Q2 2024 Live Oak Bancshares Inc Earnings Call

Good morning ladies and gentlemen and welcome to the Q2 2024 Live Oak Bancshares Earnings Conference Call. At this time all lines are in a listen only mode.

Operator: 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, July 25, 2024. I would now like to turn the conference over to Greg Seward, General Counsel and Chief Risk Officer. Please go ahead.

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, July 25, 2024. I would now like to turn the conference over to Greg Seward, General Counsel and Chief Risk Officer. Please go ahead.

Gregory W. Seward: Thank you, and good morning, everyone. Welcome to Live Oak's second 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 second quarter earnings release is also available on our website.

Gregory W. Seward: Thank you and good morning everyone. Welcome to Live Oak's second quarter of 2024 earnings conference call.

Speaker Change: 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 www.investor.liveoakbanks.com and go to the events and presentations tab for supporting materials.

Gregory W. 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 risk 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 will now undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of this call.

Speaker Change: Our second quarter earnings release is also available on our website.

Speaker Change: 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.

Speaker Change: Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this fall and in our SEC filings. We will undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's fall.

Gregory W. Seward: 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 material. I would now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Speaker Change: Information about any non-GAAP and interim measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials.

James S. Mahan: Good morning, everyone, and we're excited to tell you about our second quarter performance. First, to use a baseball analogy, I'm instituting a lineup change. Appropriately, B.J. Losch, our president, will be our leadoff batter today. Walter Phifer, our CFO, will be on deck.

Speaker Change: I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

James S. Mahan: Good morning, everyone, and we're excited to tell you about our second quarter performance.

Speaker Change: Firstly, to use a baseball analogy, I'm instituting a lineup change. Appropriately, B.J. Losch, our president, will be our leadoff batter today.

Speaker Change: Walter Phifer, our CFO , will be on deck, and even more appropriately, I will be in the hole to wrap things up before the Q&A.

William C. Losch: Thanks, Chip. Good morning, everybody.

Speaker Change: B.J.

William C. Losch: Thanks, Chip. Good morning, everybody. Let's start on slides four and five together.

William C. Losch: Let's start on slides four and five together. Our second quarter results, as I hope you've been able to take a look at, are reflective of significant efforts by everyone across the company here at Live Oak to grow our business profitably and, very importantly, control what we can control. And it showed up this quarter certainly in strong UPS and PPNR on both a reported and adjusted basis, in healthy loan and deposit growth, higher production and activity, and continued credit quality. And that's what we'll demonstrate over the next several minutes.

William C. Losch: Our second quarter results, as I hope you've been able to...

Speaker Change: Take a look at a reflective of significant efforts by everyone across the company here at Live Oak to grow our business profitably.

William C. Losch: and, very importantly, control what we can control. And it showed up this quarter, certainly, in strong UPS and PPNR on both a...

William C. Losch: reported and adjusted basis, in healthy loan and deposit growth, higher production and activity, and continued credit quality. That's what we'll demonstrate over the next several minutes. Momentum is building across numerous parts of the company.

William C. Losch: Momentum is building across numerous parts of the company. On the lending front, our teams delivered exceptional production and balance sheet growth results and healthy spreads in the quarter, and yet, approvals are up 30% from this time last year, and pipelines are still near all-time highs, both of which bode well for continued growth. As you can see on slide six, our focus on the basics, growing revenues faster than expenses, while still investing in good costs such as new lenders, verticals, products, and technology has resulted in exponential PPNR growth of 33% on revenue growth of 11% on an adjusted basis since Q2 of last year.

William C. Losch: On the lending front, our teams delivered exceptional production and balance sheet growth results and healthy spreads in the quarter, and yet approvals are up 30% from this time last year and pipelines are still near all-time highs, both of which bode well for continued growth.

Speaker Change: As you can see on slide six.

Speaker Change: Our focus on the basics.

Speaker Change: Growing Revenues Faster Than Expenses

Speaker Change: while still investing in good costs, such as new lenders.

Speaker Change: Vertical's products and technology has resulted in exponential PPNR growth of 33% on revenue growth of 11% on an adjusted basis since Q2 of last year.

William C. Losch: Our credit quality continues to be a hallmark. The result, as you can see on slide seven, is very healthy reserve levels, low levels of charge-offs, and significant reserve building well in excess of charge-offs. Importantly, with our disciplined credit box, deep understanding of the government-guaranteed lending process, and an unmatched in-depth servicing and watch list, it results in an ability to get ahead if far overstretched.

Speaker Change: Our crack quality continues to be a hallmark. The result, as you can see on slide 7, is very healthy reserve levels, low levels of charge-offs.

Speaker Change: and significant reserve building well in excess of charge-offs.

Speaker Change: Importantly, with our disciplined credit box, deep understanding of the government-guaranteed lending process, and an unmatched in-depth servicing and watch-list process,

William C. Losch: As we discussed previously, we are proactive with provisioning for growth, for changes in portfolio performance, and for impairments of specific loans when warranted, so we are well-reserved if charge-offs occur. Turning to slide eight, while I'm certainly pleased with this quarter's results, as a growth company, I'm much more excited about where we're headed. Checking balances, which were immaterial six months ago, crested $125 million in the quarter and continue to be built. Our new small-dollar SBA lending efforts are ramping up quickly and will be a meaningful contributor to our results over time.

Speaker Change: It results in an ability to get ahead of borrower stress.

Speaker Change: As we've discussed previously, we are proactive with provisioning for growth, for changes in portfolio performance, and for impairments of specific loans when warranted, so we are well-reserved if charge-offs occur.

Speaker Change: Turning to slide 8, while I'm certainly pleased with this quarter's results, as a growth company, I'm much more excited about where we're headed.

Speaker Change: checking balances, which were immaterial six months ago, crested $125 million in the quarter and continue to be billed.

Speaker Change: Our new small-dollar SBA lending effort is ramping up quickly and will be a meaningful contributor to our results over time. Our brand and reputation continues to attract and retain the highest quality talent, and we continue to heavily invest in the future through innovative technology and partnerships.

William C. Losch: Our brand and reputation continue to attract and retain the highest quality talent, and we continue to heavily invest in the future through innovative technology and partnerships. The flywheel is definitely turning at Live Oak, and our ongoing opportunities to serve more of America's small businesses are vast. So, with a big thank you to all Live Oakers and our customers for a strong quarter, I'll turn it over to Walt for some more highlights.

Speaker Change: The flywheel is definitely turning at Live Oak, and our ongoing opportunities to serve more of America's small businesses are vast. So with a big thank you to all Live Oakers and our customers for a strong quarter, I'll turn it over to Walt for some more highlights.

Walter J. Phifer: Thank you, BJ. Good morning, everyone.

Walt: Thank you, BJ. Good morning, everyone. BJ just provided a high-level overview of the quarter. I'll spend the next few pages focused on additional context on trends related to our balance sheet growth, key revenue and expense components, and credit.

Walter J. Phifer: BJ just provided a high-level overview of the quarter. I'll spend the next few pages focused on additional context on trends related to our balance sheet growth, key revenue and expense components, and credit. Slide 11 highlights our loan originations by vertical and business unit. As BJ mentioned, we had a strong quarter of loan originations in Q2, with approximately $1.2 billion of loans closed. This is 45% higher than Q1 and is our second-largest order in bank history. There are two items to note on this page. The first is on the bubble chart on the left.

Walt: Slide 11 highlights our loan originations by vertical and business unit.

Walt: As BJ mentioned, we had a strong quarter of loan originations in Q2 with approximately $1.2 billion of loans closed. This is 45% higher than Q1 and is our second largest quarter in bank history.

Walter J. Phifer: Approximately 60% of our verticals have had a year-to-date loan origination volume at or above the prior year level. The second is the strong performance by our SBB specialty business units in Q2 2024 compared to Q2 2023. You can see this on the bottom right-hand side of the page as our Q2 2024 Regulations for Small Business Banking and Specialty are up 30% and 88% year-over-year, respectively. Our energy and infrastructure business unit had a slow start in the first half of 2024 due to delays in loan closing timelines, yet that team has closed approximately $80 million of loans thus far in Q3, and the pipeline remains strong. Slide 12 illustrates the strength and consistency of our balancing group over the past five quarters.

Walt: Two items to note on this page. The first is on the bubble chart on the left. Approximately 60% of our verticals have had a year-to-date loan origination volume at or above prior year levels.

Walt: The second is the strong performance by our SBB Specialty Business Units in Q2 2024 compared to Q2 2023. You can see this on the bottom right-hand side of the page as our Q2 2024 Regulations for Small Business Banking and Specialty are up 30% and 88% year-over-year respectively.

