Q4 2023 Live Oak Bancshares Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the life Bancshares Q4 earnings Conference call.
At this time lines.
Only mode.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Thursday January 25th 2024.
I would now like to turn the conference to Craig.
Greg Seward Chief.
General Counsel and Chief Risk Officer. Please go ahead.
Thank you and good morning, everyone welcome to live Oak's fourth quarter 2023 earnings Conference call.
Craig: 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 Debacle Bank Dot Com and go to the events and presentations tab for supporting materials.
Our fourth quarter earnings release is also available on our website.
Craig: 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 expectations are detailed in the materials accompanying this call and in our SEC filings.
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'll now turn the call over to chip Mahan, our chairman and Chief Executive Officer.
Thanks, Greg and welcome to our Q4 earnings call first of all I wanted to introduce two investors, our new CFO while pfeifer.
<unk> joined the bank in 2015, and brings 18 years of experience in the financial industry, including various finance Treasury accounting audit and deposits analytic roles prior to joining our bank vault served as the deposits finance manager at Barclays USA, where he managed the finances in data analytics of a 10 billion.
Deposit portfolio.
Of course P. J, it's Steve Smits joined Us and will be active participants in the Q&A session.
Before I turn things over to Walt I, just wanted to touch on a few non operating observations on slide four.
It will always be our intent to lead with credit quality as many of you on this call I believe small business enterprises will be the tip of the spear. If a downturn occurs we will examine the numbers and let you be the judge next.
Next I thought we should look at our loan book over the last five years to check in on organic growth.
We then will examine deposit pricing across our industry and yet the Bofa Securities group announced that evil deposit beta accelerated from 48% in Q3 to 52% in Q4.
Tech top technology has made it easy for folks to see higher rates and they are doing it.
On the next bullet I will examine our business model versus the industries and unpack what appears to be a moat forming in our favor.
Lastly, a comment or two on operating leverage before we move on to the most surprising development at the SBA since we started this back.
Moving to slide five my takeaway on this slide would be steady as she goes.
I cannot tell you how proud I am of our lenders and the credit team.
$6 million in over 30 day past dues on our loan book of over $5 6 billion.
And non approvals not paying as agreed of a little over $40 million unheard of in SBA lending when compare to others.
Moving to slide six our loan loss provision supporting our growth as opposed to specific reserves for impaired credits allow this slide to join the steady as she goes club.
Please recall that the fraudulent national credit in Q3 was slightly under $8 million.
Craig: So the way I look at it total charge offs of $13 million for 2023 or 22 basis points was a remarkable performance during trying times.
Steve Smith will comment on his current view of the world during the Q&A session.
Craig: Please turn to slide seven.
For 15 years, we have been primarily a lending company.
So how have we done over the past five.
We grew our customer base from 5000 businesses to over 7500% to 48% increase not bad.
The other side of the balance sheet, how are we and others funding their back relative to my earlier comments on deposit betas customers are moving their deposits no matter what your model is.
Craig: They're at the right side of slide seven.
Our total cost of funds over the last year went up one 4% 7%.
Chose a number of regional banks to look at as opposed to the industry in general those comparisons always seem to be skewed skewed by the big five.
The cost of funds in the group was up slightly higher than <unk>, both for the year at one 5%, 7% our linked quarter of 18 bps versus lab oak at 15.
So why do we bring this up.
Paying a market rate to our customers across the entire bank and others are not could it be that the cost of branches tellers and csrs could make up the difference of 157 bps between their cost of funds and highest.
What goes on in a branch to make them necessary to fund the bank when we fund our bank at 11 bps versus this group at 221 bps or 157 bps less than levels.
Are we really talking about the essence of self service technology.
<unk> versus full service branches and call centers, So where are we really is there a difference beyond the numbers are we building a barrier to entry with our 161 lenders keen as to the nuances of government guaranteed lending.
So let's have some fun recently, a famous bank analysts did a podcast and interviewed one of our customers, let's see how things win.
So a famous.
Analysts says to our Montana pharmacy owner, what is your relationship with <unk>.
She: She says I was introduced to shale at live Oak through Luke who is an adaptive financial and he's the one who broken our pharmacy deal.
Luke Adaptive: And he's been working with previous owners as a financial adviser.
I think it was like Hey, I've been having some issues as banks around here don't understand pharmacy and even the bank currently has the loan on this pharmacy for 17 years before still doesn't understand the industry.
