Q1 2024 Live Oak Bancshares Inc Earnings Call

Operator: Good morning, ladies and gentlemen, and welcome to the Q1 2024 Live Oak Bancshares Earning Call. At this time, our 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 you need assistance, please press star zero for the operator. This call is being recorded on Thursday, April 25, 2024. I would now like to turn the conference over to Greg Seward, General Counsel and Chief Risk Officer. Please go ahead.

Good morning, ladies and gentlemen, and welcome to the Q1 2020 for live Oak Bancshares earnings 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 you need assistance. Please press star zero for the operator. This call is being recorded on Thursday April 25th 'twenty 'twenty four I would now like to turn the conference over to Greg Seward General Counsel and Chief Risk Officer. Please go ahead.

Greg Seward: Thank you and good morning everyone. Welcome to Live Oak's first quarter 2024 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 material that we will reference on the call, please visit our website at investor.liveoakbank.com and go to the events and presentations tab for supporting material. Our first quarter earnings release is also available on our website.

Greg Seward: Thank you and good morning, everyone. Welcome to live Oak's first quarter 2024 earnings conference call.

Speaker Change: Webcasting live over the Internet and this call is being recorded.

Greg Seward: Just a call over the Internet and review the presentation materials that we will reference on the call. Please visit our website at Investor that live Oak Bank Dot Com and go to the events and presentations tab for supporting materials.

Greg Seward: Our first quarter earnings release is also available on our website.

Greg Seward: 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 uncertainty. 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 these forward-looking statements to reflect the impact of circumstances or events that may arise after the date of this call.

Greg Seward: Before we get started I would like to caution you that we may make forward looking statements. During today's call that are subject to risks and uncertainties factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings.

Greg Seward: 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.

Greg Seward: Information about any non-GAAP financial measures referenced, including reconciliation of those measures to gap measures, can also be found in our SEC filings and in the presentation material. I will now turn the call over to Chip Mayhem, our Chairman and Chief Executive Officer.

Greg Seward: Information about any non-GAAP financial measures referenced include.

Greg Seward: Including reconciliation of those measures to GAAP measures can also be found in our SEC filings and in the presentation materials.

Greg Seward: Now I'll turn the call over to chip Mahan, our chairman and Chief Executive Officer.

Chip Mahan: Thanks Greg. Good morning, fellow shareholders, and welcome to our Q1 call. I'm going to kick things off this morning and discuss several areas noted on slide four. We will touch on first quarter loan originations and our pipeline of future loans to be generated. As always, we will present a credit quality update along with a view of increased operating leverage based on the investments we have made. Then we will discuss growth drivers by way of adding new lending officers and a new way of underwriting small loans. Then we will wrap up with a few thoughts from our annual report as we look back on these last 10 years. Moving to slide five.

Chip Mahan: Thanks, Greg Good morning, fellow shareholders and welcome to our Q1 call.

Chip Mahan: I am going to kick things off this morning to discuss several areas noted on slide four.

Chip Mahan: We will touch on first quarter loan originations and our pipeline of future loans to be generated and as always we will present, a credit quality update along with a view of increased operating leverage based on the investments we have made.

Chip Mahan: Then we will discuss growth drivers by way of adding these lending officers and a new way of underwriting small loans.

Greg Seward: Then we will wrap up with a few thoughts from our annual report as we look back these last 10 years.

Greg Seward: Moving to slide five.

Chip Mahan: Before we dig in on asset quality, a word on Originations and Q1. Originations of this quarter were $805 million, a $176 million decrease from Q4 of last year and $226 million less than Q1 of 2023. That said, a number of larger looms slipped at the last. As of today, many of those have closed.

Greg Seward: Before we dig in on asset quality award on originations in Q1.

Greg Seward: Originations for this quarter were $805 million.

Greg Seward: $176 million decrease from Q4 of last year and $226 million less than Q1 of 2023.

Greg Seward: That said.

Greg Seward: A number of larger loans slipped at the last minute.

Greg Seward: As of today many of those have closed we expect to catch up to our original budget by the end of this quarter.

Chip Mahan: We expect to catch up to our original budget by the end of this quarter. We expect a nice increase in originations over last year. Our overall pipeline is at an all-time high of 23% higher than last year. Back to this slide. Again, steady as she goes as it relates to the top portion of the scene.

Greg Seward: We expect a nice increase in originations over last year.

Greg Seward: Our overall pipeline is at an all time high up 23% over last year.

Greg Seward: Back to this slide.

Greg Seward: Again steady as she goes as it relates to the top portion of this slide.

Chip Mahan: The bottom half requires further explanation. Steve and his credit team have quarterly watch list meetings with all 75 banks. As you recall, these folks are recent college graduates responsible for gathering financial statements on all 6,000 customers every 90 days. This deep dive includes a healthy portion of all of our employees who touch the customer. He leaves no stone unturned.

Greg Seward: The bottom half requires further explanation.

Greg Seward: Steve and his credit team have quarterly watch list meetings with all 75 bankers as you.

Greg Seward: Call. These folks are recent college graduates responsible for gathering financial statements on all 6000 customers every 90 days.

This deep dive includes a healthy portion of all of our employees, who touch the customer.

Chip Mahan: Leave no stone unturned.

Chip Mahan: As we examine our chargeoffs as it relates to our provisioning on the next slide, Steve has a proven track record of conservatism. The real answer to credit quality exists on slide 6. Let's dig in on the actuals of these last 13 quarters.

Chip Mahan: As we examine our charge offs as it relates to our provisioning on the next slide Steve has a proven track record of conservatism.

Chip Mahan: So I will answer the credit quality exists on slide six.

Chip Mahan: Let's dig in on Actuals These last 13 quarters.

Chip Mahan: Our unguaranteed ACO reserves are almost 2.5% of unguaranteed loans and leases, or twice the industry norm. As the nation's number one SBA lender, we have also evolved as one of the nation's preeminent cash flow lenders. With interest rates rising over 500 basis points in a very short period of time, our approach seems prudent. We have added $101 million to our reserves in these last seven quarters while charging off just $27 million. This includes $7 million in fraudulent national participation in Q3 of last year. One needs to let this marinate a bit.

Chip Mahan: Our and guaranteed ACL reserves are almost two 5% on guaranteed loans and leases or twice industry norms.

Chip Mahan: As the nation's number one SBA lender, we have also evolved as one of the nation's preeminent cash flow lenders with.

Greg Seward: With interest rates rising over 500 basis points in a very short period of time, our approach seems prudent.

Greg Seward: We have added $101 million to our reserves. These last seven quarters, while charging off just $27 million.

Chip Mahan: This includes $7 million and a fraudulent national participation in Q3 of last year.

Chip Mahan: One needs to lead this marinade a bit.

Chip Mahan: Steve will be happy to answer any questions in our upcoming Q&A session. Now, we'll walk you through the non-operating adjustments as we move to slide seven. Needless to say, we're quite pleased to see a 26% increase in operating leverage from the first quarter of last year to Q1 of this year. This $8 million increase year-over-year should accelerate in the future. Our investments in next-gen technology allow us to better answer the question we constantly hear from our customers: am I approved, and when do I get the money? Our goal of never touching data twice is just around the corner. Treating each customer like our only customer is how we are built.

Chip Mahan: Steve will be happy to answer any questions that are upcoming Q&A session.

Chip Mahan: We'll walk you through the non operating adjustments as we move to slide seven <unk>.

Chip Mahan: Needless to say, we are quite pleased to see a 26% increase in operating leverage from the first quarter of last year to Q1 of this year.

Chip Mahan: This $8 million increase year over year should accelerate in the future our investments in much Jam technology allows us to better answer. The question, we constantly hear from our customers and approve and when do I get the money.

Chip Mahan: Our goal of never touching data twice is around the corner.

Chip Mahan: Treating each customer like our only customer is how we are built.

Chip Mahan: We are in constant search of ways to raise our NPS score, and we look forward to this year's results. As discussed on our last call, we are incredibly excited about changes made at the SBA that affect loans under $1 million, and particularly loans under $500,000. Our tech teams are working 24-7 to automate this process in a way never before contemplated.