Walt: Our energy and infrastructure business unit has had a slow start in the first half of 2024 due to delays in loan closing timelines, yet that team has closed approximately $80 million of loans thus far in Q3, and the pipeline remains strong.

Walter J. Phifer: While many banks across the industry are seeing minimal, if any, loan growth, our loan balances are up 3% in the quarter and 14% compared to the prior year, and this growth is net of our loan sales and participation. Deposit growth is fueled by our customer deposit platform, specifically our business deposits, which are up 8% in the late quarter and 29% compared to the prior year. This is an outstanding story given how competitive the customer deposit market is today, with many banks across the industry struggling to grow or even maintain their deposit base, especially their non-interest barriers.

Walt: Slide 12 illustrates the strength and consistency of our balancing group over the past five quarters. While many banks across the industry are seeing minimal, if any, loan growth, our loan balances are up 3% in the quarter and 14% compared to the prior year, and this growth is net of our loan sales and participation activity.

Walt: Deposit growth is fueled by our customer deposit platform, specifically our business deposits, which are up 8% in late quarter.

Walter J. Phifer: Slide 13 gives a little more detail on our quarterly-over-quarter loan growth by component. The key takeaway from this page is that prior to our typical sales and participations activity, our loan portfolio grows by 7% – that's right, 7% – late quarter as new fully funding originations and construction loans continue to drive balances. Slide 14 unpacks our net interest income, NIM, and yield trends. Our net interest income increased 1% in the late quarter and is up 80% compared to Q2 2023. This is primarily driven by our home.

Walt: Slide 14, Unpacks Your Net Interest Income, NIM and Yield Trends.

Walter J. Phifer: Our net interest margin compressed five basis points quarter over quarter due to a full quarter of interest expense related to a $100 million term loan added at the end of Q1 for growth capital of the bank. After this borrowing, our net interest margin would have been flat quarter over quarter. That's a great outcome. Now there are things we can't control and things that we can control.

Walt: Our net interest margin, compressed by basis points quarter over quarter, due to a full quarter of interest expense related to a $100 million term loan, added at the end of Q1 for growth capital of the bank.

Walt: After this borrowing, our net interest margin would have been flat quarter over quarter. That's a great outcome.

Walter J. Phifer: Some things we can't control are when the Fed will reduce rates and by how much, the competitiveness of the deposit market, or other macroeconomic or political impacts. Now, these things will certainly have an impact on the slope of our game trajectory, yet we feel really good about the things we can control, all of which will help our new performance going forward. As I just mentioned, our loan growth momentum and pipeline remain robust.

Walt: Now there are things we can't control and things that we can control. Some things we can't control are when the Fed will reduce rates by how much, the competitiveness of the deposit market, or other macroeconomic or political impacts.

Walt: All of which will help our new performance going forward.

Walter J. Phifer: Growth will be an essential component of our net interest income and NIM expansion. We continue to demonstrate good pricing discipline on new loan origination, averaging prime plus 60 basis points, or 9.1%, in Q2, thus remaining accretive to our loan portfolio yield, which currently averages 7.79%. And our increasing cost of funds since Q2 2023 has largely been driven by maturing CDs renewing into a higher-priced offer.

Walt: As I just mentioned, our loan growth momentum and pipeline remains robust. Growth will be an essential component of our net interest income and NIM expansion.

Walt: We continue to demonstrate good pricing discipline on new loan origination, averaging Prime Plus 60 basis points, or 9.1%, in Q2, thus remaining accretive to our loan portfolio yield, which currently averages 7.79%.

Walt: And our increase in cost of bonds since Q2 2023 has largely been driven by maturing CDs renewing into a higher priced offering.

Walter J. Phifer: You can see in the middle of the page the substantial headwinds this has generated in 2023 and 2024, as that portfolio is approximately 26% of our deposits. The fact that we have been able to maintain our margin over the last five quarters with this level of volume repricing at those significant increases is a great outcome. These headwinds have slowed in Q2 2024, and we expect our CD portfolio repricing to provide tailwinds over time once the Fed reduces rates. Quarter over quarter feed comes as outlined on slide 15.

Walt: You can see in the middle of the page the substantial headwinds this has generated in 2023 and 2024, as that portfolio is approximately 26% of our deposits.

Walt: The fact that we have been able to maintain our margin over the last five quarters with this level of volume repricing at those significant increases is a great outcome.

Walt: These headwinds have slowed in Q2 2024 and we expect our CD portfolio repricing to provide tailwinds over time once the Fed reduces rates.

Walter J. Phifer: We sold $250 million in Q2 2024 for an average premium of 6%, largely in line with Q2 2024. Two important things to note about our Q2 sales volume. We sold our first batch of small loan SBA 7A loans for only $9 million in loans sold for an average premium of 11%.

Walt: Quarter-over-quarter fee incomes outlined on slide 15. We sold $250 million in Q2 2024 for an average premium of 6%, largely in line with Q2 2023.

Walt: Two important things to note on our Q2 sales volume. We sold our first batch of small loan SBA 7A to only $9 million in loans sold for an average premium of 11%.

Walter J. Phifer: We continue to be excited about the profitability opportunity on small loan fraud. The other item to note is, given the improvement in the secondary market in general, we were also able to sell approximately $40 million of seasonal loans that were previously underwater. Another great outcome.

Walt: We continue to be excited about the profitability opportunity on the small loan fraud.

Walt: The other item to note is given the improvement in the secondary market in general, we were also able to sell approximately $40 million of season loans that were previously underwater. Another great outcome for the quarter.

Walter J. Phifer: Turning to expenses on slide 16, our Q2 2024 expenses of $78 million were flat late quarter and increased 3% compared to Q2 2021. Our teams have shown great expense discipline over the last year, even while adding 20 growth-oriented FTEs in our lending verticals, five FTEs in our treasury management department to support our business checking initiative, and continuing to invest in the technology side of the house. As we have been over the last five quarters, we remain focused on adding good calls where needed while continuing to identify expense efficiencies where possible, so we can continue the positive PPR trends that BJ just spoke about.

Walt: Turning to expenses on slide 16, our Q2 2024 expenses of $78 million were flatly quartered and increased 3% compared to Q2 2023.

Walt: Our teams have shown great expense discipline over the last year, even while adding 20 growth-oriented FTEs in our lending verticals, five FTEs in our treasury management department to support our business checking initiative, and continuing to invest in the technology side of the house.

Walt: As we have been over the last five quarters, we remain focused on adding good costs where needed while continuing to identify expense efficiencies where possible so we can continue the positive PPR trends that BJ just spoke on.

Operator: in our trends at B.J.

Operator: Spookhole.

Walter J. Phifer: Key credit trends are included on slide 17. We continue to be pleased with the performance of our credit portfolio in what has been a challenging environment. Our Q2 $12 million provision was primarily due to loan growth, what we refer to as good provision, and our late quarter credit trends are generally favorable with non-accruals and classified asset ratios trending downward. As you can see in the top left graph, our over 30 days has to use roughly. This was largely a result of two loans with a total of $15 million of unguaranteed balance.

Operator: Key credits are included on 517.

Operator: We continue to be pleased with the performance of our credit portfolio and was been a challenging environment. Our Q2-12 million dollar provision was primarily due to loan while we were referred to as good provision. And our link quarter credit trends are generally favorable, with non-accruals and classified asset ratios training downers. As you can see in the top left graph, our over 30 days has to use roughly quarter. This was largely result, two loans with a total of $15 million dollars of ungurity analysis. We are currently on concern about further deterioration of the loans at its cost.

BJ: Key credit trends are included on slide 17.

BJ: We continue to be pleased with the performance of our credit portfolio in what has been a challenging environment.

BJ: Our Q2 $12 million provision was primarily due to loan growth, what we refer to as good provision.

BJ: And our late quarter credit trends are generally favorable with non-accruals and classified asset ratios trending downwards.

Speaker Change: As you can see in the top left graph, our over 30-day past-use route link order.

Speaker Change: This was largely a result of two loans with a total of $15 million of unguaranteed balances.

Walter J. Phifer: We are currently unconcerned about further deterioration of those loans at this time. Given our highly attractive portfolio characteristics and our significant credit monitoring activity as outlined in our last poll, we remain confident in our reserve in the portfolio's credit strength. Lastly, slide 18 highlights our capital expenditure, which remains positioned well to support our growth going forward. Overall, as BJ said, it was a fantastic quarter. We are very pleased with the outcome, and we are looking forward to continued momentum. I will now turn it over to Chip to add his final comments before Q&A.

