How Live Oak Bank became the nation’s second-largest SBA lender

Lending leader—Scott Custer credits Live Oak’s success to “relentless” account servicing.

For Live Oak Bank, the nation’s second-largest SBA lender, lending success doesn’t come without a deep and abiding love of data. President Scott Custer shares some of its secrets.

By Susan Thomas Springer

When Live Oak Bank opened in 2008, it loaned money only to veterinary practices. Since then, the bank has made small-business loans available with the backing of the federal Small Business Administration to small businesses of all kinds, including contractors, pharmacists, dentists, brewers and funeral home directors. Recent additions are the early childhood education and professional services sectors, the latter of which includes smaller CPA and other professional firms.

It’s all part of the $2.5 billion-asset community bank’s strategy for lending to select and well-researched sectors that perform well even in economic downturns. Its extensive research is aimed at selecting niche markets with high-repayment and low-loss rates. Each year, this SBA Preferred Lender adds two to four market segments, or verticals, and now lends to 17 while striving for 15 percent year-over-year growth in company-wide loan originations.

Thanks to this strategy, the bank is ranked as one of the highest-volume lenders in the SBA 7(a) program. The SBA reports that in the third quarter of 2017, Live Oak ranked second in lending volume behind Wells Fargo.

Headquartered in Wilmington, N.C., Live Oak makes loans across the country, lending about $2 billion so far to entrepreneurs wanting to start or expand their small businesses. Officials say the key contributors to success are a high level of subject matter expertise and engaged account servicing.

The Live Oak master plan focuses on in-depth knowledge of its lending sectors. Bank executives call themselves “data hounds” who extensively evaluate a market’s lending characteristics. Live Oak researches potential new verticals using its own data analysis and SBA data.

“The amount of time and effort we spend gaining subject matter expertise in verticals we select gives us the ability to understand the industry that typical community banks don’t have,” says Scott Custer, president of Live Oak Bank.

Custer says his bank tweaks the traditional “three Cs” to mean capacity, credit profile and competition. Live Oak builds in-house competency in its chosen verticals in part by hiring top players in that niche, such as a former CEO of a company in the sector.

“We know which businesses are best suited for SBA-type lending,” says Custer. “And we always bring in a domain expert, and that gives us a head start not just with industry knowledge but in doing business with the right people.”

Persistent account servicing
The account servicing team is “relentless” in how it services accounts, Custer says. Individuals in the Business Advisory Group each manage 75 to 85 relationships, monitoring quarterly financial statements and tax returns, and conducting regular onsite visits. If a loan customer is missing a piece of financial data, a banker will get on a plane to assess the situation.

Custer, who has served as CEO of two community banks in the past, says Live Oak’s business model for account servicing is top-notch, enabled by technology and its tenacious team. “We lend money all over the country, and the only way to be comfortable doing that is if you know you’ve got the servicing capability down pat,” he says.
If a loan goes off track, Custer says credit professionals from the “very engaged” Special Assets Group get involved to solve the problem.

“We always bring in a domain expert, and that gives us a head start not just with industry knowledge but in doing business with the right people.”
—Scott Custer, Live Oak Bank

Custer encourages community bankers to take advantage of technology, such as loan pricing and servicing tools, to more effectively monitor and service loan portfolios. In 2016, Live Oak launched its eLending initiative to compete with bank and nonbank lenders. It uses Live Oak’s portal technology to streamline the small-business loan process and provide a decision to applicants within 48 hours.

Live Oak prides itself on an additional success factor: its people. The community bank seeks talented employees by offering top salaries, paid-for health care, an onsite gym and cafeteria, and even private jets to bring bankers home after a long day visiting loan customers.

But whatever a bank’s size or lending business model, Custer recommends sticking to your strengths and staying grounded in the fundamentals.
“Don’t get caught up in what the next person is doing,” he says. “Be really good at a few things. That can carry the day in terms of business generation and, ultimately, performance.”

Susan Thomas Springer is a writer in Oregon.