Live Oak Bancshares, Inc. Reports Fourth Quarter 2022 Results

Live Oak Bancshares, Inc.

WILMINGTON, N.C., Jan. 25, 2023 (GLOBE NEWSWIRE) -- Live Oak Bancshares, Inc. (NYSE: LOB) (“Live Oak” or “the Company”) today reported fourth quarter of 2022 net income of $1.8 million, or $0.04 per diluted share. Net income for the year ended December 31, 2022, totaled $176.2 million, or $3.92 per diluted share.

“Live Oak closed 2022 with a strong quarter as our teams once again produced more than $1 billion in loan originations, ending a banner year that also reflected continued deposit growth and $96 million in organic capital growth,” said Live Oak Chairman and CEO James S. (Chip) Mahan III. “The strength and determination of the small business owners we serve is profound, and we believe our strong balance sheet and approach to lending, deposits, servicing and technology continues to set us apart as we advance our mission to serve the entrepreneurs who support our country’s economy.”

Year Over Year Highlights
(Dollars in thousands, except per share data)									Increase (Decrease)
		2022				2021			Dollars				Percent
Total revenue(1)	$	565,493			$	456,985			$	108,508			24	%
Total noninterest expense		314,226				230,987				83,239			36
Income before taxes		210,324				210,788				(464	)		—
Effective tax rate		16.2	%			20.8	%			n/a			n/a
Net income	$	176,208			$	166,995			$	9,213			6	%
Diluted earnings per share		3.92				3.71				0.21			6
Loan and lease production:
Loans and leases originated	$	4,007,621			$	4,480,725			$	(473,104	)		(11	)%
% Fully funded		58.8	%			64.5	%			n/a			n/a
Total loans and leases:	$	7,898,788			$	6,637,781			$	1,261,007			19	%
Total loans and leases, excluding PPP loans:		7,885,895				6,375,903				1,509,992			24
Total assets:		9,855,498				8,213,393				1,642,105			20
Total deposits:		8,884,928				7,112,044				1,772,884			25

(1)   Total revenue consists of net interest income and total noninterest income.

Fourth Quarter 2022 Key Measures
(Dollars in thousands, except per share data)									Increase (Decrease)
	4Q 2022				3Q 2022				Dollars				Percent			4Q 2021
Total revenue(1)	$	104,973			$	141,610			$	(36,637	)		(26	)%		$	111,394
Total noninterest expense		84,585				83,048				1,537			2				59,698
Income before taxes		717				44,393				(43,676	)		(98	)			47,778
Effective tax rate	(149.9		)%			3.4	%			n/a			n/a				36.9	%
Net income	$	1,792			$	42,868			$	(41,076	)		(96	)%		$	30,147
Diluted earnings per share		0.04				0.96				(0.92	)		(96	)		$	0.66
Loan and lease production:
Loans and leases originated	$	1,177,688			$	1,005,235			$	172,453			17	%		$	1,083,623
% Fully funded		58.1	%			54.0	%			n/a			n/a				54.1	%

(1)   Total revenue consists of net interest income and total noninterest income.

Loans and Leases

At December 31, 2022, the total loan and lease portfolio was $7.90 billion, 6.9% above its level at September 30, 2022 and 19.0% above its level at December 31, 2021. This growth was the product of strong origination volumes. Compared to the third quarter of 2022, loans and leases held for investment increased $490.8 million, or 7.2%, to $7.34 billion while loans held for sale increased $17.0 million, or 3.2%, to $554.6 million. Average loans and leases were $7.64 billion during the fourth quarter of 2022 compared to $7.21 billion during the third quarter of 2022. Excluding Paycheck Protection Program (“PPP”) loans, the total loan and lease portfolio increased by $1.51 billion, or 23.7%, compared to December 31, 2021, and $518.7 million, or 7.0%, compared to September 30, 2022.

The total loan and lease portfolio of $7.90 billion includes $12.9 million of PPP loans, net of deferred fees and costs, at December 31, 2022. The total loan and lease portfolio at December 31, 2022, and September 30, 2022 was comprised of 57.7% and 56.6% of unguaranteed loans and leases, respectively.

Loan and lease originations totaled $1.18 billion during the fourth quarter of 2022, an increase of $172.5 million, or 17.2%, from the third quarter of 2022.

