Live Oak Bancshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Live Oak is a bank holding company whose bank specializes in nationwide small-business lending and deposits, including SBA- and USDA-guaranteed loans. The company reports Banking and Fintech segments.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Net interest income | $82.0 million | $77.8 million in Q1 2022 |
| Net interest margin | 3.46% | 4.02% in Q1 2022 |
| Provision for credit losses | $19.0 million | $1.8 million in Q1 2022 |
| Noninterest income | $19.6 million | $32.7 million in Q1 2022 |
| Noninterest expense | $79.0 million | $65.7 million in Q1 2022 |
| Net income / diluted EPS | $0.4 million / $0.01 | $34.5 million / $0.76 in Q1 2022 |
| Total assets | $10.36 billion | $9.86 billion at Dec. 31, 2022 |
| Loans and leases held for investment | $7.69 billion | $7.34 billion at Dec. 31, 2022 |
| Total deposits | $9.42 billion | $8.88 billion at Dec. 31, 2022 |
| Cash and cash equivalents | $463.2 million | $416.6 million at Dec. 31, 2022 |
| Borrowings | $30.8 million | $83.2 million at Dec. 31, 2022 |
| Shareholders’ equity | $822.8 million | $811.0 million at Dec. 31, 2022 |
Operating cash flow was $158.5 million, investing cash flow was negative $592.9 million, and financing cash flow was positive $480.9 million. The quarter-end allowance for credit losses on loans and leases was $108.2 million, or 1.50% of loans held for investment. The company reported $85.7 million of nonaccrual loans and leases excluding fair-value-option loans; $63.7 million was government-guaranteed. Bank capital ratios included a 10.00% Common Equity Tier 1 ratio and an 11.25% total capital ratio.
Material changes and management commentary
- Net income fell to $0.4 million from $34.5 million a year earlier. Management cited the higher credit-loss provision, lower loan-sale gains, fair-value losses on certain loans, and higher operating expenses.
- Net interest income rose 5.4%, supported by loan growth, but margin declined as deposit and other funding costs rose faster than asset yields. Average cost of interest-bearing liabilities increased to 3.11% from 0.81%; average yield on interest-earning assets increased to 6.39% from 4.79%.
- Net gains on loan sales decreased 51.5% to $10.2 million; guaranteed loan sales were $167.8 million versus $219.7 million in Q1 2022. Management attributed the decline to lower sales volume and premiums and said market conditions influenced its loan-sale appetite.
- Loans originated totaled $1.03 billion. Management said portfolio growth, credit trends, and the macroeconomic outlook drove the increased provision. Net charge-offs were $6.7 million, compared with $2.4 million in Q1 2022.
- Nonperforming loans and leases excluding fair-value-option loans increased to $85.7 million from $73.4 million at year-end. Criticized and classified loans rose to $504.2 million from $424.7 million; management said most of the increase came from a limited number of relationships, largely without government guarantees.
- Deposits increased by $537.1 million. The company said it increased liquidity in response to banking-industry stress and began offering an IntraFi insured cash-sweep product. Uninsured deposits were approximately $1.4 billion, or 14.5% of deposits.
- The company and bank each first exceeded $10 billion in assets. Certain additional regulatory requirements may apply after specified periods above the threshold.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results. It described interest-rate risk as liability-sensitive in its NII simulations: an instantaneous 100-basis-point increase was estimated to reduce NII by 0.8% over the following 12 months and 1.9% over the next 12-month period; a 400-basis-point increase was estimated to reduce economic value of equity by 30.6%. These are model estimates based on assumptions, not forecasts.
- Key risks include borrower deterioration and further credit-loss provisions; deposit competition, customer confidence and uninsured-deposit movement; interest-rate and securities valuation changes; SBA/USDA program or regulatory changes; and operational, technology, cybersecurity, and personnel risks.
- Available immediate liquidity sources totaled $4.24 billion, or 40.9% of assets. The company reported $3.77 billion of unused borrowing capacity and $1.15 billion of unpledged securities available to pledge.
- Unfunded commitments to extend credit and standby letters of credit totaled $2.93 billion; total unfunded off-balance-sheet credit risk, including airplane purchase commitments, was $2.95 billion. The allowance for off-balance-sheet credit exposures was $4.3 million.
- The company had approximately $33.6 million of estimated costs to complete a campus construction program, with $3.9 million committed at quarter-end. Management said ordinary-course legal proceedings were not expected to materially affect results; it reported no material pending legal proceedings.
- Management refined credit-loss estimation methods, increasing the loan allowance by $1.5 million and the unfunded-commitment reserve by $2.4 million. It also adopted ASU 2022-02, increasing opening retained earnings by $676,000.
Important facts for investors to verify
- Whether loan delinquencies, criticized/classified exposures, charge-offs, and the allowance continue to rise, particularly in unguaranteed relationships and identified lending verticals.
- Deposit composition, uninsured-deposit levels, deposit pricing, and the company’s ability to sustain liquidity as competition and regulatory scrutiny evolve.
- Whether loan growth and yields can offset rising funding costs and the reported decline in net interest margin.
- Loan-sale volume and premiums, fair-value changes, and the sensitivity of servicing assets to rates and prepayment assumptions.
- The timing and cost of regulatory requirements associated with assets exceeding $10 billion, and any resulting effect on expenses or business practices.
- Management’s key credit-loss, deposit-behavior, and interest-rate model assumptions; reported sensitivity estimates are assumption-dependent.