Q3 2021 Live Oak Bancshares Inc Earnings Call
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General Count my vote back in chairs Sir.
Yeah.
Thank you and good morning, everyone wasn't reliable third quarter of 2021 earnings conference call we.
Webcast live over the Internet and this call is being recorded to access like all over the Internet and review the presentation materials and commentary that we referenced on the call. Please visit our website investor got five O Dot Com and go to today's call on our event calendar for sporting journals are third quarter earnings.
He was also available on our web site.
Before we get started I would like to caution you that we may make forward looking statements. During today's call. They are subject to risks and uncertainties factors that may cause the actual results to differ materially from our expectations are detailed in the materials accompanying this call and interact SEC filings we.
We do not undertake update affordable statements to reflect the impact of circumstances or events that may arise. After the date of today's call.
Information about any non-GAAP financial measures referenced including reconciliation of those measures. The GAAP measures can also be founded our SEC filings and in the presentation materials and commentary.
I will now turn the call over to chip May hand, our chairman and Chief Executive Officer.
Thanks, Greg and good morning to all.
For today's kick off of our best quarter ever.
I would be remiss of a failed to acknowledge that this is our first call. Since we went public with al bread games.
You for you over breaths ability to scratches entrepreneurial itch.
Is only matched by my excitement of being in business would be J Lo <unk>.
Who is responsible for this preso and we will take over very shortly.
With that Steve you and I always talk about safety and soundness and I was thinking this morning that we have been in the lending business for over 85 years collectively.
US what you think.
Take your chip to a rather boring quarter from a credit perspective or credit quality remains strong evidenced by all the metrics that we like to look at historically low past is stabilized classified assets and nonaccruals and relatively low charge off levels and also we continue to remain very focused on our servicing efforts.
I'm encouraged by the financial reports that we're receiving from our borrowers cash reserves appeared to remain strong and thanks to our diligent servicing focus we haven't seen many surprises.
Most bars are now making their own payments without government support or additional payment accommodations from us in fact today, we only have 22 loans on deferral and all of these borrowers appear to be making positive financial progress.
So I would say I remain guardedly optimistic that credit will remain strong I'm certainly pleased with the health of our portfolio, but I acknowledge that now is not the time to take the eye off the ball will be prepared to deal with any challenges facing these businesses in the quarters to come will remain committed and will remain focus.
So again chip very solid although slightly boring quarter from a credit perspective.
Like boring.
Thank you Steve.
Michael Let's go with a sled.
Just a few opening up relations before I'll turn it over to VJ and Huntley I'd like to touch on our unforeseen lending growth.
Acceleration of operating leverage caused by that growth.
What is our bank looked like in the future.
And what are the advantages of being branches.
I will admit to you that we did not see this coming a year ago, we discussed 2021 production to be slightly more than $3 billion.
As I look at quarterly production from one dollar amount and the number of products sold our number of loans originated our business has dramatically increased.
Just a few highlights looking back.
So.
Going to talk a little bit about production a number of loans may overall by the company. So in 2018 about $500 million a quarter 2019 about the same 2020 $500 million. In Q1, then we had the pandemic in queue to drop into 430.
And then we jumped a non 48 in Q3 eight oh not in queue for this year's you know Q1 was 672 billion each.
And Q2 and Q3.
And the numbers of loans more or less parallel that historically about 250 loans a quarter called jumping the hunter function.
And what that means in SBA lending, particularly as there is a massive amount of infrastructure.
Infrastructure underneath the architect of the deal the underwriters and the closures and I would submit to you that.
Being a closer SBA business and certainly a lot of Mike is probably the toughest job that we have trying to manage a 148 documents and multiple closings at the same time.
Before I get to the punch line I'm equally excited about what's going on in the general lending group.
So we hired outside the theory of her to calories folks from other banks with a great deal of experience and SBA lending beginning in 2018.
We did $90 million worth of business. The that year 1900, 66, and 20, we did $331 billion worth of business and so fast your $300 million and.
And the numbers of loans of again, paralleling that so we closed $218 and the general group in 2020, and 190 year to date today.
This is a massive amount of work. So we faced the PPP for Ya. We stayed up 24, seven and then we get hit with this.
The.
The result is actually this in terms of the numbers one year ago.
We had 257 folks in the lending area.
We've increased that by 109 to.
366 today.
And we do not have a bench today, we are going to build a bench at the end of the day.
We are dedicated to treating every customer like the only customer in the bag and we do not want our people to be working seven days a week 12 hours a day, so I'm trying to get Huntley and BJ a little runway in terms of increases in non interest expense that way.
So let's go to thank you you are ahead of me Michael Slide six I mean this this to me is the most dramatic thing that's happened in our history. So if you look back five or six quarters. After you take out all the noise of the investments up and down.