And so when I started working with Sheila. This is our farmers was talking I was just blown away.
Didn't have to teach her about pharmacy, she got to teach me how easy the SBA loan process can be and I was just astonished.
Sheila: I've heard honestly nightmare stories of people buying practices and buying pharmacies and that wasn't the case for me at all this was more of a fast track deal I've never felt overwhelmed I never felt on the educated they just made it so easy for me.
So you lose used lateral back they finance the purchase of your pharmacy right. She says yes, okay, but you also have a deposit relationship with the company, Yes I do.
A whole mob bank accounts as far as checking do all my Eft's through them I do all my AC Hs through them, all but big payments.
Luke Adaptive: Like that one thing I don't do them as cash deposits.
Luke Adaptive: So the few checks that we get which we don't get a lot of them more as everything is electronic by cash deposits go actually to local bank that is in our parking lot.
Luke Adaptive: However, if there were a way to get levels. The cash deposits would just use them I don't feel like that because they're not right here and if theres anything less of a relationship.
Luke Adaptive: Body that I've worked with has been absolutely amazing in the customer service Department and the knowledge Department.
Famous bank analysts has got it. So you feel like you have a good relationship but if there was a branch available you would have your cash deposits go to level I think thats what you are.
I heard.
Luke Adaptive: So for that I'll do that taking my cash deposits over by local banks, we get our change orders through them, but I just literally taken transfer all of that <unk>. So what is my takeaway is that folks in traditional branches have to be all things to all people in a geographic area. Many.
Many of our competitors talk about high Tech and high touch tough to do in a transaction oriented environment, even tougher to do in a branch closing environment Thats Burns high turnover even in good times.
I like our model I Love, our model deep domain expertise at origination and throughout our entire bank individual account officers that are responsible for servicing our trained as to that industry.
As to our call center deposit team ask that you'd look up a recent podcast on on US we were floored at the level of knowledge. This person had as to our DNA. He is also a customer go listen to his interaction with our call center folks and his view of our business model and see for yourself, whether or not we are building a sustain.
Double organic growing bank that would be difficult to replicate.
Let's move to slide eight.
The headline here is that our investments in the past it paid dividends.
<unk> flattened and revenues are increasing.
As we discussed last quarter, we will forever be in search of great bankers that have the IATA tiger that put capital in the hands of small businesses that share that same past passion.
This is a great segue to my last observation on slide nine.
As many of you know the SBA was created and $19 53 in the ASEAN power administration. It is the smallest agency in the United States government yet it's administrator holds a seat on the President's cabinet.
We have recently attended two meetings at the White house to understand some very significant changes that have been put in place to give access to capital to smaller businesses.
And many and potentially underserved areas.
Historically, the SBA had its banks charge, an origination fee and a 55 basis point trail on each loan to fund the program.
Luke Adaptive: Under the revised plan and the origination fees on all loans are under $1 million have been eliminated and all loans under 500000, all collateral requirements have been way.
Unusual shocking.
One can use one's own underwriting standards as they do for non SBA loans loans under 150000, the government guarantee has been increased from 75% to 85%.
Traditionally we would say that our target market would be those businesses with revenues between $500000 $10 million.
In that group in 2023, there were $1 5 million such businesses in United States.
There are $5 3 million businesses that generate between 100000 500000 in revenues.
As the agencies number one the winter <unk> average loan over the past six years has been about $1 5 million.
Luke Adaptive: This will change we are extremely excited about these changes that will enable us to put capital in the hands of deserving businesses that we have not addressed in the past.
Over to you to talk about the numbers Budd.
Thank you chip and good morning, everyone. Thank you for joining the call spending the time with US this morning.
I'll start today with a high level review of 2023 on slide 11 topline.
Top line figure show EPS of $1 64, net interest margin of 335% or 6% year over year, adjusted <unk> growth of 14% year over year loan growth driven by another year of $4 billion of loan originations and an outstanding 56% increase year over year in our business deposits portfolio.
Same true to our soundness profitability and growth in that order mantra.
We are extremely proud of how our team was able to navigate the fastest rising rate environment in several decades as well as an industry wide liquidity stress event back in March while still providing strong year over year growth in positive profitability trends.
Luke Adaptive: From a soundness perspective, as Jim mentioned, our credit quality is healthy with positive trends in past dues classified assets and only 29 bps of net charge offs and 86 bps of <unk> nonperforming loans, both as a percent of held for investment on guaranteed loans.
