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Live Oak Bancshares, Inc. Reports Third Quarter 2020 Results

10/21/20

WILMINGTON, N.C., Oct. 21, 2020 (GLOBE NEWSWIRE) -- Live Oak Bancshares, Inc. (Nasdaq: LOB) (“Live Oak” or the “Company”) today reported third quarter 2020 net income of $33.8 million, or $0.81 per diluted share, compared to net income of $3.9 million, or $0.09 per diluted share, for the third quarter of 2019. The third quarter of 2020 included non-cash gains of $15.2 million related to the Company’s financial technology investments.

“We understand what a challenging year this has been for everyone, and we are pleased to report that our performance during the third quarter of 2020 successfully displayed our ability to help American small business owners in a time of real need,” said James S. Mahan, III, Chairman and Chief Executive Officer of Live Oak. “We greatly exceeded our previous quarterly maximum for loan and lease origination at nearly $1 billion, excluding the work we accomplished for the Paycheck Protection Program. Our core business has shown scale and efficiency thanks to previous investments in infrastructure and talent, and our position as a financial technology change leader was further validated with the increased valuations on several of our investments. We believe our way of business is proving itself to be a bold and successful way of providing next-generation banking experiences to American small business owners.”

Third Quarter 2020 Key Measures

(Dollars in thousands, except per share data)                   Increase (Decrease)          
    3Q 2020     3Q 2019     Dollars     Percent     2Q 2020  
Net interest income and servicing revenues   $ 58,166     $ 44,362     $ 13,804       31 %   $ 47,589  
Net income     33,780       3,895       29,885       767       3,777  
Diluted earnings per share     0.81       0.09       0.72       800       0.09  
Non-GAAP net income (1)     34,554       3,895       30,659       787       3,777  
Non-GAAP diluted earnings per share (1)     0.83       0.09       0.74       822       0.09  
Loan and lease production:                                        
Loans and leases originated   $ 966,499     $ 562,259     $ 404,240       72 %   $ 2,175,055  
% Fully funded     72.9 %     51.3 %   n/a     n/a       89.8 %
Total loans and leases   $ 6,227,399     $ 3,326,065     $ 2,901,334       87 %   $ 5,626,650  
Total assets     8,093,381       4,601,529       3,491,852       76       8,209,154  
Total deposits     5,706,044       4,017,099       1,688,945       42       5,873,292  

(1) See accompanying GAAP to Non-GAAP Reconciliation.

Loans and Leases

At September 30, 2020, the total loan and lease portfolio increased to $6.23 billion, 87.2% above its level a year ago and 10.7% above its level at June 30, 2020. Compared to the second quarter of 2020, loans and leases held for investment increased $387.3 million, or 8.3%, to $5.04 billion while loans held for sale increased $213.4 million, or 21.9%, to $1.19 billion. Loan and lease originations totaled $966.5 million during the third quarter of 2020, a decrease of $1.21 billion, or 55.6%, from the second quarter of 2020. The total loan and lease portfolio at September 30, 2020, and June 30, 2020, of $6.23 billion and $5.63 billion, respectively, consisted of approximately 37.9% and 38.7% of unguaranteed loans and leases, respectively.

Excluding loan originations as part of the Paycheck Protection Program (“PPP”), loan and lease originations totaled $948.8 million during the third quarter of 2020, an increase of $518.7 million, or 120.6%, from the second quarter of 2020. Average loans and leases were $5.87 billion during the third quarter of 2020 compared to $5.13 billion during the second quarter of 2020.

Loans and leases held for investment, loan and lease originations, and average loans and leases were impacted by PPP loans originated in the second and third quarters of 2020. The unguaranteed percentage of the total loan and lease portfolio for each of the second and third quarters of 2020 was significantly influenced by the addition of PPP loans carrying a 100% government guarantee. The total loan and lease portfolio at September 30, 2020, was comprised of $1.71 billion of PPP loans, net of deferred fees and costs. PPP loans comprised $17.7 million of the total loans and leases originated during the third quarter of 2020, compared to $1.74 billion of PPP loans originated in the second quarter of 2020, and are carried at historical cost classified as held for investment.

Deposits

Total deposits decreased by $167.2 million to $5.71 billion at September 30, 2020, from $5.87 billion at June 30, 2020, as excess deposits began to runoff following the defensive strategy to build liquidity during the first quarter of 2020 due to the uncertainty of the effects of COVID-19. Average total interest-bearing deposits for the third quarter of 2020 increased $54.7 million, or 1.0%, to $5.69 billion, compared to $5.63 billion for the second quarter of 2020. The ratio of average total loans and leases to average interest-bearing deposits was 103.1% for the third quarter of 2020, compared to 91.1% for the second quarter of 2020. The ratio is influenced by average PPP loan volume and the use of the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) classified as long-term borrowings.

