Q2 2021 Live Oak Bancshares Inc Earnings Call
Good day and thank you for standing by welcome for the second quarter 2021 live Oak Bancshares earnings Conference call.
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I'd now like to hand, the conference over to Greg Seward General Counsel live Oak Bancshares. Please go ahead.
Thank you and good morning, everyone welcome to live Oak second quarter 2021 earnings Conference call.
We are webcasting live over the Internet and this call is being recorded.
To access the call over the Internet and review the presentation materials and commentary that we will reference on the call. Please visit our website at Investor Day Live Oak Bank Dot Com and go to today's call on our event calendar for supporting materials. Our second quarter earnings release is also available on our website.
Before we get started I would like to caution you that we may make forward looking statements. During today's call that are subject to risks and uncertainties for.
Factors that may cause actual results to differ materially from our expectations are detailed on the materials accompanying this call and in our SEC filings we.
We do not undertake to update the forward looking statements to reflect the impact of circumstances or events that may arise after the day of today's call.
Information about any non-GAAP financial measures referenced including reconciliation of those measures to GAAP measures can also be found on our SEC filings and in the presentation materials on commentary.
I will now turn the call over to chip Mahan, our chairman and Chief Executive Officer.
Thanks, Greg and good morning to all.
As you stare at the last 6 quarter results allow me to review today's agenda.
It has proven to be our best quarter ever.
And what away for breath change to go out with a bang.
Brian It's been 13 short years since found you in a chemical plant on the case for your river.
Being a hard hat and safety glasses. It goes without saying that it's been an honor to serve with you.
And our next call we will explain breaths next new and exciting role in our company.
And yes to all who know how this works.
<unk> <unk> and.
In each quarterly pre though is all breath, Huntly and I'll just show up.
Brett Thanks again for all your hard work for these last 24 quarters as a public company.
And now back to the best quarter ever.
Delights or a $44 million gain in the value of Greenlight shares brought on by this cash sale of $15 million, causing a remark of our carrying value.
It is important to note that we took for me end of the $15 million on cash gains and gave it to our folks once again, excluding the senior management team.
You will recall that we were distributed $7.5 million to our folks at the end of PPP, 1 dot O given the long hours. They spent helping American small business get through this cookie process.
This $44 million for onetime non operating gain is a nice addition to tier 1 capital.
Secondly, originations reached an all time high of $1.1 billion, while credit quality continues to improve.
Third as the accountants and PPP make the unpacking of our financials more difficult we're proud to announce the dramatic increase in pretax pre provision earnings as the operating leverage in our business kicks in.
Lastly, Neil Underwood will discuss level venture investments as well as a canopy update before we turn things over to Huntley for a deep dive.
Greg, let's move to slide 5 and talk about credit quality.
So as you stare at this I'm going to ask Steve as we did last time, a couple of questions. Steve last quarter, you discussed for the ACO was going.
What is your vision over the next several quarters well chip as I mentioned last quarter I had been expecting to see reserves trending towards pre COVID-19 period levels as a percentage of loans. This is proving to be the case and I still expect to see this trend continue and I believe this because first we continue to see improved.
And the financial condition of some of our most impacted businesses, which is evidenced by favorable trends in the servicing status ratings.
Secondly, we've also noticed that many of our most impacted borrowers were actually able to build cash reserves during the pandemic and that's a result of the government stimulus and grant programs.
Thirdly through our servicing efforts, we have started to receive encouraging reports.
As these businesses reopened and as you say folks are getting back to work.
Finally, improving unemployment forecast will of course influence our allowance as well so for all these reasons I still feel that the allowance will continue to trend towards pre pandemic levels.
Steve other banks reporting are discussing subsidies and deferrals how are we doing.
As of June 30, we only have 17 loans on payment deferral 15 of those are due to COVID-19 related stress and.
In addition, as of June 13% of our loans received some level of SBA subsidy payments support for their June payments. Most of this will burn away over the next few months so in summary.
As of the end of June 87% of our borrowers are back to making regular payments and past dues continued to be at an all time low for us which is very encouraging.
Steve as folks are headed back to work it appears that our watch list loans.
<unk> assets and non accruals are trending down.
Well I must caution that businesses may not be completely out of the woods, yet and we need to be prepared for potential surprises I am encouraged by the recent trends that we're seeing within non COVID-19 impacted verticals, we're actually seeing an uptick in upgrades, especially within our debt our healthcare investment.
