Live Oak Bancshares Inc

NYSE:LOB

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Live Oak Bancshares Q2 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator's Instructions] This call is being recorded today, Wednesday, July the 26th, 2023.

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

[Greg Seward, Chief Risk Officer and General Counsel]

Thank you, and good morning, everyone. Welcome to Live Oak's second quarter 2023 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 & 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. 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, Chairman and Chief Executive Officer]

Good morning and thanks, Greg. Turning to page three, we are pleased to show significant improvements over the last two quarters. Core revenues were up, expenses were down. Charge-offs were low, credit quality remained solid notwithstanding a bump in non-accruals regressing us to our historic norm. BJ and Huntley will unpack the details in just a minute.

I'd like to pause here at mid-year and reflect on what has happened so far this year and where our industry is headed. Did you know 9,000 banks failed in this country between 1930 and 1934?

Moving to slide four, we see the history of FDIC insurance providing stability to our industry. No more Jimmy Stewart's It's a Wonderful Life runs on the bank. That was until March 8th. A Twitter led run on SVB took place minutes after they announced a $1.8 billion capital raise, exposing their mark to market losses in their bond portfolio. $43 billion went out the door on March 9th and it was over. Never had news traveled that fast. Never was a bank able to handle $43 billion worth of withdrawals in a matter of hours. Bank tech has changed. We are getting more efficient daily. AI will continue to fuel that fire.

So liquidity reigns. Rates are up 500 basis points. But what about the customer? I have been waiting for this moment for 28-years. It was 28-years ago we put the first bank on the internet. Can you remember or much less imagine a 28K telephone modem in 1995. I thought then as I think now why the need for these expensive branches.

Let's take a look at arguably the number one brand in banking. This quarter, the Bank of America released some data publishing a slide on their consumer bank. The rate paid on all consumer deposits was 22 bps. The cost to gather those deposits was 137 bps through almost 4,000 branches and an untold number of tellers and CSRs. On the self-service side, they have 37 million mobile users. BofA is a $2.5 trillion institution, whose deposit beta since 12/31/21 was 35%.

Why do you anointed analysts on this call? Applaud low deposit betas. Are we not as an industry celebrating screwing the customer? Our savings rate at Live Oak Bank has been 4% forever for both consumers and small businesses. With Live Oak simple online account opening technology, aren't these 37 million mobile users vulnerable? I mentioned Bank of America only as a proxy for our entire industry in general.

Quick question, if someone had just $10,000 to their name at a money market or savings account, is not $400 meaningful to them? The fat underbelly of our industry is exposed. Our expensive branch deposit gathering model is broken. Just a word on self-service and full-service. My wife works out with a bunch of ladies trained by wonderful professional. He saw a billboard Wilmington with our 4% savings rate and opened a savings account. He was astounded when he had a question and someone answered the phone in our bank. He called us back each of the next two days to test us.

We answered the phone in 11 seconds each day. You got to do both. I like our model. For 15-years, we've been the best small business lending bank in America by treating every customer as if they were our only customer. We are marching to the deposit side at precisely the right moment in time. Our competition cannot reprice their entire book of savings and money market accounts. We shall nip at their edges as their customers feel less appreciated.

The combination of our next-generation cloud native API technology will allow us to create new products and build a bespoke community bank for each industry we serve. While our industry remains woefully stuck in the mud, supporting and maintaining billions of lines of agent code that they call technical debt.

Moving to slide five. Just a word on credit. I call this our CECL slide. Historically that is pre-CECL, a bank would build a proper reserve and usually that quarter’s provision was about equal to total charge-offs, not so these days. The complexity of building a model to predict lifetime losses in a bank that is growing the way we have is substantial. Here's a fun fact that of last Friday, 76 banks have reported and their collective loan loss reserve to total loans jumped 2 basis points from 1.21% to 1.23%, while we increased our reserve from 183 to 246 to 63 bps.

As you can see from slide six, our provision over the last 3.5 years has been four times our charge-offs incurred. Soundness, profitability and growth in that order. One last word on production, we were not disappointed with our production numbers this quarter, even though we were a little over $100 million less than last quarter. Since Huntley and B.J. do such a wonderful job running the bank day-to-day, I get to expend an extraordinary amount of time on the road visiting customers and prospects.

We are getting better looks at the basket, higher quality larger loans are coming our way as the competition seems to be much more discerning, focusing more on existing customers and much less prospecting for new clients. In our government-guaranteed lending business, it appears that the silver tsunami or those baby boomers that are of age to sell has seen prices come down as interest rates have risen. Some deals just do not pencil the way they did a year and a half ago.

BJ, over to you.

