Q3 2023 Live Oak Bancshares Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the live Oak Bancshares Q3 earnings Conference call. At this time all lines are in a listen only mode.
Following the presentation, we will conduct a question and answer session. If at any time during this call to give required immediate assistance. Please press star zero for the operator.
Call is being recorded on Thursday October 26th 2023, I would now like to turn the conference over to Greg Seward General Counsel and Chief Risk Officer. Please go ahead.
Thank you and good morning, everyone. Welcome to live Oak's third quarter 2023 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 that we will reference on the call. Please visit our website at Investor Dot live Oak Bank Dot Com and go to the events and presentations tab for supporting materials. Our third quarter earnings release is also available on our website.
When 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 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 to all on the call and thanks, Greg.
We're going to start on slide four.
In an effort to support Vj's reporting a very fine quarter I'm going to cover five views of the future at live Oak Bank.
First as always we lead with the quality of our loan book, revealing more data than usual and re introducing you to our unique secret weapon.
Secondly.
Like the hand, we've dealt ourselves as the historic banking business has challenges with infrastructure fixed costs.
Third we shall be aggressive in hiring high quality revenue producers.
Fourth the building out of our community bank of the future has predictably taken longer and been more costly than we thought we want to remind this audience, how we're going to pay for it.
Lastly, a quick slide describing the true operating earnings of our business and the corresponding achievements and operating leverage.
Moving to slide five.
Beginning with credit quality.
Moving from left to right at the top nothing doing on past dues over 30 days less than it was eight quarters ago.
On the non accrual slide top right over the last four quarters non accrual loans deducting those borrowers that were paying as agreed where 25 basis points 47 basis points to 77 basis points and declined to 64 basis points at the end of this quarter.
On the bottom left classified loans of risk rate six loans divided by total loan guaranteed loans was less than eight quarters ago.
Bottom right section as we can with what we call our regulator slide classified assets to tier one capital plus the loan loss reserve is up slightly but virtually unchanged over the last two years. Some will remember this is the closely watched Texas ratio during the recession.
Moving to slide six let's take a look at the Q3 provision and charge offs we.
We charged off our total exposure or $8 million on the shared national credit fraud influence loan that we discussed last quarter. When we itemized specific 6 million reserve.
Normal charge offs for the quarter would have been $2 million or about one fifth of our provision.
The combination of our conservative seasonal calculations, along with consistent growth in our loan book is build a loan loss reserve of $121 million or one 5% 6% of loans held for investment.
More importantly, our unwarranted reserve too and guaranteed loans and leases is 232% or 76 basis points higher.
Many analysts on this call have told US we have never been through a recession.
And because we lend to small businesses the investment community expects our customers to be at the tip of the spear well.
Well now you have the data to draw your own conclusions.
Moving to slide seven.
Let me remind you of our secret weapon.
Managing asset quality begins with caring about each customer and providing the resources to do so every day.
There are $49 62 folks on this slide that comprise our business analyst group.
These folks are responsible for analyzing our customers financial statement every 90 days.
So back to a potential recession workouts are an art not a science knowledge and data are Paramount, we have more data and understanding of what's going on with our customers business than any bank in the country.
Our theory of Verticality combines with our early warning system to provide a solution whether its M&A advice are using industry benchmarks to provide them a definitive plan for success.
So moving to slide eight so what's happened to the banking business recently rates are up 550 bps and noninterest bearing deposits are fleeing our industry. Here's a brief deep dive on preparing our business model to larger banks with a more traditional model of gathering deposits through retail branches.
<unk>.
On the left side of the slide the large banks have lost 5% of their noninterest bearing checking accounts from 30% to 25% in the last 12 months.
In total $429 billion of noninterest bearing deposits have left are shifted into interest bearing deposits at J P. M. The bank of America.
<unk> City, Truest, P&C and U S Bank again since Q3 of 'twenty two.
Their average interest bearing cost of funds has risen almost 2% over the last year on the other hand, we strive to pay our deposit customers a market rate, while maintaining a net interest margin that it's almost a 100 bps higher at $3 37 compared to $2 67.