Chip Mahan: We're in constant search of ways to raise our NPS score and we look forward to this year's results.

Chip Mahan: As discussed on our last call. We are incredibly excited about changes made at the SBA debt effect loans under $1 million and particularly loans under $500000. Our tech teams are working 24 seven to automate this process and are we.

Chip Mahan: They never before contemplated.

Chip Mahan: Those loans will be sold on the secondary market. As we scale, those gain-on-sale dollars will have a positive effect on this ratio. Moving to slide eight.

Chip Mahan: Those loans will be sold on the secondary market.

Chip Mahan: We scale those gain on sale dollars will have a positive effect on this ratio.

Chip Mahan: Moving to slide eight.

Chip Mahan: In this year's annual report, we thought it would be informative to look back over the last 10 years. In 2013, we were a $400 million bank with $50 million in capital. Just after receiving our charter in May of 2008, the FDIC restricted our growth to no more than 25% per year until 2015.

Chip Mahan: And this year's annual report, we thought it would be informative to look back over the last 10 years in 2013, we were a $400 million bank with $50 million in capital just after receiving our chartered may have delayed the FDIC restricted our growth to no more than 25% per year until 2015.

Chip Mahan: We took the company public two months later, and in 10 years, we have grown to an $11 billion bank with almost $1 billion of capital. Assets have grown 39% year-over-year, while capital has grown a compound of 34% in those 10 years. Tangible book value has grown from $2.36 per share to $20.32 per share, a 10x increase over the period. While we're not suggesting that the past is a proxy for the future, steady, organic, non-dilutive growth has been our mantra from inception.

Chip Mahan: We took the company public three months later.

Chip Mahan: And 10 years, we have grown to $11 billion bank with almost $1 billion of capital assets have grown 39% year over year, while capital has grown a compounded 34% in those 10 years.

Chip Mahan: Tangible book value has grown from $2 36 per share to $20 32.

Chip Mahan: Per share.

Chip Mahan: Cemex increase over the period.

Chip Mahan: While we're not suggesting that the past as a proxy for the future steady organic non dilutive growth has been our mantra from inception.

Chip Mahan: The rest of this slide shows how we got there. About half a billion dollars of organic earnings growth since the last time we had to access the capital markets back in 2017, driven by our core business earnings along with $207 million in gains from FinTech activities related to FinZac, GreenLight, and PayRail. Lastly, on slide nine, our increase in tangible book value compared to others in the KBW coverage universe is in a class by itself. We are up over 700%, while the KBW coverage median has grown a tenth of that. And with that, I'll turn things over to Walt.

Chip Mahan: The rest of this slide shows how we got there.

Chip Mahan: About a half a billion dollars of organic earnings growth since the last time, we had to access the capital markets back in 2017, driven by our core business earnings along with $207 million and gains from Fintech activities related to <unk> Greenlight and payrolls.

Walt: Lastly on slide five.

Walt: Our increase in tangible book value compared to others in the K VW coverage universe is in a class by itself.

Walt: Our up over 700%, while the K BW coverage median has grown attempted that.

Chip Mahan: With that I'll turn things over to Walt.

Walt: Thank you, Chip. Good morning, everyone.

Walt: Thank you chip and good morning, everyone.

Walt: I'll start today with a high-level review of Q1 on slide 11. Our core financial objectives remain consistent with what we have discussed on recent calls. Protect your credit vault.

Walt: I'll start today with a high level review of Q1 on slide 11.

Walt: Our core financial objectives remain consistent with what we have discussed over recent call protected credit.

Walt: Utilize pricing disciplines that span our net interest income and net interest margin. Moderate expense growth, yet remain opportunistic to add good cost and grow the business. The top line figures show EPS of $0.36, a healthy net interest margin of 3.33%, 42% quarter-over-quarter growth in reported PPNR, two percent quarter-over-quarter loan growth, and a seven percent increase quarter-over-quarter in our business deposits portfolio. From a soundness perspective, our small business borrowers continue to be resilient and maintain the eye-of-the-tiger mindset despite a challenging higher-for-longer-rate environment that has put pressure on some of the loans originated back in the lower-rate years of 2020 and 2021. Our credit performance continues to remain within our expectations, and we remain confident in our portfolio strength and proactive monitoring. More on CREZ will follow shortly.

Walt: Utilized pricing discipline to expand our net interest income net interest margin.

Walt: <unk> expense growth, yet remain opportunistic to add good cost and grow the business.

Walt: Top line figures show EPS of <unk> 36.

Walt: A healthy net interest margin of 333%.

Walt: A 42% quarter over quarter growth in reported PNR.

Walt: 2% quarter over quarter loan growth.

Walt: A 7% increase quarter over quarter, and our business deposits portfolio.

Walt: From a soundness perspective, our small business borrowers continued to be resilient and maintain the eye of the tiger mindset. Despite a challenging higher for longer rate environment has put pressure on some of the loans originated back into lower rate year 2000 22021.

Walt: Our credit performance continues to remain within our expectations and we remain confident in our portfolio strength and proactive monitoring.

Walt: More on credit shortly.

Walt: Our liquidity profile remains robust with low uninsured deposits compared to the rest of the industry and 3 to 1 available liquidity capacity to those uninsured deposits. Our capital levels remain strong and have seen three consecutive quarters of capital ratio accretion. From a profitability perspective, our core business continues to perform well, as Chip mentioned with a 26% year-over-year increase in core operating earnings. This growth reflects our focus initiatives to grow revenues at a faster pace on our expenses as we scale into the strategic hiring investments made over the past few years.

Walt: Our liquidity profile remains robust with low uninsured deposits compared to the rest of the industry and the reason one available liquidity capacity to those uninsured.

Walt: Our capital levels remain strong and have seen three consecutive quarters of capital ratio accretion.

Walt: From a profitability perspective, our core business continues to perform well as Jim mentioned with a 26% year over year increase in core operating earnings.

Walt: This growth reflects our focused initiatives to grow revenues at a faster pace on our expenses as we scale into the strategic hiring of investments made over the past few years.

Walt: Our 1% quarter over quarter increase in net interest income and one basis point quarter over quarter increase in net interest margin were in line with our expectations. We will speak more about them in the upcoming five.

Walt: Our 1% quarter over quarter increase in net interest income and one basis point quarter over quarter increase in net interest margin was in line with our expectations.

Walt: We will speak more on NIM in the upcoming slides.

Walt: From a growth perspective, on the lending front, we remain the nation's largest SBA lender in terms of balance volume this far in the SBA fiscal year. Loan originations have a seasonal component, with Q1 typically resulting in the lowest quarter of originations each year, and as Chip mentioned, a good portion of the loans that push to the right have already closed thus far in Q2. Our $3.2 billion pipeline remains at all-time highs as our lenders continue to do a fantastic job of sourcing new opportunities in a very competitive environment.

Walt: From a growth perspective on the lending front, we remain the nations largest SBA lender in terms of balance volume, thus far in the SBA fiscal year <unk>.

Walt: Organizations have a seasonal component with Q1, typically resulting in the lowest quarter of originations each year and as chip mentioned.

Walt: Good portion of the loans that are pushed to the right have already closed thus far in Q2.

Walt: Our $3 $2 billion pipeline remains at all time highs as our lenders continued to do a fantastic job at sourcing new opportunities with a very competitive environment.

Walt: Our ability to calibrate deposit growth to support our loan growth remains a strength. Customer deposits grew 4% quarter over quarter, primarily in our business deposit sector. This allowed us to reduce our more expensive brokerage funding by 7% quarter over quarter. A couple of quick notes on slides 12 and 13.

Walt: Our ability to calibrate deposit growth to support our loan growth remains a strength customer deposits grew 4% quarter over quarter, primarily in our business deposit sector.

Walt: This allowed us to reduce our more expensive brokered funding by 7% quarter over quarter.

Walt: Couple of quick notes on slides 12 and 13.

Walt: Slide 12 highlights that roughly two-thirds of our $805 million in loan origination in Q1 2024 was in our small business banking space. As you can see on the top right, the bulk of the difference versus Q1 2023 was in the specialty and energy and infrastructure business units. We ultimately view this as a timing difference, as these deals tend to be larger and more fluid in their estimated closing dates and, as such, can easily be pushed from one quarter to another.