All the noise PPP, we were making about 15 $17 million a quarter and now we're about three times that so the investments that we made in the past and the operating leverage of this business is kicking in this to me is the key slot of what we're going to discuss with you today.
Let's go to the next slide all of that has allowed us to maintain and increase arlie. We have been for the last several years a number one in SBA lenders seven eight product in the country and.
And now we are stretching that lead to over $2.3 billion for fiscal year, ending 932021 number two is under a billion.
So what does all this mean where are we going with all this these profits will allow us to bill never before imagined products on a next generation <unk>.
The over used word embedded bagging not embedded backing way more than that we're.
We're not though Derek is going to march across our vertical and figure out how to digitize that which are small businesses need to make their life easier.
Certainly payments loans again, another overused word bond al pay later for.
For both our small business customers and potentially their customers too.
But more than that included but not limited to budgeting and financial forecasting tax prep debit and credit card reconciliation.
It is exciting after all these years.
To become a real bank.
So let's take it up a notch what is different about us and how might we turn these differences to our advantage.
First of all we have no branch infrastructure.
Any of you on this call no Tom Brown and his weekly interviews with prominent bank Ceos.
Our friend and canopy limited partner Harris Simmons CEO Zions Bank was on deck last week.
Tom Rights, Paris, Simmons knows the community Bank model.
With its focus on small and midsize businesses is what a differentiate differentiate science he understands very well that activity in the branches is declining in fact be quantified the decaf decline branch activities only 9% of what it was several years ago.
Consumer transactions are just 7% of what they used to be but small business transactions are still 27% a prior levels.
So we're looking at slide eight nine you can see what's going on here I actually went back and looked it up so the day I went into the banking business on July 9th 1973, there were 13748 banks in this country today, they're less than 4700 banks as of today and about 600 of those are publicly traded.
And you can see the decline of branches that fundamentally parallel of that.
So.
There have been 30 bank acquisitions above $5 billion over the past 36 months.
So there you see and that's at the next slide about three and a half trillion dollars worth of consolidation.
So what does that mean, it's more than that we are an industry with massive overcapacity and poor customer service caused in large part by ancient technology.
The average score in our industry 35 Wells Fargo was negative.
That's.
In addition.
<unk> the banking business has to tee it up every day against spin Tech companies that have attracted enormous amounts of capital from venture firms that have zero expectations of profits anytime soon and this incredibly low interest rate environment.
So many and our industry believe the answer to the problems M&A.
By the folks next door.
Eliminate overlapping expenses.
Mmk causes disruption and culture change for the acquired Cussed.
Customer service falters.
Back in the operating system or.
Years, a few few years ago between Microsoft and Apple Microsoft used the term called spud if you D fear uncertainty.
Uncertainty and doubt and that is exactly what happens in the ranks of bank M&A integration.
Folks are nervous.
All of the above allows us to be the safe Haven for the best and brightest using nexgen cloud native API first technology to build out the nation's premier small business banking platform.
We still believe that the regulated bank environment with access to the FDIC insured deposits will win today for small business America, and BJ and Huntley are going to show you, how we're going to do that.
Thanks Chip good morning, everybody.
Great great to be here at live Oak and with all of you today and.
Chip thanks for that context for for what we're doing over long term of the company. We've got some very exciting things going on.
I am not sure that I could have asked for a better quarter to start with is my first earnings call quick.
Quickly on highlights on page 10.
76 cents of diluted EPS.
More importantly, and chip talked about it earlier, 17.5% adjusted Ppnl our growth from second quarter to third driven by 11% revenue growth from second to third 64%.
Six 4%.
Adjusted PNR growth year over year, so excellent excellent performance, you'll see here is what I would call our opportunity framework that will talk about today are verdict quality, which is really our core earnings engine and lending model dedicated to small businesses.
And you can see some of the highlights here.
Finally, I'll talk a little bit more about what chip referred to which is building out.
Full scale bank building out our platform to serve more.
More customers over time, and we've got exciting things there and then on the Optionality side building product factory and innovation with our investments and financial technology and insights that are second to none so starting on the left side, we talk about 1 billion won in production.
Again this quarter with what you'll see is broad base strength across all our different vertical 7% loan growth.
From second quarter to third quarter, excluding PPP, which is excellent performance.
In this environment, Steve talked about.
Excellent credit quality will hit that as well.
Sort of exciting things in terms of net new hires where we're building our business is lending and deposits wise then of course.
We will touch on the exciting fins that conversion of our deposit business.
If we go to page 11 take a look quickly at some earnings highlights.
You'll see.
