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Interview With Live Oak Bank's Huntley Garriott

In this week's episode of Industry Focus: Financials, Jason Moser interviews Huntley Garriott about his work at Live Oak Bank (NASDAQ: LOB) and his 20-plus years' experience with Goldman Sachs (NYSE: GS). Garriott explains why so many of Live Oak's clients are veterinarians and how the company found so much success in that niche, some of the other many small-business markets that Live Oak works with, where technology players like Square and PayPal fit into the competition picture, how Live Oak works toward environmental sustainability, what drew Garriott to Live Oak in the first place, some lessons learned in the 2008 financial crisis and how they affect the banking sector today, and much more.

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This video was recorded on Jan. 17, 2020.

Jason Moser: It's Monday, Jan. 20. I'm your host, Jason Moser. While the markets are closed today in observance of Martin Luther King Jr. Day, we do have an interview for you that we think you'll enjoy.

Huntley Garriott is the president of Live Oak Bank. Prior to joining Live Oak, he was a partner at Goldman Sachs in the investment banking division and served as co-head of the banks and specialty finance team within the financial institutions group. I recently had the chance to speak with Huntley about Live Oak's robust specialty lending business, how he sees the banking environment taking shape for 2020 and beyond, and a whole lot more. I hope you enjoy our conversation.

OK, Huntley, first I want to dive into a little bit of what differentiates Live Oak from, I guess, what most listeners would consider traditional banks. When we talk about Live Oak, I think it's really important to talk about the technology behind what you all are doing there and how it differentiates you from the competition. If I'm correct here, you don't have any physical banking centers at all, right? This is essentially a bank of the internet, right?

Huntley Garriott: Correct. We are a nationwide small-business lender and online deposit gather with no branches.

Moser: I did notice in doing a little research here that you all there at Live Oak, you mentioned SBA lending, and obviously, that is a tremendous market, given the exposure to small business in this country, but you all have a big focus on veterinary practices, which I found fascinating for a number of reasons. One of which just being that I have three dogs at home myself, so I'm a big fan of pets and animals. I go to the vet all the time. Why the focus on veterinary practices, though? Tell our listeners a little bit about why that's such an important part of your business.

Garriott: Sure. It's actually the first lending that Live Oak did when we started the company over a decade ago. The notion was, if we're going to be a nationwide small-business lender, we needed to do two things really well. We needed to know our customer really well, and we needed to be really efficient and use technology. Knowing our customer well for us meant deep industry and domain knowledge. And if you look, the SBA has a lot of data. That data suggested that veterinarians are likely to pay you back. Their default rates are low. That's a good thing. The founders had a little bit of history in that space as well. So we went out and got a couple experts, one on our board, who was a dean of one of the veterinarian schools in the nation, and we have a couple of veterinarians on our staff, and started making loans. And when you understand that business really well, and you understand how to help those customers, then it's just a different relationship than just making a loan. So, now it continues to be one of the largest industries that we're in, and we've been in it for over a decade.

Moser: So, going beyond veterinary practices -- and I think this is really neat, because when I look at your business, and we could say you're a niche lender to a degree, right? You lend to some specialty areas where others may not necessarily focus. It reminds me a lot of another company that we cover here at The Motley Fool, a favorite of a lot of ours, it's an insurance company called Markel Insurance, and it's a specialty insurer. They insure a lot of things that other people just don't insure. And it sounds like you're lending to a lot of different types of business that maybe others don't necessarily feel as comfortable lending to, or at least they don't possess the same knowledge you do. Beyond veterinary practices, what are some of the other markets that you guys are dipping a toe in?

Garriott: Yeah, no, that's exactly right. It's a combination of, whether it's an industry that requires some really specific industry knowledge or that others aren't as comfortable in, and we've found those niches in those areas to go after. We have 30 of those areas now, and they range from everything from the veterinarians and the dentists to funeral homes, to chicken farms, different professional services businesses, and then we've got renewable energy lending that we do in pretty specific areas. It's a pretty broad list now across these different areas, but really focusing across small businesses by and large, across the nation.

Moser: I think I saw craft brewers in there too. Am I right?

Garriott: We do.

Moser: Is that a big exposure?

Garriott: The chief economist of the Brewers Association is actually in Wilmington giving us a talk around the trends in the craft brewing industry. Yeah, we like that space.