Deposits

Total deposits increased to $8.88 billion at December 31, 2022, an increase of $480.0 million compared to September 30, 2022, and an increase of $1.77 billion compared to December 31, 2021. The increase in total deposits from the prior periods provides support for the growth in the loan and lease portfolio.

Average total interest-bearing deposits for the fourth quarter of 2022 increased $269.0 million, or 3.3%, to $8.36 billion, compared to $8.09 billion for the third quarter of 2022. The ratio of average total loans and leases to average interest-bearing deposits was 91.4% for the fourth quarter of 2022 compared to 89.1% for the third quarter of 2022.

Borrowings

Borrowings totaled $83.2 million at December 31, 2022, compared to $35.6 million and $318.3 million at September 30, 2022 and December 31, 2021, respectively. During the fourth quarter of 2022, the Company increased borrowings by $47.6 million primarily related to providing short term support for growth in the loan and lease portfolio. The decrease in borrowings as compared to December 31, 2021 is primarily related to the repayment of the Federal Reserve’s Paycheck Protection Liquidity Facility earlier in 2022.

Net Interest Income

Net interest income for the fourth quarter of 2022 increased to $85.9 million compared to $83.9 million for the third quarter of 2022 and $77.6 million for the fourth quarter of 2021.

The net interest margin for the fourth and third quarters of 2022 was 3.76% and 3.84%, respectively, a decrease of eight basis points quarter over quarter. This decrease was due to interest rate increases where deposits are repricing more rapidly than the Company’s loan portfolio. During the fourth quarter of 2022, the average cost of interest-bearing liabilities increased by 85 basis points while the average yield on interest-earning assets increased by 67 basis points.

The increase in net interest income for the fourth quarter of 2022 compared to the fourth quarter of 2021 was driven by growth in the total loan and lease portfolio. Partially mitigating this increase was a decrease in the net interest margin arising from an increase in interest-bearing liabilities combined with average cost of funds outpacing the average yield on interest-earning assets.

Noninterest Income

Noninterest income for the fourth quarter of 2022 decreased to $19.1 million compared to $57.7 million for the third quarter of 2022 and $33.8 million for the fourth quarter of 2021. The primary drivers behind decreased noninterest income are outlined below.

The largest driver of the decrease in noninterest income for the fourth quarter of 2022 as compared to the third quarter of 2022 arose from a decrease in equity method investment income of $31.0 million. This quarter over quarter decrease of $31.0 million was principally due to the $28.4 million gain arising in the third quarter of 2022 associated with Jack Henry & Associates, Inc’s acquisition of the Company’s ownership in Payrailz, LLC (“Payrailz”). The $4.8 million decrease in equity method investment income for the fourth quarter of 2022 as compared to the fourth quarter of 2021 was principally related to higher levels of pro-rata losses of equity method investees in 2022.

The loan servicing asset revaluation resulted in a loss of $5.0 million for the fourth quarter of 2022 compared to a loss of $1.3 million for the third quarter of 2022 and $4.2 million for the fourth quarter of 2021. Higher levels of losses in the loan servicing asset revaluation compared to the prior quarters was largely the result of weaker economic conditions related to the rapidly rising interest rate environment.

Net gains on sales of loans was $7.4 million, a $1.9 million decrease compared to the third quarter of 2022 and a $12.9 million decrease compared to the fourth quarter of 2021. During the second quarter of 2022, the Company began significantly decreasing loan sale volumes due to unusually weak market conditions depressing market premiums. The decrease in net gains on sales of loans compared to the third quarter of 2022 and fourth quarter of 2021 was largely the result of lower volume of loan sales combined with overall weaker market conditions compared to those experienced in the prior periods. The average guaranteed loan sale premium was 105%, 108% and 110% for the fourth quarter of 2022, third quarter of 2022 and fourth quarter of 2021, respectively. The volume of guaranteed loans sold was $144.3 million for the fourth quarter of 2022 compared to $148.1 million sold in the third quarter of 2022 and $199.0 million sold in the fourth quarter of 2021.

The net gain on loans accounted for under the fair value option totaled $571 thousand for the fourth quarter of 2022, a $3.8 million decrease compared to the $4.4 million net gain for the third quarter of 2022. This reduced gain in valuation of loans accounted for under the fair value option was largely the result of the above referenced negative market pricing trends combined with continued amortization of the portfolio of loans accounted for under the fair value option.