<unk> on our debt care industries and since the first of the year. We've also seen slightly downward trends in classified assets in non accruals.
Of course, we continue to focus a good bit of our attention towards servicing but I for 1 will remain cautiously optimistic that these trends are going to continue.
Thanks, Steve let's move to slide 6.
Relative to the last 12 months slash the pandemic I believe this slide tells it all.
On the left you see losses on the REIT income.
On the left we took $14 million in Covid related charge offs of which $10 million was a self inflicted wound relative to the sale of $15 million on hotel paper at a discount.
True Covid losses of businesses that went down for $4 million noted under that so for a total of 2014.
On the right you see income government assistance accounted for $2.3 billion and Triple P loans and $80 million in fees, plus $8 million and net interest income.
So far COVID-19 related activities have resulted in a non dilutive capital raise.
Moving on to slide 7.
Yeah.
I have noticed that many reporting banks are having challenges growing their loan book and nims are struggling as well.
Not for Us <unk>.
Excluding PPP, we grown the loan portfolio of almost 37% compounded annually over the last 10 quarters.
Moving to slide 8.
And the last.
11 of 14 quarters, we originated roughly $400 million to $600 million in loans and.
In Q3, and Q4 of last year, we did almost a $1 billion and somewhat surprisingly this quarter, we originated $1.1 billion.
I get that the investments are going well and happy to put almost $50 million on tier 1 capital on the balance sheet from Greenlight.
But migrations this loan growth while <unk>.
Have you lost your ever loving mind.
So, let's examine what is going on here with more granularity.
Let's go to slide 9.
What we have here is a graphic depiction of the second quarter of 2019 second quarter of 2022nd quarter of 2021 of our legacy verticals that as those started between 2008 and 2017 compared to our more recent verticals started in 2014 to present.
While legacy verticals have proven a bit lumpy.
The movies have grown quite nicely producing $600 million in this quarter alone.
Again, we operate in 32 industries nationwide.
Moving on to slide 10.
This slide provides more data on product types.
The percentages of loans have remained remarkably similar as production has increased dramatically.
Again government guaranteed loans remain about half of our loan book.
And we remain confident that originations for 2021 should be in the 3.3 to $3.5 billion range.
Slide 11 is interesting.
Highlights of this slot of newer verticals yield $426 million in production with an interesting mix of products on the left the orange bioenergy and community facilities are almost exclusively government guaranteed USDA loans.
In the Middle Green.
You have 18 general lenders in 16 cities, which are almost all 700 on SBA loans.
And just for grants on the right side and for the first time on our history, we're lending money to small businesses with a balance sheet with.
With real capital in the senior housing in sponsor finance space.
Given the collective use of these 5 groups credit quality at this point seems stellar.
Slide 12.
Lastly, in an effort to closeout, our deep debt relative to the exciting growth in originations.
We are proud of this geographic diversity.
As you can see our geographic diversity has not changed in the last 2 and a half years.
Sticking to our guiding principles has worked and.
And we shall stay the course.
Slide 13.
This is by far the most telling slot of the call, which huntley will describe.
Bit more detail.
Our investments in lenders underwriters and closers and Servicers over the last 6 quarters is now paying off pre tax pre provision income eliminates a great deal of noise that always seems to surround us.
Our ability to double pretax pre provision earnings since $3.31, just 5 quarters ago in the middle of the pandemic gives us an important base to grow from in the future.
Neil over to you. Thanks Chip this is Nick.
Slide represents most of our direct investments at the holding company while the Big News. This quarter is around is really important to note that the entire portfolio continues to drive each of these companies solve a major problem in financial services. The photo really summarizes the opportunity where we've invested $26 million at very early stages and the implied value today.
Day $182 million, we expect these companies to continue to raise growth capital on elevated valuations for all you Modelers out there. We know this is a really difficult thing to forecast, but as you can see this quarter, it's real and it's tangible.
Perhaps more important than the economics of live Oak Bank. The adoption of these technologies on a next generation cloud based tech stack that allows us to build best in class Fintech like products.
Move on to the next slide on the liquid can be update as you know, it's a successor to live Oak Bancshares and as a reminder, we closed out $650 million at the end of last year from 44 banks, the EBITDA and the TBA, we've been operating for about 18 months and as you can see moving very very busy thesis is working in Canada continues to win leads.