Walt: We are currently unconcerned about further deterioration of those loans at this time.

Operator: Given our highly attractive portfolio characteristics and our significant credit monitoring activity, as outlined in our last fall, we remain confident in our reserve and the portfolio's credit strengths.

Walt: Given our highly attractive portfolio characteristics and our significant credit monitoring activity as outlined in our last poll, we remain confident in our reserve in the portfolio's credit strengths.

Operator: Lastly, flood 18 highlights capital strength, which remains the position well as the quarter growth going forward.

Walt: Lastly, slide 18 highlights our capital strength, which remains positioned well to support our growth going forward.

B.J.: Overall, as B.J. Said, it was a fantastic quarter. We are very pleased with the outcome.

Walt: Overall, as BJ said, it was a fantastic quarter. We are very pleased with the outcome.

Operator: And we are looking forward to continue to continue momentum.

Chip Mahan: I will now turn over the chip to add to its final comments before Q&A. Thanks, B.J., how do you hold us accountable? I have been thinking about that, reflecting on the last seven years. And as I look back, yes, PPP; interesting. We generated $80 million of B.N. Yes, we invested $13 million in Finsack, and got back $135, which sold the business to Fossil. Yes, we invested about $3 or $4 million in payorales, and got back about $35 million. And then we invested that money. We were a bit behind. We're not out of the day; it has 130 folks.

BJ: And we are looking forward to the continued momentum.

James S. Mahan: Thanks Walt, thanks BJ. How do you hold us accountable, right? I've been thinking about that, reflecting on the last several years. And as I look back...

Walt: I will now turn it over to Chip to add his final comments before Q&A.

James S. Mahan: Thanks Walt, thanks BJ.

James S. Mahan: How do you hold us accountable, right? I've been thinking about that and reflecting on the last several years. And as I look back,

James S. Mahan: Yes, PPP, interesting, we generated $80 million of fee income. Yes, we invested $13 million in FinSec and got back $135 million when we sold the business to Pfizer. Yes, we invested about $3 or $4 million in payrolls and got back about $35 million, and then we invested that. We were a bit behind. Renato today has 130 folks.

Speaker Change: Yes, PPP, interesting, we generated $80 million of fee income. Yes, we invested $13 million in FinSec and got back $135 million when we sold the business to Fiserv.

James S. Mahan: Yes, we invested about $3 or $4 million in payrails and got back about $35 million.

James S. Mahan: We needed to beef up cyber. We needed to beef up data. He is constantly extending our moat, reference to the Express product, more to come there. So where does that actually leave us, and how do you, how should you hold us accountable?

James S. Mahan: And then we invested that money.

Chip Mahan: We needed to beef up cyber. We needed to beef up data. He is constantly extending our vote, referenced to the express product, more to come there. So where does that actually leave us?

James S. Mahan: We were a bit behind. Renato today has 130 folks. We needed to beef up cyber. We needed to beef up data. He is constantly extending our moat.

James S. Mahan: Reference to the Express product. More to come there.

Chip Mahan: And how should you hold us accountable? Bank accounts create, in my judgment, a lot of mumbo jumbo. For instance, typical list of adjustments to revenues, any PPP-related impacts, servicing asset revails, loans accounted for under fair value option impacts. In a one-time gain from the sale of fixed assets like this, we sold an airplane, and that again is $77 million. In the gains from investment portfolio sales, Finsack investment activities, valuations, and realized gains in losses from sales, non-cash gains in losses from investments in venture funds.

James S. Mahan: So, where does that actually leave us and how do you, how should you hold us accountable?

James S. Mahan: Bank accountants create, in my judgment, a lot of mumbo-jumbo. For instance, a typical list of adjustments to revenues, NEPPP-related. Servicing Asset Reboot, loans accounted for under fair value option impacts, any one-time gains from the sale of fixed assets, like this quarter we sold an airplane and had a gain of six or seven million dollars, any gains from investment portfolios. FinTech Investment Activities, Valuations and Realized Gains and Losses from Sales, Non-Cash Gains and Losses from Investments in Venture Funds. Now let's move to the expense side. Non-routine employee bonuses related to FinTech gains, impairments or losses from sales of long-term fixed assets, renewable energy tax credit impairments, and wrap up with litigation settlement expenses.

Speaker Change: Bank accountants create, in my judgment, a lot of mumbo-jumbo.

Speaker Change: For instance, typical list of adjustments to revenues, NEPPP related impacts.

Speaker Change: Servicing Asset Reveals.

Speaker Change: loans accounted for under fair value option impacts, any one-time gains from sale of fixed assets like this quarter we sold an airplane and had a gain of $6 or $7 million, any gains from investment portfolio sales.

Speaker Change: FinTech Investment Activities, Valuations and Realized Gains and Losses from Sales, Non-Cash Gains and Losses from Investments in Venture Funds,

Chip Mahan: Now, let's move to the expense side. Non-routine employee bonuses related to Finsack gains, impairments, or losses from sales of long-term fixed assets. We're renewable energy tax credit impairments and wrapping up with litigation and satellite expenses. You need to take all that noise out to see how this business is doing. So I thought it would be interesting to go back 12 months. So from 630, 2023, to 630, 2024, what were the operating earnings for this business for all that noise? Out, 174 million. What was it the previous 12 months? 6, 30, 2022 to 6, 30, 2023, 137 million.

Speaker Change: Now, let's move to the expense side, non-routine employee bonuses related to FinTech gains, impairments or losses from sales of long-term fixed assets, renewable energy tax credit impairments and wrapping up with litigation settlement expenses. You need to take all that noise out.

James S. Mahan: You need to take all that noise in to see how this business is doing. So I thought it would be interesting to go back 12 months. So from 6-30-20-23 to 6-30-20-24, what was the operating earnings for this business with all that noise? [inaudible] What was it for the previous 12 months? 6-30-20-22 to 6-30-20-23. 137. I don't know any other bank that increases operating earnings 27% year-over. And to me, and lastly, the most exciting.

James S. Mahan: to see how this business is doing.

James S. Mahan: So I thought it would be interesting to go back 12 months, so from 6-30-2023 to 6-30-2024. What were the operating earnings of this business with all that noise out?

Speaker Change: 174 million. What was it the previous 12 months? 6, 30, 20, 22 to 6, 30, 20, 23. 137 million.

Chip Mahan: I don't know any other bank that increases operating earnings, 27% year over year. And to me, and lastly, the most exciting thing, BJ alluded to the wonderful origination quarter that we had, which matched our previous high, which was T4 of 2022. We left T4 of 2022 with a pipeline of 2.4 billion. Today, it's 3.6 billion. So those good costs and those revenue producers that have finally learned the Live Oak Way are out there generating high quality loans.

James S. Mahan: P.J. alluded to the wonderful origination quarter that we had, which matched our previous high, which was Q4 of 2022. We left Q4 2022 with a pipeline of 2.4 billion. Today, it's 3.6. So those good costs and those revenue producers that have finally learned the Live Oak way are out there generating high-quality loans. And with that, we will be happy to entertain questions.

Speaker Change: And to me, and lastly, the most exciting thing.

Speaker Change: BJ alluded to the wonderful origination quarter that we had, which matched our previous high, which was Q4 of 2022. We left Q4 of 2022 with a pipeline of $2.4 billion. Today, it's $3.6 billion.

Speaker Change: So, those good costs and those revenue producers that have finally learned the Live Oak way are out there generating high quality loans. And with that, we will be happy to entertain questions.

Chip Mahan: And with that, we will be happy to entertain questions. Thank you.

Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and questions will be answered in the order they are received. If you wish to decline the polling process, please press star followed by two. And if you're using a speakerphone, please lift your handset before pressing any key. One moment for your first question. Your first question comes from David Feaster with Raymond James. Please go ahead.

Operator: Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press star, followed by one on your touched-on phone. You'll hear a three-tone prompt acknowledging your request, and questions will be pulled in the order they are received. If you wish to decline from the polling process, please press star, followed by two. And if you're using a speaker phone, please lift your handset before pressing any key. One moment for your first question.

Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by one on your touchtone phone.

Speaker Change: You will hear a three-tone prompt acknowledging your request, and questions will be polled in the order they are received. If you wish to decline from the polling process, please press star followed by two. And if you're using a speakerphone, please lift your handset before pressing any key. One moment for your first question.

David Feaster: Your first question comes from David Feaster with Raymond James. Please go ahead.

Speaker Change: Your first question comes from David Feaster with Raymond James. Please go ahead.

