Q2 2023 Live Oak Bancshares Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the live Oak Bancshares Q2 earnings Conference call.
At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
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This call is being recorded today Wednesday July 26 2023.
I would now like to turn the conference over to Greg Stewart, Chief Risk Officer, and General Counsel. Please go ahead.
Thank you and good morning, everyone welcome to <unk> second quarter of 2023 earnings Conference call. We are webcasting library.
This call is being recorded to access the call over the Internet and review the presentation materials that we will reference on the call. Please visit our website at Investor bilateral bank Dot com.
Go to the events and presentations tab of the supporting materials are.
Our second quarter earnings release is also available on our website.
Before we get started I would like to caution you that we may make forward looking statements during today's call that are subject.
The 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.
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 measures referenced.
Including reconciliation of those measures to GAAP measures can also be found in our SEC filings and in the presentation materials.
I will now turn the call over to chip Mahan, our chairman and Chief Executive Officer.
Good morning, and thanks, Gregg turning to page three we were pleased to show significant improvements over the last two quarters.
Core revenues were up expenses were down charge offs were low credit quality remains solid notwithstanding a bump in non accruals regressing us to our historic norm.
And Huntley will unpack the details in just a minute.
I'd like to pause here at mid year and reflect on what has happened so far this year and where our industry is headed.
Did you know 9000 banks failed in this country between $19 30 at $19 34.
Moving to slide four.
We see the history of FDIC insurance, providing stability to our industry.
No more Jimmy Stewart's, it's a wonderful life runs on the bags.
That was until March eight.
But Twitter led Ron on SBB took place minutes after they announced a $1 8 billion capital raise exposing their mark to market losses in our bond portfolio.
$43 billion went out the door on March night, and it was over.
<unk> never had news travels fast never was a bank able to handle $43 billion worth of withdrawals in a matter of hours.
<unk> Tec has changed we are getting more efficient daily.
We will continue to fuel that fire.
So.
Liquidity range.
<unk> are up 500 basis points, but what about the customer.
I have been waiting for this moment for 28 years. It was 28 years ago, we put the first bank on the Internet.
Can you remember or much less imagine a 20 8-K telephone modem at $19 95.
I thought Dan is I think now while the need for these expensive branches.
Let's see.
Take a look at arguably the number one brand in banking.
This quarter the bank of America released some data publishing a slide on their consumer bank.
The rate paid on all consumer deposits was 22 bps the cost to gather those deposits was 137 bps through almost 4000 branches and an untold number of tellers and CSR.
On the self service side, they have 37 million mobile users.
Bofa is a $2 five trillion institution, whose deposit beta since 12 31, 'twenty one was 35%.
Why do you anointed analysts on this call applaud low deposit betas.
Are we not as an industry sellable celebrating screwing the customer.
Our savings related live Oak Bank has been 4% forever for both consumers and small businesses with live Oak simple online account opening technology, Rfps 37 million mobile users vulnerable.
You mentioned bank of America, only as a proxy for our entire industry in general.
Quick question.
If someone had just $10000 to their name in a money market or savings account is not $400 meaningful to them.
The fat underbelly of our industry is exposed.
Expensive branch deposit gathering model is broken.
Just a word on self service and full service.
My wife works out with a bunch of ladies trained by wonderful professional he saw a billboard or Wilmington, with our 4% savings rate and opened a savings account.
He was astounded when he had a question.
And someone answered the phone that our bank he called US back each of the next two days to test. This well you answered the phone and 11 seconds each day.
Got to do both.
I like our model.
For 15 years, we've been the best small business lending Bank in America by treating every customer as if they were our only customer.
We are marching to the deposit side at precisely the right moment in time, our competition cannot reprice their entire book of savings and money market accounts, we shall nip at their edge as their customers feel less appreciated.
The combination of our next generation cloud Native API technology will allow us to create new products and build a bespoke community bank for each industry we serve.
Our industry remains woefully stuck in the mud supporting and maintaining billions of lines of agent code that they call technical debt.
Moving to slide five just a word on credit.
I call. This our seasonal slab historically that is pre seasonal a bank would build a proper reserve.
And usually that quarter's provision was about equal to total charge offs not so these days the complexity of building a model to predict lifetime losses in a bank that is growing the way we have is substantial.
