With shares in slump, Live Oak Bank shifts strategy

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Since its formation in 2008, Live Oak Bank has been one of the most interesting stories in North Carolina banking. It modeled itself as nontraditional bank, having no branches, tellers or ATMs. It offers relatively high interest rates on deposits, while focusing on becoming the largest originator of U.S. Small Business Administration loans mainly through digital contact and rapid response times. “Long ago, we decided we don’t like banks,” Live Oak Bancshares President Neil Underwood told Business North Carolina in 2016.

Unfortunately, its concentration on making SBA loans to about 20 different industries then selling off the debt has contributed to bumpy earnings. It earned $51 million in 2018, down from $100 million a year earlier, while assets totaled $3.7 billion on Dec. 31.

Investors prefer steady growth. When Live Oak executives said its fourth quarter earnings wouldn’t meet expectations amid rising competition in small-business lending, its shares got hammered. Wilmington-based Live Oak closed Wednesday at $13.76, down from more than $30 in July and its IPO price of $17 in 2015.

With the market changing, Live Oak is adapting, including some basic steps that sound like traditional banks. It is hiring experienced lenders in select markets who will make on-site visits to clients, and it is holding more loans rather than selling them into the secondary market.

The changes are part of the work of Huntley Garriott, who became president of Live Oak Bank in September after working as a partner at Goldman Sachs & Co. His previous job included advising banks and other financial companies. He works with Underwood and Chip Mahan, the bank’s founder and CEO.

In a recent interview, Garriott discussed Live Oak’s approach. Comments are edited for brevity and clarity.

Why move to Wilmington from New York City?

I thought I had the best job in the world working with CEOs and boards. But Chip convinced me there was a great opportunity here. It has been wonderful so far because it is a really unique company in a great space. Our plan is for the central hub of the company to be in Wilmington, but we intend to bank every small business in the country.

What is unique about your company?

Live Oak started a digital bank with the notion that if you understood an industry very well, you could lend to it. So we’ve grown to more than 20 verticals. After starting exclusively with SBA loans, we have expanded into asset-based and conventional loans.

Most recently, we’ve started to hire some of best small-business bankers in the country. They sit in these markets and see lots of deal flow. That expands our opportunities.

We continue to invest in technology that is going to allow us to build really interesting deposits and payment products that will take us from being a small-business lender to a small-business bank.

We can lend to a veterinary clinic in Spokane, but it’s hard to get their checking account. But we will design very customized products that will be a better alternative than their traditional bank branch.

Is your advantage mostly speed in delivery?

With no branches, we have also had a cost advantage. We’ve also invested in our industries for a long time and we are able to bank more customers because of that expertise.  Community banks have been geographic communities. Our plan is to expand the definition using our technology.

Will Live Oak provide more personal service?

Relationships do matter, and that has been the calling card of community banking. In reality, small businesses aren’t getting the direct customer relationships like large businesses. Of course, most people also want a digital relationship now.

By and large, we’ll do on-site visits for every loan we make. We want to make sure we’ve seen every borrower.

Why not just focus on SBA loans?

The program is only so big and we were the No. 1 lender last year. There still is growth there, but we see lots of greenfield opportunities in specialty finance.

Why hold more loans rather than selling them?

Selling loans is a great source of capital, but a very volatile source of earnings. Servicing assets get revalued regularly. When you originate and then sell that loan, it’s more of a transaction. We see an added benefit for us to have more loans on our balance sheet.

Why has the share price declined?

Investors look at quarterly earnings, and the computer algorithms tell people to sell when a company takes a reduction in short-term earnings. But there is no incremental credit risk by holding versus selling loans. It’s just that some want the earnings now, rather than spaced out over time.

We’re confident we have the capital to grow. We are a $4 billion asset bank, and we’ll wake up down the road and be a $10 billion asset bank.

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