Live Oak Bancshares Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 25, 2024

Key Takeaways

  • Positive Sentiment: Exceptional production and balance-sheet growth: Q2 originations were about $1.2 billion (up 45% Q/Q), loan balances +3% Q/Q and +14% Y/Y, approvals are +30% Y/Y and the pipeline rose to ~$3.6 billion from $2.4 billion — management sees strong momentum across verticals.
  • Positive Sentiment: Improving profitability and operating leverage: Adjusted PPNR is up ~33% versus last year and management reports operating earnings of $174 million (a 27% Y/Y increase), highlighting revenue growth outpacing expense growth.
  • Neutral Sentiment: Credit remains well reserved but watch a small uptick in delinquencies: Management emphasizes healthy reserves and low charge-offs, a $12 million provision driven by loan growth, and says a quarter‑month past‑due rise was tied to two unguaranteed loans (~$15 million) that they are not currently concerned about.
  • Neutral Sentiment: Funding and margin dynamics are mixed: NII is materially higher (NII +80% Y/Y) with NIM around ~3.30% (‑5 bps Q/Q due to a $100M term loan); CD repricing has been a headwind but management expects deposit costs to roll down and NIM to expand toward a 3.50%+ target (likely into 2025 when cuts occur).
  • Positive Sentiment: Disciplined expense strategy while investing in growth: Q2 expenses were $78 million (flat Q/Q, +3% Y/Y) despite hiring growth-oriented lenders and technology staff, and management expects continued operating leverage and possibly better expense outcomes than prior guidance.
AI Generated. May Contain Errors.
Earnings Conference Call
Live Oak Bancshares Q2 2024
00:00 / 00:00

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Operator

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. 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.

Greg Seward
Greg Seward
General Counsel and Chief Risk Officer at Live Oak Bancshares

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 materials 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 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.

Greg Seward
Greg Seward
General Counsel and Chief Risk Officer at Live Oak Bancshares

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 in our SEC filings and in the presentation materials. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Good morning, everyone, and we're excited to tell you about our second quarter performance. Firstly, to use a baseball analogy, I'm instituting a lineup change. Appropriately, BJ Losch, our President, will be our lead-off batter today, Walt 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. BJ?

BJ Losch
BJ Losch
President at Live Oak Bancshares

Thanks, Chip. Good morning, everybody. 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 EPS and PPNR on both a reported and adjusted basis, in healthy loan and deposit growth, higher production and activity, and continued credit quality. As we will demonstrate over the next several minutes, momentum is building across numerous parts of the company.

BJ Losch
BJ Losch
President at Live Oak Bancshares

On the lending front, our teams delivered exceptional production and balance sheet growth results at 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, up 33% on revenue growth of 11% on an adjusted basis since Q2 of last year. 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.

BJ Losch
BJ Losch
President at Live Oak Bancshares

Importantly, with our disciplined credit box, deep understanding of the government-guaranteed lending process, and an unmatched in-depth servicing and watchlist process, we—it results in an ability to get ahead of borrower stress. As we've discussed previously, we are proactive with provisioning for growth, for changes in portfolio performance, and for impairments on 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 build. Our new small dollar SBA lending efforts ramping up quickly and will be a meaningful contributor to our results over time.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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. 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.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Thank you, BJ. Good morning, everyone. As 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 quarter in bank history. Two, 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. The second is the strong performance by our SBA and Specialty business units in Q2 2024 compared to Q2 2023.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

You can see this on the bottom right-hand side of the page as our Q2 2024 originations for Small Business Banking and Specialty are up 30% and 88% year-over-year, respectively. 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. Slide 12 illustrates the strength and consistency of our balance sheet growth over the past five quarters. While many banks across the industry are seeing minimal, if any, loan growth, our loan balances are up 3% linked quarter and 14% compared to the prior year, and this growth is net of our loan sales and participations activity.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Deposit growth is fueled by our customer deposit platform, specifically our business deposits, which are up 8% linked quarter and 29% compared to 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-bearing deposits. Slide 13 gives a little more detail on our quarter-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 growth was 7%. That's right, 7% linked quarter as new fully funding originations and construction loans continue to drive balance growth. Slide 14 unpacks our net interest income, NIM, and yield trends. Our net interest income increased 1% linked quarter and is up 80% compared to Q2 2023.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

