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Live Oak Bancshares, Inc. Reports Fourth Quarter 2017 Results

WILMINGTON, N.C., Jan. 24, 2018 (GLOBE NEWSWIRE) -- Live Oak Bancshares, Inc. (Nasdaq:LOB) (“Live Oak” or “the Company”) today reported fourth quarter net earnings available to common shareholders of $71.7 million, or $1.74 per diluted share, compared to $5.5 million, or $0.16 per diluted share, for the fourth quarter of 2016.  The fourth quarter of 2017 included a pretax gain of $68.0 million related to an equity method investment in Apiture, LLC ("Apiture"), an $18.9 million revaluation of the Company's net deferred tax liability, and several other smaller non-routine costs.  Net earnings for the year ended December 31, 2017 totaled $100.5 million, or $2.65 per diluted share, compared to $13.8 million for the year ended December 31, 2016, or $0.39 per diluted share.

“2017 was a phenomenal year for Live Oak in many ways. We enjoyed record earnings per share of $2.65 while experiencing terrific growth in recurring revenue sources that exceeded $100 million. We continued our mission to serve small businesses with record setting loan originations in excess of $1.9 billion while steadily expanding the roster of industry sectors we focus on. Specific to the fourth quarter of 2017, we closed our joint venture with First Data Corporation to create Apiture as part of our desire to fundamentally change an industry through open application program technology on next-generation digital banking platforms. We also conducted a highly successful capital raise this past year while recent changes in the tax code further bolstered our capital account, affording us additional opportunities to invest in our growth, our employees, our customers, and our community,” said James S. Mahan, III, Chief Executive Officer of Live Oak.


Year over Year Highlights

(Dollars in thousands, except per share data)       Increase (Decrease)
  2017   2016   Dollars   Percent
Net interest income and servicing revenues $ 102,622     $ 64,042     $ 38,580     60 %
Net income attributable to Live Oak Bancshares, Inc. 100,499     13,773     86,726     630  
Diluted earnings per share 2.65     0.39     2.26     579  
Non-GAAP net income (1) 47,187     20,148     27,039     134  
Non-GAAP diluted earnings per share (1) 1.25     0.57     0.68     119  
Loan and lease production:              
Loans and leases originated $ 1,934,238     $ 1,537,010     $ 397,228     26 %
% Fully funded 50.9 %   48.2 %     n/a     n/a  
Loan sales:              
Guaranteed loans sold $ 787,926     $ 761,933     $ 25,993     3 %
Net gains on sales of guaranteed loans 79,090     75,326     3,764     5  
Average net gain on sale of guaranteed loans, per million sold 100.38     98.86     1.52     2  

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


Fourth Quarter 2017 Key Measures

(Dollars in thousands, except per share data)       Increase (Decrease)    
  Q4 2017   Q4 2016   Dollars   Percent   Q3 2017
Net interest income and servicing revenues $ 28,977     $ 18,060     $ 10,917     60 %   $ 27,515  
Net income attributable to Live Oak Bancshares, Inc. 71,730     5,480     66,250     1,209     12,862  
Diluted earnings per share 1.74     0.16     1.58     988     0.33  
Non-GAAP net income (1) 16,875     6,076     10,799     178     13,312  
Non-GAAP diluted earnings per share (1) 0.41     0.17     0.24     141     0.34  
Loan and lease production:                  
Loans and leases originated $ 483,422     $ 514,565     $ (31,143 )   (6 )%   $ 395,682  
% Fully funded 42.9 %   48.0 %     n/a     n/a     37.4 %
Loan sales:                  
Guaranteed loans sold $ 211,654     $ 260,125     $ (48,471 )   (19 )%   $ 163,843  
Net gains on sales of guaranteed loans 23,314     22,513     801     4     18,148  
Average net gain on sale of guaranteed loans, per million sold 110.15     86.55     23.6     27     110.76  

