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spk00: and thank you for standing by welcome to the second quarter 2021 live oak bank shares earnings conference call at this time all participant lines are in listen only mode after the presentation there will be a question and answer session to ask a question during the session you will need to press star then one on your telephone keypad please be advised that today's conference may be recorded if you require operator assistance please press star then zero I'd now like to hand the conference over to Greg Seward, General Counsel, Live Oak Bank Shares. Please go ahead.
spk04: Thank you, and good morning, everyone. Welcome to Live Oak's second quarter 2021 earnings conference call. We're webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials and commentary that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today's call on our event calendar for supporting materials. Our second quarter earnings release is also available on our website. Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found on our SEC filings and in the presentation materials and commentary. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.
spk03: Thanks, Greg, and good morning to all. As you stare at the last six quarter results, allow me to review today's agenda. It has proven to be our best quarter ever. And what a way for Brett Canes to go out with a bang. Brett, it's been 13 short years since I found you in a chemical plant on the Cape Fear River wearing a hard hat and safety glasses. It goes without saying that it's been an honor to serve with you. In our next call, we will explain Brett's next new and exciting role in our company. And yes, to all who know how this works, today's preso, And each quarterly prezo is all Brett. Huntley and I just show up. Brett, thanks again for all your fine work these last 24 quarters as a public company. And now back to the best quarter ever. Highlights are a $44 million gain in the value of Greenlight shares brought on by the cash sale of $15 million, causing a remark of our carrying value. It is important to note that we took $4 million of the $15 million in cash gains and gave it to our folks, once again excluding the senior management team. You will recall that we were distributed $7.5 million to our folks at the end of PPP 1.0, given the long hours they spent helping American small business get through this clunky process. This $44 million one-time non-operating game is a nice addition to Tier 1 capital. Secondly, Originations reached an all-time high of $1.1 billion while credit quality continues to improve. Third, as the accountants and PPP make the unpacking of our financials more difficult, we're proud to announce the dramatic increase in pre-tax, pre-provision earnings as the operating leverage and our business kicks in. Lastly, Neil Underwood will discuss live venture investments as well as a canopy update before we turn things over to Huntley for a deep dive. Greg, let's move to slide five and talk about credit quality. So as you stare at this, I'm going to ask Steve, as we did last time, a couple of questions. Steve, last quarter you discussed where the ACL was going. What is your vision over the next several quarters?
spk07: Well, Chip, as I mentioned last quarter, I've been expecting to see reserves trending towards pre-COVID period levels as a percentage of loans. This is proving to be the case and I still expect to see this trend continue. I believe this because first, we continue to see improvements in the financial condition of some of our most impacted businesses, which is evidenced by favorable trends in the servicing status ratings. Secondly, We've also noticed that many of our most impacted borrowers were actually able to build cash reserves during the pandemic, and that's a result of the government stimulus and grant programs. Thirdly, through our servicing efforts, we've started to receive encouraging reports as these businesses reopen and, as you say, folks are getting back to work. Finally, improving unemployment forecasts will, of course, influence our allowance as well. So, for all these reasons, I still feel that the allowance will continue to trend towards pre-pandemic levels.
spk03: Steve, other banks reporting are discussing subsidies and deferrals. How are we doing?
spk07: As of June 30th, we only have 17 loans on payment deferral. Fifteen of those are due to COVID-related stress. In addition... As of June, 13% of our loans received some level of SBA subsidy payment support for their June payment. Most of this will burn away over the next few months. So in summary, as of the end of June, 87% of our borrowers are back to making regular payments, and past dues continue to be at an all-time low for us, which is very encouraging.
spk03: Steve, as folks are headed back to work, it appears that our watch list loans classified assets, and non-accruals are trending down. Thoughts?
spk07: Well, I must caution that businesses may not be completely out of the woods yet, and we need to be prepared for potential surprises. I am encouraged by the recent trends that we're seeing. Within non-COVID impacted verticals, we're actually seeing an uptick in upgrades, especially within our vet, our healthcare, investment advisory, and our death care industries. And since the first of the year, we've also seen slightly downward trends in classified assets and non-accruals. Of course, we continue to focus a good bit of our attention towards servicing, but I, for one, remain cautiously optimistic that these trends are going to continue.