[William Losch]

Excellent. Thanks, Chip, that's a great setup. Good morning, everybody. It's great to talk to you this morning. Let's start on slide eight with high-level earnings summary for Q2. While weathering the banking earthquake in the first quarter as Chip, kind of, talked about, we positioned ourselves to not only survive the aftershocks that we saw coming and know are coming, but to thrive.

The key commitments we made about what we would do in the second quarter such as strong deposit growth and liquidity, net interest margin performance, continued loan growth, stable credit quality and moderating expenses were all exceeded. And while we can't predict with certainly what the economic outlook may bring, the actions we took in the first quarter, our performance in the second quarter and the ongoing strength of our business model have set us on a strong path towards continued consistent earnings and customer growth over the next several quarters.

And so to put some numbers to it, in Q2, we earned $0.39 of EPS, driven by strong 41% improvement in PPNR, both revenue growth and expense reduction, as well as continued strong credit quality, resulting in lower provision versus the first quarter. As Chip mentioned, loan production was still healthy at $860 million, but down from Q1 as activity was steady, but we had some loan closings moved past the end of the quarter, pipelines have grown steadily throughout the quarter, which is encouraging for the second-half of the year.

Deposits were up nicely as well. Our customer deposit growth was up almost 7% in the quarter with fantastic business deposit inflows of 22% on a linked quarter basis. On our last earnings call in April, I shared our expectations for our net interest margin and I'm really pleased to say that while our forecast in April for the second quarter NIM was a decline into the 320 to 325 range with risk of further compression if we held excess liquidity, we actually ended the quarter with a 329 NIM even with about 12 basis points of drag from that excess liquidity.

I'll get into a bit more detail on the reasons for our NIM resiliency in a few minutes and the positive net interest income growth expectations for the second half of the year. In short, it's due to the excellent efforts of our lenders, along with our deposit and treasury teams to remain both competitive with our customer offerings and disciplined on our pricing. Fee income was improved linked quarter with relatively steady gain on sale premiums.

Expenses declined quarter-over-quarter and we expect continued discipline here throughout the rest of the year and provision declined as expected with only $1 million of net charge-offs and continued reserve build for both growth and to maintain sound portfolio management.

Turning to slide 10. Loan production in the quarter was again diverse across multiple areas with particular strength in our middle market sponsor finance vertical, our solar business and our general lending small business verticals. As others pull back on lending, we expect to see good opportunities for new business going forward and we look forward to capturing those opportunities.

Let's turn now to our net interest income and margin trends on slide 11. As I mentioned earlier while our Q2 NIM outlook three months ago was a decline to the 320 to 325 range with risk of further compression with excess liquidity, we ended at 329 even with that 12 basis points drag. We expected to see downward pressure on the NIM in the first-half of the year because of the accelerated deposit repricing from the Fed's rate increase cycle and that would be expected to be more rapid than the loan repricing, but in the back half of the year as our loan repricing flowed through the balance sheet and the Fed near the end of its rate increase cycle, we would expect NIM expansion.

All of those things are still true, but we were able to both grow deposits and hold our savings rate flat since March due to our already strong rate offering while loan repricing tailwinds continued and our lenders remained very disciplined where new production yields, which should help with NIM expansion and net interest income improvement in the back half of the year.

Few highlights to point out first on the deposit side, you see that we again provided information on both Live Oak and the top digital competitors as it relates to deposit pricing in betas along with the National Savings Rate and ending Fed funds upper rate for reference. As we discussed on the last earnings call when the industry crisis hit in mid-March, we saw customer outflows. We decided to move proactively and aggressively to reverse the trends we were seeing, moving savings rate up a full 50 basis points to move modestly ahead of top digital competitors. And as you can see, it worked quite well to put us back on a positive customer deposit growth path.

And even though the Fed moved another 25 basis points in the quarter, we are already in a highly competitive position to attract customer deposits, particularly on the business side, such that we were able to show outstanding deposit growth while holding flat on savings rates the entire quarter. And our through the cycle beta of 70% is exactly what we communicated all along as our expectation.

Now let's take a look at the loans side. Our loan yields have been moving up nicely as you can see in the table, but we hadn't been moving nearly as rapidly as the deposit betas we just discussed, but two points we made on loan yields last quarter continue to hold true. Loan production yields are currently being booked at rates a 175 basis points higher than the portfolio rates. See the 9.12% on new loan production yields in the upper right of the slide versus the 7.37% on portfolio loan yields in the upper right of the table.

And secondly, the majority of our variable rate loans are quarterly not monthly adjusting that means that unlike deposit rate changes, which happened intra-quarter, we don't see intra-quarter increases in loan yields. They move up the full change in the prime rate over the prior quarter on the first day of the following quarter.

