Q1 2022 Live Oak Bancshares Inc Earnings Call
Good day, everyone and thank you for standing by and welcome to the first quarter of 2022 live Oak Bancshares earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during that session you will need to press star one on your <unk>.
And if you require any progress. This does please press star zero. Please be advised that today's conference is being recorded I would now like to hand, the conference over your speaker today General Counsel of live Oak Bancshares, Mr. Gerard Seward. Thank you you may begin.
Thank you and good morning, everyone. Welcome to live Oak's first quarter 2022 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 <unk> at live Oak Bank Dot Com and go to today's call on our.
Event calendar for supporting materials, our first 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 factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings, we do not undertake to update the forward looking 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 metric measures referenced including reconciliation of those measures to GAAP measures can also be found in our SEC filings and in the presentation materials and commentary.
I'll now turn the call over to chip Mahan, our chairman and Chief Executive Officer.
Thanks, Greg It has certainly been an interesting last few months in the capital markets and live Oak Bancshares has participated in the volatility.
So welcome to our Q1 earnings call or should I say stay the course call or better said, Bob Winston Churchill stay calm and carry on coal.
Greg Let's go to slide five.
I cannot tell you how pleased we are with the growth in the core earnings of our business.
<unk> with PPP and the marks on the lab of venture investments make it difficult to understand the true operating earnings of the business.
Key in this analysis laws and the understanding the risk in our loan portfolio at this point in the cycle still proud and amazed that our loans over 30 days past due were just a little over $4 million.
On a loan book of almost $7 billion.
BJ is credit quality slide also known as non accruals of $25 million.
Interestingly over half are making payments as agreed or in the process of being placed back on accrual.
All expected losses have been charged off or are properly reserved this metric tells us more than any other relative to the growth in the true earnings of our business given how we lend money to small business America.
Moving onto the next slide slide six Greg This was our best first quarter ever as you can see although Q1 is historically, our slowest quarter, we grew 29% over last year and over the last four years, our compounded annual rate of growth for the first quarter was a healthy 21%.
So just a couple more comments before I turn the call over to BJ and Holly.
Want to talk a little bit about the future of our business.
In the future of our industry in general.
All 280 billion lines of software code that run every bank on the planet is going to get swapped out over the next decade.
To support discipline, we need to look no further than the.
Microsoft Amazon recent earnings releases.
Amazingly two days ago, Microsoft announced earnings of $17 billion 49 billion in revs revs on a very large base grew 18% year over year in earnings of 8% year over year.
Shockingly the cloud business was up 32% with $23 billion in revenue. So 23 of the 49 was cloud based.
Microsoft now has 20% of that market up from 7% in 2016.
Market leader Amazon Web services owns 40% of that market in Q1, Amazon's cloud infrastructure services business grew a whopping 46%.
Relative to taking advantage of these cloud native API first initiatives and building banking products on next Gen core processors, we workforce.
The sale of <unk>, obviously created a $120 million gain.
125 million of pretax cash we've started that business with the Sanchez brothers in December of 2016 with the help of Frank Bisignano, who at the time was CEO of first data.
First data sales to five serve Frank assumes the helm there and immediately acquire the company has five serves nextgen core processing platform.
<unk> will provide the Sanchez brothers that capital over $100 million and importantly related implementation capabilities to allow the beginnings of the digitization of our industry.
For affirmation affirmation of change in our industry and one needs to look no further than the Wall Street Journal article last week outlining the efforts of one William hockey.
<unk> is the cofounder Plaid a fintech payments company.
The article is titled.
Plaid cofounder takes aim at rickety banking tech.
He bought northern California National Bank for $50 million he renamed the Bank column. He developed his own banking platform from scratch over the last three years primarily to serve fintech.
Let's review the success of his first company founded in 2013, while student and Emory University.
<unk> capital.
July of 2013, and a $13 million valuation two years later 53 billion June of 16 to 25 December of <unk> value of the business is two six tried to sell to visa for $5 billion that was canceled in January at <unk> raised one year ago of $425 million in cash at <unk>.
$13 4 billion valuation.
For our industry to take an OCC regulated silicon valley startup likely would be a mistake.
The point is we have been building toward this since 2016, we are going to stay the course, BJ and Huntley Youre going to tell you just where we have been and how we're going to do it.
P J.
Thanks Chip.