spk03: Thanks, Steve. Let's move to slide six. Relative to the last 12 months slash the pandemic, I believe this slide tells it all. On the left, you see losses on the right income. On the left, we took $14 million in COVID-related charge-offs, of which $10 million was a self-inflicted wound relative to the sale of $15 million of hotel paper at a discount. True COVID losses of businesses that went down were $4 million noted under that, so for a total of 14. On the right, you see income. Government assistance accounted for $2.3 billion in Triple P loans and $80 million in fees, plus $8 million in net interest income. So far, COVID-related activities have resulted in a non-dilutive capital raise. Moving on to slide seven. I have noticed that many reporting banks are having challenges growing their loan book, and NIMS are struggling as well. Not for us. Excluding PPP, we've grown the loan portfolio almost 37% compounded annually over the last 10 quarters. Moving to slide eight. In the last 11 of 14 quarters, we originated roughly 400 to 600 million in loans. In Q3 and Q4 of last year, we did almost a billion. And somewhat surprisingly, this quarter we originated $1.1 billion. I get that the investments are going well and happy to put almost $50 million in Tier 1 capital on the balance sheet from Greenlight. But my gracious, this loan growth, wow. Mahan, have you lost your ever-loving mind? So let's examine what is going on here with more granularity. Let's go to slide nine. What we have here is a graphic depiction of the second quarter of 2019, second quarter of 2020, second quarter of 2021. Of our legacy verticals, that is, those started between 2008 and 2017, compared to our more recent verticals, started in 2018 to present. While legacy verticals have proven a bit lumpy, the newbies have grown quite nicely, producing $600 million in this quarter alone. Again, we operate in 32 industries nationwide. Moving on to slide 10. This slide provides more data on product types. The percentages of loans have remained remarkably similar as production has increased dramatically. Again, government-guaranteed loans remain about half of our loan book, and we remain confident that originations for 2021 should be in the $3.3 to $3.5 billion range. Slide 11 is interesting. Highlights of this slide of newer verticals yield $426 million in production with an interesting mix of products. On the left, the orange, bioenergy and community facilities are almost exclusively government-guaranteed USDA loans. In the middle, green, you have 18 general lenders in 16 cities, which are almost all 7A SBA loans. And just for grins on the right side, and for the first time in our history, we're lending money to small businesses with a balance sheet, with real capital, in the senior housing and sponsor finance space. Given the collective youth of these five groups, credit quality at this point seems stellar. Slide 12. Lastly, in an effort to close out our deep dive relative to the exciting growth and originations, we are proud of this geographic diversity. As you can see, our geographic diversity has not changed in the last two and a half years. Sticking to our guiding principles has worked, and we shall stay the course. Slide 13. This is by far the most telling slide of the call, which Huntley will describe in a bit more detail. Our investments in lenders, underwriters, closers, and servicers over the last six quarters is now paying off. Pre-tax, pre-provision income eliminates a great deal of the noise that always seems to surround us. Our ability to double pre-tax, pre-provision earnings since 3.31, just five quarters ago, in the middle of the pandemic, gives us an important base to grow from in the future. Neil, over to you.
spk08: Thanks, Jeff. This next slide represents most of our direct investments at the holding company. While the big news this quarter is around Greenlight, it's really important to note that the entire portfolio continues to thrive. Each of these companies solves a major problem in financial services. The photo really summarizes the opportunity where we've invested $26 million at very early stages, and the implied value today is $182 million. We expect these companies to continue to raise growth capital at elevated valuations. For all you modelers out there, we know this is a really difficult thing to forecast, but as you can see this quarter, it's real and it's tangible. Perhaps more important than the economics is LIBO Bank's adoption of these technologies form the next generation cloud-based tech stack that allows us to build best-in-class fintech-like products. Let's move on to the next slide. I'll give you a quick Canopy update. As you know, it's a successor to Live Up Ventures, and as a reminder, we closed out $650 million at the end of last year with 44 banks, the ABA, and the ICBA. We've been operating for about 18 months, and as you can see, we've been very, very busy. The thesis is working, and Canopy continues to win leads on strategic deals. All these companies offer services that really help banks. Much like Live Oak Ventures, our bank benefits by implementing best-in-class technology. We've either already implemented or are in the process of implementing companies such as Built, Alloy, Neuro, MX, Finzec, Notarize, and Aurum. One highlight this quarter is Blend's IPO. We're obviously super excited about that. We actually are now starting the harvest phase of the fund. And as a reminder, Live Oak not only invested a significant amount in the fund itself, but receives management fees and carry all which will be earned and realized over the years to come. Huntley, over to you.