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


Loans and Leases

At December 31, 2017, the total loan and lease portfolio of $2.02 billion increased 55.5% above its level of a year ago and 8.7% from September 30, 2017.  Net loans and leases held for investment increased $170.9 million, or 14.9%, to $1.32 billion at December 31, 2017, from $1.15 billion at September 30, 2017.  Loans held for sale decreased $12.1 million, or 1.8%, to $680.5 million at December 31, 2017, from $692.6 million at September 30, 2017. Loan and lease originations totaled $483.4 million during the fourth quarter of 2017, an increase of $87.7 million, or 22.2%, from the third quarter of 2017.  Originations for year ended December 31, 2017 rose by 25.8% to $1.93 billion compared to $1.54 billion for the year ended December 31, 2016.  The total loan and lease portfolio at December 31, 2017, and September 30, 2017, of $2.02 billion and $1.86 billion, respectively, were comprised of approximately 61.4% and 60.6% of unguaranteed loans and leases, respectively.

Average loans and leases were $1.91 billion during the fourth quarter of 2017 compared to $1.77 billion during the third quarter of 2017.

Net Interest Income

Net interest income for the fourth quarter of 2017 increased to $23.0 million compared to $12.4 million for the fourth quarter of 2016. The increase was driven by the significant growth in the combined held for sale and held for investment loan and lease portfolios and reflected the Company's initiative to grow recurring revenue sources by increasing the level of loans and leases retained on the balance sheet.  The net interest margin of 4.07% for the fourth quarter of 2017 increased from 3.91% for the third quarter of 2017.  The net interest margin has risen by 99 basis points from the fourth quarter of 2016 as the Company has benefited from the repricing characteristics of its loan portfolio in the rising interest rate environment.

Noninterest Income

Noninterest income for the fourth quarter of 2017 totaled $95.4 million, compared to $26.3 million for the fourth quarter of 2016.  The increase was driven by a $68.0 million gain arising from the Company’s equity method investment in Apiture.  Excluding this one-time gain, noninterest income totaled $27.4 million for the fourth quarter of 2017, a $1.1 million increase over the fourth quarter of 2016.

Net gains on sales of loans increased to $23.3 million in the fourth quarter of 2017 compared to $22.5 million in the fourth quarter of 2016 and $18.1 million for the third quarter of 2017.  The volume of guaranteed loans sold in the fourth quarter of 2017 totaled $211.7 million compared to $163.8 million in the third quarter of 2017 and $260.1 million in the fourth quarter of 2016.  The decline in the volume of guaranteed loans sold compared to fourth quarter of 2016 was countered by a significant increase in the average net gain on sale at $110.2 thousand per million sold for the fourth quarter of 2017 compared to $86.6 thousand per million sold for the fourth quarter of 2016.

Loan servicing revenues of $6.0 million in the fourth quarter of 2017 increased by $333 thousand from the fourth quarter of 2016.  The net loss resulting from the servicing asset revaluation totaled $6.3 million for the fourth quarter of 2017, an increase of $3.0 million compared to the fourth quarter of 2016.

The inclusion of Reltco, Inc. and National Assurance Title, Inc. (collectively referred to as "Reltco"), which were acquired in February 2017, contributed $1.8 million in noninterest income to the Company in the fourth quarter of 2017, a decline of $206 thousand compared to the third quarter of 2017.

Noninterest Expense

Noninterest expense for the fourth quarter of 2017 was $41.0 million compared to $32.4 million for the fourth quarter of 2016 and $35.9 million for the third quarter of 2017.  Noninterest expense for the fourth quarter of 2017 included costs associated with several non-routine events in the quarter.  The Company incurred expenses of $1.7 million of merger and acquisition related costs, $3.6 million due to the impairment of intangible assets associated with the acquisition of Reltco, $1.6 million due to contract modification for the continued operation of Reltco, $690 thousand for the impairment of a tax credit investment from the fourth quarter of 2016, and $360 thousand of stock based compensation expense related to restricted stock awards with an effective grant date of May 24, 2016, for key employee retention.  The resulting noninterest expense adjusted for these non-routine items totaled $33.0 million in the fourth quarter of 2017, a decline from third quarter of 2017.  See the accompanying GAAP to Non-GAAP Reconciliation for further information relative to non-routine items.