Our liquidity profile remains robust.
Has been throughout the entire year with 301 available liquidity capacity to uninsured deposits funding through a strong deposits origination engine.
Our capital levels remained strong and has seen two consecutive quarters of capital ratio accretion in Q3 and Q4 2023.
From a profitability perspective, we generated a 6% year over year increase in core total revenue aided by our growth in net interest margin and secondary market stabilization.
Net interest margin, which we will speak to more in the upcoming slides remained healthy at 335%, even though our cost of funds remains higher than industry averages proving that as long as you are maintaining pricing discipline on the asset side banks can still have an attractive NIM, while paying their depositors a competitive rate.
Our expense growth in recent years was driven by investing in our operations and technology teams like just chip just pointed out we took the opportunity to lead our expense base begin to scale in 2023 in order to evaluate how we can grow our expense base effectively and efficiently as.
As such our expenses have been relatively flat quarter over quarter through 2023.
Yeah, It's BJ and shipments have said in the past we remain a growth organization and as such we will continue to continue to invest in our future and our revenue generation side of the house, what we refer to as good cost.
From a growth perspective on the lending front inclusive in our 4 billion. Another year of loan production was a sixth consecutive year of being the nation's largest SBA lender take origination engine with the recent changes that chip just mentioned and we are excited about the opportunity of growing our lending business in the small loan arena.
On the deposit our belief in our funding model continues to be supported by the year end and year out strong performance. Our total deposits have grown 16% year over year and a highly competitive market.
Luke Adaptive: What is more impressive is that we have grown our business deposits, 56% year over year and we have also launched or launched our business checking product that will provide funding diversification a low cost of deposits.
And an opportunity for our small business customers to expand their relationship with us and begin to fully operate their business through LIBOR.
Switching to Q4 Q4 results specifically on slide 12, the key commitments that we've made to you in the past as to our outlook remain true today loan growth continues to be strong credit quality has remained stable excluding the noise in Q4 that will speak to shortly expense growth has moderated.
Net interest margin outlook remains positive.
Luke Adaptive: Our loan portfolio grew 3% quarter over quarter through the generation of close to close to $1 billion in loan originations our loan pipeline remains robust and healthy as we head into 2024.
Our deposit growth of 3% with tailored to match our loan growth.
Net interest income was up slightly quarter over quarter and NIM, while down five bps versus Q3 2023 <unk> in line with our expectations.
Excluding the notable expense items on the right hand side of the slide our core expenses were flat quarter over quarter, our core <unk> increased $2 $3 million quarter over quarter, or 5% increase and was up $13 1 million or 40% compared to Q4 2022.
Our credit quality remained steady and continues to perform well provision was down quarter over quarter at the health of the portfolio remained strong we had $4 million of net charge offs in the quarter related for loans spread across three verticals and the bulk of our Q4 provision was related to our loan growth what we refer to as good provision.
The primary noise in the quarter as BJ indicated in our prior quarter call was related to $15 million of renewable energy tax credit impairments within noninterest expense in Q4.
BJ: The benefit from these tax credits, which outweighed the Q4 expense was experienced throughout the year within the income tax expense line effectively lowering our annual tax rate to 10, 7% for the year.
Sydney, where we started the year, we are pleased with the momentum that we have been able to build over the last three quarters and are optimistic as we head into 2024.
Moving on to slide 13, and our net interest margin trends Q4, 2023, net interest income was slightly up linked quarter and up 4% year over year.
While net interest margin was down five bps quarter over quarter.
Let's dig in here to understand the dynamics given the importance of our revenue position.
On the asset front.
Our average rate on new production increased just shy of nine in quarter.
Testament to the outstanding job, our lenders continue to do on the pricing discipline from our.
Our total loan portfolio yield increased nine bps quarter over quarter to 761%.
As our newer loans replace older loans over time, our portfolio yields will continue to rise supporting continued stabilization and then improvement in our net spread.
As a reminder, it is important to focus on both sides of the balance sheet in terms of pricing while cost of funds typically gets the headlines banks have maintained their discipline on the asset side. We have done we have done just that.
On the funding front, our average cost of funds increased 18 basis points quarter over quarter. The primary driver of this increase was wasn't $875 million CD maturity that are roughly 36% of our customer CD portfolio.
The rate on these renewing Cds at replacement funding was 112 basis points higher.