Here's a fun fact that of last Friday, 76 banks have reported and their collective loan loss reserve to total loans jumped two basis points from 1% to 1% to one 3%, while we increased our reserves from 183 to $2 43 to $2 46, or <unk> 63 bps.
As you can see from slide six our provision over the last three and a half years has been four times our charge offs incurred.
Soundness.
<unk> ability.
Growth in that order.
One last word on production.
We were not disappointed with our production numbers this quarter, even though we were a little over $100 million less than last quarter.
Huntley and VJ do such a wonderful job running the bank day to day I get the expense extraordinary amount of time on the road visiting customers and prospects.
We are getting better looks at the basket high call it higher quality larger loans are coming our way as the competition seems to be much more discerning focusing more on existing customers and much less processed prospecting for new clients.
And our government guaranteed lending business. It appears that the silver tsunami or those baby boomers that are of age to sell have seen prices come down as interest rates have risen some.
Some deals just do not pencil the way they did a year and a half ago.
P J over to you.
Excellent. Thanks chip, that's a great setup good morning, everybody.
It's great to.
Talk to you this morning, let's start.
On slide eight with a high level earnings summary for Q2.
While weathering the banking earthquake in the first quarter as chip talked about repositioned ourselves to not only survive the after shocks that we.
So all coming and no are coming but to thrive. The key commitments. We made about what we would do in the second quarter, such as strong deposit growth and liquidity net interest margin performance continued loan growth stable credit quality and moderating expenses were all exceeded.
While we can't predict with certainly what the economic outlook may bring the actions we took in the first quarter our performance in the second quarter and the ongoing strength of our business model that set us on a strong path towards continued consistent earnings and customer growth over the next several quarters.
Some numbers to it in Q2, we earned 39 cents of EPS driven by a strong 41% improvement in <unk>, both revenue growth and expense reduction.
As well as continued strong credit quality, resulting in lower provision versus the first quarter.
As chip mentioned loan production was still healthy at $860 million, but down from Q1 as activity was steady, but we had some loan closings moved past the end of the quarter pipelines have grown steadily throughout the.
The quarter, which is encouraging for the second half of the year.
<unk> were up nicely as well our customer deposit growth was up almost 7% in the quarter with fantastic business deposit inflows of 22% on a linked quarter basis.
On our last earnings call in April I shared our expectations for our net interest margin and I'm really pleased to say that while our forecast in April for the second quarter NIM was a decline into the $3 20 to 325 range with risk of further compression if we held excess liquidity, we actually ended.
The quarter with a $3 29 NIM.
Even with about 12 basis points of drag from that excess liquidity.
I'll get into a bit more detail on the reasons for our NIM Brazilian resiliency in a few minutes and the positive net interest income growth expectations for the second half of the year. The insured is due to the excellent efforts of our lenders along with our deposit and treasury teams to remain both competitive with our.
<unk> offerings and disciplined on our pricing.
<unk> income was improved linked quarter with relatively steady gain on sale premiums expenses declined quarter over quarter, and we expect continued discipline here throughout the rest of year and provision declined as expected with only $1 million of net charge offs and continued reserve build for both growth.
And to maintain sound portfolio management.
Turning to slide 10 loan production in the quarter was again diverse across multiple areas with particular strength in our middle market sponsor finance vertical.
Our solar business and our general lending small business verticals.
As others pull back on lending, we expect to see good opportunities for new business going forward and we look forward to capturing those opportunities.
Let's turn now to our net interest income and margin trends on slide 11.
I mentioned earlier, while our Q2 NIM outlook three months ago was the decline.
Does the $3 20 to $3 25 range with risk of further compression with excess liquidity. We ended at $3 29, even with that 12 basis points drag we expected to see downward pressure on the NIM in the first half of the year because of the accelerated deposit repricing from the feds rate increase cycle.
And that would be expected to be more rapid than the loan repricing within the back half of the year as our loan repricing flowed through the balance sheet and the fed near the end of this rate increase cycle, we would expect NIM expansion.
All of those things are still true, but we were able to both grow deposits and hold our savings rate flat since March.
Our already strong rate offering while loan repricing tailwind continued and our lenders remains very disciplined with new production yields which should help with NIM expansion and net interest income improvement in the back half of the year.
A few highlights to point out.
First on the deposit side, you see that we again provided information on both live oak.