spk06: Thanks, Neil. Thanks, Chip. Pretty remarkable quarter across the board. We'll start on page 16, and we'll get to the financial results in a minute, but we first wanted to highlight just the consistency of our strategy. We've shown this slide for a while, and we tweak the the key messages, but it always remains kind of anchored on the same topics. And the other thing we want to do is just take a minute to recognize the tireless effort of all of our folks to execute this. Since PPP, we have been running flat out across every aspect of the company, and it's really showing up in these results. So taking care of our customers has always been kind of vital to our DNA, and we continue to do that even as our customer base has grown dramatically. You know, we mentioned the COVID-6 verticals that we've been concerned about and watching. We visited in person over half of those customers and, you know, just remarkable to see sort of their positive response to that and an overall sort of strength of that portfolio. Customer outreach continues to differentiate us across all of our markets, both in terms of sales and in terms of our portfolio. It's never been more important to take care of our team as it is today, and we continue to stay laser-focused on that. As we've grown, we've continued to invest in them. Chip mentioned the bonus that we paid in this quarter. We've also focused on supporting them with flexible hybrid work models and incremental resources. We've also invested more heavily in giving back to our community with an exciting equity investment in a fintech company called Philanthropy designed to help democratize donor-advised funds. and we've developed new models of impact investing and driving inclusive small business. Our mission to be America's small business bank continues, and our relentless quest to define the bank of the future reaches an important upcoming milestone with our deposit conversion fast approaching. So flip to 17. Extraordinary balance sheet growth this quarter, both linked quarter and year over year. As the PPP loans run off, our stated balance sheet remained roughly flat, But our core loan growth, 10% linked quarter and over 40% from a year ago. Through our retained earnings and success in our fintech investing, we've been able to grow our capital base to support this as well. Revenue and earnings growth on the next page, really solid as well. The record loan originations that Chip mentioned drove our balance sheet. Core revenues up 13% quarter over quarter. And adjusted pre-tax, pre-provision earnings, as Chip mentioned, up 50 percent over the prior quarter. So, talk about notable events. And what's notable about these is that there's less of them than usual. So, again, our efforts to try to reduce volatility in our earnings and increase consistency. The green light game clearly stands out, dominates the headlines. Aside from that, you know, the loan origination, really strong gain on sale margins. That drives the revenues. And then the last of these market price RSUs that we've talked about over the last number of quarters vested this quarter, and so those are behind us now and reduce that ongoing income statement volatility. Turning to PPP, Chip mentioned, Chip summarized these impacts, so we don't want to go into too much detail. We still have over $900 million of PPP loans on our balance sheet. Forgiveness was about $500 million in the quarter. But they've really slowed. And as you can see, the revenue is starting to trail off in the last couple quarters. The impact of this will continue to decline as that program winds down. Turning to our franchise fundamentals, loan growth is what really stands out here. 10% linked quarter growth again. The other thing that really stands out is our guaranteed loans that are eligible for sale, the treasure chest, as we've called it, which has now broken through the $2 billion barrier And it has basically doubled in the last year. So an incredible source of earnings for us, but also a great contingent source of safety and capital. Excluding PPP, all of this drives net interest income growth of 15% link quarter and 70% year over year. Achieving these levels of loan origination is a combination of all the investments that we've made in our people, our products, and our markets. We found ourselves well-positioned to leverage the government programs that were designed to support small businesses in difficult times, and as the economy rebounded, we've seen a notable increase in business activity beyond the SBA as well. As Chip mentioned, our loan origination remains balanced by product, vertical, and geography. We continue to attract great talent to the bank, and all of our folks continue to rise to the occasion. We recognize that we are the beneficiaries of some tailwinds from fiscal stimulus and SBA enhancements in our business, but we've not compromised our underwriting or our credit standards in any way to achieve this growth. As we look at the franchise today, our loan pipeline continues to be near our all-time high even after the quarter we just came off. As the SBA enhancements are scheduled to end this quarter, we expect that to impact volume to some extent and our secondary market pricing to some extent as well, but we feel really confident our franchise is in a great spot to continue to provide capital to small businesses. So looking at our secondary market activity, we sold slightly less loans in the quarter but at a meaningfully higher gain per million. The market overall remained relatively flat at historically high levels. The difference in the increase in our gain per million being that we sold more loans that had these SBA enhancements, namely no guarantee fees, and the impact that that had on pricing. We expect that to continue to see those loans through the third and into the fourth quarter as they run through our pipeline. But once those enhancements run their course, we do expect to see some compression in that gain on sale number. Looking at the amounts we're selling, we're still really in line with our overall targets, actually holding a little more of both SBA and USDA than our targets, but really no overall strategy shift there. On the expense side on page 23, really solid story. We continue to grow the team, adding over 60 new positions already this year net. Otherwise, expenses are pretty well contained. You'll see the