Salaries and employee benefits for the fourth quarter of 2017 increased to $19.0 million compared to $17.1 million for the fourth quarter of 2016. Included in these totals, total stock based compensation expense in the fourth quarter of 2017 was $1.8 million compared to $4.4 million for the fourth quarter of 2016.  This decline was offset by the ongoing expansion of the Company’s business platform, workforce and related infrastructure to support its growth strategy along with the addition of Reltco personnel during the first quarter of 2017.

Compared to the fourth quarter of 2016, there were increases in data processing expense of $1.5 million and equipment expense of $1.9 million for the fourth quarter of 2017.  The increase in data processing arose from the ongoing efforts of the Company to expand its technological competitive advantage and from the contribution of software development resources to Apiture. The latter move transferred the recognition of costs associated with the Company’s technology development from salaries and employee benefits to data processing.  The increase in equipment expense reflected the higher levels of depreciation related to aircraft acquired in the first quarter of 2017 and solar panels acquired for the Company’s renewable energy leasing business.

Asset Quality

The unguaranteed exposure of nonperforming loans increased slightly to $3.6 million at December 31, 2017, compared to $3.3 million at September 30, 2017.  Total unguaranteed nonperforming loans as a percentage of total loans and leases held for investment declined to 0.27% at December 31, 2017, compared to 0.28% at September 30, 2017.  Total nonperforming loans increased slightly to $23.5 million in the fourth quarter of 2017 from $22.4 million at the end of the prior quarter.

The unguaranteed exposure of foreclosed assets decreased to $90 thousand at December 31, 2017, from $446 thousand at September 30, 2017.  Foreclosed assets decreased $950 thousand to $1.3 million at December 31, 2017, from $2.2 million at September 30, 2017.

Net charge-offs amounted to $892 thousand in the fourth quarter of 2017 compared to $959 thousand in the third quarter of 2017 and $813 thousand in the fourth quarter of 2016.  Net charge-offs as a percentage of average held for investment loans and leases, annualized, for the quarters ended December 31, 2017 and 2016 were 0.28% and 0.39%, respectively.  Net charge-offs for the twelve months of 2017 totaled $3.6 million compared to $1.7 million for the twelve months of 2016.

Provision for Loan and Lease Losses

The provision for loan and lease losses for the fourth quarter of 2017 totaled $4.1 million compared to $2.4 million for the third quarter of 2017 and $3.8 million for the fourth quarter of 2016.  The fourth quarter of 2017 provision exceeded net charge-offs by $3.2 million, thus adding to loan and lease loss reserves in consideration of the continued growth of the loan and lease portfolio.

The allowance for loan and lease losses totaled $24.2 million at December 31, 2017, compared to $21.0 million at September 30, 2017. The allowance for loan and lease losses as a percentage of total loans and leases held for investment was 1.80% at December 31, 2017 and September 30, 2017, respectively.

Income Tax

Income tax expense in the fourth quarter of 2017 totaled $1.6 million compared to a net income tax benefit of $3.0 million in the fourth quarter of 2016 and a benefit of $5.1 million in the third quarter of 2017.  For the year ended December 31, 2017, there was a net income tax benefit of $2.2 million.  This benefit was primarily driven by the Company’s leasing of renewable energy assets which generated $24.9 million in investment tax credits along with an estimated revaluation of the Company’s net deferred tax liability totaling $18.9 million as a result of the enactment of the Tax Cuts and Jobs Act in the fourth quarter of 2017.

Deposits

Total deposits increased by $247.4 million, or 12.3%, to $2.26 billion at December 31, 2017, compared to $2.01 billion at September 30, 2017, following successful deposit gathering campaigns.  Average total interest-bearing deposits for the fourth quarter of 2017 increased $65.9 million, or 3.4%, to $2.01 billion, compared to $1.94 billion for the third quarter of 2017. The ratio of average total loans and leases to average interest-bearing deposits was 95.0% for the fourth quarter of 2017, compared to 91.1% for the third quarter of 2017.

