What Is Live Oak Bank?

…

This is the Transition To RIA Vendor Profile Series where we take a look at the solution providers powering the RIA model. On this episode:

Vendor name:

Live Oak Bank

Vendor category:

Lending (Advisor)

Episode host:

Brad Wales

Episode guest:

James Hughes

Vendor contact info:

Website, James.Hughes@liveoak.bank

Full Transcript:

Brad Wales – Hi, I’m Brad Wales with Transition To RIA, and this is the Transition To RIA Vendor Profile Series where we take a look at the solution providers powering the RIA model. On today’s episode, we’re answering the question, “What is Live Oak Bank?”. And to help us with that is James Hughes. James, thanks for coming on.

James Hughes – Thanks Brad, I appreciate you having me.

Brad – James and I go back, we were talking about this a little before I hit record, it’s probably been in the 10-year range. So you’ve been with Live Oak I assume somewhere in that ballpark and we would cross paths on the conference circuits. I appreciate you coming on and sharing your wisdom on this front.

As a little precursor of why I’m looking forward to this episode particularly, I talk a lot in my general Q&A series about the additional flexibility advisors and teams have in that RIA space to do things like acquisitions or to do more flexible succession planning or partnership buyouts and whatnot.

There is a lot of flexibility to that, but generally all of these do require you to find some way to finance those sorts of transactions. And so one of the experts out there, one of the godfathers that’s been doing this a long time, is James. So James, if you could start by, for those that are not familiar with Live Oak Bank, giving us that high-level overview of what exactly you guys do.

James – Yeah, appreciate that, Brad. So I’ve been at the bank for 12 years. Live Oak is a $15 billion bank. We are a traditional community bank in a lot of ways in sort of the way we lend. We take deposits so we have checking and savings accounts just like most banks and we lend money.

You know we’re different in that we’re located in Wilmington, North Carolina but we lend to clients that are all over the country. We actually started the bank with the idea of lending to one specific vertical, vertical is what we call one specific industry, and that was actually veterinarians. We were actually called the Doggie Bank the first few years after we got started.

Long story short, we eventually moved into other industries and we’ve been in the wealth management industry since 2013. We’ve lent $1.7 billion to financial advisors and that is on the registered rep side, so independent broker-dealers, and then also to the RIA community and a little bit in between as well, like broker-dealers, OSJs, asset managers. And it’s been a lot of fun.

It’s a lot different today than it was 12 years ago when we made our first loan and it’s all for the positive for the financial advisor. Today they have more options than they’ve ever had before so it’s an exciting time and I feel lucky to be here.

Brad – Yeah, I think it’s a great example. I talk a lot about how the ecosystem supporting the RIA model has evolved tremendously over the last five, 10, 15 years. You would maybe know the history better than I do, but 20 years ago, if someone in the RIA space wanted to do a transaction, which we’re going to kind of get into what those typical transactions might be, you didn’t have a specialty lender like a Live Oak. You were maybe just trying to go to more of a general bank.​​​​​​​​​​​​​​​​

So to be clear, Live Oak, I would describe you as a specialty lender. You’re not just some typical bank down the street that’s taking on retail deposits and doing home loans. Is that a fair way to kind of tie a bow on the verticals you do?

James – Yeah, exactly. I mean, it’s funny because we are a traditional bank, you know we are. We take deposits and we lend money. But we’re a small business-focused bank. So we don’t do home loans, car loans. We’re America’s small business bank is our sort of tagline.

So we operate like a bank because we take deposits and make loans, but we’re different in that we have deep expertise in our industries and the wealth management group that our team represents is one of many teams out there. We’ve got many different industries and we’ve got a general lending team.

But for the wealth management community, our differentiator is we’ve been doing it for a long time. We’ve got deep expertise and it’s not just in the sales team, it’s the underwriting team, the closing team. Right now we’ve got clients that are very acquisitive and are coming back to us every three or six months for another transaction. If you’re with a local bank, they might not be comfortable with doing multiple deals a year or some of the other things that we hear from advisors that they’re hearing from other banks.

I think just to sort of go back to what you were talking about, the history of this, when we first got started, we were doing a lot of education around there’s financing available for an acquisition or for an internal succession. And that was sort of mind-blowing back then. There’s less of that today. I think the industry is a lot more educated on the industry.

But prior to us and some other lenders coming into the space, there was a lot of seller financing being done or earnouts being done and not so much cash upfront. And with the evolution of the industry and more capital coming into the space, us and others, both on the equity side and on the debt side, are definitely seeing the percentage of down payments increasing over the years. And that’s stabilized a little bit. But yeah, it’s a much different marketplace today than was 12 years ago when we got started.

