IPO Report: Live Oak Bancshares (LOB)

Francis Gaskins |

Live_Oak_Banc.jpg

Live Oak Bancshares (LOB) is an established national online platform for small business lending. The company is based in Wilmington, NC.

Three other companies are scheduled for the week of July 20. The full IPO calendar is available at IPO Premium.

SEC Documents

Manager, Joint-managers: Sandler O’Neill & Partners, L.P
Co-managers: Keefe Bruyette & Woods, SunTrust Robinson Humphrey

End of lockup (180 days):
End of 25-day quiet period:

LOB scheduled a $68 million IPO with a market capitalization of $555 million at a price range midpoint of $17 for the week of July 20, 2015 on Nasdaq.

Live Oak Bancshares Summary

LOB is an established national online platform for small business lending.

LOB believes it has used technology to fundamentally change small business lending by streamlining the borrower experience. LOB is able to better serve its customers by leveraging technological advantages and combining that with deep industry experience to create an optimized borrowing experience for its customers.

Live Oak Bancshares Valuation

Glossary

Accumulated deficit (mm)

.

.

-$4

     

Per share dilution

.

.

-$12.00

     
             

Valuation Ratios

Mrkt Cap (mm)

Price /Net interest income

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

Live Oak Bancshares (LOB)

$554

27.7

17.3

3.4

3.4

12%

             

COMPARE

         

Live Oak Bancshares (LOB)

$554

27.7

17.3

3.4

3.4

 

LendingClub (LC)

$5,220

16.1

-207.1

5.3

6.0

 
             
             

Live Oak Bancshares Conclusion

Neutral slightly plus

Focused on $5mm SBA loans

Q1 '15 vs Q1 '14

.  Net income +2600%

.  Number of loans originated +60%

.  Amt of loans originated+83%

'14 vs '13 net income -64%

Annualized P/E of17

Price to book of 3.4

Achieved 55.2% CAGR in loan production from May 2007 through March 31, 2015.

Negligible dividend of .6%

Live Oak Bancshares Business

LOB is an established national online platform for small business lending.

LOB believes it has used technology to fundamentally change small business lending by streamlining the borrower experience. LOB is able to better serve its customers by leveraging technological advantages and combining that with deep industry experience to create an optimized borrowing experience for its customers.

LOB believes that its business model mitigates credit risk while capitalizing on technology to efficiently and prudently generate loans and manage its portfolio of loans outstanding. LOB’s guiding principles, in order of priority, are soundness, profitability and growth.

LOB originates loans partially guaranteed by the U.S. Small Business Administration, or the SBA, to small businesses and professionals with what LOB believes are low risk characteristics.

LOB carefully selects industries, or “verticals,” on which to focus its lending efforts. Within each vertical LOB retains individuals who possess extensive industry-specific lending experience.

LOB believes its focus on verticals has allowed Live Oak Bank to extend credit to small businesses and professionals at an average loan size of $1.0 million and has resulted in LOB’s credit quality outperforming industry averages.

Based on a data set consisting of 292 lenders that have originated 300 loans or more under the SBA’s 7(a) program and greater than $25 million dollars in total loans, assembled by LOB’s affiliate, Government Loan Solutions, Inc., or GLS, using two separate Freedom of Information Act requests for the fourteen year period ended September 30, 2014...

...LOB had the lowest default rate among the group at 1.52%.

In terms of charge-off rates, LOB ranked fifth in the same data set at 0.35% for the same period.

For the twelve months ended September 30, 2014, the U.S. government’s most recently completed fiscal quarter, LOB ranked as the nation’s second largest small business lender, by dollar volume, utilizing the SBA’s 7(a) program. LOB believes the opportunity to expand its small business lending to new verticals is significant, since LOB currently only focuses its lending efforts towards ten out of more than 1,000 industries identified in the SBA database.

The SBA’s 7(a) program provides up to a 75% guaranty for loans greater than $150,000. For loans of $150,000 or less, the program provides up to an 85% guaranty.

The maximum 7(a) loan amount is $5 million. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender.

As such, prudent underwriting and closing processes are essential to effective utilization of the 7(a) program.

LOB believes that the technology its uses provides it with a competitive advantage in the closing and servicing of 7(a) program loans.

Live Oak Bancshares Intellectual Property

Nothing

Live Oak Bancshares Competition

LOB competes with national banking organizations including the largest commercial banks headquartered in the country, all of which have small business lending divisions.

LOB also competes with other federally and state chartered financial institutions such as community banks and credit unions, finance and business development companies, peer-to-peer and marketplace lenders and other non-bank lenders.

Most of LOB’s competitors have higher legal lending limits than LOB does and is also able to provide more services and make greater use of media advertising.

Live Oak Bancshares 5% Shareholders Pre-IPO

James S. Mahan III        21.3%

Maurice J. Koury           6.8%                

Live Oak Bancshares Dividends

Following this offering, LOB currently intends to declare and pay dividends to common shareholders of up to 10% of its after tax earnings, which would be a .6% dividend based on annualizing Q1 results.

However, any determination to pay future dividends to shareholders will be dependent upon LOB’s operational results, financial condition, capital requirements, business projections, general business conditions, statutory and regulatory restrictions and any other factors that its board of directors deem appropriate. LOB’s board of directors may change or eliminate the payment of future dividends at its discretion, without notice to shareholders.

Live Oak Bancshares Use of Proceeds

LOB expects to receive $63 million from its IPO and use it for the following:

support organic growth in its existing industry verticals;

for expansion into new industry verticals;

to develop a new online lending platform for the origination of loans less than $350 thousand;

to support the growth of its balance sheet as we increase the size of its held-for-investment loan portfolio; and

for general corporate purposes, including for possible acquisitions of, or investments in, bank or permissible non-bank entities, though, we do not have any agreements or understandings presently with respect to any acquisitions or investments.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
LOB Live Oak Bancshares Inc. 17.00 -0.25 -1.45 53,360

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