Q3 2024 Live Oak Bancshares Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Q3 'twenty 'twenty live Oak Bancshares earnings Conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you need assistance. Please press star zero for the operator.
Speaker Change: This call is being recorded on Thursday October 24th 2024, I would now let's turn the conference over to Greg Seward General Counsel and Chief Risk Officer. Please go ahead.
Speaker Change: The remaining $947 million or 54% of Q3's loan production.
Speaker Change: Our commercial lending team, a 79% increase linked quarter and doubled the commercial production compared to the prior year.
Speaker Change: You can see the year over year momentum across our vertical on the left hand side of the page with approximately 60% of our verticals originating more production through the first nine months of 'twenty 'twenty four than they did in 2023.
Slide 13 illustrates the quarter over quarter loan and deposit balance growth highlighting strong growth trends through the first three quarters of 2024.
Speaker Change: While many banks across the industry continue to see minimal if any loan growth our loan balances are up 7% linked quarter and 16% compared to the prior year. This.
Speaker Change: This elevated growth rate in Q3 was primarily driven by the aforementioned strong loan production.
Speaker Change: Also let's not forget before loan sales and participations or loan balance growth was actually 11% linked quarter.
Speaker Change: Deposit growth of 7% linked quarter, and 14% compared to prior year continues to be driven by our customer deposit platform as well as our utilization of broker deposits to help fund short term liquidity needs.
Speaker Change: In addition to providing flexibility in our customer deposit repricing strategy in an uncertain rate environment.
Speaker Change: Lastly on this slide our business deposits have grown 6% linked quarter and 22% compared to prior year and continue to be a focal point of our funding strategy.
Speaker Change: As BJ mentioned, we are extremely excited about the momentum that we're seeing in building fuller relationships with both our loan and business deposit customers as shown on slide 14.
Speaker Change: You may recall that we fully launched our first true operating account offering to customers in Q1 of this year.
Speaker Change: Since then the percentage of customers with both the loan and deposit account tripled to approximately 12% or.
Speaker Change: Our business checking balances have increased to $145 million and these savings and CD balances related to businesses with a checking account at live oak have increased approximately two times to $232 million.
Speaker Change: The result of expanding our business relationships with our customers stickier deposits with an average blended cost of funds in Q3, 2024 of 245% approximately 40% less than our total bank blended cost of funds.
Speaker Change: Okay.
Speaker Change: We continue to build upon these trends and our deposit efforts will provide substantial tailwind sorry, net interest income and net interest margin over time.
Speaker Change: Speaking of net interest income and NIM their trends are highlighted on slide 15.
Speaker Change: Starting with the graph at the top of the page our net interest income increased 6% linked quarter and is up 9% compared to Q3 2023.
Speaker Change: Net interest margin increased five basis points quarter over quarter to 333% improved.
Speaker Change: Improvement in both our net interest income and NIM were primarily driven by our loan growth as highlighted on the bottom right hand side of the page.
Speaker Change: Now moving to the table below the graph, our net spread increased two basis points linked quarter to 368% driven by our loan portfolio yield, which expanded four basis points to 783% from the previous quarter, while our cost of funds only increased two basis points to four 5%.
Speaker Change: So first one are there any specific industries, where the originations were concentrated and then how do you think about originations in coming quarters compared to the third couldnt.
Speaker Change: $1 5 billion or so it'll be a more normalized level forward.
Speaker Change: Level going forward just given on pipelines just curious on how youre thinking about that after a record quarter. Thank you.
Speaker Change: Thanks, Chris It's BJ and good morning.
Speaker Change: Fantastic quarter, and if you look at what some of the slides.
Speaker Change: <unk> showed it was really pretty broad based we had really strong performance.
Speaker Change: In our small business verticals.
Speaker Change: And in our commercial banking, we saw a pretty significant increase.
What we saw earlier in the year from our solar business in particular was.
Speaker Change: Projects moving to the right and third quarter, we really saw a lot of that pent up.
Speaker Change: Origination hit in the third quarter, so that was kind of a significant step up on the solar side. We also saw some strength in project finance, particularly around seniors housing.
Speaker Change: As well so they were pretty.
Speaker Change: Big meaningful step ups from second quarter to third quarter. So.
Speaker Change: I don't I don't think we're going to continue to see a 1 billion eight.
Speaker Change: Do.
Speaker Change: I think that we're.
Speaker Change: Now in elevated levels of loan production in.