David Pipkin Feaster: Hey, good morning everybody. Hey, David. Morning, David. Maybe just following up on kind of Chip's last commentary, just talking about origination strength and care on the line. Could you talk about how much of the strength that you're seeing is from maybe improving versus you could share gains and just kind of the composition of the.

David Feaster: Hey, good morning everybody. Hey David, what are you doing?

David Feaster: Um, maybe just following up on kind of chip your last commentary, just talking about the origination strength and the care on the line.

David Pipkin Feaster: Hey, good morning, everybody.

Speaker Change: Hey David. Morning David.

David Pipkin Feaster: Maybe just following up on kind of Chip, your last commentary, just talking about the origination strength and the career on the line. You know, could you talk about how much of the strength that you're seeing is from, you know, maybe improving versus you could share gains and just kind of the composition of the line and where you're seeing the most opportunities today?

David Feaster: You know, could you talk about how much of the strength that you're seeing is from, you know, maybe improve and you could see your gains. And just kind of the composition of the line where you're seeing the most opportunities today.

William C. Losch: Yeah, so I'll start, David. Good morning. It's BJ.

William Losch: Yeah, so I'll start, David. Come on in and be Jay. We're seeing it across the board, which feels really, really good. First quarter was a little bit lighter than what we would have, even though tight lines were significant and approval was were significant. We didn't see the pull through that we had wanted in the first quarter. Not only did that come through in the second, but as Chip talked about, as I talked about, tight lines going forward, most importantly, are still healthy. So, you know, I think it's a combination of a few things. One is certainly our lenders are actually what they do.

David Pipkin Feaster: Yes, I'll start, David. Good morning. It's BJ. We're seeing it across the board.

William C. Losch: We're seeing it across the board, which feels really, really good. The first quarter was a little bit lighter than we would have wanted, even though pipelines were significant, and approvals were significant. We didn't see the pull through that we had wanted in the first quarter.

David Pipkin Feaster: which feels really, really good.

Speaker Change: The first quarter was a little bit lighter than what we would have wanted. Even though pipelines were significant and approvals were significant, we didn't see the pull-through that we had wanted in the first quarter.

William C. Losch: Not only did that come through in a second, but as Chip talked about, as I talked about, pipelines going forward are still healthy. So, you know, I think it's a combination of a few things. One is... certainly, our lenders are excellent at what they do. They're constantly talking to customers, their referral sources, and activities, and they want to win. And they want to make more loans and do more business for our customers. So obviously, that is priority number one.

William Losch: They're constantly talking to customers, their referral sources, activities, and they want to win. And they want to do more loans and do more business for our customers. Obviously, that is probably number one. I think number two, though, is, you know, with the Fed making more and more noise about rates kind of being at their starting to see more optimism and more activities, more activity across our different verticals, such that buyers and sellers are more willing to come together and get yields done. So, we're really pleased about that.

Speaker Change: Certainly our lenders are excellent at what they do. They're constantly talking to customers, their referral sources, activities, and they want to win. And they want to do more loans and do more business for our customers. So obviously that is

William C. Losch: I think number two, though, is that with the Fed making more and more noise about rates kind of being at their peak for sure and inevitably coming down sooner rather than later. I think we're starting to see more optimism and more activity, more activity across our different verticals such that buyers and sellers are more willing to come together and get deals done. So we're really pleased about that. One more thing I'll mention; I think Walt maybe hit on it a little bit.

Speaker Change: priority number one. I think number two though is, you know, with the Fed making more and more noise about rates kind of being at their peak for sure and inevitably coming down sooner rather than later.

Speaker Change: I think we're starting to see more optimism and more activities.

Speaker Change: more activity across our different verticals such that buyers and sellers are more willing to come together and get deals done. So we're really pleased about that. One more thing I'll mention, I think Walt maybe hit on it a little bit.

William Losch: One more thing I'll mention, I think we'll all maybe get on in a little bit. Our small business banking verticals and our specialty finance business have had a great quarter. And our energy and infrastructure business was down from last year. They had a lighter first quarter as well, but their pipeline is significant. And they closed almost $100 million in the first month and a half of this quarter. So, the pipeline's there; the pipeline's growing. So, when we get E&I back, where we know it can be, along with the great performance of our other two businesses, we're really feeling really good about that. That's great, and maybe touch on the expense side.

William C. Losch: Our small business banking verticals and our specialty finance business had a great quarter, but our energy and infrastructure business was down from last year. They had a lighter first quarter as well, but their pipeline is significant, and they closed almost $100 million in the first month and a half of this quarter. So the pipeline's there, the pipeline's growing, so when we get E&I back where we know it can be, along with the great performance of our other two businesses, we're feeling really good about the outcome.

Walt: Our small business banking verticals and our specialty finance business

Walt: have had a great quarter.

Speaker Change: And our energy and infrastructure business was down from last year. They had a lighter first quarter as well, but their pipeline is significant.

Speaker Change: And they closed almost $100 million in the first month and a half of...

Speaker Change: this quarter. So the pipeline's there, the pipeline's growing, so when we get E&I back where we know it can be, along with the great performance of our other two businesses, we're really feeling really good about the outlook.

William C. Losch: That's great. And maybe touching on the expense side, you guys have done a great job controlling expenses. Could you just touch on kind of what you guys are seeing? I know you're continually investing, but are we just being a bit more discerning with growth projects? Or are we at the point where we can just scale up and leverage the existing infrastructure that you've already built? I'm just kind of curious, how do you think that plays into the pace of expense growth as we go forward? Sounds like it should be slowing down.

William Losch: You guys have done a great job controlling expenses. Could you just touch on kind of what's you guys are seeing? I know you're continually investing, but are we just being a bit more discerning with growth projects? Or are we at the point where we can just scale up and leverage the existing infrastructure that you've already built? I'm just kind of curious; I think about how does that plan to the patient expense growth as we go forward? Sounds like it shouldn't be slowing.

Speaker Change: That's great. And maybe touching on the expense side, you guys have done a great job controlling expenses.

Speaker Change: Could you just touch on kind of what you guys are seeing? I know you're continually investing But are we just being a bit more discerning with growth projects? Or are we at the point where we can just scale up and leverage the existing infrastructure that you've already built?

Speaker Change: I'm just kind of curious, how does that play into the pace of expense growth as we go forward? It sounds like it should be slowing.

William C. Losch: Yeah, David, I'll add some color and then Walt can jump in as well. You may recall over the last couple years, we talked about different things. Chip alluded to it in the FinTech games that we had. We accelerated coming out of the pandemic production growth but needed to catch up on lender support growth, underwriters, closers, servicers, et cetera. We did that.

James Mahan: Yeah, David, I'll add some color and then walk and jump in as well. You may recall over the last couple of years, we talked about different things that we had. We accelerated coming out of the pandemic production growth, but needed to catch up on lender support growth, underwriters, closers, servicers, et cetera. We did that. We then accelerated our technology investments in 22, and a little bit in the first half of 23, to again, try to be. So we've put a significant amount of expenses that had a revenue over the last 24 months, I'd say. Here, we've gotten to the point where we've got the expense infrastructure in place across our businesses that we need to grow.

Walt: Yeah, David, I'll add some color and then Walt can jump in as well.

Walt: You may recall over the last couple years, we talked about different things. Chip alluded to it from the FinTech games that we had. We accelerated coming out of the pandemic.

Walt: production growth, but needed to catch up on lender support growth, underwriters, closers, servicers, etc. We did that.

William C. Losch: We then accelerated our technology investments in 22 and a little bit in the first half of 23, to again try to accelerate where our growth would be. So we've put a significant amount of expenses ahead of revenue over the last 24 months, I'd say. Here, we've kind of gotten to the point where we have the expense infrastructure in place across our businesses that we need to grow. We've just got to put the revenue apparatus on it, and that's exactly what you're seeing.

Walt: We then accelerated our technology investments in 22 and a little bit in the first half of 23 to again try to accelerate where our growth would be.

Walt: So we put a significant amount of expenses ahead of revenue.

Walt: over the last 24 months, I'd say.

Walt: Here, we've kind of gotten to the point where we've got the expense.

James Mahan: We've just got to put the revenue apparatus on it, and that's exactly what you're seeing. Our revenues up 9% on an adjusted basis as chip showed over the last 12 months on only 1% expense growth. 90% ish or so. The incremental people that we're adding right now are in revenue producing spots in our organization, and we want that to continue. We have really good infrastructure and support to be able to scale this business now because of the hard work of people over the last 24 months. And so now we're in a position to be able to provide much more operating leverage on that expense space than we had been previously.