This is primarily driven by our loan growth. Our net interest margin compressed 5 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. Absent 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. 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 and political impacts. Now, these types of things will certainly have an impact on the slope of our NIM trajectory, yet we feel really good about the things we can control, all of which will help our NIM performance going forward.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

As I just mentioned, our loan growth momentum and pipeline remains robust. Growth will be an essential, growth will be an essential component of our net interest income and NIM expansion. We continue to demonstrate good pricing discipline on new loan originations, 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 increase in cost of funds since Q2 2023 has largely been driven by maturing CDs renewing into a higher priced offering. 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 Phifer
Walt Phifer
CFO at Live Oak Bancshares

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 fee income is outlined on slide 15. We sold $250 million in Q2 2024, for an average premium of 6%, largely in line with Q2 2023. Two important things to note on our Q2 sales volume: We sold our first batch of small loan SBA 7(a), totaling $9 million in loans sold for an average premium of 11%. We continue to be excited about the profitability opportunity on the small loan front.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

The other item to note is, given the improvement in the secondary market in general, we were also able to sell approximately $40 million in seasoned loans that were previously underwater. Another great outcome for the quarter. Turning to expenses on slide 16, our Q2 2024 expenses of $78 million were flat linked quarter and increased 3% compared to Q2 2023. Our teams have shown great expense discipline over the last year, even while adding 20 growth-oriented FTEs in our lending verticals, 5 FTEs in our treasury management department to support our business checking initiative, and continuing to invest in the technology side of the house.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

As we have been over the last 5 quarters, we remain focused on adding good costs where needed, while continuing to identify expense efficiencies where possible, so we can continue the positive PPNR trends that BJ just spoke on. 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 linked quarter credit trends are generally favorable with nonaccruals and classified asset ratios trending downwards. As you can see in the top left graph, our over 30-day past dues were up linked quarter. This was largely a result of 2 loans with a total of $15 million of unguaranteed balances.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

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 call, we remain confident in our reserve and the portfolio's credit strength. Lastly, slide 18 highlights our capital strength, 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 the continued momentum. I will now turn it over to Chip to add his final comments before Q&A.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Thanks, Walt. Thanks, BJ. How do you hold us accountable, right? I've been thinking about that and reflecting on the last several years. As I look back, yes, PPP, interesting, we generated $80 million of fee income. Yes, we invested $13 million in Finxact and got back $135 million, and we sold the business to Fiserv. Yes, we invested about $3 million-$4 million in Payrailz and got back about $35 million.... and then we invested that money. 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, reference to the Express products, more to come there. So where does that actually leave us? And how do you- how should you hold us accountable?

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Bank accountants create, in my judgment, a lot of mumbo jumbo. For instance, typical list of adjustments to revenues, any PPP-related impacts, servicing asset revals, 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 million-$7 million. Any gains from investment portfolio sales, 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 wrapping up with litigation and settlement 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.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

So from 6/30/2023 to 6/30/2024, what were the operating earnings for this business with all that noise out? $174 million. What was it the previous 12 months? 6/30/2022 to 6/30/2023, $137 million. 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 Q4 of 2022. We left Q4 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. And with that, we will be happy to entertain questions.

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 touch-tone phone. You will 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 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.

David Feaster
David Feaster
Analyst at Raymond James

Hey, good morning, everybody.

BJ Losch
BJ Losch
President at Live Oak Bancshares

Hey, David.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Good morning, David.

David Feaster
David Feaster
Analyst at Raymond James

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

BJ Losch
BJ Losch
President at Live Oak Bancshares

Yes, so I'll start, David. Good morning. It's BJ. We're seeing it across the board, which feels really, really good. 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. Not only did that come through in the second, but as Chip talked about, as I talked about, pipelines 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 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 priority number one.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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, I think we're 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 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. Our Small Business anking verticals and our Specialty Finance business have had a great quarter, and our energy and infrastructure business was down from last year.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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 outlook.

David Feaster
David Feaster
Analyst at Raymond James

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 you think about how does that play into the pace of expense growth as we go forward? Sounds like it should be slowing.