We also repositioned our customers, saying its portfolio to support targeted cash flows, though as you can see on slide 13, our betas remained consistent with past guidance as well as below top digital competitors, especially on the bid on the business savings for us.
The retail deposit market remains highly competitive with three aspects at play large digital banks remain in breadth of pricing positions large traditional banks continue to leverage exception based pricing to reduce their outflows and new smaller entrants continue to rotate into the market with aggressive pricing to fund a certain goal and to establish the brand awareness.
It remains a difficult funding market I want to emphasize the soundness and liquidity will always be Paramount and we will position ourselves from a deposit rate perspective to ensure that our funding levels support our growth aspirations.
As we head into what is an unclear 'twenty 'twenty four right in macroeconomic of macroeconomic environment, let's revisit our past guidance and expectations.
We expect no further major industry disruption related deposits or liquidity.
BJ: The outlook very we currently expect no additional rate hikes and anticipate the fed to cut three times in the second half of 2024.
Our interest rate risk profile remains in plus or minus net neutral position in the near term at the timing of a fed cut could be beneficial or detrimental to any individual quarters net interest margin.
For example, 49% of our loans are variable quarterly adjust that reprice on the first business day of the month following each quarter and therefore, a June rate cut would provide less benefit in April rate cut as there is less time for our deposits reprice downward ahead of the decrease to our variable rate loan portfolio.
The opposite would hold true if the fed cuts earlier in the quarter.
So to recap.
We expect the trajectory trajectory to be off to the right over time, although not in a linear fashion.
BJ: Given the seasonality of deposits upcoming.
I'll come and CD maturity events earlier in the year and our expected fed actions, we largely expect to see more NIM expansion in the back half of 'twenty 'twenty four.
BJ: Okay moving on from my NIM dissertation, let's turn to slide 14 and loan originations.
Our year over year loan production in 2023 was diverse across multiple areas with particular strength in our specialty healthcare solar senior care and self storage verticals.
As others may pull back on lending and what could be an uncertain year, we expect to see good opportunities for new business going forward. As chip has repeatedly said we are open for business and are focused on growing our revenue generating capabilities.
Slide 15 details our quarter over quarter deposit trends the deposit growth is essentially moderated in half two 2023, as we soaked up some of the excess liquidity, we had bill coming out of March or 16% year over year growth rate outperform the industry, which has been essentially flat year over year.
We continue to be confident in our deposit teams ability to generate deposit growth through competitive rate positioning brand awareness campaigns and quality customer service.
Chip: Most notably most notably as I mentioned our customer.
Customer deposits our strategic focus.
Luke Adaptive: Up 40% to 56% year over year or approximately $1 7 billion.
Excellent job by our deposits and marketing teams in a challenging environment.
Quarter over quarter fee income as outlined on slide 16, our SBA sales activity and gain on sale premiums were steady in Q4 gain on sale.
Roughly 8% to 10% of quarterly total revenue continues to feel like the right range.
One notable item to report is that in January January 24, we sold our first two USDA loans and over seven quarters.
It's too early to celebrate we're excited about this development, having the ability to sell USDA loans provides our team with additional optionality liquidity and balance sheet management tactics.
Turning to expenses on slide 17, our core expenses in Q4, 2023 were $74 million essentially flat to Q3 of 2023 and consistent with our commitments made in prior quarters.
Moderating our expense growth, while continuing to grow revenues as the recipe of operating leverage expansion.
Going forward well, while we will remain opportunistic with hiring revenue producers and ensuring that we're investing in areas to support our growth and growing complexity, we will do so intelligently to manage our expense growth.
We remain confident in our ability to consistently grow our keeping our and improve our efficiency ratio as we head into 2024.
Turning to credit trends on slide 18, as chip discussed earlier, our credit quality remains strong and continues to tell powerful story about American small business owners. They are financially savvy and resourceful and our borrowers have adjusted well to changing economic conditions.
We continue to actively monitor monitor the existing portfolio have yet to see any notable surprises outside our expectations and do not currently see any significant weak spots.
Luke Adaptive: Past dues are the lowest they have been over the last five quarters.
Luke Adaptive: As expected in the current environment, we moved some more loans to non accrual status during the quarter, but on the bottom left of this slide you see a five quarter trend of non accruals and you can see that this quarter as non accruals to total loans are still at very manageable levels.
Overall on the top right you can see that the credit quality trends across all our three major business segments segments are healthy.
As mentioned in Q4, 2023 provisioning was driven by loan growth.