Walt: Slide 12 highlights that roughly two thirds of our $805 billion of loan origination in Q1 2024 within our small business banking space.

Walt: As you can see on the top right. The bulk of the difference versus Q1, 2023 within our specialty and energy and infrastructure business units.

Walt: We ultimately view this as a timing difference as these deals tend to be larger and more fluid in their estimated closing date and as such can easily push from one quarter to another quarter.

Walt: We are also in the early days of our focus on small SBA 7-8 loans. Thus far, we have generated $13 million of small loan SBA 7A production year-to-date and continue to see that pipeline increase. As Chip mentioned, as we work to automate the application, documentation, and decisioning process of our SBA Origination Platform, we are excited as to what possibilities that provide for small loan sub-day origination and the subsequent gain on sale income.

Walt: We are also in the early days of our focus on small SBA seven loan.

Walt: Thus far we have generated $13 million of small loan SBA seven day production year to date and continue to see that pipeline increase.

Walt: Chip mentioned as we work to automate the application documentation and Decisioning process of our SBA origination platform. We are excited as to what possibilities that provides for small loans MBA originations and the subsequent gain on sale income.

Walt: Slide 13 highlights the quarterly-over-quarter loan growth by component. It's important to note that prior to our typical sales and participations activity, our loan portfolio growth was 5% quarter-over-quarter, as new fully funding originations and construction loans continue to drive bounce growth. Our pipeline and portfolio activity suggests that a low double-digit, full-year growth rate remains a reasonable loan growth expectationancy. Deposit trends are highlighted on slide 14. I've long viewed our funding model as a strength.

Walt: Slide 13 highlights the quarter over quarter loan growth by component. It's important to note that prior to our typical sales and participations activity our loan portfolio growth was 5% quarter over quarter as new fully funding originations in construction loans continue to drive bounds growth.

Walt: Our pipeline and portfolio activity suggests that a low double digit full year growth rate remains a reasonable loan growth expectation.

Walt: Our deposit trends are highlighted on slide 14.

Walt: I have long viewed our funding model off the strength our branches funding platform is extremely efficiently with a ratio of approximately 5000 deposit accounts to one customer success representative and the expense of funds. It typically ranges from 10 to 20 basis points.

Walt: Our branch's funding platform is extremely efficient, with a ratio of approximately 5,000 deposit accounts to one customer success representative. And the expense of funds typically ranges from 10 to 20 basis points. Oh, and by the way, our customer calls are typically answered within a minute by a live customer service team that has a 93% plus first call resolution average.

Walt: And by the way our customer calls it typically answered within a minute by live customer service team as a 93% plus first call resolution average.

Walt: All while our competitive rate position ensures our customers are receiving market pricing, regardless of the interest rate environment. As evidence of this strength, our total deposits increased to roughly $10.5 billion in Q1 2024, a $1 billion or 10% increase year-over-year. Customer deposit growth has been predominantly driven by our business deposits, both in savings and CDs.

Walt: All while our competitive repositioning shorts arco customers are receiving market pricing, regardless of the interest rate environment.

Walt: As evidence of the strength, our total deposits increased to roughly $10 $5 billion in Q1 for a $1 billion or 10% increase year over year.

Walt: Customer deposit growth has been predominantly driven by our business deposits both savings and Cds.

Walt: Our overall customer deposit funding mix of 63% savings, 34% CDs, and 3% non-interest-bearing has held constant over the past year, as we have not yet seen the migration to term deposits that many in the industry have begun to experience. Given the uncertainty of the Fed outlook, we continue to like our funding portfolio short-term. Our business checking product launched in Q4 2023, and while we are in the early days of rolling this product out, we have seen positive momentum thus far.

Walt: Our overall customer deposits funding makes up 63% saving 34% Cds and 3% noninterest bearing is held constant over the past year as we have not yet seen the migration to term deposits that many in the industry have begun to experience.

Walt: Given the uncertainty of the fed outlook, we continue to like our funding portfolio of short term positioning.

Walt: Our business second product launch in Q4, 2023, and while we are in the early days of Rolling this product out we have seen positive momentum thus far.

Walt: Our expectation was that this was going to be a crawl, walk, run sort of pace, and we are optimistic with regard to this product's trajectory and its potential impact on our profitability as it scales to a larger portion of our funding mix over time. Slide 15 highlights our net interest income, NIM, and yield trends. As mentioned earlier, our Q1 2024 net interest income was slightly up by a quarter, and our net interest margin improved by one basis point to 3.33%.

Walt: The station was that this was going to be a crawl walk run sort of pace and we are optimistic with regards to this product's trajectory and its potential impact on our profitability as it scales to a larger portion of our funding mix over time.

Walt: Slide 15 highlights our net interest income NIM and yield trends.

Walt: As mentioned earlier, our Q1 2024 net interest income was slightly up linked quarter and our net interest margin improved by one basis point to 333%.

Walt: As mentioned in our last call, pressure on net interest income growth in Q1 was expected, as we had a large CD maturity event with an average renewal rate increase of 61 bps. On the pricing front, our lenders continue to hold the line on spreads in a tougher, higher-for-longer rate environment, while many of our competitors are pricing well below cost. Our average yield on new production in Q1 was 9.12%, or just above prime plus 60 basis points. Our average portfolio loan yield increased to 7.77% in Q1, up 16 basis points from Q4.

Walt: As mentioned in our last call pressure on net interest income growth in Q1 was expected as we had a large CD maturity event with an average renewal rate increase of 61 basis points.

Walt: On the pricing front, our lenders continuing to hold the line on spreads in a tougher higher for longer rate environment, while many of our competitors are pricing well below prime.

Walt: Our average yield on new production in Q1 was $9, one 2% or just above prime plus 60 basis points.

Walt: Our average portfolio loan yield increased to 777% in Q1 up 16 basis points from Q4.

Walt: As for deposit pricing the average cost of funds increased over the last two quarters has largely been a result of our CD portfolio maturity and repricing.

Walt: As for deposit pricing, the average cost of funds increased over the last two quarters has largely been a result of our CD portfolio maturities and repricing. These maturity events have provided net interest income and net interest margin headwinds in Q4 2023 and Q1 2024, but they could ultimately provide future tailwinds if the Fed cuts later in 2024 or 2025. We have not raised our business savings rate since March of 2020-23 and have not raised our personal savings rate since November of 2020-21.

Walt: These mystery events have provided net interest income and net interest margin headwinds in Q4 23 for Q1, it's likely for.

Walt: But they could ultimately provide future tailwind that deferred type later in 2024 or 2025.

Walt: We have not raised our business savings rates since March of 2023 and have not reached our personal savings rate since November of 2020 'twenty three.

Walt: At the same time, we actually have been fortunate to begin lowering our CD rate offerings recently as the market has begun to reprice and CD rates downward as they try to shorten their funding portfolio discourage funding migration to term deposits.

Walt: And pushed customers to them more variable nacion deposit offerings.

Walt: Make no mistake that the market remains highly competitive but it continues to show signs of rational pricing, which is encouraging.

Walt: So we'll have to start funding cost effort when the fed cuts rates many banks throughout the industry still expect rising funding cost even if the fed cuts rates at the current offerings are still well below market competitive.

Walt: At the same time, we actually have been fortunate to begin lowering our CD rate, as the market has begun to reprice its CD rates downward as they try to shorten their funding portfolio, discourage funding migrations to term deposits, and push customers to their more bearable nature deposit offerings. Make no mistake that the market remains highly competitive, but it continues to show signs of rational pricing, which is encouraging. So, what will happen to our funding costs if or when the Fed cuts rates?

Walt: This is evidenced by the national average savings rate still remains just shy of 50 basis points, while most digital banks have offerings north of 400 basis points.

Walt: We will assess the drivers of the fed cuts at the competitive market and our funding needs ultimately expect the digital deposit market to react fairly quickly in the downward re pricing and we'll do the same.

Walt: Lastly, given the recent inflation in fed outlook news, let's quickly revisit our net interest income and margin expectations communicated by BJ and myself over the past few calls.

