Live Oak Bancshares, Inc. Reports Second Quarter 2019 Results

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WILMINGTON, N.C., July 24, 2019 (GLOBE NEWSWIRE) -- Live Oak Bancshares, Inc. LOB ("Live Oak" or "the Company") today reported second quarter net earnings available to common shareholders of $4.9 million, or $0.12 per diluted share, compared to $14.3 million, or $0.34 per diluted share, for the second quarter of 2018. 

"We continue to deliver on our commitment to generate a more predictable earnings stream while executing our long-term objective to be a major force in the delivery of financial services to small businesses nationwide through technological innovation.  As we continue to hold a greater portion of our guaranteed loans, recurring revenues grew 21% compared to a year ago and exceeded our operating expenses.  The loan and lease portfolio grew 35% over the prior year reflecting solid efforts of our people to serve the needs of small businesses while also promoting greater financial stability and consistency for Live Oak. We maintain our focus on long-term value creation and will always strive to fulfill the complete needs of small businesses," said James S. Mahan, III, Chief Executive Officer of Live Oak.

Second Quarter 2019 Key Measures

(Dollars in thousands, except per share data)         Increase (Decrease)     
  Q2 2019  Q2 2018  Dollars  Percent  Q1 2019 
Net interest income and servicing revenues $40,998  $34,013  $6,985   21% $38,015 
Net income  4,935   14,253   (9,318)  (65)  2,372 
Diluted earnings per share  0.12   0.34   (0.22)  (65)  0.06 
Non-GAAP net income (1)  5,664   14,524   (8,860)  (61)  2,368 
Non-GAAP diluted earnings per share (1)  0.14   0.35   (0.21)  (60)  0.06 
Loan and lease production:                    
Loans and leases originated $525,088  $491,797  $33,291   7% $390,851 
% Fully funded  42.9%  55.9% n/a  n/a   55.6%
Total loans and leases $3,083,310  $2,291,862  $791,448   35% $2,774,605 
Total assets  4,274,301   3,472,969   801,332   23   4,058,047 
Total deposits  3,721,597   2,969,236   752,361   25   3,528,405 

(1) See accompanying GAAP to Non-GAAP Reconciliation.

Loans and Leases

At June 30, 2019, the total loan and lease portfolio of $3.08 billion increased 34.5% from its level at the end of the second quarter of 2018 and 11.1% from its level at March 31, 2019.  Compared to the first quarter of 2019, loans and leases held for investment increased $223.3 million, or 11.2%, to $2.23 billion while loans held for sale increased $85.4 million, or 11.0%, to $857.8 million. Loan and lease originations rose to $525.1 million during the second quarter of 2019, an increase of $134.2 million, or 34.3%, from the first quarter of 2019, due to increased originations across multiple industry verticals.  Production volumes also benefited from the ongoing selective hiring of experienced SBA lending generalists.  The total loan and lease portfolio at June 30, 2019, and March 31, 2019, of $3.08 billion and $2.77 billion, respectively, was comprised of approximately 57.0% and 59.4% of unguaranteed loans and leases, respectively.

Average loans and leases were $2.93 billion during the second quarter of 2019 compared to $2.67 billion during the first quarter of 2019.

Deposits

Total deposits increased by $193.2 million, or 5.5%, to $3.72 billion at June 30, 2019, from $3.53 billion at March 31, 2019, supporting the growing loan and lease portfolio. Average total interest-bearing deposits for the second quarter of 2019 increased $233.9 million, or 7.1%, to $3.53 billion, compared to $3.29 billion for the first quarter of 2019. The ratio of average total loans and leases to average deposits was 81.8% for the second quarter of 2019, compared to 80.0% for the first quarter of 2019.