Conference Call

Live Oak will host a conference call to discuss quarterly results at 9:00 a.m. ET tomorrow morning (January 25, 2018). 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 2778286. 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 February 1, 2018, and can be accessed by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international).

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. (Nasdaq:LOB) is a financial holding company and the parent company of Live Oak Banking Company, a national online platform for small business lending.

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
  4Q 2017   3Q 2017   2Q 2017   1Q 2017   4Q 2016
Interest income                  
Loans and fees on loans $ 29,343     $ 26,977     $ 23,559     $ 19,754     $ 16,239  
Investment securities, taxable 468     325     316     323     292  
Other interest earning assets 725     870     470     342     383  
Total interest income 30,536     28,172     24,345     20,419     16,914  
Interest expense                  
Deposits 7,330     6,758     5,592     4,543     4,283  
Borrowings 230     389     361     235     239  
Total interest expense 7,560     7,147     5,953     4,778     4,522  
Net interest income 22,976     21,025     18,392     15,641     12,392  
Provision for loan and lease losses 4,055     2,426     1,556     1,499     3,844  
Net interest income after provision for loan and lease losses 18,921     18,599     16,836     14,142     8,548  
Noninterest income                  
Loan servicing revenue 6,001     6,490     6,174     5,923     5,668  
Loan servicing asset revaluation (6,307 )   (3,691 )   (1,164 )   (2,009 )   (3,340 )
Net gains on sales of loans 23,314     18,148     18,176     18,952     22,513  
Gain on contribution to equity method investment 68,000                  
Construction supervision fee income 699     362     286     429     868  
Title insurance income 1,762     1,968     2,397     1,438      
Other noninterest income 1,972     1,783     798     1,020     618  
Total noninterest income 95,441     25,060     26,667     25,753     26,327  
Noninterest expense                  
Salaries and employee benefits 18,982     19,037     17,968     18,682     17,121  
Travel expense 2,089     2,289     2,148     1,598     1,811  
Professional services expense 709     1,068     1,424     1,736     1,137  
Advertising and marketing expense 1,386     1,516     1,976     1,485     1,109  
Occupancy expense 2,177     1,473     1,350     1,195     1,267  
Data processing expense 2,913     1,982     1,858     1,696     1,435  
Equipment expense 2,474     2,228     1,703     1,074     550  
Other loan origination and maintenance expense 1,383     1,601     981     1,005     824  
Renewable energy tax credit investment impairment 690                 3,197  
FDIC insurance 898     858     724     726     910  
Title insurance closing services expense 541     687     785     405      
Impairment expense on goodwill and other intangibles 3,648                  
Other expense 3,134     3,117     2,383     3,383     3,023  
Total noninterest expense 41,024     35,856     33,300     32,985     32,384  
Income before taxes 73,338     7,803     10,203     6,910     2,491  
Income tax (benefit) expense 1,608     (5,059 )   408     798     (2,989 )
Net income attributable to Live Oak Bancshares, Inc. $ 71,730     $ 12,862     $ 9,795     $ 6,112     $ 5,480  
Earnings per share                  
Basic $ 1.80     $ 0.34     $ 0.28     $ 0.18     $ 0.16  
Diluted $ 1.74     $ 0.33     $ 0.27     $ 0.17     $ 0.16  
Weighted average shares outstanding                  
Basic 39,879,345     37,366,041     34,618,721     34,466,904     34,235,375  
Diluted 41,184,793     38,644,677     35,942,041     35,646,918     35,208,433  


