The banking industry isn't the most exciting from the standpoint of investors, because you don't often find companies that give you growth stock potential. However, if you dig deep enough, you do find a bank stock that qualifies. One such company is Live Oak Bancshares (LOB 0.22%), the bank that small businesses turn to.
Live Oak's strong focus on small businesses is helping it crush its competition. And one number that illustrates Live Oak's dominance is 2.3 billion. That's the total value in dollars of the loans Live Oak has made through the Small Business Administration (SBA) lending program in 2021. To put this in perspective, Huntington Bancshares and Newtek Business Services Corp., second and third on SBA's list, made $928 million and $859 million in loans through the same program.
Live Oak's focus on small businesses makes it a solid investment, but it's actually another development that could drive the business higher going forward: a growth boom in small businesses.
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Live Oak dominates small business lending
Live Oak tops the list of SBA's primary program for small businesses, its 7(a) program. Since 2018, Live Oak has been the top SBA 7(a) lender, and it expanded that lead in 2021.
In 2020, Live Oak used its expertise in SBA lendings to extend $2.3 billion to small businesses as part of the Paycheck Protection Program (PPP) lending program. To process so many loans efficiently, the company used a next-gen platform called Finxact, which allowed it to make over 11,000 PPP loans. This year the bank converted its 60,000 deposit accounts to the Finxact core and plans to convert all of its loans to the platform by next year.
Moving to this core enables Live Oak to expand its product offerings and provide small-business customers with easier access to lending and better payment tools.
Growing recurring revenue to reinvest in the business
Banks make money from interest customers pay on loans minus what the banks pay for deposits it holds. One way banks can boost recurring revenue is by holding more loans on the books instead of selling those loans. By holding loans, the bank can collect more money over the life of the loan. One of Live Oak's goals is to turn those PPP recipients into long-term customers to grow its loan portfolio and recurring revenue. This added revenue can then be reinvested in its business or other fintech opportunities.
In the third quarter, Live Oak's average interest-earning assets increased 5.1% from the prior quarter to $7.74 billion. Year over year, these assets have risen 26%, which has boosted interest income too. In the third quarter, interest income of $92.8 million is up 24% from last year, and through the first nine months of 2021, interest income of $269 million is up 31% from last year.
New business applications are at an all-time high
2021 has seen a lot of growth in new businesses. According to the Census Bureau's business formation statistics, there were 1.4 million applications filed to form new businesses in 2021 as of September. This exceeds applications over the same timeframe in 2020 (1.14 million) and 2019 (987,000).
According to the Economic Innovation Group, "If the past is any guide and a substantial number of these applications turn into real new firms, their survival and growth will help power the economic recovery."
Live Oak stock trades in the expensive range for banks, with a price-to-earnings ratio of 25.3. The stock trades at a premium mostly because it generates high-quality earnings, especially in relation to its competitors. Its return on equity of 19.7% and net interest margin of 3.99% put it near the top of its class among regional banks.
The rapid expansion of small businesses over the past three years has the potential to be another tailwind for Live Oak. If the bank can keep hitting on all cylinders into 2022, the stock should maintain its status as one of the best bank stocks you can buy.
