WILMINGTON, N.C., July 27, 2016 (GLOBE NEWSWIRE) -- Live Oak Bancshares, Inc. (Nasdaq:LOB) today reported second quarter net earnings available to common shareholders of $123 thousand, or $0.00 per diluted share, compared to $3.9 million, or $0.13 per diluted share for the second quarter of 2015. The second quarter of 2016 included an incremental loan loss provision of $4.0 million, or $0.07 per diluted share, related to a strategic reclassification of $318.8 million in unguaranteed loans from held for sale to held for investment and $2.2 million, or $0.04 per diluted share, in stock based compensation expense related to restricted stock awards with an effective grant date of May 24, 2016 for key employee retention, as discussed in Note 10 of our March 31, 2016 Form 10-Q.

“Our business model is firing on all cylinders. We produced a record level of loan originations in the second quarter, up nearly 30% from a year ago. Growth is coming from both the older and newer industry verticals we focus on. We expect to comfortably exceed our targeted level of origination volumes for the full year. We continue to evolve the Live Oak franchise in pursuit of superior long term performance. Our recent success in significantly growing deposits in conjunction with our ample capital and cash position has allowed us to proceed with executing our strategic objective to retain more loans on the balance sheet as we’ve done this quarter. This will serve to accelerate growth in recurring revenues while reducing our exposure to market-related volatility,” said James S. Mahan, III, Chief Executive Officer of Live Oak.

Strategic Repositioning

The Company has implemented new policies designed to accelerate the ongoing growth of recurring revenues and reduce the market-related volatility of its revenue streams by increasing the level of loans retained on the balance sheet. Consequently, during the second quarter of 2016 the Company transferred $318.8 million in unguaranteed loans from being classified as held for sale to held for investment. Timing of the transfer was largely influenced by the intent and ability to retain quality credits with higher long term yields . Beginning in the third quarter, the Company also expects to retain a portion of its guaranteed loans where expectation for lifecycle revenues exceeds that of the sale alternative.

Net Interest Income

Net interest income for the second quarter of 2016 increased to $9.9 million compared to $5.4 million for the second quarter of 2015. The increase was driven by the significant growth in the combined held for sale and held for investment loan portfolios attributable to steadily rising loan originations and longer retention periods for certain loan types. The growth in net interest income also reflected a higher net interest margin which rose from 2.94% for the second quarter of 2015 to 3.26% for the second quarter of 2016, which benefited from higher loan rates along with reduced levels of higher-cost long term borrowings that were paid off during the third and fourth quarters of 2015. The decline from the first quarter 2016 margin of 3.52% was principally due to the large increase in interest-bearing deposits in the second quarter, following ongoing successful deposit gathering campaigns. This sustained deposit growth facilitates the Company's ability to retain more loans on the balance sheet and further grow net interest income.

Provision for loan losses

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. 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.

During the second quarter of 2016, the Company also implemented enhancements to the methodology for estimating the allowance for loan losses, including refinements to the measurement of qualitative factors in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance. The Company estimates that these revisions to the allowance methodology resulted in an approximately $390 thousand reduction in the provision for loan losses during the second quarter of 2016.

Noninterest Income

Noninterest income for the second quarter of 2016 totaled $19.3 million, compared to $18.1 million for the second quarter of 2015. Driving this increase were higher servicing revenues of $1.2 million combined with lower valuation expense adjustments to the servicing asset of $494 thousand. Net gains on sales of loans for the second quarter of 2016 totaled $14.6 million compared to $15.7 million for the second quarter of 2015 and $16.4 million for the first quarter of 2016. The decline in net gains on sales of loans in the second quarter of 2016 was principally related to the timing of settlements on contracted loan sales.

Noninterest Expense

Noninterest expense for the second quarter of 2016 was $25.1 million compared to $16.8 million for the second quarter of 2015. Salaries and employee benefits increased to $15.4 million from $9.3 million for the second quarter of 2015, as a result of increased staffing to support growing loan demand and multiple new initiatives of the Company, and $2.2 million in stock based compensation expense related to restricted stock awards with an effective grant date of May 24, 2016 for key employee retention, as discussed in Note 10 of our March 31, 2016 Form 10-Q. Total stock based compensation expense in the second quarter of 2016 was $2.9 million compared to $659 thousand for the first quarter of 2016 and $184 thousand for the second quarter of 2015. Data processing expense increased $682 thousand compared to the second quarter of 2015, related to growth in the Company’s loan and deposit portfolios and the development of an expanded deposit platform.

Loans and Asset Quality

The increase in the held for investment portfolio and decrease in the held for sale portfolio in the second quarter is principally the result of the aforementioned reclassification of $318.8 million of unguaranteed loans. Net loans held for investment increased $373.2 million, or 122.4%, to $678.2 million at June 30, 2016, from $305.0 million at March 31, 2016. Loans held for sale decreased $208.1 million, or 38.7%, to $329.2 million at June 30, 2016, from $537.3 million at March 31, 2016. Strong growth in loan origination activities further enhanced the increase in loans held for investment from the reclassification of unguaranteed loans while at the same time significantly offset the reduction in loans held for sale from the same reclassification. Loans held for sale are largely influenced by multi-advancing loans that are expected to be sold in the secondary market when fully funded. The combined total loan portfolio of $1.02 billion at June 30, 2016, rose by 71.6% above its level a year ago. The combined total loan portfolio at June 30, 2016 and March 31, 2016, of $1.02 billion and $850.9 million were comprised of approximately 64.9% and 68.2% of unguaranteed loans, respectively.

Average loans were $939.1 million during the second quarter of 2016 compared to $825.7 million during the first quarter of 2016.

The allowance for loan losses increased $3.7 million, or 42.9%, to $12.3 million at June 30, 2016, from $8.6 million at March 31, 2016. The increase in the allowance for loan losses was largely attributable to the above mentioned reclassification of unguaranteed loans from held for sale to held for investment during the second quarter of 2016 combined with continued growth in the loan portfolio, partially offset by positive credit conditions outlined below. By transferring a pool of performing unguaranteed credits into the held for investment portfolio, the allowance for loan losses as a percentage of total loans held for investment declined from 2.75% at March 31, 2016 to 1.78% at June 30, 2016.

Credit quality remained relatively stable as the unguaranteed exposure of nonperforming loans decreased to $2.2 million at June 30, 2016, from $2.4 million at March 31, 2016. Total nonperforming loans decreased to $12.9 million from $14.8 million at the end of the prior quarter.

Net charge-offs (recoveries) amounted to $(240) thousand in the second quarter of 2016 compared to $232 thousand in the first quarter of 2016. Net charge-offs (recoveries) as a percentage of average loans held for investment on an annualized basis were (0.18%) for the second quarter of 2016 compared to 0.30% for the first quarter of 2016.

Foreclosed assets decreased $49 thousand to $3.0 million at June 30, 2016 from March 31, 2016. Of this decrease, $5 thousand was associated with foreclosed assets relating to portions of loans not guaranteed by the Small Business Administration.

Deposits

Total deposits increased significantly by $125.3 million, or 12.3%, to $1.14 billion at June 30, 2016, compared to $1.02 billion at March 31, 2016, following successful deposit gathering campaigns. Average total deposits for the second quarter of 2016 increased $222.6 million, or 25.9%, to $1.08 billion, compared to $860.2 million for the first quarter of 2016. The ratio of average total loans to average deposits was 86.7% for the second quarter of 2016, compared to 96.0% for the first quarter of 2016.

About Live Oak Bancshares, Inc.

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