Borrowings

Borrowings totaled $1.75 billion at September 30, 2020. During the third quarter of 2020, the Company increased long-term borrowings by $26.1 million through the Federal Reserve’s PPPLF to $1.74 billion. The PPPLF has a 100% advance rate equal to the principal amount of PPP loans pledged as security and carries an interest rate of 0.35% and loans financed under the PPPLF have a neutral impact on regulatory leverage capital ratios.

Net Interest Income

Net interest income for the third quarter of 2020 rose to $51.4 million compared to $37.5 million for the third quarter of 2019 and $40.9 million for the second quarter of 2020. The increase from the prior year was driven by significant growth in the held for investment loan and lease portfolio reflecting the Company's ongoing initiative to grow recurring revenue sources and strengthen its liquidity profile. This increase over the prior year was further enhanced by the origination of $1.76 billion in PPP loans in the second and third quarters of 2020 and a year-to-date loan and lease originations for 2020 of $1.88 billion, excluding PPP loans.

The increase from the second quarter of 2020 arose principally from a higher average loan and lease portfolio balance enhanced by a 21-basis point improvement in the net interest margin from 2.56% to 2.77%. The decrease in interest earning asset yields of 14 basis points was outpaced by the 38-basis point reduction in the average cost of interest-bearing liabilities from 1.65% in the second quarter of 2020, to 1.27% in the third quarter of 2020. The reduction in the cost of interest bearing liabilities was a product of a lag in deposit repricing from the first quarter of 2020 cuts in fed funds rates combined with runoff of higher rate maturing deposits and the lower cost of PPPLF funds.

Noninterest Income

Noninterest income for the third quarter of 2020 increased to $47.0 million compared to $15.4 million for the third quarter of 2019 and $22.4 million for the second quarter of 2020.

Noninterest income increased $31.6 million, or 204.9%, compared to the third quarter of 2019. The net gains on sales of loans increased by $5.3 million as the average net gain on sale of guaranteed loans increased to $110.2 thousand per million sold for the third quarter of 2020 compared to $80.5 thousand per million sold during the third quarter of 2019. The volume of guaranteed loans sold increased to $114.7 million for the third quarter of 2020 from $100.5 million for the third quarter of 2019. The revaluation of the loan servicing asset resulted in a gain of $2.1 million for the third quarter of 2020, an increase of $7.2 million from the third quarter of 2019. The valuation adjustments related to loans measured at fair value resulted in a net gain of $3.4 million for the third quarter of 2020, a $2.3 million increase compared to the third quarter of 2019. The valuation of loans and loan servicing assets in the third quarter of 2020 was favorably impacted by greater stability and improvement of market conditions.

Net losses on equity method investments decreased to $1.2 million for the third quarter of 2020 compared to $2.4 million for the third quarter of 2019, partially due to a non-cash gain recognized in that portfolio. Equity security investments resulted in a gain of $14.7 million for the third quarter of 2020 compared to $3.3 million for the third quarter of 2019 and was primarily driven by a $13.7 million increase in the observable fair market value of the Company’s investment in Greenlight Financial Technology, Inc. (“Greenlight”), arising from orderly transactions in Greenlight’s securities. Additionally, management fee income earned by Canapi Advisors, the Company’s investment advisor subsidiary, increased by $1.2 million to $1.3 million for the third quarter of 2020 compared to $95 thousand for the third quarter of 2019.

Noninterest income increased $24.6 million, or 109.9%, compared to the second quarter of 2020. For the third quarter of 2020, fair value adjustments were impacted by the above-mentioned improved market conditions by recouping a portion of the losses recognized earlier in 2020 related to the COVID-19 pandemic. The valuation adjustment for loans measured at fair value for the third quarter of 2020 improved $4.5 million compared to the second quarter of 2020, while the loan servicing asset revaluation improved $3.6 million over the same period. The average net gain on guaranteed loan sales was $110.2 thousand per million sold in the third quarter of 2020 versus $66.8 thousand per million in the second quarter of 2020 also as a result of improving market conditions for the purchase of guaranteed loans and favorable fair value adjustments for exchange-traded interest rate futures contracts. The Company recorded $252 thousand in fair value net gains on exchange-traded interest rate futures contracts during the third quarter of 2020 compared to $127 thousand in fair value net gains during the second quarter of 2020. Excluding fair value gains on exchange-traded interest rate futures contracts, the average net gain on guaranteed loan sales was $108.0 thousand per million and $65.9 thousand per million sold in the third quarter of 2020 and the second quarter of 2020, respectively.

Equity security investments income increased by $14.5 million for the third quarter of 2020 compared to the prior quarter and was primarily driven by the aforementioned non-cash gain arising from the increase in the market value of the Company’s investment in Greenlight. Other noninterest income decreased by $2.4 million compared to the prior quarter primarily due to $2.5 million in revenue from co-developed technology recognized during the second quarter of 2020.

