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Pretty Good Week for Live Oak Bank: $200M in Advisor Loans, Plus an IPO

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“The capital we raised will allow us to do more of what we already do, continuing to grow within the verticals in which we lend,” said Brett Caines, CFO of Live Oak Bancshares Inc., referring to the bank’s initial public offering of 4.8 million shares of common stock on Nasdaq, which closed July 28 under the symbol LOB. The IPO had an original offering price for its stock of $17, and Caines said “we opened at $18.50 and were at $21 yesterday.”

So where was the stock on Thursday, when the interview took place? Caines said he didn’t know, not having checked. “We’re going to keep running the business the way we’ve been running it,” he said, without being distracted by the daily fluctuations of the company’s stock. (Today, Live Oak announced that its IPO underwriters exercised in full their option to purchase an additional 700,000 shares of common stock.) 

One of Live Oak’s key verticals is investment advisors, and Jason Carroll, managing director and senior loan officer for IA lending at Live Oak, reported in the same interview that the bank had just passed the $200 million mark in loans made to advisors. About 60% to 65% of that $200 million, said Carroll, formerly of Schwab, is for advisor acquisition or succession deals.

Caines said that in the beginning of 2014 “we toyed with the idea then of going public,” but decided then to go in another direction, raising some private capital. By the end of the year, he said the “capital markets were really good for banks, so it seemed like a good time to raise capital.” The goal, he said, was “expanding into new directions—monetizing some opportunities that we saw.” Caines said “we like to say we enable small businesses to get the benefits they need to achieve their deals.”

Live Oak is based in Wilmington, North Carolina, and led by executives experienced in both commercial banking but also, critically, in small-business lending with the backing of the federal Small Business Administration. “We research and find industries” with operators who have “good credit characteristics,” Caines said, but in whom other banks are not interested.

“What sets us apart from traditional banks,” Caines said, is that “they try to be everything to everyone, but when a small-business owner talks to a bank [the owner] spends so much time educating the bank about their business. When you talk to us, you talk to somebody who knows your business already” while also having expertise in the SBA loan process.

The first of those businesses was veterinarians, followed by pharmacists, funeral home operators and then investment advisors and other small-business owners. Since launching its advisor vertical, the firm has also begun lending to craft brewers. What all those verticals have in common is that they have strong cash flows but not the traditional collateral that traditional lenders require.

Caines said that while “we’ve made larger loans, our average is around $1 million.” Live Oak now sees a “significant opportunity out there for loans less than $350,000.” Traditional banks have “shied away’ from those smaller loans, partly because the lending process can be “as intense” as it is for larger loans, he said, and the “many alternative lenders” who are serving that market are doing so at rates “that are not small-business friendly.” Live Oak’s small business desk is now prepared to meet that market need, Caines said. As an example of Live Oak’s “domain expertise” in smaller loans and how it can translate to value for advisors, Carroll said that when a firm like LPL suggests all its advisors “need to become more tech savvy, we say, ‘Let’s do the marketing for [loans of] $25,000 to $50,000 to LPL just to address that technology’” capital spending need.

In the advisor vertical, Carroll says the average loan is around $880,000, which means Live Oak’s loans now can supply “30%, 40%, 50% of the value” of a firm’s acquisition. “What we’re finding is if we can give 60%, 70% or 80% of an advisory firm’s selling value,” Carroll says, “that’s very palatable to the sellers — advisors who are contemplating a succession plan.” What also makes it more palatable is that those loans come with a government guarantee courtesy of the SBA. 

Another appeal to advisors is that Live Oak now provides extensive financing options for commercial real estate. That allows advisors to increase the eventual value of their firm: “they can own their own office” at a lower cost than by leasing their office, Caroll says, which will also give them “something they can sell” along with their books of business.

Live Oak also provides financing to breakaway brokers and has relationships with “all the major custodians and broker-dealers,” listing Fidelity, Ameriprise, LPL, Raymond James and Commonwealth, “who have embedded us in their platforms,” along with firms involved in advisor M&A, like FP Transitions.

“We took a deliberate crawl-walk-run approach” to business, Carroll reported, though he likes to say now “we’re getting ready to run in 2016.”

— Check out How Advisors Can Secure Financing on ThinkAdvisor.