FORM S-1
Table of Contents

As filed with the Securities and Exchange Commission on April 14, 2014

Registration No. 333-[           ]

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549            

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

LIVE OAK BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina   6022   26-4596286

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1741 Tiburon Drive

Wilmington, North Carolina 28403

(910) 790-5867

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

James S. Mahan, III

Chairman and Chief Executive Officer

Live Oak Bancshares, Inc.

1741 Tiburon Drive

Wilmington, North Carolina 28403

(910) 790-5867

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications to:

 

Todd H. Eveson, Esq.

Alexander M. Donaldson, Esq.

Jonathan A. Greene, Esq.

Wyrick Robbins Yates & Ponton LLP

4101 Lake Boone Trail, Suite 300

Raleigh, North Carolina 27607

(919) 781-4000

 

Frank M. Conner III, Esq.

Michael Paul Reed, Esq.

Covington & Burling LLP

1201 Pennsylvania Avenue, NW

Washington, DC 20004-2401

(202) 662-6000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price (1)(2)

 

Amount of

Registration Fee (3)

Common Stock, no par value per share

  $86,250,000   $11,109

 

 

(1) Includes the aggregate offering price of additional shares that the underwriters have the right to purchase from the Registrant, if any.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(3) Calculated in accordance with Rule 457(o) under the Securities Act of 1933, based on an estimate of the proposed maximum aggregate offering price.

 

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

 

 

 


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SUBJECT TO COMPLETION, DATED APRIL 14, 2014

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

PRELIMINARY PROSPECTUS

 

 

 

LOGO

                 Shares of Common Stock

$                 Per Share

 

 

We are Live Oak Bancshares, Inc., the parent company and registered bank holding company of Live Oak Banking Company in Wilmington, North Carolina. We are offering                  shares of our common stock, no par value per share, and the selling shareholders identified in this prospectus are offering                  shares of our common stock in a fully underwritten initial public offering. We will not receive any proceeds from sales by the selling shareholders. The underwriters have an option to purchase                  additional shares of our common stock from us in this offering.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We intend to apply to list our common stock on the NASDAQ Global Market under the symbol “LOB.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 25 to read about factors you should consider before buying our common stock.

 

 

We are an “emerging growth company” under the federal securities laws and are eligible for reduced public company reporting requirements.

 

 

Neither the Securities and Exchange Commission nor any state securities commission or other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The shares of our common stock that you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.

 

 

 

 

     Per Share        Total  

Initial public offering price

   $                          $                        

Underwriting discounts and commissions(1)

       

Proceeds to us, before expenses

       

Proceeds to selling shareholders, before expenses

       

 

(1) The underwriters will also be reimbursed for certain expenses incurred in this offering. See “Underwriting” for details of the compensation payable to the underwriters.

The underwriters expect to deliver the common stock offered hereby in New York, New York on or about                 , 2014, subject to customary closing conditions.

We have granted the underwriters an option to purchase up to an additional                  shares of our common stock at the initial public offering price less the underwriting discount, within 30 days from the date of this prospectus.

 

 

LOGO

 

 

SunTrust Robinson Humphrey

Prospectus dated [], 2014.


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     ii   

INDUSTRY AND MARKET DATA

     ii   

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

     ii   

DEVELOPMENTS AFFECTING OUR BUSINESS AFTER THE OFFERING

     iii   

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     25   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     41   

USE OF PROCEEDS

     43   

CAPITALIZATION

     44   

DILUTION

     46   

DIVIDEND POLICY

     48   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     49   

BUSINESS

     77   

MANAGEMENT

     87   

EXECUTIVE COMPENSATION AND OTHER MATTERS

     93   

CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS

     98   

PRINCIPAL AND SELLING SHAREHOLDERS

     99   

DESCRIPTION OF OUR SECURITIES

     101   

SUPERVISION AND REGULATION

     107   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     118   

UNDERWRITING

     122   

WHERE YOU CAN FIND MORE INFORMATION

     127   

LEGAL MATTERS

     127   

EXPERTS

     127   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We, the selling shareholders, and the underwriters have not authorized any person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We, the selling shareholders, and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

Unless otherwise indicated or unless the context requires otherwise, all references in this prospectus to “LOB,” “we,” “us,” “our,” the “Company,” or similar references, mean Live Oak Bancshares, Inc. and its subsidiaries on a consolidated basis. References to “Live Oak Bank” or the “Bank” mean our wholly-owned banking subsidiary, Live Oak Banking Company.

INDUSTRY AND MARKET DATA

Industry and market data used in this prospectus has been obtained from independent industry sources and publications available to the public, sometimes with a subscription fee, as well as from research reports prepared for other purposes. We did not commission the preparation of any of the sources or publications referred to in this prospectus. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified the data obtained from these sources. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. Trademarks used in this prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the ™ symbols to identify such trademarks.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than $1.0 billion in gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. As an emerging growth company:

 

    we may present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

 

    we are exempt from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;

 

    we are permitted to provide less extensive disclosure about our executive compensation arrangements;

 

    we are not required to hold non-binding advisory votes on executive compensation or golden parachute arrangements; and

 

    we can delay the adoption of new or revised accounting standards affecting public companies until those standards would otherwise apply to private companies.

 

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We may take advantage of these provisions for up to five years unless we earlier cease to be an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual gross revenues, have more than $700.0 million in market value of our common stock held by non-affiliates as of any June 30 before that time, or issue more than $1.0 billion of non-convertible debt in a three-year period. We may choose to take advantage of some but not all of these reduced regulatory and reporting requirements. We have elected in this prospectus to take advantage of scaled disclosure relating to executive compensation arrangements. However, we have elected to include the audited consolidated balance sheets, statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year ended December 31, 2011. We believe that the 2011 financial information provides relevant information regarding the Company’s growth and strategic trajectory.

Following this offering, we may continue to take advantage of some or all of the reduced regulatory, accounting and reporting requirements that will be available to us as long as we continue to qualify as an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. It is possible that some investors could find our common stock less attractive because we may take advantage of these exemptions. If some investors find our common stock less attractive, there may be a less active trading market for our common stock and our stock price may be more volatile.

DEVELOPMENTS AFFECTING OUR BUSINESS AFTER THE OFFERING

In connection with the completion of this offering, we intend to take the following significant corporate actions which will affect our financial condition and results of operations after the offering:

 

    nCino Spin-Off: spin-off the ownership interests in our investment in nCino, Inc. to our shareholders as of a record date prior to completion of this offering, which we refer to in this prospectus as the “nCino Spin-Off”;

 

    Cash Dividend: pay a cash distribution to our existing shareholders prior to our conversion from a “Subchapter S” corporation to a “C corporation” to offset the estimated tax liability of our shareholders created by the nCino Spin-Off and for any undistributed 2014 tax amounts related to shareholders’ allocable share of 2014 S corporation taxable income, which we refer to in this prospectus as the “Cash Dividend”; and

 

    C Corporation Conversion: voluntarily terminate our status as a “Subchapter S” corporation and convert to a C corporation for federal income tax purposes, which we refer to in this prospectus as the “C Corporation Conversion.”

For an explanation of each of these developments and their impact on our operations, see “Prospectus Summary – Developments Affecting Our Business After the Offering” and “Unaudited Pro Forma Consolidated Financial Data.”

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus and does not contain all the information that you need to consider in making your investment decision. You should carefully read this entire prospectus before deciding whether to invest in our common stock. You should pay special attention to, among other things, our consolidated financial statements and the related notes thereto and the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus to determine whether an investment in our common stock is appropriate for you.

Although we intend to effect the nCino Spin-Off, the Cash Dividend, and the C Corporation Conversion immediately prior to the completion of this offering, except where we indicate otherwise, our discussion of our financial condition and results of operations does not reflect these transactions.

Our Company

We are a nationwide lender to small businesses in niche industries. We leverage industry expertise and a unique technology platform to optimize the credit extension, administration process and borrowing experience for our customers. We have developed a business model we believe mitigates credit risk and capitalizes on technology that facilitates efficient and prudent loan generation and portfolio management. Our guiding principles, in order of priority, are soundness, profitability, and growth.

We originate loans partially guaranteed by the U.S. Small Business Administration, or the SBA, to small businesses and professionals in a select group of industries with low risk characteristics. We refer to these carefully selected industries as “verticals.” Within each vertical we have developed in-depth expertise by retaining officers who possess extensive industry lending experience in these sectors and who continue to deepen trade knowledge by participating in a variety of sector-focused educational and marketing events.

Our tactical immersion into industry verticals is coupled with our focus on developing detailed knowledge of our customers’ businesses through regular visits to their operations wherever they are located to provide us and our customers with an in-depth and personalized experience throughout the loan relationships. We believe our industry and customer-focused approach provides us greater insight into our customers’ credit characteristics and needs and furthers our knowledge base of the vertical in which the customer operates. In turn, we are able to provide our borrowers valuable insight into trends and developments in their industry verticals and within their operations. We are able to service our customers efficiently throughout the loan process and monitor their performance by means of our integrated proprietary technology platform. As a result, we have no need to maintain any traditional branch locations or ATMs and we do not employ any tellers, thus eliminating a significant component of the overhead expense associated with the traditional banking franchise.

We typically sell the SBA-guaranteed portion (generally 75% of the principal balance) of the loans we originate at a premium in the secondary market. We also generally sell participation interests in the remaining portion of our loans while retaining a 10% unguaranteed interest and the servicing rights to the entire loan. As a result of our business model, our net income is driven primarily by non-interest income rather than net interest income.

Our focus on originating SBA guaranteed loans in select verticals nationwide has allowed us to organically develop loan portfolio credit characteristics that we believe are attractive. Our portfolio is geographically dispersed throughout all U.S. regions (Southeast, Northeast, Midwest, Southwest, and West) with each region representing between 14% and 27% of our total loan portfolio during 2013. Only one state (California at 14%) represented more than 10% of our aggregate held-for-investment loan portfolio at year-end 2013. Additionally, during 2013 our average unguaranteed exposure per loan was approximately $125 thousand compared to an average outstanding principal loan balance of approximately $800 thousand.

 

 

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Our ability to develop and execute on our business model has yielded a compounded growth rate in loan production of 25% since 2008. For the U.S. government’s 2013 fiscal year (the four quarters ended September 30, 2013), we were the third most active SBA 7(a) lender in the United States by gross approval amount, behind only Wells Fargo Bank and U.S. Bank.

Vertical Immersion Strategy

We have focused our lending to small businesses and professionals in specific industry segments, or verticals, in which we build deep industry expertise. Our seven existing industry verticals consist of the following:

 

    Veterinary Practices

 

    Healthcare Services (medical/dental/optometry)

 

    Independent Pharmacies

 

    Death Care Management (funeral/crematory)

 

    Investment Advisors

 

    Family Entertainment Centers

 

    Poultry Agriculture

We are engaged and active in each of the industries we serve by attending conventions and trade shows, and by speaking at universities and industry events. Each vertical is staffed by personnel with industry-specific knowledge, experience and contacts. For example, our senior lender in the Independent Pharmacies vertical is a third-generation pharmacist who brings broad experience and expertise to his position as a loan officer responsible for examining, evaluating and closing extensions of credit to independent pharmacies. Our Death Care Management vertical expertise includes the former president and chief operating officer of Service Corporation International (a company that operates a network of more than 2,000 funeral homes and cemeteries), and another individual who began his career in the funeral services industry over 32 years ago. Our Veterinary Practices vertical benefits from the experience of a licensed veterinarian and attorney who provides an informed perspective to our Veterinary Practices vertical team and customers.

This industry-specific expertise and participation increases our visibility within our verticals. It is also helpful in identifying and selecting credit-worthy borrowers and attractive financing projects prior to the formal underwriting process. Our familiarity with and participation in our verticals allows us to provide ongoing customer service that is relevant for each business owner’s specific industry segment.

We attempt to identify verticals with a statistical history of performance and a low risk profile. It is our intent to add a new industry to our portfolio every 12 months. Potential industries are identified and researched by our “Emerging Markets” division. We have chosen verticals that display some or all of the following characteristics:

 

    Stable cash flows

 

    Barriers to entry

 

    Granular customer bases

 

    Collateral shortfall

 

    Limited to no foreign competition

 

    Growing demand

 

    Rapid cash cycles

 

    Recession resistant

 

 

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    Limited malpractice risk

 

    Underserved by other/traditional banking models

Through our industry expertise, speed-to-market, and differentiated level of borrower experience and customer service, we have increased annual production in each year since inception. The growth in production has been due to the maturity of certain industry verticals, the establishment of new industry verticals and our origination of loans that are generally larger than the average SBA loan. The following table summarizes our annual production by industry vertical:

 

     Years Ended December 31,         
     2007      2008      2009      2010      2011      2012      2013      Total  
     (dollars in thousands)  

Veterinary Practices

   $ 40,226       $ 161,230       $ 145,920       $ 150,788       $ 149,485       $ 174,768       $ 147,661       $ 970,078   

Healthcare Services

             150         13,385         56,580         69,860         81,363         109,317         330,655   

Independent Pharmacies

                             48,919         86,757         103,358         106,391         345,425   

Death Care Management

                                             54,075         101,736         155,811   

Investment Advisors

                                                     33,647         33,647   

Other

     775         1,209         1,275         30         535         199                 4,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 41,001       $ 162,589       $ 160,580       $ 256,317       $ 306,637       $ 413,763       $ 498,752       $ 1,839,639   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In January 2014, we hired a team of five commercial lenders who have decades of experience in the poultry agriculture industry. The addition of these professionals provides us with an experienced team of poultry industry lenders who have a close understanding of agricultural businesses. We expect loans extended in this vertical to primarily fund the following agricultural-related activities: the construction of new poultry farms, the purchase or refinancing of existing operations, and the purchase of new equipment or supplies.

Our vertical immersion strategy and our commitment to sound credit underwriting and credit administration are reflected in the credit quality of our loan portfolio. Our borrowers have historically had an average Fair Isaac Corporation, or FICO, score in excess of 700 using the lowest of scores provided by three credit bureaus at the time of underwriting and an average debt service coverage ratio of approximately 200% using the most current borrower financial statements available as of February 2014. To date, we have never had a denial or repair of any SBA guarantee submitted for payment.

We do not pay our lenders commissions. Our management believes that incentivizing our lenders to produce more loans through the payment of commissions creates an inherent conflict with sound credit administration. By choosing not to implement a commission-based payment structure, we believe we generate loans of greater credit quality, enhancing overall portfolio performance and aligning lenders’ interests with those of the entire company. We believe this alignment of interests is a strategic differentiator at Live Oak.

Technology

We have created a technology-based platform to facilitate lending to the small business community on a national basis and we have leveraged this technology to optimize our loan origination process, customer experience, reporting metrics, and servicing activity. In 2012, we formed nCino, Inc., or nCino, to develop this technology, known as nCino’s Bank Operating System. The nCino Bank Operating System is a fully integrated operating system built on Salesforce.com, Inc.’s Force.com cloud computing infrastructure platform. It provides a real-time view of our loan pipeline, as well as additional process, borrower and credit data. The integration of this system into our day-to-day operations has improved work flow efficiency, minimized loan file and documentation exceptions, and provided clarity into our loan portfolio. For example, we are able to segregate production data by vertical, geography, lender, participating bank, or referral source. We can examine loans by their status in our pipeline and determine what outstanding documents are required prior to submission to the SBA.

 

 

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The technology we utilize also streamlines the paperwork that typically accompanies SBA loans. A typical SBA loan under the 7(a) program may require up to 150 separate loan documents to be submitted. Through our partnership with nCino, we collect, track, and organize these documents in a manner that maximizes efficiency and minimizes unnecessary customer contact, and we have staffed the Bank with software developers to further enhance and optimize the software. This technology has ultimately transformed the traditional means of loan servicing into one of our strongest competitive advantages by accelerating our ability to issue proposals, complete due diligence and finalize commitments. Our customers are also able to benefit from our technology, as it allows borrowers the ability to track a loan’s progress towards approval and funding through a secure online portal.

While the nCino Spin-Off will occur prior to completion of this offering, it is anticipated that the Company and nCino will remain closely aligned for the foreseeable future. Immediately after the nCino Spin-Off, directors, officers and employees of the Company and the Bank will own approximately 52% of nCino’s outstanding common stock. In addition, our executive officers, Messrs. James “Chip” S. Mahan III, Neil L. Underwood and David G. Lucht, will continue as members of the board of directors of nCino. Transactions between the Company or the Bank and nCino, including an existing software license agreement and the lease agreement for commercial office space, are anticipated to remain in effect without modification. Our transactions with nCino are at arm’s length and comply with the quantitative and qualitative requirements of Sections 23A and 23B of the Federal Reserve Act, as amended, and Regulation W of the Board of Governors of the Federal Reserve System.

Our History and Performance

Live Oak Lending Company, our predecessor company, began originating loans to small businesses in May 2007. During this time, we began the application process to become a state-chartered financial institution insured by the Federal Deposit Insurance Corporation, or FDIC. We currently operate through Live Oak Bancshares, Inc., a North Carolina business corporation and registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve System, or the Federal Reserve, and the North Carolina Commissioner of Banks. Our principal subsidiary is Live Oak Banking Company, a North Carolina chartered commercial bank that commenced operations on May 12, 2008, and is subject to regulation by the FDIC and the North Carolina Commissioner of Banks.

We have experienced significant growth in assets, loans, deposits and earnings during the last five years, all of which has been achieved organically, as we have not acquired any banks, thrifts, branches, or loans. At December 31, 2013, we had total assets of $430.4 million, loans of $300.8 million, deposits of $356.6 million, and shareholders’ equity of $48.4 million. Since December 31, 2009, our assets have grown at a compounded annual growth rate of 35.1%, and our net interest income, noninterest income, noninterest expense and net income have grown at a compounded annual growth rate of 71.5%, 54.6%, 51.8% and 102.3%, respectively. For the year ended December 31, 2013, our net interest income, noninterest income, noninterest expense and net income were $10.8 million, $56.5 million, $40.2 million and $28.1 million, respectively, and grew by 33.1%, 32.9%, 19.3% and 74.4%, respectively, from the year ended December 31, 2012. Our net income available to our common shareholders and diluted earnings per share grew by 66.8% and 71.8%, respectively, from 2012.

