Live Oak(LOB) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis of Live Oak Bancshares, Inc Financial Statements (Unaudited) This section presents Live Oak Bancshares' unaudited condensed consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flow statements Condensed Consolidated Balance Sheets As of September 30, 2022, total assets increased to $9.31 billion from $8.21 billion at year-end 2021, driven by a $1.32 billion increase in net loans and leases, funded by a $1.29 billion increase in total deposits, with shareholders' equity growing to $802.2 million despite a significant increase in accumulated other comprehensive loss Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $9,314,650 | $8,213,393 | $1,101,257 | | Net loans and leases | $6,775,091 | $5,457,678 | $1,317,413 | | Loans held for sale | $537,649 | $1,116,519 | ($578,870) | | Total Liabilities | $8,512,482 | $7,498,260 | $1,014,222 | | Total deposits | $8,404,909 | $7,112,044 | $1,292,865 | | Borrowings | $35,616 | $318,289 | ($282,673) | | Total Shareholders' Equity | $802,168 | $715,133 | $87,035 | Condensed Consolidated Statements of Income For Q3 2022, net income increased to $42.9 million from $33.8 million in Q3 2021, driven by higher equity method investment income and net interest income, with nine-month net income rising to $174.4 million from $136.8 million year-over-year primarily due to increased equity method investment income Key Income Statement Data (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $83,886 | $77,735 | $241,599 | $219,147 | | Provision for credit losses | $14,169 | $4,319 | $21,272 | $11,292 | | Total Noninterest Income | $57,724 | $25,276 | $218,921 | $126,444 | | Total Noninterest Expense | $83,048 | $55,459 | $229,641 | $171,289 | | Net Income | $42,868 | $33,839 | $174,416 | $136,848 | | Diluted EPS | $0.96 | $0.76 | $3.88 | $3.05 | - Equity method investments income was a major driver of performance, recording income of $29.1 million in Q3 2022 and $146.1 million for the first nine months of 2022, compared to losses in the same periods of 2021[13] Condensed Consolidated Statements of Comprehensive Income Total comprehensive income for Q3 2022 was $6.9 million, a significant decrease from $28.8 million in Q3 2021, and for the nine-month period, it was $77.2 million, down from $123.4 million year-over-year, driven by a substantial other comprehensive loss of $97.2 million from net unrealized losses on investment securities Comprehensive Income Summary (in thousands) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $42,868 | $33,839 | $174,416 | $136,848 | | Other comprehensive loss, net of tax | ($35,959) | ($5,058) | ($97,188) | ($13,442) | | Total Comprehensive Income | $6,909 | $28,781 | $77,228 | $123,406 | Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased from $715.1 million at the end of 2021 to $802.2 million at September 30, 2022, primarily driven by $174.4 million in net income, partially offset by a $97.2 million other comprehensive loss and $3.9 million in cash dividends - For the nine months ended September 30, 2022, shareholders' equity increased by $87.1 million, driven by net income of $174.4 million and restricted stock compensation of $14.2 million, offset by an other comprehensive loss of $97.2 million and cash dividends of $3.9 million[18] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash provided by operating activities was $98.3 million, a significant improvement from a use of $134.2 million in the prior year period, with investing activities using $903.2 million and financing activities providing $1.0 billion, resulting in a net increase in cash and cash equivalents of $199.6 million Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided (used) by operating activities | $98,328 | ($134,208) | | Net cash (used) provided by investing activities | ($903,217) | $48,059 | | Net cash provided by financing activities | $1,004,509 | $114,863 | | Net increase in cash and cash equivalents | $199,620 | $28,714 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies and financial results, covering the loan portfolio, fair value measurements, securities holdings, servicing assets, borrowings, and segment reporting Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for Q3 and the first nine months of 2022, highlighting increased net income driven by fintech investment gains, offset by higher credit loss provisions, operating expenses, and lower loan sale gains - Net income for Q3 2022 was $42.9 million, up from $33.8 million in Q3 2021, and for the first nine months of 2022, net income was $174.4 million, up from $136.8 million in the prior year period[146][149] - The increase in net income was largely driven by a $30.4 million increase in equity method investment income in Q3 2022 (from a $28.4 million gain on the sale of Payrailz) and a $150.8 million increase for the nine-month period (including a $120.5 million gain on the sale of Finxact)[147][150] - Offsetting factors included an increased provision