Moving deposit accounts digitally has become exponentially easier for all banks evidenced the $43 billion of exited SBB during March madness.
We choose not to estimate the cost of their branch system to collect those deposits most folks think it's about 2%.
For those interested in what our customers think of our Branchless business model clear Parker would be delighted to shoot the link to an online video interviews conducted recently by a third party.
Moving to slide down.
All on this call has seen these reports of layoffs asset sales in an effort to shrink the balance sheet in anticipation of more stringent capital requirements.
As well as declining loan portfolio balances many times the fear of recession leads to tightening credit standards, which leads to unhappy lending officers, many of which will suffer incentive compensation declines.
Our model.
Our credit quality standards, and our excess capital allow us to be incredibly active for the best of the best when others are pulling in their horns.
Slide 10.
While our sales team has not grown head count over the last several quarters, they've done an amazing job in continuing to grow our loan book over $2 billion over the last two years in a very difficult banking environment.
Again, we will seek to extend our feet on the street as the competition retrenching.
Slide 11.
As further confirmation of our efforts in growing our business through innovation I thought I would show you our investment in building our cloud based API first next Gen technologies.
Over the past two years, we have grown our tech staff by 60 high quality engineers, our vision of building out a bespoke bank by industry has played a large part in attracting this level of talent.
Outstanding Engineers must believe in the dream, they completely understand our customer base and that the largest banks in the land tend to focus on everything but the small business owner that operates in under $5 million revenue business in.
In addition, many have firsthand information of the sizeable technical depth that those banks must overcome.
On the left hand side of the slide I wanted to remind you of how we're supporting and maintaining these 119 folks.
Our venture pre tax gains of the past several years has amounted to over a quarter billion.
After providing $20 million in bonuses to our folks.
And to our communities.
Slide 12, before I turn it over to BJ for more color on this slide.
It's working.
Ours is the business model of the future. We are trying to show you. The true operating earnings of our business by taking out the noise here expenses have flattened and recurring revenue is on the rise.
B J.
Excellent. Thank you chip and good morning to everybody, let's start on slide 14, with a high level, earning summary.
The quarter and it was quite a good one for us here at live Oak.
The key commitments, we made about what we would do in Q3, such as margin performance continued loan growth.
Stable credit quality and moderating expenses were all delivered.
And while we cannot predict what the economic outlook might bring.
Actions, we took in the first quarter our performance in both the last two quarters and the ongoing strength of our business model have set us on a strong path towards continued earnings and customer growth over the next several quarters puts.
Put some numbers to it in Q3, we earned 88 cents.
Ah well aided by a positive change in estimate related to our servicing asset and fair value loans Ppnl are excluding that $15 million impact grew nicely again this quarter driven by strong net interest income growth and good expense management. In addition, our credit quality remains strong.
Loan production was up almost $1 1 billion from $860 million in the second quarter as closing activity with spice here than it had been in the first half of the year and pipelines continued to be very healthy.
<unk> growth was intentionally moderate this quarter as we soaked up some of the excess liquidity, we had built coming out of March.
Very importantly, however, our business customer deposits. Our primary focus were up 12% linked quarter. Since March we have grown business deposits, 36% or $1 billion and have done so with without increasing our rates paid on business savings.
And we.
Continue to see strong inflows great performance by our teams and a testament to our brand.
As discussed in April we believe that Q2 would mark the bottom for net interest margin and we're pleased to see that our margin was $3 37 in Q3 up from $3 29 in the second quarter, even more importantly, net interest income at $89 million is up almost $7 million or 9%.
<unk>.
From last quarter, owing to strong loan growth and disciplined loan and deposit pricing, but our teams I'll get into a bit more detail on the reasons for our NIM resiliency and the positive net interest income growth in a few minutes, but in short due to the excellent efforts by our lenders along with our depart.
And treasury teams to remain both competitive with our customer offerings and discipline with our pricing.
The income was improved linked quarter on a core basis with relatively steady gain on sale premiums expenses declined again quarter over quarter and while we expect continued discipline here as chip said, we're a growing company, which will continue to invest in good costs, which are those that support continued.
Revenue growth.