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Net Interest Income

Net interest income for the second quarter of 2019 rose to $33.9 million compared to $27.0 million for the second quarter of 2018 and $30.6 million for the first quarter of 2019. The increase from the prior year was driven by the significant growth in the combined held for sale and held for investment loan and lease portfolios reflecting the Company's ongoing initiative to grow recurring revenue sources.  Another contributing factor was higher investment security holdings as the Company strives to strengthen its liquidity profile while improving the asset-liability repricing mix.  The increase from the first quarter of 2019 arose from higher average balances in both loans and leases and investment securities.  The net interest margin for the second quarter of 2019 increased seven basis points to 3.70% versus 3.63% in the first quarter of 2019 as the increasing yields on interest earning assets outpaced the increase in rates on interest bearing liabilities.

Noninterest Income

Noninterest income for the second quarter of 2019 decreased by $15.9 million, or 52.0%, compared to the second quarter of 2018, and increased by $1.7 million, or 12.9%, compared to the first quarter of 2019.  The Company's transition to retaining a greater portion of its loans to improve interest income with the consequent reduction in the level of loan sales and related gains was a key driver in lower noninterest income compared to the second quarter of 2018. 

The Company's net gains on sales of loans decreased to $6.0 million in the second quarter of 2019 compared to $23.1 million in the second quarter of 2018 and increased from $4.2 million in the first quarter of 2019.  The volume of guaranteed loan sales in the second quarter of 2019 declined to $71.9 million compared to $295.2 million in the second quarter of 2018 and increased from $62.9 million in the first quarter of 2019. As mentioned above, the decline in loan sale volumes from the prior year is consistent with the Company's strategic shift to build its recurring revenue streams by holding substantially more of its production on balance sheet.  The average net gain on guaranteed loan sales was $80.1 thousand per million sold in the second quarter of 2019, a decrease from $82.6 thousand in the second quarter of 2018 and an increase from $61.3 thousand in the first quarter of 2019. The decline in average net gain on guaranteed loan sales over the second quarter of 2018 was driven by $980 thousand in fair value net losses in exchange-traded interest rate lock commitments during the second quarter of 2019 compared to a $941 thousand in fair value net gains during the second quarter of 2018. The increase in average net gain on guaranteed loans sales compared to the first quarter of 2019 was largely a product of greater selectivity over loans designated for sale combined with improving secondary market conditions.  Excluding fair value fluctuations in exchange-traded interest rate lock commitments, the average net gain on guaranteed loan sales was $93.7 thousand and $79.4 thousand per million sold in the second quarters of 2019 and 2018, respectively, and $89.0 thousand per million sold in the first quarter of 2019. 

The net loss resulting from the revaluation of the servicing asset declined to $403 thousand for the second quarter of 2019, a decrease of $3.3 million compared to the second quarter of 2018 and a decrease of $1.8 million compared to the first quarter of 2019.  The decrease in the net loss was driven by variability in market conditions and changes to the carrying value of the retained portion of USDA loans.

The flow-through loss from investments accounted for under the equity method totaled $1.7 million, $673 thousand and $2.0 million for the quarters ended June 30, 2019, June 30, 2018 and March 31, 2019, respectively.  These changes reflect the Company's pro-rata portion of operating results for certain strategic start-up investments.

Lease income from solar panels contributed $2.4 million in noninterest income in the second quarter of 2019, compared to $1.9 million in the second quarter of 2018 and $2.3 million in the first quarter of 2019.  The increase was related to growth in leased solar panels.

Other noninterest income of $1.0 million in the second quarter of 2019 decreased by $410 thousand, or 28.9%, from the second quarter of 2018 and by $1.6 million, or 60.8%, from the first quarter of 2019.  The decline from prior quarters was the product of a variety of insignificant non-recurring items.

The sale of the title insurance business in late 2018 also contributed to the decline in noninterest income for the second quarter of 2019 compared to the second quarter 2018.

Noninterest Expense

Noninterest expense for the second quarter of 2019 was $39.6 million, a decrease from $40.8 million for the second quarter of 2018 and an increase from $38.2 million for the first quarter of 2019.