On strategic deals all these circle companies offer services that really help banks.
Much like live Oak ventures, our bank benefits by implementing best in class technology.
Either already implemented or on the process of implementing companies such as built alloy narrow MFN fintech notarize and aura.
1 highlight this quarter is blended IPO, we're obviously super excited about that.
We actually are going out starting the harvest phase of the fund.
And as a reminder, a line of not only invested a significant amount in the fund itself, but receive management fees and carry all of which will be earned and realized for the year.
Years to come.
For you.
Thanks, Neil Thanks Chip prettier.
Pretty remarkable quarter across the board.
<unk>.
Start on page 16, and we will get to the financial results in a minute, but let me first I wanted to highlight the consistency of our strategy. We've shown this slide for a while and we tweak the key messages, but it always remains kind of anchored on the same topics on the other thing we wanted to do is.
Just take a minute to recognize the tireless effort of all of our folks to execute this since PPP, we had been running flat out across every aspect of the company on it and it's really showing up in these results. So taking care of our customers has always been kind of vital to our DNA and we continue to do that even as our.
<unk> base has grown dramatically.
We mentioned the Covid 6 verticals that we've been concerned about and watching we visited in person over half of those customers.
Just remarkable to see sort of there.
Positive response to that in an overall sort of strength of that portfolio.
Customer outreach continues to differentiate its across all of our markets. Both in terms of sales and in certain in terms of our portfolio.
It has never been more important to take care of our team as it is today and we continue to stay laser focused on that as we've grown we've continued to invest in them chip mentioned the bonus that we paid in this quarter. We are also focused on supporting them with flexible hybrid work models and incremental resources.
We've also invested more heavily in giving back to our community with an exciting equity investment in a Fintech company call philanthropy designed to help.
Democratize donor advised funds.
And we've developed new models of impact investing and driving inclusive small business.
Our mission to be America's small business Bank continues and our relentless quest to define the bank of the future breaches and important upcoming milestones with our deposit conversion fast approaching.
So flip to 17.
Extraordinary balance sheet growth this quarter, both linked quarter and year over year as the PPP loans runoff. Our stated balance sheet remained roughly flat, but our core loan growth, 10% linked quarter and over 40% from a year ago.
Through our retained earnings and success in our Fintech investing we've been able to grow our capital base to support this as well.
Revenue and earnings growth on the next page really solid as well.
Record loan originations that chip mentioned drove our balance sheet core revenues up 13% quarter over quarter and adjusted pre tax pre provision earnings as chip mentioned up 50% over the prior quarter.
So talk about notable event and what's notable about these is that there is less of an unusual so again, our efforts to try to reduce volatility in our earnings and increased consistency. The greenlight gain clearly stands out dominate the headlines.
Aside from that.
Loan origination really strong gain on sale margins that drives the revenues and then the last of these market price <unk> that we've talked about over the last number of quarters that did this quarter and so those are behind us now and reduce that ongoing income statement volatility.
Turning to PPP Chip mentioned chip summarize these impacts so we don't really go into too much detail, we still have over $900 million PPP loans on our balance sheet forgiveness was about $500 million in the quarter.
But they've really slowed and as you can see the revenue starting to trail off in the last couple of quarters. The impact of this will continue to decline as that program winds down.
Turning to our franchise fundamentals loan growth is what really stands out here.
10% linked quarter growth again.
The other thing that really stands out is our guaranteed loans that are eligible for sale that treasure chest as we've called it which has now broken through the $2 billion barrier and it basically doubled in the last year have shown incredible.
Source of earnings for Us, but also a great contingent source of safety and capital.
Excluding PPP all of this drives net interest income growth of 15% linked quarter and 70% year over year.
Achieving these levels of loan origination is a combination of all the investments that we've made in our people our products and our markets. We found ourselves well positioned to leverage the government programs that were designed to support small businesses and difficult times and as the economy rebounded we've seen a notable increase in business activity beyond the SBA as well as chip mentioned our loan.
<unk> remains balanced by product vertical and geography.
We continue to attract great talent to the bank and all of our folks continue to rise for vacation.
We recognize that we are the beneficiaries of some tailwind from fiscal stimulus and SBA enhancements in our business.
But we have not compromised our underwriting or our credit standards in any way to achieve this growth as you look at the franchise today, our loan pipeline continues to be near our all time high even after the quarter. We just came off.