The adjusted PNR growth that I've talked about along with the revenue growth.
Net interest income up 12% quarter to quarter, 62% year over year.
On growth on the balance sheet, plus lower deposit costs.
Operating leverage is strong with 11% revenue growth linked quarter versus 7% expense growth.
Our margin.
At 375 on and adjusted basis up 12 basis points in 47 basis points year over year. All of this performance driving continued improvement in the efficiency ratio that you can see and adjusted basis is at 56% take.
Taking a look at balance sheet growth on slide 12.
Here, you see the loan and lease portfolio, excluding PPP growing 7% linked quarter and 32% on a year over year basis on the deposit line fourth line down healthy grew.
Growth continues to support and fund that loan growth.
With strong retention will talk about that in a minute borrowings are down mostly due to PPP liquidity fund pay down as R. P. P P loans or run off running off and most importantly at the bottom.
Top tier returns on equity assets, and very very healthy tangible book value per growth share.
Per share growth excuse me.
Turning a 13 all of this leads to.
What we see on slide 13, which had continued favorable comparison.
Two other banks.
And if we moved to slide 15, let's talk a little bit about.
The origination volume in the quarter, which was again, an excellent quarter and another 1 billion dollar quarter.
You can see the mix in terms of percentage of government guaranteed as a percentage of the total loans originated about a 50 50 split and on the right hand side, you'll see.
From Q3, 20 to 21, a broadening of the mix that.
That we were producing bitch.
Between SBA seven a and conventional.
Moving to slide 16.
Thought this would be a great view for everyone. Just quickly explain what's your what you're looking at here on the left hand side on the X axis is R 2021 year to date originations.
By vertical on the Y axis, it's the origination growth.
Every year for those verticals.
The size of the bubbles is what our portfolio outstandings are in those vertical and.
And the colors.
Represent the different types of businesses, whether it's small business banking energy and infrastructure or our specialty finance businesses, the more conventional type businesses and what you'll see and notice is large broad based origination growth across.
All three types of lending.
Which is which is very exciting so we're seeing growth in all of the different types of businesses that we want will also noticed in the bottom left.
The Covid impacted industries have.
Seem very muted growth and that's.
That's positive for portfolio mixing credit quality turning to slide 17.
You will see how the originations in the quarter combined with other portfolio changes and are learning sales show up in our loan Outstandings.
Key highlights again is the 7% loan growth excluding PPP.
And as importantly, if you look at the first four.
Buckets on the waterfall chart, we had four 2% net growth before loan sales even with PPP.
Meaning that are originations in our fund ups of our existing customer.
Loans, offset any prepayments and the significant decline in our PPP balances so the production engine.
And the earnings engine of our ports.
Polio is very very strong.
Deposit trends are on slide 18.
Different takeaways here good deposit growth opportunity continues.
Continues with the favorable mix ship from savings to C DS.
And the bottom right or savings account retention remains very strong which continues to support our our growth.
R 12 basis points of noninterest expense.
To deposit is in a very efficient platform chip talked about our branch with model will this demonstrates the very low efficient cost of delivering.
That kind of deposit growth and fourth bottom continued reduction in our cost of funds from that mix shift is enabling our net interest margin expansion.
Have you turn to page 19.
Speaking of that margin expansion.
You'll see that we have relatively stable loan yields over the last few quarters, plus those lower deposit costs driving that 12 basis point improvement in the adjusted net interest margin linked quarter and 47 basis point improvement year over year revenue trends are on slide 20.
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Again, very strong performance, both from balance sheet growth and again on sales you'll see in the bottom right. We sold about half of the loans that became eligible for sale in the third quarter.
25% of the SBA that did so in the third quarter. Those sales were about two thirds fixture fixed adjusted to lock in some premiums and reduced rate risk on our books.
And we also sold at lower premiums across the board versus Q2. So there is some pressure on.
Premiums going forward.
But we feel very comfortable with the flexibility that we have with our portfolio and we will find opportunities to continue to see healthy gains on sale.
Expense trends are on.
Slide 21 is chip talked about we will continue to hire.
We will continue to invest in technology, but the positive thing here is that our revenue growth is outpacing our expense growth, which will allow us to continue to make our company more efficient.
Steve talked about credit trends earlier, so I won't hit those on slide 22, but you have some more metrics here that he referred to very very strong credit quality metrics across the board and wrapping up on slide 23, with our credit reserves and capital you can see.
In the upper right R capital ratios.
Remain very strong.
And if you look at the 23.5% bubble, we call out the coverage of our Unguaranteed portion.
Of our portfolio is over two times higher than any other bank said the strength of our reserves plus our capital relative to our unguaranteed portfolios unmatched across the industry, which.