The decline in noninterest expense from the second quarter of 2018 was primarily driven by decreases in travel, data processing, and other expenses.  Travel expense declined from $2.0 million for the second quarter of 2018 to $1.5 million for the second quarter of 2019 due to a reduction in repairs and maintenance costs associated with an older aircraft that was sold during the first quarter of 2019, higher deferred travel costs as more loans were retained, and general improvements in operational efficiency.  Data processing expenses decreased $959 thousand from the second quarter of 2018 to $1.9 million for the second quarter of 2019 primarily as a result of the expiration of software development services provided by Apiture directly to the Company and due to the capitalization of certain software development costs during the second quarter of 2019.  Other expenses declined $988 thousand from the second quarter of 2018 to $1.7 million for the second quarter of 2019.  This decline from the prior year is largely attributable to the elimination of costs related to the operation of the title insurance business, which was sold in the third quarter of 2018, and impairment expenses recognized in the second quarter of 2018 with the transfer of the title insurance business to held for sale.

The growth in noninterest expense from the first quarter of 2019 was primarily driven by increases in travel expense and equipment expense associated with the acquisition of a third corporate aircraft during the second quarter of 2019.  Additionally, the Company recognized a one-time impairment loss of $602 thousand on a renewable tax credit investment in the second quarter of 2019.

Asset Quality

Net charge-offs of $526 thousand in the second quarter of 2019 increased from $65 thousand in the first quarter of 2019 and decreased from $787 thousand in the second quarter of 2018.  Net charge-offs as a percentage of average held for investment loans and leases, annualized, for the quarter ended June 30, 2019, was 0.10% compared to 0.01% for the first quarter of 2019 and 0.21% for the second quarter of 2018. 

Total nonperforming loans decreased to $65.5 million in the second quarter of 2019 from $70.7 million at the end of the prior quarter.  The unguaranteed exposure of nonperforming loans decreased to $18.4 million, or 0.82% of total loans and leases held for investment, at June 30, 2019, compared to $20.2 million, or 1.01%, at March 31, 2019.  For the quarters ended June 30, 2019 and March 31, 2019, the percentage of unguaranteed criticized loans and leases, comprised of risk grades 5 through 8, to unguaranteed held for investment loans and leases was 5.27% and 5.39%, respectively.

Foreclosed assets increased $4.6 million to $6.0 million at June 30, 2019, from $1.4 million at March 31, 2019.  The unguaranteed exposure of foreclosed assets increased to $1.2 million at June 30, 2019, from $170 thousand at March 31, 2019. 

Provision for Loan and Lease Losses

The provision for loan and lease losses for the second quarter of 2019 totaled $3.5 million compared to $2.1 million for the second quarter of 2018 and $2.7 million for the first quarter of 2019.  The increase in provision expense was largely the result of portfolio growth for the second quarter of 2019. 

The allowance for loan and lease losses totaled $38.0 million at June 30, 2019, compared to $35.1 million at March 31, 2019. The allowance for loan and lease losses as a percentage of total loans and leases held for investment was 1.71% and 1.75% at June 30, 2019, and March 31, 2019, respectively.

Income Tax

Income tax expense was $662 thousand in the second quarter of 2019 compared to $491 thousand in the second quarter of 2018 and $317 thousand in the first quarter of 2019.  The Company's effective tax rate is predominantly driven by the leasing of renewable energy assets which generate investment tax credits.  As the lessor of these assets, the Company is accomplishing broader strategic initiatives in the renewable energy sector.

Conference Call

Live Oak will host a conference call to discuss quarterly results at 9:00 a.m. ET tomorrow morning (July 25, 2019). Media representatives, analysts and the public are invited to listen to this discussion by calling (844) 743-2494 (domestic) or (661) 378-9528 (international) with conference ID 1980859. A live webcast of the conference call along with presentation materials referenced during the conference call will be available on the Investor Relations page of the Company's website at http://investor.liveoakbank.com. A replay of the webcast will be archived on the Company's website for one year.  A replay of the conference call will also be available until 5:00 p.m. ET August 1, 2019 and can be accessed by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international).