And the top digital competitors as it relates to deposit pricing and betas, along with the national savings rate and ending fed funds upper right for reference as.
As we discussed on the last earnings call when the industry crisis hit in mid March we saw customer outflows, we decided to move proactively and aggressively to reverse the trends we were seeing <unk> savings rate up a full 50 basis points to move modestly ahead of top digital competitors and as you can see it.
Worked quite well to put us back on a positive customer deposit growth path and even though the fed moved another 25 basis points in the quarter, we were already in a highly competitive position to attract customer deposits, particularly on the business side.
First we were able to show outstanding deposit growth, while holding flat on savings rates the entire quarter.
And our through the cycle beta 70% is exactly what we've communicated all along as our expectation.
Now, let's take a look at the loans that are loan yields have been moving up nicely as you can see in the table, but we hadn't been moving nearly as rapidly as the deposit beta as we just discussed but two points. We made on loan yields last quarter continue to hold true.
Loan production yields are currently being booked at rates of 175 basis points higher than the portfolio rates.
The $9, one 2% on new loan production yields in the upper right of the slide versus the 737% on portfolio loan yields in the upper right at the table.
And secondly, the majority of our variable rate loans are quarterly not monthly adjusting that means that unlike deposit rate changes, which happened intra quarter, we don't see intra quarter increases in loan yields.
Move up the full change in the prime rate over the prior quarter on the first day of the following quarter.
So as of July one our quarterly adjusting loans saw another 25 basis points increase in rates and about 46% of our total loan portfolio now is variable rate and almost 90% of our current production is variable rate.
Therefore, as our newer loans replace older loans over time, our portfolio yields will continue to rise supporting stabilization that improvement in our net spread.
Whats all this mean for the NIM same.
Same as what we believed a quarter ago. This should be the bottom for our NIM and we should see some margin expansion in the second half of the year.
This remains an uncertain environment. So let me be very clear and transparent with our current assumptions here.
First the fed we believe moves 25 basis points. This afternoon that pauses for the rest of the year.
Deposit betas move in the 70% range for that increase.
Deposit growth for US continues on pace with the above beta assumptions and at levels that support our loan growth.
Healthy loan growth continues on pace with current pricing.
And no further major industry disruption related to deposits or liquidity.
Now remember that if we do decide to hold more on balance sheet liquidity. It may have an impact on the NIM, but will have minimal impact on net interest income.
So to recap, we had better than expected NIM, Brazil resiliency in Q2.
And we expect NIM and net interest income improvement in the back half of the year as deposit costs moderate loan yields continue to improve and earning assets continue to grow.
Turning to slide 12, let's take a quick look at noninterest income trends as I mentioned before we had been seeing improvement in secondary market conditions with premiums and valuations before the mid March events.
Being steady to improving and we were hopeful that premiums would hold at least steady after mid March <unk>.
Our SBA sales activity increased in the second quarter and the gain on sale premiums did in fact remained fairly steady.
The majority of what we sold was variable rate, we did see some fixed rate SBA sales activity, which was again encouraging.
And as you know our servicing asset revaluation and fair value Mark on our held for sale loan portfolio, our mark to market assets and valuations are based on spot rates at the end of the quarter. While there will be continued variability as these assets are valued quarterly we saw much lower volatility versus Q1.
As we expected.
Just to hit a few more highlights on deposit trends on slide 13, Youll see our deposit growth even through the events of in March were very strong relative to the industry as discussed our repricing has been exactly where we expected it to be given the rapid rate increases. So we have not had to pay up for the excellent.
Positive growth that we've experienced this quarter.
On slide 14, Youll see our key liquidity trends, which have been and continue to be very strong relative to the industry.
Turning to expenses on slide 15.
We're doing just as we said we would do.
We are moderating our expense growth, while continuing to grow revenues.
Going forward.
We will always be opportunistic with hiring revenue producers, we are tightly managing our expense growth and we are confident in our ability to consistently improve.
<unk> and our efficiency ratio over the next several quarters.
Our expenses are down linked quarter and as you can see we have held salary and employee levels steady for the past couple of quarters, even while continuing to invest in that next generation technology as evidenced by the continued increase in tech related expense versus our total expenses and we expect these trends to continue.
Turning to credit trends on slide 16, as chip discussed earlier credit metrics remained strong we continue to actively monitor the existing portfolio and do not currently see any glaring weak spots.
