Live Oak Bancshares (LOB 1.35%) had a tremendous year in 2020. The regional bank's focus on small businesses paid off handsomely, boosted by the Paycheck Protection Program (PPP). The bank was able to capitalize on the federal lending program because of its close relationships with small-business customers and its technological platform that streamlines the lending process.
While the bank performed well in 2020, it didn't happen overnight. Live Oak has built up expertise with small businesses in a variety of industries over the past decade. While management at Live Oak is happy about its growth, investments in technology have it even more excited about the bank's future.
Stellar earnings growth in 2020
Live Oak saw impressive 122% growth in loan and lease originations in 2020, bringing total originations to $4.5 billion. The growth was helped largely by the PPP lending program. However, Live Oak still saw loans and leases grow 34% from last year, excluding PPP loans.
This growth in loans and leases boosted net income to $59.5 million, a 230% increase from its $18 million the year prior. Income growth was boosted by both net interest income -- up to $194.7 million, or a 39% increase from 2019 -- and noninterest income, up to $86 million, or a 35.4% increase from 2019.
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Small business focus helped accelerate PPP lending
Since the PPP lending program started, Live Oak has originated $1.76 billion in PPP loans. Thus far, the bank has had over $25 million worth of loans forgiven by the Small Business Administration (SBA), leaving it with $1.5 billion in PPP loans in its portfolio. The lending program will run until March 31, giving the bank additional time to work with small businesses to obtain loans -- albeit at a much slower pace than last year. As the SBA processes loan forgiveness, the bank will continue to benefit from the program, which should serve as a tailwind for strong earnings into the first two quarters of 2021.
However, the PPP lending program isn't the only place where Live Oak is making an impact. Total loans and leases (excluding PPP loans) saw solid growth, with its newest verticals -- new industries the bank serves -- doing very well. For example, in the fourth quarter, loan originations totaled $808 million, with $476 million of these originations in verticals that the bank began serving in just the last three years.
Examples of new verticals served by the bank include educational services, venture banking, and senior housing, while older verticals include healthcare, agriculture, and insurance agents. The bank has done an effective job of expanding small business coverage to different industries, which should continue to drive growth in its loan and lease portfolio.
New products should help continued growth
Live Oak is looking to capitalize on the convergence of banking and fintech, leveraging its expertise on small businesses with technological investment to make the banking and lending process as smooth as possible.
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One platform the bank invested in is Finxact, which it used to process 11,000 PPP loans and counting. Live Oak is excited about this and other investments that make up its next-gen platform, which will allow the bank to expand product offerings to small businesses while delivering a unique customer experience.
While the platform drove PPP lending in 2020, a more widespread transition will take place in 2021, as the bank converts 60,000 deposit customers mid-year while also moving into broader loan offerings. Ultimately the next-gen platform will provide small-business customers with better payment tools, easier access to lending, account management, and actionable insights.
The focus on small business makes this a bank worth owning
Live Oak Bancshares had a tremendous 2020, posting impressive income growth thanks to its focus on small businesses and opportunities offered by the PPP lending program. The bank's investment in technology should continue to pay off as it works to enhance the banking experience -- which is key to maintaining its status as a go-to bank for small businesses. A customer-centric focus coupled with smart technological investments makes Live Oak Bancshares' stock a good addition to any portfolio.
