Company Overview

Live Oak Bancshares, Inc. (LOB) is a financial holding company and a bank holding company headquartered in Wilmington, North Carolina. The company conducts its primary business operations through its commercial bank subsidiary, Live Oak Banking Company. Established in 2008, the bank has carved out a unique niche by specializing in lending and deposit-related services to small businesses nationwide.

Historical Background

The company's history can be traced back to its founding in December 2008 when Live Oak Bancshares, Inc. was established. Live Oak Banking Company, the company's primary subsidiary, was organized and incorporated under the laws of the State of North Carolina in February 2008 and commenced operations on May 12, 2008. From its inception, the bank focused on providing lending and deposit services to small businesses across the country, with a significant portion of its loans guaranteed by government programs such as the Small Business Administration (SBA) 7(a) Loan Program and various U.S. Department of Agriculture (USDA) initiatives.

In its early years, Live Oak Bank concentrated on carefully selected industries or "verticals," gradually expanding to lend more broadly to select borrowers outside these verticals. The bank has built a reputation for proactive credit management, with a dedicated team of 72 employees reviewing quarterly financial statements for all 7,412 loan customers. This approach has contributed to the bank's ability to maintain strong credit quality throughout its history.

Live Oak Bancshares has grown both organically and through strategic acquisitions. In 2012, the company acquired Government Loan Solutions, a management and technology consulting firm specializing in government-guaranteed lending. This acquisition enhanced the company's expertise in navigating complex government lending programs. In 2015, Live Oak launched Live Oak Grove, an on-site dining facility for employees and customers, demonstrating its commitment to employee satisfaction and corporate culture. Further diversifying its operations, the company formed Live Oak Ventures in 2018 to invest in businesses aligned with its strategic initiative to become a leader in financial technology.

Throughout its history, Live Oak Bancshares has maintained a consistent focus on soundness, profitability, and growth, in that order. This philosophy has guided the company's decision-making and contributed to its ability to navigate various economic cycles and regulatory changes over the past 15+ years. By continuously investing in risk management, technology, and employee development, Live Oak has established itself as a leading national bank focused on serving the small business community.

Business Performance

Over the past 16 years, Live Oak Bancshares has steadily grown its loan portfolio, which stood at $9.83 billion as of September 30, 2024, up from $8.63 billion at the end of 2023. This robust growth has been driven by the company's ability to consistently deliver strong loan production, with $3.73 billion in new loan originations during the first nine months of 2024, compared to $3.95 billion for the full year of 2023. The company's lending expertise and customer-centric approach have enabled it to maintain a healthy credit quality, as evidenced by a nonperforming asset ratio of just 1.76% as of September 30, 2024.

Financials

Live Oak Bancshares' financial performance has been impressive, with the company reporting revenue of $433.58 million and net income of $73.90 million for the fiscal year 2023. The company's operating cash flow (OCF) for 2023 was $620.07 million, with free cash flow (FCF) of $573.23 million.

For the third quarter of 2024, Live Oak reported revenue of $126.34 million, representing a 17.60% increase from the same quarter in 2023. However, net income for Q3 2024 decreased by 67.20% year-over-year to $13.03 million. This decrease was primarily due to a $24.2 million increase in provision for credit losses. The company's OCF for Q3 2024 was negative $174.77 million, compared to positive $449.82 million in Q3 2023. Despite this, FCF increased by 195.40% year-over-year to $184.61 million in Q3 2024, driven by higher loan sales and proceeds.

One of the key drivers of Live Oak Bancshares' success has been its focus on government-guaranteed lending. As of September 30, 2024, the company's loan portfolio included $3.09 billion in guaranteed balances, representing 32.5% of total loans and leases. This exposure to government-backed lending has helped mitigate the company's credit risk and contributed to its strong financial performance.

Live Oak Bancshares operates through two primary segments: Banking and Fintech. The Banking segment, which is the core of the company's operations, has shown strong performance. Net interest income for this segment increased by 10.3% and 10.1% for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. This growth was driven by an expansion in the held-for-investment loan and lease portfolio that outpaced the growth in interest-bearing liabilities.

The Fintech segment, which focuses on strategic investments in emerging financial technology companies, contributed net income of $1.11 million and $3.66 million for the three and nine months ended September 30, 2024, respectively. While these figures represent a decrease from the previous year, primarily due to reduced management fee income following the restructuring of the Canapi Funds, the segment continues to play an important role in diversifying the company's revenue streams.

Liquidity

Live Oak Bancshares maintains a strong liquidity position, with $666.59 million in cash and cash equivalents as of September 30, 2024. The company's debt-to-equity ratio stands at a conservative 0.026, indicating a low level of leverage. Both the current ratio and quick ratio are 7.34, suggesting the company has ample liquidity to meet its short-term obligations.

Furthermore, Live Oak has significant borrowing capacity, with $3.69 billion in unused borrowing capacity based on available collateral as of September 30, 2024. The company's aggregate borrowing capacity with all sources is $6.37 billion, providing substantial financial flexibility to support its lending activities and meet regulatory requirements.

Future Outlook

Looking ahead, Live Oak Bancshares remains well-positioned for continued growth and success. The company's robust loan pipeline, strong credit quality, and diversified revenue streams, including its fintech investments, suggest that the company is poised to capitalize on the needs of small businesses across the country. Additionally, the company's focus on conservative growth and prudent risk management has helped it navigate challenging economic environments, positioning it well for the future.

While Live Oak Bancshares did not provide specific numerical guidance for the future in its recent conference call, management expressed optimism about the company's momentum and growth prospects. BJ Losch mentioned that LOB's loan pipeline remains "near all-time highs," suggesting continued strong loan growth ahead. CEO Chip Mahan stated that he has "never been more excited about our prospects for growth in this bank in the future." The company expects its small dollar SBA lending efforts to be a "meaningful contributor to our results over time," potentially growing to $500 million to $1 billion in annual production over the next couple of years.

However, it is worth noting that the company is not without its risks. As a specialized lender, Live Oak Bancshares is exposed to the performance of its target industries and the broader small business economy. Furthermore, the company's reliance on government-guaranteed lending programs, while a strength, also exposes it to any potential changes in these programs or their administration.

The small business lending market, particularly government-guaranteed lending through programs like SBA 7(a), has seen steady growth in recent years with a compound annual growth rate (CAGR) of around 8-10%. This trend bodes well for Live Oak Bancshares' core business and suggests a favorable market environment for continued expansion.

Conclusion

Overall, Live Oak Bancshares has demonstrated a steadfast commitment to supporting small businesses through its unique lending model and strategic investments. The company's strong financial performance, robust loan growth, and diversified revenue streams suggest that it is well-equipped to continue delivering value to its shareholders in the years to come. With a solid liquidity position, conservative leverage, and a positive outlook from management, Live Oak Bancshares appears poised to capitalize on the growing small business lending market and maintain its position as a leader in fintech-enabled banking services.