First dues are low and non accruals remained quite manageable as well you can see that the credit quality trends across our three business segments are quite strong as well.
As expected in the current environment, we've moved more loans to non accrual status during the quarter, but on the bottom left of this slide you see a five year trend of our non accruals.
So while Q2 of 2022 was an abnormally low quarter for non accruals you can see that this quarter as non accruals to total loans of 109 basis points are consistent with the past several years.
We only had a total of $1 million of net charge offs in the quarter across $8 billion plus loan portfolio very very strong performance and as expected the provision declined even as our coverage increased AR reserves on guaranteed loans remained well above the industry as <unk>.
You can see.
Slide 17 shows our overall capital strength, which continues to give us great comfort.
We are well positioned to thrive in whatever environment lies ahead and continue providing growth capital to our small business customers.
So with that.
Huntley, we'd like to wrap up with a few thoughts on our priorities for the second half of the year.
Thanks P. J just a few thoughts on my end kind of on page 18, and then we'll get to Q&A now through a turbulent first half of the year, we really continue to demonstrate our resiliency the balance sheet remains solid chip and BJ talked about it liquidity credit and capital.
So check the soundness box as the banking industry tightened standards on lending and preserves capital, we're continuing to find opportunities to provide that capital to small businesses.
And our teammates continue to go above and beyond in serving those small businesses and preparing us for the future on the earnings front and BJ did a nice job talking about the solid results. This quarter and we really believe we're setting a new baseline for performance in the future with confidence in our margin secondary markets and our focus on expense control that will.
Generate operating leverage so profitability.
As for growth.
Pipelines do remain healthy despite rumors to the contrary across America small businesses continue to thrive and we continue to help them grow.
And as chip referenced we are really excited to announce that our full service checking accounted lives. That's been well received by our small business customers and it allows us to transition to becoming a full service small business bank.
At the same time, we continue to invest in our future.
We've upgraded our small business loan origination platform, which will allow us to better serve these customers and improve efficiency. We continue to build out embedded banking solutions to help the software that powers small businesses provide banking services.
And while Theres a lot of chatter in that space lately, we're really excited that our straight through API powered solution avoids a lot of the obstruction layers in the <unk> accounts and the complexity that has caused some challenges in the industry to date.
And all of this is part of a multi year journey to a modern digital technology that will provide us with real sustainable competitive advantages as chip laid out it is in trial, but we're not holding out for the yen state along the way we will seek to deliver value in the lighter show our customers and our shareholders. The art for us is being able to achieve that future state while <unk>.
Continuing to deliver value for our small business customers everyday and strong financial results for you our investors so with that let's go to questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
I would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number two and.
And if you are using a speaker phone. Please lift your handset before pressing any case one moment. Please for your first question.
Your first question will come from Christian loss at Piper Sandler. Please go ahead.
Thanks, and good morning, everyone first BJ, just putting some numbers around what you said earlier on the NIM I think last quarter, you said in the second half of the year that the margin could increase to the lower end to the midpoint of the prior three five to $3 seven 5% range. So just firstly.
I want to make sure that that still stands and then if you have any comments on the cadence of what you might expect the NIM to do in the back half of the year.
Yes, I think.
Chris.
I said earlier, a lot of that will be.
Dependent I think on how much excess liquidity that we.
That we carry.
We were obviously very pleased that we could see.
<unk> 12 basis points.
NIM contraction with excess liquidity this quarter and yet still be above what we discussed with you all last quarter and so.
I expect the net interest margin and more importantly, the net interest income to improve in the second half of this year, assuming that the fed moves today.
That creates a little bit more of a back ended newness to that improvement if you will because of the nature of our quarterly adjusting.
Variable rate loans, but by and large we believe that we're still on that type of trajectory by the end of the year.
Great P J.
That's helpful. And then chip you mentioned earlier in your remarks, just being on the road with customers. So I'm just curious from where you sit can you provide an update on how you're seeing the health of small businesses currently their demand for loans and if there's been any major changes versus recent quarters.
Well I'll give you two quick examples so last Thursday with the California.
With our account officer in the Aesop Division so to speak.
And met with two gentlemen that started in HVAC business 20 years ago, when they were 23.
They tried to get an SBA loan couldnt.
After six months the bank couldnt fill out the paperwork they put up $2000.
Started their own business.