I appreciate that good morning, everyone.
Look at the quarter and talk about how we did and what we are looking like going forward. So.
Starting on slide five Youll see that our first quarter earnings per share were <unk> 76.
On a year over year basis, we generated 91% growth in adjusted PPE and are driven by 44% revenue growth on 24% expense growth. The revenue growth was driven by loan production of $865 million as chip said up 29% from Q1 last.
Year, and our highest first quarter production ever we generated 30% loan growth on the balance sheet and the outstanding core business performance along with continued success with our ventures investing resulted in 19% year over year growth intangible book value per share excellent value creation.
<unk>.
We delivered and continue to do so on key accomplishments across the three dimensions of our business vertical.
Our core lending business scalability, which is growth in our lender platform our products and our technology.
And our Optionality, which is our Fintech ventures activities that foster innovation and create organic capital turning to slide nine you will see more detail on our adjusted earnings highlights.
On a linked quarter basis, adjusted <unk> was down 5% on revenue growth of 3% expense growth of Ken.
It into revenue and expense growth drivers in more detail starting on the next slide the loan loss provision was again modest and credit quality remains strong turning to the revenue slide on slide 10.
See total revenue growth of 3% linked quarter and 44% year over year was driven by the strong loan growth and resulting net interest income, which was up 5% linked and 44% year over year net interest margin expanded again up another basis 0.8 basis points linked quarter to.
391, with a reported net interest margin of four O. Two on the fee income side, we saw healthy sale premiums on our guaranteed loan sales in the first quarter with the average net gain of 109%.
As you can see in both the table in the bottom left and the commentary in the bottom right. We sold $220 million of total guaranteed loans in the quarter disproportionately weighted towards the SBA sales two things we saw during the quarter led us to lean into and SBA sales this quarter.
Number one as you can see in the table USDA volume was very light eligible USDA sales volume shifted out of the first quarter into future quarters.
And secondly, while premiums remained relatively stable with recent trends during the first 45 to 60 days of the quarter. We did start to see some meaningful changes in demand in pricing due primarily to shifting market sentiment on the fed's rate and economic outlook, so with the things that gain of $120 million.
In the second quarter, we will take the opportunity to moderate our guaranteed sales in the second quarter and allow the markets to further digest the fed's rate moves.
Turning to expenses on slide 11, So we discussed on the Q4 call. We anticipated another strong hiring quarter end. We had one we added 44 net new lives acres in the first quarter and as we discussed in the last few earnings calls we've been working hard to help our lender support teams underwriter.
And closer it's primarily the catch up is a significant ramp up in volume we saw in 2021.
Good news on that front, we have caught up and have already seen a 10 day improvement in average time to close from last year's level. In 2022, there will be more of a hiring emphasis on technology talent, which you can see in the chart on the left 35% of our net new hires in Q1 were in technology.
With 45% and lender and lender support I don't think it's going to give you a little more color on the tech hires in just a moment.
Turning to the balance sheet and returns on slide 12.
Growth was again strong both linked and versus prior year quarter, as where returns on equity and assets and tangible book value growth year over year.
Slide 13 is more information on originations, which chip discussed in Huntley will cover in a bit more detail.
Turn to slide 14, this shows a waterfall of our loan growth quarter to quarter, where it came from.
With net loan growth before sales at 7% linked quarter very solid performance.
Turning to slide 15, strong loan and deposit growth has been achieved with well disciplined pricing average core loan yields have remained stable and our deposit cost decline over the course of 2021, leading to strong net interest margin expansion of 45 basis points suggested for PPP.
The $3 91, and our reported NIM of just over 4%. So while we're clearly headed into a much different interest rate environment and NIM starting point of 4% is surely a nice one to have.
Turning to credit on slide 16, our longstanding practice of frequent contact with existing customers and strong underwriting remains a top priority.
As chip talked about Youll see that our non accruals and past dues remained low and we had very low net charge offs again in the quarter.
On slide 17, Youll see in the upper right capital ratios remained strong note. The green 21, 3% bubble, we call out on the graph, which is the capital plus reserve coverage of the guaranteed portion of our loan portfolio, which is almost two times higher than most other banks. This.
This plus the $2 $9 billion of highly liquid guaranteed loans on our books give us both comfort and balance sheet flexibility.