Walt: Many banks throughout the industry still expect rising funding costs even if the Fed cuts rates as their current offerings are still well below market competitive. This is evidenced by the national average savings rate still remaining just shy of 50 basis points, while most digital banks have offerings worth up to 400 basis points. We will assess the drivers of the FedCuts, the competitive market, and our funding needs, yet ultimately, we expect the digital deposit market to react fairly quickly in its downward repricing, and we'll do the same.

Walt: We've communicated that our net interest income and margin are expected to migrate up into the right over 'twenty 'twenty four, albeit not in a linear fashion with more improvement in the back half of 2024.

Walt: This expectation included returning to a NIM range of three 5% to 375% by the end of the year and a high single digit to low double digit growth in 'twenty for net interest income relative to full year 2020, 'twenty three barring any unforeseen liquidity stress events.

Walt: That guidance was based on three fed cuts in the second half of 'twenty 'twenty four and while we are optimistic that we will continue on the up into the right journey with our margin overtime.

Walt: Lastly, given the recent inflation and Fed outlook news, let's quickly revisit our net interest income and margin expectations communicated by BJ and myself over the past few calls. We've communicated that our net interest income and margin are expected to migrate up and to the right over 2024, albeit not in a linear fashion, with more improvement in the back half of 2024. This expectation included returning to a NIM range of 3.50% to 3.75% by the end of the year and a high single-digit to low double-digit growth in 2024 net interest income relative to full year 2020-2023, barring any unforeseen liquidity stress events.

Walt: Hope that up into the right trajectory for both net interest income and NIM lay flattened with lesser del Rey cuts.

Walt: Driving us towards the lower end of the expected range by the end of the year time will tell.

Walt: Quarter over quarter fee income as outlined on slide 16, we continue to be encouraged by improvement in the SBA secondary market in Q1.

Walt: There was a good amount of liquidity in the market and stabilization in the February aided the improvement on our average premium from five to seven points on loan sold.

Walt: As you can see the bottom table. Our Q1 sales volume is typically lower than the rest of the year followed by slight stair step up in Q2 through Q4.

Walt: We expect 'twenty 'twenty four it would be no different.

Walt: In wholesale providing for roughly 8% to 12% quarterly total revenues continues to feel like the right range at this point in time.

Walt: That guidance was based on three Fed cuts in the second half of 2024, and while we are optimistic that we will continue on the up-and-to-the-right journey with our margin over time, the slope of that up-and-to-the-right trajectory for both net interest income and YIM may flatten with less or no rate cuts, driving us towards the lower end of the expected range by the end of the year. Time will tell.

Walt: As I mentioned in our last call we were able to sell our first few USDA loans for the first time in over seven quarters as asset sensitive banks begin to consider downward rate protection we.

Walt: We are excited about this development, but one quarter is not a trend and at the timing of our USDA originations can be choppy, so will our USDA sales activity.

Walt: Turning to expenses on slide 17, our Q1 2024 expenses of $79 million were up 7% quarter over quarter, but were essentially flat to Q1 2023.

Walt: Quarter over quarter fee income is outlined on slide 16. We continue to be encouraged by improvement in the SBA secondary market in Q1. There was a good amount of liquidity in the market, and stabilization in the Fed rate aided the improvement in our average premium from 5 points to 7 points on loans sold. As you can see in the bottom table, our Q1 sales volume is typically lower than the rest of the year, followed by a slight stair step up in Q2 through Q4. We expect 2024 to be no different.

Walt: Quarter over quarter growth was driven by incremental personnel costs, such as 'twenty 'twenty four hires our annual salary adjustments.

Walt: 'twenty three restricted stock unit awards and accruals related to our 2020 for employee bonus expectations.

Walt: FTE growth for good cost with the addition of two senior loan officers closings that focus on small SBA seven loans and servicing internal audit and risk personnel to support our growth and complexity.

Walt: We continue to operate as a growth organization and we will remain focused on adding revenue generators and other good cost as needed.

Walt: Gain-on-sale providing for roughly 8-12% of quarterly total revenues continues to feel like the right range at this point in time. As I mentioned in our last call, we were able to sell our first two USDA loans for the first time in over seven quarters as asset-sensitive banks began to consider downward rate protection. We are excited about this development, but one quarter is not a trend, and as the timing of our USDA regenerations can be choppy, so will our USDA sales activity.

Walt: There are still opportunities to find efficiencies and scale and technology and support areas through automation and process improvements that will help manage expense growth going forward, thus continuing to provide improvement in our operating leverage.

Walt: Additional credit trends are included on slide 18.

Walt: Our $16 million provision was primarily attributed to portfolio macroeconomic changes specifically the impact on customer cash flows from our higher for longer rate environment.

Walt: Past dues are not materially outline with prior quarters and although non accruals are up as expected in the current environment, we still feel that these levels are manageable.

Walt: Turning to expenses on slide 17, our Q1 2024 expenses of $79 million were up 7% quarter over quarter, but were essentially flat to Q1 2023. Quarter-over-quarter growth was driven by incremental personnel actions such as 2024 hires or annual salary and merit adjustments. 2023 Restricted Stock Unit Awards and accruals related to our 2024 Employee Bonus Expectations. FTE growth for a good cause With the addition of two senior loan officers, closing staff focused on small SBA 7A loans, and servicing internal audit and risk personnel to support our growth and complexity.

Walt: As Steve can expand on Q&A, we continue to actively monitor the existing portfolio have yet to see any notable surprises outside of our expectation and do not currently see any significant weak spot.

Walt: Our trademark proactive direct servicing approach has and will continue to serve us well.

Walt: In Q1 2024 alone we spent approximately 40 hours or seven business days reviewing almost 500 presentation from 100 of our relationship managers have more than 700 of our credits to understand their specific situations and status.

Walt: I continue to be impressed by our credit and servicing teams commitment to excellence and discipline in their respective areas are credible is in good hands.

Walt: With 37% of our loan book government guaranteed a strong capital and liquidity profile.

Walt: We continue to operate as a growth organization and will remain focused on adding revenue generators and other costs as needed. Yet, there are still opportunities to find efficiencies in scale and technology and support areas through automation and process improvements that will help manage expense growth going forward, thus continuing to provide improvement in operating leverage. Additional credit trends are included on slide 18. Our $16 million provision was primarily attributed to portfolio macroeconomic changes, specifically the impact on customer cash flows from a higher-for-longer-rate environment.

Walt: <unk> on guaranteed loans and leases ratio that is two times. The industry median are predominantly owner occupied CRE portfolio, that's 45% government guaranteed and our historical charge off rate being a fraction of our current allowance we remain confident in our reserve and portfolios credit strength.

Walt: Lastly, slide 19 highlights our overall capital strength, which remains robust both in terms of regulatory ratios as well as from the on guaranteed loan perspective, while we have actually called the <unk> ratio.

Walt: As you may have noticed in the earnings release, we did originate a $100 million term loan in Q1 2024 with a purpose of downstream in the funds. So our bank subsidiary to position our bank level capital ratios for the anticipated growth to come.

Walt: Past dues are not materially out of line with prior quarters, and although non-accruals are up, as expected in the current environment, we still feel that these levels are manageable. As Steve can expand on in Q&A, we continue to actively monitor the existing portfolio. I've yet to see any notable surprises outside of our expectations and do not currently see any significant weak spots. Our trademark proactive direct servicing approach has and will continue to serve us well. In Q1 2024 alone, we spent approximately 40 hours or seven business days reviewing almost 500 presentations from 100 of our relationship managers on more than 700 of our clients' loans to understand their specific situations and status.

Walt: Our earnings over the last three quarters provides us with confidence in our ability to continue to support our growth through organic earnings as we have over the last six plus years.

Walt: Positioning ourselves to be able to weather whatever storm lie ahead.

Speaker Change: Thank you for joining us this morning, and with that we're happy to take questions.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will hear I think Tom perhaps acknowledging your request. If you are using a speakerphone. Please lift the handset before pressing any key.