CFO Commentary

Additional commentary on the quarter by Brett Caines, Chief Financial Officer of the Company, is available at http://investor.liveoakbank.com in the supporting materials for the conference call.

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; 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; 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. LOB is a financial holding company and the parent company of Live Oak Banking Company.  Live Oak Bancshares and its subsidiaries partner with businesses that have a common focus of changing the banking industry by bringing efficiency and excellence to customers using technology and innovation.

Contacts:

Brett Caines | CFO | Investor Relations | 910.796.1645 & Micah Davis | Marketing Director | Media Relations | 910.550.2255

Live Oak Bancshares, Inc.
Quarterly Statements of Income (unaudited)
(Dollars in thousands, except per share data)

  Three months ended 
  2Q 2019  1Q 2019  4Q 2018  3Q 2018  2Q 2018 
Interest income                    
Loans and fees on loans $49,914  $44,966  $40,628  $37,724  $36,267 
Investment securities, taxable  4,116   3,317   2,558   2,528   2,530 
Other interest earning assets  1,108   1,639   1,568   1,638   2,179 
Total interest income  55,138   49,922   44,754   41,890   40,976 
Interest expense                    
Deposits  21,203   19,317   15,959   14,165   13,927 
Borrowings           1   1 
Total interest expense  21,203   19,317   15,959   14,166   13,928 
Net interest income  33,935   30,605   28,795   27,724   27,048 
Provision for (recovery of) loan and leases losses  3,463   2,742   6,822   (243)  2,087 
Net interest income after provision for loan and
  lease losses
  30,472   27,863   21,973   27,967   24,961 
Noninterest income                    
Loan servicing revenue  7,063   7,410   7,752   7,506   6,965 
Loan servicing asset revaluation  (403)  (2,246)  (627)  (9,380)  (3,670)
Net gains on sales of loans  6,015   4,198   5,687   22,004   23,061 
Equity method investments income (loss)  (1,736)  (2,014)  (1,289)  (360)  (673)
Gain on sale of investment securities available-for-sale     5          
Lease income  2,369   2,325   2,244   2,194   1,920 
Construction supervision fee income  386   779   323   578   597 
Title insurance income           479   996 
Other noninterest income  1,007   2,570   3,975   1,310   1,417 
Total noninterest income  14,701   13,027   18,065   24,331   30,613 
Noninterest expense                    
Salaries and employee benefits  21,990   21,855   14,503   20,553   22,146 
Travel expense  1,541   1,200   3,269   2,003   2,041 
Professional services expense  1,621   2,182   1,233   1,228   1,119 
Advertising and marketing expense  1,665   1,364   1,023   1,462   1,868 
Occupancy expense  1,848   1,609   1,738   1,588   1,882 
Data processing expense  1,947   2,399   2,606   3,661   2,906 
Equipment expense  4,239   3,325   3,630   3,649   3,368 
Other loan origination and maintenance expense  1,708   1,639   1,482   1,742   1,414 
Renewable energy tax credit investment impairment  602             
FDIC insurance  699   635   547   1,105   1,010 
Title insurance closing services expense           114   372 
Other expense  1,716   1,993   2,527   1,459   2,704 
Total noninterest expense  39,576   38,201   32,558   41,244   40,830 
Income before taxes  5,597   2,689   7,480   11,054   14,744 
Income tax expense (benefit)  662   317   (3,010)  (3,198)  491 
Net income $4,935  $2,372  $10,490  $14,252  $14,253 
Earnings per share                    
Basic $0.12  $0.06  $0.26  $0.36  $0.36 
Diluted $0.12  $0.06  $0.26  $0.34  $0.34 
Weighted average shares outstanding                    
Basic  40,196,662   40,160,118   40,148,115   40,119,561   40,027,336 
Diluted  40,998,541   40,921,823   41,075,864   41,688,430   41,619,647 