Slide 18 shows continued top quartile performance versus industry peers, and soundness profitability and growth metrics.
And before I hand, it over to Huntley had just wanted to wrap up with a few slides that might help provide some context for the future environment, sometimes it's helpful.
To take a look back before we take a look forward.
So on slide 19.
As I talked about a little earlier related to premiums and what we're seeing in the gain on sale market here, we provide two views of the SBA secondary market and gain on sale premiums over a several year period, including 2016 through 2018, which was a period, where the fed funds rate moved up to <unk>.
Hundred basis points, so first the top half or the first graph in the upper left.
For variable rate product and the second is for a five year fixed product two of our most common guaranteed SBA sales. So a few takeaways here now.
Number one is the variable rate product due to its relatively steady spread characteristics and pooling ability tends to have relatively steady gain on sale premiums through various rate cycles.
The second.
Takeaway as gain on sale premiums for fixed rate product tend to fluctuate a bit more in different environments. As you can see driven by a combination of wider spread variability prepay speeds and due to its lack of pool ability will be more susceptible to changes in demand due to a smaller set of buyers.
So what's the point the point is in an unsettled market with large moves in funding costs and appetite we have to continue to be discerning about what we sell versus hold on the balance sheet, particularly until markets digest the large anticipated moves in rates due to the fed actions.
Wrapping up on slide 20.
Perspective on long term performance is helpful as well and as you can see live oak through both rising and falling rate cycles has been consistent and delivering strong credit quality growing loan originations.
On our balance sheet, leading to healthy NII growth and will continue to strive to do the same going forward. So with that I'll turn it over to <unk> to give a little bit more color on where we are growing and investing so over to you. Thanks PJ. Another busy quarter here you can see some of the highlights on.
I wanted to touch on a couple of key themes. This morning again, the strength of our core lending business the talent acquisition and the strategy there and then our technology and product roadmap. So if you look on 'twenty three on the lending side. We continue to do what we do best which is provide capital to small businesses.
And as chip mentioned, the first quarter does run traditionally a little slower than the rest of the year, but we still originated $865 million across the franchise up 29% from last year small business Division had a great start to the year as you can see in the bubble led by some of our flagship verticals healthcare veterinarian investment advisors.
Then.
Support from our generalist strategy. We've also seen some success in some of our newer verticals like RV parks and we have a handful more that we're in the early stage of exploring.
The general strategy for US has been one I'll talk about it more in a minute that's been quite exciting as we continue to add folks around the country focused on business acquisitions, the demographic trends of the aging and retiring small business owners continues the silver tsunami as they call. It and we think we're well positioned to support business owners in those change.
Control transactions.
Our specialty finance business was similarly strong led by our middle market sponsor and our government contracting teams and as a reminder, we tend to focus on companies with EBITDA between two and $10 million in that sector and we continue to follow the flows of equity capital that are coming into that space.
The renewable energy business was off to a slow start this year with some construction project impacted by supply chains and some pressure on certain environmental attributes overall, though the demand for NME investment in clean energy continues to accelerate and we feel really confident about opportunities for us there and the pipeline there.
Look really good.
So turning to page we've talked about this in the past. This is a quick map of the U S and the dots are where we have generalists scattered around the country working in those markets and around those markets on business acquisition loans as you can see we've got 24 of those lenders currently year to date, we've hired seven folks in.
Sounds like Cincinnati in Minneapolis, and Theres, a lot of great great markets that we havent touched yet and we will continue to look for putting great people on the field.
All in all the momentum feels really strong.
And look we don't see in our numbers as it relates to credit or pipelines or anything but we also are cognizant that we're headed into a more uncertain macro environment with interest rates and the economy. So as we prepare for these environments I think it's worth noting that our SBA expertise has an element of counter cyclicality to it in the <unk>.
Past, we've seen conventional lenders tightening their credit boxes, and the SBA product become more prominent in certain markets and oftentimes with enhanced government guarantees. So we think we're ready for whatever whatever comes our way.
So as it relates to people across the bank. We just continue to attract incredible folks here and as BJ said, our primary focus has been on lenders lender support and increasingly in building out our technology team, but it's really across the company.
In a competitive talent market, we're competing not only with banks, but fintech companies private equity firms and lots of others.
We brought on 48 net new folks in the first quarter.