As the SBA enhancements are scheduled to end this quarter, we expect that impacts volume to some extent and our secondary market pricing to some extent as well, but we feel really confident on franchise and a great spot to continue to provide capital to small businesses.
So looking at our secondary market activity, we sold slightly less loans in the quarter, but at a meaningfully higher gain per million.
The market overall remained relatively flat at historically high levels. The difference on the increase in our gain per million being that we sold more loans that had these SBA enhancements, namely no guarantee fees and the impact that had on pricing, we expect that to continue to see those loans through the third and into the fourth quarter as they run through our pie.
Line, but once those enhancements run their course, we do expect to see some compression in that gain on sale number.
Looking at the amounts we're selling we're still really in line with our overall targets actually holding a little more of both SBA and USDA is on our target, but really no overall strategy shift there.
On the expense side on page 23, really solid story, we continue to grow the team, adding over 60, new positions already this year net otherwise expenses are pretty well contained youll see the special bonus that we accrued for a $4 million this quarter to our employees other than senior management to participate in the Green line gain as chip mentioned and also just recognize they are extraordinary.
Work.
We continue to gain efficiency overall with an adjusted expense base of about $52 million, coupled with strong balance sheet growth drove that adjusted expense to asset number down another 5 basis points to 71 basis points.
And the deposit market page 20 for the macro environment and competitive landscape continue to remain rational industry wide customer deposits are up and the preferences shifted decidedly towards more liquid savings accounts.
Our deposit business continues to match, our loan growth and balance sheet needs.
During the second quarter, we added another $200 million of balances, while continuing to lower our cost of funds by 23 basis points, driven by continued CD rollover and lowering our savings rate, but additional 10 basis points to 50 basis points or.
Our savings offering remains well positioned and we do not see much more savings or pricing or mix shift unless something unexpected happens in the market.
We will continue to see our CD cost of funds decline as lower cost new production replaces the higher cost legacy balances.
We look at our total operating cost of funds of 104 basis points and feel that that remains well below industry funding costs. When you put all the physical branches and operation cost of running a traditional bank relative to the 10 basis points that it cost us from an operating expected to run these and that includes all the work we're doing on conversion.
Late last year, we launched our next generation deposit platform on <unk> by offering savings and CD to new business customers and 10 months, we've on boarded nearly 3000, new business customers, providing over $425 million of funding. This quarter alone. We added 1000 customers on $270 million of growth.
Our new platform provides a simple and elegant user experience and we remain 1 of the few providers, where our business can open an account and to end entirely self service with no human engagement.
In late August we will convert all 60000 of our legacy consumer savings and CD customers onto our new platform.
We're very excited for this moment to bring a new generation of banking capabilities for our customers, but we're equally as understanding of the impact change can have on our customers on our 100% focused on providing a smooth transition that's priority number 1 for the next couple of months.
Once we are fully on our new Fintech platform. We expect this to unlock our ability to grow even more efficiently and effectively than before and will allow us the opportunity to offer new competitive savings products for our existing customers continue making progress on our checking account offering provide the platform to bring deposits on working capital under 1 umbrella and to deliver.
Increasingly more sophisticated products and services to them.
To date, we've been very methodical with our checking activities and have been fortunate in the strength of our existing deposit products to fund the bank for.
<unk> only on.
The offering the checking account to employees and a small internal pilot.
We've done so number 1 to main strict focus on conversion and number 2 to incrementally build services that our future small business customer checking customers will demand.
Following conversion, we anticipate rolling out beta programs locally in Wilmington, and some other select areas over time, we'll continue to add new products and services to that operating suite that allow businesses to spend borrow pay and get paid and manage their business all in an easy intuitive digital fashion.
So flipping the page to NIM and liquidity for continued strengthen our loan yields coupled with lower deposit costs led to core NIM expansion of 17 basis points in the quarter, which was masked in the reported numbers by lower PPP fee amortization.
We ended the quarter with a bit more normalized liquidity levels, just under 20%, which should continue to drop a bit more over the back half of the year.
Putting all that together, we get the eye chart on page 27, which is our non-GAAP pre tax pre provision income for core earnings as we look at it.
There's a lot to uncover here and there is even a bit more on the reconciliation in the appendix, but overall really great trends across every line item core net interest income.
Growth adjusted for PPP, you can see they're up over $7 million quarter over quarter solid noninterest income growth, even without the technology gain expenses in line when adjusted for the special employee bonus and the final market are a few adjustments all lead us to $37 million of core pretax pre provision earnings.
