There are a lot of companies out there that don't get the recognition they deserve. In finance, hot fintech stocks and cryptocurrencies are all the rage. Without established name recognition, many solid companies can slip by unnoticed.
Live Oak Bancshares (LOB 5.92%) is a perfect example of a company flying under Wall Street's radar. The regional bank has excelled as the bank for small businesses. This has been a great driver for growth, but what I'm more excited about is the bank's foray into fintech investments and its focus on companies revolutionizing the banking process.
America's top small-business lender
Live Oak has been crushing it because of its position as a small-business lender. The company can brag about its No. 1 ranking among Small Business Association (SBA) lenders in the country, with $747 million in loans approved through the SBA 7(a) program. It was also named the top commercial-lending partner with the U.S. Department of Agriculture and Rural Development, due to its $2.1 billion in investments in rural communities and businesses.
The bank did a stellar job of leveraging its position as a top lender to small businesses when the federal government introduced the Paycheck Protection Program (PPP). This program was introduced to provide lending for small businesses to keep employees on payroll. Live Oak helped fund 11,610 loans totaling $1.76 billion through the program last year.
Its liquidity ratios have been stellar, as well. The bank's net interest margin has improved to 3.81%, up from its pandemic low of 2.56% in the second quarter last year, driven by PPP loan forgiveness and fee recognition. The bank also posted an allowance for credit losses of 1.12%, a reduction from the fourth quarter last year, and its common equity Tier 1 capital ratio of 12.16% is well above its 4.5% regulatory requirement.
Fintech investments could catalyze bigger growth
Live Oak has done a tremendous job working with small businesses, and this bread-and-butter business provides stable growth, making the bank attractive relative to competitors. However, Live Oak isn't just good at getting loans into the hands of small businesses -- it's also done a good job of investing in financial technology companies, or fintechs for short.
The bank uses two subsidiaries to capitalize on fintech investments: Canapi Advisors and Live Oak Ventures. Through Canapi, the company provides investment-advisory services with a focus on venture capital and emerging fintechs. Through Live Oak Ventures, the company makes investments in fintechs as part of its mission to become a leader in financial technology.
One fintech that helped improve Live Oak's operations was Finxact. This fintech provides core-as-a-service, which is a fancy way of saying it modernizes the processing of bank deposits and loans. Live Oak credits this investment with helping it process the thousands of PPP loans it originated last year. The bank is also using this technology to convert its 64,000 deposit-customer accounts, which will enable Live Oak to create customized banking products for customers quickly. These can easily be integrated with other financial technology.
The company's fintech segment has not yet produced an annual net income for the bank. In 2020, this segment lost $1.9 million, which was an improvement on its $8.2 million loss the year before. However, in its first-quarter earnings presentation, the company noted that its $24.2 million in various fintechs now have an estimated implied value of $168 million.
Its most valuable investments include Apiture, a technology that gives banks and credit unions of all sizes the ability to control their digital experiences, and Greenlight, a fintech looking to transform banking for families, creating a smart debit card for kids and teens.
A bank with fintech growth potential
Wall Street's opinion of Live Oak can be hard to pin down. Compared to banks of a similar size, Live Oak's price-to-earnings ratio of roughly 27 and price-to-tangible-book-value ratio just under 5 make it look expensive. But while this valuation looks rich for a regional bank, you can make the argument that it's cheap for a fintech. Given investors' willingness to pay a higher multiple for the stock, it seems they agree about the explosive growth potential the bank's investments in fintech could provide down the road.
Live Oak has done a tremendous job as a leading bank to small businesses. This helped drive growth from the PPP lending program, giving the bank a nice boost to its top and bottom lines. The bank is positioned well for a recovering economy, which tends to be more favorable to small-business creation. However, I'm most excited about its investments in fintech, which I believe give Live Oak Bancshares higher growth potential than it's given credit for.