That pace will likely moderate a bit in the back half of the year, but we will continue to take opportunities to bring the best and brightest folks together here and we think it's a real competitive advantage for us in that vein. We brought on someone this quarter to launch our first deposit vertical. So that's in the 10 31 exchange space and we're excited about more to come on that space.
As well so turning to 'twenty five chip went through the rationale of the <unk> sale and unlocking of $120 million of capital allows us the ability to do a few things first and foremost it allows us to keep growing our balance sheet without having to raise dilutive equity, which is pretty unique among high growth banks the <unk>.
Is it allows us to accelerate some of our technology initiatives and redeploy some of the capital into Fintech investing and then the third it allows us to give a little bit of a back as in the past we've shared a portion of special gains whether it's from PPP or green light with our teammates we intend to do that again and we also plan to give a portion of it back to our community to <unk>.
The work, we're doing to help support underserved small businesses and other community efforts.
Turning to technology and products are.
Our small business checking account, which we call title went live recently and we have a little over 300 small business isn't a couple million dollars of deposits pretty early days, but that's with a basic first gen product and basically no marketing, but what we have as a baseline to build off of and the ability to add features at a pace a few banks can.
Match, one important feature is an efficient working capital solution, which our customers consistently ask for and we believe will be important to drive adoption of our overall operating account, we will start rolling that product out in early Q3, along with incremental checking account features.
And you've heard us and a lot of folks in the industry talk about embedded banking, let me spend a minute on what that means to us at a high level all of the work that we've done to build a cloud based API first bank will allow us to create not only unique products and solutions, but also to deliver them in unique locations and we'll do all of that leveraging.
Our deep industry expertise.
In this context, if you look at companies that have been successful like flat or stripe that I've made it really easy for technology first companies to embed financial services solutions data in the case of flat payments in the case of stripe and embed those into product offerings through a simple developer portal with well structured Aps in the small business.
Space there are literally thousands of vertical software companies, many of which we know well through the verticals. We serve at the end of the day embedded banking will provide us with two critical elements. The first is unique distribution channel you can think of each of these software companies as a branch that will allow us to source low cost customer.
Acquisition of the small businesses. The second is increased stickiness of these customers as their financial services embedded in their day to day business.
So aside from embedded banking, we also see a lot of opportunity in what we call platform banking, where we can leverage this technology stack to allow third party Fintech company to build and launch products faster and easier than what their current providers on legacy architecture, we call. It platform banking people have other names for it we've got a small but growing pipeline there and we're excited by.
Opportunities as well.
So we will continue to build and invest in this platform all anchored on the things that core ironically, the gain from <unk> sale of <unk> will allow us to accelerate our development by continuing to hire World class technology talent with this gain were able to invest an incremental $10 million to $15 million per year in technology some of which.
It's already showing up in our first quarter numbers. These investments will be spread across across all aspects of specifically around development cyber data and leadership.
The major areas of this technology investments for US include customer acquisition, we already see the benefits of having easy account opening where we've opened over 10000 small business savings and CD accounts and the growth in those balances as over 70% in the last year.
Customer experience is another critical area, where the challenger banks have truly excelled and it's critical for us both authentically and defensively to be best in class.
And as we fully get on boarded onto this new technology system, there are meaningful opportunities for us to improve efficiency, specifically around data quality data entry and finally, we're always thinking about disruption.
We think we're still in the early stages of some tectonic shifts that are set to occur in the way small businesses bank, the ease with which they open accounts they access capital they move money and they receive actionable information, where they choose to bank, namely within the software they use to run their business. So.
So we think of this as effectively building a challenger bank for small businesses within live Oak bank, leveraging our deep domain expertise our incredible teammates and this next generation platform.
And while this investment has taken longer than we expected to deliver we're still equally as excited for what's to come in the back half of this year and beyond.
I think we've proven to be reasonably good stewards of capital as it relates to technology investments over time from Encino aperture fins Act and we view this the same way.
So if you turn to page 27, you look at our investment strategy. We continue to have two main areas of focus for our external investing one live oak ventures, which is our direct investing arm will continue to support the existing invested investments in our portfolio, we will augment that with investments in banking infrastructure similar to what we've done in the past like <unk>.
<unk>.
Companies, where there's a strategic overlay like these vertical software companies that support small business and then third we'll also look to incubate businesses internally.
In Q1, we made one incremental investment in that middle category in the partnership space and we have more in the pipeline.