Makes us obviously very comfortable with.
Balance sheet and that strength, so with that I'll stop and turn it over to Huntley.
B J and glad to have you on board for your first earnings call. If you could keep financial performance like this for the foreseeable future that would be terrific.
On page 25 chip in BJ, both touched on some of the highlights of the quarter, but it was a significant one and a number of ways. We continued to COO excel on the lending front booking over 500, new loans, adding 300, new small business customers.
Retaining our leaders of nations SBA Saturday lender for the fourth year in a row and we continue to bring an excellent new folks across the organization have we reached a couple of notable milestones this quarter crossing $1 billion alone production for the second consecutive quarter as well as over $1 billion in cumulative energy and infrastructure lending and we can.
Cost a billion dollars for our business savings deposits and are now have roughly 10000 accounts in business deposits now across the platform, which is really exciting we're proud to receive an award from Greenwich. The leader in all things customer survey related in their small business customer experience category and we're incredibly excited about our deposit conversion that.
He completed this quarter and we'll talk about that in a few minutes. Despite these accomplishments, though we're really good like we're just getting started and we turn our immediate attention to our checking launched this quarter to enhancements to our loan servicing capabilities and setting the roadmap for additional expansion on our platform on the horizon next year's a small balance loan product and the <unk>.
Ability to innovate and create specific products to serve small businesses in our industry verticals like chip talked about.
So on side 26 or platform has two complementary components high touch and high Tech.
The roots of this company are in great people with deep domain expertise to serve our small business customers extraordinarily well we've had the good fortune of continuing to attract and retain top talent across the banking and the technology industries.
By investing in and building a next generation technology stack, we have the ability to deliver innovative products and services for our customers and for our employees. So great teammates paired with great tools allow us to better serve our customers, which at the end of the day is what we're all here to do and that creates a self reinforcing feedback loop that attract more great folk.
So I want to be a part of this journey and so on so we continue to be really excited about that so on page 27 and chip referenced.
The new technology platform with working on and we've been talking about for years now and it's anchored by a cloud based core fins Act that allows us to innovate in ways that a lot in the industry really struggle with if you were to ask the bank how long it would take for a traditional financial technology vendor to create a new product for them.
Get a grown or an IRA all or something to take a really long time, and we've experienced that as a company ourselves.
But on our next generation platform, we have the flexibility and speed to market to those add new features to existing products and to launch new products cloud.
Cloud based architecture gives us the ability to rapidly scale at lower cost or data lives in one place with multiple positions in a single account not siloed in legacy systems that gives us the ability to better understand our customers to provide them with rich insights and to help them with their financial decisions. The.
System is also real time, which further helps customer I understand their financial position enhances our fraud and transaction monitoring reduces reconciliation work and gives us the ability to keep pace.
With all the change going on in areas, such as payments and across the industry.
And finally, the open platform architecture allows us to connect with many digital partners and build a best in class ecosystems take advantage of all the innovations coming out of the 10 text base fuelled by the venture capital community.
If you turn to page 28. This platform allows us to accomplish something that rarely ever happens in banking a successful conversion that actually exceeded our expectations in terms of speed accuracy.
Customer experience et cetera.
Go into all of these stats in detail, but the ability for us on this new platform to establish multiple environments for testing to have real time access to data for reconciliations helped our incredible teammates flip the switch on 60000 accounts seamlessly.
So let's show this slide before and we spent a lot of time with our small business customers listening to what they want and we thank the sliding capsulate has a lot of those needs faster access to capital digital management tools actionable insights better payments capabilities and all in an integrated digital experience.
There are a lot of neo banks that have come online in the last few years that have identified one or two of these problems and built point solutions to target them think about early payroll or buy now pay later expense management and they've all done extremely well a lot of these companies haven't necessarily invented anything new but they've leveraged of modern technology stack that allows them to innovate more.
Quickly and have data that allows them to possess a deep understanding of digital marketing and customer acquisition costs. We believe we now have all these capabilities in-house along with an incredible team that understand our customers and are willing to go out of their way to help them.
We are just the beginning of this journey and with our first use cases live we're excited about the opportunity head and the opportunity. This platform creates for us to continue to innovate overtime, we expect us to result in even better lending experience for our customers lower deposit cost as we build operating accounts lower customer acquisition costs lower attrition rates as Wayne.
That our bank with an industry verticals and.
And the opportunity to capitalize on new revenue streams that are emerging.
On that front I'm going to turn it over to kneel to talk about the venture capital space and how our participation in those markets continue to fuel our growth not just their financial gains, but through intellectual capital and driving our product right map.
Huntley and.
From aboard BJ Super to have it.
Macro first and.
