Live Oak Bancshares, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the provided text does not give standalone fourth-quarter results. Live Oak operates a nationwide, technology-based small-business bank, with significant SBA- and USDA-guaranteed lending, alongside a fintech investment and advisory segment.
Financial results and condition
| Metric | FY 2022 / Dec. 31, 2022 | FY 2021 / Dec. 31, 2021 |
|---|---|---|
| Net income | $176.2 million; diluted EPS $3.92 | $167.0 million; diluted EPS $3.71 |
| Net interest income | $327.5 million | $296.8 million |
| Net interest margin | 3.87% | 3.86% |
| Total noninterest income | $238.0 million | $160.2 million |
| Total noninterest expense | $314.2 million | $231.0 million |
| Total assets | $9.86 billion | $8.21 billion |
| Total deposits | $8.88 billion | $7.11 billion |
| Loans and leases held for investment and sale | $7.90 billion | $6.64 billion |
| Borrowings | $83.2 million | $318.3 million |
| Shareholders’ equity | $811.0 million | $715.1 million |
- Profitability and margins: Net income rose 5.5%. Net interest income increased 10.3%, while net interest margin was nearly unchanged. Return on average assets was 1.96% (2.03% in 2021); return on average equity was 21.92% (25.58%). The non-GAAP efficiency ratio increased to 55.57% from 50.55%.
- Credit costs and quality: Provision for loan and lease credit losses rose to $40.9 million from $15.2 million. Net charge-offs were $8.0 million, or 0.14% of average historical-cost loans held for investment, versus $3.9 million, or 0.08%. The allowance was $96.6 million, equal to 1.41% of historical-cost held-for-investment loans. Nonperforming loans at historical cost were $73.4 million, compared with $42.5 million; total nonperforming assets and troubled debt restructurings, excluding fair-value loans, were $134.9 million versus $80.2 million.
- Cash flow and liquidity: Operating cash flow was $124.5 million, compared with cash used of $119.7 million in 2021. Investing activities used $1.44 billion, primarily reflecting net loan funding and securities purchases; financing activities provided $1.53 billion, mainly from deposit growth. Year-end cash and cash equivalents were $416.6 million. Management reported $4.01 billion of identified liquidity sources, or 40.7% of assets.
- Capital: Consolidated common equity Tier 1 ratio was 12.47%; total capital ratio was 13.73%; Tier 1 leverage ratio was 9.26%. The Bank was reported as well capitalized under regulatory requirements.
Material changes and unusual items
- Assets grew 20.0%, deposits 24.9%, and loans and leases held for investment and sale 19.0%. Excluding PPP loans, loans and leases increased 23.7%. Management attributed growth to lending activity, increased loan retention, and deposit gathering.
- Fintech investment gains materially affected results: the company reported $120.8 million of pre-tax gain on the Finxact sale and $28.4 million on the Payrailz sale. Equity-method investment income was $144.3 million for the year. These gains helped offset lower loan-sale gains and a decline in equity-security gains compared with 2021, which included a $44.1 million Greenlight fair-value gain.
- Net gains on loan sales fell 35.7% to $43.2 million as sales volume and average premiums declined amid weaker market conditions. The company transferred loans to held for investment and retained more loans rather than sell them.
- Noninterest expense increased 36.0%, including a 36.7% rise in salaries and benefits, reflecting hiring and growth investment. Expenses also included $16.2 million of renewable-energy tax-credit investment impairment and a $5.0 million charitable contribution associated with the Finxact gain.
- Available-for-sale securities had a $121.7 million gross unrealized loss at year-end, primarily attributed to market interest-rate movements; the resulting after-tax other comprehensive loss was $94.3 million. The filing states the company intended and was able to hold the securities for recovery and did not recognize these losses in earnings.
- The company’s total assets were $9.86 billion and management anticipated crossing $10 billion during 2023, which could trigger additional regulatory requirements and costs.
Outlook, commentary, and risks
- Management gave no specific numerical earnings or growth guidance. It expects loan portfolios to continue growing, supported by healthy origination volumes and greater retention, and plans to build recurring revenue, develop existing and new industry verticals, and pursue selected conventional lending.
- Management noted that future earnings will depend on loan growth, deposit costs, secondary-market loan-sale premiums, credit performance, and interest-rate movements. The filing’s static-balance-sheet model estimated that a 400-basis-point rate increase would raise net interest income 8.6% over the following 12 months, but reduce economic value of equity 34.3%; actual results may differ and depend on model assumptions and management actions.
- Key risks include deterioration in small-business borrowers’ credit quality; concentration in selected industries; changes to SBA or USDA programs or preferred-lender status; weaker loan-sale markets; interest-rate and funding-cost changes; deposit and liquidity pressures; valuation uncertainty in loans, servicing rights, securities, and fintech investments; cybersecurity, third-party technology, and platform implementation risks; and increased regulatory costs if assets exceed $10 billion.
- Unfunded commitments to extend credit and standby letters of credit totaled $2.76 billion, with an additional $24.0 million in airplane purchase commitments. The filing says many lending commitments may expire undrawn. Management reported no material pending legal proceedings at year-end; a previously disclosed $3.9 million employee-mobility class-action settlement became effective in June 2022.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The audit identified the allowance for credit losses, fair-value loans, and servicing assets as critical audit matters involving significant estimates and assumptions.
Important facts for investors to verify
- How much of reported earnings is repeatable without the Finxact and Payrailz gains, and whether recurring Banking-segment profitability improves after higher credit costs and operating expenses.
- Loan performance by industry and guarantee status, including the increase in nonperforming balances, criticized/classified loans, and the adequacy of the $96.6 million allowance under less favorable economic scenarios.
- Deposit composition, pricing, uninsured balances, and maturity profile, together with the bank’s ability to fund loan growth while controlling deposit costs and preserving liquidity.
- Exposure to interest-rate changes and the effects of unrealized securities losses, loan retention, and future loan-sale premiums on earnings, capital, and liquidity.
- The timing and costs of crossing the $10 billion asset threshold, and progress and execution risks in the next-generation banking platform and other technology initiatives.