Live Oak Bancshares (LOB) Q4 2020 earnings summary

Executive summary

• FY20 net income rose 230.2% YoY to $59.5M, or $1.43 diluted EPS, supported by loan growth, stronger net interest income and gains on loan sales; pandemic-related credit costs and fair-value losses partly offset gains.

• Record traditional-platform originations reached $2.69B, excluding $1.76B of PPP originations; loan and lease balances held for sale and investment rose 75.9% to $6.32B.

• Q4 net income was $29.6M, or $0.72 diluted EPS, versus $33.8M, or $0.81, in Q3; Q4 included a $17.6M income tax benefit.

Financial highlights

• Net interest income increased 39.0% YoY to $194.7M; noninterest income rose 35.4% to $86.0M, while noninterest expense increased 16.8% to $192.7M.

• Provision for loan and lease credit losses increased 167.3% to $40.7M; $23.5M was estimated to reflect COVID-19 severity, CECL effects, portfolio growth, charge-offs and model refinements.

• Net loss on fair-value-option loans was $13.1M versus a $7.4M gain in 2019; estimated pandemic-related effects accounted for $10.4M of the 2020 loss.

• Income tax benefit was $12.2M versus $5.4M expense in 2019, including a $22.1M benefit from market-price-condition RSU vesting and a $3.7M CARES Act benefit.

Outlook and guidance

• Management expects held-for-sale and held-for-investment portfolios to grow on healthy originations and higher retention, while pursuing recurring revenue and conventional lending beyond government-guaranteed programs.

• Prioritizes recurring revenue, expansion of selected existing verticals and new verticals; historical stated growth focus is 15% annually, with a long-term objective of consistent growth.

• Gains on loan sales are expected to remain a meaningful revenue component in 2021, although pandemic effects and program expiration could reduce future gains.

• New checking accounts are being tested on a Finxact-based, cloud-native platform; embedded banking across 30+ industries is viewed as a path to noninterest-bearing deposits.