I think we all heard about this but seen it on this chart. It's just amazing what's happening in Fintech, both evaluation and the amount of capital that's going into it and I tend to oversimplify. This but in my view that falls into two categories. Those that are back friendly and those that compete directly with banks and on the ladder.
Massive amounts of capital are going into these companies and it's going directly to marketing customer acquisition costs to the tune of hundreds of millions we get to look at the income statements of these and is going into R&D and all of them are using best in class metrics like lifetime value of customers customer acquisition cost and tuning in optimizing all the way.
That's why the search for the right bank friendly cloud Native API first and text must continue and we've been pretty passionate about this from the start.
The next slide this is.
A good site that embodies the evolution of Fintech investing at live Oak Bang and you can say we've been on this mission for quite some time by now everybody knows you've seen a story I'm sure, but then under the banner of Labour Adventures, we incubated and invested in companies.
They hope further revolutionized the entire bank tech stack much like the pin Tech competition I was referring to early any of the logos listen bold by the way that.
We are using them at live oak bag, there either live or an inactive projects and implementation and that's ultimately how we define the sex.
The the ultimate resolution between 11th ventures and.
Canopy that we use the software Andrew service and it's been a big way.
The evolution of our imaging became more formal when we lost the first Fintech fund of its kind $650 million in capital 40 banks DBA AICPA. We spent the last three years combining over thousands of companies combing over thousands of companies only to find the best which again, we intend to implement lack of bank in the mission.
We'll continue as we work to launch canopy fun too.
Moving on to the next slide you seen some of this before but this shows an aggregate view over time of the level of ventures companies through.
A financial lens.
He saw in the previous slide breaking down the investment amount carrying value and value. If it were priced at the last round and while the original intent to incubate. These companies was for strategic value economic benefit is meaningful impact.
As you scenery to quarters, and we certainly hope these trends will continue.
So with that said Mister chairman anything else from you we could open up the Q&A.
Let's open it up to Q&A.
As a reminder to ask a question you don't need to press star one on your telephone.
Draw your question.
Please can buy will be compiled the Q&A roster.
Our first question comes from the line scheming, Alex pollen from J P. Morgan.
<unk> has now been.
Hey, good morning, everyone.
When Steve.
B J I think we're as excited as chip in the team have you on the call. So.
Thanks, Steve Chip.
Chip I wanted to start so you said when you kicked off the call that you guys didn't see this coming in terms of the loan originations can you drill down for us. So we can better understand what exactly is coming in even better than you expected and second do you feel like we could now I know I ask you this last quarter, but now there were two quarters.
Above $1 billion do you think we could stay above there in terms of originations.
I just knew that you were going to have some forward question, Steve really good.
I think it's a couple of things and then.
Huntley and team will land I mean, certainly the 90% guarantee and the 708 spaces helped.
The government pick it up but usually we pick up.
Through the customer give the zoo United States government to 55 bps Thats helped subsidies has helped Steve mentioned earlier.
I don't know only it's a little early for us to predict next year.
Feels.
Okay, Yeah, how would you how would you go with that one yeah.
I agree I mean momentum feels really solid and I think that part of what happened over the last 18 months is that our brands and sort of success, sometimes feeds on that and so the PPP work. We did we worked with small.
Small business customers, who work a referral sources some.
Some of these associations that we spend time with and we serve them well and so we were getting a fair amount of word of mouth referrals now and so things are coming in I think the macro trends that we see are still quite positive as it relates to.
The aging population of small business owners and M&A in that space, some macro trends around industries around healthcare veterinarian et cetera. So all of those feel good.
And feels like we're continuing to attracted people in that space as we as we grow and I think chips ride we may see some.
Some headwind as it relates to the SDA enhancements going away, but pipeline still feel really solid right. Now so we're kind of take it as it comes and one other thing as of last night, Brian in the three trillion dollars Reconceive reconciliation build a 90% guarantee extending for five years plus other enhancements is in.
That I.
I don't think anyone sitting around this table that level of bank in Wilmington, North Carolina thinks it will make the cut will probably go back to what we used to so would not be factoring any of that in for the future.
Okay.
That's helpful.
And chip I wanted to ask about expenses you mentioned at one point you need to build bigger bench and huntley you'd be J, giving you a little more runway what does that mean for us like what should we be thinking from an expense growth viewpoint.
That's probably more for you B J I, just with Steve I just wanted to make sure we have killed our people in the last 12 months. They wake up every day and they really try to treat every customer like the only customer when they spent.
Three months spend an 18 hours a day trying to help out Pvp and all this massive volume comes with double the volume of the business and they are trying their very best going home at night, staying up til eight o'clock working every Saturday and so on and I don't want that I, just do not that will not continue and if we need to build a bench to.