The other area, we continue to be accurate and canopy, where we plan to invest $20 million into the second fund. That's currently being raised the first one is made 18 investments and some fantastic fintech companies, many of which were using or evaluating for use in our technology stack today.
Sure.
So turning to page 28, and wrap this up a little bit regardless of the economic environment. We have the same core components of our strategy great people that understand and truly want to serve small businesses technology platform purpose built for them and.
And on the technology front, we are willing to admit that we're playing the long game and that at times is in favor and at times less in favor with investors, but in the near term we have a rock solid balance sheet, our small business lending franchise that second to none the best team on the planet and it allows us to simultaneously grow our core business and drive profitability there.
And also invest for the future.
We have an enormous sense of urgency to do all of this and confidence we're on the right track so with that why don't we turn it over for questions.
Thank you, ladies and gentlemen, we will now come back a question and answer session.
Well I think I'd like to remind everyone to ask a question. Please press star one so we draw a question press the pound key.
Clinton is coming from Steven Alexopoulos of JP Morgan. Your line is open go ahead.
Hey, good morning, everyone.
Let's see.
P. J I wanted to first follow up on the commentary to moderate loan sales in the second quarter is this only the second quarter, where you plan to moderate sales and maybe how should we think about the level of gain on sale revenue for <unk> and then for the full year.
Yes so.
Steve is.
I said during my commentary.
Particularly on the fixed rate.
Product.
If you if you think about what what's going on there and how we price those loans that then go into the secondary market. They are largely based on a prime plus.
Type rate quote.
So.
Prime Hasnt moved up.
As substantially as we know it's going to but the funding markets have clearly anticipated that and so spreads on that product and.
And yields on that product relative to.
Have been compressed so.
Was that gain on sale premiums, particularly around fixed rate products.
Are under quite a bit of pressure until the market moves through.
The rematch if you will of.
The appropriate spreads between yields and funding costs. So what we'll do is we'll continue to look at the mix of what we want to sell variable versus <unk>.
Fixed rate.
And respond accordingly, particularly in the second quarter, yes.
Yes, we do plan to moderate the sales force.
For two reasons one is the one I just said, let the market settle a little little bit because gain on sale premiums have compressed.
A bit more than what we think they will ultimately settle out, but then secondarily because we anticipated the fins that gain.
Which flows through noninterest income, we didn't feel the need to be selling into an environment that wasn't favorable to us. So it will moderate the second quarter and then we'll evaluate third and fourth as we see what the market is shaping up to date.
Okay.
So I would take you choose not to give us a range, where you think gain on sale revenue could move to.
Now that would be correct, yes that would be correct.
We'll see where the markets are in the second quarter and then.
And we'll go from there okay.
Is this implying more on balance sheet loan growth I mean should we be gain on sale margins going down if we think about.
Year over year, roughly 30% growth in the origination should we be dialing up the loan growth expectations for this year.
Yes, I think we start with what our outlook is for production right, which we still feel.
Very strong about so again first quarter.
Was very strong record quarter relative to other Q1 s. Our pipelines are very very strong.
Not quite at records that we saw.
At the second half of last year, but pretty close and so we're very encouraged by that so our production outlook still looks pretty strong and to your point, if we're not selling through to the secondary markets. We do maintain.
More balance sheet, which will.
Obviously generate more carry income.
Over time, so yes, I mean, it's kind of nice to have the flexibility that we do with the balance sheet plus.
A very liquid liquid secondary market to <unk>.
Manage both gain on sale income and interest rate risk.
We do still feel pretty good about originations at this point okay.
Good enough that I think the prior expectation was about $4 billion for 2022 is that still intact B J.
Yes, I think we will still feel pretty good about that okay.
Okay.
And then finally its interesting what your stock.
I think you are more than double that my typical bank in terms of short interest in that thesis has been gain on sale margins are going to collapse as rates rise and the NIM will shrink as rates rise and I think you are telling us that yes gain on sale margins are going to shrink a lot in the second quarter, maybe could we at least level set on net interest margin right.
<unk> starting point, but assuming the fed does go maybe 50 basis points per meeting can you walk us through where that would take net interest margin too. Thanks.
Say that last piece again, Steve if he could.
So if the if the forward curve plays out and let's just say, we got 50 basis points at each of the May and June meetings.