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

  As of the quarter ended
  4Q 2017   3Q 2017   2Q 2017   1Q 2017   4Q 2016
Assets                  
Cash and due from banks $ 295,271     $ 260,907     $ 207,373     $ 158,887     $ 238,008  
Certificates of deposit with other banks 3,000     3,250     5,750     6,000     7,250  
Investment securities available-for-sale 93,355     76,575     72,993     68,630     71,056  
Loans held for sale 680,454     692,586     609,138     512,501     394,278  
Loans and leases held for investment 1,343,973     1,169,887     1,084,503     999,270     907,566  
Allowance for loan and lease losses (24,190 )   (21,027 )   (19,560 )   (18,195 )   (18,209 )
Net loans and leases 1,319,783     1,148,860     1,064,943     981,075     889,357  
Premises and equipment, net 178,790     129,233     125,008     101,398     64,661  
Foreclosed assets 1,281     2,231     2,140     1,706     1,648  
Servicing assets 52,298     53,392     53,675     53,584     51,994  
Other assets 134,242     65,155     57,087     48,344     37,009  
Total assets $ 2,758,474     $ 2,432,189     $ 2,198,107     $ 1,932,125     $ 1,755,261  
Liabilities and Shareholders’ Equity                  
Liabilities                  
Deposits:                  
Noninterest-bearing $ 57,868     $ 55,260     $ 40,966     $ 38,029     $ 27,990  
Interest-bearing 2,202,395     1,957,631     1,830,755     1,601,114     1,457,086  
Total deposits 2,260,263     2,012,891     1,871,721     1,639,143     1,485,076  
Short term borrowings         10,000     13,100      
Long term borrowings 26,564     26,872     52,173     27,473     27,843  
Other liabilities 34,714     27,835     26,582     26,220     19,495  
Total liabilities 2,321,541     2,067,598     1,960,476     1,705,936     1,532,414  
Shareholders’ equity                  
Preferred stock, no par value, 1,000,000 shares authorized, none issued or outstanding                  
Class A common stock (voting) 268,557     266,336     150,939     147,933     149,966  
Class B common stock (non-voting) 49,168     49,168     49,168     50,015     50,015  
Retained earnings 120,241     49,707     38,041     28,938     23,518  
Accumulated other comprehensive (loss) income (1,033 )   (620 )   (517 )   (697 )   (652 )
Total equity 436,933     364,591     237,631     226,189     222,847  
Total liabilities and shareholders’ equity $ 2,758,474     $ 2,432,189     $ 2,198,107     $ 1,932,125     $ 1,755,261  


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

  Twelve months ended
  December 31, 2017   December 31, 2016   December 31, 2015
Interest income          
Loans and fees on loans $ 99,633     $ 55,107     $ 33,340  
Investment securities, taxable 1,432     1,132     811  
Other interest earning assets 2,407     1,033     300  
Total interest income 103,472     57,272     34,451  
Interest expense          
Deposits 24,223     13,659     7,379  
Borrowings 1,215     964     1,483  
Total interest expense 25,438     14,623     8,862  
Net interest income 78,034     42,649     25,589  
Provision for loan and lease losses 9,536     12,536     3,806  
Net interest income after provision for loan and lease losses 68,498     30,113     21,783  
Noninterest income          
Loan servicing revenue 24,588     21,393     16,081  
Loan servicing asset revaluation (13,171 )   (8,391 )   (6,229 )
Net gains on sales of loans 78,590     75,326     67,385  
Equity in earnings (loss) of non-consolidated affiliates         (26 )
Gain on sale of investment in non-consolidated affiliate         3,782  
Gain on contribution to equity method investment 68,000          
Gain on sale of securities available-for-sale     1     13  
Construction supervision fee income 1,776     2,667     1,623  
Title insurance income 7,565          
Other noninterest income 5,573     2,543     1,699  
Total noninterest income 172,921     93,539     84,328  
Noninterest expense          
Salaries and employee benefits 74,669     62,996     40,323  
Travel expense 8,124     8,205     7,379  
Professional services expense 4,937     3,482     2,643  
Advertising and marketing expense 6,363     4,534     4,333  
Occupancy expense 6,195     4,573     3,475  
Data processing expense 8,449     5,299     3,583  
Equipment expense 7,479     2,246     2,119  
Other loan origination and maintenance expense 4,970     2,825     2,069  
Renewable energy tax credit investment impairment 690     3,197      
FDIC insurance 3,206     1,417     514  
Title insurance closing services expense 2,418          
Impairment expense on goodwill and other intangibles 3,648          
Other expense 12,017     7,671     5,277  
Total noninterest expense 143,165     106,445     71,715  
Income before taxes 98,254     17,207     34,396  
Income tax (benefit) expense (2,245 )   3,443     13,795  
Net income 100,499     13,764     20,601  
Net loss attributable to noncontrolling interest     9     24  
Net income attributable to Live Oak Bancshares, Inc. $ 100,499     $ 13,773     $ 20,625  
Earnings per share          
Basic $ 2.75     $ 0.40     $ 0.66  
Diluted $ 2.65     $ 0.39     $ 0.65  
Weighted average shares outstanding          
Basic 36,592,893     34,202,168     31,079,032  
Diluted 37,859,535     35,086,959     31,973,146  