Credit quality and on-going credit administration are cornerstones of our franchise. Non-performing loans represented 2.02% of total assets at December 31, 2013. Adjusting for the portion of nonperforming loans that carry a U.S. Government guarantee, the ratio becomes 0.40%. Our ratio of net charge-offs to average total loans on book was 0.66% for the year ended December 31, 2013. Our ratio of allowance for loan losses to loans was 1.93% at December 31, 2013 and our ratio of allowance for loan losses to nonperforming loans not guaranteed by the U.S. government was 158.8% at December 31, 2013. In evaluating our credit quality we focus on the unguaranteed portion of our loan portfolio. As of December 31, 2013, approximately $86.5 million of our assets or approximately 20% were guaranteed by the SBA.

 

 

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Our principal executive office is located at 1741 Tiburon Drive, Wilmington, North Carolina 28403 and our telephone number is (910) 790-5867. Our Internet address is www.liveoakbank.com. Information on or accessible through our website is not incorporated by reference into and is not part of this prospectus.

Our Executive Management Team and Board of Directors

Our executive management team has a combined 154 years of banking and financial experience, as well as extensive experience in developing technologies to support online and Internet operations and within our industry verticals.

James “Chip” S. Mahan III, Chief Executive Officer and Chairman of the Board, has more than 40 years of banking experience and has founded multiple banks, including Cardinal Bancshares, which he took public in 2002, and Security First Network Bank, the nation’s first Internet-only bank and predecessor of S1 Corporation.

William “Lee” L. Williams III is the Vice Chairman of the Company and one of the original founders of the Bank. Prior to starting Live Oak Bank, Williams spent 19 years in corporate banking at Wachovia and worked for 14 years at Vine Street Financial engaged in SBA lending.

Neil L. Underwood, President, has significant banking and technology experience, and was instrumental in the development of both nCino and S1 Corporation.

David G. Lucht, Chief Risk Officer, joined the Live Oak team in May 2007 as a founding member. Prior to joining Live Oak, Mr. Lucht was the Chief Credit Officer, Executive Vice President and Director for First Merit Bank in Akron, Ohio, where he was responsible for leading the turnaround in credit culture and performance of the $10.5 billion bank.

S. Brett Caines, Chief Financial Officer, joined the Live Oak team in June 2007. Prior to the Bank, Mr. Caines worked as a Production Engineer for INVISTA and as a Process Engineer for Shell Chemical Company.

Our board of directors consists of experienced individuals, many of whom have direct connections with our chosen industry verticals, allowing them to understand and provide meaningful contributions to both our operations and strategy.

Developments Affecting Our Business After the Offering

We intend to take the following significant corporate actions which will affect our financial condition and results of operations after the offering:

nCino Spin-Off

Immediately prior to the completion of this offering, we intend to spin off the shares of common stock we own in nCino to our shareholders as of a record date prior to completion of this offering. nCino commenced operations in early 2012 and was a consolidated subsidiary of the Company until January 2013, when our ownership interest declined to a level that no longer allowed for consolidation. Since January 28, 2013, our interest in nCino has been accounted for as an equity method investment. The distribution of nCino’s shares will be taxable as if nCino shares had been sold for their fair market value, and any gain will flow through to our existing shareholders for income tax purposes, not creating a tax liability to the Company. In addition, for income tax purposes, the nCino Spin-Off will be treated as a distribution of property to our existing shareholders. The nCino Spin-Off will be accounted for at book value for financial reporting purposes. Accordingly, no gain or loss will be recorded in the statement of income related to the nCino Spin-Off. In addition, we do not expect to record any impairment related to the nCino Spin-Off based on our last valuation of the entity on the effective date of the

 

 

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aforementioned deconsolidation, performed in the first quarter of 2013. Because of the timing of the last valuation, no subsequent impairment analysis has been performed. Because the nCino Spin-Off will be taxable to our current shareholders, a valuation of nCino will be performed immediately prior to the nCino Spin-Off. Any impairment resulting from the book value of the net assets exceeding their fair value at the time of the nCino Spin-Off, although not anticipated, will be recorded on our books to the extent of our ownership at that time.

As shown in the Unaudited Pro Forma Consolidated Financial Data beginning on page 10, nCino will no longer be our affiliate as a result of the nCino Spin-Off, and we will no longer report our respective share of nCino’s earnings (loss). For the years ended December 31, 2013, 2012, and 2011, nCino generated net losses of $6.7 million, $3.6 million, and $0, respectively. After the nCino Spin-Off, we will no longer recognize our allocated portion of these net losses, however, we will continue to receive income from nCino for rental income on shared office space as well as certain administrative services we provide. For the years ended December 31, 2013, 2012, and 2011, the allocated net losses we reported from nCino were $0.2 million $2.3 million, and $0, respectively.

In addition to the effect on our net earnings, the nCino Spin-Off will reduce our assets by approximately $11.3 million, based upon the December 31, 2013 carrying amount of this equity method investment.

Cash Dividend

We intend to pay a cash distribution of approximately $6.0 million to our existing shareholders prior to our conversion from a “Subchapter S” corporation to a C corporation to offset the estimated tax liability of our shareholders created by the nCino Spin-Off and for any undistributed 2014 tax amounts related to shareholders’ allocable share of 2014 S corporation taxable income. Our final determination of the amount of the cash distribution will be largely dependent upon the fair value of our investment in nCino at the time of the nCino Spin-Off.

C Corporation Conversion

We intend to voluntarily terminate our status as a “Subchapter S” corporation and convert to a C corporation for income tax purposes. As a “Subchapter S” corporation, our earnings were not subject to income tax at the corporate level but were passed through to our shareholders, who incurred income tax liability for a portion of our earnings proportionate to their percentage of common stock ownership. Accordingly, we have not paid any income tax on our earnings since inception. As a C corporation, we will be subject to income tax at the corporate level at an estimated effective rate of 38.5%.

 

 

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THE OFFERING

 

Common stock offered

  

By us

                    shares of our common stock.

By the selling shareholders

                    shares of our common stock.

Total

                    shares of our common stock.

Option to purchase additional shares

   The underwriters will have an option to purchase up to                  additional shares of our common stock in this offering, exercisable within 30 days from the date of this prospectus.

Common stock to be outstanding immediately after this offering

  

                 shares (                 if the underwriters exercise their option in full).

Dividends

   We will pay dividends on our common stock, when, as, and if declared by our board of directors or a duly authorized committee thereof. Our ability to declare and pay dividends is limited by state law and by applicable federal and state regulatory restrictions, including the regulations and guidelines of the Federal Reserve applicable to bank holding companies.
   In addition, because we are a bank holding company, our ability to pay dividends on our common stock will be highly dependent upon the receipt of dividends, fees and other amounts from the Bank, which, in turn, will be highly dependent upon the Bank’s historical and projected results of operations, liquidity, cash flows and financial condition, as well as various legal and regulatory prohibitions and other restrictions on the ability of the Bank to pay dividends, extend credit or otherwise transfer funds to us. For additional information, see “Dividend Policy.”

Listing

   We intend to apply to list our common stock on the NASDAQ Global Market under the symbol “LOB.”

Risk factors

   Investing in our common stock involves risks. See “Risk Factors” for a discussion of factors you should consider carefully before making a decision to invest in our common stock.

Tax consequences

   The material U.S. federal income tax consequences of purchasing, owning and disposing of our common stock are described in “Material U.S. Federal Income Tax Considerations.” You should consult your tax advisor with respect to the U.S. federal income tax consequences of owning our common stock in light of your own particular situation and with respect to any tax consequences arising under the laws of any state, local, foreign or other taxing jurisdiction.

 

 

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   Since inception, we have been taxable for federal income tax purposes as an “S corporation” under the Internal Revenue Code of 1986, as amended. As a result, our net income has not been subject to, and we have not paid, U.S. federal income taxes, and no provision or liability for federal or state income tax has been included in our consolidated financial statements. Shortly before the consummation of this offering, our status as an S corporation will terminate, and our net income will thereafter be subject to U.S. federal income taxes and state income taxes.

Use of proceeds

   Assuming an initial public offering price of $         per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, we expect to receive net proceeds from this offering of approximately $         million (or $         million if the underwriters exercise their option in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
   We intend to use the net proceeds of this offering to pay off outstanding debt of the Company estimated to be $8.0 million at the time of the offering, to support the growth and expansion of our franchise and for general corporate purposes such as investments in the development of new technology platforms. We may also use net proceeds for possible acquisitions of, or investments in, bank or permissible non-bank entities, including opportunities to enhance and optimize our internal operations. In addition, proceeds from this offering may be used for investments in additional subsidiaries to take advantage of potential start-up opportunities that we believe we have created or identified through the use of technology to enhance and optimize our internal operations and observations of the banking industry in general. However, no agreements or understandings presently exist with respect to any acquisitions or investments. Before we apply any of the proceeds for any of these uses, the proceeds likely will be temporarily invested in short-term investment securities. See “Use of Proceeds.”

Transfer agent and registrar

   Broadridge Corporate Issuer Solutions, Inc., Brentwood, New York.

 

 

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Unless expressly indicated or the context otherwise requires, all information in this prospectus:

 

    assumes no exercise by the underwriters of their option to purchase up to an additional                 shares of our common stock in this offering;

 

    does not include as outstanding 22,500 shares of our common stock issuable upon the exercise of outstanding stock options as of December 31, 2013 at a weighted average exercise price of $16.77 per share;

 

    does not include as outstanding 141,000 shares of our common stock and 59,999 shares of restricted stock reserved for issuance in connection with stock awards that remain available for issuance under our stock incentive plans.

 

 

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Summary Selected Historical Consolidated Financial Data and

Unaudited Pro Forma Consolidated Financial Data

The table below sets forth selected historical consolidated financial data and other information for the periods presented. We have derived the selected financial data as of and for the years ended December 31, 2013, 2012 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the selected financial data as of and for the year ended December 31, 2010 from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

The selected consolidated historical financial information should be read in conjunction with:

 

    our audited consolidated financial statements as of and for the years ended December 31, 2013, 2012 and 2011 and related notes included in this prospectus, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus; and

 

    the section entitled “Risk Factors” in this prospectus.

The unaudited pro forma consolidated financial data as of and for the years ended December 31, 2013 and 2012 are presented to show the impact on our historical financial position and results of operations from the nCino Spin-Off, the Cash Dividend and the C Corporation Conversion.

The unaudited pro forma consolidated balance sheet data reflects our historical position as of December 31, 2013 and 2012 with pro forma adjustments based on the assumption that the nCino Spin-Off, the Cash Dividend and the C Corporation Conversion were effective as of January 1, 2013 and 2012, respectively. The unaudited pro forma consolidated statements of operations data assume that each such transaction was consummated on January 1 of the earliest indicated period. The adjustments are based on information available and certain assumptions that we believe are reasonable.

The following information should be read in conjunction with and is qualified in its entirety by our consolidated financial statements and accompanying notes included in this prospectus.

The unaudited pro forma consolidated financial data are intended for informational purposes and are not necessarily indicative of our future financial position or future operating results or of our financial position or operating results that would have actually occurred had the nCino Spin-Off, the Cash Dividend and the C Corporation Conversion been in effect as of the date or for the period presented. The unaudited pro forma consolidated financial data will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

 

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Summary Selected Historical Consolidated Financial Data

 

       As of and for the years ended December 31,  
       2013      2012      2011      2010  
       (dollars in thousands except per share)  

Selected Period End Balance Sheet Data

             

Total assets

     $ 430,355       $ 342,468       $ 266,157       $ 245,336   

Cash and due from banks

       37,244         44,173         27,536         25,977   

Investment securities available for sale, at fair value

       19,446         15,416         16,842         6,134   

Loans held for sale

       159,438         145,183         111,877         81,884   

Loans held for investment

       141,349         92,669         85,721         60,730   

Total loans held for sale and investment

       300,787         237,852         197,598         142,614   

Allowance for loan losses

       (2,723      (5,108      (4,617      (3,438

Servicing assets

       29,053         24,220         18,731         15,250   

Deposits

       356,620         286,674         222,163         167,964   

Long-term borrowings

       12,325         12,205         8,659         4,200   

Total shareholders’ equity

       48,390         33,057         27,583         17,162   

Tangible shareholders’ equity(1)

       47,963         33,057         27,583         17,162   

Selected Income Statement Data

             

Interest income

     $ 15,302       $ 11,725       $ 8,744       $ 6,636   

Interest expense

       4,521         3,628         2,737         3,339   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

       10,781         8,097         6,007         3,297   

Provision for loan losses

       (858      2,110         2,855         2,619   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

       11,639         5,987         3,152         678   

Noninterest income

       56,467         42,480         32,127         20,932   

Noninterest expense

       40,164         33,669         20,967         13,365   

Net income attributable to noncontrolling interest

       120         1,297                   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Live Oak Bancshares, Inc.

     $ 28,062       $ 16,095       $ 14,312       $ 8,245   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (net of tax effect)(2)

     $ 17,258       $ 9,899       $ 8,802       $ 5,070   

Per Share Data (Common Stock) Attributable to the Company

             

Earnings:

             

Basic

     $ 13.79       $ 8.27       $ 8.15       $ 5.66   

Diluted(3)

       13.73         7.99         6.97         4.88   

Earnings (net of tax effect)(2):

             

Basic

       8.48         5.08         5.01         3.48   

Diluted(3)

       8.44         4.92         4.29         3.00   

Dividends(4)

       4.81         5.91         5.48         2.70   

Book value(5)

       23.82         16.30         14.64         11.01   

Tangible book value(1)

       23.61         16.30         14.64         11.01   

Selected Performance Metrics

             

Return on average assets

       6.53      5.01      5.75      4.13

Return on average equity

       62.82         50.62         61.64         59.63   

Return on average assets (net of tax effect) (2)(6)

       4.02         3.08         3.54         2.54   

Return on average equity (net of tax effect) (2)(6)

       38.63         31.13         37.91         36.67   

Average yield on loans(7)

       5.04         4.91         4.82         4.92   

Average cost of deposits(7)

       1.13         1.10         1.22         2.03   

Net interest margin(7)

       2.95         2.83         2.81         2.16   

Efficiency ratio(8)

       59.73         66.57         54.98         55.16   

Noninterest income to total revenue(9)

       83.97         83.99         84.25         86.39   

Average equity to average assets

       10.40         9.89         9.33         6.93   

Dividend payout ratio(10)

       10.65         33.56         20.70           

Dividend payout ratio (net of tax effect)(2)(10)

       17.32         54.57         33.66           

Employees at year end(11)

       141         94         62         44   

 

 

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Summary Selected Historical Consolidated Financial Data (continued)

 

       As of and for the years ended December 31,  
       2013      2012      2011      2010  
       (dollars in thousands except per share)  

Selected Loan Metrics

             

Annual number of loans originated(12)

       524         447         322         277   

Annual amount of loans originated(12)

     $ 498,752       $ 413,764       $ 306,637       $ 256,317   

Outstanding borrowers’ principal balance

       1,446,772         1,104,160         802,653         551,203   

Percent of total loans held for sale and investment guaranteed by the U.S. government(13)

       28.72      33.96      32.86      35.56

U.S. government guaranteed loans sold at a premium(14)

     $ 339,342       $ 276,676       $ 238,442       $ 169,251   

U.S. government guaranteed loans sold at par for excess servicing(14)

                                 

Loans sold not guaranteed by U.S. government(14)

       42,932         52,574         12,680         9,907   

Total loans sold and serviced for others(14)

       382,274         329,250         251,122         179,158   

Outstanding balance of guaranteed loans sold(15)

       1,005,764         767,721         550,622         350,649   

Number of loans serviced(16)

       1,780         1,323         929         623   

Average net gain on sale of loans(17)

     $ 99.99       $ 101.85       $ 90.05       $ 80.56   

Average servicing fee on sale of loans(18)

       0.89      0.84      0.95      0.94

Average servicing fee on sale of loans guaranteed by the U.S. government(18)

       1.00         1.00         1.00         1.00   

Weighted average servicing fee of sold loans guaranteed by the U.S. government(19)

       1.16         1.24         1.39         1.67   

Average outstanding loan size(20)

     $ 812.8       $ 834.6       $ 864.0       $ 884.8   

Average balance of loans on balance sheet(21)

       173.9         185.1         214.2         232.4   

Average balance of loans on balance sheet not guaranteed by U.S. government(22)

       124.0         122.2         143.8         149.8   

Asset Quality Ratios

             

Nonperforming loans and foreclosed assets guaranteed by the U.S. government(23)

     $ 6,983       $ 5,062       $ 6,791       $   

Nonperforming loans to total assets(23)

       2.02      2.51      3.71      1.85

Nonperforming loans not guaranteed by the U.S. government to total assets(23)

       0.40         1.03         1.16         1.85   

Nonperforming loans to loans held for investment(23)

       6.15         9.27         11.52         7.46   

Nonperforming loans not guaranteed by the

             

U.S. government to loans held for investment(23)

       1.21         3.81         3.59         7.46   

Allowance for loan losses to nonperforming loans not guaranteed by the U.S. government(23)

       158.83         144.66         149.90         75.93   

Allowance for loan losses to loans held for investment

       1.93         5.51         5.39         5.66   

Net charge-offs

     $ 1,887       $ 1,860       $ 1,461       $ 1,062   

Net charge-offs to average loans on book outstanding(24)

       0.66      0.82      0.85      0.83

Capital Ratios

             

Tier 1 leverage ratio (Bank)

       10.39      10.63      11.84      8.84

Tier 1 risk-based capital ratio (Bank)(25)

       15.09         16.65         17.13         14.72   

Total risk-based capital ratio (Bank)(25)

       15.95         17.91         18.40         15.99   

Total equity to total assets

       11.24         9.65         10.36         7.00   

Tangible common equity to tangible assets(26)

       11.16         9.65         10.36         7.00   

 

 

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Unaudited Pro Forma Consolidated Financial Data

 

       As of and for the years ended December 31,  
       2013      2012  
       Pro Forma      Actual      Pro Forma      Actual  
       (dollars in thousands except per share)  

Selected Period End Balance Sheet Data

             

Total assets

     $ 413,030       $ 430,355       $ 340,460       $ 342,468   

Cash and due from banks

       31,244         37,244         37,795         44,173   

Investment securities available for sale, at fair value

       19,446         19,446         15,416         15,416   

Loans held for sale

       159,438         159,438         145,183         145,183   

Loans held for investment

       141,349         141,349         92,669         92,669   

Total loans held for sale and investment

       300,787         300,787         237,852         237,852   

Allowance for loan losses

       (2,723      (2,723      (5,108      (5,108

Servicing assets

       29,053         29,053         24,220         24,220   

Deposits

       356,620         356,620         287,198         286,674   

Long-term borrowings

       12,325         12,325         12,205         12,205   

Total shareholders’ equity(27)

       29,880         48,390         30,234         33,057   

Selected Income Statement Data

             

Interest income

     $ 15,332       $ 15,302       $ 12,087       $ 11,725   

Interest expense

       4,521         4,521         3,628         3,628   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

       10,811         10,781         8,459         8,097   

Provision for (recovery of) loan losses

       (858      (858      2,110         2,110   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

       11,669         11,639         6,349         5,987   

Noninterest income

       46,738         56,467         41,938         42,480   

Noninterest expense

       39,692         40,164         29,850         33,669   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income before income tax & noncontrolling interest

     $ 18,715       $ 27,942       $ 18,437       $ 14,798   

Provision for income tax expense

       (8,390              (6,263        

Net income attributable to noncontrolling interest

               120                 1,297   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Live Oak Bancshares, Inc.