BJ Losch
BJ Losch
President at Live Oak Bancshares

Yeah, David, I'll, I'll add some color, and then Walt can jump in as well. You may recall over the last couple of years, we talked about different things. Chip alluded to it from the fintech gains 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 2022, and a little bit in the first half of 2023, to again try to accelerate where our growth would, would be. So we put a significant amount of expenses ahead of revenue over the last 24 months, I'd say. Here, we've, we've kind of gotten to the point where we've got the expense infrastructure in place across our businesses that we need to grow.

BJ Losch
BJ Losch
President at Live Oak Bancshares

We've just got to put the revenue apparatus on it, and that's exactly what you're seeing. Our revenue is 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 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 base than we had been previously.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Yeah, David, I'll just add on, quickly to what BJ just mentioned. Now, you know, we've been really fortunate that our company has embraced this challenge of, you know, how we think about expenses. And, you know, 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 BJ just mentioned. But there are other opportunities, you know, you know, across the company where we can look to find efficiencies as well. So we've found thus far, so far, in 2024, we found a really nice balance between the two: growing, investing. I don't, I wouldn't say we're slowing down on any technology or growth initiative whatsoever. I think, if anything, it's the opposite.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

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

David Feaster
David Feaster
Analyst at Raymond James

That's great. And then, last one from me, just, great to hear the commentary on, on deposit costs stabilizing. It sounds like, you know, we're starting to see some opportunity to even... You know, the, the CD repricing is behind us, and you're seeing, a lot of success on, on the, the core deposit front from the, the business customers. I'm just kind of curious, would you expect the funding costs start to decline, I guess, as... If you can continue to have this kind of success with, the business clients, and, and we could maybe be set up for a, you know, approaching a, 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?

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Yeah, I'll start, and then, BJ can jump in. Great question, David. I 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. And, I say problem with a smile because I think that's, that's not something many other banks are seeing. 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 are things like the Fed, like I mentioned, that we can't control. We don't know what they're going to do. But ultimately, you know, 3.30% margin with our level of growth over the last 12 months, you know, feels pretty good.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

I think, you know, if we can maintain that, you know, going forward, you know, we'll be just fine.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

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. 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 side, in our sponsor business yesterday in the Northeast, I 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.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

This guy that ran the firm, he 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, and we, we get to move on with our customer and book the deal." So I think it's like banking 101, David.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Sorry.

David Feaster
David Feaster
Analyst at Raymond James

Okay.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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... but almost 3/4 of our deposit portfolio will reprice in less than a year. So when the Fed does start to reduce rates, you know, there'll probably be a little bit of treading water because our loan portfolio is coming down a little bit quicker than the deposit portfolio.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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 NIM expansion over time to levels that we expect we can generate from this business model.

David Feaster
David Feaster
Analyst at Raymond James

All right. Thanks, everybody.

BJ Losch
BJ Losch
President at Live Oak Bancshares

Thanks, David.

Operator

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

Tim Switzer
Tim Switzer
Analyst at KBW

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

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

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. 1/4 of that CD portfolio matures each quarter over the next 12 months, as you've seen over the last 12 months.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

That's correct.

BJ Losch
BJ Losch
President at Live Oak Bancshares

You know, almost 200 basis points higher at the beginning, 150 basis points through the middle of to end of last year. We still held not—we held the margin flat, and we grew our net interest income by 8% year-over-year.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

That's right.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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 deposits team has had to manage that large repricing and still maintain our margins.

Tim Switzer
Tim Switzer
Analyst at KBW

Okay. Okay, that's helpful. And could you guys talk about 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 SBA from other banks who are kind of trying to diversify their loan exposures?

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Hey, Tim, it's Walt. I'll start with the secondary market. You know, the rates helped, or at least the outlook of what the Fed is going to do has helped. Really what we're starting to see is the assumption that when Fed decides to cut rates, prepayment rates, both voluntary and involuntary, will slow. Obviously, depending on, you know, why the Fed is cutting rates and if they do it in a disciplined fashion. So that has definitely helped, as well as, you know, our spreads continue to be competitive, especially on the small loan front, which could be in ranges anywhere from prime plus 1.5 to prime plus 4. So broadly speaking, you know, expectations for the Fed have helped. You know, the Treasury curve coming down has helped.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

You know, and then just continued high demand, you know, from investors for those SBA pools that they start taking downward rate protection and alternatives to cash. So I'll start with that one. And then, I'm sorry, the second question was?

