Live Oak Bancshares, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2021. Live Oak is a North Carolina bank holding company whose bank specializes in nationwide small-business lending and deposits, including SBA- and USDA-guaranteed loans. It also operates a fintech investment segment. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2021 / Sept. 30, 2021 | Comparable period / change |
|---|---|---|
| Net interest income | $77.7 | Up 51.3% from Q3 2020 |
| Net interest margin | 3.99% | 2.77% in Q3 2020 |
| Provision for credit losses | $4.3 | $10.3 in Q3 2020 |
| Noninterest income | $25.3 | Down 46.3% from Q3 2020 |
| Noninterest expense | $55.5 | Up 30.0% from Q3 2020 |
| Net income / diluted EPS | $33.8 / $0.76 | $33.8 / $0.81 in Q3 2020 |
| Nine-month net income / diluted EPS | $136.8 / $3.05 | $30.0 / $0.73 in first nine months of 2020 |
| Total assets | $8,137.3 | Up 3.4% from Dec. 31, 2020 |
| Loans held for investment, net of allowance | $5,358.9 | Gross balance up 5.3% from year-end |
| Deposits / borrowings | $6,816.6 / $575.0 | Deposits up 19.3%; borrowings down from $1,542.1 at year-end |
| Shareholders’ equity | $689.4 | $567.9 at Dec. 31, 2020 |
For the first nine months, net interest income was $219.1 million, up 65.5%; the net interest margin was 3.81%, versus 2.89% in 2020. Nine-month noninterest income rose 68.2% to $126.4 million, while expenses increased 22.1% to $171.3 million. Gains on equity investments included a $44.1 million second-quarter gain related to Greenlight Financial Technologies.
Cash and cash equivalents were $347.0 million at September 30. For the first nine months, operating cash flow was negative $149.1 million, investing cash flow was positive $63.0 million, and financing cash flow was positive $114.9 million; cash increased $28.7 million. Reported operating cash flow reflects substantial loan originations and sales. Immediate liquidity sources totaled $3.30 billion, or 40.6% of assets. The company reported regulatory capital ratios above minimum requirements; the bank’s CET1 ratio was 12.13% and total capital ratio was 13.33%.
Material changes versus comparable periods
- Q3 net income was nearly unchanged year over year, but diluted EPS declined as weighted-average shares increased. Higher net interest income, lower credit-loss provision, and increased loan-sale gains were offset by a $5.9 million servicing-asset revaluation loss, a $1.0 million fair-value loan loss, lower equity-security gains, and higher operating expenses.
- Nine-month earnings increased substantially, led by stronger net interest income, lower provision expense, higher loan-sale gains, and Greenlight-related investment gains. This comparison includes significant pandemic-related credit provisions in 2020 and investment gains in both periods.
- Deposits grew by $1.10 billion from year-end, supporting lending growth. Borrowings fell by $967.1 million, mainly as Paycheck Protection Program Liquidity Facility (PPPLF) balances were repaid following PPP forgiveness.
- The allowance for credit losses increased to $59.7 million from $52.3 million at year-end, while the allowance-to-held-for-investment-loans ratio was 1.26%. Management cited loan growth partly offset by improved economic and credit forecasts.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management said improving pandemic conditions supported credit trends and net interest income, while warning that renewed COVID-19 disruption or a weaker economy could increase credit losses, fair-value losses, and reduce loan-sale gains and interest income. Management’s results for the nine months are not necessarily indicative of full-year results.
- Credit: Management identified $472.5 million of unguaranteed exposure in six pandemic-sensitive verticals, including hotels, education, wine and craft beverage, entertainment, fitness, and quick-service restaurants. It reported improving borrower payment behavior but continued monitoring. Criticized and classified loans, excluding fair-value loans, totaled $387.5 million, up from $311.4 million at year-end. Nonperforming assets and TDRs including fair-value loans were $173.1 million; the comparable figure excluding fair-value loans was $93.1 million.
- PPP and funding: PPP loans on the balance sheet totaled $489.8 million at September 30, down from $927.3 million at June 30. PPP fee amortization contributed $10.9 million of Q3 interest income. PPPLF borrowings were $526.0 million. Management noted that higher funding costs or deposit outflows could pressure margins and liquidity.
- Valuation and revenue variability: Beginning in Q1 2021, the company stopped electing fair-value accounting for new retained participating interests in government-guaranteed loan sales, aiming to reduce revenue volatility. Existing elections remain. Servicing-asset and fair-value loan results remain sensitive to market rates, prepayment assumptions, and other valuation inputs.
- Litigation: After quarter-end, the company agreed to a proposed $3.9 million settlement of an employee-mobility antitrust class action; preliminary court approval remained pending. The company recorded a $3.9 million expense accrual and a $3.7 million insurance receivable.
- Other items: Nine-month expenses included $3.2 million of renewable-energy tax-credit investment impairment. The filing also reports $2.70 billion of unfunded credit commitments and standby letters of credit. A revolving credit line was increased from $50 million to $100 million on October 20, 2021.
- Management reported effective disclosure controls. It converted its core deposit system in Q3 and had migrated human-capital, accounting, and financial-management systems in Q2; related controls and processes were modified and remain subject to monitoring.
Important facts for investors to verify
- Whether loan growth, net interest margin, and loan-sale gains remain sustainable as PPP-related income and forgiveness activity diminish.
- Trends in criticized loans, nonperforming assets, TDRs, and the adequacy of the $59.7 million allowance amid continued economic and pandemic uncertainty.
- The sensitivity of servicing-asset and fair-value loan marks to interest rates, prepayments, market premiums, and model assumptions.
- The final approval and payment terms of the $3.9 million proposed settlement, and recovery of the related $3.7 million insurance receivable.
- Deposit stability, funding costs, liquidity access, and capital levels; management noted that prolonged stress could affect funding and the parent’s ability to service debt.