Live Oak Bancshares, Inc. — FY2023 Form 10-K
Reporting period: Year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter report. Unless otherwise indicated, amounts are in U.S. dollars.
Business context
Live Oak is a digital, nationwide small-business lender and deposit-gathering bank headquartered in Wilmington, North Carolina. Lending is concentrated in selected industry verticals, with a significant share of originations partially guaranteed by the SBA or USDA. The company reports Banking and Fintech segments; it also sells guaranteed loan portions and generally retains servicing.
Financial performance and position
| Metric | FY2023 / Dec. 31, 2023 | FY2022 / Dec. 31, 2022 |
|---|---|---|
| Net income | $73.9 million | $176.2 million |
| Diluted earnings per share | $1.64 | $3.92 |
| Net interest income | $345.3 million | $327.5 million |
| Net interest margin | 3.35% | 3.87% |
| Noninterest income | $111.7 million | $238.0 million |
| Noninterest expense | $322.9 million | $314.2 million |
| Efficiency ratio | 70.65% | 55.57% |
| Total assets | $11.27 billion | $9.86 billion |
| Total deposits | $10.28 billion | $8.88 billion |
| Borrowings | $23.4 million | $83.2 million |
| Shareholders’ equity | $902.7 million | $811.0 million |
| Operating cash flow | $620.1 million | $124.5 million |
- Profit and revenue: Net income fell 58.1%. The principal driver was the absence of $149.2 million of 2022 gains from the sales of Finxact and Payrailz investments. Net interest income increased 5.4%, but total noninterest income declined 53.1% to $111.7 million. Pretax income was $82.8 million, versus $210.3 million.
- Interest and funding: Average yield on interest-earning assets rose to 6.68%, while the average cost of interest-bearing liabilities rose to 3.59%; deposit expense increased sharply as rates and balances rose. The net interest margin contracted despite loan growth.
- Credit and lending: Originations were $3.95 billion, down 1.5%; loans and leases held for sale and investment rose $1.12 billion, or 14.2%. Provision for credit losses increased to $51.3 million from $40.9 million. Net charge-offs on loans at historical cost were $21.4 million, or 0.28% of average loans, versus $8.0 million, or 0.14%.
- Liquidity and capital: Management reported $4.26 billion of identified liquidity sources, equal to 37.8% of assets, and $3.68 billion of unused borrowing capacity based on identified collateral. Uninsured deposits were $1.46 billion, or 14.2% of deposits. The bank was classified as well capitalized; its CET1 ratio was 10.40% and total capital ratio 11.65%. Consolidated CET1 was 11.73%.
- Cash flow: Operating cash flow was $620.1 million; investing activities used $1.77 billion, principally reflecting net loan originations and collections and securities purchases. Financing activities provided $1.32 billion, including $1.39 billion of net deposit growth.
Material changes and unusual items
- 2022 earnings included $149.2 million in gains from Finxact and Payrailz; the Fintech segment consequently moved from $109.7 million net income in 2022 to a $3.2 million net loss in 2023. Banking segment net income increased to $82.8 million from $71.9 million.
- A third-quarter change in fair-value estimation methods generated a one-time $15.0 million increase in noninterest income: $13.7 million for servicing assets and $1.3 million for loans measured at fair value. Management said the revised methods better reflected market conditions and observable inputs.
- Credit quality weakened on several indicators: nonperforming loans at historical cost rose to $135.0 million from $73.4 million; criticized and classified loans increased to $785.2 million from $424.7 million. Management attributed much of the criticized-loan increase to delayed construction completion and slower project ramp-ups in certain verticals. It reported that 99.3% of Risk Grade 5 loans were performing.
- Available-for-sale securities had $111.9 million of unrealized losses at year-end, primarily attributed to market interest rates rather than credit concerns. Accumulated other comprehensive loss was $84.7 million.
- The company and bank exceeded $10 billion in assets during 2023. Management expects additional requirements to apply in 2024, including CFPB supervision, large-bank FDIC assessment methodology, and a reduction in debit interchange income beginning July 1, 2024.
Outlook, risks, and contingencies
Management expects loan and lease portfolios to continue growing through small-business lending under SBA and other government programs, as well as conventional lending. It emphasized recurring revenue, credit-risk management, technology, and expansion of existing and new lending verticals. The filing provides no specific numerical earnings, margin, or growth guidance.
- Key risks include borrower deterioration and higher credit losses; dependence on SBA and USDA programs and secondary-market loan sales; rising funding costs, deposit competition and interest-rate sensitivity; liquidity and uninsured-deposit movements; and valuation uncertainty in loans, servicing rights, securities, and fintech investments.
- Technology and third-party dependence are material: the nCino license was disclosed as expiring November 14, 2024, and the next-generation banking platform depends on Apiture and other vendors. Cybersecurity, operational resilience, data privacy, and implementation risks are also highlighted. The company reported no cybersecurity threat that had materially affected or was reasonably likely to materially affect it as of the report date.
- FDIC insurance expense rose to $16.7 million from $9.8 million. Management expects heightened regulatory scrutiny and compliance costs after crossing the $10 billion threshold.
- No material pending legal proceedings were reported. The company had $2.92 billion of commitments to extend credit and $20.5 million of standby letters of credit; these are not equivalent to funded loans. Completion of a campus facility was estimated to require $37.0 million in total, of which $21.5 million had been paid or committed at year-end.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified the allowance for credit losses, fair-value loans, and servicing assets as critical audit matters because their valuations rely on significant assumptions and estimates.
Important facts for investors to verify
- Whether credit migration, nonperforming loans, charge-offs, and criticized exposures continue to rise, and whether the $125.8 million allowance remains adequate.
- Whether deposit growth and retention can support loan growth without further margin pressure, particularly given the 14.2% uninsured-deposit share and higher funding costs.
- How the company’s earnings perform excluding the 2022 investment-sale gains and the 2023 one-time $15.0 million valuation adjustment.
- The effect of 2024 regulatory thresholds, FDIC assessment changes, and debit interchange fee limits on expenses and revenue.
- Progress and costs for the next-generation banking platform, and renewal or replacement of the nCino license before its disclosed expiration.
- Future fintech investment results, tax-credit realization, and the outcome of the IRS audit relating principally to prior energy credits.