Moser: Oh, that's really cool. Yeah, I'm sure you get a lot of our listeners' attention here by uttering the two words "craft" and "brew."

You mentioned renewable energy. I'd like to pivot for a second, talk about a little bit of a bigger picture, not necessarily as Live Oak related, but it is something that is, I think, at the forefront of a lot of people's minds now, and just the other day, we saw Larry Fink come out with his letter to CEOs talking about sustainable strategies and how that is such an important part of his investing philosophy going forward, talking about companies developing sustainable strategies and investing with that in mind going forward. I wonder if you've had a chance to talk about that type of thing with leadership there at the bank, or if you have any thoughts regarding that in general.

Garriott: Yeah, look, I read Larry's letter. He's obviously one of the great business leaders of our era, but it's still, I think, pretty courageous for him to make a statement like that when he manages $7 trillion of AUM. For us, we really like the notion of giving back and mission-driven. The renewable energy space, the USDA space, has been one we gravitated to years ago. We were the nation's top-ranked USDA lender last year, and that's largely in renewable energy. That's solar projects, that's water treatment, that's bio energy, waste energy, all sorts of things around that. And we'll do a couple hundred million dollars of lending a year across those programs. Which, we think they're good loans, so we like that, but it also, we think, goes to help some of the initiatives nationwide as it relates to building out sustainability.

Moser: Yeah, and he said something in that letter too that really struck me, I think it was toward the end, but he said, quote, "Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn a higher cost of capital." Do you think that's accurate?

Garriott: I do think that's right. In a free-market economy, you have to wonder how many people fully bake in those externalities and fully price them in and how that market develops and the efficiency of that. So I think we could talk a lot about that theoretically. But you certainly think that in the extremes, there will be repercussions and an appreciation for the cost of doing business in a nonsustainable way. If you look at our campus here in Wilmington, it's really energy efficient, we've got panels on our roof, we try to get rid of as much paper as we can. So we do a lot in that regard as well, just here on a more local basis.

Moser: Let's take a bit of a turn here and talk about your previous job a little bit, because you had considerable experience with your time at Goldman Sachs covering smaller banks. I wonder, was there any insight from that job that ultimately led you to Live Oak? What was that job like? For all of our listeners here who love following this industry, what was it about covering those smaller banks that had you looking forward to going to work every day?

Garriott: Sure. I spent 20 years at Goldman. The business that I was involved in, we covered the top 150 banks, with the exception of the very largest. That's everything from a couple hundred billion dollars of assets to maybe $3 billion to $5 billion of assets. When I got to know Live Oak, I joked that it was my smallest client. It was before the IPO. Got to know the founders, and Chip and Neil. And I'll tell you, there were three things that really captivated me.

One was this intersection of banking and technology. I'd spent a lot of my career not only with banks, but also with some of the fintech and specialty lenders, and know enough to know that the answer can't just be a bank that is relying on their physical distribution network and FDIC insurance and not attuned to what's going on and the changing technology. But it also wasn't a fintech firm that didn't really respect regulation and banking and the like, in that Live Oak really embraced both. It had a foot in both worlds. I really do believe that's the right answer in the industry.

The second is the business model. And I think that increasingly, very, very large banks have scale advantages, and very, very focused banks have an opportunity to excel. But I think both of those two camps are really important. And Live Oak has been, from the start, laser focused on small businesses. And I think that creates a competitive advantage in terms of that industry knowledge, that efficiency, but also, it's a really important part of the economy. So to some extent, I just kind of found myself enamored with the ability to help small businesses. We made over 1,000 small-business loans this past year. And I think that just feels really good.

And then the third, and I think the most important, is the culture and the focus on our people and our employees. I think the traditional three-legged stool that you've got: your customers, your employees, and your shareholders. Banks often have a fourth leg, which is the regulators. And you try to focus on all of those. But if you focus on your employees in banking, and you really find great people, and you empower them to do great things, they take care of customers, and that takes care of shareholders. That's the theory. I really, really like that concept. And the three of those things together was just too enticing. And so we moved from New York about a year and a half ago to come down and join Live Oak.

Moser: Well, you did mention the scale advantages that a lot of the bigger banks in the industry possess. That's a difficult thing to compete against, particularly in this day and age, where interest rates don't seem to be going anywhere. A lot of banks are kind of treading water, just trying to bide their time until profitability becomes a little bit easier. But what are some of the opportunities, and what are some of the challenges you see as a smaller but clearly growing bank in today's economy?