special bonus that we accrued for, $4 million this quarter to our employees, other than senior management, to participate in the green light game, as Chip mentioned. and also just recognize their extraordinary work. We continue to gain efficiency overall with an adjusted expense base of about $52 million, coupled with strong balance sheet growth, drove that adjusted expense to asset number down another five basis points to 71 basis points. In the deposit market, page 24, the macro environment and competitive landscape continue to remain rational. Industry-wide, customer deposits are up. and the preference has shifted decidedly towards more liquid savings accounts. Our deposit business continues to match our loan growth and balance sheet needs. During the second quarter, we added another $200 million of balances while continuing to lower our cost of funds by 23 basis points, driven by continued CD rollover, and lowering our savings rate by an additional 10 basis points to 50 basis points. Our savings offering remains well positioned, and we do not see much more savings repricing or mix shift unless something unexpected happens in the market. We'll continue to see our CD cost of funds decline as lower cost new production replaces the higher cost legacy balances. We look at our total operating cost of funds of 104 basis points and feel that that remains well below industry funding costs when you include all the physical branches and operation costs of running a traditional bank relative to the 10 basis points that it costs us from an operating perspective to run these. And that includes all the work we're doing on conversion. Late last year, we launched our next generation deposit platform on Finzex by offering savings and CDs to new business customers. In 10 months, we've onboarded nearly 3,000 new business customers, providing over $425 million of funding. This quarter alone, we added 1,000 customers and $270 million of growth. Our new platform provides a simple and elegant user experience, and we remain one of the few providers where a business can open an account end-to-end, entirely self-service with no human engagement. In late August, we'll convert all 60,000 of our legacy consumer savings and CD customers onto our new platform. We're very excited for this moment to bring a new generation of banking capabilities to our customers, but we're equally as understanding of the impact change can have on our customers and are 100% focused on providing a smooth transition. That's priority number one for the next couple months. Once we're fully on our new Finzec platform, we expect this to unlock our ability to grow even more efficiently and effectively than before. It'll allow us the opportunity to offer new competitive savings products to our existing customers, continue making progress on our checking account offering, provide the platform to bring deposits and working capital under one umbrella, and to deliver increasingly more sophisticated products and services to them. To date, we've been very methodical with our checking activities and have been fortunate in the strength of our existing deposit products to fund the bank, focusing only on the offering the checking account to employees in a small internal pilot. We've done so, number one, to main strict focus on conversion, and number two, to incrementally build services that our future small business checking customers will demand. Following conversion, we anticipate rolling out beta programs locally in Wilmington and some other select areas. Over time, we'll continue to add new products and services to that operating suite that allow businesses to spend, borrow, pay, get paid, and manage their business all in an easy, intuitive, digital fashion. So flipping the page to NIM and liquidity, the continued strength in our loan yields, coupled with a lower deposit cost, led to core NIM expansion of 17 basis points in the quarter, which was masked in the reported numbers by lower PPP fee amortization. We ended the quarter with a bit more normalized liquidity levels, just under 20%, which should continue to drop a bit more over the back half of the year. Putting all that together, we get the eye chart on page 27, which is our non-GAAP pre-tax pre-provision income, the core earnings as we look at it. There's a lot to uncover here, and there's even a bit more in the reconciliation in the appendix. But overall, really great trends across every line item. Core net interest income growth adjusted for PPP. You can see there up over $7 million quarter over quarter. solid non-interest income growth even without the technology gain, expenses in line when adjusted for the special employee bonus and the final market RSU adjustments, all lead us to $37 million of core pre-tax, pre-provision earnings, and that's up $14 million, about $13 million from last year and over doubling from a year ago. We're extraordinarily proud of these results, but we also remain confident we can continue to grow this in a prudent manner going forward. So turning to capital and liquidity, capital remains strong with 12.5%, CET1, leverage ratio just under 9%. Over half the balance sheet remains government guaranteed, and we hold a significant amount of liquidity. To grow the loan book 10% link quarter and maintain capital ratios is a tall order. Fortunately, this quarter, the green light game helps support that growth. Going forward, we don't expect to keep running at quite that pace for balance sheet growth, but we do continue to have options to manage our capital efficiently. So turning to 29, so this is our leverage ratio, and you can see the green light gain there being a meaningful driver in supporting that capital base quarter over quarter, despite the significant balance sheet growth. I'll wrap up with a chart we've shown you for a while now, and we're really proud that this is the first time that every color on here is green on the screen. Even adjusting for the green light gain, we've achieved the metrics that we've been striving for in terms of profitability and growth. It's been almost a three-year journey since we elected to start holding more of our loans on balance sheet. We aren't standing still, though, far from it. We genuinely believe the best is yet to come from us as we continue to grow our lending franchise and develop technology and products to further help support small businesses.