Noninterest Expense

Noninterest expense for the third quarter of 2020 totaled $42.7 million compared to $42.7 million for the third quarter of 2019 and $48.1 million for the second quarter of 2020.

Salaries and employee benefits for the third quarter of 2020 increased $1.5 million, or 6.5%, to $24.2 million compared to $22.7 million for the third quarter of 2019 and decreased $6.5 million, or 21.4%, from $30.8 million for the second quarter of 2020. The salaries and employee benefits increase over the third quarter of 2019 was attributable to the Company’s investment in its workforce to support growth and a variety of initiatives, offset by increased levels of deferred salary expense for the increased loan originations compared to the prior year. The decrease of $6.5 million for the third quarter of 2020 was driven primarily by $7.2 million in expense for a performance bonus pool that was available to all employees other than executive officers during the second quarter of 2020.

Operational adaptations due to the impact of the COVID-19 pandemic resulted in travel expense decreasing to $250 thousand for the third quarter of 2020 compared to $1.9 million for the third quarter of 2019 and $364 thousand for the second quarter of 2020. Similarly, advertising and marketing expense decreased to $552 thousand for the third quarter of 2020 compared to $1.3 million for the third quarter of 2019 and $624 thousand for the second quarter of 2020.

Compared to the third quarter of 2019, FDIC insurance increased $2.0 million for the third quarter of 2020.

Asset Quality

Net charge-offs for loans carried at historical cost increased to $10.1 million in the third quarter of 2020 compared to $1.8 million in the second quarter of 2020 and increased from $840 thousand in the third quarter of 2019. The increase in net charge-offs during the third quarter of 2020 was principally driven by the reclassification of fifteen hotel loans aggregating $81.2 million in net investment from held for investment to held for sale during the quarter. After charge-offs, discussed more fully below, ten of these loans were sold for the adjusted net investment of $45.7 million prior to quarter end. These loans were marked to the lower of cost or fair value upon reclassification with the write down of $9.8 million reflected in charge-offs. At September 30, 2020, the Company still held five of these loans for sale with an aggregate net investment balance of $25.7 million; however, these unsold loans have been written down to an agreed upon price. Net charge-offs as a percentage of average held for investment loans and leases carried at historical cost, annualized, for the quarters ended September 30, 2020 and 2019 and June 30, 2020, were 1.03%, 0.23% and 0.21%, respectively.

Unguaranteed nonperforming (nonaccrual) loans and leases, excluding $7.5 million and $6.4 million accounted for under the fair value option at September 30, 2020 and June 30, 2020, respectively, and excluding one loan for $6.1 million included in the above hotel loans still held for sale as of September 30, 2020, increased to $20.2 million, or 0.48% of loans and leases held for investment which are carried at historical cost, at September 30, 2020, compared to $13.1 million, or 0.34%, at June 30, 2020. The increase in unguaranteed nonperforming loans and leases was primarily driven by loans in the entertainment center vertical.

The unguaranteed exposure of foreclosed assets decreased $557 thousand to $642 thousand at September 30, 2020, compared to June 30, 2020. Foreclosed assets decreased $2.4 million to $3.3 million at September 30, 2020, from $5.7 million at June 30, 2020.

Provision for Loan and Lease Credit Losses

The provision for loan and lease credit losses for the third quarter of 2020 totaled $10.3 million compared to $4.0 million for the third quarter of 2019 and $10.0 million for the second quarter of 2020. The Company adopted the new current expected credit losses (“CECL”) standard effective January 1, 2020, and accordingly determined to use forecasted levels of unemployment as a primary economic variable in forecasting future expected losses. Ongoing developments including charge-offs and changing economic forecasts related to the COVID-19 pandemic significantly influences the Company’s allowance for credit losses on loans and leases.

The allowance for credit losses on loans and leases totaled $44.2 million at September 30, 2020, compared to $44.1 million at June 30, 2020. The allowance for credit losses on loans and leases as a percentage of total loans and leases held for investment carried at historical cost was 1.05% and 1.16% at September 30, 2020, and June 30, 2020, respectively. The allowance for credit losses on loans and leases as a percentage of total loans and leases held for investment carried at historical cost during the third quarter is heavily influenced by the PPP loans.

Income Tax

Income tax expense was $11.7 million in the third quarter of 2020 compared to an income tax expense of $2.4 million in the third quarter of 2019 and $1.5 million in the second quarter of 2020. The increase in the third quarter of 2020 over the third quarter of 2019 and second quarter of 2020 is primarily due to a significant increase in income before taxes. Also influencing the increase over the third quarter of 2019 is the absence of expected tax credits during 2020.

Shareholders’ Equity

During the first nine months of 2020, 450,000 shares of Class B common stock (non-voting) were converted to Class A common stock (voting) in connection with private sales. The conversion decreased the value of Class B common stock (non-voting) and increased the value of Class A common stock (voting) by $4.8 million.