Walt: I continue to be impressed by our credit and servicing team's commitment to excellence and discipline in their respective areas. Our credit vault is in good hands. With 37% of our loan book government guaranteed, a strong capital and liquidity profile, a reserve to unguaranteed loans and leases ratio that is two times the industry median, a predominantly owner-occupied CRE portfolio that's 45% government guaranteed, and our historical charge-off rate being a fraction of our current allowance, we remain confident in our reserve and portfolio's credit strength.

Walt: Next question comes from Steven Alexopoulos from Jpmorgan. Please go ahead.

Walt: Hi, Good morning, this is Alex Lau on for Steve.

Walt: Good morning, Alex.

Walt: My first question is on credit can you share some color on the loans that you built specific reserves for the quarter and what is your outlook for the health of these credits and their related industries.

Walt: Yes. This is Steve Smits I'll take that one.

Walt: So these are.

Walt: Dominantly main street SBA borrowers.

Walt: That are struggling with the higher rate environment and the impact to their overall.

Walt: On debt obligations.

Walt: Lastly, slide 19 highlights our overall capital strength, which remains robust both in terms of regulatory ratios as well as from the unguaranteed loan perspective, what we affectionately call the Bayhan Ratio. As you may have noticed in the earnings release, we did originate a $100 million term loan in Q1 2024 with the purpose of downstreaming the funds to our bank subsidiary to position our bank-level capital ratios for the anticipated growth to come.

Walt: We've put impairments on.

Walt: These flows.

Walt: As we navigate but as well had mentioned we continue to stay very focused and close to them and our servicing.

Walt: And.

Walt: And we will continue to work through them.

Walt: Yes.

Walt: The uncertainties in the economic outlook going forward, how long rates will remain high.

Walt: Prudent steps to put the reserves today.

Walt: Our earnings over the last three quarters provide us with confidence in our ability to continue to support our growth through organic earnings as we have over the last six plus years while positioning ourselves to be able to weather whatever storms fly ahead. Thank you for joining us this morning. And with that, we're happy to take questions.

Walt: For you to work with them to rehabilitate and work through these challenges what gives me. Some comfort is that is really we're not surprises for these where borrowers that we were aware.

Walt: We're experiencing challenges and struggles.

Walt: So that bodes well to our servicing and be on top of understanding the challenges our borrowers are working through so no huge surprises, but we'll continue to work through there.

Operator: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any key.

Operator: Well.

Speaker Change: Thank you and I wanted to ask about expenses. So what is your expense outlook range for 2020 for considering a baseline growth rate and if there are opportunities to add more revenue producers.

Operator: The first question comes from Stephen Alexopoulos from J.P. Morgan. Please go ahead.

Alex Lau: Hi, good morning. This is Alex Lau on for Steve.

Operator: Good morning, Alex Royo.

Alex Lau: My first question is on credit. Can you share some color on the loans that you built specific reserves for in the quarter? And what is your outlook on the health of these loans in related industries?

Alex Lau: That revenue expense range be thank you.

Walt: Yes, it's a good question this is walt.

Alex Royo: Yes, so from expectation for 2024 baseline, we think a high single digits.

Steve Smith: Yeah, this is Steve Smith. I'll take that one.

Steve Smith: So these are predominantly Main Street SBA borrowers that are struggling with the higher rate environment and the impact on their overall debt obligation. So we've put impairments on these loans. As we navigate, but as Will mentioned, we continue to stay very focused and close to them in our servicing. We will continue to work through them, but with the uncertainties in the economic outlook going forward, how long rates will remain high, prudent steps to put the reserves today, and continue to work with them to rehabilitate and work through these challenges.

Alex Lau: Reasonable.

Steve Smith: Given that we still remain that growth organization.

Steve Smith: To the extent that if we can hire revenue generators, what does that become as it moved to a low single digit perhaps right. I think there is still some efficiencies that we can look at so.

Steve Smith: And then obviously depends on how many revenue generators, we can add.

Steve Smith: So to the extent that that goes into low single digits mid teens.

Steve Smith: I personally don't see that as a problem with it is all revenue generators, because it's going to generate revenue and help with on the operating leverage side.

Steve Smith: You want to give me for answering my question.

Steve Smith: Okay.

Steve Smith: Thank you. Our next question comes from Brandon King from Thomas. Please go ahead.

Speaker Change: Hey, good morning.

Steve Smith: Hey, Brian.

Steve Smith: What gives me some comfort is that these really were not surprises. These were borrowers that we were aware were experiencing challenges and struggles, so that bodes well for our servicing and being on top of understanding the challenges our borrowers are working through. So, no huge surprises, but we'll continue to work.

Steve Smith: Okay.

Steve Smith: No.

Steve Smith: Square away the commentary around the pipeline being stronger than ever, but we hear more and more how higher rates are impacting just smaller business demand. So could you talk about what youre seeing within your customer base, what's driving the strong pipelines just relative to these higher rates potentially impacting demand and obviously.

Alex Lau: Thank you. And I wanted to ask about expenses. So what is your expense outlook range for 2024 considering a baseline growth rate? And if there are opportunities to add more revenue producers, where would that revenue expense range be?

Speaker Change: Credit as well.

Speaker Change: Yes, Hey, Bryan and BJ so.

Speaker Change: What we're seeing is.

Alex Lau: Thank you.

Walt: Yeah, a good question. This is Walt.

Speaker Change: And the expectation level setting or.

Walt: So, from the expectation for 2024, the baseline, we think a high single digit is reasonable, given that we still remain that growth organization. To the extent that if we can hire revenue generators, what does that become? Does it move to low single digits?

Walt: Got it.

Walt: Realization if you will.

Walt: Buyers and sellers.

Walt: In the SBA space kind of getting on common ground on what evaluation should be given the rapid increase in rates that happened over the last 18 months or so last year was kind of an interesting one in terms of.

Walt: Sellers having expectations.

Walt: Evaluations.

Walt: Perhaps, right? I think there's still some efficiencies that we can look at. And then, obviously, it depends on how many revenue generators we can add. So, to the extent that that goes into low single digits, mid-teens, I personally don't see that as a problem if it's all revenue generators, because it's going to generate revenue and help on the operating leverage side.

Walt: The increase in rates as buyers looking at.

Walt: There.

Walt: Borrower base.

Walt: What they can actually afford to pay and so there were some disconnects there continue to be high activity, but a lot of what we saw coming through.

Walt: Pipelines actually fell out of closing.

Walt: Because buyers and sellers' couldnt come to terms, we're seeing that true up a little bit more now so rates are generally steady.

Operator: You wanna give Thank you?

Operator: Thank you for answering my question.

Operator: Thank you. The next question comes from Brandon King from Truist. Please go ahead.

Brandon King: Our work to understand what their cash flow coverage is going to be.

Brandon King: And Ken can forecast that a little bit better and so we're seeing much better pull through activity.

Brandon King: So could you square away the commentary around the pipeline being, you know, stronger than ever, but we hear more and more how these higher rates are impacting just smaller business demand. So could you talk about what you're seeing within your customer base, what's driving these strong pipelines just relative to these higher rates potentially impacting demand and, obviously, credit as well?

Brandon King: As we look at the pipeline now.

Brandon King: Well said is true is in the first quarter.

Brandon King: Youll see that our originations were largely flat quarter over quarter excuse me year over year and SBA, they were down meaningfully and specialty finance and Eni, which we've already seen come back here in the second quarter, we do expect stronger sbe.

BJ: Yeah. Hey, Brandon. It's BJ.

BJ: So I think what we're seeing is an expectation level setting or a [inaudible] realization, if you will, of buyers and sellers, particularly in the SBA space, kind of getting on common ground on what the evaluation should be given the rapid increase in rates that happened over the last 18 months or so. So last year was kind of an interesting one in terms of, you know, sellers having expectations, evaluations, you know, pre-increase in rates, and buyers looking at their borrower base and what they could actually afford to pay. And so there were some disconnects here.

BJ: Small business volume in the second quarter in addition to that specialty and Eni.

BJ: We're pretty pretty excited about what we're seeing going forward and we expect to continue to see more more growth with the existing business that we've got as Rob talked about we are always always always in the market for high quality revenue producers.

BJ: We're a growing company, we'd love to see more lenders country come onto our platform and we are actively looking for those so youll continue to see us invest there.