spk11: With that, let's go to questions. Let's do it.
spk00: If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Again, that is star, then one to ask a question at this time. Our first question comes from Stephen Alexopoulos with J.P. Morgan.
spk09: Hey, good morning, everyone. Morning, Steve. I wanted to start, so one of the key questions is obviously chip around the origination growth What was it about this quarter, specifically when I look at the new verticals and how much they really popped up, what was it about this quarter that caused such strong origination growth?
spk03: I think it's just comprehensive. I don't know, Huntley. It's just frigging everywhere, as we said at the top of the call. Geography, different verticals, the general lenders, the 18 general lenders are now – We're going to be probably a top eight SBA lending group by themselves in the country. So we're just beginning to hit on all cylinders. You and Steve may have something to add.
spk06: Yeah, I'll agree with that. On the SBA side, clearly the enhancements have driven activity and we're in the right places. And that's across our verticals. That's across the generalists. And so that business just feels like it is really firing. And then the renewable energy space, there's just a ton of tailwinds in that space and infrastructure builds. We've seen a handful of, you know, slightly larger deals there, so that was nice, some nice wins there. Timing of a couple deals we've been working on for a while, you know, hit. And then across the specialty finance, the sponsor finance, these are just we're finding really, really great businesses and in the right places.
spk03: Those are the larger deals, too, don't they? You know, I spend right much time on the road this quarter calling on customers with a sponsor group. and the senior lending group. These are much, much larger deals that we're looking at, companies with significant balance sheets. So it's across the board, Steve. Okay.
spk09: So when we look at the guidance, right, the $3.3 billion to $3.5 billion of originations for this year, that implies, I guess, $750, $850, somewhere in that range, right, each quarter. Is that just being conservative, or do you really expect to step down? It could be fairly material from where we were this quarter.
spk03: Well, we seek not to disappoint Steve. You know, the 90% things coming off Steve Smith's, I mean, that's going to affect it a little bit. Usually Q4 is a pretty good quarter for us, but I would say that we are highly confident that we will be in that range.
spk09: Okay. Thanks. And then finally, so when we bake everything in the cake, right, there's so many things going on in a quarter. You have PPP still coming off. You have the SBA enhancements coming off. You have all these new verticals. You know, total loan growth, you know, period end was down a little bit with the PPP runoff. How should we think about total loan growth for the rest of this year? Thanks.
spk03: Well, I think you've got to take the PPP out. We don't really pay any attention to that. That's why we try to focus almost all day, every day internally on pre-tax, pre-provision earnings on how we operate the business. Others may have something to say on that.
spk06: Yeah, in terms of, I agree with Chip, the core loan growth, XPPP, you know, we grew that from $5 to $5.5 billion Q1 to Q2. I think it will be hard to maintain that pace, although there are variables, you know, as you know. You know, prepayment speeds have ticked up a little bit in the last quarter, and we expected that from where we were, you know, historically really low level through the pandemic. timing of deals that we have that have been in construction that fully fund, how that affects the balance sheet, and then, you know, what loans we end up selling. So all of those go into the mix. I think the balance sheet growth will continue to be, you know, quite strong, a little less than what you've seen maybe in Q2, but still really strong.
spk09: Great. Thanks for taking my questions. Thanks, Steve.
spk00: Our next question comes from Jennifer Demba with Truist.
spk02: Thank you. Good morning. Great quarter. So back to the origination topic that we've been talking about also, and there's what is the pipeline for future lender hires and new verticals?
spk03: Jennifer, we can't understand you.
spk05: I think, Jennifer, you were talking about new hires, right? You're a little scratchy on the phone. Is that right? Can you hear me better now?