Provision declined modestly with the vast majority of net charge offs like chip said from a credit previously impaired and largely reserved for.
And the majority of the provision build came from net new loan growth, which I believe is good provision.
Let's turn to our net interest income and margin trends on slide 16 as.
As we've discussed in prior calls 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 more rapid than the loan re pricing, but in the back half of the year as a running repricing flowed through the balance sheet and the fed near the end of its rate increase cycle. We would expect NIM expansion all of those things are still true we have been able to both grow deposits and hold savings rates very steady since March.
Due to our already strong rate offering.
Loan repricing tailwind continue as our lenders remain disciplined with new production yields we expect loan pricing discipline to remain strong but deposit competition to continue increasing overall, however, while the trajectory may not be linear quarter to quarter, we do expect steady NIM.
Expansion and net interest income improvement over the next several quarters 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 pricing and betas.
Even though the fed's move 50 bps since mid March we were already in a highly competitive position to attract customer deposits, particularly on the business side, such that we continue to see healthy deposit growth, while holding very steady on savings rates.
And our through the cycle beta of 70% is exactly what we've communicated all along as our expectation.
It is modestly better than that on the business side.
Now, let's take a look at the loan side, our loan yields have been moving up nicely as you can see in the table, but hadn't been moving nearly as rapidly as pathet betas that dynamic is shifting.
Two points, we've made on loan yields last two quarters continue to hold true number one loan production yields are currently being booked at rates much higher than the portfolio rates.
The $8 93 on new loan production yields in the upper right at the slide versus the 752% on portfolio loan yields in the upper right of the table.
And number two the majority of our variable rate loans are quarterly not monthly adjusting.
This means that unlike deposit rate changes, which happened intra quarter, we don't see intra quarter increases in loan yields they move up the full change in the prime rate over the prior quarter on the first day of the following quarter. So as of October one our quarterly adjusting loans saw another 25.
Five basis point increase in rate owing to the 25 basis point July fed move.
And about 47% of our total loan portfolio is variable rate and almost 90% of our current production is variable rate that will certainly help us.
Therefore, as our newer loan yields to replace older loans over time, our portfolio yields will continue to rise supporting continued stabilization than improvement in our net spread.
On the deposit side, we've been able to see continuing strong customer deposit growth.
However, while we have fully expected upward pricing pressure for traditional banks, we have been a bit surprised by the aggressive consumer savings pricing, we've seen from top digital competitors time will tell if this continues and it is this trend we are monitoring closely.
So what does all this mean for the NIM.
It's what we believe the last two quarters absent a large change in direction from the fed or an economic shock both of which are entirely possible given the geopolitical environment. We have hopefully seen the bottom for our NIM and we should continue to see steady margin expansion over the next several quarters may not be linear.
Their improvement quarter to quarter, but should be generally up and to the right over time.
So it remains an uncertain environment. So let me be very clear and transparent with our current assumptions here.
First we are assuming no further fed rate increases and remain on hold through at least the first half of 2024.
Second deposit pricing will remain highly competitive from both traditional banks and digital competitors and if it gets more competitive we will respond accordingly to support continued growth.
Third healthy loan growth continues on pace with current pricing.
And fourth no further major industry disruption related to deposits or liquidity.
So to recap we saw expected NIM expansion in Q3, and we're particularly pleased with the net interest income improvement we've seen.
Turning to slide 17, our loan production in the quarter was again diverse across multiple areas with particular strength in our specialty healthcare and middle market sponsor solar senior care educational services self storage and general lending verticals.
As chip talked about others are pulling back on lending, but we expect to see good opportunities for new business going forward, we're open for business and focused on growing our revenue generating capabilities.
We've already talked enough about deposit growth and pricing dynamics, let's move on to slide 19 takes a look at noninterest income trends are.
Our SBA sales activity and gain on sale premiums were pretty steady in Q3, not much new to report the gain on sale at roughly 8% to 12% of quarterly total revenue feels like the right range for us over the last two years, we have intentionally reduced our reliance on.
Gain on sale income to both improve the consistency of our revenue by shifting to more net interest income and to provide more flexibility.