It's an $80 million revenue business, dropping 8 million to the bottom line and we're going to do an eight plus figure.
Aesop onto them.
The headline there is.
It's awfully difficult for them to find help.
The you know that in HVA C.
<unk> experienced person with 10 Years' experience makes $100 an hour.
Yesterday went to Minneapolis.
And spent a better part of a day with a roll up private equity group out in New York and asphalt company.
Asphalt business is kind of interesting in Minneapolis, So six months of the year, you don't work and six months of the year you do work.
And in asphalt person makes a $160000 a year.
Same thing really hard to find talent.
And that usually happens for me at least a day or two week.
And.
These both of those businesses are thriving margins are up way beyond their expectations. If they can just find people I don't know that I actually answered your question, but I could go on at all.
No I think thats helpful Chip I appreciate the color and Thats all from me.
Thanks Kristen.
Your next question comes from Steven Alexopoulos at Jpmorgan. Please go ahead.
Hey, good morning, everyone.
Steve.
I wanted to start on credit.
The increase in the UN guaranteed Npls could you just give us more color or you call. It. The two credits what are the size of each credit industry anything systemic.
More color there to start.
Steve Smits, our chief credit officers at some point, yes, Steve how are you doing this is Steve smits.
Two credits the first one is in our senior housing portfolio to memory care.
Facility It is collateralized.
Project level challenges, while theyre seeing.
Good.
Occupancy they are struggling with cash flow, which put them behind on payments.
I will add that we did reserve given the uncertainties with commercial real estate valuations. We did put a reserve so we're protected on that side.
Talk to the team they are very confident that we're going to be able to trade out.
Somebody will have an interest in buying this real estate. So I am cautiously optimistic that we will most likely not see a loss on that credit.
Second one is we are actually a participant and another lenders credit facility.
It appears that our borrower had fraud perpetrated against them from our primary supplier. This all came to fruition in the final days of the quarter. We had to act real quickly. So we placed it on non accrual we put a pretty healthy reserve against it.
Due to the uncertainty of fraud, I would say way too early.
To conclude how thats going to play out it was a collateralized loan however with fraud.
You never really know so thats going to.
That's going to have to play itself out before I have a feel for whether we will see any losses associated with that credit.
As I pointed out.
Bose, we put healthy reserves against them, so I feel that we.
Did the prudent prudent.
I'll also point out Steve that.
If you pull these out we actually our non performers would have been flat, which I think is how I look at the portfolio as a whole, we're just seeing very much stable and consistent.
But just a couple of outliers here.
Don't see anything systemic we continue to watch loans that were originated at the top of the market specifically in change of ownership since 2019 or early 2020 originations just to make sure. These new owners continue to be able to weather.
Additional challenges associated with the last couple of years that we went through but overall I feel pretty good that the portfolio is very stable.
Okay, that's very helpful color.
Peter I had a question for you on the NIM outlook, you mentioned excess liquidity, a few times sort of putting that aside as a variable around NIM, but.
Getting into the range of $3 $53 75 range do you need to draw down that excess liquidity to get into that range or could you get there. If you maintain this liquidity through the rest of the year.
Obviously, it would be more helpful to get there.
If we drew down excess liquidity.
But we have we have more than a reasonable chance to.
Strategy in that that type of level, even if we're carrying excess liquidity, but it all depends on.
How.
How competitive deposit rates get after this next move and if the fed actually stands flat and we start to we start to see some moderation so.
I think the point that I want to make sure. We get across is we talked last quarter I talked a little bit this quarter that we would see a V shape to our NIM right that our NIM would compress into the second quarter, but then start to improve in the back half of the year that dynamic is.
Feel intact and so whether it's.
No.
Up to a $3 50 level or just.
10, 15, 2025 basis points, either way its margin expansion and I think thats what were what were hopeful well see.
Got it okay.
On the deposit side I'm looking at slide 11.
You guys didn't change your savings rates in the quarter CD rates are up a bit but the rate has slowed but you had very strong deposit growth could you give us a sense, what's driving such strong deposit growth without needing to lean on rate and do you think I would think your deposits are up somewhere around 20% year over year do you think we finished the year now in that range.
Yes, I mean, it's.
<unk>.
We have quite a strong brand on both consumer savings and the.
Small business savings.
And we offer the same rate to both the dynamics.
