By Vanessa Mambrino, consultant & Nick Robin, business analyst, Capital Performance Group LLC, Washington, D.C., a firm providing advisory, planning, analytic, and project management support to the financial services industry.  www.capitalperform.com

 

 

Chartered in May 2008, Live Oak Banking Company of Wilmington, N.C., is a new addition to ABA Banking Journal’s group of top performing community banks and thrifts. Live Oak Bank ranks #3 among subchapter-S-corporations with total assets of between $100 million and $3 billion—a marked improvement over its position at #103 in the previous year’s rankings. The bank’s strong 2010 earnings performance and ROAE of 51.99%, however, were driven by its attainment of a different ranking—Live Oak Bank is currently the fourth largest servicer of Section 7(a) loans guaranteed by the U.S. Small Business Administration (SBA).

Live Oak Bank was founded by David Lucht and several colleagues (many of whom had worked together previously at large regional institutions) to provide financing to small businesses within the healthcare industry. Originally, the bank provided C&I and CRE loans to veterinarians. During 2010, Live Oak Bank expanded the definition of its target customer to include dentists and independent pharmacists; however, 92% of its commercial loan portfolio is comprised of loans to small veterinary practices. The bank originates loans nationally, getting its leads from industry trade shows and continuing education programs. 

Live Oak Bank benefited substantially from changes to the Section 7(a) loan program implemented as part of the American Recovery and Reinvestment Act of 2009. This act provided expanded funding to the SBA to allow for the temporary elimination of loan fees for borrowers (the SBA paid select fees on the borrower’s behalf), the expansion of the SBA’s guarantee on these loans to 90%, and the expansion of the secondary market for SBA loans.  “Our results are primarily due to our great partnership with the SBA,” says Lucht, who is president of Live Oak. “This allows us to help small businesses while also generating nice returns.” The expanded program drove year-over-year loan growth to 103.25% at Live Oak Bank, a rate which significantly outpaced the median growth rate among both other top performing large S-corps (5.79%). Among all large S-corps, median loan growth was actually negative—the median institution reported a 0.99% decline in loan balances.

The temporary changes to the SBA program also helped Live Oak Bank to generate fee income. During 2010, net servicing fees increased from $3 million to $5.1 million, while gains on the sales of loans increased from $6.9 million to $14.4 million. Noninterest income reached 10.76% of average assets by year-end, compared to 8.63% of average assets in 2009. In comparison, noninterest income was 3.45% of average assets at the average top performing large S-corp and 0.94% of average assets at the average large S-corp.

Can this performance be sustained now that the temporary expansion of the Section 7(a) program has ended? Lucht believes that it can: “We still expect to do well as our customers do well; after all, any loan portfolio is only as good as its customers.” In 2011, Live Oak Bank plans to continue to explore ways to continue to diversify its customer base while “sticking to industries that we know well”—for example, by lending to optometrists. The bank is also evaluating new products to supplement its SBA offerings.

 

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[This article was posted on June 10, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]  

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