Despite lower quarterly earnings in the second quarter of 2016, officials at Live Oak Bancshares Inc. said they are positive about the company’s plans and prospects.
Wednesday afternoon, Live Oak reported second quarter net earnings available to common shareholders of $123,000, or 0 cents per diluted share, compared to $3.9 million, or 13 cents per diluted share, for the second quarter of 2015.
The numbers,
reported in a news release, were also down considerably from the
bank’s earnings for the first quarter of this year.
Live Oak Bancshares’ net income for the first quarter of 2016 was nearly $4.7 million, with net diluted income per share of 13 cents.
The Q2 report is “very deceiving” and “totally masks our organic growth,” said Live Oak chairman and CEO Chip Mahan, commenting on the results in a webinar conference call Thursday morning.
The lower earnings are a result of several factors, Mahan and other bank officials said in the conference call.
One factor is the incremental loan loss provision of $4 million (7 cents per diluted share) related to a “strategic reclassification” of $318.8 million in unguaranteed loans from “held for sale” to “held for investment.” Officials said that interest revenues from holding onto these loans would eventually be higher than revenues from selling them, but required an up-front outlay.
“The provision for loan losses for the second quarter of 2016 increased to $3.5 million compared to $1.4 million for the first quarter of 2016 and $50 thousand for the second quarter of 2015,” Wednesday’s release stated. “Upon transfer from held for sale classification, loans held for investment become subject to the allowance for loan loss review process. As a result of this process, the above mentioned $318.8 million loan reclassification necessitated a $4.0 million increase in the provision for loan losses during the second quarter of 2016.”
A second major factor is the bank’s allocation of $2.2 million (4 cents per diluted share) for stock-based compensation to key employees.
“We want to ensure we have the right people,” Mahan said, explaining that the restricted stock awards are an important incentive in retaining talent essential to the company’s growth.
Also contributing to lower earnings in the second quarter, according to Mahan, was the fact that a number of loans in Live Oak’s agricultural vertical did not close as expected in the second quarter, and will roll over into the third quarter.
In the conference call, officials pointed to Live Oak’s “record-setting” quarterly loan originations since March 31 of this year. That brings to more than $640 million total loan originations for the first half of 2016, CFO Brett Caines said. He estimated that the company’s loan originations for 2016 would total $1.5 billion.
Live Oak is on track to become a national small business bank, an entity Mahan referred to as “Live Oak Bank 2.0.” Company president Neil Underwood spoke of Live Oak’s e-lending initiative, which he said “continues to hit the mark.”
Also on the rise are Live Oak’s deposits. Underwood said the bank is marketing its digital deposit products broadly to small businesses but also using channels within its existing lending verticals to market the products to businesses in those industries.
Total deposits increased significantly by $125.3 million, or about 12 percent, to $1.14 billion as of June 30, compared to just over $1 billion as of March 31, following the bank’s “successful deposit gathering campaigns,” the release stated. Average total deposits for the second quarter of 2016 increased $222.6 million, or almost 26 percent, to $1.08 billion, compared to just over $860 million for the first quarter of 2016.
Mahan pointed out in the conference call that Live Oak was reporting its second quarter earnings a year to the day after it went public. On July 28, 2015, when LOB shares hit the Nasdaq exchange, the share price was around $19. At market close Thursday, the stock was at about $13 per share.
Nevertheless, Nasdaq reported analysts' recommendation for the stock as "buy."