In addition, the USDA secondary market has been nonexistent for six quarters now eventually that will change and that will provide us with further opportunity.
As noted earlier, we changed our valuation technique used to estimate the fair value of our servicing asset and the mark on our held for sale loan portfolio and so.
As a result, we made a one time adjustment to both the servicing asset and the fair value portfolio.
Going forward there will be continued variability if these assets are revalued quarterly, but we believe that these revisions are more representative of the value of the portfolio's.
Turning to expenses on slide 20, we're doing just as we said we would do we're moderating our expense growth, while continuing to grow revenues and going forward, we will always be opportunistic with hiring revenue producers, but we're smartly managing our expense growth, we're confident in our ability to <unk>.
<unk> grow RP, PNR and improve our efficiency ratio over the next several quarters, our expenses were down linked quarter and as you can see we have held salary employee level steady for the past several quarters, even while continuing to invest in next generation technology.
One item I will mention as I wrap up expenses, which also relates to the variability in the tax rate.
And as you have seen over the last few years, we will from time to time invest in investment tax credits related to solar projects. These tax credit impairments show up as a noninterest expense in a given quarter, but they're more than offset in the tax expense line over the course of the year.
<unk> in an overall net benefit to after tax earnings that is while you will see much variability in our effective tax rate from quarter to quarter and you saw it again this quarter with only a 7% tax rate.
In Q4, we expect one of those investment tax credit investments to hit noninterest expense for about $16 million, but it will ultimately lead to an effective tax rate for the full year 2023 of about 10%. So a net positive to us overall.
Turning to credit trends on slide 21, as chip discussed earlier credit metrics remained strong we continue to actively monitor the existing portfolio and don't currently see any significant weak spots past dues are low non accruals remained quite manageable as well and as you can see that.
Credit quality trends across all of our three major business segments are healthy.
As expected in the current environment, we move some more loans to non accrual status during the quarter, but on the bottom left of the slide you'll see a five quarter trend of our non accruals and see that there is still at very manageable levels.
Provisioning again was healthy largely driven by what I call. Good provision for new loan growth our reserves on guaranteed loans as chip said remained almost twice as high as the industry average.
And 40% of our total loan portfolio is government guarantee.
Slide 22 shows our overall capital strength, which continues to give us great ability to continue providing growth capital to our small business customers and comfort that we are well positioned to thrive in whatever environment lies ahead.
Wrap up on slide 23.
I really like our position.
At live Oak over the long term our revenue growth has a strong upward bias.
Our loan production engine and reduced reliance on secondary market sales is producing solid double digit loan growth that.
That loan growth, coupled with strong new loan origination yields and deposit rates that are already at market is leading to growing net interest income and expanding margins and we are in the very early innings of attracting checking accounts, which will be a tailwind to building longer term customer relationships and lowering funding costs.
For years to come we have already made smart investments in lender support and technology over the last few years, so while our expenses will grow commensurate with a growing company.
That is adding what I call good costs, such as new lenders and they should increase.
As we grow over the next several years credit quality is strong and we expect it to hold up very well on a relative basis in whatever credit environment, we might face and again, having 40% of our portfolio.
Government guaranteed when the industry is about 110th of that provides great comfort and confidence.
Finally, and most importantly, we have got the best mission inspired people and culture in the industry, serving America's small businesses.
With that we're happy to take questions.
Thank you ladies and gentlemen, so do you have a question. Please press the star followed by the one on your Touchtone phone if you'd like to withdraw your question. Please press the star followed by the Q, if you're using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Brandon King from tourists Securities. Please go ahead.
Hey, good morning.
Hey, Brian.
So I wanted to start on expenses, they were down quarter over quarter Ftes were down as well.
But how are you thinking about growth next year, excluding the tax credit you periods.
In 2023 mid teens was.
The target.
How are you thinking about expense growth next year any details around that.
Yes, sure Brandon its BJ.
I said like chip set at the front.
Growing company, and we're always going to be in the market for.
What I call good costs costs that are going to help us generate revenue in the future, whether that's hiring new lenders or.
Creating additional technologies that are going to be better for our customers and building relationships. So.
We did have the bubbles of expense growth I would say in 2021 and 2022 related to.