Our reserves on guaranteed loans remains twice as high as the industry average and 38% of our total loan portfolio is government guarantee.
Speaker Change: Our commercial real estate portfolio is primarily owner occupied think Dennis office Behner from veterinarians.
17% of our CRE portfolio is non owner occupied but it's primarily senior housing in storage and lastly, 45% of our CRE portfolio is government guarantee.
Luke Adaptive: Slide 19 highlights our overall capital strength, which continues to give us great ability to continue providing growth capital. So our small business customers and comfort that we are well positioned to thrive in whatever environment lies ahead.
To wrap up on slide 20, I'm proud of what this organization has been able to accomplish in a challenging <unk>.
23, and I'm very bullish on our position over the long term.
Luke Adaptive: Our loan production engine, along with reduced reliance on secondary market sales is producing solid double digit loan growth that loan growth coupled with excellent pricing discipline on both the lending and funding fronts has core recurring revenue on an upwards trajectory.
It's early but we are successfully attracting noninterest bearing checking accounts, we will be able to expand our customer relationships, providing a tailwind of lowering funding cost for years to come.
We will continue to invest in our growth and be opportunistic and our addition of revenue generating lenders and products. We will do so intelligently to bounce both near term earnings and long term growth aspirations.
Credit quality is a strength and we.
It to hold up well on a relative basis in whatever credit environment that we may face, having close to 40% of our government of our portfolio of government guaranteed when the industry is about 110th of that also provides great comfort and confidence.
Finally, our not so secret weapon has been and will always remain our people and our culture to us treating every customer like they're the only customer is not a choice it's a way of life.
Luke Adaptive: Thank you again for joining us this morning, and with that we're happy to take questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Should you have a question. Please press the star followed by itself.
No.
Luke Adaptive: Uh huh.
You will hear 310 problems knowledge in real quick question on your questions will be told in the World does it say I received.
Should you wish to decline from the polling process. Please press the star followed.
Luke Adaptive: Let's see.
If you are using a speaker phone please lift the handset before pressing keys.
Luke Adaptive: Our first question comes from the line of Steven Alexopoulos of Jpmorgan. Please go ahead.
Hey, good morning, everyone.
Good morning.
Luke Adaptive: Welcome to the call officially.
Thank you.
I wanted to start on first the margin.
Luke Adaptive: So many banks as you I'm sure you've heard you've outlined quite a few of them on that one slide or talking about this lag right. What's the fed cuts in terms of how quickly they could lower rates because like you said many of them are below market still you guys arent. How do you think about that maybe the first 50 basis point cut what's the beat our range there.
The next hundred could you could you walk us through that.
Yes, Thanks, Steve.
Steve: Look I think when you think of NIM outlook.
It really depends on how rational deposit market.
We generally expect to see similar behaviors going up or going down as we saw going up.
We like we had in Q4, where the large CD maturity you bet. We are CD maturity event, typically our Q1 and Q4 of each year.
No.
I think largely we will see how the market responds.
And then we will position ourselves appropriately.
Steve: I do think Steve.
The first 50 basis points that would probably be a little bit slower on the way down, particularly on the savings side.
Interestingly enough we've seen on the CD portfolio.
Inside of a year that competitors have already started to tips out of their way down the curve and it started to reduce rates.
So.
We're being a little bit conservative, we expect a bit of lag. The first maybe 50 basis points on the way down of savings but.
Yes, I think generally speaking it's going to be.
After that at all.
Moved with long term natus.
Got it okay.
Steve: Maybe for you B J or Walt originally be JV or the CFO, you talked about NIM getting it to a $3 $53 75 range for a variety of factors are at 330 ish could you help us think about.
I know NIM could bounce around a little bit in 2024, given timing right when the fed actually moves and what they do but do you think you ultimately is that still a good range. It's funny when I look back at you guys. You were like a $363 75 in the bank with a normal curve and I'm trying to figure out where we're headed.
Maybe 2024, and then longer term with margin.
Assuming we get Hudson a normal shape curve.
The <unk>, Steve and then BJ can clean me up.
I think the $3 50 to 375 range is still reasonable.
We expect that to be like we mentioned earlier it won't be in a linear fashion.
Steve: I think we will head that direction more so in the back half of the year.
Longer term I think it depends.
How successful we are on our on launching our checking product and the balance billed.
Our lenders continue to do a great job managing their spreads.