Our competition are a little bit different in each.
And I think we're a little bit.
More at the top of the market with the business savings side and that aligns with who we are as a.
America's small business bank, obviously, and so I think the combination of us being towards the top already combined with our brand reputation and small business and our marketing efforts have all led to very very strong inflows from our business deposit perspective, the other thing I'll mention is.
As well as.
Over the last several months in particular getting ready for our checking account launch.
Our lenders have been doing a really good job of starting to think more about selling deposits.
And selling savings accounts first has been kind of step one to try to build that muscle with step two being obviously checking accounts and so I think the tailwind of our lenders doing a really good job selling savings accounts. It certainly been helpful. As well, yes, Hey, Steve I'll add just one thing I think.
Chip touched on this in his outset, I think especially for business customers. There has been a great awakening over the last six months about is my money safe and then what is my money, earning and I think that Theres, just a flow of business owners and finance folks at businesses, who are realizing that they can earn.
<unk> on business savings, which just hasn't really been a dialogue in a while so I think we're seeing or we're a beneficiary of that kind of macro flower right now.
Got it Okay, and then final question.
I know you said that a few low deals it sounds like were pushed out to the third quarter, but period end growth at 8% annualized held for investment is a little more muted how are we thinking about the second half.
Think prior guidance was I think mid to high teens.
That range for full year, how are we thinking about loan growth now.
Yes so.
Mentioned briefly the pipelines were still pretty healthy.
Probably up until the last two weeks of the quarter. We thought we were going to be at $1 billion.
In terms of production, we ended at 860 and the vast majority of those loans.
Well over 90% of the loans that we thought were going to close by 630 that didn't have already closed.
In July .
It just did move to the right. So all of that to say is we feel like.
Pipelines and production are still going to be pretty healthy in the second half of the year and that should drive.
Continued loan growth whether it gets to.
The upper end of the range that you commented on probably not.
Probably.
Low <unk>.
Teens, maybe mid teens by the end of the year.
Got it.
Okay. Thanks for taking all my questions.
Thank you.
Your next question comes from David Feaster at Raymond James. Please go ahead.
Hey, good morning, everybody.
Okay.
Maybe just kind of following up on the growth side of it you guys. Just had a lot of success on the hiring front and attracting folks just given the unique business model and the culture.
Is the disruption that's gone on in the market and you clearly being open for business, giving you more opportunity for additional hiring opportunities.
I guess as you think about it is now a good time for you guys to maybe be a bit more greedy, while others are starting to pull back.
Yes. Good question, David I think agree with your sentiment that we're open for business and we do have.
The opportunity in lots of folks call us and are interested in maybe joining what we're doing.
But at the same time I think we recognize.
With what's going on in the industry and where we are that we do want to be more mindful around around adding folks and so we're going to be really selective we're going to add great folks when it's the right.
Time and place to do that in specific spots.
But I don't think as we sit here now we have an ambition to kind of go on a great talent land grab.
Sit here I think we feel really really good about the team.
That we've got and if we find a few opportunities we'll lean into this.
That's helpful.
And then maybe just touching on.
You talked about the checking account rollout.
We're obviously, you're starting to see some some growth in the noninterest bearing side, which is great. I think last quarter. You said you had 10 clients on boarded I'm. Just curious where are you having success are you starting to see more clients getting on boarded there and then.
Ultimately.
Does that play into the conventional lending side too because I know thats been another big Big initiative. So just curious what youre seeing on that side as well.
Yes so.
I think the last count we've got 50 customers live.
And then continuing to.
Make sure everything works, which it does well and continuing to roll this out.
The next step for us is going to really be as BJ said marrying the deposit accounts with the loan opportunities and having folks on the road every day talking about this and Thats better and Thats true for.
Conventional lending where theres typically as you know larger balances, but it's also true in our in our day in day out SBA business as well. So that's really the next phase of this and then I think the third phase is where we go blast out to everyone kind of outside of our existing customers and prospects.
<unk>.
Okay.
And then last one for me, you've obviously got a incredibly diverse production engine, you've got loans across across the country and a lot of different verticals.
So you've got a really good pulse on the market and I'm just curious as you.
Talk to borrowers it's tough out there it sounds like Youre still youre pretty cautiously optimistic if I'm hearing you chip, but at the same time.
You talked about higher rates slowing demand.