Conference Call

Live Oak will host a conference call to discuss quarterly results at 9:00 a.m. ET tomorrow morning (October 22, 2020). Media representatives, analysts and the public are invited to listen to this discussion by calling (844) 743-2494 (domestic) or (661) 378-9528 (international) with conference ID 4575196. A live webcast of the conference call along with presentation materials referenced during the conference call will be available on the Investor Relations page of the Company’s website at http://investor.liveoakbank.com. A replay of the webcast will be archived on the Company's website for one year. A replay of the conference call will also be available until October 29, 2020 and can be accessed by dialing (855) 859-2056 (domestic) or (404) 537-3406 (international) with conference ID 4575196.

CFO Commentary

Additional commentary on the quarter by Brett Caines, Chief Financial Officer of the Company, is available at http://investor.liveoakbank.com in the supporting materials for the conference call.

Important Note Regarding Forward-Looking Statements

Statements in this press release that are based on other than historical data or that express the Company’s plans or expectations regarding future events or determinations are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements based on historical data are not intended and should not be understood to indicate the Company’s expectations regarding future events. Forward-looking statements provide current expectations or forecasts of future events or determinations. These forward-looking statements are not guarantees of future performance or determinations, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties, and actual results may differ materially from those presented, either expressed or implied, in this press release. Factors that could cause actual results to differ materially from those expressed in the forward-looking statements include changes in Small Business Administration (“SBA”) rules, regulations or loan products, including the Section 7(a) program, changes in SBA standard operating procedures or changes in Live Oak Banking Company's status as an SBA Preferred Lender; changes in rules, regulations or procedures for other government loan programs, including those of the United States Department of Agriculture; the potential impacts of the Coronavirus Disease 2019 (COVID-19) pandemic on trade (including supply chains and export levels), travel, employee productivity and other economic activities that may have a destabilizing and negative effect on financial markets, economic activity and customer behavior; a reduction in or the termination of the Company's ability to use the technology-based platform that is critical to the success of its business model, including a failure in or a breach of operational or security systems; competition from other lenders; the Company's ability to attract and retain key personnel; market and economic conditions and the associated impact on the Company; operational, liquidity and credit risks associated with the Company's business; the impact of heightened regulatory scrutiny of financial products and services and the Company's ability to comply with regulatory requirements and expectations; and the other factors discussed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) and available at the SEC’s Internet site (http://www.sec.gov). Except as required by law, the Company specifically disclaims any obligation to update any factors or to publicly announce the result of revisions to any of the forward-looking statements included herein to reflect future events or developments.

About Live Oak Bancshares

Live Oak Bancshares, Inc. (Nasdaq: LOB) is a financial holding company and the parent company of Live Oak Bank. Live Oak Bancshares and its subsidiaries partner with businesses that share a groundbreaking focus on service and technology to redefine banking. To learn more, visit www.liveoakbank.com.

Contacts:

Brett Caines | CFO | Investor Relations | 910.796.1645 & Claire Parker | SVP | Media Relations | 910.550.2255



Live Oak Bancshares, Inc.
Quarterly Statements of Income (unaudited)
(Dollars in thousands, except per share data)

    Three months ended  
    3Q 2020     2Q 2020     1Q 2020     4Q 2019     3Q 2019  
Interest income                                        
Loans and fees on loans   $ 70,621     $ 62,022     $ 58,961     $ 57,017     $ 55,939  
Investment securities, taxable     4,123       3,786       3,762       3,911       4,001  
Other interest earning assets     334       1,009       750       885       1,167  
Total interest income     75,078       66,817       63,473       61,813       61,107  
Interest expense                                        
Deposits     22,155       25,121       23,255       23,801       23,576  
Borrowings     1,560       798       57       1        
Total interest expense     23,715       25,919       23,312       23,802       23,576  
Net interest income     51,363       40,898       40,161       38,011       37,531  
Provision for loan and lease credit losses     10,274       9,958       11,792       4,809       3,960  
Net interest income after provision for loan and
   lease credit losses
    41,089       30,940       28,369       33,202       33,571  
Noninterest income                                        
Loan servicing revenue     6,803       6,691       6,422       6,730       6,831  
Loan servicing asset revaluation     2,061       (1,571 )     (4,692 )     (4,135 )     (5,161 )
Net gains on sales of loans     12,690       10,695       11,112       11,364       7,425  
Net gain (loss) on loans accounted for under the fair
   value option
    3,403       (1,089 )     (10,638 )     1,432       1,102  
Equity method investments income (loss)     (1,231 )     (2,243 )     (2,478 )     (1,769 )     (2,370 )
Equity security investments gains (losses), net     14,705       161       (64 )     54       3,343  
Gain (loss) on sale of investment securities
   available-for-sale, net
    1,225       734       (79 )     528       87  
Lease income     2,634       2,635       2,624       2,600       2,361  
Management fee income     1,296       1,206       1,644       1,556       95  
Construction supervision fee income     1,365       684       390       240       360  
Other noninterest income     2,093       4,508       1,501       1,525       1,355  
Total noninterest income     47,044       22,411       5,742       20,125       15,428  
Noninterest expense                                        
Salaries and employee benefits     24,203       30,782       28,063       24,072       22,717  
Travel expense     250       364       1,781       2,246       1,934  
Professional services expense     1,346       1,385       1,937       983       2,073  
Advertising and marketing expense     552       624       1,361       1,630       1,277  
Occupancy expense     2,079       1,955       2,421       2,528       2,131  
Data processing expense     3,009       2,764       3,157       1,847       3,072  
Equipment expense     4,314       4,652       4,635       4,402       4,361  
Other loan origination and maintenance expense     2,669       2,492       2,456       2,390       3,535  
FDIC insurance     2,095       1,721       1,510       2,012       101  
Other expense     2,133       1,361       2,170       2,300       1,536  
Total noninterest expense     42,650       48,100       49,491       44,410       42,737  
Income (loss) before taxes     45,483       5,251       (15,380 )     8,917       6,262  
Income tax expense (benefit)     11,703       1,474       (7,778 )     2,085       2,367  
Net income (loss)   $ 33,780     $ 3,777     $ (7,602 )   $ 6,832     $ 3,895  
Earnings (loss) per share                                        
Basic   $ 0.83     $ 0.09     $ (0.19 )   $ 0.17     $ 0.10  
Diluted   $ 0.81     $ 0.09     $ (0.19 )   $ 0.17     $ 0.09  
Weighted average shares outstanding                                        
Basic     40,542,696       40,506,671       40,334,179       40,291,867       40,240,740  
Diluted     41,549,632       41,122,025       41,074,049       41,178,472       41,113,575  