spk02: Is that better?
spk05: A little bit. Not much.
spk02: Okay. All right. Hold on one second here. How's that? It's good. A little bit better. Okay. Okay. You're hitting on all cylinders. What is the pipeline for new hires and new verticals?
spk06: Yeah. So we believe that we have a pretty attractive platform right now. We continue to see opportunities to hire great talent, and we continue to sort of evaluate that. And so finding those great people who have experience in SBA primarily, we continue to think we've got great opportunity. In terms of new verticals, we continue to look at a few here and there. They'll be kind of tuck-in ones from that perspective. No real major splash in the infrastructure space. In renewables, we still see adjacencies there. And then in the sponsor lending that we're doing, we're broadening that. Just like the generalists in SBA broaden that aperture of the industries we look at, so do the sponsor lending group as well. So We broaden out of the specific industries a bit as we go into some of those more horizontal businesses that we're into. Okay.
spk02: And the loan loss reserve, you think it could go down further? Could you just talk about, you know, how low you think it could go? I know it's hard based on the loan loss reserve methodology to kind of make that kind of statement, but...
spk06: Jennifer, again, really hard to hear you. Sounds like the question was about loan loss reserves and maybe provision. Is that right? Yeah.
spk02: So how low do you think that loan loss reserve could go?
spk07: Okay. Jennifer, this is Steve Smith. I'll take a stab at that because you are correct. As I mentioned earlier on in the call, I continue to believe that it's trending back towards the pre-provision, which is interesting because remind ourselves that we went over to CECL at the first of the year, which is a challenging time to do that. So when you look historically, we were running under a different model. So there's some unknown there, and we are getting very close as a percentage of our net loans. I always look at the percentage of our unguaranteed to get a feel for where we're actually reserving against. And we are getting close to where we were before the world changed second quarter of 2020. So how low will it go? Hard to say because there isn't longevity to the seasonal model and how that reacts. I will say that the reserving that we put in place against unknown stress associated with COVID, businesses being forced to shut down or curtail or pull back, As expected, that is starting to burn away, and the nice line behind that is it's burning away because the businesses are actually showing very positive signs of health. We're not going to spike the ball in the five-yard line at all. We are constantly reminded of that there could be another shoe to drop. We're watching it very, very closely. We know that their balance sheets are strong. It has a lot to do with the federal programs, and we've got to see if that has some legs to continue. So again, Jennifer, I feel very comfortable that we're returning to a normal portfolio. and feel very comfortable that historically we've always reserved at a very appropriate level. So I do think that it may chalk down a little bit as a percentage. I think we're, you know, about 2.5% of net loans, depending on how you'd like to look at it. That feels comfortable to me, and that might give back a little bit.
spk03: That's where it is, yeah.
spk00: Thank you. Our next question comes from Michael Perito with KBW.
spk11: Hey, good morning.
spk04: Good morning, Mike.
spk11: A few questions for me. One, just on the Outback side, I think, Huntley, you mentioned kind of the $52 million adjusted run rate for the quarter. Just curious if you have any additional commentary about how we should think about that near term here. I mean, my guess is there's some upward pressure just given the growth you guys are having, but just wanted to see if that's kind of And if there's any other kind of one-off items in the back half of the year that you expect could have an impact on the cost side, whether it's, you know, I know the RSUs, I think, have run their course, but anything else that we should be mindful of?
spk06: That's a good question, and I'll bounce over to Brett for his crystal ball as well. I mean, our headcount growth, probably in the 15% range, and so obviously salaries and benefits is a pretty decent size of the line item. So that growth, we think, will continue, just our visibility around franchise growth. The rest of the line items, though, I think are relatively range-bound, not sort of seeing anything unusual kind of popping up or down out of that. But, Brett, what do you have to add?
spk01: Yeah, probably the one thing I would agree with everything Huntley said, not saying going forward that we know of, but that's kind of the point of that chart. It pulls out those things that aren't routines. And like you said, the market price are issues. Those have exhausted themselves. But the one thing I would add to that, and I think this is really an important part of our growth story, which we reported today, is in the past, we didn't shy away from investing in or hiring when we saw new opportunities. And in a lot of ways, those past expenses are what led to our 1.1 billion of originations reported today. So I think there are potentially opportunities where we will continue to invest and make decisions like that that will pay off in the future. So that definitely will impact non-interest expense. But other than those kinds of initiatives, it's pretty steady as it goes.