Live Oak Bancshares, Inc.
Quarterly Balance Sheets (unaudited)
(Dollars in thousands)

  As of the quarter ended 
  2Q 2019  1Q 2019  4Q 2018  3Q 2018  2Q 2018 
Assets                    
Cash and due from banks $115,292  $221,159  $316,823  $368,565  $392,941 
Federal funds sold  68,153   64,708          
Certificates of deposit with other banks  7,250   7,250   7,250   750   2,250 
Investment securities available-for-sale  576,275   569,739   380,490   374,284   382,890 
Loans held for sale  857,837   772,481   687,393   646,475   757,494 
Loans and leases held for investment  2,225,473   2,002,124   1,843,419   1,631,337   1,534,368 
Allowance for loan and lease losses  (38,048)  (35,111)  (32,434)  (26,797)  (29,350)
Net loans and leases  2,187,425   1,967,013   1,810,985   1,604,540   1,505,018 
Premises and equipment, net  281,126   271,810   262,524   263,861   234,817 
Foreclosed assets  6,044   1,374   1,094   1,429   1,725 
Servicing assets  41,687   44,324   47,641   49,261   52,689 
Operating lease right-of-use assets  1,996   2,136          
Other assets  131,216   136,053   156,249   135,592   143,145 
Total assets $4,274,301  $4,058,047  $3,670,449  $3,444,757  $3,472,969 
Liabilities and Shareholders' Equity                    
Liabilities                    
Deposits:                    
Noninterest-bearing $55,416  $53,843  $53,993  $48,622  $46,192 
Interest-bearing  3,666,181   3,474,562   3,095,590   2,875,666   2,923,044 
Total deposits  3,721,597   3,528,405   3,149,583   2,924,288   2,969,236 
Short term borrowings  1,345   1,393   1,441       
Long term borrowings  16   17   16   1,506   3,385 
Operating lease liabilities  2,162   2,314          
Other liabilities  30,195   25,538   25,849   41,733   37,362 
Total liabilities  3,755,315   3,557,667   3,176,889   2,967,527   3,009,983 
Shareholders' equity                    
Preferred stock, no par value, 1,000,000 shares
  authorized, none issued or outstanding
               
Class A common stock (voting)  284,987   281,994   278,945   276,831   274,043 
Class B common stock (non-voting)  49,168   49,168   49,168   49,168   49,168 
Retained earnings  171,954   168,225   167,124   157,839   144,791 
Accumulated other comprehensive income (loss)  12,877   993   (1,677)  (6,608)  (5,016)
Total equity  518,986   500,380   493,560   477,230   462,986 
Total liabilities and shareholders' equity $4,274,301  $4,058,047  $3,670,449  $3,444,757  $3,472,969 
                     


Live Oak Bancshares, Inc.
Statements of Income (unaudited)
(Dollars in thousands, except per share data)