Speaker Change: And the 1 billion two range or more yes, I do and I'm very encouraged about again and how broad based it is.
Speaker Change: And that the pipelines as we showed continued to remain very healthy so.
Speaker Change: No I really I really think there's a lot of good customer activity out there as rates have crested and started to come down. So you know I think we've got kind of our production engine rolling and just the right time.
Speaker Change: Add to that P. J, we have another pipeline that has a pipeline of lenders that were talking to.
Speaker Change: SBA lender pipeline is at all time highs and we see some other banks changing comp plans and things like that so our existing pipeline of originations is as robust as you mentioned before.
Speaker Change: The lender pipeline.
Thank you Jay and Chuck I appreciate all the color there and then just on the on the three relationships that drove 14 million of the provision just a little bit more color there would be great. What industries are those companies, then and how long large or the individual loans and then just views on credit broadly in the port.
Speaker Change: It seems like you are pretty confident here given that uptick might just be a blip, but I'm curious on your views. Thank you.
Speaker Change: Sure Yeah, Let me, let me start and then I'll kick it to Michael who who looks at our portfolios each and every day in detail with its credit officers, but really they are.
Speaker Change: Isolated incidents across our portfolio one was just a poor management transition.
Speaker Change: And oversight by equity sponsors one is litigation overhang hindering a customer's ability to get new business and the third was.
Speaker Change: One that didn't work.
Speaker Change: And you know as a bank we are in the business of taking risk and we get it right 90, 999, 5% of the time and sometimes we don't but.
Speaker Change: But we still like we said feel really comfortable about our overall portfolio, Michael what would you add.
Michael: Oh, yes, good morning.
Michael: Add to that is that from I see I have a lot of confidence in our lending strategy and our loan portfolio and our credit team and our servicing team. Our lenders are analysts. We're all meeting quarterly to go through all of the loans in our commercial portfolio, we're talking about them.
Michael: Looking at trends on an individual loan basis and in the markets there.
Michael: That we serve and when I look at these three credits I don't see an underlying theme that is woven into the rest of our portfolio.
Michael: I see them as truly off.
Michael: One off.
Michael: Isolated events.
Speaker Change: Okay great.
Speaker Change: Great. Thank you and then are you able to share how large the individual credit sorry.
Speaker Change: Okay.
Speaker Change: I think we'll kind of pass on that but you know if its fifth.
Speaker Change: $15 million Theres three credits.
Speaker Change: Yes, you can you can kind of guess.
Speaker Change: Okay. Thanks I appreciate it.
Speaker Change: Thank you next question comes from David Feaster, Raymond James. Please go ahead.
David Feaster: Hey, good morning, everybody.
Speaker Change: Hey, David.
David Feaster: I wanted to touch on you touched a bit DJ but I wanted to get a sense of the small dollar SBA originations kind of where we are in the build out there you talked about it being a.
Speaker Change: <unk> growth driver over time, but.
Speaker Change: Where are we there and when would you start to expect some more significant growth.
Speaker Change: Revenues from that.
Speaker Change: Sure.
Speaker Change: I'll start and anybody else can kind of jump in but a couple of weeks weeks ago, we crested $100 million.
Speaker Change: Production and ours.
Speaker Change: Like what we call it live Oak Express or small dollars 708 program, which is primarily big loans $500000.
Speaker Change: And below and as Youll recall, David we really just didn't focus on that lower end of the market. We were we were focused on the higher end.
Speaker Change: But we redoubled our efforts on that starting at the beginning of the year and really what's really exciting about it is we stood up essentially a new business too.
Speaker Change: For small dollar SBA and I've done 100 million, we'll probably do 125 $130 million by the end of the year with a modest amount of technology and a heck of a lot of work from people.
Speaker Change: I think what youre going to see next year is a heck of a lot of work from our people.
Speaker Change: Enabled by a significant improvement in our technology for our people and customers, it's going to be a lot easier to do business with us.
Speaker Change: We are.
Speaker Change: Approving loans by and large between four business days, and 12 business days or getting to.
Speaker Change: Two approval that quickly which is a huge.
Speaker Change: Huge benefit to those borrowers and I think our processes and our technology advancements going into next year is going to make that even better so.
Speaker Change: 125 in a year without technology is just the start I think this is a half a billion to a billion dollar a year production business over the next couple of years.
Speaker Change: That's great and then maybe just kind of staying on the investment and expansion side I wanted to touch on two things.