Brad – Certainly and maybe could you give some examples. I know you won’t be able to list every imaginable scenario that you might be able to help with. But of the types of lending arrangements you’re involved in, I assume there’s just the pure play hey I’m acquiring a practice but then there’s also that maybe buying out a retiring member of the team or is there maybe taking some chips off the table?

Can you give us some examples so folks know when it would make sense to be reaching out to have these kind of conversations?

James – Yeah. So it is basically anything that you need for the business. So one of the things I really like about where Live Oak sits is we lend as little as $10,000 and as much as $150 million. And so just taking the wealth management industry, that means we’re helping the sole advisor with $20 million in assets and then the like national RIA that’s got $25 billion or more. Our largest client is somewhere in that $30 to $40 billion range.

And obviously the credit facility that’s a hundred million dollars looks a lot different than the term loan that’s fifty thousand. It’s great because we’ve got insight into all aspects of the industry. And some examples are we’ll do commercial real estate, we have some clients that have used us for like a ground-up construction, commercial real estate building, buying a commercial real estate building, refinancing their commercial real estate. You know, we do working capital.

We do recruiting, right? So we have OSJs, sort of a platform RIA or broker-dealers that are customers or clients that utilize us for recruiting. We also do debt revise.

The bulk of what we do is acquisition and succession. So succession can look like a lot of different things. But it’s either like an employee buying in for the first time or you know a 5 percent owner getting to 10 percent or 20 percent. And we have a lot of clients that come back to us every year to sort of continue that succession program.

We’re looking at one right now that they have penciled out the next 10 years of financing that they’ll need. One of the other things when you’re out there looking for a financing source is, I think a lot of people shop it like a mortgage. You want the lowest rate. But if you have a need in a year and the next year and the next year and the next year, really a long-term relationship is what you’re looking for. That’s where we’re seeing success is people that are looking for a little bit longer-term relationship.

We helped those firms sort of transition out the G1, get the G2s in there, then G3s and G4s. And that’s been a lot of fun. On the acquisition front when we first got started, it was a lot of sort of one-off acquisitions, sort of a hundred, hundred-million-dollar firm buying another hundred-million-dollar firm. We did a lot of that.

The industry has just changed so much. Back then, if you were a billion-dollar firm, it was like, my goodness, it’s like you’re a massive firm. Now there’s a lot of firms that have more than a billion in assets.

One of the things about Live Oak is we’re actually the largest SBA lender in the country. And so early on in our time in wealth management, we were doing a lot of SBA loans. And, you know, that may mean something to you or not, but we’ve moved away from that in wealth management. We still offer SBA loans for some of our smaller clients, but almost all of our lending today is conventional. That allows us to offer a lot more flexible credit facilities for our clients.

Where we’re seeing a lot of success are these two-billion to five-billion dollar firms that have bought sort of sparingly over the years. Now they have a need for a more serious credit facility. They need, you know, five, 10, 15, 25 million dollars and they want to create a relationship with the bank to do multiple acquisitions over the next five to 10 years. They want to grow from two billion to 10 billion and  we’re setting them up with a, think about like a line. We give them a $25 million line and they can close on the acquisition that they have that’s sort of signed. They need $15 million. So we close on that and then they’ve got $10 million in availability to go out and continue acquiring. Then as they acquire, we look to just increase that line and sort of keep going with them. That’s where we’ve seen a lot of success in the last two to four years.

Brad – I think just going through these reps, and in your case you’ve been doing this so long and you do so many transactions every year, how would you describe it? I would say you’re part banker, part consultant in a way.

I wrote down that you gave one example, an employee buying into the firm. So if there’s an advisor team out there that has that scenario, I’ll presume but then let you speak for yourself, that not only are they coming to you for potential access to capital but also because you can say hey, here’s all the different ways I’ve seen this done prior to this. Here’s why you might want to do it this way. Is it fair to say there’s a fair amount of consultation involved in this?

James – Like I said, I think the industry has gotten better educated. And so early on, we were doing a lot of education. The internal succession stuff is tough, especially right now where valuations are. And you still have all of the normal stuff such as is the founder ready to sell? Is the buyer actually ready to buy and become a partner and take out a million-dollar loan and all of those emotional aspects to it?

I would definitely say we play a therapist a little bit. Certainly there’s a good amount of consulting or coaching that goes on. One of the questions we get often is, when should we reach out to you? We always say the earlier the better, because if you’re structuring a deal without us and you’ve got a signed LOI and then you come to us and say, hey, I need, five million dollars in 45 days. We may have to say, well, the way it’s structured doesn’t work for us. That’s when you get yourself into a tough spot. And so we prefer people who reach out to us earlier.