     $ 10,325       $ 28,062       $ 12,174       $ 16,095   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (net of tax effect)(2)

     $ 10,325       $ 17,258       $ 12,174       $ 9,899   

Per Share Data (Common Stock) Attributable to the Company

             

Earnings:

             

Basic

     $ 5.07       $ 13.79       $ 6.25       $ 8.27   

Diluted(3)

       5.05         13.73         6.05         7.99   

Earnings (net of tax effect)(2):

             

Basic

       5.07         8.48         6.25         5.08   

Diluted(3)

       5.05         8.44         6.05         4.92   

Dividends(4)

       13.32         4.81         7.79         5.91   

Book value(5)

       14.71         23.82         14.91         16.30   

Selected Performance Metrics

             

Efficiency ratio(8)

       68.98      59.73      59.23      66.57

Noninterest income to total revenue(9)

       81.21         83.97         83.22         83.99   

Asset Quality Ratios

             

Nonperforming loans and foreclosed assets guaranteed by the U.S. government(23)

     $ 6,983       $ 6,983       $ 5,062       $ 5,062   

Nonperforming loans to total assets(23)

       2.11      2.02      2.52      2.51

Nonperforming loans not guaranteed by the U.S. government to total assets(23)

       0.42         0.40         1.04         1.03   

Nonperforming loans to loans held for investment(23)

       6.15         6.15         9.27         9.27   

Nonperforming loans not guaranteed by the U.S. government to loans held for investment(23)

       1.21         1.21         3.81         3.81   

Allowance for loan losses to nonperforming

             

Loans not guaranteed by the U.S. government(23)

       158.83         158.83         144.66         144.66   

Allowance for loan losses to loans held for investment

       1.93         1.93         5.51         5.51   

Net charge-offs

     $ 1,887       $ 1,887       $ 1,860       $ 1,860   

 

 

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Unaudited Pro Forma Consolidated Statement of Income

For the Year Ended December 31, 2013

 

       Live Oak
Historical
     nCino
Spin-Off(28)
     Cash Dividend
and
C Corporation
Conversion
     Live Oak
Pro Forma
 
       ( in thousands except per share )  

Interest income

             

Loans and fees on loans

     $ 14,481       $       $       $ 14,481   

Investment securities

       391                         391   

Other interest earning assets

       430         30                 460   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

       15,302         30                 15,332   
    

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

             

Deposits

       3,947                         3,947   

Borrowings

       574                         574   

Total interest expense

       4,521                         4,521   

Net interest income

       10,781         30                 10,811   

Provision for (recovery of) loan losses

       (858                      (858
    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

       11,639         30                 11,669   
    

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income

             

Loan servicing revenue & revaluation

       7,926                         7,926   

Net gains on sales of loans

       38,225                         38,225   

Gain on deconsolidation of subsidiary

       12,212         (12,212                

Income from equity method investments

       (2,756      2,648                 (108

Gain on sale of securities available for sale

       11                         11   

Other noninterest income

       849         (165              684   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

       56,467         (9,729              46,738   
    

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense

             

Salaries and employee benefits

       20,766         (349              20,417   

Travel expense

       4,458         (16              4,442   

Professional services expense

       2,237         (56              2,181   

Advertising and Marketing expense

       2,316         (11              2,305   

Occupancy expense

       1,678         (2              1,676   

Data processing expense

       1,749         (1              1,748   

Equipment expense

       1,042                         1,042   

Other expense

       5,918         (37              5,881   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

       40,164         (472              39,692   
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income before income tax & noncontrolling interest

     $ 27,942       $ (9,227    $       $ 18,715   

Provision for income tax expense

                       (8,390      (8,390

Net Income

       27,942         (9,227      (8,390      10,325   

Net loss attributable to noncontrolling interest

       120         (120                
    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Live Oak Bancshares, Inc.

     $ 28,062       $ (9,347    $ (8,390    $ 10,325   
    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

             

Basic

     $ 13.79             $ 5.07   

Diluted

       13.73               5.05   

Weighted average shares outstanding:

             

Basic

       2,035               2,035   

Diluted

       2,044               2,044   

 

 

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Table of Contents

Unaudited Pro Forma Consolidated Balance Sheet

As of December 31, 2013

 

       Live Oak
Historical
     nCino
Spin-Off(28)
     Cash Dividend
and
C Corporation
Conversion
     Live Oak
Pro Forma
 
       (dollars in thousands)  

Assets

             

Cash and due from banks

     $ 37,244       $       $ (6,000    $ 31,244   

Investment securities available for sale, at fair value

       19,446                         19,446   

Loans held for sale

       159,438                         159,438   

Loans held for investment

       141,349                         141,349   

Allowance for loan losses

       (2,723                      (2,723
    

 

 

    

 

 

    

 

 

    

 

 

 

Net Loans

       138,626                         138,626   

Accrued interest receivable

       1,842                         1,842   

Premises and equipment, net

       25,036                         25,036   

Foreclosed real estate

       341                         341   

Servicing assets

       29,053                         29,053   

Investments in non-consolidated affiliates

       11,467         (11,325              142   

Other assets

       7,862                         7,862   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

     $ 430,355       $ (11,325    $ (6,000    $ 413,030   
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities and Shareholders’ Equity

             

Deposits

             

Noninterest-bearing

     $ 13,022       $       $       $ 13,022   

Interest-bearing

       343,598                         343,598   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Deposits

       356,620                         356,620   

Long-term borrowings

       12,325                         12,325   

Other liabilities

       9,415                 1,185         10,600   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

       378,360                 1,185         379,545   
    

 

 

    

 

 

    

 

 

    

 

 

 

Redeemable equity securities

       3,605                         3,605   

Shareholders’ Equity

             

Common stock, no par value; 2,750,000 shares authorized; 2,031,833, shares issued and outstanding at December 31, 2013

       18,319                         18,319   

Retained earnings (deficit)

       30,262         (11,325      (7,185      11,752   

Accumulated other comprehensive

             

Income (loss)

       (191                      (191
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Shareholders’ Equity

       48,390         (11,325      (7,185      29,880   

Noncontrolling interest

                                 

Total equity

       48,390         (11,325      (7,185      29,880   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities and Shareholders’

             

Equity

     $ 430,355       $ (11,325    $ (6,000    $ 413,030   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

15


Table of Contents

Unaudited Pro Forma Consolidated Statement of Income

For the Year Ended December 31, 2012

 

       Live Oak
Historical
       nCino
Spin-Off(28)
     Cash Dividend
and
C Corporation
Conversion
     Live Oak
Pro Forma
 
       ( in thousands except per share )  

Interest income

               

Loans and fees on loans

     $ 11,178         $       $       $ 11,178   

Investment securities

       467                           467   

Other interest earning assets

       80           362                 442   
    

 

 

      

 

 

    

 

 

    

 

 

 

Total interest income

       11,725           362                 12,087   
    

 

 

      

 

 

    

 

 

    

 

 

 

Interest expense

               

Deposits

       2,975                           2,975   

Borrowings

       653                           653   
    

 

 

      

 

 

    

 

 

    

 

 

 

Total interest expense

       3,628                           3,628   
    

 

 

      

 

 

    

 

 

    

 

 

 

Net interest income

       8,097           362                 8,459   

Provision for (recovery of) loan losses

       2,110                           2,110   
    

 

 

      

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

       5,987           362                 6,349   
    

 

 

      

 

 

    

 

 

    

 

 

 

Noninterest income

               

Loan servicing revenue & revaluation

       8,346                           8,346   

Net gains on sales of loans

       33,535                           33,535   

Gain on sale of securities available for sale

                                   

Other noninterest income

       599           (542              57   
    

 

 

      

 

 

    

 

 

    

 

 

 

Total noninterest income

       42,480           (542              41,938   
    

 

 

      

 

 

    

 

 

    

 

 

 

Noninterest expense

               

Salaries and employee benefits

       17,968           (2,211              15,757   

Travel expense

       3,115           (290              2,825   

Professional services expense

       2,580           (768              1,812   

Advertising and Marketing expense

       2,181           (206              1,975   

Occupancy expense

       679           (13              666   

Data processing expense

       1,420           555                 1,975   

Equipment expense

       738           (31              707   

Other expense

       4,988           (855              4,133   
    

 

 

      

 

 

    

 

 

    

 

 

 

Total noninterest expense

       33,669           (3,819              29,850   
    

 

 

      

 

 

    

 

 

    

 

 

 

Net income before income tax expense & noncontrolling interest

     $ 14,798         $ 3,639       $       $ 18,437   

Provision for income tax expense

                         (6,263      (6,263

Net income

       14,798           3,639         (6,263      12,174   

Net loss attributable to noncontrolling interest

       1,297           (1,297                
    

 

 

      

 

 

    

 

 

    

 

 

 

Net income attributable to Live Oak Bancshares, Inc.

     $ 16,095         $ 2,342       $ (6,263    $ 12,174   
    

 

 

      

 

 

    

 

 

    

 

 

 

Earnings per common share:

               

Basic

     $ 8.27               $ 6.25   

Diluted

       7.99                 6.05   

Weighted average shares outstanding:

               

Basic

       1,947                 1,947   

Diluted

       2,014                 2,014   

 

 

16


Table of Contents

Unaudited Pro Forma Consolidated Balance Sheet

As of December 31, 2012

 

       Live Oak
Historical
     nCino
Spin-Off(28)
     Cash Dividend
and
C Corporation
Conversion
     Live Oak
Pro Forma
 
       (dollars in thousands)  

Assets

             

Cash and due from banks

     $ 44,173       $ (378    $ (6,000    $ 37,795   

Investment securities available for sale, at fair value

       15,416                         15,416   

Loans held for sale

       145,183                         145,183   

Loans held for investment

       92,669                         92,669   

Allowance for loan losses

       (5,108                      (5,108
    

 

 

    

 

 

    

 

 

    

 

 

 

Net Loans

       87,561                         87,561   

Accrued interest receivable

       1,457                         1,457   

Premises and equipment, net

       18,951                         18,951   

Foreclosed real estate

       232                         232   

Servicing assets

       24,220                         24,220   

Other assets

       5,275         3,535         835         9,645   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

     $ 342,468       $ 3,157       $ (5,165    $ 340,460   
    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities and Shareholders’ Equity

             

Deposits

             

Noninterest-bearing

     $ 2,479       $ 524       $       $ 3,003   

Interest-bearing

       284,195                         284,195   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Deposits

       286,674         524                 287,198   

Long-term borrowings

       12,205                         12,205   

Other liabilities

       10,668         (1,006              9,662   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

       309,547         (482              309,065   
    

 

 

    

 

 

    

 

 

    

 

 

 

Redeemable equity securities

       1,161                         1,161   

Shareholders’ Equity

             

Common stock, no par value; 2,750,000 shares authorized; 2,027,495 shares issued and outstanding at December 31, 2012

       20,535                         20,535   

Retained earnings (deficit)

       11,980         2,342         (5,165      9,157   

Accumulated other comprehensive income

       542                         542   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Shareholders’ Equity

       33,057         2,342         (5,165      30,234   

Noncontrolling interest

       (1,297      1,297                   

Total equity

       31,760         3,639         (5,165      30,234   
    

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities and Shareholders’ Equity

     $ 342,468       $ 3,157       $ (5,165    $ 340,460   
    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

17


Table of Contents

NOTES TO SELECTED HISTORICAL CONSOLIDATED AND PRO FORMA FINANCIAL DATA

 

  (1) We calculate tangible book value per share as total shareholders’ equity less goodwill and other intangible assets to determine “tangible shareholders equity” and then tangible shareholders’ equity is divided by the outstanding number of shares of our common stock at the end of the relevant year. Tangible book value is not a financial measure recognized by generally accepted accounting principles in the United States, or GAAP, and, as we calculate tangible book value, the most directly comparable GAAP financial measure is total shareholders’ equity. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” set forth below.

 

  (2) We have calculated our net income (net of tax effect), earnings per share (net of tax effect) on a basic and diluted basis, return on average assets (net of tax effect), return on average equity (net of tax effect) and dividend payout ratio (net of tax effect) for each year shown by calculating a provision for income taxes using an assumed annual effective income tax rate of 38.5% for the years ended December 31, 2013, 2012, 2011 and 2010, respectively, and adjusting our historical net income for each year to give effect to the pro forma provision for federal and state income taxes for such year. The unaudited pro forma consolidated statements of income for 2013 and 2012 reflect provision for income tax expense in the column entitled “Cash Dividend and C Corporation Conversion”. Pro forma income tax expense for fiscal 2013 and 2012 includes the aforementioned computed income tax effect in addition to the effect of estimated deferred tax assets or liabilities associated with conversion to a C corporation.

 

  (3) We calculated our diluted earnings per share for each year shown as our net income divided by the weighted-average number of our common shares outstanding during the relevant year adjusted for the dilutive effect of outstanding options to purchase shares of common stock. See Note 1 to our consolidated financial statements appearing elsewhere in this prospectus for more information regarding the dilutive effect of our outstanding options. The number of pro forma shares outstanding 2013 and 2012 are equal to historical, or stated, shares outstanding in each respective year. Earnings per share on a basic and diluted basis and pro forma earnings per share on a basic and diluted basis were calculated using the following outstanding share amounts:

 

       2013        2012        2011        2010  

Share Data

                   

Weighted average shares outstanding (basic)

       2,034,766           1,946,730           1,756,751           1,455,368   

Weighted average shares outstanding (diluted)

       2,043,913           2,013,836           2,073,219           1,760,943   

Shares outstanding at end of period

       2,031,833           2,027,495           1,883,541           1,559,260   

 

  (4) Dividends declared include the cash distributions paid to our shareholders in the relevant year to provide them with funds to pay their income tax liabilities incurred as a result of the pass-through of our net taxable income for such year to our shareholders as holders of shares in an S corporation for income tax purposes. The aggregate amounts of such cash distributions relating to the payment of tax liabilities were $3.34 per share, $3.13 per share, $3.80 per share, $2.70 per share and $0.69 per share for the years ended December 31, 2013, 2012, 2011 and 2010, respectively.

 

  (5) Book value per share equals our total shareholders’ equity as of the date presented divided by the number of shares of our common stock outstanding as of the date presented. The number of shares of our common stock outstanding as of December 31, 2013, 2012, 2011 and 2010 has been presented in note (3) above.

 

 

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Table of Contents
  (6) We have calculated our pro forma return on average assets and pro forma return on average equity for a year by calculating our pro forma net income for that year as described in note 2 above and dividing that by our average assets and average equity, as the case may be, for that year. We calculate our average assets and average equity for a year by dividing the sum of our total asset balance or total shareholder’s equity balance, as the case may be, as of the close of business on each day in the relevant year and dividing by the number of days in the year.

 

  (7) We calculate average yield on loans by taking loan interest income divided by average loans. We calculate average cost of deposits by taking deposit expense divided by average interest-earning deposits. Net interest margin represents net interest income divided by average interest-earning assets.

 

  (8) Efficiency ratio represents noninterest expenses divided by the sum of net interest income and noninterest income, excluding realized gains or losses from sales of investment securities. Efficiency ratio is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” set forth below.

 

  (9) We calculate the ratio of noninterest income to total revenue as noninterest income (excluding securities gains or losses) divided by the sum of net interest income plus noninterest income (excluding securities gains or losses).

 

  (10) We calculate our dividend payout ratio for each year presented as the dividends paid per share for such period (excluding cash distributions made to shareholders in connection with tax liabilities as described in note (4) above) divided by our basic earnings per share and earnings (net of tax) for such year.

 

  (11) Employees exclude employees of nCino for periods when nCino was a consolidated subsidiary. There were six non-Bank employees as of December 31, 2013. There were no non-Bank employees as of December 31, 2012, 2011 and 2010.

 

  (12) Includes the number of notes and amount of the entire note with note dates in the respective year.

 

  (13) We primarily originate loans through the SBA 7(a) program. Typically, 75% of the note amount of loans originated through the SBA 7(a) program is guaranteed by the U.S. government. Total loans include the gross loans held for sale and held for investment.

 

  (14) We operate an originate-sell-and-service model. We primarily sell the U.S. government guaranteed portion of loans at a premium with a 1% servicing fee. Prior to 2010, we primarily sold the guaranteed portion of loans at par for servicing in excess of 1%. Additionally, we sell portions of our loans not guaranteed by the U.S. government. These loans are typically sold at par.

 

  (15) The outstanding principal balance of guaranteed loans, as of December 31 of the applicable year that have been sold into the secondary market.