And that's up $14 million $13 million from last year.
And over doubling from a year ago.
Extraordinarily proud of these results, but we also remain confident we can continue to grow this in a prudent manner going forward.
So turning to capital and liquidity capital remains strong with 12, 5% CET 1.
Leverage ratio just under 9% over half the balance sheet remains government guaranteed and we hold a significant amount of liquidity to grow the loan book, 10% linked quarter and maintained capital ratio is a tall order. Fortunately this quarter. The greenlight game helps support that growth going.
Going forward, we don't expect to keep running at quite that pays for balance sheet growth, but we do continue to have options to manage and manage our capital efficiently.
So turning to 2009. So this is our leverage ratio and you can see the green light gain there being a meaningful driver in and supporting that capital base quarter over quarter. Despite the significant balance sheet growth.
I'll wrap up with a chart. We've shown you for a while now and we're really proud that this is the first time that every color on here is green from on the screen.
Even adjusting for the Green line gain we've achieved the metrics that we've been striving for in terms of profitability and growth has been almost a 3 year journey since we elected to start holding more of our loans on balance sheet.
We aren't standing still though far from it.
Genuinely believe the best is yet to come from US as we continue to grow our lending franchise and develop technology and products to further help support small businesses.
With that let's go to questions.
Yes.
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Our first question comes from Steven Alexopoulos with JP Morgan.
Hey, good morning, everyone on.
Steve.
I wanted to start with.
1 other key questions is obviously chip around the origination growth.
Was it about this quarter, specifically when I look at the new verticals on how much they really popped up.
What was it about this quarter that caused such strong origination growth.
I think it's just comprehensive I don't know Huntley.
You just bring on everywhere as we said on the top of the top of the call geography different verticals.
The general lenders the 18 general lenders are now going live.
Probably a top 8 SBA lending group by themselves on the country. So we're just beginning to hit on all cylinders, you and Steve May have something today, yes ill agree with that and the SBA side clearly the enhancements have driven activity and we're in the right places and thats across our verticals that's across the generalists and to that business.
Feels like it is really firing in men.
<unk> energy space, there's just a ton of tailwind in that space and infrastructure build we've seen we've seen a handful of slightly larger deals. There. So that was nice some nice wins there timing of a couple of deals we've been working on for a while hit and then across the.
The specialty finance the sponsor finance. These are just were finding really really great businesses in the right places those are the larger deals to Aspen, which Tom on the road this quarter, calling on customers with the with the sponsor group and the senior lending group.
These are much much larger deals that we're looking at companies.
<unk> balance sheet, so it's across the board Steve Okay. So.
So when we look at the guidance for 8 to $3.3 billion for $3.5 billion of originations for this year that implies I guess, 7% and $58.50 somewhere in that range rate each quarter is that just being conservative or do you really expect a step down.
It could be fairly materially from where we were this quarter.
Well, we seek not to disappoint Steve.
You know the 90% things come on all Steve Smits, I mean, thats going to affect it a little bit usually Q4 is a pretty good quarter for us, but I would say that we are highly confident that we will be in that range.
Okay.
And then thanks, and then finally, so when we bake everything on the cake right. There's so many things going on in the quarter you have PPP still coming off you have the SBA enhancements coming off you have all these new verticals.
Total loan growth.
Period end was down a little bit with the PPP run off how should we think about total loan growth for the rest of this year. Thanks.
You've got to take the PPP, we don't really pay any attention to that that's why we've tried to focus almost all day every day internally on pre tax pre provision earnings on how we operate the business.
Others may have something to say on that yes.
Yes in terms of I agree with chip the core loan growth ex PPP, we grew that from 5 to $5.5 billion Q1 to Q2.
I think it will be hard to maintain that pace. Although there are variables as you know.
Prepayment speeds have ticked up a little bit in the last quarter and we expected that from where we were historically really low level through the pandemic.
Timing of deals that we have that have been in construction on a fully fund.
How that affects the balance sheet and then what loans, we ended up selling so all of those go into the mix I think the balance sheet growth will continue to be.
Quite strong a little less than what you've seen maybe in the Q2, but still but still really strong.
Great. Thanks for taking my questions.
Thanks, Steve.
Our next question comes from Jennifer Denver with Truest.
Thank you good morning.
