Live Oak(US:LOB)2023-05-03 20:31PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Live Oak Bancshares, Inc. as of March 31, 2023, and for the three-month period then ended, with comparative data for December 31, 2022, and the corresponding period in 2022 Condensed Consolidated Balance Sheets As of March 31, 2023, total assets grew to $10.36 billion from $9.86 billion at year-end 2022, driven by a $343 million increase in net loans and leases, while total liabilities rose to $9.54 billion, primarily due to a $537 million increase in total deposits Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $10,364,297 | $9,855,498 | | Net loans and leases | $7,578,745 | $7,247,612 | | Investment securities available-for-sale | $1,149,691 | $1,014,719 | | Cash and due from banks | $463,186 | $280,239 | | Total Liabilities | $9,541,490 | $9,044,465 | | Total deposits | $9,421,994 | $8,884,928 | | Borrowings | $30,767 | $83,203 | | Total Shareholders' Equity | $822,807 | $811,033 | Condensed Consolidated Statements of Income For the first quarter of 2023, net income plummeted to $398 thousand from $34.5 million in Q1 2022, primarily due to a significant increase in the provision for credit losses and a drop in noninterest income Q1 2023 vs Q1 2022 Income Statement (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net interest income | $82,017 | $77,779 | | Provision for loan and lease credit losses | $19,021 | $1,836 | | Total noninterest income | $19,579 | $32,668 | | Total noninterest expense | $78,962 | $65,714 | | Net income | $398 | $34,509 | | Diluted earnings per share | $0.01 | $0.76 | Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2023, net cash provided by operating activities was $158.5 million, while net cash used in investing activities was significant at $592.9 million, resulting in a net increase in cash and cash equivalents of $46.6 million Cash Flow Summary for Three Months Ended March 31, 2023 (in thousands) | Activity | Amount | | :--- | :--- | | Net cash provided by operating activities | $158,456 | | Net cash used by investing activities | $(592,854) | | Net cash provided by financing activities | $480,948 | | Net increase in cash and cash equivalents | $46,550 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's operations, accounting policies, and financial instrument specifics, including its SBA/USDA guaranteed lending model, fintech investments, and the adoption of ASU 2022-02 - The company operates primarily through its bank subsidiary, specializing in nationwide small business lending, with a significant portion of loans guaranteed by the SBA and USDA19 - The company has two reportable operating segments: Banking (lending and deposit services) and Fintech (strategic investments in financial technology companies)27126127 - In Q1 2023, the company refined its allowance for credit losses (ACL) methodology, resulting in a $1.5 million increase in the ACL and a $2.4 million increase in the reserve on unfunded commitments2829 - The company adopted ASU 2022-02 on January 1, 2023, which eliminates Troubled Debt Restructuring (TDR) accounting and enhances disclosures for loan modifications to borrowers experiencing financial difficulty, resulting in a net increase to retained earnings of $676 thousand33 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant drop in Q1 2023 net income to $0.4 million from $34.5 million in Q1 2022, attributing it to higher provision for credit losses, lower gains on loan sales, and increased operating expenses Performance Summary For Q1 2023, net income was $398 thousand ($0.01 per diluted share), a steep decline from $34.5 million ($0.76 per diluted share) in Q1 2022 Q1 Performance Snapshot | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Income | $398 thousand | $34.5 million | | Diluted EPS | $0.01 | $0.76 | - Key drivers for the decrease in net income included a higher provision for loan losses (+$17.2 million), lower net gains on loan sales (-$10.8 million), increased net loss on fair value loans (-$5.0 million), and higher noninterest expense (+$13.2 million)144 Net Interest Income and Margin Net interest income for Q1 2023 increased by 5.4% to $82.0 million, driven by a 22.3% increase in average interest-earning assets, though the net interest margin compressed to 3.46% from 4.02% year-over-year Net Interest Income and Margin Analysis | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Interest Income | $82.0 million | $77.8 million | | Net Interest Margin | 3.46% | 4.02% | | Avg. Yield on Earning Assets | 6.39% | 4.79% | | Avg. Cost of Interest-Bearing Liabilities | 3.11% | 0.81% | - The increase in net interest income was primarily due to a $13.8 billion increase in volume, which was partially offset by a $9.5 billion decrease due to rate changes (margin compression)152 Provision for Loan and Lease Credit Losses The provision for loan and lease credit losses was $19.0 million in Q1 2023, a substantial increase of $17.2 million from $1.8 million in Q1 2022, attributed to significant loan growth and evolving portfolio trends - Provision for credit losses increased to $19.0 million in Q1 2023 from $1.8 million in Q1 2022155 - Net charge-offs increased to $6.7 million (0.38% of average loans) in Q1 2023, compared to $2.4 million (0.19%) in Q1 2022, with the increase primarily isolated to two relationships157 Noninterest Income Noninterest income fell by 40.1% to $19.6 million in Q1 2023 from $32.7 million in Q1 2022, mainly due to a $10.8 million decrease in net gains on sales of loans and a $4.5 million net loss on fair value loans Noninterest Income Components (in thousands) | Component | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net gains on sales of loans | $10,175 | $20,977 | | Net (loss) gain on loans (fair value option) | $(4,529) | $516 | | Loan servicing asset revaluation | $356 | $(1,569) | | Management fee income | $3,472 | $1,488 | | Total noninterest income | $19,579 | $32,668 | - The volume of guaranteed loans sold decreased by 23.6% to $167.8 million in Q1 2023 from $219.7 million in Q1 2022, and the average net gain on sale premium fell from 109% to 106%167 Noninterest Expense Total noninterest expense for Q1 2023 rose 20.2% to $79.0 million