Where should we expect net interest margin to move to.
Yeah, So I'll start with what I think I said last quarter on the call win.
We thought maybe three rate increases were on the horizon for this year.
And we thought at that point that we that our net interest margin would float down more towards.
Where we're seeing our core margin at that point, which was the $3 75 to 380 range I think with.
Faster rate increases and more rate increases I think funding costs go up more quickly than.
Loan yields reprice and so there is more pressure on that in the near term.
So if rates rise faster I think we are below that $3 75 range above $3 50.
But below the $3 75 range and then once rates start to settle out we start to see more yield.
And spreads kind of normalize then we should start to see a steady.
Increase from there.
And then I'm sorry to monopolize the call. This will be my last question.
And this might be a dumb question, but I'm going to ask it anyway. So if you look at the industry more broad the asset sensitive banks, whether it be as ions Comerica Keycorp Huntington.
All increasing their use of swaps to pull some of the benefit forward right. So doing receive fixed swaps to reduce their level of asset sensitivity why can't you guys beyond the other side of that exact trade increasing your asset sensitivity.
Yes, we're looking at we're looking at different things to to do that.
Obviously it depends on how quickly you think rates are going to rise.
But yes, we're looking at different options too.
To be able to capture some of that.
Okay. Thanks for taking my questions.
Thanks, Steve.
And our next question is with Crispin Love.
Sandler. Please go ahead.
Thank you good morning, So last quarter and also this quarter you talked about investing back into the business and increasing head count and I'm. Just curious have you had any recent issues with recruiting new employees retaining employees and then just the impact of having to pay up for employees based on companies.
Comments it didn't really seem like you had too much trouble, adding but just would appreciate if there if you have any more color there or any more detail.
Yes, hi, good morning, everyone does this we're not though Derek.
We are actually seeing the opposite of what people would typically expect.
Every single position, we're opening in the technology space has a range of 60 to 90 people offline.
Six zero to nine zero driven by.
How modern our architecture is.
The fashion that people have for velocity unless bureaucracy and also by the.
Great culture the <unk>.
Organization brings in the new leaders that we brought into the organization.
So we're actually seeing the opposite.
FX and our organization continues to grow and we have a <unk>.
A very large talented pool of folks that are really interested in LIBOR too.
Leverage.
No matter, how many folks have you hired so when did you join exactly yes.
Joined.
June 2nd week of June .
This year, we hired.
30, approximately 30.
Engineers leaders in data technology cyber across our organization.
I think a similar trend across the lending side of the franchise to we've got a lot of momentum of people that want to be a part of the platform the culture.
Look we pay competitively and we will have to do that and that's the fact that everybody is dealing with will continue to be competitive, but we're seeing great great folks across the franchise right now.
Sure.
Alright, thank you.
All helpful color.
I heard your color on overall production, but I'm, just looking to get a little bit more detail on SBA SBA originations were down sequentially in the quarter I think that's likely due to some seasonal aspects that they were up year on year.
But.
Curious what your SBA origination expectations are for 'twenty, two at least qualitatively.
<unk> had a really strong 2021, but would you expect a pullback in SBA in 2022 as there were some tailwind in 'twenty two that helped 21 production or just how are you thinking about that.
I'll start currently or are you starting out and then I'll close look I think there's a couple of things I think.
From a we definitely had a tailwind last year in terms of the SBA enhancements and those those aren't around so got that I think we also look as rates rise that does affect the eligible market for some deals that don't cash flow as well in a higher rate environment until prices of acquisitions.
Settle out so again, you could say, there's a couple of headwinds at the same time.
We continue to see just having like BJ said, our pipelines are at or near records, we're bringing on people will bring on a general lender in a market, whose got a 20 year experience and that person will do $40 million of SBA lending for us in a 12 month year and you think.
About their ability to do that we put seven people on the field. So far this year and our ability to do that we add a couple more verticals.
It feels like we've got a lot of a lot of wins still at our backs to offset that.
The macro trends.
The expansion in certain areas and business acquisition continues to be really strong.
And we just continue to try to get faster and better on what we do and I think we're we feel really good about where we are.
The only thing I would add to that.
Question would be you have to bifurcate that which sensibly hardly touched all you have the theory of <unk> and 33 verticals and people and your business have typically asked us what is the organic growth per vertical doesn't work that way right.
