Live Oak Bancshares, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY 2020. This is an annual report, not a standalone Q4 earnings filing. Live Oak is a Wilmington, North Carolina-based bank holding company whose bank lends and gathers deposits nationally, principally through a technology platform and industry-focused small-business lending. Many loans are government-guaranteed. Amounts below are in U.S. dollars; financial statement amounts are converted to millions where indicated.
Financial performance and condition
| Metric | FY 2021 / year-end | FY 2020 / comparison |
|---|---|---|
| Net income | $167.0 million | $59.5 million |
| Diluted earnings per share | $3.71 | $1.43 |
| Total revenue | $457.0 million | $280.7 million |
| Net interest income | $296.8 million; up 52.4% | $194.7 million |
| Net interest margin | 3.86% | 3.03% |
| Noninterest income / expense | $160.2 million / $231.0 million | $86.0 million / $192.7 million |
| Return on average assets / equity | 2.03% / 25.58% | 0.85% / 10.49% |
| Total assets | $8.21 billion | $7.87 billion |
| Deposits | $7.11 billion | $5.71 billion |
| Borrowings | $318.3 million | $1.54 billion |
| Cash and cash equivalents | $203.8 million | $318.3 million |
| Shareholders’ equity | $715.1 million | $567.9 million |
- Earnings drivers: Net interest income rose with loan growth and lower funding costs. Total noninterest income increased to $160.2 million, including $44.1 million from an increase in the observable value of the Greenlight investment. Net gains on loan sales were $67.3 million, up 36.0%.
- Profitability and costs: Income before taxes was $210.8 million. The effective tax rate was 20.8%, compared with a tax benefit in 2020; prior-year tax benefits included restricted-stock vesting and CARES Act effects. Noninterest expense rose 19.9%, including higher staff, professional-services and data-processing costs. The efficiency ratio improved to 50.55% from 69.10%.
- Lending and credit: Originations were $4.48 billion, including $3.93 billion excluding PPP loans. Loans and leases held for investment were $5.52 billion at year-end. The allowance for credit losses was $63.6 million, or 1.30% of loans held for investment at historical cost. Net charge-offs fell to $3.9 million (0.08% of average historical-cost loans) from $15.3 million (0.44%). Unguaranteed nonperforming historical-cost loans were 0.33% of held-for-investment loans, versus 0.46% a year earlier.
- Cash flow: Consolidated cash flows were $(119.7) million from operating activities, $(149.8) million from investing activities and $155.0 million from financing activities. Cash and cash equivalents declined $114.6 million to $203.8 million. The filing describes loan originations, loan sales and deposit funding as important business cash flows.
- Capital and liquidity: Consolidated common equity Tier 1 and total risk-based capital ratios were 12.38% and 13.53%; the Tier 1 leverage ratio was 8.87%. The Bank was reported well-capitalized. Management reported $3.42 billion of liquidity sources, equal to 41.6% of assets; this includes available borrowing capacity and unpledged securities, not just cash.
Material changes versus FY 2020
- Net income increased by $107.5 million, while total revenue grew 62.8%. Results included the $44.1 million Greenlight-related gain and a $25.4 million reduction in provision for loan and lease credit losses.
- Excluding PPP loans, loans and leases held for investment increased 63.0% at historical cost, and total deposits increased 24.5%. PPP loan balances declined to $261.9 million from $1.50 billion; related PPPLF borrowings fell to $267.6 million from about $1.53 billion.
- Available-for-sale securities increased to $906.1 million from $750.1 million. A $19.6 million after-tax unrealized securities loss reduced other comprehensive income in 2021, compared with $9.8 million of other comprehensive income in 2020.
- The company stopped electing fair value treatment for new retained participating interests from government-guaranteed loan sales beginning in Q1 2021, aiming to reduce earnings volatility and recognize more of the discount over time in interest income.
Outlook, risks and unusual items
- Management described strong underlying performance and growth momentum, and expects loan portfolios to continue growing with healthy originations and higher retention. Priorities include recurring revenue, existing and new lending verticals, fintech initiatives and selective conventional lending. The filing provides no specific earnings or revenue guidance.
- Management expects to recognize most of the $6.5 million of remaining net deferred PPP loan fees in 2022. It also said gains on loan sales are expected to remain a meaningful revenue component in 2022, while noting that premiums and secondary-market conditions may change.
- Interest-rate risk is mixed: the balance sheet was described as asset-sensitive, and a +100 basis-point rate shock was modeled to increase net interest income by 1.2% over 12 months. The same shock was modeled to reduce economic value of equity by 8.8%. These are model estimates, not forecasts.
- COVID-19 remained a source of uncertainty. At year-end, $1.1 million of unguaranteed loans were on payment deferral and $76.9 million of unguaranteed loans were receiving SBA payment assistance. The company continued monitoring pandemic-sensitive industries and noted that most loans after assistance expired had resumed regular payments.
- Key risks include credit losses and reserve-estimation uncertainty; changes to SBA/USDA programs or preferred-lender status; interest-rate, liquidity and deposit risks; cybersecurity and dependence on third-party technology; competition; and execution and valuation risks related to fintech investments.
- Finxact transaction: After year-end, Fiserv announced an agreement to acquire Finxact, in which Live Oak had invested. If completed, Live Oak anticipated an estimated pretax gain of approximately $115 million; closing remained subject to approvals and conditions. The gain was not FY 2021 income.
- Contingency: The company agreed to pay $3.9 million to settle a putative employee antitrust class action. Preliminary approval had been granted; final approval was scheduled for April 25, 2022. The amount was included in other liabilities at year-end.
- The auditor gave an unqualified opinion on the financial statements and internal controls. The filing identifies the allowance for credit losses, fair-value loans and servicing assets as critical audit matters because their valuations involve significant estimates.
Important facts for investors to verify
- Whether the Finxact acquisition closed, the proceeds and realized gain, and how these compare with the filing’s estimated $115 million pretax gain.
- Whether the employee antitrust settlement received final court approval and whether the recorded $3.9 million fully addresses the obligation.
- How much of FY 2021 earnings growth came from recurring banking activity versus investment gains, fair-value changes, loan-sale premiums and PPP-related income.
- Credit performance after SBA payment assistance, including criticized loans, pandemic-sensitive verticals, unguaranteed exposure and whether the $63.6 million allowance remains adequate.
- Deposit mix, uninsured deposits, funding costs and liquidity as PPP-related borrowing declines and loan growth continues.
- The sensitivity of earnings and economic value to interest-rate changes, securities valuations and servicing-right assumptions.