Live Oak Bancshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Live Oak is a nationwide small-business lender, with significant SBA- and USDA-guaranteed lending and income from loan sales, servicing, and interest. Results were materially affected by the emerging COVID-19 pandemic and the adoption of CECL on January 1, 2020.
Key financial results
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $40.2 million | Up 31.2% from $30.6 million in Q1 2019 |
| Net interest margin | 3.55% | Down from 3.65% in Q1 2019 |
| Provision for credit losses | $11.8 million | Up from $3.0 million; management attributed much of the increase to COVID-related unemployment forecasts, portfolio growth, and credit deterioration |
| Noninterest income | $5.7 million | Down 56.9% from $13.3 million |
| Noninterest expense | $49.5 million | Up 29.6% from $38.2 million |
| Net income (loss) | $(7.6) million; $(0.19) per diluted share | Compared with $2.4 million profit; $0.06 per diluted share |
| Cash and cash equivalents | $415.1 million at quarter-end | Up $191.5 million from year-end |
| Total assets / deposits | $5.28 billion / $4.64 billion | Assets up 9.6%; deposits up 9.8% from year-end |
| Loans and leases held for investment | $2.82 billion gross; $2.78 billion net of allowance | Gross balance up $190.2 million from year-end |
| Allowance for credit losses | $35.9 million | 1.8% of held-for-investment loans at historical cost; $28.2 million at year-end |
| Borrowings | $50.0 million | Includes a fully drawn $50 million unsecured revolving line due October 2020 |
Material changes and drivers
- Interest income rose with substantial loan growth, while lower asset yields and Federal Reserve rate cuts contributed to the margin decline. Average interest-earning assets increased 33.3% year over year to $4.53 billion.
- Noninterest income fell primarily because fair-value-option loans generated a $10.6 million net loss, versus a $2.1 million net gain in Q1 2019. Loan servicing revenue declined to $6.4 million, and servicing-asset revaluation was negative $4.7 million.
- Net gains on loan sales increased to $11.1 million from $4.2 million; guaranteed loan sales rose to $162.3 million from $62.9 million. Management said the higher sales volume supported capital and liquidity amid market uncertainty.
- Personnel costs increased 28.4% to $28.1 million, reflecting investment in staffing; full-time equivalent employees rose to 622 from 507. Total noninterest expense rose 29.6%.
- Operating cash flow was negative $91.5 million and investing cash flow was negative $179.2 million; financing cash flow was positive $462.3 million, mainly from a $413.0 million increase in deposits and $50.0 million of borrowings.
- Shareholders’ equity was $533.8 million, little changed from year-end. Consolidated CET1 and total capital ratios were 13.81% and 14.83%; the Bank’s corresponding ratios were 12.67% and 13.71%. Management reported ratios above regulatory requirements.
Outlook, risks, and unusual items
- COVID-19 uncertainty: Management warned that prolonged economic weakness could increase credit provisions and fair-value losses, reduce loan-sale gains and interest income, weaken asset quality, and raise funding costs. The quarter-end credit allowance incorporated sharply worsened unemployment forecasts; management reported no charge-offs specifically attributed to COVID-19 as of the filing.
- Credit profile: Nonperforming assets and troubled debt restructurings, including fair-value-option loans, totaled $136.7 million, up $37.9 million from year-end; $104.5 million was government-guaranteed. Criticized and classified loans at historical cost were $143.2 million versus $129.1 million at year-end. At-risk exposures included healthcare, hotels, early education, wine and craft beverage, entertainment centers, fitness centers, and quick-service restaurants.
- Borrower relief and PPP: The company offered 60- or 90-day payment deferrals and described six months of SBA payments for eligible fully disbursed SBA 7(a) and Express loans. As of May 5, 2020, it had secured SBA funding for 9,582 PPP loans totaling $1.7 billion. As of April 30, it had borrowed $462.7 million through the Federal Reserve’s Paycheck Protection Lending Facility. These are post-quarter-end disclosures.
- Capital and liquidity: Immediate liquidity sources totaled $1.38 billion, or 26.2% of assets, at quarter-end. Management said capital was sufficient for an extended recession, but noted further losses could pressure capital. The company also disclosed approximately $1.20 billion of available FHLB borrowing capacity and $309.1 million available through the Federal Reserve discount window, subject to applicable terms and collateral.
- Taxes: The quarter included a $7.8 million income tax benefit, including an estimated $3.7 million CARES Act benefit. Management estimated a 26%–28% effective tax rate for the remainder of 2020, subject to future results and discrete items.
- No formal earnings guidance is provided in the supplied filing text. The board authorized up to $20 million in common-stock repurchases through December 31, 2020; none had occurred by March 31.
- CECL adoption produced an $822,000 increase to opening retained earnings, reflecting a $1.3 million decrease in the loan allowance partly offset by a $499,000 increase in the reserve for unfunded commitments.
Important facts for investors to verify
- How COVID-era borrower accommodations, unemployment forecasts, and subsequent credit performance affect provisions, nonperforming loans, and charge-offs.
- Whether SBA guarantees and PPP loan eligibility, origination, servicing, and forgiveness processes protect the company from material losses or litigation.
- Trends in fair-value-option loan marks, servicing-asset valuations, loan-sale premiums, and secondary-market liquidity.
- Deposit stability, funding costs, liquidity availability, and the October 2020 maturity of the $50 million revolving credit line.
- Whether operating expenses and staffing growth can be supported by recurring revenue and whether the stated tax-rate estimate remains applicable.