Live Oak Bancshares, Inc.

Quarterly Balance Sheets (unaudited)
(Dollars in thousands)

    As of the quarter ended  
    3Q 2020     2Q 2020     1Q 2020     4Q 2019     3Q 2019  
Assets                                        
Cash and due from banks   $ 608,826     $ 1,256,958     $ 254,077     $ 124,610     $ 157,359  
Federal funds sold     25,924       91,188       158,226       96,787       88,919  
Certificates of deposit with other banks     7,250       7,250       7,250       7,250       7,250  
Investment securities available-for-sale     765,777       779,794       574,168       540,045       570,795  
Loans held for sale (1)     1,190,200       976,594       996,050       966,447       903,095  
Loans and leases held for investment (2)     5,037,199       4,650,056       2,817,491       2,627,286       2,422,970  
Allowance for credit losses on loans and leases     (44,210 )     (44,083 )     (35,906 )     (28,234 )     (23,961 )
Net loans and leases     4,992,989       4,605,973       2,781,585       2,599,052       2,399,009  
Premises and equipment, net     253,737       269,063       274,177       279,099       280,942  
Foreclosed assets     3,264       5,660       6,744       5,612       5,702  
Servicing assets     37,831       33,834       33,532       35,365       37,583  
Operating lease right-of-use assets     2,697       2,886       2,236       2,427       1,890  
Other assets     204,886       179,954       185,524       156,134       148,985  
Total assets   $ 8,093,381     $ 8,209,154     $ 5,273,569     $ 4,812,828     $ 4,601,529  
Liabilities and Shareholders Equity                                        
Liabilities                                        
Deposits:                                        
Noninterest-bearing   $ 58,771     $ 53,938     $ 51,275     $ 51,965     $ 54,205  
Interest-bearing     5,647,273       5,819,354       4,588,126       4,175,015       3,962,894  
Total deposits     5,706,044       5,873,292       4,639,401       4,226,980       4,017,099  
Borrowings     1,747,083       1,721,029       50,012       14       1,310  
Operating lease liabilities     2,931       3,079       2,416       2,619       2,041  
Other liabilities     53,159       63,319       47,968       50,829       52,860  
Total liabilities     7,509,217       7,660,719       4,739,797       4,280,442       4,073,310  
Shareholders equity                                        
Preferred stock, no par value, 1,000,000 shares
   authorized, none issued or outstanding
                             
Class A common stock (voting)     325,753       319,542       314,994       309,526       296,925  
Class B common stock (non-voting)     26,106       28,753       28,753       30,871       40,401  
Retained earnings     207,400       174,837       172,276       180,265       174,641  
Accumulated other comprehensive income     24,905       25,303       17,749       11,724       16,252  
Total shareholders' equity     584,164       548,435       533,772       532,386       528,219  
Total liabilities and shareholders equity   $ 8,093,381     $ 8,209,154     $ 5,273,569     $ 4,812,828     $ 4,601,529  


(1) Includes $30.4 million, $32.1 million, $19.2 million, $16.2 million and $14.7 million measured at fair value for the quarters ended September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019 and September 30, 2019, respectively.
(2) Includes $845.7 million, $834.6 million, $831.4 million, $824.5 million and $831.3 million measured at fair value for the quarters ended September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019 and September 30, 2019, respectively.