  Six months ended 
  June 30, 2019  June 30, 2018 
Interest income        
Loans and fees on loans $94,880  $68,958 
Investment securities, taxable  7,433   3,647 
Other interest earning assets  2,747   3,394 
Total interest income  105,060   75,999 
Interest expense        
Deposits  40,520   24,345 
Borrowings     130 
Total interest expense  40,520   24,475 
Net interest income  64,540   51,524 
Provision for loan and lease losses  6,205   6,479 
Net interest income after provision for loan and lease losses  58,335   45,045 
Noninterest income        
Loan servicing revenue  14,473   13,863 
Loan servicing asset revaluation  (2,649)  (8,758)
Net gains on sales of loans  10,213   47,479 
Equity method investments income (loss)  (3,750)  (1,037)
Gain on sale of investment securities available-for-sale  5    
Lease income  4,694   3,528 
Construction supervision fee income  1,165   1,376 
Title insurance income     2,296 
Other noninterest income  3,577   2,622 
Total noninterest income  27,728   61,369 
Noninterest expense        
Salaries and employee benefits  43,845   42,355 
Travel expense  2,741   3,884 
Professional services expense  3,803   2,417 
Advertising and marketing expense  3,029   3,530 
Occupancy expense  3,457   3,739 
Data processing expense  4,346   5,743 
Equipment expense  7,564   6,445 
Other loan origination and maintenance expense  3,347   2,743 
Renewable energy tax credit investment impairment  602    
FDIC insurance  1,334   1,582 
Title insurance closing services expense     798 
Other expense  3,709   5,666 
Total noninterest expense  77,777   78,902 
Income before taxes  8,286   27,512 
Income tax expense  979   806 
Net income $7,307  $26,706 
Earnings per share        
Basic $0.18  $0.67 
Diluted $0.18  $0.64 
Weighted average shares outstanding        
Basic  40,178,491   39,977,336 
Diluted  40,960,283   41,516,333 
         

Live Oak Bancshares, Inc.
Quarterly Selected Financial Data
(Dollars in thousands, except per share data)

  As of and for the three months ended 
  2Q 2019  1Q 2019  4Q 2018  3Q 2018  2Q 2018 
Income Statement Data                    
Net income $4,935  $2,372  $10,490  $14,252  $14,253 
Per Common Share                    
Net income, basic $0.12  $0.06  $0.26  $0.36  $0.36 
Net income, diluted  0.12   0.06   0.26   0.34   0.34 
Dividends declared  0.03   0.03   0.03   0.03   0.03 
Book value  12.90   12.45   12.29   11.89   11.55 
Tangible book value (1)  12.90   12.45   12.29   11.89   11.45 
Performance Ratios                    
Return on average assets (annualized)  0.48%  0.25%  1.20%  1.65%  1.61%
Return on average equity (annualized)  3.85   1.88   8.64   12.08   12.34 
Net interest margin  3.70   3.63   3.72   3.61   3.46 
Efficiency ratio (1)  81.37   87.56   69.48   79.23   70.81 
Noninterest income to total revenue  30.23   29.85   38.55   46.74   53.09 
Selected Loan Metrics                    
Loans and leases originated $525,088  $390,851  $498,987  $377,337  $491,797 
Guaranteed loans sold  71,934   62,940   104,646   298,073   295,216 
Average net gain on sale of guaranteed loans  80.12   61.30   59.83   71.81   82.61 
Adjusted average net gain on sale of guaranteed
  loans (2)
  93.74   89.04   77.42   69.23   79.42 
Outstanding balance of sold loans serviced:                    
Guaranteed  2,870,108   2,952,774   3,045,460   3,102,820   2,951,379 
Unguaranteed  183,991   179,307   174,066   170,784   155,939 
Total  3,054,099   3,132,081   3,219,526   3,273,604   3,107,318 
Asset Quality Ratios                    
Allowance for loan losses to loans and leases held for
  investment
  1.71%  1.75%  1.76%  1.64%  1.91%
Net charge-offs $526  $65  $1,185  $2,310  $787 
Net charge-offs to average loans and leases held for
  investment (3)
  0.10%  0.01%  0.28%  0.57%  0.21%
Nonperforming loans $65,473  $70,692  $57,690  $52,709  $46,105 
Foreclosed assets  6,044   1,374   1,094   1,429   1,725 
Nonperforming loans (unguaranteed exposure)  18,352   20,186   14,488   12,897   11,466 
Foreclosed assets (unguaranteed exposure)  1,228   170   148   158   197 
Nonperforming loans not guaranteed by the SBA and
  foreclosures
 $19,580  $20,356  $14,636  $13,055  $11,663 
Nonperforming loans and foreclosures, not guaranteed
  by the SBA, to total assets
  0.46%  0.50%  0.40%  0.38%  0.34%
Capital Ratios                    
Common equity tier 1 capital (to risk-weighted assets)  16.01%  16.68%  17.10%  17.88%  17.49%
Total capital (to risk-weighted assets)  17.26   17.92   18.28   18.93   18.68 
Tier 1 risk based capital (to risk-weighted assets)  16.01   16.68   17.10   17.88   17.49 
Tier 1 leverage capital (to average assets)  11.77   12.34   13.40   13.21   12.31 

