Live Oak Bancshares, Inc. — Q2 2022 Form 10-Q
Business context and period. Live Oak is a North Carolina bank holding company focused on nationwide small-business lending and deposits, with a separate fintech investment and advisory segment. This unaudited filing covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $79.9 million | $71.5 million | $157.7 million | $141.4 million |
| Net interest margin | 3.89% | 3.63% | 3.95% | 3.72% |
| Noninterest income | $128.5 million | $70.1 million | $161.2 million | $101.2 million |
| Provision for loan and lease losses | $5.3 million | $7.8 million | $7.1 million | $7.0 million |
| Noninterest expense | $80.9 million | $57.6 million | $146.6 million | $115.8 million |
| Net income | $97.0 million | $63.6 million | $131.5 million | $103.0 million |
| Diluted earnings per share | $2.16 | $1.41 | $2.92 | $2.29 |
- Q2 total interest income was $99.2 million and interest expense was $19.3 million. Net interest income grew 11.9% year over year; management attributed the increase to loan portfolio growth and higher yields, partly offset by higher funding costs.
- Total assets were $9.12 billion, up 11.0% from year-end 2021. Loans held for investment were $5.86 billion; loans held for sale were $1.20 billion.
- Deposits rose 14.7% to $8.16 billion. Borrowings fell to $86.2 million from $318.3 million, mainly due to repayments of Paycheck Protection Program Liquidity Facility advances.
- Cash and cash equivalents ended the period at $632.2 million. For the first six months, operating cash flow was $77.7 million, investing cash outflow was $456.8 million, and financing cash inflow was $807.6 million.
- Shareholders’ equity was $791.7 million. The bank’s common equity Tier 1 ratio was 11.39%, and its total capital ratio was 12.49%.
Material changes and notable items
- Q2 and first-half earnings included a $120.5 million pretax gain from the April sale of the company’s Finxact investment. The fintech segment reported Q2 net income of $94.7 million; banking segment net income was $3.8 million, versus $34.8 million in Q2 2021.
- Prior-year comparisons included a $44.1 million Q2 2021 unrealized gain on Greenlight. Equity investment gains were therefore much lower in 2022 absent the Finxact sale.
- Banking-related loan-sale conditions weakened: Q2 net gains on loan sales fell 65.3% year over year to $5.6 million, and servicing-asset revaluation losses increased to $8.7 million. The company also recorded $4.5 million of losses on loans under the fair value option. Management linked these results to higher rates and broader market conditions, and said it held loans for sale longer amid weaker premiums.
- Noninterest expense increased 40.5% in Q2, including higher salaries and benefits, travel, marketing, and a $5.0 million charitable donation made in connection with the Finxact gain. Full-time equivalent employees rose to 891 from 701 a year earlier.
- Available-for-sale securities had $78.5 million of gross unrealized losses at June 30, versus $12.2 million at year-end 2021. The resulting first-half after-tax other comprehensive loss was $61.2 million; management attributed the securities losses primarily to market interest rates and said it had the intent and ability to hold them for recovery.
Credit, liquidity, outlook, and risks
- The allowance for credit losses was $65.9 million, or 1.2% of loans held for investment at historical cost. First-half net charge-offs were $4.8 million, up from $1.4 million a year earlier. Management cited portfolio growth and increased loss-given-default following charge-offs from one relationship.
- Nonaccrual loans and leases, excluding fair-value-option loans, were $45.8 million; there were no loans 90 days past due and still accruing. Criticized and classified loans and leases, excluding fair-value-option loans, increased to $396.1 million from $372.7 million at year-end. Management said most Risk Grade 5 loans were performing.
- The company reported $4.05 billion of immediately available liquidity sources, equal to 44.4% of assets, including cash, federal funds sold, unpledged securities, and available credit. This is a broader liquidity measure than cash alone.
- Management described the balance sheet as asset-sensitive under its base interest-rate simulations. A 100-basis-point instantaneous increase was estimated to raise net interest income 2.5% over the next 12 months, while the EVE analysis indicated a theoretical 8.2% decline. These are model estimates dependent on assumptions; management cautioned that rate paths and balance-sheet behavior may differ.
- The filing provides no formal earnings or revenue guidance. Management expected to recognize most remaining PPP net deferred fees in 2022 and noted the Federal Reserve’s further rate increase in July 2022, after quarter-end.
- Key risks include borrower deterioration and higher credit losses, changing SBA/USDA rules, interest-rate and market movements affecting funding costs, loan-sale premiums and servicing values, operational or cybersecurity disruption, and regulatory or litigation exposure. A $3.9 million class-action settlement became effective June 11, 2022. Management reported no material pending legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much reported earnings depend on the nonrecurring Finxact gain, and how core banking profitability develops without investment gains.
- Whether deposit growth and deposit pricing sustain net interest margin as interest rates and funding competition change.
- Trends in criticized/classified loans, charge-offs, nonaccruals, and the adequacy of the allowance as economic conditions evolve.
- Whether weaker loan-sale premiums and servicing-asset valuations persist, and how long loans held for sale remain on the balance sheet.
- The effects of unrealized securities losses on capital and the company’s actual liquidity and interest-rate sensitivity relative to its models.