Live Oak Bancshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Live Oak is a bank holding company focused on small-business lending and deposits, including SBA- and USDA-guaranteed lending, with a fintech investment and advisory business. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and position
| Metric | Q1 2022 / Mar. 31, 2022 | Comparable period / Dec. 31, 2021 |
|---|---|---|
| Net interest income | $77.8 million | $70.0 million in Q1 2021 |
| Net interest margin | 4.02% | 3.81% in Q1 2021 |
| Net income | $34.5 million; diluted EPS $0.76 | $39.4 million; diluted EPS $0.88 in Q1 2021 |
| Provision for credit losses | $1.8 million expense | $0.9 million recovery in Q1 2021 |
| Total assets | $8.62 billion | $8.21 billion at Dec. 31, 2021 |
| Loans held for investment | $5.74 billion | $5.52 billion at Dec. 31, 2021 |
| Total deposits | $7.64 billion | $7.11 billion at Dec. 31, 2021 |
| Borrowings | $196.9 million | $318.3 million at Dec. 31, 2021 |
| Shareholders’ equity | $713.3 million | $715.1 million at Dec. 31, 2021 |
| Cash and cash equivalents | $507.8 million | $203.8 million at Dec. 31, 2021 |
Net interest income and noninterest income were $77.8 million and $32.7 million, respectively. Noninterest expense was $65.7 million and income tax expense was $8.4 million. The filing does not present a single total-revenue figure as a headline metric.
Net cash provided by operating activities was $156.4 million, investing activities used $253.2 million, and financing activities provided $400.8 million. The resulting increase in cash and cash equivalents was $304.0 million. The company reported $3.88 billion of immediately available liquidity, equal to 45.0% of assets.
At March 31, 2022, consolidated regulatory capital ratios included CET1 of 12.10%, total capital of 13.17%, and Tier 1 leverage of 8.87%. The Bank’s ratios were above the stated “well-capitalized” thresholds.
Material changes versus the prior comparable period
- Net income declined 12.5% year over year. Higher net interest income (+11.2%) and loan-sale gains (+75.8%) were outweighed by higher expenses, provision expense versus a prior-year recovery, weaker servicing-asset revaluation, lower fair-value loan gains, and higher tax expense.
- Net gains on loan sales rose to $21.0 million from $11.9 million; guaranteed loan sales increased to $219.7 million from $136.7 million. Loan originations were $865.1 million, down from $1.18 billion in Q1 2021.
- Noninterest expense increased 12.8% to $65.7 million, notably reflecting salaries and benefits up $7.1 million and technology expense up $1.2 million. Headcount rose to 842 from 651 year over year.
- Available-for-sale securities fell to $844.6 million from $906.1 million at year-end. Unrealized losses produced a $38.5 million after-tax other comprehensive loss, taking accumulated other comprehensive loss to $36.5 million and reducing reported equity despite quarterly net income.
- Deposits grew $525.1 million from year-end, while borrowings fell $121.4 million, mainly as Paycheck Protection Program Liquidity Facility borrowings were repaid. Loans held for investment grew 3.9% from year-end; excluding PPP loans, they grew 6.6%.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no formal earnings or growth guidance. Management described continued loan growth and improving economic conditions, while noting that Q1 results are not necessarily indicative of full-year results. The company expected to recognize most remaining PPP deferred fees, $2.7 million, during 2022.
- Rates: Management characterized the balance sheet as asset-sensitive. Its model estimated that a 100-basis-point rate increase would raise net interest income by 2.0% over the 12 months ending March 31, 2023, while a 100-basis-point decrease would lower it by 5.2%. The model also showed a decline in economic value of equity in rising-rate scenarios; estimates depend on assumptions and a static balance sheet.
- Credit: The allowance for credit losses was $63.1 million, or 1.23% of loans held for investment. Nonperforming loans and leases excluding loans measured at fair value were $52.3 million, up from $42.5 million at year-end; total nonperforming assets and troubled debt restructurings on that basis were $93.8 million. Criticized and classified loans increased to $412.4 million from $372.7 million. Management cited continued improvement in economic forecasts but warned future deterioration could require material reserve additions.
- Portfolio and market risks: Key risks include borrower deterioration, interest-rate and securities-market movements, SBA/USDA program or regulatory changes, loan-sale market conditions, servicing-asset valuation, technology and cybersecurity, competition, and ongoing economic uncertainty. Management said COVID-19 impacts had eased, but continued to monitor previously vulnerable industry verticals.
- Subsequent event: On April 1, 2022, Fiserv acquired the company’s Finxact investment. Live Oak received $125.3 million initial cash proceeds; the transaction generated an estimated $120.5 million pretax gain expected to be recorded in Q2 2022.
- Contingency: A proposed settlement of an employee antitrust class action calls for a $3.9 million payment. The court granted final approval on April 28, 2022; the company expected the settlement to become effective by June 30, 2022.
- Other: Unfunded credit commitments were $3.01 billion. The company had stopped originating LIBOR-based variable-rate loans at year-end 2021 and expected outstanding contracts to transition by Q2 2023 or at a later 2023 repricing date. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit growth and loan originations continue to support net interest income as funding costs and interest rates change.
- Trends in criticized loans, nonperforming assets, net charge-offs, and allowance adequacy, especially in identified higher-risk industry verticals.
- The impact of unrealized securities losses on equity and liquidity, and the sensitivity of servicing-asset values to prepayments and rates.
- Whether the Finxact sale gain is recognized as expected in Q2 2022, and how proceeds are used.
- The timing and final cost of the $3.9 million settlement and any material developments in litigation or off-balance-sheet commitments.