Noninterest Expense

Noninterest expense for the fourth quarter of 2022 totaled $84.6 million compared to $83.0 million for the third quarter of 2022 and $59.7 million for the fourth quarter of 2021. The primary drivers in the noninterest expense changes are outlined below.

Salaries and employee benefits for the fourth quarter of 2022 decreased $919 thousand compared to the third quarter of 2022 and increased $10.1 million compared to the fourth quarter of 2021. Driving the quarter over quarter decrease was an additional bonus accrual of $3.0 million that was included in the third quarter of 2022 related to the earlier discussed Payrailz gain. The increase over the fourth quarter of 2021 was principally the result of continued investment in human resources to support strategic and growth initiatives.

Advertising and marketing expense increased $1.3 million compared to the third quarter of 2022 and $2.0 million compared to the fourth quarter of 2021 as a continued investment in the Company’s lending and deposit market growth.

Technology expenses increased $1.1 million compared to the third quarter of 2022 and $2.4 million compared to the fourth quarter of 2021. The increase for both periods was primarily related to enhanced investments in the Company’s technology resources.

The Company incurred impairment charges related to new renewable energy tax credit investment transactions of $8.4 million in the fourth quarter of 2022 compared to $7.7 million in the third quarter of 2022. Investments of this type generate a return primarily through the realization of income tax credits and other benefits; accordingly, impairment of the investment amount is recognized in conjunction with the realization of related tax benefits. These investments generated federal investment tax credits in the fourth and third quarters of 2022 of $10.3 million and $6.1 million, respectively, which are reflected in the Company’s 2022 effective tax rate. Investments of this nature are part of the Company’s ongoing initiative to promote renewable energy sources.

Asset Quality

During the fourth quarter of 2022, the Company recognized net charge-offs for loans carried at historical cost of $1.4 million compared to $1.7 million in the third quarter of 2022 and $15 thousand in the fourth quarter of 2021. Net charge-offs as a percentage of average held for investment loans and leases carried at historical cost, annualized, for the quarters ended December 31, 2022, September 30, 2022 and December 30, 2021, was 0.09%, 0.12% and 0.00%, respectively. Net charge-offs as a percentage of total average held for investment loans and leases carried at historical cost for the years ended December 31, 2022 and 2021, were 0.14% and 0.09%, respectively.

Unguaranteed nonperforming (nonaccrual) loans and leases, excluding $6.7 million and $2.7 million accounted for under the fair value option at December 31, 2022, and September 30, 2022, respectively, increased to $18.8 million, or 0.27% of loans and leases held for investment which are carried at historical cost, at December 31, 2022, compared to $14.3 million, or 0.23%, at September 30, 2022.

Provision for Loan and Lease Credit Losses

The provision for loan and lease credit losses for the fourth quarter of 2022 totaled $19.7 million compared to $14.2 million for the third quarter of 2022 and $3.9 million for the fourth quarter of 2021. The higher provision expense in the fourth quarter of 2022 was primarily the result of continued growth of the loan and lease portfolio combined with charge-off experience impacts and specific reserve growth related to a small number of relationships.

The allowance for credit losses on loans and leases totaled $96.6 million at December 31, 2022, compared to $78.3 million at September 30, 2022. The allowance for credit losses on loans and leases as a percentage of total loans and leases held for investment carried at historical cost was 1.41% and 1.23% at December 31, 2022, and September 30, 2022, respectively.

Income Tax

Income tax benefit and related effective tax rate was $1.1 million and (149.9)% for the fourth quarter of 2022. In comparison, income tax expense and related effective tax rates for the third quarter of 2022 and fourth quarter of 2021 were $1.5 million and 3.4%, and $17.6 million and 36.9%, respectively. The lower level of income tax expense for the fourth quarter of 2022 compared to the third quarter of 2022 was primarily the result of decreased pretax income combined with a research credit recognized during the quarter related to the Company’s ongoing investment in developing its technology-based platform. The lower level of income tax expense for the fourth quarter of 2022 compared to the fourth quarter of 2021 was primarily the result of a lower level of pretax income combined with higher levels of investment tax credits related to renewable energy investment transactions and additional impacts discussed above related to research credits.