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

  As of and for the three months ended
  4Q 2017   3Q 2017   2Q 2017   1Q 2017   4Q 2016
Income Statement Data                  
Net income attributable to Live Oak Bancshares, Inc. $ 71,730     $ 12,862     $ 9,795     $ 6,112     $ 5,480  
Per Common Share                  
Net income, basic $ 1.80     $ 0.34     $ 0.28     $ 0.18     $ 0.16  
Net income, diluted 1.74     0.33     0.27     0.17     0.16  
Dividends declared 0.03     0.03     0.02     0.02     0.02  
Book value 10.95     9.15     6.86     6.54     6.51  
Tangible book value (1) 10.85     8.84     6.50     6.17     6.51  
Performance Ratios                  
Return on average assets (annualized) 11.21 %   2.18 %   1.89 %   1.33 %   1.26 %
Return on average equity (annualized) 68.33     16.79     16.53     10.93     9.95  
Net interest margin 4.07     3.91     3.92     3.76     3.08  
Efficiency ratio (1) 34.64     77.80     73.90     79.69     83.64  
Noninterest income to total revenue 80.60     54.38     59.18     62.21     68.00  
Selected Loan Metrics                  
Loans and leases originated $ 483,422     $ 395,682     $ 586,471     $ 468,663     $ 514,565  
Guaranteed loans sold 211,654     163,843     203,714     208,715     260,125  
Average net gain on sale of guaranteed loans 110.15     110.76     91.68     90.80     86.55  
Held for sale guaranteed loans (note amount) (2) 1,087,636     1,093,385     1,005,753     866,260     754,834  
Quarterly increase (decrease) in note amount of held for sale guaranteed loans (5,749 )   87,632     139,493     111,426     62,556  
Estimated net gain to be recognized on quarterly increase in guaranteed loans held for sale (3)   N/A     9,707     12,789     10,117     5,414  
Asset Quality Ratios                  
Allowance for loan and lease losses to loans and leases held for investment 1.80 %   1.80 %   1.80 %   1.82 %   2.01 %
Net charge-offs $ 892     $ 959     $ 191     $ 1,513     $ 813  
Net charge-offs to average loans and leases held for investment (4) 0.28 %   0.34 %   0.07 %   0.63 %   0.39 %
Nonperforming loans $ 23,480     $ 22,420     $ 21,856     $ 22,469     $ 23,781  
Foreclosed assets 1,281     2,231     2,140     1,706     1,648  
Nonperforming loans (unguaranteed exposure) 3,610     3,299     3,546     3,643     4,784  
Foreclosed assets (unguaranteed exposure) 90     446     345     304     246  
Nonperforming loans not guaranteed by the SBA and foreclosures 3,700     3,745     3,891     3,947     5,030  
Nonperforming loans and foreclosures, not guaranteed by the SBA, to total assets 0.13 %   0.15 %   0.18 %   0.20 %   0.29 %
Capital Ratios                  
Common equity tier 1 capital (to risk-weighted assets) 17.81 %   17.78 %   11.93 %   12.79 %   15.35 %
Total capital (to risk-weighted assets) 18.91     18.93     13.08     14.01     16.60  
Tier 1 risk based capital (to risk-weighted assets) 17.81     17.78     11.93     12.79     15.35  
Tier 1 leverage capital (to average assets) 15.53     13.99     9.93     10.60     12.03  

Notes to Quarterly Selected Financial Data

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

(2)  Includes the entire note amount, including undisbursed funds for the multi-advance loans.