On the asset side, so even if we stayed with our current funding model I still think it's trending longer term, depending on the rate cycle and the shape of the curve into that high <unk> low <unk> range.
Yes, and then obviously, we have some potential upside.
If we if we're able to really launch our low low cost deposits.
Luke Adaptive: Got it Okay, and then can I pivot to expenses historically the company is pretty easy to forecast would expenses right. It's like mid teens for next year, but when you look at the trend this year.
Got it down right, how do we think about expense growth in 2024.
Luke Adaptive: Yeah.
<unk> I'll take that one if you look at how quickly we grew our company.
It was pretty massive we've talked in the past about coming out of Covid, we had to really ramp up our lender support groups underwriters closers, Servicers et cetera, and then we made intentional significant investment in technology in 2002, so big bundles.
Is there <unk>.
Over the timeframe from January 21 to January 23, we grew the number of <unk>, 55% in two years that is a massive increase in the number of people and we needed to digest that we needed to put those folks into our machine.
And our organization get them up to see it.
Start to realize benefits from some of the technology investments and 2023 was a year of doing that so we added and Frontloaded a lot of people over the last two years, which afforded us the ability to moderate that expense growth in 'twenty. Three now we've got the right people on the field.
<unk>.
Opportunities that we've got.
Luke Adaptive: Got you.
<unk> point, we are always always in the market looking for new lenders new revenue producers, we are working on new products like.
<unk> technology solutions to make it easier for us to do small dollars set may that's going to continue we're still on the journey that we're very excited about long term on embedded banking.
Luke Adaptive: So youre going to continue to see our expenses go up commensurate with the revenues.
But we've been able to moderate what had been pretty outsized expenses over the last couple of years. So.
Luke Adaptive: If you look at 2024.
Luke Adaptive: I still think that revenues are going to be up.
Luke Adaptive: But I think.
They're going to be up far less than what our what our revenues are.
Our expenses will be up but revenues will be up much more.
Got it.
Luke Adaptive: Hey, if I could sneak one more in chip going back to the changes to the SBA program you called out it sounds like there are smaller dollar loans right and you guys typically did larger dollar SBA loans as we think about loan growth for 2024.
A needle mover right. If we think about where the growth has been call. It mid teens or so on loans can you do better than that in 2024 because of this the changes to the program. Thanks.
Steve I don't know I mean, this was a tectonic change that Florida. This all mean for the agency.
Our rear people that sit at the door of the ball to fundamentally.
Say, two and the entire banking industry that you can make loans under $500000 and not take all available collateral is shocking to us.
We turn down at least $500 million worth of loans under 1 million Bucks every year just from our website.
So we have no idea what this is going to be we're doing a lot of work technology wise to see a we can scale. This and it reminds me of the earlier days because what we'll probably do is sell those smaller loans like we did when we started the company. So we will have an even more interesting balance between gain on sale dollars and holding.
On the more of our $1 5 million average loans and just keep those on book and sell some of the smaller ones, but I just don't have any idea of what that number could possibly be but we are rightfully focused on.
And you think about it Steve is like.
You know.
What person ever said to you well I got a $1 $5 million loan from our bank and Everything's Fantastic. Most people say well I've got $100000 loans roll back or got a $25000 loan from a bank and I really bill my business overtime.
And the fact that we can reach down to some of the underserved communities and and take care of them the ones that are deserving of good.
Good historic credit quality so.
It's a huge difference.
Got it.
So best guess chip same growth this year as last like no real changes to the trend line.
Luke Adaptive: Donald.
Yeah.
Yeah, again, I think close to chip's point.
These small dollar loans, we would likely sell pretty close to a 100% of underwrite into the secondary market.
Got it.
The dynamics in the Optionality it gives us a whole of those larger loans like chipset. So I don't think that you would see the opportunity there.
That we're looking at with small dollar on the loan growth side on the balance sheet, you would see it in fee income got it okay.
Okay. Thanks for taking my questions.
Thanks, Steve Thanks, Steve.
Our next question comes from the mind of Brandon King.
Please go ahead.
Hey, good morning.
Okay great.
So just a follow up on the change of SBA and I know, it's early stages and ship you're still thinking into this but the live oak is known for such a high touch model.
Do you think about kind of extrapolating that towards the smaller dialog as well.
What could that potentially mean as far as the people you have in place.
Infrastructure.
Hey, Brandon.
P J so if.
We will still be as high touch.
As we have always been but I think hi tech is going to be the emphasis here on small dollar so what chip talked about us.
