the aggregate of amounts previously charged-off and expected to be
charged-off. Judgment in determining the adequacy of the ACL is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available and as situations and information change.

The ACL is evaluated on a quarterly basis by management and is estimated using
relevant information, from internal and external sources, relating to past
events, current conditions, and reasonable and supportable forecasts. The
Company's historical credit loss experience provides the basis for the
estimation of expected credit losses. Management adjusts historical loss
information for differences in current risk characteristics such as portfolio
risk grading, delinquency levels, or portfolio mix as well as for changes in
environmental conditions such as changes in unemployment rates.

The ACL of $28.2 million at December 31, 2019 increased by $15.8 million, or
56.1%, to $44.1 million at June 30, 2020. The ACL, as a percentage of loans and
leases held for investment at historical cost amounted to 1.2% at June 30, 2020
and 1.6% at December 31, 2019. Excluding PPP loans and related reserves, the
ACL, as a percentage of loans and leases held for investment at historical cost
amounted to 2.0% at June 30, 2020. As mentioned earlier, the Company adopted the
new CECL standard effective January 1, 2020. Upon adoption, the Company recorded
a $1.3 million decrease in the ACL. In implementing CECL, the Company
accordingly determined to use forecasted levels of unemployment as a primary
economic variable in forecasting future expected losses. Based upon the severity
of ongoing developments resulting from the COVID-19 pandemic, the Company's
allowance for credit losses on loans and leases increased significantly,
combined with the effects of the above discussed increased levels of criticized
and classified loans and leases and charge-offs, as addressed more fully in the
Provision for Loan and Lease Credit Losses section of Results of Operations.

Actual past due held for investment loans and leases, inclusive of loans
measured at fair value, have decreased by $8.5 million since December 31,
2019. This decrease was due to monthly payments being made by SBA for our SBA
7(a) borrowers. Total loans and leases 90 or more days past due increased $6.6
million, or 17.0%, compared to December 31, 2019. The increase was the result of
a $6.9 million increase in the guaranteed portion of past due loans compared to
December 31, 2019. At June 30, 2020 and December 31, 2019, 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 0.9% and 1.7%, respectively. Total unguaranteed loans and leases
past due were comprised of $9.4 million carried at historical cost, an increase
of $1.4 million, and $4.1 million measured at fair value, a decrease of $7.6
million as of June 30, 2020 compared to December 31, 2019. Management continues
to actively monitor and work to improve asset quality. Management believes the
ACL of $44.1 million at June 30, 2020 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, including but not limited to
factors related to the above mentioned SBA delinquency effect and
pandemic-susceptible verticals. 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 Notes to the
Unaudited Condensed Consolidated Financial Statements in this report.

Liquidity Management


Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of the
Company's customers. Liquidity is immediately available from four major sources:
(a) cash on hand and on deposit at other banks; (b) the outstanding balance of
federal funds sold; (c) the market value of unpledged investment securities; and
(d) availability under lines of credit. At June 30, 2020, the total amount of
these four items was $3.28 billion, or 40.0% of total assets, an increase of
$2.09 billion from $1.19 billion, or 24.8% of total assets, at December 31,
2019.

Loans and other assets are funded by loan sales, wholesale deposits and core
deposits. To date, an increasing retail deposit base and an increased long term
wholesale deposit base have been adequate to meet loan obligations, while
maintaining the desired level of immediate liquidity. Additionally, the
investment securities portfolio is available for both immediate and secondary
liquidity purposes.

                                       57
--------------------------------------------------------------------------------

At June 30, 2020, none of the investment securities portfolio was pledged to secure public deposits or pledged to retail repurchase agreements, leaving $779.8 million available as lendable collateral.

Contractual Obligations


The following table presents the Company's significant fixed and determinable
contractual obligations by payment date as of June 30, 2020. The payment amounts
represent those amounts contractually due to the recipient. The table excludes
liabilities recorded where management cannot reasonably estimate the timing of
any payments that may be required in connection with these liabilities.



                                                               Payments Due by Period
                                                    Less than         One to          Three to        More than
                                      Total         One Year       Three Years       Five Years       Five Years
Contractual Obligations
Deposits without stated maturity   $ 2,247,774$ 2,247,774     $          -     $          -     $          -
Time deposits                        3,625,518       2,396,055          812,146          340,346           76,971
Borrowings                           1,721,029           5,004        1,716,025                -                -
Operating lease obligations              3,753             736            1,430              363            1,224
Total                              $ 7,598,074$ 4,649,569$  2,529,601$    340,709$     78,195


As of June 30, 2020, and December 31, 2019, the Company had unfunded commitments
to provide capital contributions for on-balance sheet investments in the amount
of $16.8 million and $16.9 million, respectively.

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, 2020, the balance sheet's total cumulative gap position was
slightly liability-sensitive at -1.5%. The shift to liability-sensitive versus
the prior quarter asset-sensitive position is primarily due to the variable,
short-term funding added in early in the second quarter of 2020 to provide
initial funding for the Payroll Protection Program fixed rate loans.

