Live Oak Bancshares SBA Loan Sales Decline – Is the Stock Still a Buy? – The colorful fool | Region & Cash

Despite its relatively small size, the $9.1 billion investment bank Live Oak Bank Stocks (PRAISE 2.15%) is one of the largest US Small Business Administration (SBA) lenders in the country. SBA loans are made to slightly riskier companies than a bank would normally accept, but the loans are heavily guaranteed by the SBA, making them much more attractive.

Lenders like Live Oak can hold these loans on their balance sheets or sell the guaranteed portion of the loan, which is typically about 75% guaranteed by the SBA, on the secondary market, which promotes liquidity. Live Oak recently saw slow sales of SBA secondary loans. Is the stock still a buy? Let’s take a look.

Difficult market conditions

In the second quarter, Live Oak realized only about $6 million in net income from loan sales, which is well below last year’s average. The bank sold just $50 million of SBA loans in the secondary market, well below the $92 million the bank sold in the second quarter of 2021 and the $211 million it sold in the first quarter of the year sold.

Image source: Live Oak Bancshares.

In its second-quarter earnings release, the bank said the slowdown was mainly due to dislocations in the secondary market stemming from rapidly rising interest rates and difficult market conditions. When interest rates rise, investors in the secondary market have a higher cost of capital, increasing the required returns they need from the loans they buy. Investors are also beginning to worry about credit performance as the macroeconomic outlook deteriorates with the potential for a recession.

The slowdown in loan sales in the second quarter was more evident in the SBA fixed-rate loans that Live Oak originates. Very few of these loans were sold in the second quarter, and the premiums paid by investors on these loans fell from 106% to 102%, likely because while investors are paying a higher cost of capital, the yields on these loans are not adjusted higher, with almost interest rates as high as adjustable rate loans.

Live Oak also posted a loss of $8.7 million after it had to reevaluate its credit service rights due to higher interest rates during the quarter.

While the decline in loan sales in the second quarter and difficulties in the secondary market may have surprised some investors, Live Oak CFO BJ Losch cautioned investors to stay tuned for the impact of higher interest rates on the bank’s first-quarter earnings call on March 28. to prepare for April.

“While premiums have been relatively stable with recent trends over the first 45 to 60 days of the quarter, we have seen some significant changes in demand and prices, largely reflecting changing market sentiment on interest rates and the Fed’s economic outlook were attributable to,” said Losch. “So with the $120 million fintech gain posted in Q2, we will take the opportunity to moderate our guaranteed sales in Q2 and allow markets to continue digesting Fed rate moves.”

Is Live Oak Stock a Buy?

Right now, most banks or fintech companies that sell loans to some sort of secondary market are dealing with the same issues as Live Oak, so the problem isn’t specific to the bank or the result of poor management.

And while revenue from those loan sales weakened, it was partially offset by higher loan revenue on Live Oak’s balance sheet, many of which experienced higher yields and higher interest rates.

Live Oak also reported healthy origination volume of $960 million for the quarter, up from the first quarter of the year. Additionally, since 2013, the bank’s credit quality has far surpassed the broader SBA lending program and the bank is well capitalized.

Live Oak continues to execute on its strategic vision to become America’s small business bank, serving the small business community more holistically. Management has adopted and implemented cutting-edge technology that has enabled it to begin rolling out products that help small businesses run their day-to-day operations, making Live Oak an attractive banking partner.

The market should eventually adjust to rising interest rates, and with the Federal Reserve recently saying it may soon start slowing the pace of rate hikes, problems in the secondary market could pose near-term headwinds. I still think Live Oak stock is a good long-term buy.

Bram Berkowitz does not hold any of the shares mentioned. The Motley Fool has positions in and recommends Live Oak Bancshares. The Motley Fool has a disclosure policy.

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