(3)  The estimated revenue from the sale of the quarterly increase in guaranteed loans is based on the average net gain on sale of loans for that quarter. This is an estimate based on the respective quarter activity and does not reflect actual gains to be recognized.

(4)  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 December 31, 2017   Three months ended September 30, 2017
    Average Balance    Interest   Average Yield/Rate   Average Balance    Interest   Average Yield/Rate
Interest earning assets:                        
Interest earning balances in other banks   $ 242,261     $ 725     1.19 %   $ 292,066     $ 870     1.18 %
Investment securities   90,884     468     2.04     73,312     325     1.76  
Loans held for sale   643,764     9,819     6.05     653,342     9,922     6.03  
Loans and leases held for investment (1)   1,264,721     19,524     6.12     1,116,209     17,055     6.06  
Total interest earning assets   2,241,630     30,536     5.40     2,134,929     28,172     5.24  
Less: allowance for loan and lease losses   (20,943 )           (19,544 )        
Non-interest earning assets   338,148             242,014          
Total assets   $ 2,558,835             $ 2,357,399          
                         
Interest bearing liabilities:                        
Interest bearing checking   $ 36,958     $ 83     0.89 %   $ 35,127     $ 51     0.58 %
Savings   566,050     1,992     1.40     196,220     682     1.38  
Money market accounts   247,899     695     1.11     453,985     1,303     1.14  
Certificates of deposit   1,157,405     4,560     1.56     1,257,072     4,722     1.49  
Total interest bearing deposits   2,008,312     7,330     1.45     1,942,404     6,758     1.38  
Other borrowings   26,756     230     3.41     42,219     389     3.66  
Total interest bearing liabilities   2,035,068     7,560     1.47     1,984,623     7,147     1.43  
Non-interest bearing deposits   57,917             43,652          
Non-interest bearing liabilities   45,933             22,650          
Shareholders' equity   419,917             306,474          
Total liabilities and shareholders' equity   $ 2,558,835             $ 2,357,399          
                         
Net interest income and interest rate spread       $ 22,976     3.93 %       $ 21,025     3.81 %
                         
Net interest margin           4.07             3.91  
                         
Ratio of average interest-earning assets to average interest-bearing liabilities           110.15 %           107.57 %

(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
  4Q 2017   3Q 2017   2Q 2017   1Q 2017   4Q 2016
Total shareholders’ equity $ 436,933     $ 364,591     $ 237,631     $ 226,189     $ 222,847  
Less:                  
Goodwill     7,278     7,266     7,165      
Other intangible assets 4,264     5,126     5,292     5,410      
Tangible shareholders’ equity (a) $ 432,669     $ 352,187     $ 225,073     $ 213,614     $ 222,847  
Shares outstanding (c) 39,895,583     39,862,147     34,639,848     34,600,819     34,253,602  
Total assets $ 2,758,474     $ 2,432,189     $ 2,198,107     $ 1,932,125     $ 1,755,261  
Less:                  
Goodwill     7,278     7,266     7,165      
Other intangible assets 4,264     5,126     5,292     5,410      
Tangible assets (b) $ 2,754,210     $ 2,419,785     $ 2,185,549     $ 1,919,550     $ 1,755,261  
Tangible shareholders’ equity to tangible assets (a/b) 15.71 %   14.55 %   10.30 %   11.13 %   12.70 %
Tangible book value per share (a/c) $ 10.85     $ 8.84     $ 6.50     $ 6.17     $ 6.51  
Efficiency ratio:                  
Noninterest expense (d) $ 41,024     $ 35,856     $ 33,300     $ 32,985     $ 32,384  
Net interest income 22,976     21,025     18,392     15,641     12,392  
Noninterest income 95,441     25,060     26,667     25,753     26,327  
Less: gain on sale of securities                  
Adjusted operating revenue (e) $ 118,417     $ 46,085     $ 45,059     $ 41,394     $ 38,719  
Efficiency ratio (d/e) 34.64 %   77.80 %   73.90 %   79.69 %   83.64 %