Lender support in particular and technology that obviously has moderated this year so.
Mid teens to actually in the 2025% range, where kind of the norm in 2021 and 'twenty two I would see it is much lower than that.
Going forward, but still at a pretty healthy clip as we as we continue to support revenue growth.
So I would say.
High single digits, and lower is kind of a.
Better gauge.
Is it fair to say.
It's certainly less than mid teens have out that maybe you go okay. Okay. Okay.
Okay, and then on the net interest margin I appreciate the commentary around that and certainly we're experiencing going forward.
I know the 350 has been mentioned before.
Do you think you can get there in the fourth quarter, just given what youre seeing as far as deposit competition.
And rates and loan repricing.
So I kind of.
Kind of if you read between the lines in some of my comments.
Basically said im highly confident that our margin is up and to the right over the next several quarters, but it won't necessarily be linear.
So said a different way in the fourth quarter, given what we've been seeing in.
Deposit competition, particularly from top digital competitors, it's been quite surprising.
We would have thought that that would have moderated but it hasnt.
So we still have an upward bias, we believe to the margin and net interest income, but it will it will depend in the fourth quarter on how.
Proactive we need to be re pricing the deposit portfolio, giving competition to support our loan growth So I'm still very.
Very confident in our abilities to expand the margin, but again it'll be it'll be based on what what near term deposit competition looks like.
Okay and just.
A follow up to that.
Any thoughts to maybe leaning more into.
The business customer deposits is best seen such strong growth as opposed to maybe not competing as much for those consumer deposits.
Yes, great Great question, if you go back in time.
I think around 2018, the vast majority well over 90% of our deposits, where consumer very very literal ware business and over the last five years, we intentionally have shifted that such that I think is actually was last quarter that we tipped.
<unk>.
Over 50% business savings deposits versus consumer savings. So it's been a very intentional shift towards small businesses and providing them.
Very competitive rates in building that book, So with that said, we continue to emphasize our business savings product offerings and operating accounts to build business.
We'll continue to try to optimize both those portfolios as we grow and BJ I think on that point right certainly our growth and business savings over the last call. It 18 months or so it does not a trend make but it certainly seems that its less volatile.
Consumers are a little more rate sensitive in a little more fluidity in the stability of our business savings book seems to be.
Yeah.
Much more predictive yes that is certainly true so whenever we can build.
Our loan and deposit relationship that certainly helps I think our LIBOR brand as a small business certainly helps and our rates for.
Business savings are literally at the top of the industry and there is there's quite a bit more competition from a variety of other competitors traditional and digital on the consumer side. So correct. So yes, that's why we we focus on.
On small business side a bit more.
Great. Thanks for taking my question.
Thanks Brandon.
Your next question comes from Michael Perito from <unk> W. Please go ahead.
Hey, Mike.
Hey, guys. Good morning, how are you.
Good.
I wanted to just dissect the margin question a bit further.
And Peter I think I pretty much have a good handle on it I was just curious if maybe you could give us an indication I think you've mentioned in October.
The loan yields kind of readjusted higher and I was wondering if you could maybe just give us an indication of where the margin was in October just as we kind of think about the starting point moving forward.
Those with the loan yield adjustment.
Yeah, I'd say the margin in October was largely the same as where we were in September maybe a modest.
Modest step up because of that repricing in the loan yields. So if you think about it Mike 47% of our loan book is variable rate.
All of that is the quarterly adjusting we do have some software based.
Loans in there, but generally speaking you can kind of look at our.
Loan yields in the third quarter, and then adjust it for 40% of the portfolio being variable rate. So thats helpful. But we also moved late in the quarter.
Consumer savings up from four to $4 15.
And so that has somewhat of an offset as well so largely the same.
But we'll have to see on how again deposit competition heats up or not in the fourth and beyond.
Yes.
Helpful and makes sense.
So on that last point.
Obviously switching I think the slides I saw 80% of production. The last few quarters has been variable obviously, that's been very advantageous and particularly on the loan sales right. I mean, the fixed rate SBA loan sales were pretty nonexistent for a while there but.
How you guys are thinking about that dynamic.