So I'm just curious maybe.
As you as you look into your Crystal ball and whats Youre seeing how do you feel about the economy are there any segments that youre looking at as you see these that you're maybe seeing a bit more pressure thats.
Maybe any red flags that you're seeing and just where from a growth side are you seeing the best risk adjusted returns right now.
I got to tell you that.
Past 50 calls about pad on the road.
Remember.
One customer.
Customer and mainly prospects.
Focused mainly on prospects, saying the world is coming to India.
I'll just I'll, just theyre, not saying that to me now that said of.
35 industries, if I'm worried about one it would be the pharmacy space margins of that business have consistently come down over the past 10 years.
And while the 23000 independent family pharmacist make a nice living that's just about it right. So it's a $3 million revenue business with a 2% 3%.
Margin business and it's just it's just tough out there with the Pbms.
I don't see it huddling maybe.
You may have little or no no I think I think you said it perfectly we just don't see a macro issue I think there are still some pockets and I think as chip said in his intro business acquisition is a big part of what we do and those deals buyer seller interest rates trying to figure out the right deal structure, we've seen that a little.
Slow, but they are still really good deals out there and then everybody talks about real estate. We obviously don't do sort of office real estate, which is I think what everybody's most concerned about but we have seen situations, where it feels like banks are pulling back from all real estate and so we see some more opportunities in.
In places that are secondary tertiary related to that and so in some ways, we see some maybe mentioning opportunities there.
And I guess kind of with the whole idea that the.
So most of the conventional lending slowing and a lot of banks kind of pulling back do you expect that to push more folks into the SBA and ultimately we could we could really potentially see growth accelerate kind of into next year and through next year.
I would say it would be more than a conventional space P J that.
You spent some time.
I don't know that.
With the SBA space, it's going to be much different than it always has been we will say that.
Great.
Want to get my hands on every great SBA lending officer in the country. So as we can get qualified A&P players will continue to hire those folks.
The sponsors that we do business with are primarily focused on the $5 million to $10 million EBITDA businesses and those folks have a lot of capital. So we're seeing that area grows substantially.
Yes look I do think they are the more you read and we haven't seen this may be in practice, yet, but if things do start to tighten up pullback et cetera. It ought to open up the market for SBA right in theory, we haven't seen it.
Practice, yet, but but we like we like the thesis David.
Alright sounds good thanks, everybody.
Your next question comes from Brendan King at Truest Securities. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I think we are in it.
Yes.
I wanted to get your updated outlook on secondary market you.
You mentioned, how premiums were stable quarter over quarter, but what are you kind of expecting you are baking in for the second half of the year.
Yes, I think.
I think we kind of see steady.
As our outlook for the second half.
A little bit concerned after what happened in mid March a couple of the large buyer.
Buyers exited the market for a couple of different reasons and so we were wondering what that would do to.
Supply and demand dynamics, but.
The.
The premiums have stayed fairly stable so we expect that to.
To continue throughout the rest of the year.
Okay.
And you also mentioned that there was a little uptick in fixed rate.
In the secondary market as well.
Just wanted just curious where the premiums on those.
Retractive windows to kind of restart that engine going.
Just wanted to get more color and context around that.
Yes, probably not.
The vast majority is still a variable rate.
So a little bit of FX, which is encouraging we actually saw a little fixed in the first and the second quarter, but its not.
It's certainly not where it used to be so most of the volume that we sell is going to be variable.
Okay.
And then lastly, just a broad strategic question.
I've seen a couple of reports of other banks trying to push their presence into it.
The SBA small business lending.
Just wanted to get your thoughts on that.
If there is any.
Concerns on your part from more competition in the space or just kind of where they play different from where LIBOR place.
So Brandon again, we like where we are positioned we like our team we like the folks who do business with we feel really good about where we are I think.
Certainly.
See competition, all the time and we see it from banks based on wherever the BSO PMA fallout, we might see it from technology companies and where we find we just.
We're pretty comfortable with with level of competition and.
We'll we'll do our best against it.
Alright, Thats all I had.
Thanks for taking my questions.
Your next question comes from Michael Perito at K B W. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions.
Hi, Mike.
I just had a couple of quick ones, obviously, a lot's been asked already here just I just wanted to clarify on the expense side.
To put some numbers around it. So you guys expect to hold steady kind of around $77 million a quarter near term.