spk03: Yeah, let me support that, too, just a wee bit, right? So, you know, our guiding principle is to treat every customer like the only customer in the bank. And for the past nine months or so, that's been hard. I mean, we did a billion one this quarter, and the pipe is about the same. We've hired about 100 people so far this year, and we're going to continue to stay the course of trying to treat every customer like the only customer in the bank. We will continue to have opportunities to hire other folks that are experienced SBA lenders as we become a bit more of a nationwide platform in that regard on top of increasing verticals. So that's all I've got to say on that.
spk11: That's all helpful. Thank you. And then, Brett, maybe sticking with you just for a second on the margin, it seems like if I'm looking at slide 26, there's a comment that a lot of the – well, maybe not a lot, but there was maybe a bit of loan production that was towards the end of the quarter and some of the liquidity deployment, you know, didn't really manifest in the second quarter NIM that you guys experienced. Just curious if you could maybe take that a step further. I mean, is it fair to think that the NIM could maybe bounce back barring something really unpredictable happening on the PPP side in the third quarter and kind of get back up towards where you were in the first quarter? Or are there other dynamics that we should be considering?
spk01: Yeah, well, I guess first of all, I'd say on the slide you're referencing, slide 26, I would say focus on the 346 to 363 trend, just kind of excluding the impact of PPP on Q1 and Q2. And then on the right-hand side of that chart, liquidity at 22.2%. That is probably a little bit higher than where we will run as normal ops, just had some things going on in Q2 as part of our liquidity planning that pushes there. But, you know, probably, you know, somewhere sub-20 is where it would be more normal operation for liquidity percent. And, yes, as that's deployed and some of that excess liquidity runs off, you could see, you know, a pop, or maybe not pop isn't the right word, but a uh, continued trend, uh, on that, uh, adjusted liquidity number, the green 3.63.
spk11: But we said differently, the, the, the trend of the green line moving upward, there's still some potential more, more leverage there. I think you guys have said in the past that, you know, the core name could go to the high threes. Is that still, you know, generally a principle that that's still solid?
spk01: Yeah, I think that, I think that's correct. Um, north of three, five, um, you know, three point, uh, seven, five, but it's three and a half to four range or high threes, as we've said.
spk11: Got it. And then just, just last for me, I appreciate all the color on the call thus far given, but just on the SBA gain on sale, I'm just curious if you guys have any from the first few weeks of the third quarter here have, have those margins kind of remained elevated or is there any other kind of market dynamics at play that, that you guys think could give that higher margin some, some, lengthier as we move into the back half of the year? Or is the better base case to think that there's maybe some normalization there? I'm just curious what you guys think on that.
spk06: Yeah, I'll start and Brett can clean up. Market remains really strong. Obviously, a ton of liquidity everywhere and, you know, kind of a star for assets. You know, if you think about the SBA enhancement, there's about a 55 basis point guarantee fee that is waived right now. And that's a direct pass through to the loan buyer. And so if the duration of the asset is four plus years, you know, that's a couple points on that gain on sale that we'll continue to enjoy until those enhancements run out. You know, unclear if all of that gets given back, just how competitive the bidding market is right now. And we'll see. But we don't see anything that would suggest that that would change as we look at it. You know, prepayment speeds have ticked up a little bit, but aren't crazy. Other than that, that enhancement will be the big driver of the market once it starts to roll off.
spk11: Helpful. I should probably know this, but do you guys know, is there a duration at which you know that enhancement is good through at this point? Has that been communicated? The waiver is through September 30th, subject to availability of funds. So we'll see. It'll be no later than 930. We'll be exhausted.
spk03: Well, and the 90% is in the infrastructure bill that is being kicked around, but certainly don't even think about spiking that ball. Right.
spk11: All right. Listen, guys, thank you for taking all my questions as always. I appreciate it.
spk00: Our next question comes from Chris Donat with Piper Sandler.
spk10: Good morning. Thanks for taking my questions. Just chip on that. your last comment about spiking that ball on the infrastructure bill. I don't want you to handicap the prospects of that bill, but an extension of the waiver is something that Congress is considering. Is that fair to say?
spk03: Yeah. I talked with our government relations person the other day, and believe me, none of that's in our projections.
spk02: Yeah.
spk10: Fair enough. I just wanted to see if that's in the realm of possible outcomes. Huntley, I know you answered a bunch of questions around expenses, but I just want to double-check one thing, because I've heard anecdotes from some fintech companies about some more elevated expenses around hiring new employees. But with the people that you're going out and hiring, I imagine you're competing more with – with banks for like SBA expertise. Is that a fair assessment of what you're seeing in the hiring market as you're growing your loans?