 

  (16) The number of loans outstanding as of December 31 of the applicable year that we service. We service all of the loans we originate.

 

  (17) Average net gain on sale of loans is calculated by taking net gains on sales of loans divided by total loans sold and serviced for others multiplied by 1,000. This ratio represents the average net gain on sale generated from every $1 million of loan sales. Net gain on sale for our guaranteed loans is comprised primarily of four components: premium cash, establishment of the servicing asset related to that sale, a discount on the retained unguaranteed portion of the loan and the recognition into income of deferred costs and fees associated with the loan relative to the portion sold.

 

 

19


Table of Contents
Average net gain on sale of loans (dollars in
thousands)
                                   
       2013        2012        2011        2010  

U.S. government guaranteed loans sold at a premium

     $ 113.11         $ 121.28         $ 91.94         $ 83.35   

U.S. government guaranteed loans sold at par for excess servicing

                                       

Loans sold not guaranteed by U.S. government

       (3.70        (0.40        54.41           32.76   
Average net gain on sale of U.S. government
guaranteed loans sold at a premium (dollars
in thousands)
                                   
       2013        2012        2011        2010  

Premium cash received

     $ 103.12         $ 108.11         $ 93.44         $ 82.05   

Servicing asset established

       24.88           23.17           20.98           20.33   

Discount on retained portion

       (8.23        (4.30        (18.25        (13.45

Deferred fees and costs

       (6.47        (5.68        (4.23        (5.55

Other adjustments

       (0.19        (0.02                  (0.03
    

 

 

      

 

 

      

 

 

      

 

 

 
     $ 113.11         $ 121.28         $ 91.94         $ 83.35   

 

  (18) We calculate average servicing retained by taking the total of the servicing percentage multiplied by the amount sold for each loan divided by the total loans sold and serviced for others.

 

  (19) We calculate the weighted average servicing fee of sold loans guaranteed by the U.S. government by taking the servicing fee multiplied by the total outstanding guaranteed amount sold for each loan divided by the total outstanding guaranteed amount of loans sold and serviced for others.

 

  (20) We calculate average outstanding loan size by taking the outstanding borrower principal balance divided by the number of loans.

 

  (21) We calculate average balance of loans by taking total loans (gross) divided by the number of loans. We exclude any loans that have been completely charged off.

 

  (22) We calculate average balance of loans not guaranteed by the U.S. government by taking the portion of total loans (gross) not guaranteed by the U.S. government divided by the number of loans. We exclude any loans that have been completely charged off.

 

  (23) Nonperforming loans include nonaccrual loans.

 

  (24) Average loans on book outstanding includes held for sale and held for investment loans.

 

  (25) We calculate our risk-weighted assets using the standardized method of the Basel II Framework, as implemented by the Federal Reserve and the FDIC.

 

  (26) We calculate tangible common equity as total shareholders’ equity less goodwill and other intangible assets and we calculate tangible assets as total assets less goodwill and other intangible assets. Tangible common equity to tangible assets is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” set forth below.

 

  (27)

We have declared and will pay certain dividends subsequent to December 31, 2013, that are discussed under “Dividend Policy” on page 48 of this prospectus and in Note 2 beginning on page F-17 to our consolidated financial statements appearing elsewhere in this prospectus. In addition, the pro forma balance sheet in our consolidated financial statements includes the effect of recording a deferred tax liability resulting from the difference between the financial statement carrying amounts of assets and liabilities and their

 

 

20


Table of Contents
  respective tax bases we as a C Corporation rather than an S Corporation. As of December 31, 2013, we would have recorded an estimated deferred tax liability of $1.2 million, which is reflected as a decrease in retained earnings of $1.2 million. As of December 31, 2012, we would have recorded an estimated deferred tax asset of $835 thousand, which is reflected as an increase in retained earnings of $835 thousand. As a result of the dividends described above and the recording of the deferred tax assets and liabilities, the pro forma adjusted amount of total shareholders’ equity would have been $29.9 million and $30.2 million as of December 31, 2013 and 2012, respectively. The pro forma adjusted amount of total shareholders’ equity does not include any earnings subsequent to December 31, 2013.

 

  (28) The nCino Spin-Off on the Pro Forma Balance Sheet as of December 31, 2012 includes $3.6 million note receivable from nCino that will no longer be eliminated upon a spin-off. There was no note receivable from nCino as of December 31, 2013. A reconciliation of the nCino Spin-Off found on the Pro Forma Income Statements as of December 31, 2013 and 2012 can be found below:

 

2013 nCino Spin-Off reconciliation    nCino
Financials
    Elmininating
Entries
     Income
from non-
consolidated
nCino
    nCino Spin-
Off
 
     (dollars in thousands)  

Interest income

         

Other interest earning assets

   $      $ 30       $      $ 30   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

            30                30   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

         

Borrowings

     (30     30                  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     (30     30                  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     30                       30   

Provision for loan losses

                             
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     30                       30   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income

         

Gain on deconsolidation of subsidiary

                    (12,212     (12,212

Income from equity method investments

                    2,648        2,648   

Other noninterest income

     (165                    (165
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     (165             (9,564     (9,729
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expense

         

Salaries and employee benefits

     (349                    (349

Travel expense

     (16                    (16

Professional services expense

     (56                    (56

Advertising and Marketing expense

     (11                    (11

Occupancy expense

     (2                    (2

Data processing expense

     (1                    (1

Other expense

     (37                    (37
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     (472                    (472
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     337                (9,564     (9,227

Net (income) loss attributable to noncontrolling interest

     (120               (120
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings before income tax expense

     217                (9,564     (9,347

Income tax expense — current period

                        
  

 

 

   

 

 

    

 

 

   

 

 

 

Net earnings

   $ 217      $       $ (9,564   $ (9,347
  

 

 

   

 

 

    

 

 

   

 

 

 

 

 

21


Table of Contents
2012 nCino Spin-Off reconciliation    nCino
Financials
    Elmininating
Entries
     Income from
non-
consolidated
nCino
     nCino Spin-
Off
 
     (dollars in thousands)  

Interest income

          

Other interest earning assets

   $      $ 362       $       $ 362   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest income

            362                 362   
  

 

 

   

 

 

    

 

 

    

 

 

 

Interest expense

          

Borrowings

     (362     362                   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     (362     362                   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

     362                        362   

Provision for loan losses

                              
  

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     362                        362   
  

 

 

   

 

 

    

 

 

    

 

 

 

Noninterest income

          

Other noninterest income

     (1,112     570                 (542
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest income

     (1,112     570                 (542
  

 

 

   

 

 

    

 

 

    

 

 

 

Noninterest expense

          

Salaries and employee benefits

     (2,211                     (2,211

Travel expense

     (290                     (290

Professional services expense

     (768                     (768

Advertising and Marketing expense

     (206                     (206

Occupancy expense

     (13                     (13

Data processing expense

     (15     570                 555   

Equipment expense

     (31                     (31

Other expense

     (855                     (855
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest expense

     (4,389     570                 (3,819
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

     3,639                        3,639   

Net (income) loss attributable to noncontrolling interest

     (1,297                     (1,297
  

 

 

   

 

 

    

 

 

    

 

 

 

Earnings before income tax expense

     2,342                        2,342   

Income tax expense — current period

                              
  

 

 

   

 

 

    

 

 

    

 

 

 

Net earnings

   $ 2,342      $       $       $ 2,342   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

 

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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial measures included in our selected consolidated financial data are not measures of financial performance recognized by GAAP. These non-GAAP financial measures are “tangible shareholders’ equity,” “tangible book value per share,” “tangible average equity to tangible average assets,” and “efficiency ratio.” Our management uses these non-GAAP financial measures in its analysis of our performance.

 

    “Tangible shareholders’ equity” is shareholders’ equity less goodwill and other intangible assets. We have not considered loan servicing rights as an intangible asset for purposes of this calculation.

 

    “Tangible book value per share” is defined as total equity reduced by goodwill and other intangible assets divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets. We have not considered loan servicing rights as an intangible asset for purposes of this calculation.

 

    “Tangible average equity to tangible average assets” is defined as the ratio of average shareholders’ equity less average goodwill and average other intangible assets, divided by average total assets. This measure is important to investors interested in relative changes from period to period in equity and total assets, each exclusive of changes in intangible assets. We have not considered average loan servicing rights as an intangible asset for purposes of this calculation.

 

    “Efficiency ratio” is defined as total noninterest expense divided by the sum of net interest income and noninterest income. This measure is important to investors looking for a measure of efficiency in the Company’s productivity measured by the amount of revenue generated for each dollar spent. While the efficiency ratio is a measure of productivity its value is mitigated by the unique attributes of a high-touch business model employed by the Company.

We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:

 

     Years ended December 31,  
     2013     2012     2011     2010  
     (dollars in thousands, except per share data)  

Total shareholders’ equity

   $ 48,390      $ 33,057      $ 27,583      $ 17,162   

Less:

        

Goodwill

     272                        

Other intangible assets

     155                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible shareholders’ equity

   $ 47,963      $ 33,057      $ 27,583      $ 17,162   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares outstanding

     2,031,833        2,027,495        1,883,541        1,559,260   

Tangible book value per share

   $ 23.61      $ 16.30      $ 14.64      $ 11.01   

Average assets

     429,634        321,489        248,779        199,591   

Average equity

     44,671        31,799        23,220        13,825   

Average goodwill and other intangible assets

     156                        

Tangible average equity to tangible average assets

     10.36     9.89     9.33     6.93

 

 

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       Years ended December 31,  
       2013        2012        2011        2010  
       (dollars in thousands)  

Efficiency ratio

                   

Noninterest expense

     $ 40,164         $ 33,669         $ 20,967         $ 13,365   

Net interest taxable equivalent income

       10,781           8,097           6,007           3,297   

Noninterest taxable equivalent income (loss)

       56,467           42,480           32,127           20,932   

Less gain (loss) on sale of securities

       11                                 
    

 

 

      

 

 

      

 

 

      

 

 

 

Adjusted operating revenue

     $ 67,237         $ 50,577         $ 38,134         $ 24,228   
    

 

 

      

 

 

      

 

 

      

 

 

 

Efficiency ratio

       59.73        66.57        54.98        55.16

 

       As of and for the years ended December 31,  
       2013        2012  
       Pro Forma        Actual        Pro Forma        Actual  
       (dollars in thousands)  

Total shareholders’ equity

     $ 29,880         $ 48,390         $ 30,234         $ 33,057   

Less:

                   

Goodwill

       272           272                       

Other intangible assets

       155           155                       
    

 

 

      

 

 

      

 

 

      

 

 

 

Tangible shareholders’ equity

     $ 29,453         $ 47,963         $ 30,234         $ 33,057   
    

 

 

      

 

 

      

 

 

      

 

 

 

Shares outstanding

       2,031,833           2,031,833           2,027,495           2,027,495   

Tangible book value per share

     $ 14.50         $ 23.61         $ 14.91         $ 16.30   

Average assets

       415,486           429,634           313,897           321,489   

Average equity

       29,338           44,671           27,387           31,799   

Average goodwill and other intangible assets

       156           156                       

Tangible average equity to tangible average assets

       7.02        10.36        8.72        9.89

Efficiency ratio

                   

Noninterest expense

     $ 39,692         $ 40,164         $ 29,850         $ 33,669   

Net interest taxable equivalent income

       10,811           10,781           8,459           8,097   

Noninterest taxable equivalent income (loss)

       46,738           56,467           41,938           42,480   

Less gain (loss) on sale of securities

       11           11                       
    

 

 

      

 

 

      

 

 

      

 

 

 

Adjusted operating revenue

     $ 57,538         $ 67,237         $ 50,397         $ 50,577   
    

 

 

      

 

 

      

 

 

      

 

 

 

Efficiency ratio

       68.98        59.73        59.23        66.57

 

 

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RISK FACTORS

An investment in our common stock involves certain risks. You should carefully consider the risks described below, as well as the other information included in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this prospectus.

Risks Related to Our Business

We may experience increased delinquencies and credit losses, which could have a material adverse effect on our capital, financial condition, and results of operations.

Like other lenders, we face the risk that our customers will not repay their loans. A customer’s failure to repay us is usually preceded by missed monthly payments. In some instances, however, a customer may declare bankruptcy prior to missing payments, and, following a borrower filing bankruptcy, a lender’s recovery of the credit extended is often limited. Since many of our loans are secured by collateral, we may attempt to seize the collateral if and when a customer defaults on a loan. However, the value of the collateral may not equal the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our customer. The resolution of nonperforming assets, including the initiation of foreclosure proceedings, requires significant commitments of time from management, which can be detrimental to the performance of their other responsibilities, and will expose us to additional legal costs. Elevated levels of loan delinquencies and bankruptcies in our market area, generally, and among our customers, specifically, can be precursors of future charge-offs and may require us to increase our allowance for loan and lease losses, or ALLL. Higher charge-off rates, delays in the foreclosure process or in obtaining judgments against defaulting borrowers or an increase in our ALLL may hurt our overall financial performance if we are unable to increase revenue to compensate for these losses, may increase our cost of funds, and could materially adversely affect our capital, financial condition, results of operations and the value of the common stock.

SBA lending is an important part of our business. Our SBA lending program is dependent upon the federal government, and we face specific risks associated with originating SBA loans.

Our SBA lending program is dependent upon the federal government. As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s Preferred Lender status. If we lose our status as a Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results. Any changes to the SBA program, including changes to the level of guarantee provided by the federal government on SBA loans, may also have a material adverse effect on our business.

We generally sell the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales have resulted in both premium income for us at the time of sale, and created a stream of future servicing income. There can be no assurance that we will be able to continue originating these loans, that a secondary market for these loans will continue to exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of our SBA 7(a) loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on the non-guaranteed portion of a loan, we share

 

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any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us, which could materially adversely affect our results of operations as well as the value of our common stock.

A return of recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which could have a material adverse effect on our results of operations.

All financial institutions are subject to similar risks resulting from a weakened economy, such as increased charge-offs and levels of past-due loans and nonperforming assets. Although the U.S. economy has emerged from the severe recession that occurred from 2007 to 2009, economic growth has been slow and uneven, and unemployment levels remain high in many areas of the country. In addition, recovery by many businesses has been impaired by lower consumer spending. A return of prolonged deteriorating economic conditions could adversely affect the ability of our customers to repay their loans, the value of our investments, and our ongoing operations, costs and profitability. These events may cause us to incur losses and may materially adversely affect our financial condition and results of operations.

Our loan portfolio mix, which includes owner-occupied commercial real estate loans, could result in increased credit risk in a challenging economy.

Our loan portfolio is concentrated in owner-occupied commercial real estate and owner-occupied commercial business loans. These types of loans generally are viewed as carrying more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about heavy loan concentrations in certain types of commercial real estate loans, including acquisition, construction and development loans, and heavy loan concentrations in certain geographic segments. Because a portion of our loan portfolio is composed of these types of higher-risk loans, we face an increased risk of nonperforming loans that could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, any of which could have a material adverse impact on our results of operations and financial condition.

The current economic environment and any deterioration or downturn in the economies or real estate values in the markets we serve could have a material adverse effect on both borrowers’ ability to repay their loans and the value of the real property securing those loans. Our ability to recover on defaulted loans would then be diminished, and we would be more likely to suffer losses on defaulted loans. Any of these developments could materially adversely affect our business, financial condition, results of operations and prospects, as well as the value of our common stock.

The fair value of our investment securities can fluctuate due to factors outside of our control.

As of December 31, 2013, the fair value of our investment securities portfolio was approximately $19.4 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, monetary tapering actions by the Federal Reserve, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects, as well as the value of our common stock. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

 

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Our allowance for loan losses may prove to be insufficient to cover actual loan losses, which could have a material adverse effect on our financial condition and results of operations.

Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that we will experience credit losses. The risk of loss will vary with, among other things, general economic conditions, including the current economic environment and real estate market, the type of loan, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on our operating results. Our management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions, and other pertinent information.

If our assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and we may need to make adjustments to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income. We expect our allowance to continue to fluctuate; however, given current and future market conditions, we can make no assurance that our allowance will be adequate to cover future loan losses.

In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulators could have a negative effect on our operating results and could materially adversely affect the value of the common stock.

The amount of other real estate owned, or OREO, may increase significantly, resulting in additional losses, and costs and expenses that will negatively affect our operations.

As the amount of OREO increases, our losses, and the costs and expenses to maintain the real estate, likewise increase. The amount of OREO we hold may increase due to various economic conditions or other factors. Any additional increase in losses and maintenance costs and expenses due to OREO may have material adverse effects on our business, financial condition, and results of operations. Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory, which may make the disposition of OREO properties more difficult, increase maintenance costs and expenses, and may reduce our ultimate realization from any OREO sales. In addition, at the time of acquisition of the OREO we are required to reflect the fair market value in our financial statements. If the OREO declines in value subsequent to its acquisition, we are required to recognize a loss. As a result, declines in the value of our OREO have a negative effect on our results of operations and financial condition, and could materially adversely affect the value of our common stock.

We are subject to environmental liability risk associated with lending activities.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require

 

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us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations and could materially adversely affect the value of the common stock.

Our use of appraisals in deciding whether to make a loan secured by real property or how to value the loan in the future may not accurately describe the net value of the collateral that we can realize.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may experience changes in value in relatively short periods of time, especially given heightened economic uncertainty, this estimate might not accurately describe the net value of the real property collateral after the loan has been closed. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. In addition, we rely on appraisals and other valuation techniques to establish the value of our OREO and to determine certain loan impairments. If any of these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of OREO, and our ALLL may not reflect accurate loan impairments. The valuation of the properties securing the loans in our portfolio may negatively impact the continuing value of those loans and could materially adversely affect our results of operations and financial condition, as well as the value of the common stock.

We could be subject to losses, regulatory action or reputational harm due to fraudulent and negligent acts on the part of loan applicants, our borrowers, our employees and vendors.

