Live Oak Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Live Oak is a North Carolina bank holding company whose bank specializes in nationwide small-business lending and deposits, including SBA- and USDA-guaranteed lending. The company also operates a fintech investment and advisory segment.
Financial performance and position
| Metric | Q3 2023 | Comparable period / change |
|---|---|---|
| Net income | $39.8 million; diluted EPS $0.88 | $42.9 million; diluted EPS $0.96 in Q3 2022 |
| Net interest income | $89.4 million | Up 6.6% from $83.9 million |
| Net interest margin | 3.37% | 3.84% in Q3 2022 |
| Provision for credit losses | $10.3 million | Down from $14.2 million |
| Noninterest income | $37.9 million | Down from $57.7 million |
| Noninterest expense | $74.3 million | Down from $83.0 million |
- For the first nine months, net income was $57.7 million, or $1.28 diluted EPS, versus $174.4 million, or $3.88, in 2022. Net interest income increased 5.8% to $255.7 million, while net interest margin declined to 3.36% from 3.91%.
- At September 30, total assets were $10.95 billion, up 11.1% from year-end 2022. Loans and leases held for investment were $8.20 billion, up 11.7%; total deposits were $10.00 billion, up 12.6%.
- Shareholders’ equity was $850.4 million. Borrowings were $25.8 million, down from $83.2 million at December 31, 2022. The company reported $3.80 billion in unused borrowing capacity.
- For the nine months, operating cash flow was $449.8 million, investing cash flow was negative $1.39 billion, and financing cash flow was positive $1.05 billion. Cash and cash equivalents ended at $534.8 million.
- Immediate liquidity sources totaled $4.34 billion, or 39.6% of assets. Uninsured deposits were approximately $1.48 billion, or 14.6% of deposits. Available-for-sale securities had a fair value of $1.10 billion and $155.8 million of gross unrealized losses, which management attributed primarily to market rates and said it intended and was able to hold through recovery.
- Bank regulatory capital ratios remained above “well-capitalized” thresholds: CET1 was 10.25%, total risk-based capital 11.51%, and Tier 1 leverage 7.35%.
Material changes and management commentary
- Year-over-year Q3 earnings were affected by the prior-year $28.4 million Payrailz investment sale gain. Nine-month 2022 results also included a $120.5 million Finxact sale gain. These fintech gains explain much of the sharp decline in 2023 year-to-date net income.
- Effective July 1, the company revised fair-value methods for servicing rights and loans measured at fair value. The changes produced one-time estimated-value increases of $13.7 million for servicing assets and $1.3 million for fair-value loans, increasing Q3 noninterest income by $15.0 million. These amounts are estimates, not recurring operating gains.
- Higher loan volumes lifted interest income, but deposit funding costs rose faster than asset yields. Q3 cost of funds on interest-bearing liabilities rose to 3.72% from 1.55% a year earlier; management reported margin pressure from repricing and competition for deposits.
- Credit metrics weakened: nine-month net charge-offs were $16.9 million versus $6.6 million in 2022, with management citing two relationships. Nonperforming assets excluding fair-value-option loans were $105.8 million, including $99.1 million of nonaccrual loans and $6.7 million of foreclosed assets. Criticized and classified loans and leases increased to $567.6 million from $424.7 million at year-end. The allowance for credit losses was $121.3 million, or 1.56% of held-for-investment loans and leases.
- Management said the allowance was appropriate but noted that changing economic conditions or revised assumptions could require significant future additions. It cited continued loan growth, specific reserves, and charge-off impacts as drivers of provision expense.
- The company and bank each exceeded $10 billion in assets during Q1 2023. Certain regulatory requirements, including aspects of CFPB supervision and FDIC assessment methodology, apply after specified consecutive quarters above that threshold.
- The filing provides no specific earnings or balance-sheet guidance. Management describes the company as slightly liability-sensitive in its NII simulations for the next two years: modeled instantaneous rate increases of 100 basis points reduced NII by 0.6% in each year; a 400-basis-point increase reduced it by 3.1% and 3.6%. Model outcomes depend on deposit pricing, repricing and other assumptions.
Risks, contingencies, and unusual items
- Key risks include borrower deterioration and credit losses; interest-rate and deposit-cost changes; SBA or USDA program and regulatory changes; customer confidence and liquidity conditions in the banking sector; technology, cybersecurity and service-provider risks; and economic, collateral-value and loan-sale-market changes.
- Off-balance-sheet commitments included $2.83 billion to extend credit and $22.0 million in standby letters of credit. The allowance for off-balance-sheet credit exposures was $4.6 million. The company also had $30.1 million of recorded unfunded investment commitments and estimated $36.7 million to complete its campus construction program, of which approximately $12.0 million had been paid or committed.
- Management reported no material pending legal proceedings and no material changes to previously disclosed risk factors beyond the additional factor disclosed in the Q1 2023 Form 10-Q. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
- After quarter-end, the company sold an aircraft for a $4.4 million gain. The sale was not reflected in the September 30 balance sheet results.
Important facts for investors to verify
- Whether deposit growth and pricing can sustain loan growth without further compression in net interest margin.
- Trends in criticized/classified loans, nonaccrual balances, net charge-offs, and the adequacy of both funded and unfunded credit-loss reserves.
- How much Q3 reported noninterest income depended on the one-time $15.0 million valuation-method change, and how servicing-asset values respond to rates and prepayments.
- The concentration and behavior of uninsured deposits, available collateral, and liquidity capacity as the company adapts to its new asset-size regulatory thresholds.
- The assumptions underlying interest-rate simulations and the potential effect of faster deposit repricing, funding competition, or changes in loan and deposit mix.