Do that we're going to do that now how that gets into noninterest expense VJ that's up to you.
Yes, Steve.
Steve what I would say is.
Look at look at this quarter right, we had 11% linked quarter revenue growth on 7%.
Expense growth.
I think that kind of.
Revenue versus expense should likely continue right, there's going to be continued heavy investment like chip said.
We had about 70% of our year to date hires in the lender or lender support probably more much more weighted towards lenders support underwriter closer than it was even on the lender itself side, we're making continued investments in technology and the technology platform.
Not yet been Zach, but checking roll out in the fourth quarter.
Loan servicing enhancements Huntley referred to small ticket lending coming next year. So we continue to be on a journey to build out the platform. So <unk>.
Expenses continue to go up commensurate with revenue, but our expectation is that P. P. NR trend continues to be on a steady climb upward.
Just one quick other thing on this issue right Steve So.
Think we now have 22 lenders that are that came from other banks are not part of the theory of her to Kelly.
And in the future Huntley, we're going to get ahead of that by bringing the infrastructure with them in terms of underwriters include you might want to just comment on that because that is going to.
Yes, yes, I mean, I think chip. So we have had great success in finding these experienced lenders and we've tended to hire them and then a little bit scrambled to provide the support behind them and we're just going to flip the order of that so that you'll see as we grow that business will start with with incremental underwriting credit.
Closing bench and then and then later on those people because we still see I think great opportunity to continue.
Long that strategy.
Okay.
That's helpful. And then final question on the checking launched that's coming this quarter will this be initially a pilot and select verticals or is this going out more broadly across all of the verticals. Thanks.
Yes.
Yeah, I'll start I mean, we've got a pilot in place now for our employees and so that is.
Already planned what we will launch is a product that had base capabilities for small businesses. It won't be vertical specific yes, that'll be the enhancements that will later on so the base product I think will be a a a.
Very good product for a broadly applicable for small businesses and then we'll start to get more more.
More specific overtime.
Found that you haven't tested district clients, yet just internal.
That's right okay.
Thanks for taking my question.
Steve.
Thank you. Our next question comes from the line of.
To his security your line is now from.
Thank you good morning.
Good morning, Jennifer.
So let me follow up I wanted to Steve questions based on your pipeline today, and what you're seeing in 10th or do you think you could see another billion dollar origination quarter and fourthquarter.
Hard to say at this point, but I would say close Jennifer.
You people are some forward.
Yeah.
Knowledge that would.
Business is pretty good.
Okay.
And on Slide 16, you have the breakdown of small business lending versus especially lending.
And and and.
Energy and infrastructure.
You think the loan mix evolved over time.
When you look at those three and are there more either type to come later.
Hey, Jennifer I'll I'll take that.
I think we see really good opportunities across all three I think trying to figure out exactly which one is going to grow the fastest is a bit tricky we've had a great run on the small business side.
And so I think you could continue to see a little bit more waiting to the other two and some of the specialty finance businesses were really just getting started and so I think we have a lot of white space to run and then given all the tailwinds in renewable energy. It feels like we've just got to continue of a massive opportunity there chip continue to grow as well.
Okay and my final question design.
CJ can you just talk about what you see for net interest income and an interest margin. When said time do you start to get lap.
Sure Jennifer so.
We continue to obviously think that net interest income is going to climb pretty materially.
Particularly over the near term from continued deposit cough declines over the next maybe quarter too, but then also obviously, adding all this production and net loan growth is going to continue to move higher in the near term as well we do thank the margin.
Could benefit incrementally from from those two things I think spreads are still pretty pretty good I'm pretty stable on the loan side and on the deposit side cost of funds continues to trickle down longer term.
We are not as asset sensitive as others.
But we do have about 50% of our loan portfolio.
Ever to the shorter end of the curve. So we will see some some modest improvement.
As rates start to rise, but more of our net interest income will be driven by increases in volume.
So much.
Thank you. Our next question comes down the line, Michael Burrito from K B W.
Now then.
Hey, guys. Good morning, Thanks for taking my question.
Hey, Mike.
I wanted to start I kind of had a.
Question around the debenture investments I was curious if you guys could maybe just random minute refreshing off on on how.
Right up through gains actually flow.
Through live Oaks consolidated statement for example, I saw it in the third quarter in September got alloy completed a series see I think the valuation we've got four acts on the $100 million raised I mean, I'm pretty sure that canopy, let that series be so I imagine, there's a pretty psycho ownership I'm. Just curious if you could maybe just refresh us on how those types of.
Gains flow through.
Moving forward as as we probably get a little bit more in line of sight on some of these companies that you have investments in as they raise their evaluations.