In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements, property appraisals, title information, employment and income documentation, account information and other financial information. We may also rely on representations of clients and counterparties as to the accuracy and completeness of such information and, with respect to financial statements, on reports of independent auditors. Any such misrepresentation or incorrect or incomplete information may not be detected prior to funding a loan or during our ongoing monitoring of outstanding loans. In addition, one or more of our employees or vendors could cause a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our loan documentation, operations or systems. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We may fail to realize all of the anticipated benefits, including estimated cost savings, of potential future acquisitions.

In the future, we may encounter difficulties in obtaining required regulatory approvals or unexpected contingent liabilities from businesses we may acquire. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect our operations or results. Additionally, given continued market volatility and uncertainty, we may also experience increased credit costs or need to take additional markdowns and allowances for loan losses on assets and loans we may acquire. These increased credit costs, markdowns and allowances could materially adversely affect our financial condition and results of operations, as well as the value of our common stock.

Changes in the interest rate environment could reduce our net interest income, which could reduce our profitability.

As a financial institution, our earnings depend on our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and

 

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the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Additionally, changes in interest rates affect the premium market for SBA 7(a) loans. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, affects us more than non-financial companies and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin, noninterest income, and results of operations.

We face strong competition from larger, more established competitors.

The banking business is highly competitive, and we experience strong competition from many other financial institutions, including some of the largest commercial banks in the United States as well as other bank and non-bank lenders that operate in the United States.

We compete with these institutions both in attracting deposits and in making loans, primarily on the basis of the interest rates we pay and yield on these products. Many of our competitors are well-established, much larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our industry verticals, we may face a competitive disadvantage as a result of our smaller size. In addition, many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. We expect competition to continue to intensify due to financial institution consolidation, legislative, regulatory and technological changes, and the emergence of alternative banking sources.

Our ability to compete successfully will depend on a number of factors, including, among other things:

 

    our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices;

 

    the scope, relevance and pricing of products and services that we offer;

 

    customer satisfaction with our products and services;

 

    industry and general economic trends; and

 

    our ability to keep pace with technological advances and to invest in new technology.

Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans, which could reduce our profitability. Our failure to compete effectively in our primary markets could cause us to lose market share and could have a material adverse effect on our business, financial condition, results of operations and future prospects.

Prior to this offering, we were treated as an S corporation under the Internal Revenue Code, and claims of taxing authorities related to our prior status as an S corporation could harm us.

Upon consummation of this offering, our S corporation status will terminate, and we will be treated as a C corporation under “Subchapter C” of the income tax provisions of the Internal Revenue Code of 1986, as amended, which is applicable to most corporations and treats the corporation as an entity that is separate and distinct from its shareholders. If the open tax years in which we were an S corporation were audited by the Internal Revenue Service, and we are determined not to have qualified for, or to have violated, our S corporation status, we will be obligated to pay back taxes, interest and penalties, and we do not have the right to reclaim tax distributions that we have made to our shareholders during those periods. These amounts could include taxes on all of our taxable income while we were an S corporation. Any such claims could result in additional costs to us and could have a material adverse effect on our results of operations and financial condition.

 

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We are subject to increased regulatory requirements and supervision due to our de novo status.

The Bank was chartered in 2008 and is accordingly subject to more stringent regulatory requirements and supervision than banks that have been established for a longer period of time. In 2009, the FDIC extended the period of heightened supervision for newly insured FDIC-supervised institutions from three to seven years. Our seven-year de novo period will expire in 2015. Until that time, the Bank will be subject to enhanced supervision and any material change in its business plan will require FDIC approval. These enhanced supervisory requirements could restrain our growth or limit our ability to engage in activities that are outside the scope of our business plan, which in turn could have a material adverse effect on our business, results of operations, financial condition and future prospects.

Our loan portfolio may be affected by deterioration in real estate markets, including declines in the performance of loans.

Deterioration in real estate markets could result in declining prices and excess inventories. As a result, developers may experience financial deterioration and banking institutions may experience declines in the performance of construction, development and commercial loans. We make credit and reserve decisions based on the current conditions of borrowers or projects combined with our expectations for the future. If conditions are worse than forecast, we could experience higher charge-offs and delinquencies than is provided in the allowance for loan losses, which could materially adversely affect our earnings.

A prolonged U.S. government shutdown or default by the U.S. on government obligations could harm our results of operations.

Our results of operations, including revenue, non-interest income, expenses and net interest income, would likely be adversely affected in the event of widespread financial and business disruption on account of a default by the U.S. on U.S. government obligations or a prolonged failure to maintain significant U.S. government operations, particularly those pertaining to the SBA or the FDIC.

Deterioration in the fiscal position of the U.S. federal government and downgrades in U.S. Treasury and federal agency securities could adversely affect us and our subsidiary’s banking operations.

The long-term outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011 downgrade by certain rating agencies of the credit rating of the U.S. government and federal agencies. In addition to causing economic and financial market disruptions, any future downgrade, failure to raise the U.S. statutory debt limit, or deterioration in the fiscal outlook of the U.S. federal government, could, among other things, materially adversely affect the market value of the U.S. government and federal agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost and availability of funding, which could negatively affect our profitability. Also, the adverse consequences could extend to those to whom we extend credit and could adversely affect their ability to repay their loans. Any of these developments could materially adversely affect our business, financial condition, results of operations and prospects, as well as the value of our common stock.

Deterioration in the commercial soundness of our counterparties could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could create another market-wide liquidity crisis similar

 

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to that experienced in late 2008 and early 2009 and could lead to losses or defaults by us or by other institutions. There is no assurance that the deterioration or failure of our counterparties would not materially adversely affect our results of operations.

We have different lending risks than larger, more diversified banks.

Our ability to diversify our economic risks is limited. We lend primarily to small businesses in selected industries, which may expose us to greater lending risks than those of banks lending to larger, better-capitalized businesses with longer operating histories. Small businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If economic conditions negatively impact the verticals in which we operate, our results of operations and financial condition may be adversely affected.

We manage our credit exposure through careful monitoring of loan applicants and through loan approval and review procedures. We have established an evaluation process designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the establishment of loan losses is an estimate based on experience, judgment and expectations regarding our borrowers, and the economies in which we and our borrowers operate, as well as the judgment of our regulators. This is an inherently uncertain process, and we cannot assure you that our loan loss reserves will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, profitability or financial condition.

We are subject to liquidity risk in our operations.

Liquidity risk is the possibility of being unable, at a reasonable cost and within acceptable risk tolerances, to pay obligations as they come due, to capitalize on growth opportunities as they arise, or to pay regular dividends because of an inability to liquidate assets or obtain adequate funding on a timely basis. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses, and capital expenditures. Liquidity is derived primarily from the sale of loans in the 7(a) secondary market, retail deposit growth and retention, principal and interest payments on loans and investment securities, net cash provided from operations, and access to other funding sources. Historically, we have relied on brokered and Internet funds as a large portion of our deposit base. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption in the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Our access to borrowed funds could become limited in the future, and we may be required to pay above market rates for additional borrowed funds, if we are able to obtain them at all, which may adversely affect our results of operations.

A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber-attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

As a financial institution, our operations rely heavily on the secure data processing, storage and transmission of confidential and other information on our computer systems and networks. Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our online banking system, customer relationship management, general ledger, deposit and loan servicing and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of financial assets. We cannot assure you that any such failures, interruptions or security breaches will not occur, or if they do occur, that they will be adequately addressed. While we have certain protective policies and

 

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procedures in place, the nature and sophistication of the threats continue to evolve. We may be required to expend significant additional resources in the future to modify and enhance our protective measures.

Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems. Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.

Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could materially adversely affect our business, financial condition, results of operations and prospects, as well as the value of our common stock.

Hurricanes or other adverse weather events could disrupt our operations, which could have an adverse effect on our business or results of operations.

North Carolina’s coastal region is affected, from time to time, by adverse weather events, particularly hurricanes. We cannot predict whether, or to what extent, damage caused by future hurricanes will affect our operations. Weather events could cause a disruption in our day-to-day business activities and could have a material adverse effect on the value of our common stock.

We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and retain key personnel.

We are a customer-focused and relationship-driven organization. We expect our future growth to be driven in a large part by the relationships maintained with our customers by our chief executive officer, president, and other senior officers. The unexpected loss of any of our key employees could have an adverse effect on our business and possibly result in reduced revenues and earnings. The implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. We are not party to non-compete or non-solicitation agreements with any of our officers or employees. The market for our personnel is competitive, and we cannot assure you that we will be successful in attracting, hiring or retaining key personnel.

Our risk management framework may not be effective in mitigating risks and/or losses to us.

We have implemented a risk management framework to manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial and other modeling methodologies which involve management assumptions and judgment. There can be no assurance that our risk management framework will be effective under all circumstances or that it will adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and be subject to potentially adverse regulatory consequences, and our business, financial condition, results of operations or prospects could be materially and adversely affected.

 

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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential shareholders could lose confidence in our financial reporting which would harm our business and the trading price of our securities.

If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. We may also face regulatory enforcement or other actions, including the potential delisting of our securities from NASDAQ. This could have an adverse effect on our business, financial condition and results of operations, including our stock price, and could potentially subject us to litigation.

Changes in accounting standards and management’s selection of accounting methods, including assumptions and estimates, could materially impact our financial statements.

From time to time the SEC and the Financial Accounting Standards Board, or FASB, change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings. In addition, management is required to use certain assumptions and estimates in preparing our financial statements, including determining the fair value of certain assets and liabilities, among other items. If the assumptions or estimates are incorrect, we may experience unexpected material adverse consequences.

Our business reputation is important and any damage to it could have a material adverse effect on our business.

Our reputation, including the intellectual property associated with our reputation, is very important to sustain our business, as we rely on our relationships with our current, former and potential clients and shareholders, and the industries that we serve. Any damage to our reputation, whether arising from legal, regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, the conduct of our business or otherwise could have a material adverse effect on our business.

Insiders have substantial control over us, and this control may limit our shareholders’ ability to influence corporate matters and may delay or prevent a third party from acquiring control over us.

Our directors and executive officers and their related entities currently beneficially own, in the aggregate, approximately 45.82% of our outstanding common stock. Further, we anticipate that our directors and executive officers and their related entities will beneficially own an aggregate of approximately     % of our common stock following this offering (without giving effect to the exercise of the overallotment option granted to the underwriters). The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise. In addition, these shareholders will be able to exercise influence over all matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other shareholders. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, see the section titled “Principal and Selling Shareholders.”

 

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Risks Related to Our Regulatory Environment

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. Our compliance with these regulations is costly and restricts certain of our activities, including the declaration and payment of cash dividends to shareholders, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth and operations. Should we fail to comply with these regulatory requirements, federal and state regulators could impose additional restrictions on the activities of the Company and the Bank, which could materially adversely affect our growth strategy and operating results in the future.

The laws and regulations applicable to the banking industry have recently changed and may continue to change, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted on July 21, 2010. The provisions of the Dodd-Frank Act, and its implementing regulations, on our business remain somewhat uncertain at this time, but they may adversely affect our business, results of operations, and the underlying value of our securities, including our common stock. The full effect of this legislation will not be reasonably certain until all implementing regulations are promulgated, which could take several years in some cases.

Some or all of the changes, including the new rulemaking authority granted to the Consumer Financial Protection Bureau, or the CFPB, may result in greater reporting requirements, assessment fees, operational restrictions, capital requirements, and other regulatory burdens applicable to us, and many of our non-bank competitors may remain free from such limitations. This could adversely affect our ability to attract and maintain depositors, to offer competitive products and services, and to expand our business.

Congress may consider additional proposals to change substantially the financial institution regulatory system and to expand or contract the powers of banking institutions and bank holding companies. Such legislation may change existing banking statutes and regulations, as well as our current operating environment significantly. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.

Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could have an adverse effect on our deposit levels, loan demand, or business and earnings, as well as the value of the common stock.

We may be required to raise additional capital in the future, including to comply with new increased minimum capital thresholds established by our regulators as part of their implementation of Basel III, but that capital may not be available when it is needed and could be dilutive to our existing shareholders, which could adversely affect our financial condition and results of operations.

On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act.

 

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The major provisions of the new rule applicable to us are:

 

    The new rule implements higher minimum capital requirements, includes a new common equity Tier 1 capital requirement, and establishes criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. These enhancements will both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the U.S. banking system to deal with adverse economic conditions. The new minimum capital to risk-weighted assets, or RWA, requirements are a common equity Tier 1 capital ratio of 4.5 percent and a Tier 1 capital ratio of 6.0 percent, which is an increase from 4.0 percent, and a total capital ratio that remains at 8.0 percent. The minimum leverage ratio (Tier 1 capital to total consolidated assets) is 4.0 percent. The new rule maintains the general structure of the current prompt corrective action, or PCA, framework while incorporating these increased minimum requirements.

 

    The new rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets, or MSAs, deferred tax assets, or DTAs, and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity Tier 1 capital.

 

    Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements, and corresponding limits on capital distributions and discretionary bonus payments, will begin on January 1, 2016. After the capital conservation buffer is fully phased in, a banking organization with a buffer greater than 2.5 percent would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5 percent would be subject to increasingly stringent limitations as the buffer approaches zero. When the new rule is fully phased in, it would prohibit a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the PCA well-capitalized thresholds.

 

    The new rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

On July 9, 2013, the FDIC issued an “interim final rule” applicable to the Bank that is identical in substance to the final rules issued by the Federal Reserve described above. The Bank is required to comply with the interim final rule on January 1, 2015.

In order to support the operations at the Bank, we may need to raise capital in the future. Our ability to raise capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we cannot assure you of our ability to raise capital, if needed, on terms acceptable to us. If we cannot raise capital when needed, our ability to operate or further expand our operations could be materially impaired. In addition, if we decide to raise equity capital under such conditions, the interests of our shareholders could be diluted.

The FDIC Deposit Insurance assessments that we are required to pay may continue to materially increase in the future, which would have an adverse effect on our earnings.

As a member institution of the FDIC, we are assessed a quarterly deposit insurance premium. Failed banks nationwide have significantly depleted the insurance fund and reduced the ratio of reserves to insured deposits.

 

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As a result, we may be required to pay significantly higher premiums or additional special assessments that could adversely affect our earnings.

On October 19, 2010, the FDIC adopted a Deposit Insurance Fund, or DIF, Restoration Plan, which requires the DIF to attain a 1.35 percent reserve ratio by September 30, 2020. In addition, the FDIC modified the method by which assessments are determined and, effective April 1, 2011, adjusted assessment rates, which will range from 2.5 to 45 basis points (annualized), subject to adjustments for unsecured debt and, in the case of small institutions outside the lowest risk category and certain large and highly complex institutions, brokered deposits. Further increased FDIC assessment premiums, due to our risk classification, emergency assessments, or implementation of the modified DIF reserve ratio, could adversely impact our earnings.

Risks Related to this Offering and our Common Stock

An active, liquid, and orderly market for our common stock may not develop.

Prior to this offering, there was no market for shares of our common stock. An active trading market for our common stock might never develop or be sustained, which could depress the market price of our common stock and affect your ability to sell our shares. The initial public offering price was determined through negotiations between us and the representative of the underwriters and might bear no relationship to the price at which our common stock will trade following the completion of this offering. The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which may be beyond our control. These factors include:

 

    our operating performance and the operating performance of similar companies;

 

    the overall performance of the equity markets;

 

    prevailing interest rates;

 

    economic, financial, geopolitical, regulatory or judicial events affecting us or the financial markets generally;

 

    the market for similar securities;

 

    announcements by us or our competitors of acquisitions, business plans, or commercial relationships;

 

    threatened or actual litigation;

 

    any major change in our board of directors or management;

 

    publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

    whether we declare dividends on our common stock from time to time;

 

    our creditworthiness;

 

    the ratings given to our securities by credit rating agencies, if any;

 

    large volumes of sales of our shares of common stock by existing shareholders; and

 

    general political and economic conditions.

In addition, the stock market in general, and the market for banks and financial services companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations might be even more pronounced in the trading market for our stock shortly following this offering. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.

 

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Additional expenses following the offering from operating as a public company will adversely affect our profitability.

Following the offering, our noninterest expenses will increase as a result of the additional accounting, legal and various other additional expenses usually associated with operating as a public company and complying with public company disclosure obligations, particularly those obligations imposed by the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Act.

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the federal securities laws. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although we could lose that status sooner if our gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions, or if we choose to rely on additional exemptions in the future. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We have broad discretion in the use of the net proceeds from this offering, and our use of those proceeds may not yield a favorable return on your investment.

We expect to use the net proceeds of this offering to support our long-term growth by enhancing our capital ratios to permit growth initiatives and for general working capital and other corporate purposes, which may include, among other things, funding loans and purchasing investment securities through the Bank.

Our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins that we generally earn on loans, potentially adversely affecting shareholder returns, including earnings per share, return on assets and return on equity.

You will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the net tangible book value of each outstanding share of common stock immediately after this offering. If you purchase common stock in this offering, you will suffer immediate and substantial dilution. At the assumed initial public offering price of $         per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus with net proceeds to us of $         million, after deducting estimated underwriting discounts and commissions and estimated offering expenses, investors who purchase shares in this offering from us will have contributed approximately     % of the total amount of funding we have received to date, but the shares purchased from us in this offering will represent only approximately     % of the total voting rights. The dilution will be $         per share in the net tangible book value of the common stock from the assumed initial public offering price. In addition, if outstanding options or warrants to purchase shares of our common stock are exercised, there could be further dilution. For more information refer to “Dilution.”

 

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Securities analysts may not initiate or continue coverage on our common stock.

The trading market for our common stock will depend in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts, and they may not cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our common stock is the subject of an unfavorable report, the price of our common stock may decline. If one or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our common stock to decline.

Future sales of shares of our common stock by existing shareholders could depress the market price of our common stock.