Notes to Quarterly Selected Financial Data

(1)  See accompanying GAAP to Non-GAAP Reconciliation.

(2)  Excludes fair value gain/loss on exchange-traded interest rate lock commitments.

(3)  Quarterly net charge-offs as a percentage of quarterly average loans and leases held for investment, annualized.


Live Oak Bancshares, Inc.
Quarterly Average Balances and Net Interest Margin
(Dollars in thousands)

  Three Months Ended June 30, 2019  Three months ended March 31, 2019 
  Average
Balance
  Interest  Average
Yield/Rate
  Average
Balance
  Interest  Average
Yield/Rate
 
Interest earning assets:                        
Federal funds sold and interest earning
  balances in other banks
 $184,986  $1,108   2.40% $283,364  $1,639   2.35%
Investment securities  566,159   4,116   2.92   461,339   3,317   2.92 
Loans held for sale  839,724   14,333   6.85   749,700   12,583   6.81 
Loans and leases held for investment (1)  2,089,225   35,581   6.83   1,922,280   32,383   6.83 
Total interest earning assets  3,680,094   55,138   6.01   3,416,683   49,922   5.93 
Less: allowance for loan and lease losses  (35,124)          (32,464)        
Non-interest earning assets  474,706           476,232         
Total assets $4,119,676          $3,860,451         
Interest bearing liabilities:                        
Interest bearing checking $  $   % $169  $   %
Savings  989,512   5,235   2.12   927,579   4,786   2.09 
Money market accounts  85,982   161   0.75   83,298   108   0.53 
Certificates of deposit  2,452,159   15,807   2.59   2,282,709   14,423   2.56 
Total interest bearing deposits  3,527,653   21,203   2.41   3,293,755   19,317   2.38 
Other borrowings  1,409         1,464       
Total interest bearing liabilities  3,529,062   21,203   2.41   3,295,219   19,317   2.38 
Non-interest bearing deposits  51,643           46,822         
Non-interest bearing liabilities  26,580           14,449         
Shareholders' equity  512,391           503,961         
Total liabilities and shareholders' equity $4,119,676          $3,860,451         
Net interest income and interest rate spread     $33,935   3.60%     $30,605   3.55%
Net interest margin          3.70           3.63 
Ratio of average interest-earning assets to average
  interest-bearing liabilities
          104.28%          103.69%

(1)   Average loan and lease balances include non-accruing loans.


Live Oak Bancshares, Inc.
GAAP to Non-GAAP Reconciliation
(Dollars in thousands)

  As of and for the three months ended 
  2Q 2019  1Q 2019  4Q 2018  3Q 2018  2Q 2018 
Total shareholders' equity $518,986  $500,380  $493,560  $477,230  $462,986 
Less:                    
Goodwill               
Other intangible assets              3,980 
Tangible shareholders' equity (a) $518,986  $500,380  $493,560  $477,230  $459,006 
Shares outstanding (c)  40,220,916   40,175,079   40,155,792   40,140,417   40,086,409 
Total assets $4,274,301  $4,058,047  $3,670,449  $3,444,757  $3,472,969 
Less:                    
Goodwill               
Other intangible assets              3,980 
Tangible assets (b) $4,274,301  $4,058,047  $3,670,449  $3,444,757  $3,468,989 
Tangible shareholders' equity to tangible assets (a/b)  12.14%  12.33%  13.45%  13.85%  13.23%
Tangible book value per share (a/c) $12.90  $12.45  $12.29  $11.89  $11.45 
Efficiency ratio:                    
Noninterest expense (d) $39,576  $38,201  $32,558  $41,244  $40,830 
Net interest income  33,935   30,605   28,795   27,724   27,048 
Noninterest income  14,701   13,027   18,065   24,331   30,613 
Less: gain on sale of securities     5          
Adjusted operating revenue (e) $48,636  $43,627  $46,860  $52,055  $57,661 
Efficiency ratio (d/e)  81.37%  87.56%  69.48%  79.23%  70.81%


