If you had watched Live Oak Bancshares (NASDAQ: LOB) in early 2020 (before the pandemic), on the surface it would have looked like a lot of other banking stocks. Live Oak stock traded for less than $ 20 per share and was valued at around 150% of tangible book value (TBV), which a bank would be worth if it went into liquidation and what banks tend to trade in .
Fast forward so far, and Live Oak is trading over $ 93 a share and nearly 600% at TBV. Banks don’t normally get such a high valuation – at least not since the Great Recession. So how did this happen?
Well, investors stopped valuing Live Oak as a bank and started seeing it as the booming fintech company that it really is. Let me explain.
From banking to fintech
While the Live Oak stock price may have climbed in a very short period of time, management has been working on this transition for many years now. Contrary to popular belief, many banks understand the need for technology, but it takes time to make big changes.
Live Oak is a branchless bank specializing in serving small businesses primarily through the United States Small Business Administration (SBA) Loan Program. In this program, banks work with the SBA to provide partially government guaranteed loans. Live Oak also provides conventional loans and participates in other government-guaranteed loan programs, such as those of the United States Department of Agriculture.
Despite having significantly fewer assets and resources, Live Oak is the largest SBA lender in the United States, regularly beating out some of the largest banks in the country that also offer this type of loan. It is able to achieve this because it has a technology platform that serves small businesses nationwide. The bank, according to its annual report, uses this platform to “optimize the company’s lending process, customer experience, reporting metrics and service activity.”
In 2020, Congress implemented the Paycheck Protection Program (PPP) as part of larger stimulus bills to help small businesses severely affected by the pandemic. PPP was built on the basis of the SBA loan program, which gave Live Oak a unique opportunity, which the bank took full advantage of. Live Oak generated $ 2.3 billion in PPP loans, which will collectively have brought in more than $ 80 million in net deferred charges once the loans are all canceled.
But Live Oak’s success cannot be entirely attributed to the fact that he was already familiar with the SBA lending space – tons of lenders are giving SBA loans. This is the technology platform that sets Live Oak apart by making the SBA loan origination process much more efficient. It also allows Live Oak to manage and engage a nationwide network of small businesses without the existing infrastructure.
Create a next-generation technological platform
Several years ago, Live Oak started investing directly in fintech companies because she was familiar with the field and wanted to stay at the forefront of innovation that could revolutionize banking. Now the bank has taken a lot of those successful investments and added them to its own tech stack.
One of those companies was Finxact, a company that makes a basic real-time cloud-based banking system that enables open banking. Most banks use old, legacy core systems to perform their day-to-day banking functions, which are clunky and make it difficult for banks to innovate. During the third quarter, Live Oak successfully converted all of its retail and commercial depository customers to the main Finxact platform.
Live Oak chairman Huntley Garriott said during the bank’s third quarter earnings call that the new technology stack the bank is building on Finxact will give Live Oak the ability to create new products and ” improve existing products much faster and much more cost-effectively than banks. using the old basic banking platforms. The Finxact platform also offers a data advantage, according to Garriott, adding, “Our data resides in one place with multiple positions in a single account, and is not siled into existing systems. This allows us to better understand our clients, to provide them with rich ideas, and to help them with their financial decisions. “
Here you can see the platform that Live Oak is developing. Many of the fintech companies that will make these capabilities possible are fueled by the fintech startups in which Live Oak has already invested.
Can Live Oak stay on its new path?
Since the start of the pandemic, investors have seen the benefits of Live Oak’s investments. The bank’s adjusted net sales before provisions, a good indicator of operating income, increased by nearly 150% between the first quarter of 2020 and the third quarter of this year. Loan origination has exceeded $ 1 billion in each of the past two quarters, which is a lot for a bank with total assets of $ 8.1 billion. With rapidly growing earnings and future innovation to come, Live Oak is trading 600% at TBV and nearly 25 times earnings. It is no longer valued as a traditional bank and is now considered a financial technology company.
Given this new designation, I certainly think Live Oak can continue to grow. Even with PPP nearing completion, Live Oak has probably encountered tons of new customers thanks to PPP. Excluding PPP loans, total loan balances at the bank grew by nearly $ 1.5 billion year over year at a time when loan growth was difficult to achieve for most of the industry. Although the company does not make $ 1 billion loan origination every quarter, management seems very optimistic about the pipeline’s future. The new technology platform and the roll-out of new products should allow the bank to further penetrate its existing customer base and attract more small businesses, giving Live Oak shares plenty of avenues for future growth.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.