Upon completion of this offering, there will be                  shares of our common stock outstanding. The                  shares being sold in this offering will be freely tradeable immediately after this offering (except for shares purchased by affiliates) and of the remaining                  shares outstanding on a pro forma as adjusted basis as of                     , 2014 (assuming no exercise of outstanding options after                     , 2014),                  shares may be resold under Rule 144 as of the date of this prospectus,                  shares may be sold 90 days after the date of this prospectus, and                  shares may be sold upon expiration of lock-up agreements 180 days after the date of this offering (subject in some cases to volume limitations). In addition, as of                     , 2014, there were outstanding options to purchase                  shares of our common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of the lock-up agreements. A large portion of these shares and options are held by a small number of persons. Sales by these shareholders or option holders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. We also intend to register all common stock that we may issue under our stock plans. Effective upon the completion of this offering, an aggregate of                  shares of our common stock will be reserved for future issuance under these plans (assuming no exercise of outstanding options after                     , 2014). Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

Our ability to pay cash dividends on our securities is limited and we may be unable to pay future dividends.

We make no assurances that we will pay any dividends on our securities, including our common stock, in the future. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our board of directors may deem relevant. The holders of our capital stock are entitled to receive dividends when, and if, declared by our board of directors out of funds legally available for that purpose. As part of our consideration to pay cash dividends, we intend to retain adequate funds from future earnings to support the development and growth of our business. In addition, our ability to pay dividends is restricted by federal policies and regulations. It is the current policy of the Federal Reserve that bank holding companies should pay cash dividends on capital stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. Further, our principal source of funds to pay dividends is cash dividends that we receive from Live Oak Bank, which, in turn, will be highly dependent upon the Bank’s historical and projected results of operations, liquidity, cash flows and financial condition, as well as various legal and regulatory prohibitions and other restrictions on the ability of the Bank to pay dividends, extend credit or otherwise transfer funds to the Company.

 

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Additional issuances of common stock or securities convertible into common stock may dilute holders of our common stock.

We may, in the future, determine that it is advisable, or we may encounter circumstances where we determine it is necessary, to issue additional shares of common stock, securities convertible into, exchangeable for or that represent an interest in common stock, or common stock-equivalent securities to fund strategic initiatives or other business needs or to build additional capital. Our board of directors is authorized to cause us to issue additional shares of common stock from time to time for adequate consideration without any additional action on the part of our shareholders. The market price of our common stock could decline as a result of other offerings, as well as other sales of a large block of common stock or the perception that such sales could occur.

We are subject to extensive regulation, and ownership of the common stock may have regulatory implications for holders thereof.

We are subject to extensive federal and state banking laws, including the Bank Holding Company Act of 1956, as amended, or BHCA, and federal and state banking regulations, that will impact the rights and obligations of owners of our common stock, including, for example, our ability to declare and pay dividends on our common stock. Shares of our common stock are voting securities for purposes of the BHCA and any bank holding company or foreign bank that is subject to the BHCA may need approval to acquire or retain more than 5% of the then outstanding shares of our common stock, and any holder (or group of holders deemed to be acting in concert) may need regulatory approval to acquire or retain 10% or more of the shares of our common stock. A holder or group of holders may also be deemed to control us if they own 25% or more of our total equity. Under certain limited circumstances, a holder or group of holders acting in concert may exceed the 25% percent threshold and not be deemed to control us until they own 33% percent or more of our total equity. The amount of total equity owned by a holder or group of holders acting in concert is calculated by aggregating all shares held by the holder or group, whether as a combination of voting or non-voting shares or through other positions treated as equity for regulatory or accounting purposes and meeting certain other conditions. Holders of our common stock should consult their own counsel with regard to regulatory implications.

Holders should not expect us to redeem outstanding shares of our common stock.

Our common stock is a perpetual equity security. This means that it has no maturity or mandatory redemption date and will not be redeemable at the option of the holders. Any decision we may make at any time to propose the repurchase or redemption of shares of our common stock will depend upon, among other things, our evaluation of our capital position, the composition of our shareholders’ equity, general market conditions at that time and other factors we deem relevant. Our ability to redeem shares of our common stock is subject to regulatory restrictions and limitations, including those of the Federal Reserve Board.

Offerings of debt, which would rank senior to our common stock upon liquidation, may adversely affect the market price of our common stock.

We may attempt to increase our capital resources or, if our or the Bank’s regulatory capital ratios fall below the required minimums, we or the Bank could be forced to raise additional capital by making additional offerings of debt or equity securities, senior or subordinated notes, preferred stock and common stock. Upon liquidation, holders of our debt securities and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock.

Anti-takeover provisions could adversely affect our shareholders.

In some cases, shareholders would receive a premium for their shares if we were acquired by another company. However, state and federal law and our articles of incorporation and bylaws make it difficult for anyone to acquire us without approval of our board of directors. For example, our articles of incorporation

 

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require a supermajority vote of two-thirds of our outstanding common stock in order to effect a sale or merger of the company in certain circumstances. Consequently, a takeover attempt may prove difficult, and shareholders may not realize the highest possible price for their securities. See “Description of Our Securities — Certain Provisions of Our Articles of Incorporation and Bylaws Having Potential Anti-Takeover Effects.”

Shares of our common stock are not insured deposits and may lose value.

Shares of our common stock will not be savings accounts, deposits or other obligations of any depository institution and will not be insured or guaranteed by the FDIC or any other governmental agency or instrumentality, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this prospectus. As a result, if you acquire shares of our common stock, you may lose some or all of your investment.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Information set forth in this prospectus may contain various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements represent our judgment concerning the future and are subject to business, economic, and other risks and uncertainties, both known and unknown, that could cause our actual operating results and financial position to differ materially from the forward-looking statements. Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” or “continue,” or the negative thereof or other variations thereof or comparable terminology.

We caution that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including, without limitation:

 

    deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;

 

    changes in SBA loan products, including specifically the Section 7(a) program, or changes in SBA standard operating procedures;

 

    changes in interest rates or an extended period of record-low interest rates on 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 losses;

 

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

 

    changes in financial market conditions, either internationally, nationally or locally in areas in which we conduct our operations, including, without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices;

 

    changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;

 

    fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;

 

    effective on January 1, 2015 and subject to certain transition periods, changes in minimum capital requirements, adjustments to prompt corrective action thresholds, increased quality of regulatory capital, revised risk-weighting of certain assets, and implementation of a “capital conservation buffer,” included in the final rule promulgated by the Federal Reserve on July 2, 2013, to implement the so-called “Basel III” accords;

 

    the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our 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;

 

    governmental monetary and fiscal policies, including the effects of the Federal Reserve’s “Quantitative Easing” program, as well as other legislative and regulatory changes;

 

    changes in political and economic conditions, including continuing political and economic effects of the global economic downturn and other major developments;

 

    the impact of heightened regulatory scrutiny of financial products, primarily led by the CFPB;

 

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    our ability to comply with any requirements imposed on LOB or the Bank by our respective regulators, and the potential negative consequences that may result;

 

    the effect of any mergers, acquisitions or other transactions, to which we or the Bank may from time to time be a party, including, without limitation, our ability to successfully integrate any businesses that we acquire; and

 

    the risk factors described under the heading “Risk Factors” in this prospectus.

Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date such forward-looking statements are made.

You should read carefully this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify all of our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the shares of common stock offered by us in this public offering will be approximately $        , or $         if the underwriters elect to exercise their option in full, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $        , or $         if the underwriters elect to exercise their option in full, assuming the number of shares offered by us, as indicated on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling shareholders.

We intend to use the net proceeds of this offering to pay off outstanding debt of the Company with a third party lender estimated to be $8.0 million at the time of this offering, to support the growth and expansion of our franchise and for general corporate purposes such as investments in the development of new technology platforms. This debt will mature in the first quarter of 2015 and carries a variable rate of 4.0% on March 5, 2014, calculated based on the Wall Street Journal prime rate plus 75 basis points. We may also use net proceeds for possible acquisitions of, or investments in, bank or permissible non-bank entities, including opportunities to enhance and optimize our internal operations. In addition, proceeds from this offering may be used for investments in additional subsidiaries to take advantage of potential start-up opportunities that we believe we have created or identified through the use of technology to enhance and optimize our internal operations and observations of the banking industry in general. However, no agreements or understandings presently exist with respect to any acquisitions or investments. Before we apply any of the proceeds for any of these uses, the proceeds likely will be temporarily invested in short-term investment securities.

 

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CAPITALIZATION

The following table sets forth our consolidated capitalization, including regulatory capital ratios, at December 31, 2013 on:

 

    an actual basis;

 

    a pro forma basis to give effect to the nCino Spin-Off, the Cash Dividend and the C Corporation Conversion immediately prior to the completion of this offering; and

 

    a pro forma as adjusted basis to give further effect to the net proceeds from the sale by us of                  shares of common stock in this offering (assuming the underwriters do not exercise their option in full) at an assumed initial public offering price of $         per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma consolidated capitalization information below is illustrative only, and our cash and due from banks, long-term debt, common stock, retained earnings, accumulated other comprehensive income (loss), total shareholders’ equity, and total capitalization following the nCino Spin-Off, the Cash Dividend and the C Corporation Conversion will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing. You should read the following table in conjunction with “Selected Historical Consolidated Financial Data,” “Unaudited Pro Forma Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto, which are included elsewhere in this prospectus.

 

     December 31, 2013         
     Actual     Pro
Forma
    Pro
Forma as
Adjusted
for the
Offering(1)
        
     (dollars in thousands, except per
share data)
        

Cash and due from banks

   $ 37,244      $ 31,244      $                   

Long term debt

     12,325        12,325        

Shareholders’ equity:

         

Common stock, no par value, 2,750,000 shares authorized, 2,031,833 shares issued and outstanding, actual; 2,031,833 shares issued and outstanding, pro forma;                  shares issues and outstanding, pro forma as adjusted

     18,319        18,319        

Retained earnings

     30,262        11,752        

Accumulated other comprehensive income (loss)

     (191     (191     

Total shareholders’ equity

     48,390        29,880        

Total capitalization

     48,390        29,880        

Book value per common share

     23.82        14.71        

Tangible book value per common share(2)

     23.61        14.50        
                        Minimum
Regulatory
Requirement
 

Capital ratios:

         

Tangible common equity to tangible assets(2)

     11.16     7.14     %      

Company regulatory capital ratios:

         

Tier 1 leverage capital

     10.30        6.71           4.00

Tier 1 risk-based capital

     14.99        9.68           4.00   

Total risk-based capital

     17.96        12.66           8.00   

Bank regulatory capital ratios(3):

         

Tier 1 leverage capital

     10.39        10.39           4.00   

Tier 1 risk-based capital

     15.09        15.09           4.00   

Total risk-based capital

     15.95        15.95           8.00   

 

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(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the estimated price range reflected on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and due from banks, long-term debt, common stock, retained earnings, accumulated other comprehensive income (loss) total shareholders’ equity, and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2) These measures are not measures recognized under GAAP and are therefore considered to be non-GAAP financial measures. See the information set forth under the caption “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” in the section “summary Selected Historical Consolidated Financial Data” for a reconciliation of these measures to their most directly comparable GAAP measures.

 

(3) The pro forma as adjusted column assumes that $         million of net cash proceeds from the offering are pushed down to the Bank as common equity.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

Net tangible book value per share is equal to the amount of our shareholders’ equity less intangible assets, divided by the number of shares of common stock outstanding at December 31, 2013. The net tangible book value of our common stock at December 31, 2013 was approximately $48.0 million, or $23.61 per share, based on the number of shares of common stock outstanding at December 31, 2013.

Pro forma net tangible book value per share of our common stock is equal to net tangible book value, divided by the number of shares of our common stock outstanding, after giving effect to the nCino Spin-Off, the Cash Dividend and the C Corporation Conversion immediately prior to the completion of this offering. At December 31, 2013, the pro forma net tangible book value of our common stock would have been $         per share. Pro forma as adjusted net tangible book value per share gives further effect to the net proceeds from the sale by us of                  shares of common stock in this offering (assuming the underwriters do not exercise their option in full) at an assumed initial public offering price of $         per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. At December 31, 2013 the pro forma as adjusted net tangible book value of our common stock would have been approximately $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to existing shareholders and an immediate dilution of $         per share to new investors, or approximately     % of the public offering price of $         per share. Dilution is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the public offering price of $         per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of December 31, 2013

   $                   

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share

     
     

 

 

 

Dilution per share to new investors in this offering

      $     
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our pro forma as adjusted book value by approximately $         million, or approximately $         per share, and the dilution per share to new investors in this offering by approximately $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million in the number of shares offered by us, together with a $1.00 increase in the assumed initial public offering price of $         per share, would result in pro forma as adjusted book value of approximately $         million, or $         per share, and the dilution per share to new investors in this offering would be $         per share. Similarly, a decrease of 1.0 million in the number of shares offered by us, together with a $1.00 decrease in the assumed initial public offering price of $         per share, would result in pro forma as adjusted book value of approximately $         million, or $         per share, and the dilution per share to new investors in this offering would be $         per share. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.

 

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If the underwriters exercise their option in full, our pro forma as adjusted book value as of December 31, 2013, would have been $         million, or $         per share, representing an immediate increase in pro forma as adjusted book value to our existing shareholders of $         per share and immediate dilution to new investors in this offering of $         per share.

The following table summarizes the total consideration paid to us and the average price paid per share by existing shareholders and new investors purchasing common stock in this offering. This information is presented on a pro forma basis as of                     , 2013, after giving effect to our sale of                  shares of common stock in this offering (assuming the underwriters do not exercise their option) at an assumed initial public offering price of $         per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus,.

 

     Shares Purchased         Total Consideration         Average Price
Per Share
 
     Number    Percent     Amount      Percent    

Existing shareholders

                   $                                 $                

New investors in this offering

            

Total

        100.0   $           100.0  
  

 

  

 

 

   

 

 

    

 

 

   

Assuming no shares are sold to existing shareholders in this offering and assuming the underwriters do not exercise their option in full, sales of shares of our common stock by the selling shareholders in this offering will reduce the number of shares of common stock held by existing shareholders to                     , or approximately     % of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors in this offering to                     , or approximately     % of the total shares of common stock outstanding after this offering.

After giving effect to the sale of shares in this offering by us and the selling shareholders, if the underwriters’ exercise their option in full, our existing shareholders would own approximately     % and our new investors would own approximately     % of the total number of shares of our common stock outstanding after this offering.

The table above excludes 22,500 shares of our common stock issuable upon exercise of outstanding stock options at December 31, 2013 at a weighted-average exercise price of $16.77 per share. To the extent that these stock options are exercised, investors participating in the offering will experience further dilution.

 

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DIVIDEND POLICY

It has been our practice since inception to make distributions to our common shareholders. Historically, we have been an “electing small business corporation” under “Subchapter S” of the Internal Revenue Code. As such, we have paid distributions to our shareholders to assist them in paying income taxes on the pro rata portion of the Company’s taxable income that “passed through” to our shareholders. It has also been our historical practice to distribute approximately 40.0% of our after tax earnings to our shareholders.

Prior to the consummation of this offering, we will declare a dividend to our shareholders for any undistributed 2014 tax amounts related to their allocable share of 2014 S corporation taxable income to be payable after the offering. We estimate this dividend will be $1.0 million. In addition, shortly before the consummation of this offering, we will distribute approximately $5.0 million to the shareholders for tax related to the S corporation taxable gain on the nCino Spin-Off.

We are organized under the North Carolina Business Corporation Act, which prohibits the payment of a dividend if, after giving it effect, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders. In addition, because we are a bank holding company, the Federal Reserve may impose restrictions on cash dividends paid by us. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if any of the holding company’s bank subsidiaries are classified as undercapitalized.

Our ability to pay dividends is largely dependent upon the amount of cash dividends that the Bank pays to us, which distributions are restricted under North Carolina banking laws and regulations. The Bank may make distributions only to the extent that the Bank remains adequately capitalized. In addition, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank. The Office of the North Carolina Commissioner of Banks and the FDIC also are authorized to prohibit the payment of dividends by a bank under certain circumstances. Such requirements and policies may limit our ability to obtain dividends from the Bank for our cash needs, including payment of dividends to our shareholders and the payment of operating expenses. For additional information on these limitations, see “Supervision and Regulation — Regulation of the Company — Dividends” and “— Live Oak Bank — Dividends.”

Our dividend policy may change with respect to the payment of dividends as a return on investment, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to shareholders. Presently, we plan to pay dividends up to 40% of our after tax earnings, however, the determination to pay future dividends to shareholders will be dependent upon our operational results, financial condition, capital requirements, business projections, general business conditions, statutory and regulatory restrictions and any other factors that our board of directors deem appropriate.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Summary Selected Historical Consolidated Financial Data” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.

Overview of Company Operations

We are a nationwide lender to small business owners in niche industries. We leverage industry expertise and a comprehensive technology platform to optimize the credit extension process and borrowing experience for our customers.

We are organized as a bank holding company headquartered in Wilmington, North Carolina and were incorporated under the laws of North Carolina in December 2008. We conduct business operations primarily through our commercial bank subsidiary, Live Oak Banking Company. The Bank was established in May 2008 as a North Carolina-chartered commercial bank. Our strategy centers on a business model that we believe mitigates credit risk while capitalizing on technology unique to the financial services industry. In the execution of this strategy our emphasis is extending primarily variable rate loans that are 75% guaranteed by the SBA, an independent agency of the U.S. federal government. The guaranteed portion of our loans is typically sold in the secondary market while servicing is retained, with the remainder of each loan either participated out to a third party or retained on our books. Our proprietary cloud-based software allows us to maintain a streamlined loan delivery system on a national platform. Our compliance with SBA regulations is enhanced by lending and credit professionals with strong SBA lending backgrounds and our technology platform. To maximize our business model, we focus on specific industries with a series of low risk characteristics and substantial market size potential. This industry specific focus complements our status as an SBA 7(a) Preferred Lender. We refer to the industries we specialize in as “verticals.”

