Live Oak Bancshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. Live Oak is a North Carolina bank holding company whose bank focuses on nationwide small-business lending and deposits, including SBA- and USDA-guaranteed lending. Comparisons below are with Q1 2020 unless otherwise noted.
Financial performance
| Metric | Q1 2021 | Prior period / comparison |
|---|---|---|
| Net interest income | $70.0 million | $40.2 million; up 74.2% |
| Net interest margin | 3.81% | 3.55% |
| Provision (recovery) for credit losses | $(0.9) million recovery | $11.8 million provision |
| Noninterest income | $31.1 million | $5.7 million |
| Noninterest expense | $58.3 million | $49.5 million; up 17.7% |
| Net income (loss) | $39.4 million; $0.88 diluted EPS | $(7.6) million; $(0.19) diluted EPS |
| Net cash from operating activities | $(38.7) million | $(91.5) million |
Management attributed the earnings improvement principally to loan and PPP portfolio growth, lower funding costs, a credit-loss recovery, and improved loan-servicing and fair-value results. Q1 2021 noninterest income included a $1.5 million servicing-asset revaluation gain and a $4.2 million gain on loans under the fair value option; the comparable 2020 figures were a $4.7 million loss and a $10.6 million loss, respectively. PPP fee amortization contributed materially to interest income. A $3.1 million impairment charge on a renewable-energy tax-credit investment and higher personnel costs partly offset gains.
Financial position, liquidity and capital
- Total assets were $8.42 billion at March 31, up 6.8% from year-end 2020. Loans held for investment were $5.46 billion, net of a $52.4 million allowance; loans held for sale were $1.08 billion.
- Deposits were $6.32 billion, up $603.2 million from year-end. Borrowings were $1.47 billion, including $1.41 billion under the Federal Reserve’s PPP Liquidity Facility (PPPLF). A new $50 million term loan carries a fixed 2.95% rate and matures in 2026.
- Cash and cash equivalents were $635.5 million. Management reported $3.38 billion of immediately available liquidity sources, or 40.1% of assets, including available borrowing capacity and unpledged securities.
- Shareholders’ equity was $590.4 million; book value was $13.74 per share. Consolidated CET1 and total capital ratios were 12.16% and 13.32%; the Bank’s corresponding ratios were 11.39% and 12.59%. The Bank exceeded applicable “well-capitalized” thresholds.
- Accumulated other comprehensive income fell to $9.1 million from $21.5 million at year-end, reflecting a $12.4 million after-tax unrealized loss on available-for-sale securities during the quarter.
Material changes and management commentary
- Loan originations totaled $1.18 billion, including $507.8 million of PPP originations. At March 31, the company reported 9,046 PPP loans with a $1.45 billion book balance and $33.7 million in net deferred fees. By May 4, it had received $905.6 million of forgiveness payments on 7,000 loans.
- Management said improving economic forecasts drove the Q1 credit-loss recovery, while the allowance remained nearly flat at $52.4 million. The allowance was 1.1% of historical-cost held-for-investment loans, or 1.6% excluding PPP loans and related reserves.
- Asset-quality indicators warrant monitoring: nonperforming loans and leases at historical cost were $57.4 million, up from $46.1 million at year-end. Total nonperforming assets and troubled debt restructurings, excluding fair-value loans, were $97.2 million, up from $82.5 million. Criticized and classified loans and leases rose to $341.2 million from $311.4 million.
- Management identified $451.9 million of unguaranteed exposure in six COVID-19-sensitive verticals: hotels, wine and craft beverage, educational services, entertainment centers, fitness centers and quick-service restaurants. It cautioned that SBA payment assistance and deferrals may obscure borrowers’ ability to repay.
- The company stopped electing fair-value accounting for new retained participating interests from government-guaranteed loan sales, aiming to reduce earnings volatility. Previously elected loans remain under fair-value accounting; the change generally lowers initial sale gains and recognizes more discount over time in interest income.
- Management described the balance sheet as asset-sensitive to interest rates. It said higher rates would generally tend to increase net interest income, while noting that outcomes depend on customer behavior, market conditions and modeling assumptions.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management said COVID-19’s economic effects and potential resurgence or variants remain uncertain; deterioration could increase credit provisions, reduce loan-sale gains and interest income, and cause negative fair-value adjustments. Other stated risks include interest-rate and funding-cost changes, deposit outflows, SBA or USDA program changes, competition, technology or cybersecurity disruptions, regulatory developments and the company’s ability to retain key personnel. Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
A purported antitrust class action filed March 12, 2021 alleges an agreement with nCino and Apiture not to solicit or hire one another’s employees. The plaintiff seeks monetary and other relief, including treble damages. The company said it could not estimate a reasonably possible loss or range of loss because the case is at a preliminary stage. Separately, a Greenlight Financial Technology share transaction announced after quarter-end is expected to produce an approximately $6.9 million pretax, noncash gain in Q2 2021.
Key facts for investors to verify
- Whether PPP forgiveness, fee amortization and loan growth can sustain net interest income and margin as these items change.
- Developments in nonperforming, criticized and classified loans, especially unguaranteed exposure in pandemic-sensitive industries, and whether the allowance remains adequate.
- How much reported earnings depend on fair-value marks, servicing-asset assumptions, loan-sale premiums and other potentially variable income items.
- Liquidity and funding composition, including PPPLF repayments, deposit stability and borrowing availability and cost.
- Progress and potential financial exposure in the employee-mobility class action; the filing provides no loss estimate.
- The Q2 recognition and valuation of the expected Greenlight gain and its noncash, nonrecurring nature.