Live Oak Bancshares Inc. is searching for the "holy grail" of banking, one of its top executives said: low-to-zero cost deposits.
The internet bank has seen double-digit deposit growth but hopes its focus on financial technology will attract lower-cost funding, Mark Moroz, its director of deposits, said in an interview.
"[Technology] is probably the biggest part of our strategy at this point," Moroz said in an interview. "We want to be the best in the marketplace, so innovation is a big part of our strategy."
The biggest key to its deposit strategy may be its joint venture with fintech heavyweight First Data Corp. to create Apiture — a company that combines First Data and Live Oak's products to provide cost-effective mobile and online solutions for banks.
Live Oak expects to use Apiture to access low-cost deposits. Through the platform, Live Oak can add a suite of new products to its its lineup, such as consumer and business demand deposit accounts, Moroz said.
The bank has launched other application programming interface plans, including lending platform nCino, which spun off in 2014. Live Oak is also busy deploying Payrailz, a payments platform, and Finxact, a cloud-based core banking solution, according to management.
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Sandler O'Neill & Partners analyst Aaron Deer said while the bank is flush with liquidity, and its current deposit profile should "work just fine," it is pursuing alternative strategies that could "dramatically lower their deposit costs, widen their margin and improve profitability."
"They're a pretty unique bank — not just being an online bank, but they are a genuine leader in some of the digital banking innovation that's going on right now," Deer said.
Deer believes it is unlikely the bank would acquire another financial institution to gain low-cost deposits. "If they're going to do acquisitions, my guess is it's probably going to be something more on the technology side," he said.
During the first quarter of 2018, the Wilmington, N.C.-based bank posted a 31.5% increase in deposits from the linked quarter. The bank offers deposit rates well above the national average — currently a 1.70% rate on regular savings accounts and a 2.70% rate on 5-year CDs. Fifty percent of its deposit portfolio is composed of retail time deposits, compared to 8% among all U.S. banks and thrifts.
The bank's interest margin was 3.72% in the first quarter of 2018, down from 4.07% during the fourth quarter of 2017. Executives on the bank's first-quarter earnings call largely attributed the decline to its increase in liquidity, and said they hope to maintain rather than strengthen their liquidity profile.
But, Moroz said, since Live Oak's loans are yielding more than what Live Oak pays out in deposits, the bank can continue to pay higher rates without feeling much pressure on its net interest margin.
"You're starting to see NIM grow a little bit in a rising rate environment on the types of loans that we have," Moroz added. "It's not like that for every bank. It really hasn't put a ton of pressure on [us], but if rates continue to go as they are, it might."
Live Oak is one of the nation's top Small Business Administration lenders and is continuing to add lending divisions across an array of niche sectors. Loans and leases increased 6.8% from the linked quarter, but 43% year over year.
Deer expects the bank's net interest margin will climb but said its deposit rates will likely rise as well in response to increased competition and higher Fed rates.
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Live Oak's low cost of operations also helps explain why the bank can afford to pay higher deposit rates. Since most of the bank's operations are online, Moroz said it does not have to worry about things like keeping the lights on or managing a teller window.
"The advantage to us is we can reach out more with spending less," Moroz said. "We are a national bank. We're not a small North Carolina community bank."
Deposit rates play a key role in customer acquisitions, Moroz said, but are not the only factor.
A key to the bank's deposit strategy is its high retention rate, which he said is about 80%. Live Oak is still "acquiring customers at a good clip," and the bank recently hired a head of product development to develop the next product that could put it ahead of competition and create a better customer experience, Moroz said.
"There are other better rates out there," Moroz said. "[But] I think it's [that] I have their trust, they understand the platform and they enjoy that security."