Speaker Change: First just embedded banking something we've talked about in the past I know, it's still in its infancy, but curious what you're seeing there how the pipeline is and then.
Speaker Change: You saw the announcement was simply.
Speaker Change: You guys had been exploring indications for a while I'm just kind of curious.
Speaker Change: Where you are in the build out of that platform and your plans for that.
Speaker Change: Sure.
Speaker Change: Start again, David on embedded banking, we're still remain really excited about the opportunity. That's there we've spent.
Speaker Change: Really the last couple of years building out what I would call our technology chassis to building out.
Speaker Change: The broad array of.
Speaker Change: AEP is in a very.
Speaker Change: Professional world class developer portal to be able to eventually take on embedded banking clients across any type of vertical.
Speaker Change: And allow them to integrate with our API seamlessly we launched our first partnership with anatomy financial.
Speaker Change: Which is a start up in the health care industry.
Speaker Change: Industry, we're very pleased with how that's going we've essentially been co developing our embedded banking efforts with you now.
Speaker Change: Each side learning from each other I expect that will add a second partnership.
Speaker Change: This year to accelerate our efforts going forward. So you know.
Speaker Change: This to me is kind of a moon shot effort.
Speaker Change: Where we're combining all of the innovation that is part of the fabric of live oak.
Speaker Change: And bringing it to bear.
Speaker Change: With our customers and figuring out the right partnerships over time to be able to drive deposit growth.
Speaker Change: Loan opportunities and payments.
Speaker Change: Growth over the next several years, so more to come on that but but still very excited about it on the simply side. This this is.
Speaker Change: Kind of.
Speaker Change: The essence of the lives of culture.
Speaker Change: We had one of our developers in house that was doing work for us and came to us with something he was already building and said Hey, I think there's an opportunity here to help the bank, but then also maybe commercialize.
Speaker Change: Something that other banks could use and so we internally incubated that for about a year.
Speaker Change: With some funding in some resources and then as she saw just went to the external market too.
Speaker Change: Get some more seed capital to allow them to grow and commercialized further so just another point of evidence.
Speaker Change: About the innovative nature of what we're doing here at live those were very willing to try new things and be able to innovate on behalf of our company first but then the industry as well the only thing I would add to that certainly.
Speaker Change: Sean it's appropriate P J and embedded banking and our nation.
Speaker Change: With anatomy and soon to be others that business cannot occur on a traditional core our proprietary advantage of putting that business on a fintech core.
Speaker Change: But it's a bit more of a barrier to entry when we get it right over the next several years.
Speaker Change: That's good color and last one from me you touched on the improvement in the secondary market and you know as rates come down gain on sale margins likely continued to improve.
Speaker Change: I'm just curious how do you think about what's your appetite for additional.
Speaker Change: Loan sales into the secondary market, just kind of given where gain on sale margins are and the growth. I mean, you talked about $1 2 billion in originations and then the acceleration in the small dollar Sps product just curious how you think about.
Speaker Change: The pace of loan sales going forward versus retained on the balance sheet.
Speaker Change: Hey, David as well.
Speaker Change: Thanks for your question.
Speaker Change: Yeah, I think you'd think about secondary market sales and the trajectory year over year, they kind of fall similar pattern isn't kind of up into the right through the year.
Speaker Change: With Q1 being the lowest and then kind of bridges up let's get to Q4 with each quarter being higher than it was the prior year.
Speaker Change: So that kind of gives you feel for in terms of trajectory I think one point to $1.3 billion origination.
Speaker Change: With the demand in the secondary market and where premiums are right now and where our pricing is and it will continue to you basically sell as much as we can for the <unk>.
Speaker Change: B a loans and then obviously with the small loans that that production ramp that will just be accretive.
Speaker Change: And give us some flexibility if any of those larger loans that we may want to hold.
Speaker Change: Okay sure.
Speaker Change: Thanks, everybody.
Speaker Change: Thanks, David.
Speaker Change: Thank you. Your next question comes from Tim Switzer keep it W. Please go ahead.
Tim Switzer: Hey, good morning, Thank you for taking my question.
David Feaster: It's Dave.
Tim Switzer: My first question is a follow up on some of the credit discussions and the outlook. There can you discuss some of the challenges your borrowers are experiencing right now and.
Tim Switzer: Like how do you expect that to change over the next year or so and now lower rates might be to help in some of the credit migration you've seen this quarter was that primarily due to like struggles with the higher rates and inflation are more idiosyncratic issues.
Tim Switzer: Okay.