Walt: infrastructure in place across our businesses that we need to grow. We've just got to put the revenue apparatus on it, and that's exactly what you're seeing. Our revenue is up.

William C. Losch: Revenue's up 9% on an adjusted basis, as Chip showed over the last 12 months, on only 1% expense growth. About 90%-ish or so of the incremental people that we're adding right now are in revenue-producing roles. We want that to continue. We have really good infrastructure and support to be able to scale this business now because of the hard work of our people over the last 24 months. And so now we are in a position to be able to provide much more operating leverage on that expense base than we have been previously.

Walt: 9% on an adjusted basis, as Chip showed over the last 12 months.

James S. Mahan: on only 1% expense growth, about 90%-ish or so of the incremental people that we're adding right now are in revenue producing.

Walt: spots in our organization, and we want that to continue.

Walt: We have really good infrastructure and support to be able to scale this business now because of the hard work of people over the last 24 months. And so now we're in a position to be able to provide much more operating leverage on that expense base than we had been previously.

Walter J. Phifer: David, I'll just add quickly to what BJ just mentioned. Now, you know, we've been really fortunate that our company has embraced this challenge of how we think about expenses. And you can definitely grow your expenses, and we'll inherently have growth in our expenses because we're a growth organization, and that's what we're about, for all the reasons Vijay just mentioned. But there are other opportunities across the company where we can look to find efficiencies as well.

James Mahan: The day of all is that on quickly to what we did this message.

James Mahan: Now, we've been really fortunate that our company has embraced this challenge of how we think about expenses. And you know, there, you can definitely grow your expenses. And we'll inherently have growth that our expenses, because we're a growth organization, and that's what we're about. I'm for all of you can be just mentioned, but there are other opportunities across the company where we can look to find efficiency as well. So we've thus far, so both in 2024, we found a really nice south between the two growing, investing. I wouldn't say we're slowing down on any technology or growth initiative whatsoever.

Walt: David, I'll just add on quickly to what B.J. just mentioned. Now, you know, we've been really fortunate that our company has embraced this challenge.

David Pipkin Feaster: of how we think about expenses. And you can definitely grow your expenses, and we'll inherently have growth in our expenses because we're a growth organization, and that's what we're about, for all the reasons Vijay just mentioned. But there are other opportunities across the company where we can look to find efficiencies as well.

Walter J. Phifer: So thus far, so far, in 2024, we've found a really nice balance between the two, growing and investing. I wouldn't say we're slowing down on any technology or growth initiative whatsoever. I think, if anything, it's the opposite.

Speaker Change: So far in 2024, we've found a really nice balance between the two, growing and investing. I wouldn't say we're slowing down on any technology or growth initiative whatsoever. I think if anything, it's the opposite. We're trying to progress as quickly as we can.

James Mahan: I think if anything, if the opposite, we're trying to progress as quickly we can, but we continue to look further away, you know, to across our lines, across our business units, to be finding expense reductions when you can as well. And that's a good, healthy expense discipline, you know, that we really demonstrate your last follow-up. That's great.

Walter J. Phifer: We're trying to progress as quickly as we can, but we continue to look for other ways, across our lines, across our business units, to find expense reductions when we can as well. And that's just good, healthy expense discipline that we really demonstrated over the last 12 months.

Speaker Change: Well, we continue to look for other ways to, across our lines, across our business units, to find expense reductions when we can as well. And that's a good, healthy expense discipline that we've really demonstrated over the last 12 months.

Walter J. Phifer: And then, last one for me, just great to hear the commentary on deposit cost stabilization. It sounds like, you know, we're starting to see some opportunity to even, you know, the CD repricing is behind us, and you're seeing a lot of success on the core deposit front from business customers. I'm just kind of curious, would you expect the funding costs to start to decline, I guess, as if you can continue this kind of success with the business clients, and we could maybe be set up for a, you know, approaching a pretty material inflection point in the margin? And how quickly do you expect to be able to reprice those business clients in a potential down rate scenario?

William Losch: And then last one for me, just great to hear the commentary on the pause and pause stabilizing. It sounds like, you know, we're starting to see some opportunity to even, you know, the CD repricing as is behind us and you're seeing a lot of success on the court of pause when the business customers. I'm just kind of curious, would you expect a funding cost start to decline? Yes, as if you can continue to, this kind of success with the business clients, and we could maybe be set up for, you know, approaching a pretty material inflection point in the margin, and how quickly do you expect to be able to replicate those business clients in a potential downright scenario?

Speaker Change: That's great.

Speaker Change: And then last one for me, just great to hear the commentary on deposit cost stabilizing. It sounds like, you know, we're starting to see some opportunity to even, you know, the CD repricing is behind us and you're seeing

Speaker Change: A lot of success on the core deposit front from the business customers. I'm just kind of curious

Speaker Change: Would you expect...

Speaker Change: funding costs start to decline, I guess, as if you can continue to have this kind of success with

Speaker Change: the business clients, and we could maybe be set up for approaching a pretty material inflection point in the margin. And how quickly do you expect to be able to reprice those business clients in a potential downrate scenario?

Walter J. Phifer: You know, I'll start and then PJ can jump in. Great question, David. Look, I think ultimately, you know, we're going to control what we can control, right? We have a really good problem right now, and that problem is that we're growing. And I say problem with a smile because I think that that's not something many other banks are seeing.

Speaker Change: I'll start and then BJ can jump in. Great question, David, appreciate that. Look, I think ultimately, you know, we're going to control what we can control, right? We have a really good problem right now and that problem is we're growing.

William Losch: William Losch, James Mahan, Gregory Seward, William Losch, James Mahan, Gregory Seward William Losch James Mahan, Gregory Seward William Losch, James Mahan, Gregory Seward, David, I'll just add one more quick thing. I'll back to the topic dynamics. There's something that Wall has on his pilot fly that I think is pretty important and insightful. About half of our lung portfolio is virical rate, but almost three quarters of our deposit portfolio will reprice in less than a year. So when the Fed does start to reduce rates, they'll probably be a little bit of trading water because our loan portfolio is coming down a little bit quicker than the deposit portfolio.

BJ: And I say problem with a smile because I think that's not something many other banks are seeing.

Walter J. Phifer: So we're going to price accordingly, and we're going to really see what the competitive market does here, kind of going forward. You know, there's things like the Fed, like I mentioned, that we can't control; we don't know what they're going to do. Ultimately, you know, a 330 margin with our level of growth over the last 12 months feels pretty good. And I think, you know, we can maintain that, you know, going forward. We'll be just fine. Just one more.

BJ: So we're going to price accordingly, and we're going to really see what the competitive market does here going forward. There are things like the Fed, like I mentioned, that we can't control. We don't know what they're going to do.

Speaker Change: Ultimately, a 330 margin with our level of growth over the last 12 months feels pretty good. I think if we can maintain that going forward, we'll be just fine.

James S. Mahan: Just one thing, David, on your first question to BJ, sorry to back up. You know, BJ does such a wonderful job operating this bank, and I get to spend probably two or three days a week at least on the road with customers. And certainly in our SBA business, in our 35 verticals, when Steve designs the credit box and tells the lending officers what the credit box is, it's kind of banking 101.

David Pipkin Feaster: Just one thing, David, on your first question to BJ. Sorry to back up. You know, BJ does such a wonderful job operating this bank, and I get to spend probably two or three days a week, at least, on the road with customers.

James S. Mahan: Am I approved, and when are you going to get me the money? So these lending officers know exactly what to say to these borrowers. On the other hand, in the sponsor business yesterday, the Northeast had a chance to visit with a firm that has about $3 billion in assets under management and does business with a lot of banks.

Speaker Change: So, these lending officers know exactly what to say to these borrowers.

Speaker Change: On the other side, in the sponsor business yesterday in the Northeast I had a chance to visit with a with a firm that has about three billion dollars in assets under management and does business with a lot of banks and this guy that ran the firm, I said you guys are different.

James S. Mahan: This guy that ran the firm said, "You guys are different. We never have to worry about the loan committee. We never have to worry about going back and forth. You guys give us an answer, and it's always direct."

Speaker Change: We never have to worry about the loan committee, we never have to worry about going back and forth. You guys give us an answer and it's always direct and we get to move on with our customer and book the deal. So I think it's like a fucking one-on-one, David.