Tim Switzer
Tim Switzer
Analyst at KBW

Yeah. Are you seeing any more competition from other banks in the SBA?

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Yeah, thanks. So on the competition side, I, 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, 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.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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. We generally don't like to sell any SBA guaranteed loans that are less than a 105 premium, you know, by and large, because we think it makes more sense to hold those than it does to sell those at those levels. And over the previous 4 quarters, you know, what we were generating in terms of reduction was anywhere between 30%-50% of what we were producing of SBA guaranteed was going to yield a 105 or greater. This quarter, it was 70%.

BJ Losch
BJ Losch
President at Live Oak Bancshares

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, you know, metrics. So I'm really pleased at how our, you know, 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.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

BJ, I think in the small dollar, in the Express situation where we're not having to take many times all available.

BJ Losch
BJ Losch
President at Live Oak Bancshares

Yes.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

We can close these loans much more quickly, and we're seeing pricing in that area of, you know-

BJ Losch
BJ Losch
President at Live Oak Bancshares

It ranges from 1.11 to 1.17.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Yeah, and then that's going to help too, because that's going to pick up dramatically.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

For sure.

Tim Switzer
Tim Switzer
Analyst at KBW

Okay, great. Appreciate all the color. Thank you.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Thanks.

Operator

Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star one. Next question comes from Alex Lau at JPMorgan. Please go ahead.

Alex Lau
Alex Lau
Analyst at JPMorgan

Hi, good morning.

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Good morning, Alex.

Alex Lau
Alex Lau
Analyst at JPMorgan

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?

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Hey, Alex, this is Walt. I'll start. Look, I think... You know, we continue to do what we can, you know, can do on that front. Like I mentioned, balancing, finding expense efficiencies while you continue to invest in our growth organization and especially on the revenue generator side. You know, I think our expenses will continue to inherently grow, right? I think if you take the last couple of 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, the focus on, you know, hiring new lenders and other support personnel to, you know, proactively aid our, you know, in terms of complexity, I think you'll get a pretty good expectation, you know, versus last year.

BJ Losch
BJ Losch
President at Live Oak Bancshares

Yeah, and I, 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, I would be, optimistic about us being better than what we've talked about on expenses for the year.

Alex Lau
Alex Lau
Analyst at JPMorgan

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

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

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 into the right trajectory still applies. You know, I think the, 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, and, and the Fed. So, you know, I think that 3.50%+ range still remains our target, right? And I think we'll, you know, we'll navigate our way back there. You know, the, the timing of that really depends on those things we can't control.

BJ Losch
BJ Losch
President at Live Oak Bancshares

It's probably not in 2024, Alex. You know, it's probably into 2025, 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 3.50%+ range is, sometime next year.

Alex Lau
Alex Lau
Analyst at JPMorgan

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

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Yeah, that... you know, to migrate into that level, you know, we would expect 1-2 cuts this year, and then, you know, going to 3 or 4 cuts going in the next year, you know, similar to what you see in the forward curve.

Alex Lau
Alex Lau
Analyst at JPMorgan

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?

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Yeah, I think that, you know, you know, that low double-digit range feels, you know, right early on, right? I think the 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
Alex Lau
Analyst at JPMorgan

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.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Yeah, great question. So in Q3, Q3 is actually our lightest of the four quarters in terms of CD maturities. 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. You know, I think that the rates that it's rolling off on right now, you know, would be our current offering is about 5%, rolling off about 5.20%-5.25%. 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.

Alex Lau
Alex Lau
Analyst at JPMorgan

Great. Thanks for taking my questions.

Walt Phifer
Walt Phifer
CFO at Live Oak Bancshares

Thanks, Alex.

Operator

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

Chip Mahan
Chip Mahan
Chairman and CEO at Live Oak Bancshares

Well, we enjoyed being with you this morning, and we look forward to seeing you in the fall. Thanks for attending.

Operator

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

Executives
    • BJ Losch
      BJ Losch
      President
    • Chip Mahan
      Chip Mahan
      Chairman and CEO
    • Greg Seward
      Greg Seward
      General Counsel and Chief Risk Officer
    • Walt Phifer
      Walt Phifer
      CFO
Analysts
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