Conference Call

Live Oak will host a conference call to discuss the company’s financial results and business outlook tomorrow, January 26, 2023, at 9:00 a.m. ET. To listen to the call via a live audio webcast, visit http://investor.liveoakbank.com/. To participate via telephone, please register in advance at https://register.vevent.com/register/BI38276e2e147f4289a0d59072d04a6f09. Upon registration, participants will receive a confirmation email detailing how to join the conference call, including the dial-in number and unique passcode and that can be used to access the call. After the conference call, a replay will be available until February 2, 2023, at the same audio webcast link.

Important Note Regarding Forward-Looking Statements

Statements in this press release that are based on other than historical data or that express the Company’s plans or expectations regarding future events or determinations are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements based on historical data are not intended and should not be understood to indicate the Company’s expectations regarding future events. Forward-looking statements provide current expectations or forecasts of future events or determinations. These forward-looking statements are not guarantees of future performance or determinations, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from those presented, either expressed or implied, in this press release. Factors that could cause actual results to differ materially from those expressed in the forward-looking statements include changes in Small Business Administration (“SBA”) rules, regulations or loan products, including the Section 7(a) program, changes in SBA standard operating procedures or changes in Live Oak Banking Company's status as an SBA Preferred Lender; changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture; the potential impacts of the Coronavirus Disease 2019 (COVID-19) pandemic on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior; a reduction in or the termination of the Company's ability to use the technology-based platform that is critical to the success of its business model, including a failure in or a breach of operational or security systems; competition from other lenders; the Company's ability to attract and retain key personnel; market and economic conditions and the associated impact on the Company; operational, liquidity and credit risks associated with the Company's business; the impact of heightened regulatory scrutiny of financial products and services and the Company's ability to comply with regulatory requirements and expectations; a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget; adverse results, including related fees and expenses, from pending or future lawsuits, government investigations or private actions; and the other factors discussed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) and available at the SEC’s Internet site (http://www.sec.gov). Except as required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

About Live Oak Bancshares, Inc.

Live Oak Bancshares, Inc. (NYSE: LOB) is a financial holding company and the parent company of Live Oak Bank. Live Oak Bancshares and its subsidiaries partner with businesses that share a groundbreaking focus on service and technology to redefine banking. To learn more, visit www.liveoakbank.com.

Contacts:

William C. (BJ) Losch, III | CFO & Chief Banking Officer | Investor Relations | 910.765.9966
Claire Parker | SVP Corporate Communications | Media Relations | 910.597.1592