Yeah, I'll start and then turn it over to BJ for more clarity, but I think it's important to to look at LIBOR measures, which are direct investments and every time, there's a raise there's a mark as compared to canopy, which is a fund.
And that fund, we levelled bank invested $20 million in.
But we're also subject to maybe.
Management fees.
But more importantly, the Kerry and that indeed also as mark to market, but wood.
Who would have I think it's much more impact on income as it flows through then alive adventurous direct investment.
And I'm going to turn it over to you to clean all that up.
And you got it Neil.
The ventures investments or arrange a variety of equity security method in equity method and so those some are mark to market and some are more flow through and then as Neil said anything that's in canopy. We are an investor in the fund until our stake in that will have.
Once that things start to get Martin realized but it'll be a much smaller impact for us just given the size of our investment in the fund itself and then we've got some performance fees that over time.
Their way through.
As well.
Got it so something like like alloy the actual impact health in the financial.
Far less than something like Greenlight, where is the.
A majority is held within Leabo counters.
Yes, yes, that's right.
Perfect and then on the.
The cost side.
<unk> 70, and it makes a lot of sense tried it could just be amount of grocery you guys have had in the amount of volume in the.
Launching a new core.
The branch I think it's pretty logical but.
Sounds like you've already made quite a few of these higher just curious about kind of a wage pressures.
How that factored in I mean is it harder to find talent I mean, you guys have a fairly unique culture I mean I'm sure you guys are are pretty.
Sticklers at the door I guess for lack of a better way of putting it to make sure you bring in the right people I mean, maybe just a little bit more color around that process would be helpful.
So sure I'll I'll take it it's it is a competitive market. There is no question about it and great folks have a ton of options to where they want to work. So we've got to be competitive in all facets in the mission and what we're doing there and how we treat people and that includes compensation includes a bunch of other stuff too and we're out.
Every day trying to find folks and the best ones can go work wherever they want I think that's especially true in the technology side.
And to convince folks like Ronaldo and others to come join Us is.
It's kind of fun to actually go out and recruit and try to see what we can build here, but it is competitive as no doubt about very very competitive just an extension of that.
Hiring other lenders has not been a problem nor do foresee that being a problem in the future with them, bringing their infrastructure staff with them.
We're not you may want to comment on I know that you've done a couple of.
Searches recently for senior people in your organization that it's seemingly gone reasonably well, yes incredibly well.
There is incredible amount of excitement from folks who are having dialogue with the bulk of the future state architecture. The access to finback and also the culture of displays which makes it incredibly special so we are fortifying and continuing to build our capabilities and the technology space and had.
No issues at all are attracting incredible talent across an industry equipment that will be announced where do some.
Michael you'll remember that years ago, when we saw.
It started in Chino people used to tell me like there's no way in Hell, you could attract technology Wilmington, North Carolina.
It is 1200 people across down today, so something's going right.
Nice b.
Thank you for that call I appreciate it and then just last I wanted to just clarify an answer to an earlier question about kind of positive operating leverage moving forward and how revenue growth should outpaced expense growth.
Functionally.
Could a model over the next handful of quarters here.
There will be a step back in that operating lever so right PJ just from.
The P. P P revenues that boosted.
The full year 2021 is I mean, I kept saying in another way I mean, the efficiency ratio will likely step back up next year before hopefully trending down after that correct.
Yeah, I think if if you're looking at it on a on a gross basis. If you will with the PPP and the benefit that we've had there yet the answer's, yes on the adjusted basis I do think like we talked about there still.
A little bit of margin expansion, there's quite a bit more net interest income growth from the production that we've already put on the balance sheet, we've got flexibility on.
Gain on sale because of what.
Kind of portfolio, we have that is eligible for sale. So we can we can be discerning pick and choose on that side and then all of that should more than cover the.
The increases inexpensive as it relates to hiring.
Investment in technology so.
I think the revenue engine is incredibly helpful and supportive for.
Continuing to to pay for our expense growth over the next several quarters.
Got it makes sense.
Thank you guys I appreciate it.
Michael.
Thank you. Our next question comes from the lineup do not from Pipers handler. Your line is now open.
Thanks, Good morning, everyone. I appreciate you taking the questions here.
One for Steve about the boring credit quality use.
Use the phrase is not out of the woods and not taking our eyes off the ball.
<unk> and chip I I'm going to be another sell side analysts asking a forward looking question here, but is there any point in coming quarters, where you think you might be able to relax a little bit or.
With the pandemic and the macro situation, it's going to be tough to to really relax for awhile.
The chip I can take it this is Steve Chris unpaid not to relax.
So I won't.
My point is we will never be complacent.
We will never Spike the ball.