Live Oak Bancshares, Inc.

Statements of Income (unaudited)
(Dollars in thousands, except per share data)

    Nine months ended  
    September 30, 2020     September 30, 2019  
Interest income                
Loans and fees on loans   $ 191,604     $ 150,819  
Investment securities, taxable     11,671       11,434  
Other interest earning assets     2,093       3,914  
Total interest income     205,368       166,167  
Interest expense                
Deposits     70,531       64,096  
Borrowings     2,415        
Total interest expense     72,946       64,096  
Net interest income     132,422       102,071  
Provision for loan and lease credit losses     32,024       10,403  
Net interest income after provision for loan and lease credit losses     100,398       91,668  
Noninterest income                
Loan servicing revenue     19,916       21,304  
Loan servicing asset revaluation     (4,202 )     (12,446 )
Net gains on sales of loans     34,497       17,638  
Net (loss) gain on loans accounted for under the fair value option     (8,324 )     5,976  
Equity method investments income (loss)     (5,952 )     (6,120 )
Equity security investments gains (losses), net     14,802       3,478  
Gain on sale of investment securities available-for-sale, net     1,880       92  
Lease income     7,893       7,055  
Management fee income     4,146       186  
Construction supervision fee income     2,439       1,525  
Other noninterest income     8,102       4,706  
Total noninterest income     75,197       43,394  
Noninterest expense                
Salaries and employee benefits     83,048       66,562  
Travel expense     2,395       4,675  
Professional services expense     4,668       5,876  
Advertising and marketing expense     2,537       4,306  
Occupancy expense     6,455       5,588  
Data processing expense     8,930       7,418  
Equipment expense     13,601       11,925  
Other loan origination and maintenance expense     7,617       6,882  
Renewable energy tax credit investment impairment           602  
FDIC insurance     5,326       1,435  
Other expense     5,664       5,245  
Total noninterest expense     140,241       120,514  
Income before taxes     35,354       14,548  
Income tax expense     5,399       3,346  
Net income   $ 29,955     $ 11,202  
Earnings per share                
Basic   $ 0.74     $ 0.28  
Diluted   $ 0.73     $ 0.27  
Weighted average shares outstanding                
Basic     40,461,479       40,199,468  
Diluted     41,248,866       41,011,608  



Live Oak Bancshares, Inc.
Quarterly Selected Financial Data (unaudited)
(Dollars in thousands, except per share data)

    As of and for the three months ended  
    3Q 2020     2Q 2020     1Q 2020     4Q 2019     3Q 2019  
Income Statement Data                                        
Net income (loss)   $ 33,780     $ 3,777     $ (7,602 )   $ 6,832     $ 3,895  
Per Common Share                                        
Net income (loss), basic   $ 0.83     $ 0.09     $ (0.19 )   $ 0.17     $ 0.10  
Net income (loss), diluted     0.81       0.09       (0.19 )     0.17       0.09  
Dividends declared     0.03       0.03       0.03       0.03       0.03  
Book value     14.69       13.53       13.22       13.20       13.12  
Tangible book value (1)     14.30       13.43       13.22       13.20       13.12  
Performance Ratios                                        
Return on average assets (annualized)     1.67 %     0.22 %     (0.61 )%     0.58 %     0.35 %
Return on average equity (annualized)     23.64       2.68       (5.64 )     5.06       2.94  
Net interest margin     2.77       2.56       3.55       3.57       3.75  
Efficiency ratio (1)     43.89       76.87       107.63       77.09       80.83  
Noninterest income to total revenue     47.15       34.64       12.66       34.02       29.02  
Selected Loan Metrics                                        
Loans and leases originated   $ 966,499     $ 2,175,055     $ 500,634     $ 523,688     $ 562,259  
Guaranteed loans sold     114,731       154,980       162,297       105,002       100,498  
Average net gain on sale of guaranteed loans     110.19       66.76       63.71       106.16       80.51  
Adjusted average net gain on sale of guaranteed loans (2)     107.99       65.94       83.48       94.86       94.98  
Outstanding balance of sold loans serviced:                                        
Guaranteed     2,878,664       2,840,429       2,761,015       2,746,480       2,802,073  
Unguaranteed     264,829       231,602       223,587       224,127       211,095  
Total     3,143,493       3,072,031       2,984,602       2,970,607       3,013,168  
Asset Quality Ratios                                        
Allowance for credit losses to loans and leases held for
   investment (4)
    1.05 %     1.16 %     1.81 %     1.57 %     1.51 %
Net charge-offs (4)   $ 10,147     $ 1,781     $ 2,799     $ 536     $ 840  
Net charge-offs to average loans and leases held for
   investment (3) (4)
    1.03 %     0.21 %     0.58 %     0.13 %     0.23 %
Nonperforming loans and leases (4) (5)   $ 46,749     $ 40,275     $ 34,088     $ 21,937     $ 22,300  
Foreclosed assets     3,264       5,660       6,744       5,612       5,702  
Nonperforming loans and leases (unguaranteed
   exposure) (4) (5)
    20,153       13,122       9,623       7,224       7,842  
Foreclosed assets (unguaranteed exposure)     642       1,199       1,478       1,120       1,142  
Nonperforming loans and leases not guaranteed by the
   SBA and foreclosures (4) (5)
  $ 20,795     $ 14,321     $ 11,101     $ 8,344     $ 8,984  
Nonperforming loans, leases and foreclosures, not
   guaranteed by the SBA, to total assets (4) (5)
    0.29 %     0.20 %     0.25 %     0.21 %     0.24 %
Nonperforming loans accounted for under the fair value
   option
  $ 47,434     $ 46,221     $ 60,558     $ 49,739     $ 54,024  
Nonperforming loans accounted for under the fair
   value option (unguaranteed exposure)
    7,495       6,352       8,193       6,700       8,214  
Capital Ratios                                        
Common equity tier 1 capital (to risk-weighted assets)     13.09 %     12.84 %     13.81 %     14.90 %     15.28 %
Total capital (to risk-weighted assets)     14.19       13.99       14.83       15.74       16.03  
Tier 1 risk based capital (to risk-weighted assets)     13.09       12.84       13.81       14.90       15.28  
Tier 1 leverage capital (to average assets)     8.47       7.96       9.94       10.65       11.12  