First in fundamentally very important the SBA is making it easier for borrowers.
Luke Adaptive: Two.
Be eligible for SBA dollars, which makes it easier for us to get them approved and get them. The money the way that we're going to do that is to really.
To make as much as possible on the front end for our borrowers and our lenders to be able to get the documentation that we need to make the credit decision.
More on an automated fashion not 100%, but much more.
We typically would on a larger deal today, and then build out the appropriate infrastructure to service this debt.
Wei.
It'll be much more of a technology solution.
And then then.
Yes, and I think one other thing Brandon on that as I said on the call a quarter ago. We have 62 22 year olds that collect financial statements every quarter on every one of our 7000 customers we won't be doing that on the small dollar amounts will get an annual tax return.
<unk>.
<unk> is really a hand holding group, we do everything that we can help these borrowers if it's deferred this from loblaw that we want to do that we probably won't do that on these.
Could be a massive number of under $500000 months. So I think that special asset treatment in the event of a material adverse change will be a big difference.
Okay.
That's very helpful. And then what you mentioned, how the CD maturities are chunkier in first quarter and fourth quarter of each year could you give us a sense. So.
Sort of maturities are expecting or the size of maturities you you're expecting this year.
We're kind of like.
The run off rates.
Renewal rates could be.
Yes no.
Thanks, Brian Great question. So Q1 is not quite as large as the 875 million that we saw here in Q4.
It's slightly below that the average rate of renewal will be.
Brian: Similar to what we saw in Q4, so I would say plus 100 bps.
At the minimum.
Typically.
Can you just the way the deposit seasonality forms throughout the year. It's typically Q1 and Q4 are the heavy quarters, a little bit lighter in Q2, and even even later than that in Q3.
One of the things that we're working on with just our CD strategy is how we can continue to try to level off those CD maturities.
We will start to see some more progress here in 2024. So this is more of a 2025 2026 benefit.
And that's where the user.
The channels like wholesale can help you.
Essentially plan and fine.
Yes.
Certain maturity gaps.
Speaker Change: You can kind of flat funding into.
Speaker Change: Yes.
Speaker Change: Okay, Yes.
You want to add that solved noticed.
The raising of wholesale deposits declined in the quarter I was wondering if that was the intention Norway.
Speaker Change: B potentially paying for a downrate cycle.
Yeah, no. That's it that's exactly right one of the ways. We navigated Q4 was essentially maintaining a competitive position, but then.
Given all the uncertainty.
With the potential fed cuts in 2024 in the range of <unk>.
Speaker Change: Likely.
The amount of cuts that could happen.
We really start to leverage some.
Speaker Change: More on the wholesale side four odd maturity.
Nine months seven months.
Four months and so forth just to try to help level off that CD maturity portfolio as much as we can.
Got it thanks for taking my questions.
Thanks, Brian.
Our next question comes from the line of Michael Perito of K B W.
Go ahead.
Yes.
Hey, good morning, everyone. Thanks for taking my questions.
Morning, Mike.
I wanted to.
Follow up on the expense question just the employee bonus is is that something that will recur annually and be accrued for more evenly going forward or was there. Another can you maybe just extrapolate that out a little bit as I try to think about where.
You know kind of full year expenses grow year on year.
Okay.
Yes, I think Mike hit it.
P. J 2023 was quite an interesting year, particularly with what happened in March and so.
Yeah.
We didn't have as great of a year is what we thought at the beginning.
Like a lot of of others and so.
We moderated our incentive pools appropriately.
Throughout the year at the end of the year. We saw that we were going to have a one time fixed asset gains.
And decided that we were going to repurpose that edge encourage our employees about navigating through a tough 2003 and moving into 2024, we have fully accrued going into this year our normal incentive.
Payouts.
So that is included in what are our expense expectations are so.
Well.
We have that included in what we're looking at a 2024.
Okay. That's helpful. Thanks, and then.
Yeah realize this is a challenging question like asking you guys to find the needle in a stack of needles here, but the renewable energy tax credits any line of sight on additional <unk>.
Projects or investments in and do you guys have an initial kind of budget range on what you expect the tax burden to be in 'twenty four.
Okay.
Hey, Mike this fall.
Yes, right now we are not planning being another one of these renewable energy ITC tax investments.
In 2024.
Continue to evaluate what our tax rate is going to be.
Which will probably be somewhere in the 25% range given federal and state.
I think the.