BJ: There would continue to be high activity, but a lot of what we saw coming through our pipelines actually fell out of closing because buyers and sellers couldn't come to terms. We're seeing that happen a little bit more now. So rates are generally steady, and borrowers understand what their cashflow coverage is gonna be and can forecast that a little bit better. And so we're seeing much better pull-through activity as we look at the pipeline.

BJ: Just one other thing on that brand and I have always felt in our business banking business that banks are.

BJ: Sold and not bought.

BJ: Im more channel or a certain expectation on those sell my bank for two and a half times book Mark.

BJ: And there are in the cycle I think that's what has happened, particularly in the M&A business Center space.

BJ: Now, what Walt said is true, in that first quarter, you'll see that our originations were largely flat quarter over quarter, excuse me, year over year in SBA, but they were down meaningfully in specialty finance and E&I, which we've already seen come back here in the second quarter.

BJ: The silver tsunami is expecting a certain price numbers don't pencil silver tsunami is running a runway.

BJ: Speaking as one of those silver tsunami as.

BJ: And that could come to realization that I'm not going to get to and I have to ask what I'm going to get to kind of spoken out better take it now so I think our guys were saying in the phones Iranian the phone to Randy and Thats. The reason that the pipe is up 26%.

BJ: We do expect stronger SBA small business volume in the second quarter, in addition to that specialty and E&I. So we're pretty excited about what we're seeing going forward. And we expect to continue to see more growth with the existing business that we've got. And as Walt talked about, we are always, always, always in the market for high-quality revenue producers. We're a growing company. We'd love to see more lenders come on to our platform, and we're actively looking for them.

BJ: 23, or whatever it was.

BJ: Okay.

BJ: It makes sense.

BJ: And then as far as the NIM commentary.

BJ: Sounds like if we are in kind of at least stable rate environment, you're going to reach the low end of that $3 $53 70 range by <unk> <unk>, but what is implied in your outlook for deposit costs within that guidance are you expecting deposit cost to be potentially.

BJ: So you'll...

Chip Mahan: Just one other thing on that, Brandon. I have always felt in our business, the banking business, that banks are sold and not bought; bank boards have a certain expectation that I'm gonna sell my bank for two and a half times book and cash, isn't there, then they're not going to sell the bank. And I think that's what has happened, particularly in the M&A business, and I've heard studies that.

Chip Mahan: Stable from here or with sort of creep are you expecting on the deposit cost Brian.

Speaker Change: Hey, Brian.

Chip Mahan: So from a savings perspective, we expected, especially to stabilize both on the personal and the business side.

Chip Mahan: The Silver Tsunami is expecting a certain price, but the numbers don't add up. Silver Tsunami's running out of runway, speaking as one of those silver tsunami guys, and I come to the realization that I'm not gonna get two-and-a-half times the book. I'm gonna get two times the book, and I better take it now. So I think our guys were saying, and the phones are ringing, and the phones are ringing, and that's the reason that the pipe is up 26%. 23 or whatever.

Chip Mahan: And that guidance that gets us back towards that $3 $53 75 range towards Q4, we still have too.

Chip Mahan: The fed cuts, which obviously our savings will respond accordingly.

Chip Mahan: Those costs I believe are September and November.

Chip Mahan: And our current models.

Chip Mahan: And then just from a CD front.

Brandon King: Okay, that makes sense. And then, as far as the new commentary, it sounds like if we are in kind of the least stable rate environment, you're going to reach the low end of that 350, 370 range by 4Q. But what is implied in your outlook for deposit costs within that guidance? Are you expecting deposit costs to be potentially stable from here? Or what sort of creep are you expecting on the deposit costs?

Chip Mahan: Like I mentioned in the call, we've been able to reduce our CD rates thus far.

Brandon King: Yes.

Brandon King: I think it largely will depend on how the market moves.

Brandon King: Digital market typically on CD pricing will reprice ahead of fed expectations.

Brandon King: And then the gap between our renewal are maturing CD rates and our renewal rates.

Brandon King: It's much less as we get further through the year just given we were pricing our 12 month, which is are our largest CD offering in Q3 and Q4 of last year at $5 25 to $5 30 Mark.

Walt: Hey Brandon, well, from a savings perspective, we expected, you know, essentially to stabilize both on the personal and the business side. You know, in that guidance that gets us back towards that 350, 375 range towards Q4, we still have two expected Fed cuts, which obviously, you know, our savings will respond accordingly. Those cuts, I believe, are in September and November in our current models. You know, and then on the CD front, like I mentioned in the call, we've been able to reduce our CD rates thus far.

Brandon King: Okay. Okay. So it sounds like interest bearing checking savings and money market account at least stable from here until fed rate cuts and then.

Walt: Cds are marching towards that $5 20 would would be the best way to frame it.

Walt: Yes, I think I would frame it more is it there yes, they are marching towards our current rate offerings today.

Walt: Okay.

Walt: Okay.

Speaker Change: I will thanks for answering.

Walt: You know, I don't, you know. I think it largely will depend on how the market moves. Digital markets, typically on CD pricing, will reprice ahead of Fed expectations. And then the gap between our renewal, our maturing CD rates, and our renewal rates is much less as we get further, you know, through the year. Just given, you know, we were pricing our 12-month CD, which is our largest CD offering in Q3 and Q4 last year at the 525 and 530 mark. So, you know, we've been able to, you know, we've been able to, you know, we've

Speaker Change: Yes, My question I'll hop back in queue.

Speaker Change: Thank you.

Walt: Thank you. Your next question comes from Sam switch Sir.

Speaker Change: Please go ahead.

Speaker Change: Hey, good morning. Thank you for taking my question I had a quick follow up on.

Speaker Change: Your commentary on the NIM and deposits, what's kind of the.

Speaker Change: Deposit beta you guys are assuming on the initial rates I would say, we get one or two cuts in the back half of 'twenty four what's your initial expectation there.

Walt: Okay, okay. So it sounds like interest-bearing checking and savings and money market kind of at least stable from here until Federate cuts it in. CDs are marching towards that 520 would be the best way to frame it.

Walt: And then how could debate it.

Walt: Possibly accelerate as we move through the cycle, if we get a series of cuts.

Speaker Change: Yes, great question.

Walt: From a beta perspective.

Brandon King: Yeah, I think I would frame it more as that they're, yeah, they're marching towards their current rate offerings today. Okay.

Walt: The bank here, it's been about 15 years old so we haven't seen a lot of robust downward cycles.

Walt: Okay, got it. Thanks for answering my question. I'll hop back in the queue.

Brandon King: The last time the rates came down our deposit pricing digital market acted pretty rational.

Operator: Thank you. The next question comes from Tim Switzer at SIKW. Please go ahead.

Walt: From a beta perspective early on you'll probably be somewhere in the.

Tim Switzer: 50% to 70% range.

Tim Switzer: Good morning. Thank you for taking my question. I had a quick follow up on your commentary on NIM and deposits. What's the deposit beta you guys are assuming on, you know, the initial rate cuts, say we get one or two cuts in the back half of 24, what's your initial expectation there? And then how could the beta knowledge possibly accelerate as we move through the cycle if we get a series of cuts?

Tim Switzer: It could be a potential lag.

Tim Switzer: Whether it's one month or so.

Tim Switzer: On the CD side, that's typically 80% or so and that will.

Tim Switzer: <unk>.

Tim Switzer: We're pretty confident that'll hold.

Tim Switzer: Given the way the market typically is very reactive.

Tim Switzer: As you kind of move forward.

Tim Switzer: As you as you saw kind of win rates came down or I'm, sorry, when rates were rising cumulative beta is Roes, we think our cumulative betas will also increase on the safety side as well.

Walt: Yeah, great question. You know, from a beta perspective, we've been about 15 years old, so we have seen a lot of robust downward cycles. The last time the rates came down, our deposit pricing digital market acted pretty rationally. From a beta perspective, early on, you'll probably be somewhere in the 50% to 70% range. It could be a potential lag, whether it's one month or so.

Walt: But largely will depend on how essentially the overall market.

Speaker Change: Okay got it and then I also wanted to ask about.