What's been successful and worked for us and we will continue to do so.
We're not we're fully aware that we need to focus on inflation, we need to focus on supply chain, we need to focus on the political environment and we need to train our folks to work with our borrowers ask the right questions. So we have a very good pulse.
On our borrowers and how they're doing and we react to that and try to be as proactive weekend. So.
Again, I think we are really really good place much better place than I.
Would have first Boston pandemic first hit.
But I think that has a lot to do with the type of portfolio that we built over the last.
More than a decade, and we'll just continue to do what works for us going forward and we will shy away from the challenges that might or may not be in front of us.
Okay, and then Steve just to follow up on that one when I look at the the loan origination graphic on <unk>.
Slide 16.
With the year to date originations and year on year origination growth.
Did.
Can you just comment about Phil certainly must filter into that can just talk about how it goes with like inflation concerned supply chain concerns all of the other more recent developments beyond the pandemic.
Make a couple comments first of all models incredibly powerful allows us to expand and contract in various industries based on the pressures in front of them.
We do that also our domain expertise in so many of these areas is incredibly powerful to give us a very close pulse.
What's facing those businesses in those areas also I'll make a comment that we also manage risk through participations, which has been very successful for us and we put a lot of investments and growing.
That capacity over the years. So you can look at senior housing you can look at middle market, where we're making really good and roads. However.
However, about 50% of what you see there we manage the risks through participation and that also gives us a very good tool to.
Control, our risk tolerance as well.
Got it thank you very much Steve.
Thank you. Our next question comes in the lineup William wallet from Raymond James Your line is now open.
Hi, Thanks for taking my question.
Maybe you'd like to.
Just trying to put a bow on the on the expense line of questioning.
If we kind of just think about the comments that you made about.
Some investments and people believe in the press release, you've talked about.
And he's starting to normalize et cetera assistant expense pressures, there, but but revenue growth driving continued operating leverage if we think about it from.
And efficiency ratio perspective, maybe just help us think about in the current interest rate environment, where efficiency could trend to say and then the next year and a half.
Two years.
So.
Let's let's kind of put aside.
And run off and all of those types of things and just think about.
Where we sit in third quarter at a 56%.
Efficiency ratio kind of on and adjusted basis, and that's been that that has been trending down.
R. R strong PNR growth if we can continue to generate PNR growth, which is you know is.
Just simply revenues minus expenses, we're going to we're going to inherently spend less to make a dollar and the efficiency ratio kind of inverted so over the next couple of quarters.
I can I can.
Think about it continue that trend down a couple hundred basis points over that time and our longer term goal would continue to move that even further down as as we build the earnings.
Okay. Thank you that's helpful.
And then and then there's been there's a couple of comments made about the.
Premiums on loan sales under pressure a little bit correct me, if I'm wrong D. B incentives ended at the beginning of this quarter correct.
That's the case can you just talk a little bit about how premiums have trended quarter to date.
Yeah, we really started to see a change in the premium it's really actually mid quarter of.
This this quarter so really in August it started to change in premiums.
They're going to be different for different products, but unbalanced, maybe 150 to 200 basis points lower.
So we did a little bit of work.
In the third quarter to sell a little bit more on the longer fixed right side to.
To take advantage of what we saw was historically higher premiums and to take a little bit of interest rate risk off off the books.
We'll look this quarter.
Be a little bit more opportunistic in terms of looking at at premiums and the mix between SBA and USDA going forward. So.
Premiums are going to continue to be under pressure because of the reintroduction of the spa's.
Fees and the dealer excess inventory, that's that's out there, particularly gone in a year and but again all of that to say is we.
Have better insights arguably than anybody in this industry as it relates to SBA and premium trends in what's going on in the secondary market and so the flexibility that we've got we have the guaranteed portfolio and our ability to pick our spots on when and how we sell it's going to be.
Really helpful to us.
Okay. Thank you and then my last question you had a slight if you just slide 28th it just gave some stats around how successful the conversion.
In fact was wondering if you could just provide us with any updates on how the beta testing is going with with several of the larger thanks.
Zac will there.
I think it's going pretty well don't you Neal I don't know how much frankly laws to disclose yes, but I think.
Having a live oak.
The first banks, it's live it's actually done a conversion from the old core is a meaningful inflection point.
And well I think he would be happy to share and he's got over 12 banks and implementation right now.
It just bodes well for the locked in the momentum of that company and their product market fit.
Okay I really appreciate that update thank you very much.
Thank you at this time I'm showing no further questions I would like to turn the call back over to chip Mayhem closing remark.
Thank you ma'am.
Joy today's call we enjoyed your questions and we'll see.
This concludes today's conference call. Thank you for participating you may now disconnect.
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