As we think about kind of long term planning tax strategy planning trying to find things.
Essentially a portfolio of whether its low income housing tax credits or things like that all fall within the income tax expense line, so you're not creating that.
Quarter over quarter noise.
The non interest expense and the impairment.
That we're aspiring to do.
Yes.
At this point don't see a lot of movement in 2024.
Really to bring that tax rate down from that 25% range.
Okay Alright.
Sorry, if I misunderstood this but I thought when the the tax.
Benefit would come.
After the impairment was recognized but is that not the case is it whats the tax benefit before the impairment.
Speaker Change: That's correct. So we the tax benefit the ECS.
You see it throughout the current year of the tax impairment, so even though the tax impairment happened in Q4, we see the tax benefit in Q1, Q2, Q3, and Q4 of the current year. Okay got it okay. So the 25% at this point is it pretty clean.
Best guess for you guys absent taking any other actions to lower your tax burden that that Youll, obviously Dallas once once you do.
That's correct.
Okay.
Uh huh.
On the on the loan growth side.
Obviously for good reason a lot of focus on kind of the SBA and some of the changes going on there, but what about on kind of the non SBA the general lending side.
Any kind of recent additions or updates on the on the team there and thoughts around what type of production you could we could expect from that group in 'twenty four.
Yes so.
If you look back on slide 14, I'm really looking at this case visually it kind of helps.
Where we're seeing growth in originations and where we are but.
Because of the.
IRA.
Debt.
<unk> reduction Act.
And the incentives our solar business, which has always been very strong had a particularly strong year.
You can see the green bundles, if you look at those RR more conventional lending businesses.
Particularly specialty healthcare, which a lot of that is our lending to dsos dental service organization that they are rolling up dental practices still very very high.
<unk> business seniors housing had a great great year, because as you might imagine a lot of other banks, we're trimming their commercial real estate.
Concentrations and not doing as much and so our teams to great advantage of.
So really really high quality developer relationships and putting some loans on the books there, but if you look at the purple, which is where our small business banking verticals are our traditional bread and butter you can see that that while a few like senior care and self storage at really good.
Luke Adaptive: <unk> growth year over year in 2023, the majority of our small business verticals were actually down in originations from 2022 to 2023.
2023 was just to grind it started tough in the first half of the year rapid rate rises borrowers and sellers still not on the same page in terms of valuations, we started to see that come back.
Luke Adaptive: In our small business areas in the last half of the year and we expect that small business.
Our verticals across our company are going to have quite a good year in 2024 as rates have stabilized.
Likely come down.
We think theres going to be a heck of a lot of activity in 2024.
Sure.
Helpful. And then just lastly for me.
Following up on the kind of the technology investment about the SBA loans sub 500, K is this going to be a good.
Luke Adaptive: Test track for for the fins at core and hopefully being able to accomplish things a lot faster and lower cost than than maybe.
Historically in and where do you guys not feel that way and I'm just kind of wondering how has it generally I don't think we've talked about it a bit since the conversion and maybe I'm forgetting a comment or two here or there, but it has the pins out core been kind of working out as you expected and is it correct for us to assume that like your ability to turn around on a technology project.
This is still going to be enhanced from all those investments made in prior years.
It will certainly down the road Fintech.
For us is continuing to be primarily on the deposit side and where we're doing a lot of development and innovation is talking about a pause.
<unk> itself is still maturing.
Their load capabilities.
So.
While this will help down the road as we ultimately migrate everything.
From a core perspective to <unk>, yes, the technology solutions that we're building for small dollars seven a.
We'll be more.
Standalone innovative as opposed to relying on <unk> at this point.
Mike I think the answer is over time, yes, because if you think about <unk>.
Grabbing.
Persons tax return I mean, that's lumped that not a ratio on yesterday.
2022, 2023, what does that have to do with the current state of the business integrating plaid and fins that together, where we have up to date transactions and complete understanding of exactly where those small businesses are will be quite helpful. In figuring out had a credit score of those 100000 to 500000 dollar months.
Luke Adaptive: Excellent. Thank you guys for taking my questions I appreciate it.
Thanks, Bob.
There are no further questions at this time, so I'll hand, the call back to chip Mahan, Chairman and CEO.
We enjoyed talking to you investors on our Q4 call and look forward to talking to you the end of April and the new year.
Thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.
Yes.
Okay.
Yes.
Luke Adaptive: Okay.
Luke Adaptive: Okay.
[music].