for loan and lease credit losses ($9.9 million higher in Q3 YoY), decreased net gains on sales of loans ($9.6 million lower in Q3 YoY), and higher noninterest expense ($27.6 million higher in Q3 YoY)[149][150] Results of Operations The company's results were significantly impacted by its Fintech segment, with a $150.8 million increase in equity method investment income from Finxact and Payrailz sales driving profitability, despite a $42.0 million decrease in equity security investment gains and a 34.1% rise in noninterest expenses Key Performance Drivers - Nine Months 2022 vs 2021 | Metric | YTD 2022 | YTD 2021 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $241.6M | $219.1M | +10.2% | | Provision for Credit Losses | $21.3M | $11.3M | +88.4% | | Equity Method Investments Income | $146.1M | ($4.7M) | +$150.8M | | Equity Security Investments Gains | $2.5M | $44.5M | -94.4% | | Net Gains on Sales of Loans | $35.9M | $47.0M | -23.7% | | Noninterest Expense | $229.6M | $171.3M | +34.1% | Financial Condition Total assets grew by $1.10 billion (13.4%) to $9.31 billion at September 30, 2022, primarily fueled by a $1.33 billion increase in loans and leases held for investment, funded by $1.29 billion in deposit growth, while borrowings decreased and shareholders' equity increased despite an unrealized investment portfolio loss - A transfer of $754.7 million in loans from held for sale to held for investment occurred in Q3 2022, driven by management's intent to hold loans longer in the current rising rate environment[201] - Loans and leases held for investment increased by $1.33 billion (24.1%) in the first nine months of 2022[202] - Total deposits increased by $1.29 billion (18.2%) to fund asset growth[204] Asset Quality Asset quality metrics showed mixed results, with total nonperforming assets and TDRs (excluding fair value loans) increasing by $27.8 million to $108.0 million, while the allowance for credit losses grew to $78.3 million due to loan growth and macroeconomic changes Nonperforming Assets and TDRs (excluding fair value loans, in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Nonaccrual loans and leases | $60,064 | $42,533 | | Total performing TDRs | $46,804 | $37,063 | | Total nonperforming assets and TDRs | $108,046 | $80,216 | | Unguaranteed exposure of NPA & TDRs | $42,727 | $37,000 | - The allowance for credit losses (ACL) increased by $14.7 million to $78.3 million at September 30, 2022, driven by loan growth, charge-off experience, loan reclassifications, and macroeconomic changes[223] Capital The company maintained strong capital levels, with all regulatory capital ratios remaining well in excess of 'well capitalized' requirements, including a consolidated Common Equity Tier 1 (CET1) capital ratio of 13.16% and a Total Capital ratio of 14.36% as of September 30, 2022 Regulatory Capital Ratios (Consolidated) | Ratio | Sep 30, 2022 | Dec 31, 2021 | Minimum Requirement | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 13.16% | 12.38% | 4.50% | | Tier 1 Capital | 13.16% | 12.38% | 6.00% | | Total Capital | 14.36% | 13.53% | 8.00% | Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk through its Asset/Liability Committee, using EVE and NII simulation models, with the balance sheet being asset-sensitive, expecting NII to increase in a rising rate environment, though EVE analysis shows a theoretical market value loss - The company's balance sheet is asset-sensitive, with a total cumulative one-year gap of 5.2% as of September 30, 2022[230][242] Interest Rate Sensitivity Analysis (as of Sep 30, 2022) | Basis Point Change | Estimated % Change in NII (12 Months) | Estimated % Change in EVE | | :--- | :--- | :--- | | +300 | +7.2% | (17.8)% | | +200 | +4.8% | (11.6)% | | +100 | +2.4% | (5.6)% | | -100 | (2.4)% | +5.2% | Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022[250] - No material changes to internal control over financial reporting occurred during the third quarter of 2022[251] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits Legal Proceedings As of September 30, 2022, the company reports no material pending legal proceedings - Management states that as of September 30, 2022, there are no material pending legal proceedings against the company or its subsidiaries[254] Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes in risk factors were reported compared to the 2021 Form 10-K[255] Unregistered Sales of Equity Securities and Use of Proceeds The Board of Directors authorized a stock repurchase program of up to $50 million, effective from May 17, 2022, through December 31, 2023, with no shares repurchased as of September 30, 2022 - A $50 million stock repurchase program was authorized in May 2022, but no shares have been purchased as of the end of Q3 2022[256] Defaults Upon Senior Securities None Mine Safety Disclosures Not applicable Other Information None Exhibits This section provides an index of all exhibits filed with the Form 10-Q, including certifications by the CEO and CFO and interactive data files