Notes to Quarterly Selected Financial Data

(1) See accompanying GAAP to Non-GAAP Reconciliation.
(2) Excludes fair value gain/loss on exchange-traded interest rate futures contracts.
(3) Quarterly net charge-offs as a percentage of quarterly average loans and leases held for investment, annualized.
(4) Excludes loans measured at fair value.
(5) The quarter ended September 30, 2020 excludes one $6.1 million hotel loan classified as held for sale.



Live Oak Bancshares, Inc.
Quarterly Average Balances and Net Interest Margin
(Dollars in thousands)

    Three Months Ended
September 30, 2020
    Three Months Ended
June 30, 2020
 
    Average Balance     Interest     Average Yield/Rate     Average Balance     Interest     Average Yield/Rate  
Interest earning assets:                                                
Federal funds sold and interest earning
   balances in other banks
  $ 736,387     $ 334       0.18 %   $ 711,916     $ 1,009       0.57 %
Investment securities     755,412       4,123       2.17       556,014       3,786       2.73  
Loans held for sale     1,084,024       14,399       5.27       921,956       13,115       5.71  
Loans and leases held for investment (1)     4,782,075       56,222       4.66       4,208,109       48,907       4.66  
Total interest earning assets     7,357,898       75,078       4.05       6,397,995       66,817       4.19  
Less: allowance for credit losses on loans and
   leases
    (44,054 )                     (35,875 )                
Non-interest earning assets     778,826                       603,610                  
Total assets   $ 8,092,670                     $ 6,965,730                  
Interest bearing liabilities:                                                
Interest bearing checking   $ 500,007     $ 747       0.59 %   $ 462,977     $ 646       0.56 %
Savings     1,669,199       3,674       0.87       1,398,378       4,814       1.38  
Money market accounts     95,151       83       0.35       82,908       89       0.43  
Certificates of deposit     3,423,643       17,651       2.05       3,689,041       19,572       2.13  
Total interest bearing deposits     5,688,000       22,155       1.55       5,633,304       25,121       1.79  
Borrowings     1,733,805       1,560       0.36       676,849       798       0.47  
Total interest bearing liabilities     7,421,805       23,715       1.27       6,310,153       25,919       1.65  
Non-interest bearing deposits     43,993                       41,218                  
Non-interest bearing liabilities     55,353                       50,554                  
Shareholders' equity     571,519                       563,805                  
Total liabilities and shareholders' equity   $ 8,092,670                     $ 6,965,730                  
Net interest income and interest rate spread           $ 51,363       2.78 %           $ 40,898       2.54 %
Net interest margin                     2.77                       2.56  
Ratio of average interest-earning assets to average
   interest-bearing liabilities
                    99.14 %                     101.39 %

(1)   Average loan and lease balances include non-accruing loans and leases.



