Live Oak Bancshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Live Oak is a bank holding company focused on nationwide small-business lending and deposits, including SBA and USDA-guaranteed lending, with a fintech investment and advisory business. Financial statement amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net interest income | $71.5 | $40.9 | $141.4 | $81.1 |
| Provision for credit losses | $7.8 | $10.0 | $7.0 | $21.8 |
| Noninterest income | $70.1 | $22.4 | $101.2 | $28.2 |
| Noninterest expense | $57.6 | $48.1 | $115.8 | $97.6 |
| Net income (loss) | $63.6 | $3.8 | $103.0 | ($3.8) |
| Diluted earnings (loss) per share | $1.41 | $0.09 | $2.29 | ($0.10) |
| Net interest margin | 3.63% | 2.56% | 3.72% | 2.97% |
Q2 net interest income rose 74.7% year over year, reflecting loan growth, PPP-related income and lower deposit costs. Noninterest income included a $44.3 million gain on equity securities, primarily from an observable valuation increase in the Greenlight investment. Management said the Greenlight gain followed an arm’s-length sale of part of its holding; the filing also reports $13.9 million of realized cash gains on an investment sale. This investment-related income is unusual and materially boosted reported earnings.
Financial position, liquidity and cash flow
- At June 30, total assets were $8.24 billion, up 4.7% from year-end 2020. Loans and leases held for investment were $5.44 billion, versus $5.14 billion at year-end; loans held for sale were $1.06 billion, versus $1.18 billion.
- Deposits totaled $6.52 billion, up 14.1% from year-end. Shareholders’ equity was $657.3 million, compared with $567.9 million; book value per share was $15.19, compared with $13.38.
- Cash and cash equivalents were $438.8 million at period-end. Management reported $3.27 billion of immediately available liquidity, or 39.6% of assets, including cash, federal funds sold, unpledged securities and credit availability.
- The balance sheet reports borrowings of $1.012 billion, including $961.0 million of PPPLF funding. The MD&A separately states borrowings of $529.7 million at June 30; the filing text does not reconcile these figures. Verify the correct amount and basis.
- For the first half, operating cash flow was negative $119.0 million, investing cash flow negative $17.7 million, and financing cash flow positive $257.2 million; cash and cash equivalents increased $120.5 million. Operating cash flow reflects, among other items, loan originations and sales and is not directly comparable to earnings.
- Bank regulatory capital ratios exceeded “well-capitalized” thresholds: CET1 11.36%, total capital 12.60%, Tier 1 risk-based capital 11.36%, and Tier 1 leverage 7.63%. The consolidated CET1 ratio was 12.45%.
Changes, outlook and risks
- Year-over-year earnings improved substantially, but the result reflects both stronger banking performance and the one-time-like Greenlight investment gain. The first-half provision fell to $7.0 million from $21.8 million, while the allowance for credit losses increased to $57.8 million from $52.3 million at year-end.
- Management attributed improving credit conditions to economic recovery and government support, while continuing to monitor pandemic-sensitive industries. Nonperforming assets and troubled debt restructurings, excluding fair-value loans, totaled $90.4 million, up from $82.5 million at year-end. Criticized and classified loans and leases were $357.0 million, versus $311.4 million.
- PPP loans had a $927.3 million book balance at June 30, including $24.1 million of net deferred fees; the company recognized $11.2 million of PPP fee amortization in Q2. PPP forgiveness and changes to SBA support may affect future funding, interest income and credit exposure.
- Beginning in Q1 2021, the company stopped electing fair-value accounting for new retained participating interests from guaranteed loan sales, aiming to reduce earnings volatility and make revenue more predictable. Previously elected loans remain at fair value.
- There was no specific quantitative earnings guidance in the supplied filing text. Management cautioned that renewed COVID-19 disruption, weaker economic forecasts, borrower deterioration, interest-rate changes, deposit outflows, loan-sale market conditions, and valuation changes in servicing assets could adversely affect results. It also noted that higher or volatile funding costs could pressure net interest margin. The balance sheet was described as asset-sensitive to interest rates, subject to modeling assumptions and other factors.
- A purported class action filed in March 2021 alleges an agreement restricting employee recruitment among Live Oak, nCino and Apiture. The company said it could not estimate a reasonably possible loss or range of loss. Management otherwise stated that ordinary-course proceedings were not expected to materially affect the company.
- The company migrated human-capital, accounting and financial-management systems during Q2, modifying controls and adding processes. Management reported disclosure controls were effective and said it would continue monitoring controls over financial reporting related to the new platform.
Important facts for investors to verify
- Reconcile the $1.012 billion balance-sheet borrowing figure with the MD&A’s $529.7 million figure, including whether the PPPLF is included.
- Assess how much of Q2 and first-half earnings is repeatable without the $44.3 million equity-security gain and other fair-value-related gains.
- Review PPP forgiveness, deferred-fee recognition and the pace at which temporary SBA support ends.
- Track criticized/classified exposures, nonperforming assets, allowance adequacy and credit trends in pandemic-sensitive verticals.
- Monitor the employee-mobility litigation, system-migration control testing, funding costs and sensitivity of servicing-asset valuations to rates and prepayments.