Thanks.
Good morning, Dan.
So.
Back to origination capital.
Everything included non all Sandoz.
Is the pipeline for the future.
Linda Hi.
Jennifer we can't understanding I think Jennifer if you were talking about new hires right Richard a little scratchy you on the phone is that right can you hear me better now is that better.
Little bit on much.
Alright.
Okay.
Okay.
How's that.
It's good for Loopnet Okay.
Youre hitting on all cylinders, what does the pipeline for new hires and new vertical.
Yes, so we believe that we have a pretty attractive platform right now we continue to see opportunities to hire great talent and we.
Continue to sort of evaluate that and so finding those great people who have experience in.
SBA, primarily we continue to think we've got great opportunity in terms of new verticals. We continue to look at a few here and there there'll be kind of tuck in ones from that perspective, no real major splash.
In the infrastructure space and renewables, we still see Adjacencies there.
And then in the sponsor lending that we're doing we're broadening that just like the generalist on SBA broadened that aperture of the industry. If you look at so to the sponsor.
Lending group as well so we broaden out of the specific industries are bad as we go into some of those more horizontal businesses that were entail.
Okay.
And the.
On the loan loss reserve.
Good day, gentlemen could you.
Just talk about.
No.
I think it could go on that card.
On the loan loss reserve methodology.
But.
Jennifer again really hard to hear you. It sounds like the question was about loan loss reserves and maybe provision is that right.
Okay.
When do you think that loan losses that could go.
Okay. Jennifer this is Steve Smits I'll take a stab at that because you are correct as I mentioned earlier.
Earlier on in the call I continue to believe that it's trending back towards the pre provision, which is interesting because remind ourselves that we.
<unk> went over to see so at the first of the year, which is a challenging time to do that so when you look historically, we were running under a different model. So there's some unknown there and we are getting very close as a percentage of our net loans I always looked at the percentage of our on guaranteed to get a feel for.
Where were actually reserving against it we are getting close to where we were before the world changed second quarter of 2020, So how low will it go.
Hard to say because there isn't longevity to the seasonal model and how that reacts I will say that the reserving that we put in place against unknown.
Stress associated with Covid business has been forced to shut down or curtail our pull back on as.
As expected that is starting to burn away.
And.
The nice.
Line pipe that is burning away because the businesses are actually showing very positive signs of health, we're not going to spike the ball on the 5 yard line at all we're constantly reminded that there could be another shoe to drop we're watching it very very closely we know that their balance sheets are.
Strong that has a lot to do with the federal programs that we've got to see if that has some legs to continue.
So again, Jennifer I think I feel very comfortable that we're returning to a normal portfolio.
And feel very comfortable that historically, we've always reserved at a very appropriate level. So I do think that it may chalk down a little bit as a percentage I think for about 2.5% of <unk>.
Net loans that could easily take like to look at it that feels comfortable to me and that might give back a little bit.
Yes.
Thank you.
Our next question comes from Michael Perito with K B W.
Hey, good morning.
Good morning, Mike.
A few questions for me 1 just on the on the Opex side I think.
You mentioned kind of the 52 million adjusted run rate for for the quarter I'm. Just curious if you have any additional commentary about how we should think about that near term here. I mean, my guess is that there is some upward pressure.
On.
Just given the growth you guys are having but just wanted to see if thats kind of fair and if theres any other kind of 1 off items from the back half of the year that you expect could have an impact on the cost side. What are you I know the rfps are I think have run their course for anything else debt that we should be mindful of.
That's a good question and I'll bounce over to Brett for any of his crystal ball as well I mean, our head count growth probably in the 15% range and so obviously salaries and benefits as a pretty decent size of the line items. So that growth. We think will continue just our visibility around franchise growth.
The rest of the line items, though I think a relatively range bound.
Not sort of seeing anything unusual kind of popping up or down out of that but Brett what we have to add yes, probably the 1 thing I would agree with everything like that.
Nothing going forward that we know of.
Yeah, that's kind of the point of that chart it pulled out those things that arent.
Routine and like you said the market price of our issues those have exhausted themselves.
But the 1 thing I would add to that and I think that the.
Really important part of our growth story.
We reported.
We reported today as in the past.
We didn't shy away from investing in our hiring when we saw new opportunity.
And in a lot of ways this past expenses.
What led to our $1.1 billion of originations reported today. So I think there are potentially opportunities.