Walt: Your expectations around SBA margins in the secondary market demand kind of.

Walt: A good lift in the premium.

Walt: This quarter, but now with.

Walt: On the CD side, that's typically 80% beta or so, and we're pretty confident that'll hold, given the way the CD market is typically very reactive. As you move forward, as you saw when rates were rising, the cumulative betas rose. We think our cumulative betas will also increase on the savings side as well, but largely will depend on how the overall market reacts.

Walt: No rate cuts being pushed a little bit further out interest rates moving higher has that kind of.

Walt: Moderated demand or the premiums for you and what are your expectations once you get either stabilization or cut in rates.

Walt: Yes, the secondary market.

Tim Switzer: Okay, I got it. And then I also wanted to ask something. Your expectations around SBA margins and secondary market demand kind of, you know, a good lift in the premium this quarter, but now with you know rate cuts being pushed a little bit further out, interest rates moving higher have that kind of, moderated demand or premiums for you, and you know, what are your expectations once we get either stabilization or cuts in rates?

Walt: I tend to look at the forward curve. So the 105 to 107 improvement.

Tim Switzer: But we saw here in Q1.

Tim Switzer: I think it will stay in that range, especially now given with potentially later fed cuts so think of a lot.

Tim Switzer: Six quarters, or so and say hey, that's probably a reasonable expectation for right now.

Tim Switzer: As far as demand demand is strong the liquidity strong in the market. So we're not having issues.

Tim Switzer: As far as selling.

Tim Switzer: In executing those sales.

Walt: Yeah, the secondary market, you know, tends to look at the forward curve. So the 105 to the 107 improvement that we saw here in Q1, I think we'll stay in that range, you know, especially now given the potentially later Fed cuts. So think of, you know, the last six quarters or so and say, hey, that's probably a reasonable expectation for right now. You know, as far as demand is concerned, demand's strong, and liquidity's strong in the market.

Tim Switzer: I think as rates come down we typically will see an improvement.

Walt: Hard to say right now of that improvement.

Walt: As drastic, but I think from a reasonable expectation stick in that 105 to $107 range.

Walt: Through the next few quarters feels right.

Speaker Change: Okay, Great. That's all for me. Thank you.

Walt: Okay.

Speaker Change: Thank you, ladies and gentlemen, as a reminder, so do you have any questions. Please press star one.

Walt: Next question comes from David Feaster at Raymond James. Please go ahead.

Walt: So we're not having issues, you know, as far as selling and executing those sales. I think as the rates come down, we typically will see an improvement. Hard to say right now that the improvement is drastic. But I think from a reasonable expectation, you know, sticking that 105 to 107 range, at least through the next few quarters feels right.

Speaker Change: Hey, good morning, everybody.

Speaker Change: Good morning, Dave.

Walt: Maybe just I'd like to touch on the small loan automation you guys touched.

Walt: About it in your prepared remarks, I'm, just curious where where are we in that build out.

Walt: What's left there and then I mean are there any other investments or back office.

Tim Switzer: Okay, great. That's all for me. Thank you.

Operator: Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star 1. The next question comes from David Feaster at Raymond James. Please go ahead.

Walt: Build out that we need.

Speaker Change: And when do you maybe expect that we could start beta testing that are rolling it out more broadly.

David Feaster: Hey, David Good morning P. J. So we have already started originating.

David Feaster: Hey, good morning everybody.

David Feaster: Small dollars SBA loans right now, it's mainly through a small team that we put together.

Operator: David, where are you?

David Feaster: I'd like to touch on small loan automation. You guys touched on it in your prepared remarks. I'm just curious, where are we in that build-out? What's left there? Are there any other investments or back-office build-out that we need? And Wendy, you may be.

Speaker Change: Yes, we've got 12 or 13 main book to another pipeline about that size. So good start we had not opened it up to all of our lenders yet we're getting ready to do that.

David Feaster: But we've got two major.

BJ: Hey, David. Good morning. It's BJ.

David Feaster: Technology Slash credit enhancements that were looking at before we really open up the floodgates.

BJ: So we have already started originating small dollar SBA loans. Right now, it's mainly through a small team that we put together, so I thank you. We've got 12 or 13 million booked, another pipeline about that size. So, good start. We haven't opened it up to all of our lenders yet. We're getting ready to do that.

BJ: One is a digital application, which we're expecting to have.

BJ: Later in the second quarter early third quarter.

BJ: So that'll be a big deal because that will automate the front ash make it very easy for our borrowers on referral sources or lenders.

BJ: But we've got two major... technology-based credit enhancements that we are looking at before we really open up the floodgates. One is a digital application which we're expecting to have later in the second quarter or early third quarter. So that will be a big deal because that will automate the front end and make it very easy for our borrowers, our referral sources, or our lenders to put small dollar loans through our pipeline. That will be very helpful.

BJ: Put small dollar loans through our pipeline that will be very helpful. The second is on.

BJ: Automated.

BJ: Credit scoring.

BJ: Not go 100% automated credit, scoring but we are looking at.

BJ: Streamlining the process for these small dollar loans to be yet to be able to get more through.

BJ: Our system. So we're really excited about this this is always been.

BJ: Something that was available that other SBA lenders do but we intended to do.

BJ: The second is automated credit scoring. We will not go 100% automated credit scoring, but we are looking at streamlining the process for these small dollar loans to be able to get more through our system. So we are really excited about this. This has always been something that was available to other SBA lenders, but we intended to do larger dollar loans. We are very happy to provide access to capital for smaller small business owners, and this very much aligns with what the SBA and the current administration are looking for from us in the industry.

BJ: Larger dollar credits, we're very happy to provide access to capital for smaller small business owners and it's very much aligned with what the SBA and the current administration or looking for.

BJ: From us in the industry. So we're excited about that and it just adds to our ability to serve more and more small business customers. So more to come on this but we expect it to really start to ramp towards the back half of the year.

BJ: So we are excited about that, and it just adds to our ability to serve more and more small business customers. So more to come on this, but we expect it to really start to ramp up towards the back end.

BJ: And if the plan is still to sell all of that production and where our gain on sale.

BJ: Smaller dollar relative to what you typically sell.

Speaker Change: Yeah, Hey, Dave This fall, yes, our plan is 100% sale.

David Feaster: And if the plans are still to sell all of that production, and where our gain on sale is a smaller dollar relative to what you

David Feaster: Model relates to the small loan SBA premiums there range.

Walt: Hey Dave, this is Walt. Yes, the plan is a 100% sale model related to small loan SBA. Premiums there range typically anywhere from $110 to $113 depending on your spreads, but historically those have held true. Secondary market views, those loans, that's kind of the creme a la creme because you can essentially create larger pools with more diversification. So high demand, good premiums. Historically, we expect that to continue to go

Walt: Typically anywhere from 110 to 113th depending on your spreads.

Walt: Historically those have held true.

Walt: Secondary market views those loans, that's kind of the criminal crowded because you can.

Walt: Essentially create larger pools with more diversification so high demand good premiums.

Walt: Yes.

Walt: Historically, and we expect those.

Walt: I expect that to continue to go forward.

David Feaster: Got it. And then maybe switching gears back to business deposit growth. I mean, first off, I guess could you remind us where pricing is on those products and then where you would characterize us at this point? You know we've seen obviously nice growth, but are we still crawling from your perspective, and maybe when do you think we will shift to walking or even start running?

Speaker Change: Got it and then.

David Feaster: Maybe switching gears back to the business deposit growth I mean first off I guess could you remind us where pricing is on those products.

David Feaster: And then where are we.

David Feaster: Would you characterize we are at this point.

David Feaster: Obviously nice growth.

David Feaster: But are we still crawling from your perspective, and maybe when do you think that we ship excuse me shifts walking or even start running.

Walt: I'll start. Dave, this is Walt.

Speaker Change: I'll start.

Walt: So, in our business price or business deposit pricing, our savings is at 4%. Our CDs are the same as our personal CD rate offerings. And then, obviously, you have a non-expiring check. As far as the kind of where we are on the crawl, walk, run, I'd say we're very much in the crawl stage. I think we're working as aggressively as we can to sell those to our existing customers as well as to new customers. I think it will take time to ramp up on the checking side, just where we are in the market right now, where essentially depositors can get very nice rates on the interest-bearing side.