Michael: Yeah, I'll take that it's Michael.
Tim Switzer: No.
Tim Switzer: When I look at the portfolio as a whole I don't see an area of particular stress.
Tim Switzer: Our teams really focused on credit quality and portfolio monitoring as I mentioned earlier I kind of look back at where we would have been in our small business borrowers have been over the last couple of years and they've had to navigate some challenges in the interest rate environment. Obviously, it's.
Tim Switzer: It's a big part of that and we've seen loans.
Tim Switzer: The loans that were underwritten two years ago that were at much lower rates than where they are today. So to your point I agree that.
Tim Switzer: The rate environment that we're in today with this declining should.
Tim Switzer: It should provide some breathing room for.
Tim Switzer: For our borrowers so yeah, I would say that's probably the.
Tim Switzer: Biggest impact on our small business owners today.
Speaker Change: Okay. Thank you and.
Speaker Change: The other question I have is more on kind of like the deposit.
Speaker Change: Theater trajectory, how do you expect that to change over the course of the cycle and.
Speaker Change: Like what has kind of been the initial customer reaction to lower deposit costs and I guess the competitive.
Speaker Change: Dynamics, you've seen recently as well.
Speaker Change: Hey, Tim as well.
Tim Switzer: You have to kind of get a feel for that beta trajectory kind of have to go back to pre Covid Big July 2019, where the fed cut I think it's July.
Tim Switzer: August September of that year, and what you're essentially sold was early in the cycle banks were cautious and the repricing you.
Tim Switzer: Assessing their liquidity and their growth needs and really what the whole deposit market.
Tim Switzer: The market will behave, especially on the savings front.
Tim Switzer: And then with time as you know banks are to reprice downward. It was kind of as ratcheting effect right, where you have a couple of major banks would come down and then others would follow and then it was kind of back and forth for for a while it took about five to six months to get back to what we would say would be you are kind of a club until our soon.
Tim Switzer: Assumed cumulative betas, which is the next 50% to 70% range for savings.
Tim Switzer: Cities on the other hand, you know they've repriced pretty quickly back then and they're doing the same again.
Tim Switzer: In this cycle, we've been able to reprice, our 12 month term, which is our most.
Tim Switzer: Productive CD offering down 40 basis points already most of that was leading up to the fed that's 80% beta that's right in line with our historical.
Tim Switzer: This cycle I would say so far on business and consumer savings, we repriced 10 bps so 20%.
Speaker Change: That's great problem, that's just strong as seen in Q3, the strong quarterly loan growth. So we can be aggressive or overly overly aggressive to reprice down quickly, but what we do with research really evaluate our market position and see what other banks do and then we kind of thought of ourselves.
Speaker Change: And at the right level to support our growth with the thought of being as you know.
Speaker Change: And as we possibly can.
Speaker Change: Customer reaction has been.
Speaker Change: Pretty much a non reaction, which I think is a good thing right. I think you know they've largely expected you know rates are going to come down I think it's widely publicized that the fed is going to cut rates banks are going to drop the rates as well.
Speaker Change: We haven't really seen any reaction or negative flows to our early changes we don't expect to the you know that the market itself is huge.
Speaker Change: Basically balancing the rate reductions with other.
Speaker Change: Promotions, whether it's cash cash bonuses were no different.
Speaker Change: We've seen some competitors do what we think what we call a bait and switch where they sunset of old product and the launch new product that's not the live Oak way I don't think that's kind of in our DNA.
And we've seen others do kind of a promotional rates, where youre locked in for three to six months and then it drops down to 25 or 50 basis points again, I think that's a baker switch it's not a long term play it's not about doing the right thing by the customer.
Speaker Change: So largely.
Speaker Change: Largely in line of what we're seeing now is what we.
Speaker Change: What we expect to early on in the cycle, we do think it's going to ramp up.
Speaker Change: I'm encouraged especially over the last few weeks of seeing some major digital competitors come down which is allowing some of the smaller competitors at the very top of the market to reprice, especially resetting the entire product deal.
Speaker Change: Yeah.
Speaker Change: That was great I appreciate all the detail. Thank you sure.
Speaker Change: Thank you we have no further questions I will turn the call back over to chip Mahan for final remarks.
Chip Mahan: Thanks to everyone for attending today and we so see you in January.
Speaker Change: Yeah.
Ladies and gentlemen, this concludes our conference for today, we thank you for participating and we ask that you. Please disconnect your lines.
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