Where we will continue and as they make decisions like that that will pay off in the future said that definitely will impact noninterest expense.
But other than those kinds of initiatives.
It's pretty steady debt as it goes yeah, let me, let me support that too just just a wee bit right. So our guiding principle is to treat every customer like the only customers on bank and for the past 9 months or so that's been hard I mean, we did 1 billion won this quarter and the pipe is about the same we've hired about 100 people so far.
For this year and we're going to continue to stay the course of trying to keep treat every customer like the only customer of the bank. We will continue to have opportunities to hire other folks that are experienced SBA lenders as we become a bit more of a nationwide platform in that regard on top of increasing vertical so.
That's all I got to say on that.
That's all helpful. Thank you and then maybe sticking with you just for a second on the on the margin.
It seems like if I'm looking at slide 26, there is a comment that there are a lot of the.
Well, maybe not a lot, but there was maybe a bit of loan production that was towards the end of the quarter and some other liquidity deployment.
Did it really manifest in the second quarter NIM that you guys experienced just curious if you could maybe take a step further I mean is it fair to think that bad.
For the NIM could maybe bounce back barring something really unpredictable happening on the PPP side in the third quarter and kind of get back up towards where you were in the first quarter or are there other dynamics that we should be considering.
Yes.
First of all I'd say on that on the slide you're referencing slide 26, I would say focus on the $3.46 to $3.63 trend.
Just kind of excluding.
The impact of PPP.
On Q1, and Q2 and then on the right hand side of that chart liquidity at 22, 2%.
That is probably a little bit higher than where we will run at normal loss.
Just had some things going on in Q2 as part of our liquidity planning that that places us there but.
Probably somewhere.
<unk> is what would be more.
<unk> would be more normal operation.
For liquidity percent and yet does that deployed on and some of that excess liquidity runs off.
You could see.
<unk>.
Our pop maybe not pop isn't the right word but.
Continued trend on that.
Adjusted liquidity under the Green 363, but I guess I'll.
Said differently the.
The trend of the Green line moving upward there's still some potential more more leverage there I think you guys have said in the past that the core NIM could go to the high threes is that still.
Generally our principle, that's still solid yes, I think that I think thats correct.
North of 3.5.
<unk> 3 point.
7.5 but 3.
3.5 to 4 range.
<unk> as I said.
Got it and then just last for me and I appreciate all the color on the call thus far give it but just on the SBA gain on sale.
Curious if you guys have any.
From the first few weeks of the third quarter here have had those margins kind of remained elevated.
Or is there any other kind of market dynamics at play that you guys think could give that higher margin from some length tier as we move into the back half of the year or is the better base case to take that Theres, maybe some normalization there.
I'm just curious what you guys think on that.
Yeah, I'll start and Brad can cleanup market remains really strong obviously, a ton of liquidity everywhere and.
And kind of a star for assets.
If you think about the SBA enhancement, there's about a 55 basis point guarantee fee that is waived right now and Thats a direct pass through to the loan buyer and so if the duration of the asset is 4 plus years. That's a couple of points on that gain on sale that we will continue to enjoy until those enhancements run out.
Unclear if all of that gets given back just how competitive the bidding market is right now and we will say, but we don't see anything.
That would suggest that that would change as we look at it.
Payment speeds has ticked up a little bit, but arent crazy other that enhancement will be the big the big driver of the market. It once it starts to roll off.
I should probably know this but do you guys know is there a duration.
That enhancement.
Through them at this point has that been communicated or.
So the program with lot of waiting on to see the waiver is Vic through September 30th subject to availability of funds.
I will say it'll be no later than 930 will be exhausted.
And the 90% is in the infrastructure Bill that is being kicked around but certainly don't even think about spike in that book.
Right.
Alright, guys. Thank you for taking all my questions as always I appreciate it.
Okay.
<unk>.
Our next question comes from Chris Donat with Piper Sandler.
Good morning. Thanks, Thanks for taking my question.
Chip on that your last time about spiking that fall on the infrastructure Bill.
I don't want you to handicap, the prospects of that bill but.
But as an extension of the waiver is something that Congress is considering is that fair to say.
Yes.
I've talked with our government relations person on the other day and believe me none of that's in our projections.
Yeah.
Fair enough I just wanted to see if that's on.
The realm of possible outcomes.
I know you answered a bunch of questions around <unk>.
Fences.