Live Oak Bancshares, Inc.
GAAP to Non-GAAP Reconciliation (Continued)
(Dollars in thousands)

  Three Months Ended  Six Months Ended 
  2Q 2019  1Q 2019  2Q 2018  2Q 2019  2Q 2018 
Reconciliation of net income to non-GAAP net income
  for non-routine income and expenses:
                    
Net income $4,935  $2,372  $14,253  $7,307  $26,706 
Gain on sale of aircraft     (357)     (357)   
Stock based compensation expense for restricted
  stock awards with an effective grant date of May
  24, 2016, as discussed in Note 10 of our March
  31, 2016 Form 10-Q
  357   352   357   709   709 
Renewable energy tax credit investment impairment  602         602    
Income tax effects and adjustments for non-GAAP items *  (230)  1   (86)  (229)  (170)
Non-GAAP net income $5,664  $2,368  $14,524  $8,032  $27,245 
* Estimated at 24.0%                    
Non-GAAP earnings per share:                    
Basic $0.14  $0.06  $0.36  $0.20  $0.68 
Diluted $0.14  $0.06  $0.35  $0.20  $0.66 
Weighted-average shares outstanding:                    
Basic  40,196,662   40,160,118   40,027,336   40,178,491   39,977,336 
Diluted  40,998,541   40,921,823   41,619,647   40,960,283   41,516,333 
Reconciliation of financial statement line items as reported
  to adjusted for non-routine income and expenses:
                    
Noninterest income, as reported $14,701  $13,027  $30,613  $27,728  $61,369 
Gain on sale of aircraft     (357)     (357)   
Noninterest income, as adjusted $14,701  $12,670  $30,613  $27,371  $61,369 
Noninterest expense, as reported $39,576  $38,201  $40,830  $77,777  $78,902 
Stock based compensation expense  (357)  (352)  (357)  (709)  (709)
Renewable energy tax credit investment impairment  (602)        (602)   
Noninterest expense, as adjusted $38,617  $37,849  $40,473  $76,466  $78,193 
Income before taxes, as reported $5,597  $2,689  $14,744  $8,286  $27,512 
Gain on sale of aircraft     (357)     (357)   
Stock based compensation expense  357   352   357   709   709 
Renewable energy tax credit investment impairment  602         602    
Income before taxes, as adjusted $6,556  $2,684  $15,101  $9,240  $28,221 
Income tax expense, as reported $662  $317  $491  $979  $806 
Income tax effects and adjustments for non-recurring
  income and expenses
  230   (1)  86   229   170 
Income tax expense, as adjusted $892  $316  $577  $1,208  $976 

This press release presents the non-GAAP financial measures previously shown. The adjustments to reconcile from the applicable GAAP financial measure to the non-GAAP financial measures are included where applicable in financial results presented in accordance with GAAP. The Company considers these adjustments to be relevant to ongoing operating results. The Company believes that excluding the amounts associated with these adjustments to present the non-GAAP financial measures provides a meaningful base for period-to-period comparisons, which will assist regulators, investors, and analysts in analyzing the operating results or financial position of the Company. The non-GAAP financial measures are used by management to assess the performance of the Company's business for presentations of Company performance to investors, and for other reasons as may be requested by investors and analysts. The Company further believes that presenting the non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although non-GAAP financial measures are frequently used by shareholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.

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