William C. Losch: David, I'll just add one more quick thing going back to the deposit dynamics. There's something that Walt has on his deposit slide that I think is pretty important and insightful. About half of our loan portfolio is in a variable range, but almost three-quarters of our deposit portfolio will reprice in less than a year. So, when the Fed does start to reduce rates... There will probably be a little bit of treading water because our loan portfolio is coming down a little bit quicker than the deposit portfolio, but once we start to get past the first quarter or two, the majority of our deposits will start to come down in cost, and we believe that we'll start to see an expansion over time to levels that we expect we can generate from this business model.

David Pipkin Feaster: Sorry. Okay.

David Pipkin Feaster: David, I'll just add one more quick thing going back to the deposit dynamics. There's something that Walt has on his deposit slide that I think is pretty important and insightful. About half of our loan portfolio is variable rate.

Walt: But almost three-quarters of our deposit portfolio will reprice in less than a year. So, when the Fed does start to reduce rates,

Speaker Change: There will probably be a little bit of treading water because our loan portfolio is coming down a little bit quicker than the deposit portfolio.

William Losch: But once we start to get past the first quarter or two, the majority of our deposits will, our deposit costs will be coming down more quickly, and we believe that we'll start to see an expansion over time to levels that we expect we can generate from this business model.

Walt: Bye.

Speaker Change: once we start to get past the first quarter or two.

Walt: The majority of our deposit costs will be coming down more quickly and we believe that we'll start to see NIM expansion over time to levels that we expect we can generate from this business model.

Operator: All right.

Operator: All right. Thanks, everybody.

Operator: Thanks, everybody. Thank you.

Speaker Change: All right. Thanks, everybody.

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

Tim Switzer: Next question comes from Tim Switzer at KBW.

Walt: [inaudible]

Tim Switzer: Please go ahead. A good morning. Thank you for taking my questions.

Speaker Change: Thank you. Next question comes from Tim Switzer at KBW. Please go ahead.

Walter J. Phifer: Hey, good morning. Thank you for taking my questions. Can I ask a quick clarification real quick? Did you say 25% of your deposits will be repriced within a year or a quarter? So, over the next 12 months, we'll have roughly about 76%, so you have our liquid savings portfolio and then you have our CD portfolio that takes time just to migrate through the maturity schedule. It's roughly about a quarter of that CD maturity, a quarter of that CD portfolio matures each quarter over the next 12 months, as you've seen over the last 12 months.

Tim Switzer: Can I ask a quick clarification real quick? Did you say 25% of your deposits reprice within a year quarter? So, over the next 12 months, we'll have roughly about 76%. So you have our liquid savings portfolio, and then you have our CD portfolio that takes time to migrate through the maturity schedule.

Tim Switzer: Hey, good morning. Thank you for taking my questions. Can I ask a quick clarification real quick? Did you say 25% of your deposits repriced within a year?

Walt: Recorder.

Speaker Change: So over the next 12 months we'll have, it's roughly about 76%, so you have our liquid savings portfolio and then you have our CD portfolio that takes time just to migrate through the maturity schedule. It's roughly about a quarter of that CD maturity.

William Losch: It's roughly about quarter of that CD maturity, quarter of that CD portfolio. The maturity is each quarter over the next 12 months, as you've seen over the last 12 months.

Walt: A quarter of that CD portfolio matures each quarter over the next 12 months, as you've seen over the last 12 months.

William Losch: Well, I think Tim, to add to in Walt's initial comments, you were talking about how over 25% of our entire deposit portfolio reprices because of CD maturity is a threat.

William C. Losch: I think, Tim, to add to Walt's initial comments, you were talking about how over 25% of our entire deposit portfolio repriced because of CD maturities, almost 200 basis points higher at the beginning, and 150 basis points through the middle of to end of last year. And we still held the margin flat, and we grew our net interest income by 8% year-over-year. So I think we're just incredibly pleased with the pricing discipline that our lenders have had and the activity that they've generated to continue our loan growth and the discipline that our deposits team has had to manage that large repricing and still maintain our margins.

Tim: I think, Tim, to add to Walt's initial comments, you were talking about how over 25% of our entire deposit portfolio repriced because of CD maturities. That's correct.

Walter J. Phifer: Okay, okay, that's helpful. And can you guys talk about...

William Losch: almost 200 basis points higher at the beginning, 150 basis points through the middle of to end of last year, and we still held not we held the margin flat and we grew our net interest income by 8% year-years. So, you know, I think we're just incredibly pleased with the pricing discipline that our lenders have had and the activity that they've generated to continue our loan growth and the discipline that our department's team has had to manage that large repricing and still maintain our margins.

Speaker Change: almost 200 basis points higher at the beginning, 150 basis points through the middle of to end of last year, and we still held

Walter J. Phifer: We held the margin flat and we grew our net interest income by 8% year-over-year.

Speaker Change: So, you know, I think we're just incredibly pleased with the pricing discipline that our lenders have had and the activity that they've generated to continue our

Tim: loan growth and the discipline that our deposits team has had to manage that large repricing and still maintain our margins.

Tim Switzer: Okay, okay, that's helpful.

William Losch: And can you guys talk about the secondary market demand and SBA space, you know, is it, did the rate movement help at all? And do you think lower rates will help improve going forward?

Walter J. Phifer: The secondary market demand in the SBA space, you know, is it... Did the rate movement help at all, and do you think lower rates will help improve going forward? And then have you started to see some rising competition generally in the SBA space from other banks who are kind of trying to diversify their loan exposures? It's in this wall.

Speaker Change: Okay, okay, that's helpful. And could you guys talk about...

Speaker Change: The secondary market demand in the SBA

Speaker Change: space, you know, is it...

Walter J. Phifer: Did the rate movement help at all, and do you think lower rates will help improve going forward? And then, have you started to see some rising competition generally in SBA from other banks who are kind of trying to diversify their loan exposures?

William Losch: And then have you started to see some rising competition generally in SBA from other banks are kind of trying to diversify. They're low in exposures.

William Losch: Based in this wall, I'll start with the secondary market. You know, the rates help, or at least the outlook of what the Fed is going to do has helped. Really what we're starting to see there is the assumption that when Fed decides to cover its pre-payment rates both voluntary and voluntary will slow, obviously, depending on why the Fed can erase and if they do it in a disciplined fashion. So that is definitely helpful as well as, you know, our spreads continue to be competitive, especially on the smaller and probably should be rearranged as anywhere from prime plus one and half to prime plus four.

Walter J. Phifer: I'll start with the secondary market. You know, the rates helped, or at least the outlook of what the Fed's going to do has helped. Really, what we're starting to see there is the assumption that when the Fed decides to cut rates, prepayment rates, both voluntary and involuntary, will slow, obviously depending on, you know, why the Fed's putting rates in, if they do it in a disciplined fashion. So that has definitely helped as well as, you know, our spreads continue to be, you know, competitive, especially on the small loan front, which could be in ranges anywhere from prime plus one and a half to prime plus four.

Speaker Change: It's in this wall. I'll start with the secondary market.

Speaker Change: The rates helped, or at least the outlook of what the Fed is going to do has helped.

Speaker Change: Really what we're starting to see there is the assumption that when Fed decides to cut rates, prepayment rates, both voluntary and involuntary, will slow, obviously depending on why the Fed is going to raise and if they do it in a disciplined fashion.

Walter J. Phifer: So that has definitely helped as well as, you know, our spreads continue to be competitive.

Walter J. Phifer: especially on the small loan front, which ranges anywhere from prime plus one and a half to prime plus four.

William Losch: So broadly speaking, you know, expectations for the Fed have helped; you know, the Treasury curve coming down has helped. You know, and then it would just continue to hide demand from investors for the SBA pool if they start taking a downward rate protection and alternative to cash. So far, with that one.

Speaker Change: Thank you.

Walter J. Phifer: So, broadly speaking, you know, expectations for the Fed have helped. You know, the Treasury curve coming down has helped. You know, and then there is just continued high demand from investors for those SBA pools if they start taking standard rate protection and alternatives to cash. So I'll start with that one. And then, I'm sorry, the second question was... Are you seeing any more competition from other banks in the SBA? Yeah, thanks.

Walter J. Phifer: So, broadly speaking, you know, expectations for the Fed have helped.

Speaker Change: You know, the treasury curve coming down has helped, you know, and then the just continued high demand, you know, from investors for those SBA pools as they start taking downward rate protection and alternatives to cash.

William Losch: And then I'm sorry, the second question was, yeah, are you seeing any more competition from other banks in SBA? Yeah, thanks. So, on the competition side, I think it's pretty much the same, right? I think, you know, every industry is very different, and every industry has their own competitive pressures. And so we actually get this question a lot of what banks are we seeing out in the market, and my answer always is what industry are looking at. But really, no, I wouldn't say we've seen any migration or any more competition, you know, pretty much across the spectrum.