Garriott: Yeah, look, I mean, we compete against all the banks around the country, specifically that end up being the nation's top SBA lender, you compete against the Wells Fargos and Chases and [Bank of America]s. We've got less than $5 billion of assets and may have $2 trillion. So, they can do pricing campaigns and run things that to us may not make economic sense, but they may be by market share or doing other things. We find some pockets where things can get super, super competitive. Back to the notion that we'll find our niches and still create areas that we can do business.

But I do think that the opportunity in that just laser focus in small business, because some folks think of that as the upper end of the consumer market. some folks think of that as the lower end of the commercial market, but it really is pretty unique, right? These customers have pretty unique needs. The financing products are unique. The way that you actually underwrite them, and all those things. If we just stay laser focused and then we create great technology to support that, and that service and technology that comes together, to us, is our competitive advantage and allows us to get to our customers and to treat them well. And we think that that's got duration to it, even as we compete every day against the giant banks.

Moser: So, given the role that technology is playing today in virtually everything we do, certainly finance is being disrupted by technology, and now we have companies like Square and PayPal getting into this market and opening up their own lending channels -- you have companies like Square, they open up a Square Capital. How do you view competition with companies like that? Are they taking away some of what traditionally would be SBA traffic? Or do you view that as more part of this rising tide that is lifting the boats in your industry?

Garriott: Yeah, look, it's really interesting, and we compete against banks, and we equally compete against large technology companies in an increasingly blurred landscape. The folks right now that are doing, whether it's Square or some of the other fintech companies that are lending, are doing more shorter-term, smaller-balance loans. That stuff has largely been financed on small-business owners' credit cards and things like that. So it isn't the large-dollar SBA term loan, the business acquisition, the real estate finance. Those things are really hard to automate. We spend a lot of time in underwriting those, data aggregation, and that stuff. So not to say that they're not a competitive threat. Right now, there's not much overlap in terms of who they're lending to or the type of product. But it all converges over time, and we need to continue to get better at making quick underwriting decisions and having a broader suite of products. Largely, our technology build now is designed to create more deposit products, payment products, small-balance revolving products, things like that so we can go from being that SBA small-business lender to being a more full-service small-business bank for all the products that they need.

Moser: OK, before we let you go, I want to step back in time a little bit, talk about something that we still talk about here very often at The Motley Fool, and it's something a lot of us lived through and remember still very well, going back to the Great Recession. Given your experience in the industry, given that you certainly went through that period of time and had a little bit of an inside baseball point of view, I think, it would be safe to say, what do you remember about the financial crisis, about the Great Recession? What do you remember about that prevailing sentiment in the industry? And what lessons were you able to take away from that that served you in this business going forward?

Garriott: Yeah, I still remember, we had an event for global CFOs at Goldman. And the CFO of Goldman Sachs, David Viniar, spoke. And they asked him that exact question. And he said, "It's very simple: Don't run out of money." And you look at that, and it sounds kind of trite, but it's actually quite profound, right? Liquidity is paramount, right?

Moser: It's that's simple. It feels like it's that simple once you say it.

Garriott: But liquidity is driven by credit quality, by capital adequacy, by regulatory standing. And you have to be mindful of all of those things, right? And occasionally, an extreme example, that's even a function of customer sentiment. But you've got to be mindful of all those risks and all those things, because any one of those in the extreme can lead to liquidity issues. And that's the downfall in banks. And so I just think that all of us that lived through that and worked in situations that were really difficult and really uncertain just have that risk dial in the back of their mind, that they're thinking about all the time. I just don't think you can ever lose that perspective, even after a decade or more.

Moser: He's the president of Live Oak Bank. Mr. Huntley Garriott, thank you so much for taking the time to speak with us this week.

Garriott: Thanks, Jason.

Moser: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks to Austin Morgan behind the glass for making the magic happen this week. I'm Jason Moser. Thanks for listening, and we'll see you next week.

Jason Moser owns shares of Markel, PayPal Holdings, and Square. The Motley Fool owns shares of and recommends Live Oak Bancshares, Markel, PayPal Holdings, and Square. The Motley Fool has a disclosure policy.


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