We approach theoretically the top of the cycle here.
Aren't quite as volatile.
I would think that the market for fixed loan rates sales might come back a bit stronger if thats the case.
I'm wondering how you guys are thinking about the mix of loan production going forward, where we're at.
Given where we're at today.
Yes, I think.
There is there is obviously much less appetite right now for a fixed rate product, where we where are we in a customer thing. It's the best for them. We will certainly put them there, but variable rate is kind of the flavor of the day right now when rates do start to come down.
Obviously, our portfolio loan yields will come down on the variable rate side commensurate with that.
We also think prepayments would slow because rates are coming down on those loans and making a cash flow a little bit more palatable for existing clients. So that will continue to help us expand our balance sheet growth in our net interest income growth. So we feel good about that and then I'll.
Our ability to move the deposit portfolio rates down.
With market at the betas that we usually do.
We feel like.
<unk>.
Higher for longer but even in a.
Probably more importantly in a declining rate environment, our margin will have tailwind that.
That'll be very helpful. Michael let me add to that in another way I have said for the 50 years I've been in this business that historically.
Brickley loyalty in the bank and this ought to be somewhere between a quarter.
And eight in a quarter percent I really don't feel that way right now relative to.
Our small business borrowers I'll tell you why so the theory of vertical <unk>.
Exists when you've been in for us in the lending space for <unk>.
15 years and your reputation is out there when times get tough people capital.
I think that matters, so our folks in the field everyday understanding the businesses that we lend to I think makes a difference in terms of everything including including that bid on that last rate on the loan.
Helpful. Thanks, guys, just two more quick ones, if I can and I'll just ask them together, even though they're really not related but BJ just wondering if.
As we think about the model.
Wondering if you'd be willing.
To provide a little guidance or some guardrails around charge offs and the tax rate for 2024 and realized both are probably incredibly difficult.
But yes.
Obviously, the charge offs starting there.
Have been kind of up and down and I imagine that will just continue to be the case given the environment.
It's like a 30 40 basis point number annually, you think pretty fair given the type of portfolio, you have and where we're at and then secondly on the tax rate just any initial thoughts about what you are budgeting there for for next year, just given the pipeline of tax credit activity.
Mike.
Michael This is chip.
Take a shot Buddy.
Not going to we're not going to predict charge offs in 2024, so I'll take that one and leave the other one to Vijay.
Okay.
The tax rate Mike.
We currently don't have any investment tax credit activity in the pipeline for 2024, if that changes, we'll certainly let you know but in the absence of any ITC is you should expect our effective tax rate more in the 20% to 22%.
Range next year.
Got it.
That's helpful.
First day on the charge offs, maybe I'll ask the credit question, just a little differently.
Take the numbers out of it I think this quarter over the last two weeks we saw some.
Data points.
From others, particularly on my credit card data and like discover and stuff like that.
Wasn't great, obviously thats not directly correlated to you guys.
But just curious.
As you think about the reserve level.
The $2 32, you guys mentioned.
Could you maybe go a layer deeper in terms of why you think that's kind of the right level.
Given where we're at obviously a unique portfolio and it's kind of a unique metrics. So just maybe just some context around it additional context would be helpful.
So I'm going to Tee, Steve up, but let me just say this before I do right. So in anticipation of this call.
Earlier this week as Steve and I spent considerable amount of time with that business Advisory group.
62 young people that are in the market every day with 6000 customers.
And then they went industry by industry, all 35 industries and gave Steve.
Complete write up of what their view is currently of those industries at this time, so Steve you can take it from there.
So.
Ill provide my.
Thoughts around our portfolio today, and then maybe from that you can answer that question for yourself.
So I am cautious first of all I feel the portfolio today is stable.
I am cautiously optimistic that the portfolio will continue.
To be stable, if not improving over the next few periods.
My confidence stems from a couple of points.
First and foremost with chip articulated very well.
As we continue to double down on our servicing as we always have I feel we have a very good pulse on the health.
Of our borrowers.
And I think we will continue to do that provides me confidence I've identified where there is areas of stress and.
And we have reps that and support.
Secondly.