Live Oak Bancshares, Inc.
GAAP to Non-GAAP Reconciliation
(Dollars in thousands)

    As of and for the three months ended  
    3Q 2020     2Q 2020     1Q 2020     4Q 2019     3Q 2019  
Total shareholders’ equity   $ 584,164     $ 548,435     $ 533,772     $ 532,386     $ 528,219  
Less:                                        
Goodwill     1,797       1,797                    
Other intangible assets     2,218       2,294                    
Tangible shareholders’ equity (a)   $ 580,149     $ 544,344     $ 533,772     $ 532,386     $ 528,219  
Shares outstanding (c)     40,575,982       40,525,632       40,380,201       40,316,974       40,272,908  
Total assets   $ 8,093,381     $ 8,209,154     $ 5,273,569     $ 4,812,828     $ 4,601,529  
Less:                                        
Goodwill     1,797       1,797                    
Other intangible assets     2,218       2,294                    
Tangible assets (b)   $ 8,089,366     $ 8,205,063     $ 5,273,569     $ 4,812,828     $ 4,601,529  
Tangible shareholders’ equity to tangible assets (a/b)     7.17 %     6.63 %     10.12 %     11.06 %     11.48 %
Tangible book value per share (a/c)   $ 14.30     $ 13.43     $ 13.22     $ 13.20     $ 13.12  
Efficiency ratio:                                        
Noninterest expense (d)   $ 42,650     $ 48,100     $ 49,491     $ 44,410     $ 42,737  
Net interest income     51,363       40,898       40,161       38,011       37,531  
Noninterest income     47,044       22,411       5,742       20,125       15,428  
Less: gain (loss) on sale of securities     1,225       734       (79 )     528       87  
Adjusted operating revenue (e)   $ 97,182     $ 62,575     $ 45,982     $ 57,608     $ 52,872  
Efficiency ratio (d/e)     43.89 %     76.87 %     107.63 %     77.09 %     80.83 %



Live Oak Bancshares, Inc.

GAAP to Non-GAAP Reconciliation (Continued)
(Dollars in thousands, except per share data)

    Three Months Ended     Nine Months Ended  
    3Q 2020     2Q 2020     3Q 2019     3Q 2020     3Q 2019  
Reconciliation of net income to non-GAAP net income:                                        
Net income   $ 33,780     $ 3,777     $ 3,895     $ 29,955     $ 11,202  
Gain on sale of aircraft                             (357 )
Impairment on aircraft held for sale     1,019                   1,019        
Renewable energy tax credit investment impairment                             602  
Income tax effects and adjustments for non-GAAP
   items *
    (245 )                 (245 )     (58 )
Non-GAAP net income   $ 34,554     $ 3,777     $ 3,895     $ 30,729     $ 11,389  
* Estimated at 24.0%                                        
Non-GAAP earnings per share:                                        
Basic   $ 0.85     $ 0.09     $ 0.10     $ 0.76     $ 0.28  
Diluted   $ 0.83     $ 0.09     $ 0.09     $ 0.74     $ 0.28  
Weighted-average shares outstanding:                                        
Basic     40,542,696       40,506,671       40,240,740       40,461,479       40,199,468  
Diluted     41,549,632       41,122,025       41,113,575       41,248,866       41,011,608  
Reconciliation of financial statement line items as reported
   to non-GAAP:
                                       
Noninterest income, as reported   $ 47,044     $ 22,411     $ 15,428     $ 75,197     $ 43,394  
Gain on sale of aircraft                             (357 )
Noninterest income, non-GAAP   $ 47,044     $ 22,411     $ 15,428     $ 75,197     $ 43,037  
Noninterest expense, as reported   $ 42,650     $ 48,100     $ 42,737     $ 140,241     $ 120,514  
Impairment on aircraft held for sale     (1,019 )                 (1,019 )      
Renewable energy tax credit investment impairment                             (602 )
Noninterest expense, non-GAAP   $ 41,631     $ 48,100     $ 42,737     $ 139,222     $ 119,912  
Income before taxes, as reported   $ 45,483     $ 5,251     $ 6,262     $ 35,354     $ 14,548  
Gain on sale of aircraft                             (357 )
Impairment on aircraft held for sale     1,019                   1,019        
Renewable energy tax credit investment impairment                             602  
Income before taxes, non-GAAP   $ 46,502     $ 5,251     $ 6,262     $ 36,373     $ 14,793  
Income tax expense, as reported   $ 11,703     $ 1,474     $ 2,367     $ 5,399     $ 3,346  
Income tax effects and adjustments for non-GAAP
  items
    245                   245       58  
Income tax expense, non-GAAP   $ 11,948     $ 1,474     $ 2,367     $ 5,644     $ 3,404  


This press release presents the non-GAAP financial measures previously shown. The adjustments to reconcile from the applicable GAAP financial measure to the non-GAAP financial measures are included where applicable in financial results presented in accordance with GAAP. The Company considers these adjustments to be relevant to ongoing operating results. The Company believes that excluding the amounts associated with these adjustments to present the non-GAAP financial measures provides a meaningful base for period-to-period comparisons, which will assist regulators, investors, and analysts in analyzing the operating results or financial position of the Company. The non-GAAP financial measures are used by management to assess the performance of the Company’s business for presentations of Company performance to investors, and for other reasons as may be requested by investors and analysts. The Company further believes that presenting the non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although non-GAAP financial measures are frequently used by shareholders to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP.


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Live Oak Bancshares, Inc.