Walt: Yes, David this as well.

Walt: So in our business priced business deposit pricing our savings is up 4%. Our Cds are the same as our personal CD rate offerings.

Walt: And then obviously you have a non interest bearing checking.

Walt: As far as the kind of where we are in the crawl walk run.

Walt: I'd say were.

Walt: Much in the crawl stage.

Walt: I think we are working.

Walt: As aggressively as we can to sell those to our existing customers as well too.

Walt: New customers I think it will take time to ramp.

Walt: On the checking side.

Walt: Where we are in the market right now where.

Walt: Especially as partners can get very nice rate.

Walt: Yeah, I think just to clarify, we're on the crawl as it relates to checking.

Walt: On the interest bearing side.

Walt: <unk>.

Speaker Change: Yes, I think just clarify Robyn.

Speaker Change: As it relates to checking yes, right and there's a long runway there we are absolutely spending.

Walt: And there's a long runway there. We are absolutely sprinting on business deposits. You know, we've got a very strong offering there. We've got a great brand reputation. The growth in business deposits is incredibly strong, so we expect that. Yeah, I would just say at that time, David, this is Chip.

Chip Mahan: Business deposits, we've got it very strong offering there we've got a great brand reputation to grow.

Chip Mahan: Both in business deposits.

Chip Mahan: Incredibly strong so we expect that to continue.

Chip Mahan: Yes, I would just add.

Walt: Ed.

Chip Mahan: David This chip so I would just add this right that we have been a primarily a lending company for 15 years and a lot of.

Chip Mahan: So I would just add this, right, that we have been primarily a lending company for 15 years, and a lot of our SBA staff, particularly the generalists, have been SBA commissioned loan producers. And now that we have a checking account product that is second to none in the industry, it's been a bit of an educational process, particularly, for instance, if we're funding an acquisition, then the money goes to the seller. We need to convince our customer, who is the buyer, to bank with us this time.

Chip Mahan: Our SBA, particularly the generalists had been SBA Commission loan producers and now that we have a checking account product that is second to none in the industry, it's been a bit of a.

Chip Mahan: Educational process, particularly for instance, if we're funding an acquisition.

Chip Mahan: He goes to the seller, we need to convince our customer who is the buyer to bank with US that we are back at this time, we're not just a lending company.

Chip Mahan: We're not just a lending institution. And that piece, and that education, is in the educational area in the early days. I would still put that piece in the crawl area. We can get better there. And we will get better.

Chip Mahan: There is a.

Chip Mahan: And that education is in the educational area in early days.

Chip Mahan: I would still put that piece of the crawl area, we can get better there and we will get better.

Speaker Change: That makes sense.

David Feaster: That makes sense, and you know Honestly, that might play into, as you do more conventional lending, play into more of that growth. And so maybe touching on the conventional lending side, looking at one of your charts, it looks like you've seen a decent amount of growth on that front. There's obviously a higher focus on the CRE front. I'm just curious, what are you targeting on the conventional side at this point? How's that going? And then how did you just think about the growth of conventional?

Chip Mahan: Yeah.

Chip Mahan: Honestly that might play into as you do more conventional lending play into more of that that growth. So maybe touching on the conventional lending side.

David Feaster: Looking at one of your charts, it looks like you've seen a decent amount of growth.

David Feaster: On that front there is obviously a hyper focus on on the CRE front I'm. Just curious what are you targeting on the conventional side at this point how is that going and then how do you just think about.

David Feaster: Growth of conventional production and shifting underwriting standards and credit quality there.

BJ: I mean, we're really excited about what we're doing on the conventional lending side. We've transported our theory of verticality from the SBA side over to the specialty side, which we think is incredibly important to be very expert in the verticals that we go after so that we can add value as an $11 billion bank on larger credits relative to just being a bank that's a generalist type calling effort. And I think we've been incredibly successful there so far.

BJ: We're really excited about what we're doing on the conventional lending side.

BJ: Transported.

BJ: Theory of Verticality from the SBA side over to the specialty side, which we think is incredibly important to be very expert in the verticals that we.

BJ: We go after so that we can add value as an $11 billion bank on larger credits relative to just being a.

BJ: Bank, that's a generalist type calling effort and I think we've been incredibly successful there so far and we've got an excellent sponsor finance business, we have a venture banking vertical which makes sense with with our organization seniors housing commercial.

BJ: We've got an excellent sponsor finance business. We have a venture banking vertical, which makes sense with our organization, senior housing, commercial real estate, and specialty healthcare. So we're trying to be very niche-oriented in how we grow that.

BJ: Real estate specialty healthcare so.

BJ: We're trying to be very niche oriented and how we grow that and over the last five years, we have grown our specialty finance business tenfold in terms of Outstandings and what that's also allowed us to do is have credit.

Chip Mahan: And over the last five years, we have grown our specialty finance business tenfold in terms of outstanding loans. And what that's also allowed us to have credit, be comfortable with the loans that we're doing in those verticals because we're, by and large, seeing the same types of deals as opposed to, again, having a generalist calling effort on the conventional side, which can be more difficult to underwrite and approve. So we're pretty bullish on what we can do to grow that responsibly.

Chip Mahan: Comfortable with the credits that we're doing in those verticals because we're buying large seeing the same types of deals as opposed to again, having a generalist calling effort on the conventional side, which can be more difficult.

Chip Mahan: Underwriting.

Chip Mahan: Approved so we're pretty bullish on what we can do to grow that responsibly and in addition to that.

Chip Mahan: And in addition to that, talking going back to the deposit side and the checking side, it is very common to do a conventional loan deal and ask for the deposit. And so from that perspective, we're having great success starting to build out our deposit and checking platform on the specialty conventional side because our borrowers are used to being asked for the deposit. So, you know, we're gonna build our book there probably quicker, frankly, than we're gonna build it on the small business side, and we're starting to see the fruits of that labor.

Chip Mahan: Going back to the deposit side on the checking side. It is very common to do a conventional loan deal and ask for the deposits and so from that perspective, we're having great success starting to build out our deposits are checking platform.

Chip Mahan: On the specialty conventional side, because our borrowers are used to being Ashford.

Chip Mahan: So yes, we're going to build our book there probably quicker frankly, then we're going to build it on the small business side.

Speaker Change: And we're starting to see the fruits of that Labor. Just one addition to that David This chip is.

Chip Mahan: Just one addition to that, David, this chip. It has been really, really fun for my co-founders, David Luck and Tiffany Williamson. We kind of view this from our perspective as regression to the norm. We came up with this idea to create a bank that's the portal out of the banking business in the SBA area. All of a sudden, we get to use our 50 years of experience of actually seeing our lenders ourselves. So this is a bit, again, a regression to the norm for us. Getting back to your roots. That's it. That's great. I appreciate all the color. Thanks, everybody.

Chip Mahan: It's been really really fun for my co founders, David Luckily Williamson.

Chip Mahan: We kind of view this from our perspective is regression to the norm.

Chip Mahan: We came up with this idea to create a bank to support letters of banking business SBA area all of a sudden we get to use our 50 years experience.

Chip Mahan: Actually C&I lenders ourselves. So this is a bit again regression to the norm for us getting back to your roots.

Chip Mahan: That's great.

Chip Mahan: I appreciate all the color thanks, everybody.

Operator: Thank you. We have no further questions. I will turn the call back over to Chip Mahan for final comments.

Speaker Change: Thank you.

Chip Mahan: Thank you we have no further questions I will turn the call back over to chip Mahan for final comments.

Chip Mahan: As always, we appreciate your attention today and look forward to seeing you again in 90 days. Thanks for coming.

Chip Mahan: As always we appreciate your attention today and look forward to seeing you again in 90 days.

Speaker Change: Thanks for time.

Operator: Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.

Operator: Ladies and gentlemen. This concludes your conference for today, we thank you for participating and we ask that you. Please disconnect your lines.

Operator: Yeah, the naughty days.

Chip Mahan: And in 90 days.

Chip Mahan: Thanks for coming.