We made adjustments to our underwriting criteria I believe at the right times.
And they appear to be proving out to be such if we look at our performance by cohort year, we will see that 2020 cohort originations is significantly stronger than 2019, So we made adjustments with the anticipation.
And that we will be entering into more rocky economic environment for a prolonged period of time higher interest rate environment for a prolonged period of time and I feel like that.
Loans were underwritten to.
To account for that so I believe that those businesses will do quite well.
I do believe that the government programs at the right time provided meaningful support that has translated into stronger balance sheets, and we've led to very strong operators that have done the right things.
Taking advantage of that additional balance sheet strength and I believe they can navigate.
We don't have the CRE challenges that many of our other banks have.
R R.
Our <unk> portfolio I'll remind you again is not multi tenant office.
And then finally, I think we've been very strategic and smart.
About when others have either as a disruption in the lending environment are government sponsored programs bode very very well to attract higher profile applicants and we're seeing that again feel really strong about.
What we're putting on the books today. So I think you put that altogether I would call it <unk>.
Competence instability, knowing that we will have pockets of challenges that we always will.
Great I appreciate you guys spent.
Spent so much time on that and thanks for taking all my questions.
Thanks, Mike.
Your next question comes from Eric <unk> from Raymond James. Please go ahead.
Hey, good morning, everybody. This is Eric dialing in for David Feaster, Congrats on a good quarter.
Thanks, Eric just wanted to touch on.
Yes.
I just wanted to touch on the loan growth that loan growth accelerated in the quarter pretty nice uptick in originations just curious how demand is trending from your perspective, what segments, you're seeing the most growth in.
It seems like solar is especially strong I'm, just curious what youre seeing across the board, especially in solar.
Yes, if you look at slide 17, Eric This is one that I like looking at every quarter and we put in every quarter to just kind of give you an idea of where youre seeing it so.
Solar has had a had a really really big year.
Jan Williams, who is kind of.
Primary lender out there has just done a wonderful job tailored king and others.
So we've seen huge opportunity the inflation reduction act.
And all of the government incentives combined with the network that we've got has just continued to create great opportunities. So that's certainly one but if you look.
Lots of our other.
Areas like I talked about earlier.
Specialty healthcare and seniors housing have been quite strong in our conventional lending businesses senior care.
Educational services self storage in our SBA verticals.
Are up year over year versus where they were last year. So those are those are very strong so.
We've got a very diverse.
Set of verticals that complement each other quite well and so we're very.
Okay I appreciate all of the other color.
I appreciate all the color earlier on credit.
Just kind of ask it another way.
More anecdotally you have a pretty diverse detection engine and tend to have a good pulse on markets.
Just curious as you talk to borrowers and seed new loans come across your desk.
Segment that youre, starting to see weakness in and have you seen.
You noticed any shifts in tone in your conversations with us.
But your small business customers.
Steve deny it.
Dress that together I think I think the number one thing that they say to US is people, having a hard time finding people that will actually work.
Do not see trouble with price increases, Steve I mean, most of our borrowers.
Seem to think that.
Inflation is here, but they can pass that cost along those would be my two headline comments there.
Yes, I would say that our borrowers for the most part have done a very good job in adjusting their cost of their services or their products commensurate with.
Increase in debt with the rate environment, coupled with any inflationary pressures depending on the industry.
These are questions that we dig into quite deep with each one of them.
I'd say a pocket we continue to watch.
Our breweries.
And just to put that in context.
We have about $20 million in total exposure and small breweries that were prior to the pandemic years, I think 2019 and before so they've been on the books for four plus years. However, they continue to navigate challenges challenges from the rate environment and just the which is probably a.
<unk> theme that we hear obviously no one likes to see their payments going up.
Because of the rate so we do get a lot of questions. There, but also there is legitimate shift in the industry for smaller breweries customer behaviors have changed.
There you could argue over saturation and brands in many markets and many of these small breweries their plan was to distribute.
And distribution model really doesn't work real well, so they had to pivot and change to hyper local taproom and then you've have Catherine that were closed.
Due to the pandemic.
Mountain the challenges that they are navigating one thing I can tell you.