We alleviate the need for traditional branch locations or ATMs to ensure a quality customer experience by leveraging technology and having an industry vertical focus. As a result, the Bank has no brick-and-mortar branch locations and does not employ any tellers. Our headquarters serves as our sole deposit gathering location for local customers seeking a more traditional interaction for their banking needs. While our principal business is lending to small business owners in niche industries, we derive our income principally from the gains recognized on loans sold. Our revenue model results in noninterest income that has historically been greater than four times net interest income. This is achieved through leveraging our originate-sell-and-service platform through the sale of government guaranteed loans at a premium

S Corporation Status

Since our formation in 2008, we have elected to be taxed for income tax purposes as a “Subchapter S” corporation under the provisions of Section 1361 through 1379 of the Internal Revenue Code. As a result, our net income has not been subject to, and we have not paid, income taxes and we have not been required to make any provision or recognize any liability for income tax in our financial statements. Immediately prior to the completion of this offering, we plan to voluntarily terminate our status as an S corporation and convert to a C corporation under Subchapter C of the Internal Revenue Code for income tax purposes. Upon the termination of our status as an S corporation, we will commence paying income taxes on our pre-tax net income and our net

 

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income for each fiscal year and each interim period will reflect a provision for income taxes. As a result of that change in our status under the income tax laws, the net income and earnings per share data presented in our historical financial statements set forth elsewhere in this prospectus, which do not include any provision for income taxes, will not be comparable with our future net income and earnings per share in periods after we commence to be taxed as a C corporation, which will be calculated by including a provision for income taxes.

Depending on our effective income tax rate, the termination of our status as an S corporation may affect our financial condition or cash flows. We have historically made periodic cash distributions to our shareholders in amounts estimated to be necessary for them to pay their estimated personal U.S. income tax liabilities relating to the items of our income, gain, deductions and losses allocated to each of our shareholders. The aggregate amount of such cash distributions has been approximately 40% of our net income. If our effective annual income tax rate were to be materially less than 40% of our net income for any fiscal year, our cash flows and financial condition may improve commensurately compared with our historical cash flows and financial condition. On the other hand, if our effective annual income tax rate were to be materially higher than 40% in future periods, our future cash flows and financial condition would be adversely affected compared to our historical cash flows and financial condition.

Deferred tax assets and liabilities will be recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C corporation will be recognized in income in the quarter such change takes place. This difference between the financial statement carrying amounts of assets and liabilities and their respective tax basis would have been recorded as a net deferred tax liability of $1.2 million if it had been recorded on our balance sheet as of December 31, 2013 and as a net deferred tax asset of $835 thousand if it had been recorded on our balance sheet as of December 31, 2012. If we had become a C corporation as of December 31, 2013, there would be an income tax expense of approximately $1.2 million, which would decrease after tax earnings and equity by the same amount.

Critical Accounting Policies and Estimates

We have identified accounting policies that are the most critical to fully understand and evaluate its reported financial results and require management’s most difficult, subjective or complex judgments. Management has reviewed the following critical accounting policies and related disclosures with the Audit Committee of the Board of Directors.

 

    Determination of the allowance for loan losses;

 

    Valuation of servicing assets; and

 

    Valuation of foreclosed assets.

For a full description of these critical accounting policies, see Note 1 “Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements.”

Executive Overview of Recent Financial Performance

To date, we have originated loans in all 50 states and certain U.S. territories, primarily across five established industry verticals, which include veterinary practices, healthcare services, independently owned pharmacies, death care management, and investment advisors. In 2013, we added family entertainment centers as a vertical, followed by agriculture, with an initial focus on poultry farming, in 2014. We strive to achieve expertise not only in SBA lending, but also within the specific industries in which our customers operate. Our commitment to serving the banking needs of small business clients, the use of an integrated technology platform, and our level of

 

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servicing has contributed to growth in annual loan production since commencing operations. For the government’s 2013 fiscal year, or the four quarters ending September 30, 2013, we were the third most active SBA 7(a) lender in the United States by gross approval amount, behind Wells Fargo Bank and U.S. Bank. Since inception, we have extended over $1.8 billion of loans to small businesses in the United States.

Through our industry expertise, speed-to-market, and a highly focused level of customer service, we have achieved approximately a 25% CAGR in loan production since inception. The growth in production has been due to the growth in established industry verticals and the establishment of new industry verticals. The following table summarizes the annual production of the Bank by industry vertical since our inception:

 

    Years Ended December 31,        
    2007     2008     2009     2010     2011     2012     2013     Total  
    (dollars in thousands)  

Veterinary Practices

  $ 40,226      $ 161,230      $ 145,920      $ 150,788      $ 149,485      $ 174,768      $ 147,661      $ 970,078   

Healthcare Services

           150        13,385        56,580        69,860        81,363        109,317        330,655   

Independent Pharmacies

                         48,919        86,757        103,358        106,391        345,425   

Death Care Management

                                       54,075        101,736        155,811   

Investment Advisors

                                              33,647        33,647   

Other

    775        1,209        1,275        30        535        199               4,023   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 41,001      $ 162,589      $ 160,580      $ 256,317      $ 306,637      $ 413,763      $ 498,752      $ 1,839,639   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit quality and on-going credit administration are the foundation of our franchise. The composition of the $1.8 billion in loans originated from inception through December 31, 2013 is reflected below to highlight the portion of loans sold versus the portion of loans retained, as well as the credit quality of those originated loans:

 

     Guaranteed      Unguaranteed         
     (dollars in thousands)         
     Dollars      % of
Total
     Dollars      % of
Total
     Total  

Originated loans since inception

   $ 1,388,405         75.47       $ 451,234         24.53       $ 1,839,639   

Sold loans since inception

     1,224,747         90.50         128,517         9.50         1,353,264   

Unfunded commitments at 12/31/13

     74,193         72.96         27,491         27.04         101,685   

Charge-offs since inception

                     7,383         100         7,383   

Lost SBA guarantees

                                       

Composition of loans at December 31,2013:

              

Total loans held for sale

     74,035         46.57         84,927         53.43         158,963   

Total loans held for investment

     12,418         8.74         129,688         91.26         142,106   

Impaired nonaccrual loans

     6,983         80.29         1,714         19.71         8,697   

Impaired accrual loans

     2,857         47.67         3,136         52.33         5,993   

Potential problem loans(1)

   $ 2,578         15.48       $ 14,081         84.52       $ 16,659   

 

(1) Potential problem loans are defined as currently unimpaired loans that management has identified as having possible credit problems that may cause the borrowers difficulty in complying with current repayment terms.

The vertical approach we employ allows us to immerse ourselves in an industry, enabling clarity on both the business and the borrower, which we believe augments our small business lending ability and the credit quality of our originated loan portfolio. Concentration factors are consistently managed across the portfolio. The Bank closely monitors geographic concentration, industry concentration, and concentrations by customer (loan amount), among other factors. Furthermore, we believe the Bank’s national lending footprint mitigates the risk of concentrated economic events.

 

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Results of Operations

Performance Summary

2013 vs. 2012

For the year ended December 31, 2013, we reported net income attributable to the Company of $28.1 million, an increase of $12.0 million, or 74.4%, compared to net income of $16.1 million for the year ended December 31, 2012. The increase resulted primarily from the recognition of a one-time gain in January 2013 in connection with the deconsolidation of our previously consolidated subsidiary, nCino in the amount of $12.2 million. Offsetting this one-time gain were losses recognized for equity method investments of $2.8 million, principally related to allocated losses from nCino subsequent to deconsolidation. For the year ended December 31, 2013, revenue generated from our core banking operations of net interest income and gain on sale of loans increased $2.7 million and $4.7 million, respectively, compared to the corresponding amounts for the year ended December 31, 2012. The net gain on sale of loans was positively impacted by an increase in the volume of guaranteed loans sold of $62.7 million, and negatively impacted by a reduction in the revenue recognized for each loan sold as the premium market for guaranteed 7(a) loans compressed from an average $121.3 thousand per million for fiscal year 2012 to an average of $113.1 thousand per million for fiscal year 2013, due to changes in market rates. For the same period, servicing revenue and revaluation of servicing rights decreased $420 thousand as the result of amortization of the serviced portfolio, changes in prepayment speeds, and prevailing market conditions. As the current market improves or deteriorates, the value of the existing servicing asset responds accordingly. Noninterest expense increased $6.5 million, or 19.3%, compared to the year ended December 31, 2012, primarily as the result of increasing personnel and infrastructure to support growth in the loan portfolio. For the year ended December 31, 2013, the allowance for loan loss provision expense decreased $3.0 million, or 140.7%, compared to the year ended December 31, 2012, due to improving credit quality.

2012 vs. 2011

For the year ended December 31, 2012, we reported net income attributable to the Company of $16.1 million, an increase of $1.8 million, or 12.5%, compared to net income of $14.3 million for the year ended December 31, 2011. For the year ended December 31, 2012, revenue generated from our core banking operations of net interest income and gain on sale of loans increased $2.1 million and $10.9 million, respectively, compared to the corresponding amounts for the year ended December 31, 2012. The net gain on sale of loans in fiscal year 2012 was positively impacted by an increase in the volume of loans sold of $38.2 million and further enhanced by an increase in the revenue recognized for each loan sold as the premium market for guaranteed 7(a) loans improved from an average $91.9 thousand per million for fiscal 2011 to an average of $121.3 thousand per million for fiscal year 2012. For the same period, servicing revenue and revaluation of servicing rights decreased $1.2 million compared to the year ended December 31, 2011, primarily as the result of the revaluation of our servicing asset having less of a positive impact in fiscal year 2012 compared to fiscal 2011. The value of the servicing asset is driven by amortization of the serviced portfolio, changes in prepayment speeds, and prevailing market conditions. Noninterest expense for the year ended December 31, 2012 increased $12.7 million, or 60.6%, compared to the year ended December 31, 2011, primarily as the result of growth in year over year loan production and infrastructure to support the growing loan portfolio. The majority of the increase was a $7.3 million change in salaries and benefits due to increased staffing at both Live Oak Bank and nCino, as well as a result of a change to the incentive compensation plan at the Bank in fiscal year 2012. There were also significant increases in data processing costs of $1.1 million as the Bank implemented and modified new technology to optimize workflow associated with the lending process. For the year ended December 31, 2012, provision expense decreased $745 thousand compared to the year ended December 31, 2011, due to improving credit quality and the application of bank specific loss rates for loans in the veterinary vertical, our largest and most mature loan segment, as a factor for the calculation.

 

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Net Interest Income and Margin

Net interest income, a secondary contributor to our earnings, represents the difference between the income that we earn on our interest-earning assets and the cost to us of our interest-bearing liabilities. Our net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that we earn or pay on them. 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.”

2013 vs. 2012

For the year ended December 31, 2013, net interest income increased $2.7 million, or 33.1%, to $10.8 million compared to the year ended December 31, 2012. This increase was due to growth in average interest earning assets combined with higher asset yields and a relatively stable cost of funds. Average interest earning assets increased by $80.3 million, or 28.1%, from fiscal year 2012 to 2013, while the related yield on average interest earning assets increased by 8 basis points to 4.18%, or an equivalent of $3.6 million. As a strategic initiative to develop market share as a de novo bank, loans were offered at highly competitive market rates in the development phase of our business. As the business evolved, management began pricing loans commensurate with premium market rates and the unique added value that accompanies each loan from our business advisory group, or BAG. The BAG was formed in 2010 to enhance the borrower experience by focusing specifically on the needs of our borrowers within each vertical. The BAG provides complementary advisory service to customers, such as receivables and inventory review, in conjunction with periodic financial health reviews which deepen existing relationships. While the corresponding cost of funds on interest bearing liabilities for fiscal year 2013 declined slightly by 4 basis points to 1.25%, the average balance in interest bearing liabilities increased by $80.1 million or 28.4%. As indicated in the below rate volume table, the slight drop in the cost of funds was outpaced by the effects of the increased volumes of interest bearing liabilities resulting in increased interest expense for fiscal year 2013 of $893 thousand. The primary mitigant to rising cost of funds was growth in money market funds in conjunction with lowering of money market rates by 13 basis points during fiscal year 2013. For the year ended December 31, 2013 compared to the year ended December 31, 2012, our net interest margin increased from 2.83% to 2.95% due to the aforementioned affects. As a bank without a branch network, we gather deposits over the Internet and in the community in which the Company is headquartered. Due to the unique nature of a branchless bank and low overhead required for deposit gathering, the rates we are able to offer are above the industry average. The Bank began, on a limited basis, publicly promoting its deposit products in fiscal year 2012, which accounts for the increase in interest bearing liabilities.

2012 vs. 2011

For the year ended December 31, 2012, net interest income increased $2.1 million, or 34.8%, to $8.1 million compared to the year ended December 31, 2011. Our net interest income increase was due to growth in average interest earning assets, stable asset yields, and a slight reduction in the cost of funds. Average interest earning assets increased by 33.6%, or $71.9 million from fiscal 2011 to fiscal year 2012, while the related yield on average interest earning assets increased by 1 basis point to 4.10%, or an equivalent of $3.0 million. The Bank significantly increased its use of money market deposit accounts in 2012 as it moved to a more traditional funding source. While the corresponding cost of funds on interest bearing liabilities for fiscal year 2012 declined slightly by 2 basis points to 1.29%, the average balance in interest bearing liabilities increased by $73.5 million, or 35.2%. As indicated in the below rate volume table, the slight drop in the cost of funds was outpaced by the effects of the increased volume of interest bearing liabilities resulting in increased interest expense for fiscal year 2012 of $891 thousand. Deposit rates decreased 12 basis points in fiscal year 2012; however, this reduction was largely offset by the issuance of additional long term debt in fiscal year 2012 at a rate higher than the deposit base. Other long term debt included $6.8 million obtained via the Small Business Lending Fund, or SBLF, and $3.6 million of Senior Notes issued by the Company. Overall, our net interest margin increased slightly to 2.83% in 2012 from 2.81% in 2011 due to the aforementioned affects.

 

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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 amounts 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. Loan fees are included in interest income on loans.

 

    For the Year Ended December 31,  
    2013     2012     2011  
    Average
Balance
    Interest     Average
Yield/
Rate
    Average
Balance
    Interest     Average
Yield/
Rate
    Average
Balance
    Interest     Average
Yield/
Rate
 
    (dollars in thousands)  

Interest earning assets:

                 

Interest earning balances in other banks

  $ 58,319      $ 126        0.22   $ 42,259      $ 80        0.19   $ 30,918      $ 67        0.22

Investment securities

    17,543        391        2.23        15,726        467        2.97        11,676        415        3.55   

Loans

    287,100        14,481        5.04        227,770        11,178        4.91        171,245        8,262        4.82   

Subsidiary note receivable

    3,039        304        10.00                      0.00                      0.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest earning assets

    366,001        15,302        4.18        285,755        11,725        4.10        213,839        8,744        4.09   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Allowance for loan losses

    (5,146         (5,279         (4,283    

Non-interest earning assets

    68,779            41,013            39,223       
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 429,634          $ 321,489          $ 248,779       
 

 

 

       

 

 

       

 

 

     

Interest bearing liabilities:

                 

Savings

  $      $        0.00   $ 275      $ 3        1.09   $ 2,766      $ 9        0.33

Money market accounts

    186,265        2,401        1.29        107,513        1,530        1.42        20,541        295        1.44   

Certificates of deposit

    163,686        1,546        0.94        161,826        1,442        0.89        181,418        2,203        1.21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Deposits

    349,951        3,947        1.13        269,614        2,975        1.10        204,725        2,507        1.22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Small business lending fund

    6,800        102        1.50        6,800        102        1.50        2,040        31        1.52   

Notes payable to investors

    3,623        362        9.99        3,623        362        9.99                      0.00   

Other borrowings

    1,826        110        6.02        2,044        189        9.25        1,806        199        11.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

    362,200        4,521        1.25        282,081        3,628        1.29        208,571        2,737        1.31   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest bearing deposits

    15,732            5,265                  

Non-interest bearing liabilities

    4,350            2,775            16,988       

Redeemable equity

    2,681            216             

Shareholders’ equity

    44,671            31,799            23,220       

Noncontrolling interest

               (647               
 

 

 

       

 

 

       

 

 

     

Total liabilities and shareholders’ equity

  $ 429,634          $ 321,489          $ 248,779       
 

 

 

       

 

 

       

 

 

     

Net interest income and interest rate spread

    $ 10,781        2.93     $ 8,097        2.82     $ 6,007        2.78
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Net interest margin

        2.95            2.83            2.81   
     

 

 

       

 

 

       

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

        101.05         101.30         102.53
     

 

 

       

 

 

       

 

 

 

 

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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by current volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes 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.

 

     For the Year Ended December 31,  
     2013     2012  
     Increase (Decrease) Due to     Increase (Decrease) Due to  
     Rate     Volume     Total     Rate     Volume     Total  
     (Dollars in thousands)  

Interest income:

            

Interest earning balances in other banks

   $ 13      $ 33      $ 46      $ (10   $ 23      $ 13   

Investment securities

     (123     47        (76     (80     132        52   

Loans

     351        2,952        3,303        165        2,751        2,916   

Subsidiary note receivable

     152        152        304                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     393        3,184        3,577        75        2,906        2,981   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Savings

     (1     (2     (3     12        (18     (6

Money market accounts

     (197     1,068        871        (8     1,243        1,235   

Certificates of deposit

     87        17        104        (555     (206     (761

Small business lending fund

                          (1     72        71   

Notes payable to investors

                          181        181        362   

Other borrowings

     (62     (17     (79     (34     24        (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest bearing liabilities

     (173     1,066        893        (405     1,296        891   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 566      $ 2,118      $ 2,684      $ 480      $ 1,610      $ 2,090   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for Loan Losses. The provision for loan losses represents our derivation of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that is adequate in relation to the estimated losses inherent in the loan portfolio. We consider a number of factors in determining the required level of our loan reserves and the provision required to achieve the appropriate reserve level, including loan growth, credit risk rating trends, nonperforming loan levels, delinquencies, loan portfolio concentrations and economic and market trends.

Losses inherent in loan relationships are mitigated by the portion of the loan that is guaranteed by the U.S. government. A typical SBA 7(a) loan carries a 75% guarantee, which greatly reduces the risk profile of the loan portfolio. Our focus on compliance with regulations and guidance from the SBA is paramount to our continued success within this space. As shown in the paragraphs below, we believe that the risk associated with our portfolio should be assessed with greater emphasis placed on the unguaranteed exposure.