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 uses an earnings
simulation model to prepare, on a regular basis, earnings projections based on a
range of interest rate scenarios to measure interest rate risk more accurately.
As of June 30, 2020, the Company's interest rate risk profile under the earnings
simulation model method remains asset-sensitive. 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. The
quarterly revaluation adjustment to the servicing asset, however, adjusts in an
opposite direction to interest rate changes. Asset/liability sensitivity is
primarily derived from the prime-based loans that adjust as the prime interest
rate changes and the longer duration of indeterminate term deposits.

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 to provide adequate capital to support the Company's
risk profile consistent with the risk appetite approved by the Board of
Directors; provide financial flexibility to support future growth and client
needs; comply with relevant laws, regulations, and supervisory guidance; achieve
optimal credit ratings for the Company and its subsidiaries; and 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.


                                       58
--------------------------------------------------------------------------------

Capital amounts and ratios as of June 30, 2020 and December 31, 2019, are presented in the table below.



                                                                                             Minimum To Be
                                                                                            Well Capitalized
                                                                                              Under Prompt
                                                                  Minimum Capital          Corrective Action
                                             Actual                 Requirement              Provisions (1)
                                       Amount        Ratio       Amount       Ratio        Amount        Ratio
Consolidated - June 30, 2020
Common Equity Tier 1 (to
Risk-Weighted Assets)                 $ 498,283       12.84 %   $ 174,660       4.50 %          N/A         N/A
Total Capital (to Risk-Weighted
Assets)                               $ 542,984       13.99 %   $ 310,506       8.00 %          N/A         N/A
Tier 1 Capital (to Risk-Weighted
Assets)                               $ 498,283       12.84 %   $ 232,879       6.00 %          N/A         N/A
Tier 1 Capital (to Average Assets)    $ 498,283        7.96 %   $ 250,488       4.00 %          N/A         N/A
Bank - June 30, 2020
Common Equity Tier 1 (to
Risk-Weighted Assets)                 $ 453,473       11.85 %   $ 172,243       4.50 %   $  248,795        6.50 %
Total Capital (to Risk-Weighted
Assets)                               $ 498,174       13.02 %   $ 306,210       8.00 %   $  382,762       10.00 %
Tier 1 Capital (to Risk-Weighted
Assets)                               $ 453,473       11.85 %   $ 229,657       6.00 %   $  306,210        8.00 %
Tier 1 Capital (to Average Assets)    $ 453,473        7.30 %   $ 248,462       4.00 %   $  310,577        5.00 %
Consolidated - December 31, 2019
Common Equity Tier 1 (to
Risk-Weighted Assets)                 $ 499,513       14.90 %   $ 150,927       4.50 %          N/A         N/A
Total Capital (to Risk-Weighted
Assets)                               $ 527,747       15.74 %   $ 268,315       8.00 %          N/A         N/A
Tier 1 Capital (to Risk-Weighted
Assets)                               $ 499,513       14.90 %   $ 201,236       6.00 %          N/A         N/A
Tier 1 Capital (to Average Assets)    $ 499,513       10.65 %   $ 187,582       4.00 %          N/A         N/A
Bank - December 31, 2019
Common Equity Tier 1 (to
Risk-Weighted Assets)                 $ 451,807       13.66 %   $ 148,950       4.50 %   $  215,150        6.50 %
Total Capital (to Risk-Weighted
Assets)                               $ 480,040       14.51 %   $ 264,800       8.00 %   $  331,000       10.00 %
Tier 1 Capital (to Risk-Weighted
Assets)                               $ 451,807       13.66 %   $ 198,600       6.00 %   $  264,800        8.00 %
Tier 1 Capital (to Average Assets)    $ 451,807        9.68 %   $ 186,627       4.00 %   $  233,283        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, 2019, 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. Management
believes that the critical accounting policies and estimates listed below
require the Company to make difficult, subjective or complex judgments about
matters that are inherently uncertain.

  • Determination of the allowance for credit losses on loans and leases;


  • Valuation of loans accounted for under the fair value option;


  • Valuation of servicing assets;


  • Income taxes;


  • Restricted stock unit awards with market price conditions;


  • Valuation of foreclosed assets;


                                       59
--------------------------------------------------------------------------------



  • Business combination and goodwill; and


  • Unconsolidated joint ventures.


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.

© Edgar Online, source Glimpses

share with twitter share with LinkedIn share with facebook
All news about LIVE OAK BANCSHARES, INC.
09/21LIVE OAK BANCSHARES : Bank Transforms its Digital Banking Operations Running Fin..
PR
09/17LIVE OAK BANCSHARES, INC. : Change in Directors or Principal Officers, Financial..
AQ
09/17LIVE OAK BANCSHARES : Appoints Dr. Tonya Bradford to Board of Directors
AQ
09/17Live Oak Bancshares Appoints Dr. Tonya Bradford to Board of Directors
GL
09/16ALLOY : Secures $40 Million in Series B Funding Led by Canapi Ventures
PR
08/25LIVE OAK BANCSHARES, INC. : Other Events (form 8-K)
AQ
08/12BLEND : Raises $75M at Nearly $1.7B Valuation
PR
08/05LIVE OAK BANCSHARES : Management's Discussion and Analysis of Financial Conditio..
AQ
07/23LIVE OAK BANCSHARES : Q2 2020 Earnings Presentation
PU
07/22LIVE OAK BANCSHARES : 2Q Earnings Snapshot
AQ
More news