So as of July 1st, our quarterly adjusting loans saw another 25 basis points increase in rate and about 46% of our total loan portfolio now is variable rate and almost 90% of our current production is variable rate. Therefore, as our newer loans replace older loans over time, our portfolio yields will continue to rise, supporting stabilization that improvement in our net spread. So what's all this mean for the NIM, same as what we believe the quarter ago. This should be the bottom for our NIM and we should see some margin expansion in the second-half of the year.

This remains in an uncertain environment, so let me be very clear and transparent with our current assumptions here. First the Fed we believe moves 25 basis points this afternoon that pauses for the rest of the year. Deposit betas move in the 70% range for that increase. Deposit growth for us continues on pace with the above beta assumptions and at levels that support our loan growth. Healthy loan growth continues on pace with current pricing and no further major industry disruption related to deposits or liquidity.

And remember that if we do decide to hold more on balance sheet liquidity, it may have an impact on the NIM, but will have minimal impact on net interest income. So to recap, we had better than expected NIM resiliency in Q2 and we expect NIM and net interest income improvement in the back half of the year as deposit cost moderate, loan yields continue to improve, and earning assets continue to grow.

Turning to slide 12. Let's take a quick look at non-interest income trends. As I mentioned before, we had been seeing improvement in secondary market conditions with premiums and valuations before the mid-March events being steady to improving and we were hopeful that premiums would hold at least steady after mid-March. Our SBA sales activity increased in the second quarter and the gain on sale premiums did in fact remain fairly steady. Though the majority of what we sold was variable rate, we did see some fixed rate SBA sales activity, which was again encouraging.

And as you know our servicing asset revaluation and fair value mark on our held-for-sale loan portfolio, our mark-to-market assets and valuations are based on spot rates at the end of the quarter. While there will be continued variability as these assets are valued quarterly, we saw much lower volatility versus Q1 as we expected.

Just to hit a few more highlights on deposit trends on slide 13, you will see our deposit growth even through the events in March were very strong relative to the industry. As discussed, our repricing has been exactly where we expected it to be given the rapid rate increases, so we have not had to pay up for the excellent deposit growth that we've experienced this quarter.

Quickly on slide 14, you see our key liquidity trends, which have been and continue to be very strong relative to the industry.

Turning to expenses on slide 15. We are doing justice we said we would do. We are moderating our expense growth while continuing to grow revenues going forward. While we will always be opportunistic with hiring revenue producers, we are tightly managing our expense growth and we are confident in our ability to consistently improve our PPNR and our efficiency ratio over the next several quarters.

Our expenses are downlinked quarter and as you can see, we have held salary and employee levels steady for the past couple of quarters even while continuing to invest in next-generation technology as evidenced by the continued increase in tech-related expense versus our total expenses. And we expect these trends to continue.

Turning to credit trends on slide 16. As Chip discussed earlier, credit metrics remained strong. We continue to actively monitor the existing portfolio and do not currently see any glaring weak spots. Past dues are low and non-accruals remain quite manageable as well. You can see that the credit quality trends across our three business segments are quite strong as well.

As expected in the current environment, we've moved more loans to non-accrual status during the quarter, but on the bottom left of this slide, you see a five-year trend of our non-accruals, so while Q2 of 2022 with an abnormally low quarter for non-accruals, you can see that this quarter's non-accruals to total loans of 109 basis points are consistent with the past several years. We only had a total of $1 million of net charge-offs in the quarter across $8-billion-plus loan portfolio, very, very strong performance. And as expected, the provision declined even as our coverage increased, our reserves to unguaranteed loans remain well above the industry as you can see.

Slide 17, shows our overall capital strength, which continues to give us great comfort. We are well positioned to thrive in whatever environment lies ahead and continue providing growth capital to our small business customers.

So with that, see if Huntley would like to wrap up with a few thoughts on our priorities for the second half of the year. Huntley?

[Huntley Garriott, President, Live Oak Bank]

Thanks, BJ. Yes, just a few thoughts on my end on page 18 and then we'll get to Q&A. Through a turbulent first half of the year, we really continue to demonstrate our resiliency. The balance sheet remains solid, Chip and BJ talked about it. Liquidity credit and capital so checked soundness box.

As the banking industry tightened standards on lending and preserve capital, we're continuing to find opportunities to provide that capital to small businesses and our teammates continue to go above and beyond in serving those small businesses and preparing us for the future.

On the earnings front, BJ did a nice job talking about the solid results this quarter and we really believe we're setting a new baseline for performance in the future with confidence in our margin, secondary markets and a focus on expense control that will generate operating leverage, so profitability.