2013 vs. 2012. For the year ended December 31, 2013, the provision for loan losses was recorded as a recovery of $858 thousand, a decrease of $3.0 million, or 140.7%, compared to the same period in 2012. The lower provision for loan losses in 2013 was the result of improving credit quality. Evidence of the improving credit quality is reflected principally in the stabilization of net loan charge-offs for 2013. Net loan charge-offs were $1.89 million for the fiscal year ended December 31, 2013, compared to $1.86 million for fiscal year 2012, equating to 0.66% and 0.82% of average loans held for investment for the same respective periods. In addition, at December 31, 2013, nonperforming loans not guaranteed by the U.S. government totaled $1.7 million, which was 1.2% of our held for investment loan portfolio compared to $3.5 million, or 3.8%, of loans held for investment at December 31, 2012. Both the stabilization of charge off experience, a significant increase in the loans held for

 

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investment portfolio and a drop in nonperforming loans not guaranteed by the U.S. government contributed to a lower provision in fiscal year 2013.

2012 vs. 2011

For the year ended December 31, 2012, the provision for loan losses was $2.1 million, a decrease of $745 thousand, or 26.1%, from the 2011 provision. The decrease in the provision for loan losses in fiscal year 2012 was primarily due to a decline in loss experience combined with an increase in loans held for investment. Net charge-offs as a percentage of average loans held for sale for fiscal year 2012 and 2013 was 0.82% and 1.54%, respectively. The lower provision expense in fiscal year 2012 was also affected by an initial migration from industry to actual loss rates in the veterinary vertical, the Banks most mature industry emphasis.

Noninterest Income. The following table shows the components of noninterest income and the dollar and percentage changes for the years ended December 31, 2013, 2012 and 2011.

 

    Years Ended December 31     2012/2013 Increase     2011/2012 Increase  
    2013     2012     2011     Amount     Percent     Amount     Percent  
    (dollars in thousands)  

Noninterest income excluding nCino, LLC

             

Loan servicing revenue

  $ 10,272      $ 8,310      $ 6,909      $ 1,962        23.6   $ 1,401        20.3

Loan servicing revaluation

    (2,346     36        2,603        (2,382     (6,616.7     (2,567     -98.6   

Net gains on sales of loans

    38,225        33,535        22,612        4,690        14.0        10,923        48.3   

Gain on deconsolidation of subsidiary

    12,212                      12,212         

Equity in income (loss) of non-consolidated affiliates

    (2,756                   (2,756      

Gain on sale of securities available for sale

    11                      11         

Other noninterest income

    684        57        3        627        1,100.0        54        1,800.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

  $ 56,302        41,938        32,127        14,364        34.3     9,811        30.5

Noninterest income nCino, LLC

             

Software professional services

  $ 103        234               (131     -56.0     234       

Software subscription fee

    56        297               (241     -81.1        297          

Sales of support contracts

    6        11               (5     -45.5        11          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    165        542               (377     -69.6     542     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

  $ 56,467        42,480        32,127        13,987        32.9     10,353        32.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

2013 vs. 2012

For the year ended December 31, 2013, noninterest income increased by $14.0 million, or 32.9%, compared to the year ended December 31, 2012. Increases in loan production, the core component of our business, as well as the volume of loans sold in the 7(a) secondary market, contributed $6.7 million to noninterest income growth, including $2 million of increased servicing revenue and $4.7 million of increased gains on sale of loans.

For the year ended December 31, 2013, net gains on sales of loans increased $4.7 million, or 14.0%, compared to the year ended December 31, 2012. The increase was primarily due to an increase in the volume of guaranteed loans sold by $62.6 million, or 22.6%, from $276.7 million for the year ended December 31, 2012 to $339.3 million for the year ended December 31, 2013. The increase was partially offset by a decrease in the volume of loans sold in the premium market from an average of $121.8 thousand per $1 million for the year ended December 31, 2012 to an average of $113.5 thousand per $1.0 million sold for the year ended December 31, 2013. We believe the decrease in 2013 represented a return to premiums more in line with historical trends after an overcorrection of the 7(a) premium market following the economic downturn that began in late 2007.

 

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For the year ended December 31, 2013, loan servicing revenue increased $2.0 million, or 23.6%, compared to the year ended December 31, 2012, as a result of an increase in the average outstanding balance of guaranteed loans sold due to an increase in the volume of loans sold throughout the year. At year end December 31, 2013, the outstanding balance of loans sold in the 7(a) secondary market was $1 billion, with a weighted average servicing rate of 1.16%. For the year ended December 31, 2012, the outstanding balance of loans sold was $767.7 million, with a weighted average servicing rate of 1.24%. Prior to January 2010, we sold loans for servicing in excess of 1.0%. As loans sold prior to fiscal 2010 amortize, the weighted average servicing rate should approach and stabilize at 1.0%.

For the year ended December 31, 2013, the loan servicing revaluation revenue decreased $2.4 million, or 6,616.7%, compared to the year ended December 31, 2012. Servicing rights retained are revalued quarterly and consider the amortization of the portfolio, current market conditions for premium loan sales, and current prepayment speeds. Loans sold prior to 2010 resulted in a larger servicing asset component per loan sale as a function of the servicing retained in excess of 1.0%. Accordingly, the amortization of servicing rights retained from periods prior to fiscal 2011results in significant decreases in the servicing asset value in subsequent periods. Additionally, the progression into a higher interest rate environment results in a higher prepayment speed, as our loans are primarily variable rate loans adjusting quarterly, which, therefore, reduces the servicing asset value.

We deconsolidated our partially owned subsidiary, nCino, effective January 31, 2013. The deconsolidation resulted in a one-time gain of $12.2 million by marking our investment to fair value at the January 2013 market value. Subsequent to deconsolidation, the investment in nCino was accounted for under the equity method.

For the year ended December 31, 2013, we had two equity method investments: nCino, and 504 Fund Advisors, LLC, or 504 Fund Advisors, which total $11.5 million. Losses attributable to these entities for the year ended December 31, 2013 totaled $2.8 million. nCino will be spun off as part of this public offering. For the year ended December 31, 2013, noninterest income related to nCino was $165 thousand, or $377 thousand less than the amount recognized for the year ended December 31, 2012, primarily due to fiscal year 2013 reflecting only one month of operations prior to deconsolidation on January 28, 2013.

2012 vs. 2011

For the year ended December 31, 2012, noninterest income increased by $10.4 million, or 32.2%, compared to the year ended December 31, 2011. Increases in loan production and the volume of loans sold in the 7(a) secondary market resulted in noninterest income growth of $12.3 million, including increased gains on the sale of loans of $10.9 million and increased servicing revenue of $1.4 million.

For the year ended December 31, 2012, net gains on sales of loans increased $10.9 million, or 48.3%, compared to the year ended December 31, 2011. The increase was primarily due to the volume of guaranteed sold loans increasing $38.3 million, or 16.0%, from $238.4 million sold in fiscal year 2011 to $276.7 million sold in fiscal year 2012. The revenue increase was further enhanced by the increase in the volume of loans sold in the premium market from an average of $91.9 thousand per $1.0 million sold in the year ended December 31, 2011, to an average of $121.3 thousand per $1.0 million sold for the year ended December 31, 2012.

For the year ended December 31, 2012, loan servicing revenue increased $1.4 million, or 20.3%, compared to the year ended December 31, 2011, as a result of an increase in the average outstanding balance of guaranteed loans sold due to an increase in the volume of loans sold. At year end December 31, 2012, the outstanding balance of loans sold in the 7(a) secondary market was $767.7 million with a weighted average servicing rate of 1.24%. For the year ended December 31, 2011, the outstanding balance of loans sold was $550.6 million with a weighted average serving of 1.39%. Prior to January 2010, we sold loans for servicing in excess of 1.0%. As loans sold prior to fiscal 2010 amortize, the weighted average servicing rate should approach and stabilize at 1.0%.

 

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For the year ended December 31, 2012, the loan servicing revaluation revenue was reduced by $2.6 million, or 98.6%, compared to the year ended December 31, 2011. The negative valuation adjustment to the servicing asset from fiscal 2011 to 2012 was driven principally by asset amortization and, to a lesser extent, by changes in anticipated prepayment speeds derived from market conditions at that time, partially offset by an increase in noninterest income contributed to by nCino. nCino was founded by the Company in January 2012. Total noninterest income for fiscal year 2012 related to nCino amounted to $1.1 million.

Noninterest Expense. The following table shows the components of noninterest expense and the related dollar and percentage changes for the years ended December 31, 2013, 2012 and 2011.

 

    Years Ended December 31     2012/2013
Increase (Decrease)
    2011/2012
Increase (Decrease)
 
    2013     2012     2011     Amount     Percent     Amount     Percent  
    (dollars in thousands)                          

Noninterest expense — excluding nCino, Inc.:

             

Salaries and employee benefits

  $ 20,417      $ 15,757      $ 10,633      $ 4,660        29.57   $ 5,124        48.19

Non staff expenses:

             

Travel expense

    4,442        2,825        2,558        1,617        57.24        267        10.44   

Professional services expense

    2,181        1,812        1,206        369        20.36        606        50.25   

Advertising and Marketing expense

    2,305        1,975        2,279        330        16.71        (304     -13.34   

Occupancy expense

    1,676        666        638        1,010        151.65        28        4.39   

Data processing expense

    1,748        1,405        284        343        24.41        1,121        394.72   

Equipment expense

    1,042        707        201        335        47.38        506        251.74   

Other expense

    5,881        4,133        3,168        1,748        42.29        965        30.46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-staff expenses excluding nCino, Inc.

    19,275        13,523        10,334        5,752        42.53        3,189        36.38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense excluding nCino, Inc.

    39,692        29,280        20,967        10,412        35.56        8,313        39.65   

Noninterest expense — nCino, Inc.:

             

Salaries and employee benefits

    349        2,211               (1,862     -84.22        2,211        0.00   

Travel expense

    16        290               (274     -94.48        290        0.00   

Professional services expense

    56        768               (712     -94.75        768        0.00   

Advertising and Marketing expense

    11        206               (195     -94.66        206        0.00   

Occupancy expense

    2        13               (11     -84.62        13        0.00   

Data processing expense

    1        15               (14     -94.44        15        0.00   

Equipment expense

           31               (31     -100.00        31        0.00   

Other expense

    37        855               (818     -93.31        855        0.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense of nCino, LLC

    472        4,389               (3,917     -89.25        4,389        0.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

  $ 40,164      $ 33,669      $ 20,967      $ 6,495        19.29   $ 12,702        60.58
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2013 vs. 2012

For the year ended December 31, 2013, we recognized $40.2 million in total noninterest expense, an increase of $6.5 million, or 19.3%, compared to the year ended December 31, 2012. Excluding nCino, total noninterest expense increased by $10.4 million, or 35.6%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The primary drivers of this increase are discussed below:

Salaries and employee benefits: For the year ended December 31, 2013, total personnel expense increased $2.8 million, or 15.6%, compared to the year ended December 31, 2012. Excluding nCino, personnel expense

 

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increased by $4.7 million, or 29.6%, from the year ended December 31, 2012 to $20.4 million for the year ended December 31, 2013 and represented 51.4% of our total noninterest expense for the year ended December 31, 2013. This increase primarily resulted from an increase in our full-time equivalent employees from 94 at December 31, 2012 to 141 at December 31, 2013 to support our loan production, balance sheet, and income growth. Salaries and benefits expense for nCino declined from fiscal year 2012 to 2013 by $1.9 million, or 84.2%, compared to the year ended December 31, 2012, due to the deconsolidation of this investment in January of 2013.

Travel expense: For the year ended December 31, 2013, total travel costs increased by $1.3 million, or 43.1%, compared to the year ended December 31, 2012. Travel costs are a crucial element of our national footprint since we do not maintain brick and mortar locations. The increase in travel related expenses is the result of growing loan production 20.5% from $413.8 million for the year ended December 31, 2012 to $498.8 million for the year ended December 31, 2013. Travel costs also increased due to our relationship management via our BAG, one of our primary differentiators, as a result of servicing a $1.4 billion loan portfolio as of December 31, 2013 compared to a $1.1 billion loan portfolio as of December 31, 2012. Travel expense, excluding nCino, was $4.4 million for fiscal year 2013 and represented 11.2% of total noninterest expense. Exclusive of nCino, travel expense increased $1.6 million, or 57.2%, from 2012 to 2013.

Professional service expense: For the year ended December 31, 2013, the total cost of professional services decreased by $343 thousand, or 13.3%, compared to the year ended December 31, 2012. The primary basis for this decline in expenses is due to fees paid by nCino in the development of its technology products. Professional service expense related solely to nCino declined by $712 thousand from fiscal year 2012 to 2013 as a result of the deconsolidation in January of 2013.

2012 vs. 2011

For the year ended December 31, 2012, we recognized $33.7 million in total noninterest expense, an increase of $12.7 million, or 60.6%, compared to the year ended December 31, 2011. Excluding nCino, total noninterest expense for the year ended December 31, 2012 increased by $8.3 million, or 36.7%, compared to the year ended December 31, 2011. The primary drivers of this increase are discussed below:

Salaries and employee benefits: For the year ended December 31, 2012, total salaries and benefits expense increased $7.3 million, or 69.0%, compared to the year ended December 31, 2011. The primary cause of this increase was an increase in our full-time equivalent employees from 62 at December 31, 2011, to 94 at December 31, 2012, to support increased annual loan production and our balance sheet and revenue generation growth. Excluding nCino, salaries and benefits expense for the year ended December 31, 2012 was $15.8 million and represented 53.8% of our total noninterest expense, an increase of $5.1 million, or 48.2%, from the year ended December 31, 2011. In fiscal year 2012, nCino’s salaries and benefits expense was $2.2 million.

Travel expense: For the year ended December 31, 2012, total travel costs increased by $557 thousand, or 21.8%, compared to the year ended December 31, 2011. Excluding nCino, travel costs are the second largest noninterest expense category following personnel. For the year ended December 31, 2012, travel expense was $2.8 million and represented 9.6% of total noninterest expense. Excluding nCino, this category increased $267 thousand, or 10.4% compared to fiscal 2011. The increase in travel related expenses is the result of a 34.9% growth in loan production from $306.6 million in fiscal 2011 to $413.8 million in fiscal year 2012. Travel related costs associated with BAG, one of our primary differentiators, increased as the result of managing a $1.1 billion loan portfolio at December 31, 2012, versus an $802.7 million loan portfolio at December 31, 2011.

Professional service expense: For the year ended December 31, 2012, the total cost of professional services increased by $1.4 million, or 113.9%, from the year ended December 31, 2011. The primary basis for the increase in this expense category is due to nCino’s use of professional service providers. Professional service expense attributable to nCino increased by $768 thousand from fiscal 2011 to 2012 as a result of the formation of the subsidiary in fiscal year 2012.

 

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Discussion and Analysis of Financial Condition

We believe there is an exceptional opportunity in lending to small businesses nationwide. By focusing on credit quality in verticals where we have a deep understanding, the Bank has the ability to fill a specific market niche. We believe that the niche focus combined with a national presence promotes the origination of high-quality loans. We have never sought to grow for the sake of growth. Rather, we strive to establish ourselves as the preferred lender to, and partner of, small business professionals in our chosen industries. As a result, we have provided financing totaling $1.8 billion since inception to fulfill the needs of new and existing business across the U.S.

While our lending activity totaled $498.8 million in fiscal year 2013, we were able to maximize annual return on capital and assets by selling portions of our loans for a premium. As a result, our total assets increased only $87.9 million, or 25.7%, to $430.4 million at December 31, 2013, from $342.5 million at December 31, 2012, primarily due to growth in our combined held for investment and held for sale loan portfolios of $62.9 million. Our total assets increased $76.3 million, or 28.7%, to $342.5 million at December 31, 2012, as compared to $266.2 million at December 31, 2011, primarily due to growth of $40.3 million in our combined held for investment and held for sale loan portfolios.

Loans. As of December 31, 2013, 2012, and 2011, the outstanding principal balance of loans sold since inception totaled $1.4 billion, $1.1 billion, and $802.7 million, respectively. A significant portion of our loans are subsequently sold in the 7(a) secondary market while we continue to service the loan in full. As of December 31, 2013, 2012 and 2011, combined loans held for investment and held for sale totaled $300.8 million, $237.9 million, and $197.6 million, respectively. Any loan or portion of a loan that we have the intent and ability to sell is carried as held for sale. As a result, as of December 31, 2013, 2012, and 2011, loans held for investment totaled $141.3 million, $92.7 million, and $85.7 million. The significant increase in loans held for investment as December 31, 2013 compared to December 31, 2012 is the result of a change in the classification of loans held for investment. In fiscal year 2012, we were granted permission by the SBA to sell an additional 5.0% of the unguaranteed balance on loans originated prior to June 30, 2012, resulting in a reclassification of $35.1 million of loans from held for investment to held for sale during that year. Traditionally, the SBA requires the originating lender to retain 10% of the outstanding loan balance comprised of unguaranteed dollars. Only with permission may an SBA lender sell down to a 5% retained unguaranteed balance. The following table presents the balance and associated percentage of each category of loans held for investment within our loan portfolio at the three most recently completed fiscal year ends.

 

     December 31  
     2013     2012     2011  
     Total
Loans
     % of Loans
in Category
of Total
Loans
    Total
Loans
     % of Loans
in Category
of Total
Loans
    Total
Loans
     % of Loans
in Category
of Total
Loans
 
     (dollars in thousands)  

Commercial & Industrial

   $ 57,359         40.36   $ 34,200         36.66   $ 33,798         39.07

Death Care Management

     1,782         1.25        283         0.30                0.00   

Healthcare

     8,739         6.15        4,996         5.36        7,005         8.10   

Independent Pharmacies

     24,026         16.91        12,192         13.07        10,963         12.67   

Investment Advisors

     2,817         1.98                0.00                0.00   

Veterinary Industry

     19,978         14.06        15,719         16.85        15,809         18.28   

Other

     17         0.01        1,010         1.08        21         0.02   

Construction & Development

     10,286         7.24        8,503         9.12        1,989         2.30   

Death Care Management

     989         0.70        315         0.34                0.00   

Healthcare

     4,997         3.52        3,136