Live Oak Bancshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023 unless noted. Live Oak is a nationwide small-business lender, with substantial SBA- and USDA-guaranteed lending, and also operates a fintech investment segment. Amounts below are in U.S. dollars.
Financial results
- Net income: $27.6 million, or $0.60 diluted EPS, versus $0.4 million, or $0.01, in Q1 2023. Results include a significant, unusual tax-credit benefit described below.
- Net interest income: $90.1 million, up 9.9% year over year. Net interest margin narrowed to 3.33% from 3.46%; average interest-earning asset yield was 7.11%, while cost of interest-bearing liabilities rose to 4.07% from 3.11%.
- Noninterest income: $26.1 million, up 33.3%, including $11.5 million in loan-sale gains. Noninterest expense declined 1.6% to $77.7 million; salaries and benefits increased 5.6% to $47.3 million.
- Credit provision and allowance: Provision was $16.4 million, down from $19.0 million. The allowance for credit losses was $139.0 million, or 1.63% of held-for-investment loans at historical cost, versus $125.8 million and 1.53% at year-end.
- Cash flow: Operating cash flow was $90.9 million versus $158.5 million in Q1 2023; investing cash outflow was $278.7 million and financing cash inflow was $202.7 million. Cash and due from banks ended at $597.4 million.
- Balance sheet and funding: Total assets were $11.51 billion; held-for-investment loans and leases were $8.91 billion before allowance ($8.77 billion net). Deposits were $10.38 billion, up 1.1%; borrowings rose to $120.2 million from $23.4 million. Shareholders’ equity was $927.7 million.
- Liquidity and capital: Management reported $4.11 billion of identified liquidity sources, 35.7% of assets, and $3.51 billion of unused borrowing capacity based on identified collateral. Bank CET1 and total capital ratios were 11.86% and 13.12%, respectively, above stated well-capitalized thresholds.
Changes versus comparable periods
- Net interest income grew as loan balances increased, but higher funding costs outpaced asset-yield improvement and compressed margin.
- Loan originations were $805.1 million, down from $1.03 billion in Q1 2023. Held-for-investment loans at historical cost were up 18.2% year over year.
- Net charge-offs on historical-cost loans were $3.2 million, or 0.15% annualized, versus $6.7 million, or 0.38%, in Q1 2023. However, nonperforming and criticized loans increased from year-end.
- Noninterest income benefited from a smaller fair-value-option loan loss and a $5.7 million gain associated with equity warrant revaluation. These were partly offset by a $2.7 million servicing-asset revaluation loss and higher equity-method investment losses.
Unusual items, outlook and risks
- Material change to previously reported Q1 results: After its April 24 earnings release, the company identified eligibility for additional renewable-energy investment tax credits following IRS Notice 2024-30. The 10-Q reflects $10.6 million of incremental federal tax credits and related impacts, increasing net income by $11.0 million, or $0.24 per diluted share, versus figures furnished with the earnings release. As adjusted, income tax was a $5.5 million benefit, compared with $3.2 million of tax expense in Q1 2023. Investors should use the 10-Q figures and review the reconciliation to the earlier release.
- Credit risk: Nonperforming assets including loans measured at fair value were $215.3 million. Excluding fair-value-option loans, nonperforming assets were $157.0 million, up 11.0% from year-end. Criticized and classified loans at historical cost rose to $908.2 million from $785.2 million; management attributed much of the increase to delays in construction completion and project ramp-up. Management considers the allowance appropriate but cautions that changing conditions could require further additions.
- Rate and funding exposure: The company described its position as slightly asset-sensitive for net interest income, but its simulations indicate that a 100-basis-point rate decline could reduce projected NII by 2.2% over the next 12 months. Its economic-value-of-equity model indicates a 5.4% decline under a 100-basis-point increase. Actual results depend on deposit pricing, prepayments, rates and other assumptions.
- Other developments: The $100 million term borrowing entered in March carries a fixed 5.95% rate, with principal due in 2028 and 2029. The Bank became subject to CFPB supervision and the FDIC large-bank assessment method in Q1 after exceeding $10 billion in assets; debit interchange-fee limits are expected to reduce pretax income beginning July 1, 2024. The company also estimated $37.4 million to complete its campus expansion, with $30.7 million paid or committed at quarter-end.
- The filing provides no specific earnings or growth guidance. Management identifies risks including borrower deterioration, SBA/USDA program or regulatory changes, interest-rate and deposit competition, liquidity and customer confidence, cybersecurity and technology disruption, and market volatility affecting securities, loan-sale premiums and servicing values. It reported no material change in risk factors from its 2023 Form 10-K and no material pending legal proceedings.
Investor verification checklist
- Reconcile the $11.0 million tax-credit-related earnings adjustment to the April 24 earnings release; assess its nonrecurring nature and the eligibility assumptions.
- Track deposit pricing and mix, net interest margin, loan growth and the impact of the new borrowing and higher funding costs.
- Review trends in nonaccruals, past-due loans, criticized/classified exposures by lending vertical, charge-offs, and allowance coverage—particularly given the increase in criticized balances.
- Assess the durability of noninterest income, including servicing valuations, fair-value changes in loans and warrants, and fintech investment losses.
- Monitor liquidity, uninsured deposits, capital ratios, campus spending, and the effect of new regulatory requirements, including interchange-fee limits.