Live Oak Bancshares, Inc. Quarterly Statements of Income (unaudited) (Dollars in thousands, except per share data)
	Three Months Ended																				4Q 2022 Changes vs.
	4Q 2022				3Q 2022				2Q 2022				1Q 2022				4Q 2021				3Q 2022			4Q 2021
Interest income																					%			%
Loans and fees on loans	$	127,310			$	107,880			$	94,157			$	89,198			$	88,577			18.0			43.7
Investment securities, taxable		6,716				5,506				4,046				3,399				3,455			22.0			94.4
Other interest earning assets		2,584				2,448				1,044				185				171			5.6			1411.1
Total interest income		136,610				115,834				99,247				92,782				92,203			17.9			48.2
Interest expense
Deposits		50,357				31,553				18,777				14,348				13,817			59.6			264.5
Borrowings		351				395				536				655				748			(11.1	)		(53.1	)
Total interest expense		50,708				31,948				19,313				15,003				14,565			58.7			248.1
Net interest income		85,902				83,886				79,934				77,779				77,638			2.4			10.6
Provision for loan and lease credit losses		19,671				14,169				5,267				1,836				3,918			38.8			402.1
Net interest income after provision for loan and lease credit losses		66,231				69,717				74,667				75,943				73,720			(5.0	)		(10.2	)
Noninterest income
Loan servicing revenue		6,296				6,230				6,477				6,356				6,289			1.1			0.1
Loan servicing asset revaluation		(5,016	)			(1,324	)			(8,668	)			(1,569	)			(4,160	)		(278.9	)		(20.6	)
Net gains on sales of loans		7,362				9,275				5,630				20,977				20,257			(20.6	)		(63.7	)
Net gain (loss) on loans accounted for under the fair value option		571				4,420				(4,461	)			516				(66	)		(87.1	)		965.2
Equity method investments income (loss)		(1,818	)			29,136				119,056				(2,124	)			2,969			(106.2	)		(161.2	)
Equity security investments gains (losses), net		868				876				1,655				(44	)			218			(0.9	)		298.2
Lease income		2,555				2,516				2,510				2,503				2,521			1.6			1.3
Management fee income		3,200				2,844				2,558				1,488				1,482			12.5			115.9
Other noninterest income		5,053				3,751				3,772				4,565				4,246			34.7			19.0
Total noninterest income		19,071				57,724				128,529				32,668				33,756			(67.0	)		(43.5	)
Noninterest expense
Salaries and employee benefits		42,560				43,479				46,276				38,507				32,464			(2.1	)		31.1
Travel expense		1,872				2,372				2,358				1,897				1,782			(21.1	)		5.1
Professional services expense		2,453				2,505				3,988				2,791				3,724			(2.1	)		(34.1	)
Advertising and marketing expense		3,892				2,621				2,301				1,729				1,844			48.5			111.1
Occupancy expense		3,469				2,519				2,773				2,327				2,045			37.7			69.6
Technology expense		8,849				7,770				5,762				6,053				6,489			13.9			36.4
Equipment expense		3,759				3,761				3,784				3,816				3,741			(0.1	)		0.5
Other loan origination and maintenance expense		3,657				3,376				3,022				3,113				3,406			8.3			7.4
Renewable energy tax credit investment impairment		8,446				7,721				50				—				—			9.4			100.0
FDIC insurance		2,923				2,697				2,164				1,972				1,931			8.4			51.4
Contributions and donations		33				191				5,515				723				328			(82.7	)		(89.9	)
Other expense		2,672				4,036				2,886				2,786				1,944			(33.8	)		37.4
Total noninterest expense		84,585				83,048				80,879				65,714				59,698			1.9			41.7
Income before taxes		717				44,393				122,317				42,897				47,778			(98.4	)		(98.5	)
Income tax (benefit) expense		(1,075	)			1,525				25,278				8,388				17,631			(170.5	)		(106.1	)
Net income	$	1,792			$	42,868			$	97,039			$	34,509			$	30,147			(95.8	)		(94.1	)
Earnings per share
Basic	$	0.04			$	0.97			$	2.22			$	0.79			$	0.69			(95.9	)		(94.2	)
Diluted	$	0.04			$	0.96			$	2.16			$	0.76			$	0.66			(95.8	)		(93.9	)
Weighted average shares outstanding
Basic		44,005,220				43,914,920				43,824,707				43,701,943				43,492,172
Diluted		44,794,941				44,797,109				44,803,278				45,227,536				45,474,530

Live Oak Bancshares, Inc. Quarterly Balance Sheets (unaudited) (Dollars in thousands)
	As of the quarter ended																				4Q 2022 Change vs.
	4Q 2022				3Q 2022				2Q 2022				1Q 2022				4Q 2021				3Q 2022			4Q 2021
Assets																					%			%
Cash and due from banks	$	280,239			$	335,046			$	580,493			$	477,778			$	187,203			(16.4	)		49.7
Federal funds sold		136,397				68,324				51,694				29,993				16,547			99.6			724.3
Certificates of deposit with other banks		4,000				4,250				4,250				4,250				4,750			(5.9	)		(15.8	)
Investment securities available-for-sale		1,014,719				1,005,372				927,968				844,577				906,052			0.9			12.0
Loans held for sale (1)		554,610				537,649				1,199,734				1,028,635				1,116,519			3.2			(50.3	)
Loans and leases held for investment (2)		7,344,178				6,853,382				5,860,209				5,738,241				5,521,262			7.2			33.0
Allowance for credit losses on loans and leases		(96,566	)			(78,291	)			(65,863	)			(63,058	)			(63,584	)		23.3			51.9
Net loans and leases		7,247,612				6,775,091				5,794,346				5,675,183				5,457,678			7.0			32.8
Premises and equipment, net		263,290				260,285				257,926				254,865				240,196			1.2			9.6
Foreclosed assets		—				1,178				191				198				620			(100.0	)		(100.0	)
Servicing assets		26,323				29,081				28,661				36,286				33,574			(9.5	)		(21.6	)
Other assets		328,308				298,374				275,634				268,201				250,254			10.0			31.2
Total assets	$	9,855,498			$	9,314,650			$	9,120,897			$	8,619,966			$	8,213,393			5.8			20.0
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	194,100			$	170,336			$	119,371			$	86,342			$	89,279			14.0			117.4
Interest-bearing		8,690,828				8,234,573				8,036,373