Live Oak Bancshares, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. Dollar amounts below are in U.S. dollars. Live Oak operates a nationwide, technology-based small-business bank, primarily originating SBA- and USDA-guaranteed loans. Its reportable segments are Banking and Fintech.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $194.7 million | $140.1 million |
| Noninterest income | $86.0 million | $63.5 million |
| Provision for credit losses | $40.7 million | $15.2 million |
| Noninterest expense | $192.7 million | $164.9 million |
| Income before taxes | $47.4 million | $23.5 million |
| Income tax benefit (expense) | $12.2 million benefit | $5.4 million expense |
| Net income / diluted EPS | $59.5 million / $1.43 | $18.0 million / $0.44 |
| Net interest margin | 3.03% | 3.67% |
| Efficiency ratio | 69.10% | 81.25% |
At December 31, 2020, total assets were $7.87 billion, up 63.6%; loans held for sale and investment totaled $6.32 billion, up $2.73 billion; deposits were $5.71 billion, up 35.2%; and shareholders’ equity was $567.9 million. The allowance for credit losses was $52.3 million, or 1.21% of held-for-investment loans at historical cost (1.8% excluding PPP loans). Net charge-offs were $15.3 million, or 0.44% of average historical-cost held-for-investment loans, versus $1.4 million and 0.10% in 2019.
Cash and cash equivalents ended the year at $318.3 million. Cash flows were negative $273.0 million from operations and negative $2.61 billion from investing activities, largely reflecting loan originations and securities purchases; financing activities provided $2.98 billion, mainly from deposit growth and borrowings. Management reported $3.06 billion of liquidity sources, or 38.8% of assets, including available borrowing capacity and unpledged securities. Borrowings ended at $1.54 billion, principally $1.53 billion under the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF), at 0.35% interest. The Bank was reported well capitalized; consolidated common equity Tier 1 and total capital ratios were 12.15% and 13.39%, respectively, down from 14.90% and 15.74% in 2019.
Material changes and notable items
- 2020 loan originations reached $4.45 billion, including $1.76 billion in PPP loans and a record $2.69 billion from traditional platforms. The Bank held 9,990 PPP loans totaling $1.53 billion at year-end and recognized $27.9 million of interest income from amortized PPP fees.
- Net interest income rose 39.0%, primarily on loan growth, but net interest margin fell 64 basis points as market rates declined and liquidity increased. Deposit repricing and use of excess liquidity to fund loans helped margins later in the year.
- Net gains on loan sales rose 70.6% to $49.5 million as guaranteed-loan sales increased to $542.6 million. Loan fair-value changes shifted from a $7.4 million gain in 2019 to a $13.1 million loss in 2020; loan-servicing asset revaluation remained negative at $10.0 million.
- Credit-loss provision increased by $25.4 million, reflecting COVID-19 uncertainty, portfolio growth, charge-offs and adoption of CECL. Management attributed approximately $23.5 million of 2020 provision to pandemic severity. Fifteen hotel loans totaling $81.2 million were reclassified to held for sale and written down by $9.8 million.
- The $12.2 million tax benefit included a $22.1 million benefit associated with vesting of market-price-condition restricted stock awards and a $3.7 million CARES Act benefit. A $13.7 million noncash gain from the observable value of the Greenlight investment boosted equity-security gains; Apiture’s conversion to a corporation contributed $7.8 million of the Company’s share of tax expense.
- Noninterest expense increased 16.8%, including higher staff costs, $7.2 million of employee performance-pool expense, and $4.1 million of payroll-related expense from accelerated vesting of awards. The Company recorded a $1.3 million aircraft impairment after deciding to sell two aircraft.
Fourth quarter: Net income was $29.6 million, compared with $6.8 million in Q4 2019. Q4 2020 included a $17.6 million income tax benefit; quarterly results therefore warrant review alongside the tax and equity-compensation disclosures.
Outlook, risks and contingencies
Management expected loan portfolios to continue growing through healthy originations and higher retention, while developing recurring revenue, expanding selected lending verticals and pursuing conventional lending opportunities. It expected loan-sale gains to remain a meaningful revenue component in 2021. These are forward-looking expectations, not guarantees; the filing provides no numerical earnings or margin guidance.
Management said pandemic effects remained uncertain. It identified possible deterioration in borrower repayment, collateral values, loan-sale premiums, loan fair values and servicing values. Payment assistance and deferrals could obscure borrowers’ underlying repayment capacity. At year-end, 11% of amortized-cost loans excluding PPP were on payment deferral; 20% were receiving SBA payments. Management highlighted unguaranteed exposure in pandemic-at-risk verticals, including hotels, wine and craft beverage, education, entertainment, fitness and quick-service restaurants. Criticized and classified loans increased to $311.4 million from $129.1 million.
Other material risks include concentration in small-business and commercial real-estate lending; dependence on SBA and USDA programs and preferred-lender status; interest-rate, funding and deposit-retention risk; reliance on third-party technology and cloud services; cyber and operational risk; and execution, valuation and liquidity risks in fintech investments and the planned next-generation banking platform. The Company disclosed a December 2020 demand letter threatening class-action antitrust claims related to alleged employee nonsolicitation or hiring agreements; no complaint had been filed. Management reported no material pending legal proceedings at year-end. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether PPP forgiveness, SBA guarantees and related servicing comply with program requirements, and how PPP fee income and loan balances unwind.
- Subsequent credit performance, deferrals, criticized loans, charge-offs and the adequacy of the $52.3 million credit-loss allowance as pandemic support expires.
- The sustainability of earnings excluding the substantial tax benefit and noncash Greenlight gain, and the sensitivity of loan-sale premiums, fair-value marks and servicing valuations to market assumptions.
- Funding and liquidity concentration, including the PPPLF balance, deposit mix and maturities, and the effect of rapid asset growth on capital ratios.
- Developments in the threatened antitrust matter, and progress, cost and risk controls for Apiture and the next-generation banking platform.