Walter J. Phifer: So I'll start with that one. And then, I'm sorry, the second question was...

Speaker Change: Are you seeing any more competition from other banks in the SBA?

Walter J. Phifer: So on the competition side, I think it's pretty much the same, right? I think, you know, every industry is very different, and every industry has its own competitive pressures. And so we actually get this question a lot: what banks are we seeing out in the market? And my answer always is, what industry are you looking at? But really, no, I wouldn't say we've seen any migration or any more competition, you know, pretty much across the spectrum. It seems to be the same players.

Walter J. Phifer: Yeah, thanks. So on the competition side, I think it's pretty much the same, right? I think, you know, every industry is very different and every industry has their own competitive pressures.

Walter J. Phifer: And so we actually get this question a lot, what banks are we seeing out in the market? And my answer always is, what industry are you looking at? But really, no, I wouldn't say we've seen any migration or any more competition. You know, pretty much across the spectrum, it seems to be the same players.

William Losch: It seems to be the same players.

William Losch: Okay, one more thing I'll mention on secondary markets that I'm particularly proud of this. You get that it speaks to what our lenders are doing to, you know, balance production growth and doing the right things for the customer and being disciplined on pricing. We generally don't like to sell any SBA guaranteed loans that are less than 105%. and Biden-large because we think it makes more sense to hold those than it does to sell those at those levels. And over the previous four quarters, what we were generating in terms of production was anywhere between 30 to 50 percent of what we were producing of SBA guaranteed was going to yield a 105 or greater.

William C. Losch: Hey Tim, one more thing I'll mention about secondary markets that I'm particularly proud of this because it speaks to what our lenders are doing to, you know, balance production growth and doing the right thing for the customer and being disciplined on pricing. We generally don't like to sell any SBA guaranteed loans that are less than a 105 percent premium, you know, by and large, because we think it makes more sense to hold those than it does to sell them at those levels.

William C. Losch: Hey Tim, one more thing I'll mention on secondary markets that I'm particularly proud of this because it speaks to what our lenders are doing to, you know, balance production growth and doing the right thing for the customer and being disciplined on pricing.

William C. Losch: We generally don't like to sell any SBA guaranteed loans that are less than a $105 premium.

William C. Losch: You know, by and large, because we think it makes more sense to hold those than it does to sell those at those levels.

William C. Losch: And over the last, over the previous four quarters, you know, what we were generating in terms of production was anywhere between 30 to 50 percent of what we were producing with SBA guaranteed. What's going to yield a 105 or greater. This was Kirk. It was 70.

William C. Losch: And over the last, over the previous four quarters, you know, what we were generating in terms of production was anywhere between 30 to 50 percent of what we were producing of SBA guaranteed was going to

William Losch: This will occur if it was 70 percent. So, in addition to whatever the pricing dynamics are going on in the marketplace, our people are producing loans that give us the optionality to either keep or sell for very attractive profitability metrics. So I'm really pleased that how our lenders and how our business are really kind of turning over the Rubik's cube to give us as much optionality as we can.

Kirk: was going to yield a 105 or greater. This was 70%.

William C. Losch: So, you know, in addition to whatever the pricing dynamics are going on in the marketplace, our people are producing loans that give us the optionality to either keep or sell for very attractive profitability metrics. So I'm really pleased at how our, you know, our lenders and how our business are really kind of turning over the Rubik's Cube to give us as much optionality as we can.

William C. Losch: So, you know, in addition to whatever the pricing dynamics are going on in the marketplace,

William C. Losch: Our people are producing loans that give us the optionality to either keep

William C. Losch: or sell for very attractive profitability metrics. So I'm really pleased at how our lenders and how our business are really kind of turning over the Rubik's cube to give us.

William Losch: And DJ, I think in the small dollar and the expressed situation where we're not having to take many times all available collateral. Yes. And we can close these loans much more quickly, and we're seeing pricing in that area of, you know, it raises from 111 to 113. Yeah. And then that's going to help because that's going to pick up dramatically, for sure. Okay, great.

James S. Mahan: And B.J., I think in the small dollar, in the express situation where we're not having to take many times all available collateral, and we can close these loans much more quickly, and we're seeing pricing in that area of, you know. It ranges from $111 to $117.

James S. Mahan: as much optionality as we can.

B.J.: And B.J., I think in the small dollar, in the express situation where we're not having to take many times all available collateral, and we can close these loans much more quickly, and we're seeing pricing in that area of, you know... It ranges from $111 to $117. Yeah, and then that's going to help too, because that's going to pick up dramatically. For sure.

William C. Losch: It ranges from 111 to 117. Yeah, and that's going to help too because that's going to pick up dramatically. For sure. Okay, great. I appreciate all the color. Thank you. Thank you. Thank you.

Tim Switzer: Appreciate all the color. Thank you.

William C. Losch: Okay, great. Appreciate all the color. Thank you.

Operator: Thank you, ladies and gentlemen. As a reminder, should you have any questions? Please press star one.

Operator: Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star 1. The next question comes from Alex Lau at J.P. Morgan. Please go ahead.

Speaker Change: Thank you.

Operator: Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star 1.

Alex Lau: Next question comes from Alex Lau at JP Morgan. Please go ahead.

Alex Lau: Hi, good morning. I don't follow up on the expenses.

Operator: Next question comes from Alex Lau at J.P. Morgan. Please go ahead.

Alex Lau: I had a follow up question on expenses. So with expenses flat in the first half of the year, when you compare year over year, have you changed your expectations for your full year expense growth outlook from that high single-digit to low double-digit range?

Speaker Change: Hi, good morning.

Alex Lau: So, with expenses flat in the first half of the year when you compare year over year, have you changed your expectations for your full year expense growth outlook from that high single digit to low double digit range?

Speaker Change: Good morning, y'all.

Alex Lau: I had a follow-up on the expenses. So with expenses flat in the first half of the year when you compare year-over-year, have you changed your expectations for your full-year expense growth outlook from that high single-digit to low double-digit range?

James Mahan: Hey, Alex, this is what I'll start. Look, I think the, you know, we continue to do what we can, you know, can do on that front. Like you mentioned, balancing, finding expenses, fish disease, while you continue to invest in our growth organization and especially on revenue generator size. I think our expenses will continue to inherently grow, right? I think you take lots of the quarters, and you run rate those for the full year. You know, add, you know, a growth expectation on top of that, just given, you know, the focus on, you know, hiring new lenders and other support personnel to, you know, correctively aid or, you know, in terms of complexity.

Walter J. Phifer: Hey Alex, this is Walter.

Walter J. Phifer: Hey Alex, this is Walt. I'll start. Look, I think we continue to do what we can do on that front. Like I mentioned, balancing, finding expense efficiency as well. We continue to invest in our growth organization, especially on the revenue generator side.

Walter J. Phifer: Look, I think we continue to do what we can do on that front. Like I mentioned, balancing, and finding expense efficiencies while we continue to invest in our growth organization, and especially on the revenue generator side. I think our expenses will continue to inherently grow. I think if you take the last couple quarters and you run rate those for the full year, add a growth expectation on top of that, just given the focus on hiring new lenders and other support personnel to proactively aid in terms of complexity, I think you'll get a pretty good expectation versus last year.

Walter J. Phifer: Yeah, I think our expenses will continue to inherently grow, right? I think if you take the last couple quarters and...

Walter J. Phifer: Run rate those for the full year. Add a growth expectation on top of that, just given the focus on hiring new lenders and other support personnel to proactively aid in terms of complexity.

James Mahan: I think you'll get a pretty good expectation versus last year.

William C. Losch: I would just add, Alex, that we're going to continue to look for new lenders, invest in technology, and build our business, so we're not really concerned quarter to quarter about how much expense we're going to add ahead of revenues or expense growth. But with that said, if I were a betting man, I would be optimistic about us being better than what we've talked about in terms of expense growth.

Speaker Change: I think you'll get a pretty good expectation versus last year.

James Mahan: Yeah, I would just add, Alex, that, you know, we're going to continue to look for new lenders, invest in technology, build our business, so we're not really concerned quarter to quarter on how much expense we're going to add ahead of revenues or expense growth. But with that said, if I were a betting man, I would be optimistic about us being better than what we've talked about on expenses for the year.

William C. Losch: Yeah, I would just add, Alex, that, you know, we're going to continue to look for new lenders, invest in technology.

William C. Losch: build our business so we're not.