spk06: Yeah, look, we're hiring across the board, but specifically the majority of the growth is in the lending side, and that's lenders, underwriters, closers. And so that's competitive. I think all labor markets are competitive right now. And but we're really in the market with the banks on that front. We are active in the technology space as well, and there is clearly some pressure around that, less of a percentage of our overall hiring than the banking side as we sit here right now.
spk10: Okay. And then just for me, one last question on competition. Thinking about your new deposit platform, is there a way you can characterize where you think you stand competitively with banks? with banks on one hand and then with companies like square on the other with square making more of a push into, you know, they're already there in small business lending and small business, uh, payments, but getting more involved in small business checking. Do you, is that something you're watching or deeply concerned about or not so much?
spk06: Yeah. Watching very closely. Right. And the market continues to evolve. I think, um, We look at both sides as very viable competitors that we are working towards. And I think what we believe we can do is sort of be the best of both. And so the understanding of the client base, if you think about veterinarians, you think about pharmacists, you think about these industries we've been in for a decade or more, knowing that customer and what we can provide, if this technology platform is what we have designed to be, it will be flexible enough that we can create bespoke customers uh, solutions for, um, industries and these industries that we serve with capital and that we know an awful lot about. And that's, um, a slightly different model maybe than square, which obviously has a tremendous breadth among small businesses and, and what they're trying to do with more of that small balance loan and then moving that into, into savings and checking. But they're, um, a very, very worthy competitor, you know, no doubt.
spk03: Chris, uh, So we have not talked on today's call much at all about core conversions. But you, having been in the banking business for a long time, know and understand that a core conversion is something like a heart transplant and brain surgery at the same time. But that said, Neil, relative to our tech stack, as it emerges past that core conversion to 14 separate vendors, the tech stack that you referred earlier in the call, and certainly the Our call this week with One Financial, which has a similar tech stack in the NEO Bank, along the lines of Chris's comments. You may just want to comment on how you see all of that playing out.
spk08: Yeah, Chris. Well, I think from our view, fintechs are actually setting the standard in terms of beautiful onboarding, customer journeys, this frictionless approach. onboarding. And so, you know, to do that, they built purpose-built cores. They bought R&D budgets, hundreds of millions of dollars of R&D budgets. We set down a path in 2016 to incubate what is today FINZAC. And, you know, the best testimonial to that is when we looked at putting triple P loans on a core last year, literally it was six days to build the integration and we stood up a brand new product on a core. And so, We believe, you know, we talk about convergence where fintechs are going to have to become more like banks over time from a licensing cost of funds perspective. You're seeing that with Square, ILC. You're seeing that with Radius and Lending Club, Borrow. I mean, the list goes on. Banks at the same time are going to have to implement these new technology steps so they can build best-in-class products. And we just see that convergence continuing. We think we're in a really unique spot as a bank because, you know, this conversion represents us completely getting off one of the oligopolies and now focusing on this next-gen core. And this is, you know, this has been a build, a conversion. Now the fun begins. Now we can actually build new innovative products for our small business customers. And that's super exciting.
spk10: Okay, sorry, I said that was the last one, and that wasn't entirely accurate. Just on the notion of building new products, and I think someone used the word bespoke, that's really the vision, right? You have the customer relationships, and you're not trying to build something that's self-service for a small business. You're trying to build something that empowers customers. your lenders and other people within Live Oak to do new things for their customers, not so much for the customers to just go out and do it themselves? Is that reasonable?
spk06: I think convergence is the right word, Chris, that we have lived in a world with bankers who know our customers really well, a lot of human interaction, high touch for a high value add larger product. There's a lot of products and services that customers want to self-service. We need to provide those. We need to offer those digitally in a beautiful user experience, but be able to help them when they want to do something more value add that they need somebody. And to seamlessly integrate that, again, back to we're in a pretty interesting position where the capabilities to deliver the technology to self-service when they want to and the experience and the knowledge in the industries and the verticals and in banking to deliver that touch to. And that's really where we're headed.
spk10: Got it. Thanks very much.
spk00: I'm showing no further questions in queue at this time. I'd like to turn the call back to Chip Mahan for closing remarks.
spk03: See you next quarter, folks. Thanks for dialing in.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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