Is this $20 million had been on the books for four plus years, we feel very confident in their fighters.
Theyre very communicative working really hard some will navigate perfectly fine.
Others will continue to have some challenges and we'll watch it but that is a space that I think that we're continuing to watch.
I appreciate all the color there.
One last question and then I'll step back.
It would be more longer term could you provide maybe an update on your embedded banking build out I think we talked about the onboarding of the first time coming online pretty soon here just curious how that's progressing and give any color on your pipeline for additional clients.
Yes.
Short answer it's gone great. We wanted to really hone in on one partnership make.
Make it a deep one.
Make it an excellent experience for our partner.
And the customers that would be.
On boarded via that platform. So that is still going quite well, we expect that to launch early next year.
And then from there we are building our capabilities and candidly learning a lot from each other in this partnership to then expand to further partnerships.
Over the course of 2024 into 2025 so.
But we'll probably have a.
More fulsome update for you once we actually get to launch early next year, but.
It's gone quite well.
Got it. Thanks, Thanks for answering my questions I'll step back and congrats again on a great quarter.
Thanks, Eric.
Your next question comes from Steven Alexopoulos from Jpmorgan. Please go ahead.
Hi, Good morning, everyone. This is Alex Lau on for Steve.
Hey, Alex Good morning, Alex.
I wanted to start with the gain on sale income line.
Your line the premiums for the loan sales have been stable in the 5% range for the past few quarters are you expecting them to remain in this 5% range in the next few quarters and what would need to happen in your view for these premiums to expand and for USDA loan sales to return.
Hey, Alex it's PJ I would generally say that we expect them to be in this range.
A lot of factors that go into it.
Anything from <unk>.
Demand from.
Buyers and Poolers.
Two.
Tradeoffs of what the.
The yields might be on those pools and securitizations for SBA relative to other alternative investments like treasuries or.
Conventional mortgages back.
Backed by the government et cetera, So theres a lot goes into it.
If you go two or three years ago. The enhanced premiums. We saw were from some of the enhancements coming out of the pandemic as it related to higher guarantees and.
Those types of things, which have have burned off so 105 is probably a good.
Place to assume for the next several quarters.
SDA.
We do expect to eventually come back, but the way that does work is we're not able to sell the guaranteed portion of those loans until.
There is construction that.
Builds up over 12 months to 18 months, let's say and then once the project is finished we can then sell the guaranteed portion, but if you rewind 12 months to 18 months the rate environment was a lot different so therefore.
The rates on the guaranteed portion of what we originated in USDA is just not as.
Attractive.
For sales right now, but what we're putting on now.
As rates have risen will be very attractive going forward. When the guarantee is ready to be sold so that's why we're optimistic that at some point hopefully starting next year, we'll start to see more USDA sales volume, but it's been.
Non existent over the last four to six quarters.
Thank you for that my next question is on checking accounts can you give us an update on the operating account initiative in terms of account growth customer usage. When do you think the noninterest bearing deposit mix will start increasing from the 2% today to say, 5% will be measured in quarters.
For years.
So I think right now as of today, we're probably around 200.
New operating accounts, we were in pilot.
<unk> of last year and as of September <unk>.
We are.
Asking requiring that loans that we fund be funded into a live oak checking account.
That's going to be incredibly helpful to ramp.
But that just was instituted in September one so we're still in the very very early innings of of growing our checking accounts, but if we're at 2% today, Alex I can't.
It's not going to be measured in quarters, but I think if you measure it in years, we're going to continue to see steady improvement from the 2% range hopefully up into the 10, 15% plus range over the next several years, which will do.
And customer relationships.
Make those stickier ability too.
Keep lending customers longer in addition to deposit accounts and of course change fundamentally the mix of our funding, which will provide a tailwind too so.
It's going to be a long term effort, but one that is going to be a gift that keeps on giving for years to come.
Great. Thanks for taking my questions.
Sure Alex.
There are no further questions at this time I will turn the call back over to chip Mahan, Chairman and CEO for final comments.
Final comments or thanks for joining today and we shall be talking to you at the end of January.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.
Okay.
Sure.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Sure.
[music].