William C. Losch: really concerned quarter-to-quarter on how much expense we're going to add ahead of revenues or expense growth, but with that said

William C. Losch: If I were a betting man, I would be optimistic about us being better than what we've talked about on expenses.

Alex Lau: Thank you. And well, just to confirm your comment earlier on the net interest margin, are you expecting to maintain the name in the three-thirties range for the rest of the year?

Walter J. Phifer: And, Walt, just to confirm your comment earlier on the net interest margin, are you expecting to maintain the NIM in the $3.30 range for the rest of the year, or was there any change to the prior NIM outlook of the $3.50 to $3.75 range for year-end? Thanks.

Walt: for the year.

Walter J. Phifer: Thank you. And Walt, just to confirm your comment earlier on the net interest margin, are you expecting to maintain the NIM in the 330s range for the rest of the year, or was there any change to the prior NIM outlook in the 350 to 375 range for year-end? Thanks.

William Losch: Or was there any change to the prior name outlook in the 350 to 375 range for urine? Thank you. Yeah, I think the, you know, if we focus on the things we can't control, which outline or pricing discipline or growth, you know, or pricing discipline on the public side too, you know, I think that up into the right trajectory still applies, you know. I think the slope of that trajectory will really depend on some of the things we can't control, right?

Walter J. Phifer: Yeah, no, I think the, you know, if we focus on the things we can control, which outline our pricing discipline, our growth, you know, our pricing discipline on the deposit side too, you know, I think that up to the right trajectory still applies. You know, I think the slope of that trajectory will really depend on some of the things we can't control, right? And that's the competitiveness of deposits and the Fed.

Walter J. Phifer: Yeah, no, I think the, you know, if we focus on the things we can control, which outline our pricing discipline, our growth, you know, our pricing discipline on the deposit side, too.

Walter J. Phifer: You know, I think that up and to the right trajectory still applies.

Walter J. Phifer: I think the slope of that trajectory will really depend on some of the things we can't control, right? And that's the competitiveness of the deposits and the Fed. So I think that 350 plus range still remains our target, right? And I think we'll navigate our way back there.

William Losch: That's the competitiveness of the policy and the Fed. So, you know, I think that 350 plus range still remains our target, right? And I think we'll, you know, we'll navigate our way back there. You know, the timing of that really depends on those things we can't control. It's probably not in 24, Alex; you know, it's probably into 25 just, you know, thinking about the forward curve, you know, what our business model is generating is, you know, moving us up into the right, but, you know, probably getting into the 350 plus range is sometimes next year.

Walter J. Phifer: So, you know, I think that 350 plus range still remains our target, right? And I think we'll, you know, we'll navigate our way back there. But the timing of that really depends on those things we can't control.

Walter J. Phifer: It's probably not in 24, Alex. You know, it's probably N225, just, you know, thinking about the Fulbright curve. What our business model is generating is, you know, moving us up into the right, but, you know, probably getting into the 350 plus range is sometime next.

Walter J. Phifer: The timing of that really depends on those things we can't control.

Walter J. Phifer: It's probably not in 24, Alex.

Walter J. Phifer: You know, it's probably N225, just, you know, thinking about the Fulbright curve.

Walter J. Phifer: What our business model is generating is moving us up and to the right, but probably getting into the 350 plus ranges sometime next year.

Alex Lau: Got it.

Alex Lau: Got it. And is that also assuming rate cuts for the rest of the year?

William Losch: And is that also assuming rate cuts for the rest of the year? Yeah.

Speaker Change: Got it. And is that also assuming rate cuts for the rest of the year?

Walter J. Phifer: Yeah, to migrate into that level, you know, we would expect one or two cuts this year and then, you know, going to three or four cuts the next year, you know, similar to what you see in the forward curve.

William Losch: Now, you know, it's the migrates at that level, you know, we would expect one to cut this year, and then you're going to three or four cuts going the next year, you know, similar to what you've seen in the forward curve. Thank you.

Walter J. Phifer: Yeah, to migrate into that level, you know, we would expect one or two cuts this year and then, you know, going into three or four cuts going into next year, you know, similar to what you see in the forward curve.

Alex Lau: Thank you. And then, just on the stronger loan production and pipelines near all-time highs in the second quarter, do you expect loans on balance sheet growth for the year to be in that low double-digit range, or is there potential upside to that given the strong pipeline?

Alex Lau: And then just on the stronger loan production and pipe blinds near all time highs in the second quarter, do you expect loans on balance sheet growth for the year to be in that low double digit range, or is there a potential upside to that, given the strong pipelines? I think that, you know, that low double digit range feels, you know, right early on, right? I think that upside there really depends on Q3, Q4.

Speaker Change: Thank you. And then just on the stronger loan production and pipelines near all-time highs in the second quarter, do you expect loans on balance sheet growth for the year to be in that low double-digit range or is there potential upside to that given the strong pipelines?

Walter J. Phifer: I think that the low double-digit range feels right early on. I think that upside there really just depends on Q3, Q4. We think we have the pipeline and the production to really have a strong second half. So I think that expectation still applies right now.

Walter J. Phifer: I think that, you know, that low double-digit range feels, you know, right early on, right? I think that upside there really just depends on Q3, Q4. We think we have the pipeline and the production to really have a strong second half. So I think kind of, you know, that expectation still applies right now.

Alex Lau: We think we have the pipeline and the production to really have a strong second half. So I think, you know, that expectation still applies right now.

Alex Lau: Got it. And just one follow-up on the comment on the tailwinds on the CD portfolio.

Alex Lau: Got it. And just one follow-up on the comment on the tailwinds on the CD portfolio. How much of the CD book is repricing in the third quarter? And what are the rates of CDs rolling off and being replaced at? Thank you.

Alex Lau: How much of the CD book is repricing in the third quarter? And what are the rates of CDs rolling off at and being replaced at? Thank you.

Speaker Change: Got it. And just one follow-up on the comment on the tailwinds on the CD portfolio. How much of the CD book is repricing in the third quarter? And what are the rates of CDs rolling off at and being replaced at? Thank you.

William Losch: Yeah, great question. So in Q3, Q3s actually are lightest of the four quarters in terms of CD maturities. So you'll roughly be somewhere between 15 to 20% of our customer CD portfolio will repriced in Q3, Q4, the large quarter as well as Q1.

Walter J. Phifer: Yeah, great question. So in Q3, Q3 is actually our lightest of the four quarters in terms of CD maturity. So you'll roughly be somewhere between 15 to 20% of our customer CD portfolio will reprice in Q3. Q4 is a large quarter as well as Q1. You know, I think that the rate that it's rolling off on right now would be our current offering, about 5%, rolling off about 520 to 525.

Walter J. Phifer: Yeah, great question. So in Q3, Q3 is actually our lightest of the four quarters in terms of CD maturities.

Walter J. Phifer: So you'll roughly be somewhere between 15-20% of our customer CD portfolio will reprice in Q3. Q4 is a large quarter as well as Q1.

William Losch: You know, I think that the rate that it's rolling off on right now, you know, would be, or her all brings up 5%, rolling off 5, 20 to 5, 25. You see a slight pick up there. Again, you know, that all depends on our growth and our funding needs. You know, CDs, especially short-term CDs, are one of the primary tactics that we use. You know, given the Fed uncertainty, you know, going into the second half.

Walter J. Phifer: You know, I think that the race that it's rolling off on right now, you know, would be.

Walter J. Phifer: So you see a slight pickup there. Again, you know, that all depends on our growth and our funding needs. You know, CDs, especially short-term CDs, are one of the primary tactics that we use, you know, given the Fed uncertainty, you know, going into the second half. Great, thanks.

Walter J. Phifer: Our current offering is about 5%, rolling off to about 520 to 525, so you see a slight pick-up there. Again, you know, that all depends on our growth and our funding needs. You know, CD's, especially short-term CD's, are one of the primary tactics that we use.

Walter J. Phifer: you know, given the Fed uncertainty, you know, going into the second half.

Alex Lau: Great. Thanks for taking my questions.

Alex Lau: Great, thanks for taking my question.

Operator: I saw it. Thank you.

Speaker Change: Great. Thanks for taking my questions.

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

Operator: We have no further questions.

Chip Mahan: I'll turn the call back over to Chip Mahan for closing comments. Well, we enjoyed being with you this morning, and we look forward to seeing you in the fall. Thanks for attending.

Speaker Change: I felt.

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

James S. Mahan: Well, we enjoyed being with you this morning, and we look forward to seeing you in the fall.

James S. Mahan: Well, we enjoyed being with you this morning and we look forward to seeing you in the fall.

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