Like a good example of that is we do forgivable note refinancing. We’ve always done this. But if you’re an advisor that’s UBS, Merrill, Morgan, and you’re thinking about going independent and you’ve got a three-million-dollar forgivable note and that’s why you don’t want to leave, well, we can actually pay off that note so that you can leave.

And those folks, we want them to reach out to us really early because the last thing you want to be dealing with when you’re breaking away is hey, do I have the money lined up to pay off my forgivable note? So we typically get those phone calls maybe six to 12 months before they make the move.

Brad – Okay, that’s helpful. I was going to ask you about the timeline, so thanks for adding the perspective there. I know there’s no simple answer, but for those that have never done a loan like this, how are these typically structured? Are these five-year loans, 10-year loans, longer, shorter? How are interest rates set? How does it kind of come together? I’m sure it’s not one answer, you’ve to get into the details on a particular situation, but for a general high overview, what does that typically look like?

James – The answer is yes, Brad. All those things. So because we’re so varied on what we do from a dollar amount and from the type of financing that we’re doing, what we like to do is have a conversation with the advisor or with the firm and listen to their problem or opportunity and try and build a credit facility for them. A commercial real estate is going to be different than an acquisition loan. A $50,000 loan is going to look different than a $50 million loan.

So sometimes it is a simple-term loan and generally we do 10-year terms. So 10-year term, 10-year amortization. But some other times it’s a more creative or flexible option where they’re getting interest only for a period of time or the entire facility is interest only. There’s longer amortizations and then sometimes people want shorter terms. So sometimes it’s a five-year term or seven-year term. It really is all over the map. I would say the core is sort of that 10-year term, 10-year amortization.

In terms of interest rate, the biggest impact to interest rate is going to be the loan size. So if you’re borrowing fifty thousand dollars it’s going to be more expensive than if you borrow fifty million dollars. And there’s a big gap in between there. But I mean rates have come down which is great. You know I would say we’re probably in that 7 to 8 percent range right now for most of our deals. And then, don’t hold me to it, sometimes we’re a little bit lower than that. For the smaller loans, you’re going to be higher than that.

Brad – This video will likely be viewed for years to come, so I’ll give the hard disclaimer. At the time we recorded it, that was ranged. If either one of us could predict where interest rates would be in the future, we would be beyond wealthy. So fair disclosure on that. How does the collateral work on loans like this just to kind set expectations with potential borrowers?

James – Yeah, so almost all of our loans are conventional, like I said. So the business is the collateral. So we’ll take a lien on the business. You know, if you end up doing an SBA loan, there may be additional collateral needed. You know, for most of our loans, the business is the collateral. We may require life insurance. Let’s say that you’re the only owner and you’re the only producer. So we might ask for life insurance. But as we get into some of these ensembles or RIAs where there’s multiple owners, then we probably wouldn’t require life insurance because the key main risk is less when there’s continuity. If one person was not there, the business would live on.

Brad – Okay, now this is helpful. I think it’s given an overview of kind of what’s out there, that there is such a thing as a very specialized lender in this space. But clearly at the end of the day, every situation is very unique, very different. The only way to really “bake the cake” and understand what the details will look like for you is you got to reach out to James and have that direct conversation.

What would be the best way for folks that potentially do envision some of these scenarios near-term, long-term and want to better understand that lending process to reach out to you and the team?

James – Yeah, you can just email me at James.Hughes@liveoak.bank or go to our website and look at our team. We have five people on our team. My role over the last year has grown a little bit. I’m leading the insurance team, independent insurance agent team, and the CPA team as well. So we’ve got five salespeople focused on the wealth management industry. So reach out directly to me or go to the website, reach out to anybody on the team.

Brad – We’ll put it in the show notes, but just to repeat it, if I wrote down correctly, so please correct me, James.Hughes@liveoak.bank, and likewise, that’s the domain as well as liveoak.bank. So take a look, and everything begins with a conversation.

James has been a mainstay of the industry. Like I said I first met James back at conferences where you were giving presentations on these exact topics, so you clearly know your stuff. You might even be, I don’t know if it exists, you might be the longest-tenured person in our industry in this vertical. So, clearly a great resource and I encourage people to reach out where it might make sense. I appreciate you coming on to help us with this.

James – Yeah, thanks, Brad. Appreciate you having me.

Brad – All right, thanks James.

Want To Learn More?

Schedule a Discovery call to begin the conversation about what an RIA path would look like for your practice.