Live Oak Bancshares, Inc.
GAAP to Non-GAAP Reconciliation (Continued)
(Dollars in thousands)
 
  Three months ended   Twelve months ended
  4Q 2017   3Q 2017   4Q 2016   4Q 2017   4Q 2016
Reconciliation of net income to non-GAAP net income for non-routine income and expenses:                  
Net income attributable to Live Oak Bancshares, Inc. $ 71,730     $ 12,862     $ 5,480     $ 100,499     $ 13,773  
Provision for loans reclassified as held for investment                 4,023  
Gain on contribution to equity method investment (68,000 )           (68,000 )    
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 360     286     3,365     1,370     8,973  
Merger costs associated with Reltco acquisition and Apiture investment 1,718     390         2,874      
Trade-in loss on aircraft             206      
Impairment charge taken on aircraft held for sale         1,422         1,422  
Impairment expense on goodwill and other intangibles 3,648             3,648      
Contract modification of Reltco 1,600             1,600      
Renewable energy tax credit investment income, impairment and loss 710         3,239     690     3,239  
Income tax effects and adjustments for non-GAAP items * 23,986     (270 )   (3,210 )   23,045     (7,062 )
Deferred tax liability revaluation (18,921 )           (18,921 )    
Other renewable energy tax expense 44     44     176     176     176  
Renewable energy tax credit         (4,396 )       (4,396 )
Non-GAAP net income $ 16,875     $ 13,312     $ 6,076     $ 47,187     $ 20,148  
* Estimated at 40.0%                  
Non-GAAP earnings per share:                  
Basic $ 0.42     $ 0.36     $ 0.18     $ 1.29     $ 0.59  
Diluted $ 0.41     $ 0.34     $ 0.17     $ 1.25     $ 0.57  
                   
Weighted-average shares outstanding:                  
Basic 39,879,345     37,366,041     34,235,375     36,592,893     34,202,168  
Diluted 41,184,793     38,644,677     35,208,433     37,859,535     35,086,959  
                   
Reconciliation of financial statement line items as reported to adjusted for non-routine income and expenses:                  
Noninterest income, as reported $ 95,441     $ 25,060     $ 26,327     $ 172,921     $ 93,539  
Gain on contribution to equity method investment (68,000 )           (68,000 )    
Renewable energy tax credit investment income 20         42         42  
Noninterest income, as adjusted 27,461     25,060     26,369     104,921     93,581  
                   
Provision for loan and lease losses, as reported 4,055     2,426     3,844     9,536     12,536  
Provision for loans reclassified as held for investment                 (4,023 )
Provision for loan and lease losses, as adjusted 4,055     2,426     3,844     9,536     8,513  
                   
Noninterest expense, as reported 41,024     35,856     32,384     143,165     106,445  
Stock based compensation expense (360 )   (286 )   (3,365 )   (1,370 )   (8,973 )
Merger costs associated with Reltco acquisition and Apiture investment (1,718 )   (390 )       (2,874 )    
Trade-in loss on aircraft             (206 )    
Impairment charge taken on aircraft held for sale         (1,422 )       (1,422 )
Impairment expense on goodwill and other intangibles (3,648 )           (3,648 )    
Contract modification of Reltco (1,600 )           (1,600 )    
Renewable energy tax credit investment impairment and loss (690 )       (3,197 )   (690 )   (3,197 )
Noninterest expense, as adjusted 33,008     35,180     24,400     132,777     92,853  
                   
Income tax (benefit) expense, as reported 1,608     (5,059 )   (2,989 )   (2,245 )   3,443  
Income tax effects and adjustments for non-recurring income and expenses (23,986 )   270     3,210     (23,045 )   7,062  
Deferred tax liability revaluation 18,921             18,921      
Other renewable energy tax expense (44 )   (44 )   (176 )   (176 )   (176 )
Renewable energy tax credit         4,396     $     4,396  
Income tax (benefit) expense, as adjusted $ (3,501 )   $ (4,833 )   $ 4,441     $ (6,545 )   $ 14,725  


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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Live Oak Bancshares, Inc.
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