Live Oak Bancshares (LOB 4.12%) is a roughly $8.2 billion asset bank that has benefited immensely from the Paycheck Protection Program (PPP). Since the coronavirus pandemic began, insiders have been buying shares of the stock heavily, which has already resulted in huge gains for some of them. The buying continued in August. While insiders can sell shares for a number of different reasons, they only buy shares for one reason: They believe the price will rise. Let's take a look at the moves and at what they mean for the stock.
Different executives at the bank began buying shares in early March, taking advantage of the market declines that resulted from the pandemic. Notably, Live Oak President Neil Lawrence Underwood purchased 95,000 shares at $11.46 per share for a total value of $1.09 million . That purchase has profited tremendously, as shares of Live Oak are now trading at more than $22 per share. At least five other executives or board members purchased shares when Live Oak was trading around $11 or $12 per share .
Recently, Live Oak CEO James Mahan III made eight different purchases between Aug. 17 and Aug. 27. Collectively, he purchased more than 233,000 shares at prices ranging from $18.89 to $20.62 . He now owns almost 6.5 million shares . No officers have sold shares since 2018.
Why the confidence?
In a sector where most banks are trading well below where they started the year, Live Oak has been one of the few bright lights in the industry, up more than 15% since the beginning of the year.
Prior to the pandemic, the bank specialized in originating U.S. Small Business Administration (SBA) loans, and was the largest SBA lender in the country in 2019. So, when the PPP was approved to aid businesses struggling as a result of the pandemic, Live Oak was well positioned to take advantage because it already had the infrastructure built and extensive knowledge of the SBA process.
The bank originated more than $1.7 billion in PPP loans, which came with origination fees ranging from 1% to 5% for each loan, depending on the size of the loan. Live Oak brought in roughly $62 million in PPP loan fees . That's a ton for a bank of its size. Those fees are eventually recognized as interest income, and Live Oak did about $66 million in interest income in the second quarter of this year, so fees from the PPP program equate to nearly an entire quarter of interest income .
Live Oak President Huntley Garriott said on the company's second-quarter earnings call that the bank has only recognized about $5.4 million of those origination fees. He added that most of the PPP loans will be forgiven later this year or in early 2021 -- the fees are primarily recognized at the time of loan forgiveness . This could certainly be a boon to Live Oak's earnings in the fourth quarter of this year and the first quarter of 2021.
Buy Live Oak
I believe following the insiders and buying Live Oak stock right now is a good move. The bank still has yet to recognize most of the fees from the PPP program. Additionally, the bank's total assets have ballooned from roughly $4.2 billion at the end of the second quarter of 2019 to roughly $8.2 billion now. The bank likely found lots of new customers through the PPP and now has an opportunity to convert those customers into long-term relationships that could benefit the bank down the line.
CORRECTION: The original version of this report misstated how many Live Oak shares are owned by CEO James Mahan III.