from $65.7 million in Q1 2022, driven by increases in salaries and employee benefits, advertising and marketing, technology, and other expenses Noninterest Expense Components (in thousands) | Component | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Salaries and employee benefits | $44,765 | $38,507 | | Technology expense | $7,729 | $6,053 | | Advertising and marketing expense | $3,603 | $1,729 | | Other expense | $6,329 | $2,786 | | Total noninterest expense | $78,962 | $65,714 | - Full-time equivalent employees increased from 842 at March 31, 2022, to 968 at March 31, 2023, contributing to higher salary costs173 Financial Condition Total assets grew by 5.2% to $10.36 billion at March 31, 2023, officially crossing the $10 billion threshold, fueled by loan and investment securities growth, and supported by a 6.0% increase in total deposits - Total assets increased by $508.8 million to $10.36 billion as of March 31, 2023184 - Loans and leases held for investment grew by $342.8 million (4.7%) during Q1 2023186 - Total deposits grew by $537.1 million (6.0%) to $9.42 billion, with uninsured deposits approximately $1.4 billion, or 14.5% of total deposits187 - As of March 31, 2023, the Company and Bank first exceeded $10 billion in total assets, which will subject them to additional regulatory requirements under the Dodd-Frank Act, including potential CFPB supervision and changes to interchange fee rules (Durbin Amendment)189190193 Asset Quality Asset quality showed some deterioration in Q1 2023, with nonperforming assets (excluding fair value loans) increasing by 16.8% to $85.7 million and criticized and classified loans rising to $504.2 million Nonperforming Assets (excluding loans at fair value) | Metric | March 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total nonperforming assets | $85,698 thousand | $73,392 thousand | | Unguaranteed nonperforming exposure | $22,002 thousand | $18,784 thousand | | NPA / Total HFI Loans | 1.19% | 1.07% | | ACL / Total HFI Loans | 1.50% | 1.41% | - Potential problem (criticized) and classified loans increased by $79.5 million in Q1 2023 to $504.2 million203 - The increase in criticized loans (Risk Grade 5) was concentrated in several verticals, including Sponsor Finance, Bioenergy, Senior Housing, and Venture Banking205 Liquidity and Capital The company maintained a strong liquidity position, with immediately available sources totaling $4.24 billion, or 40.9% of total assets, at March 31, 2023, and capital levels remained well above regulatory requirements - Immediate liquidity sources (cash, fed funds sold, unpledged securities, credit lines) totaled $4.24 billion, or 40.9% of total assets, at March 31, 2023209 Bank Capital Ratios - March 31, 2023 | Ratio | Actual | Well Capitalized Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 Ratio | 10.00% | 6.50% | | Tier 1 Capital Ratio | 10.00% | 8.00% | | Total Capital Ratio | 11.25% | 10.00% | | Tier 1 Leverage Ratio | 7.24% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk The company's interest rate risk profile shifted to slightly liability-sensitive as of March 31, 2023, with simulation models projecting a 0.8% decrease in Net Interest Income (NII) and a 7.8% decrease in Economic Value of Equity (EVE) in a +100 basis point rate shock - As of March 31, 2023, the company's interest rate risk profile shifted to slightly liability-sensitive, meaning net interest income will generally move in the opposite direction of interest rates215 Interest Rate Sensitivity Analysis (as of March 31, 2023) | Basis Point Change | Estimated % Change in NII (12 months) | Estimated % Change in EVE | | :--- | :--- | :--- | | +300 | (2.1)% | (23.3)% | | +200 | (1.3)% | (15.6)% | | +100 | (0.8)% | (7.8)% | | -100 | (0.1)% | 7.7% | - The liability-sensitive position is attributed to the rapid repricing of deposits compared to the longer duration of the asset portfolio, which includes an increased amount of fixed-rate loans originated since 2020231232 Controls and Procedures The company's Chief Executive Officer and Chief Financial Officer evaluated the disclosure controls and procedures as of March 31, 2023, and concluded they were effective, with no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of March 31, 2023233 - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2023234 PART II. OTHER INFORMATION Legal Proceedings As of March 31, 2023, the company reports that it is not a party to any material pending legal proceedings - In the opinion of management, there are no material pending legal proceedings as of March 31, 2023237 Risk Factors The company has identified a new material risk factor following recent high-profile bank failures, involving the potential for eroded customer confidence in the banking system and anticipated increased regulatory scrutiny - A new risk factor highlights that recent negative developments in the banking industry have eroded customer confidence, which could materially adversely impact the Company's liquidity, net interest margin, and results of operations238 - The company anticipates increased regulatory scrutiny and new regulations as a result of recent events, which may increase costs and reduce profitability239 Unregistered Sales of Equity Securities and Use of Proceeds The company has a share repurchase program, authorized in May 2022, for up to $50 million of its voting common stock through December 31, 2023, under which no shares had been repurchased as of March 31, 2023 - The Board of Directors authorized a repurchase program for up to $50 million in common stock, effective through December 31, 2023240 - As of March 31, 2023, the Company had not made any purchases of shares under the Repurchase Program240 Defaults Upon Senior Securities None reported - None241 Mine Safety Disclosures Not applicable - Not applicable242 Other Information None reported - None243 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, material contracts such as an amendment to the software service agreement with nCino, and certifications by the CEO and CFO - Exhibits filed include an amendment to the software service agreement with nCino, Inc., and certifications from the Principal Executive Officer and Principal Financial Officer245