But I just wanted to double check 1 thing because that far to anecdotes from some fintech company, it's about <unk>.
More elevated.
Expenses around hiring new employees, but with the people that youre going out on hiring.
I imagine you're competing more with.
With banks for like SBA expertise is that that a fair assessment of what youre seeing on the hiring market as you're as you're growing your.
Your line.
<unk>.
Yes look we're hiring across the board, but specifically the majority of the growth is in the lending side and that lenders underwriters closers.
And to that competitive I think all labor markets are competitive right now and.
But we're really in the market with the banks on that front we are.
On the technology space as well and there is there.
There is clearly some pressure around that.
For the less of a percentage of our overall hiring them then the bad.
<unk> side as we sit here right now.
Okay and then just for me 1 last question on competition thinking about your new deposit platform.
Is there a way you can characterize where you are.
Do you stand competitively with with banks on 1 hand, and then with companies like square on the other with square, making more of a push into.
They're already there in small business lending and small business payments, but getting more involved in small business checking is that something you're watching or deeply concerned about or not so much yes watching very closely right and the market continues to evolve I think.
We look at both sides as very viable competitors that we are working towards and I think.
What we believe we can do is sort of be the best of both and so the understanding of the client base. If you think about veterinarians do you think about pharmacists you think about these industries, we've been in for a decade or more.
Knowing that customer on what we can provide.
This technology platform is what we have designed to be it will be flexible enough that we can create bespoke.
Aleutians for <unk>.
Industries in these industries that we serve with capital and that we know an awful lot about and Thats a slightly different model, maybe then square, which obviously has a tremendous breath among small businesses and what they're trying to do with more of that small balance loan and then moving that into savings on checking but there.
A very very worthy competitor no debt.
Al.
Chris.
So we have not talked on today's call much at all about core conversions.
But you haven't been to the banking business for a long time know and understand that our core conversion is something like a heart transplant and.
And brain surgery at the same time, but that said Neil relative to our tech stack as it emerges past debt core conversion to 14 separate vendors. The tech stack that you referred earlier on the call and certainly our call. This week with 1 financial which is a similar tech stack and the Neo bank.
<unk>.
Along the lines of Chris's comments, you may just want to comment on how you see all of that playing out yet.
So I think I think from.
From our view fintech or actually setting the standard in terms of beautiful onboarding customer journeys for this.
Frictionless.
On boarding and so to do that they built purpose built cores is on R&D, but it's hundreds of millions of dollars of R&D budgets, we set down a path in 2016 to incubate what is today Zac and.
The best testimonial to that is when we looked at putting triple P loans on a core of last year.
Literally it was 6 days to build the integration and we stood up a brand new product on our core and so we.
We believe we talk about convergence, where fintech theyre going to have to become more like banks over time from a licensing cost of funds perspective, youre seeing that with square IFC youre seeing that would radius and lending club borrow on the list goes on banks at the same time, we're going to have to implement these new technology stack. So they can build best in class products.
And we just see that convergence convergence continuing we think we're in a really unique spot on the bank because.
This conversion represents us completely getting off.
On the Oligopolies and now focusing on this next Gen core and this is.
This has been a build a conversion now the fun begins now we can actually build new innovative products for our small business customers. So that's super exciting.
Okay, sorry for that.
For the last 1 that wasn't entirely accurate.
On the day notion sorry about that on the notion of building new products and I think someone needs to work be spoke is that that's really the vision right you have the customer relationships and youre not trying to build something that self service for small business you're trying to.
So you are trying to build something that empowers.
Your lenders and.
Other people within live oak to do new things for their customers not so much for the customers to just go out and do it themselves is that reasonable to think I think convergence is the right word Chris that.
We have lived in a world with with bankers, who know our customers really well a lot of human interaction high touch for a high value add larger pre.
Product, there's a lot of products and services that customers want to self service, we need to provide those we need to offer those digitally in a beautiful.
User experience, but be able to help them when they want to do something more value add that they need somebody to seamlessly integrate that again back to we're in a pretty interesting position, where the capabilities to deliver the technology to self service when they want to and the experience and knowledge in the industry is in the verticals and in banking to delay.
Over that touch too and that's really where we're headed.
Got it thanks very much.
I'm showing no further questions in queue at this time I'd like to turn the call back to chip Mahan for closing remarks.
See you next quarter folks thanks for dialing in.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
Okay.
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Yes.
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