And then just a follow up.
What I guess do you guys need to see to I realize I can't really it's hard to tell me what the growth rate for 2020 for repeat but but I guess, what do you guys need to see macro or other kind of reaccelerate the investment rate because I imagine. This is more of just kind of a temporary pause given some of the revenue challenges, but just curious if you can confirm the numbers.
Just give a little bit more color longer term about how youre thinking about the rate of investment.
Yes, Mike.
<unk> talked about over the last year and a half that we had two different types of hiring levels in 2020.
One we really had a hiring bubble to catch up our lending support staffing too.
To keep up with the increase in loan production, we had seen so hiring a lot of underwriters and hiring a lot of closers and those types of folks that was kind of 2021 2022.
We accelerated our technology investments of people and.
Actual tech spend too.
To again try to.
Leverage some of the Fintech investment gain that we took to move ahead with some of the strategic projects on the tech side that we wanted.
To get done as quickly as possible. So those two things cause quite an acceleration.
We've always and will always to chip's point B looking for revenue producers because they are going to be very accretive to our <unk> and our earnings and our growth going forward, but right now we feel like we've got a lot of the right pieces on the field from a people perspective in.
The revenue support as well as the technology side, we've just got to actually put it to work.
And make ourselves more productive and more efficient and drive higher revenue. So we do think that our expense growth will be steady as we talked about throughout the rest of this year at these types of levels, while our revenues.
Continuing to expand.
And then from there into 2024, we fully expect to keep that kind of operating leverage momentum and take full advantage of.
The two years' worth of investments in people and technology that we made.
That's super helpful. Thank you BJ and then just one last one from me for Chip just you made a comment in your prepared remarks about.
Focus on deposit betas in celebration of deposit betas and I guess, it's an interesting point of view I guess my perspective was I guess historically is a little different I think deposit betas for analysts is kind of an imperfect way to measure kind of customer stickiness and so I guess my question for you Chip is just how do you.
You measure kind of customer stickiness for reliable customer I mean, it's not obviously, it's not data my guess, it's maybe it's more qualitative and quantitative today, because but just kind of would love your thoughts on that as the industry. Clearly is that a moment here, where I think that the unit of measurement around customer stickiness is going to change I'm just wondering what your kind of.
Internal view is as you look at that kind of.
Hard to quantify metrics.
Yes.
Good question I'm sitting here.
Our old boardroom, where you have been and there is a new addition in our boardroom, we have a indigo chair and we copied chick fillet because when we got close to the senior management team of that company. They have a red chair in every conference room at night.
<unk> business.
Pretending that theres, a customer sitting there in that meeting room right. So when I think about stickiness of old right.
$1 billion.
It's like well the rates went up a half a percent im just too lazy to go down to the branch to move but when you have 500 bps.
Roughly overnight.
Significant as I said in my prepared comments I mean, if you have 10 Grand in the bank and Youre not a wealthy person you pick up $400 in the couch My real answer to your question is you have to earn stickiness everyday.
I think that our deposit gathering machine.
It's a little bit viral because of the 30 people we have on our call Center every one of them actually care about the customers. That's why they answer the phone and 11 seconds and Thats why we get email after me, but I will say in your different youre different you really care about me and you know a lot of our customers, particularly on the consumer side.
Are people holding their hands and some of them don't even have cell phones. So I think you have to earn that stickiness on the deposit side every day.
And on the loan side, you know we've done that for 15 years.
No.
Rather thinking from the customer's point of view that only care about two things approved when are you going to give me the money and when I go out there and see these customers and we are in.
Competitive situations with other banks I mean, we just moved probably twice as fast as any other buyer given that answer to those people. So we're just going to keep on keeping on the lending side and it's going to be fun as we rollout.
For the first time in the history of our company if you get a loan from us like as of next week, we're going to deposit your loan.
<unk> checking account, which we have never been so we'll see how that goes.
Helpful.
Yes, it should be interesting too.
Pablo how this the recent events kind of changed your perspective of how people value.
So I appreciate that color and thanks for taking my questions and the color. This morning.
Thank you Mike.
There are no further questions. So I will turn the conference back to chip Mahan for any closing remarks.
No closing remarks, we will see you in October .
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please.
Connect your lines.
Okay.
Thanks.
Yes.
Yes.
Okay.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Sure.