You just can't map that it's up one year, it's down one year.
That said on the other side and the general side is completely different.
That's where the growth is going to come 100% of the SBA lenders in this country have heard of love of Mac and we are actively attacking probably at least 50 markets. We're in 20, some odd markets today.
Would be shocked if we didn't have well over 100 lenders in a meaningful short period of time from the 24, what it was on that earlier slide. So we are becoming the platform of choice for these very experienced not only soundness profitability and growth and debt service coverage ratio and like you do in analog.
During a normal credit, but also in understanding how to architect the deal in loans with the SBA guidelines.
Alright. Thank you thanks for taking my questions and for all the color.
Thanks.
Our next question is from Michael Perito of Keyw. Please go ahead.
Hey, everyone. Good morning, Mike.
Mike.
I wanted to drill down on the.
The operating expense line for a second here. So you guys were at just over $65 million in the first quarter.
You mentioned, the $10 million to $15 million of annual kind of investment criteria.
Ian.
Which some of which was in that run rate. So I mean is it reasonable to add maybe another million or two to that run rate for that.
The.
Accelerated tech investment and then grow that kind of low double digits moving forward as you guys continue to hire and grow or would you frame it differently.
Sure.
Yes.
I'll start and Huntley can give a little bit more color, but.
Two things one is last last quarter, we did.
Talk about what we thought expenses would grow at and so.
I kind of said the fourth quarter was kind of a good jumping off point.
We had fourth quarter.
20% of fourth quarter 'twenty, one I think it was growth of.
25 ish percent in salary and benefits.
<unk>.
And.
So I think that Thats, probably still a good pace for us at this point.
It may be a little bit heavier because we're leaning into.
Technology investment because of the things that gain.
So.
I think that that's still a good number all the other operating expenses generally growing with inflation.
But really the bulk of our expense growth is going to be on the salary.
And benefit side I think the other way to look at this as well and huntley might might give a little bit more color on this.
$10 million to $15 million.
In incremental annual run rate for technology investment that is going to have what we believe large pay off in the future also means that.
The core expense line is much lower it's $10 million to $15 million lower so if we were simply just running a company for the short term.
We have far less expenses.
Relative to the revenue that we're generating.
Which obviously would be nice short term, but we're building something for the long term and so this investment we think is absolutely.
Right.
Yes.
Understood.
Helpful. Thank you so.
And then secondly, you know really appreciate all of.
Your comments around platform banking embedded banking business checking and all these initiatives you guys have going on which seem to be on track I guess the question is.
When you guys talk about some of the benefits of these initiatives.
It would seem to me that that one financial benefit over time would be the ability to have lower deposit betas and lower funding costs relative to what you historically have performed at an I guess.
The question is is that more of a.
Next cycle benefit at this point, though or do you think some of these initiatives as they launch over the course of this year could grow fast enough, where you could see some benefits to the deposit equation.
Towards the middle to latter half of this tightening cycle.
Okay.
Yes, Mike Good question, and obviously as rates start to go up the value equation gets it gets larger and more attractive for lowering deposit costs, we've talked for a while about our funding costs and a zero interest rate environment was about as good as antibodies.
And now we have the ability to capture some real value.
I think that what we're doing here in the back half of the year is going to set us up really nicely and I think that we will see benefit next year.
Our cost of funds and in our balances we are working every day towards it and.
It's a little bit of a race against the clock here, but but we feel really good about already are and I do think that in this cycle, we're going to see some impact on our balance sheet. Michael just two things I thought you had a good point a minute ago about embedded banking branch.
So if you think about the bank of America, where market used to work you're sitting across the table at 5000 branches took a 100 years to build 5000 branches.
So we're not out when you think about the architecture that you have created here and do you think about <unk> earlier comment about plaid and stripe and how fast those companies grew and a developer friendly environment, maybe take a minute and explain to Michael Perito, what you've built from an architectural.
Standpoint, and the speed with which it might answer his question.
Yes, absolutely Hunter you mentioned briefly about the developer portal and hallmark basically structuring our Apis. So that it's really easy for third parties to integrate more effectively wafers. Our goal is still.
To allow engineers and Chief Technology Officer from these organizations that we're partnering with to be able to understand how to connect with us.
And leverage our services within a period of 30 minutes.
The quality of the technology architecture that we're putting in place. So we can lead the two.
