Live Oak Bancshares (LOB) Q4 2018 earnings summary

Executive summary

• 2018 strategy shifted toward retaining more sale-eligible loans, aiming to build recurring revenue and reduce earnings volatility; roughly $2 of every $3 eligible loans are intended to be held.

• Results reflected strong balance-sheet and recurring-revenue growth, while reported net income fell sharply against 2017’s one-time Apiture gain and weaker loan-sale premiums.

Financial highlights

• Net interest income rose 38.5% YoY to $108.0 million; net interest income plus servicing revenue increased 33.7% to $137.2 million.

• Core revenue, defined as net interest income, servicing revenue and loan-sale gains, increased 17.2% to $212.3 million.

• Net income fell 48.8% to $51.4 million, or $1.24 diluted EPS; adjusted non-GAAP net income, excluding non-routine items, rose 15.6% to $54.6 million.

• Total assets grew 33.1% to $3.67 billion; deposits rose 39.3% to $3.15 billion and loans held for investment increased 37.2% to $1.84 billion.

• Guaranteed loan sales rose 20.0% to $945.2 million, but gains on loan sales fell 4.4% to $75.2 million as average gain per $1 million sold declined to $80.9 thousand from $100.4 thousand.

Outlook and guidance

• 2019 loan-sale gains are expected to remain a significant revenue component; held-for-sale and held-for-investment portfolios are expected to grow with originations and higher retention.

• Management expects the retention strategy to support long-term recurring revenue and profitability, despite lower earnings in the near term.

• Finxact next-generation core processing was in friends-and-family testing, with the target of beginning to realize benefits in Q4 2019.

• The effective tax rate for 2019 was projected in the low double digits, dependent on income, renewable-energy tax credits and discrete tax items.