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Banking & Finance

Live Oak Q2 Report Shows Continued Growth, Reduced COVID Impact

By Jenny Callison, posted Jul 23, 2021
Live Oak Bancshares officials touted their best quarter ever during their second-quarter earnings report this week.
 
Live Oak (Nasdaq: LOB) showed net earnings of more than $63.5 million and diluted earnings per share of $1.41 plus more than $1.1 billion in loan and lease originations during the period.

After mentioning that one highlight of the quarter ended June 30 was the company’s gain of $44 million on its investment in financial technology company Greenlight, company chairman and CEO James “Chip” Mahan noted two other results during Thursday’s earnings call.
 
“Secondly, originations reached an all-time high of $1.1 billion while credit quality continues to improve,” he said. “Third, as the accountants and PPP make the unpacking of our financials more difficult, we're proud to announce the dramatic increase in pre-tax pre-provision earnings as the operating leverage in our business kicks in.”
 
Q2 net earnings and EPS were ahead of those of the previous quarter, in which net earnings reached nearly $39.5 million, with earnings per share of 88 cents. Loan and lease originations in the quarter ended March 31 were slightly higher than in Q2, however, at nearly $1.2 billion.
 
For comparison purposes, Live Oak’s net earnings in Q2 of 2020 were about $3.7 million, yielding earnings per share of 9 cents.
 
Total deposits increased to $6.52 billion as of June 30, an increase of $647.5 million compared to the total as of June 30, 2020, and an increase of $204.8 million compared to March 31. Deposits as of June 30, 2020, were about $5.8 million.
 
Industries that Live Oak started lending to since 2018 have shown greater borrowing growth than have what the company calls its “legacy verticals” – those added to Live Oak’s portfolio between 2008 and 2017, Mahan pointed out.
 
“While legacy verticals have been proven a bit lumpy, the newbies have grown quite nicely, producing $600 million in this quarter alone,” he said. “Again, we operate in 32 industries nationwide.”
 
Chief Credit Officer Steve Smits said in the call that, as he expected, the company’s reserves are increasing toward pre-COVID-19 levels as a percentage of loans.
 
“I still expect to see this trend continue,” he said. “I believe this because first, we continue to see improvements in the financial condition of some of our most impacted businesses, which is evidenced by favorable trends in the servicing status ratings. Secondly, we've also noticed that many of our most impacted borrowers were actually able to build cash reserves during the pandemic and that's a result of the government stimulus and grant programs.
 
“Thirdly, through our servicing efforts, we've started to receive encouraging reports as these businesses reopened and ... folks are getting back to work. Finally, improving unemployment forecasts will, of course, influence our allowance as well. So, for all these reasons, I still feel that the allowance will continue to trend towards pre-pandemic levels.”
 
The status of Live Oak’s loans is improving as more borrowers strengthen their financial position, Smits added.
 
“As of June 30, we only have 17 loans on payment deferral. Fifteen of those are due to COVID-related stress,” he said. “In addition, ... 13% of our loans received some level of SBA subsidy payment support for their June payment. Most of this will burn away over the next few months. In summary, as of the end of June, 87% of our borrowers are back to making regular payments. And past due is continuing to be at an all-time low for us, which is very encouraging.”
 
Live Oak Bank President Huntley Garriott updated listeners on the bank’s Paycheck Protection Program lending portfolio.
 
“We still have over $900 million of PPP loans on our balance sheet," he said. "Forgiveness was about $500 million in the quarter. But they've really slowed, and as you can see the revenue is starting to trail off in the last couple quarters. The impact of this will continue to decline as that program winds down.”
 
After hovering in the $40-$70 range in recent months, Live Oak Bancshares’ stock was trading at just above $60 per share at press time Friday.
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