Credible amount of growth at no incremental acquisition costs for the organization.
Great. Thank you guys for all the color there and then just.
Lastly, and I'll hop back in the queue, but just on the platform banking can you guys give us a sense.
<unk>.
What that pipeline looks like are we looking at.
No.
Good tax that are more likely to be like in your venture investment arm like early mid stage or are you guys looking at more larger companies.
<unk> syntax that are looking to offer services or just how do you guys think about that pipeline and the <unk>.
Types of opportunities with Ed Thanks for taking all my questions.
I'll start with this one.
There is.
At least one company that's anr vent.
Ventures investing right now that we're that we're looking at I think what we started as a framework is are there ways that we can help small businesses out and are there fintech companies that serve small businesses and that's a natural extension of what of what we do so there is a body of fin techs out there clearly that are serving that.
At our serving small businesses and one way or another and can we help partner and leverage that that's not exclusively the case I think we've been less apt to go after the largest.
Fintech companies in that realm to date and really focus on where maybe we can have a bit more of a strategic relationship but also drive the economics, either on a per unit basis or by generating low cost funds et cetera.
Thank you.
Okay.
And our next question is from Jennifer Denver of tourists Securities. Please go ahead.
Thank you good morning.
Jennifer.
I Wonder if you could give it give us.
Some more color on where exactly you are with the embedded banking.
And the plans for the second half of the year rollout, where you or does it still.
Is that product still going to be for that.
Yes, we're basically.
In the process of building our.
Critical foundation in this quarter.
It has to do with the.
Safe and secure way of exchanging communications the depth the developer portal that I was just describing.
Starting in Q3, we're going to basically be putting specific services and our new oral and.
Establishing the initial partnerships with the companies.
Companies that Huntley was describing.
And Jennifer to your point, the first couple of partnerships and company that they're spending a lot of time with our in our traditional vertical so veterinarian healthcare still the place theres, some others as well, but it will be consistent with I think what you've heard before in terms of those.
Those early pilots and partnerships.
When you move on to other industry verticals after yours.
Does that product rolled out.
First of all the developments how much faster do you think the development.
Subsequent vehicles.
It can take less than a week for us more of a new partner in the new with the new technology foundations that were created.
Okay.
Okay.
Quick question most of my questions have been asked.
Just curious your asset quality bid.
Terrific.
What do you see as the most vulnerable loan buckets as rates go up.
Steve Smith less hiring.
And your purpose Jennifer. Thank you this is Steve Smits.
Yes.
First of all my comment is have pretty good confidence in the health of our portfolio today also really good confidence.
And what it looks is going to look like going forward because as we know.
Our customers very very well so we've always been best in class in servicing will continue to do so if anything we've got an even sharper throughout the past two years. So we feel like we have a good.
I would say.
Less about.
Specific verticals, because we really don't see right now any systemic trends to a specific vertical more about themes that we watch very closely labor market of course.
So we every vertical to some degree has some challenges around the labor market that.
That we need to understand so we're very specific about understanding that with each of our customers.
And then of course inflation in fuel. So we have small exposure to businesses that have a heavy reliance on fleet for example, but certainly a few customers that we look at very closely and how they are navigating how sensitive is there pricing.
To their end customers if they can keep up with the inflation pressures I would say those are the pressures that we look very closely at.
However, I will say, we feel even with the labor market, while they're all experiencing some degree of stress I feel really good that theyre navigating quite well and I don't have really huge concerned that they're not doing the right things that we're going to be in good shape there.
I would just add to that Jennifer a maintenance last from me right.
You think about and we were much smaller company in the last recession. It was wonderful for US typically in a year will go to 450 Tradeshows.
We do have a recession and the credit guys are running the bank, we will continue to stay the course.
Yes, an SBA lender theoretically as a lender of last resort and yes somehow our charge offs have been 110th of every SBA lender in the country over the last 13 years.
Knowing and understanding the industry and staying in the business when the credit guys running the bank and the sales guys are sitting at home.
Throw us in that Briar patch, we're ready.
Great. Thanks, a lot.
Thanks, Jennifer.
Alright, there are no more further questions on the queue. So at this point I would like to turn over the call to chip Mahan for some closing remarks.
As always my closing remarks sure. Thanks for attending today, and we will see you next quarter.
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Yes.
Yes.
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