As for growth, pipelines do remain healthy despite rumors to the contrary across America, small businesses continue to thrive and we continue to help them grow and as Chip referenced, we're really excited to announce that our full-service checking account is live, has been well received by our small business customers, and it allows us to transition to becoming a full-service small business bank.

At the same time, we continue to invest in our future. We've upgraded our small business loan origination platform, which will allow us to better serve these customers and improve efficiency. We continue to build out embedded banking solutions to help the software to power small businesses, provide banking services and while there's a lot of chatter in that space lately, we're really excited that our straight-through API-powered solution avoids a lot of abstraction layers in the FBO accounts and the complexity that's caused some challenges in the industry to-date.

And all of this is part of a multi-year journey to a modern digital technology that will provide us with real sustainable competitive advantages as Chip laid out in his intro, but we're not holding out for the end state. Along the way, we will seek to deliver value and delight our short customers and our shareholders. The art for us is being able to achieve that future state while still continuing to deliver value for our small business customers every day and strong financial results for you, our investors.

With that, let's go to questions.

[Operator]

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question will come from Crispin Love at Piper Sandler. Please go ahead.

[Crispin Love, Piper Sandler]

Thanks. Good morning, everyone. First BJ, just putting some numbers around what you said earlier on the NIM, I think last quarter you said in the second-half of the year that the margin could increase to the lower end to the midpoint of the prior 3.5% to 3.75% range. So, just first I want to make sure that that still stands and then if you have any comments on the cadence of what you might expect the NIM to do in the back half of the year.

[William Losch]

Yes. I think, Crispin, kind of, as I said earlier, a lot will be dependent I think on how much excess liquidity that we carry. We were obviously very pleased that we could swallow 12 basis points of NIM contraction with excess liquidity this quarter and yet still be above what we discussed with you all last quarter. And so I expect the net interest margin and more importantly, the net interest income to improve in the second-half of this year, assuming that the Fed moves today that creates a little bit more of a back-ended this to that improvement if you will, because of the nature of our quarterly adjusting variable-rate loans. But by and large, we believe that we're still on that type of trajectory by the end of the year.

[Crispin Love, Piper Sandler]

Great, BJ that's helpful. And then Chip, you mentioned earlier in the remarks just being on the road with customers. So, I'm just curious from where you sit, can you provide an update on how you're seeing the help a small businesses currently, their demand for loans and if there's been any major changes versus recent quarters?

[Chip Mahan, Chairman and Chief Executive Officer]

Well, I'll give you two quick examples. So last Thursday, I went to California with our account officer in the ESOP division, so to speak and met with two gentlemen that started in HVAC business 20-years ago when they were 23. They tried to get an SBA loan, couldn't. After six months, the bank couldn't even fill out the paperwork. They put up $2,000 and started their own business. Today, it's a $80 million revenue business drop and $8 million to the bottom line and we're going to do an eight-plus figure ESOP on to them.

The headline there is it's awfully difficult for them to find help. Do you know that an HVAC-experienced person with 10-years’ experience makes $100 an hour? Yesterday, I went to Minneapolis and spent a better part of the day with a roll-up private equity group out of New York buying an asphalt company. Well you know asphalt business is kind of interesting in Minneapolis, so six months of the year, you don't work and six months of the year, you do work and an asphalt person makes $160,000 a year.

Same thing, really hard to find talent and that usually happens for me at least a day or two a week and both those businesses are thriving. Margins are up way beyond their expectations if they can just find people. I don't know that I actually answered your question, but I can go on and on.

[Crispin Love, Piper Sandler]

No, I think that's helpful, Chip. I appreciate the color and that's all from me.

[Greg Seward, Chief Risk Officer and General Counsel]

Thanks, Crispin.

[Operator]

Your next question comes from Steven Alexopoulos at JP Morgan. Please go ahead.

[Steven Alexopoulos, JP Morgan]

Hey. Good morning, everyone.

[Chip Mahan, Chairman and Chief Executive Officer]

Good morning, Steve.

[Steven Alexopoulos, JP Morgan]

I want to start on credit and the increase in the unguaranteed NPLs. Could you just give us more color you call it the two credits? What are the size of each credit, the industry, anything systemic, a little more color there to start?

[Chip Mahan, Chairman and Chief Executive Officer]

Steve Smits, our Chief Credit Officer, is on point.

[Steven Smits, Chief Credit Officer]

Yes, Steve, how are you doing? This is Steve Smits. Two credits, the first one is in our senior housing portfolio, it's a memory care facility. It is collateralized project-level challenges while they're seeing good occupancy. They are struggling with cash flow, which put them behind on payments. I will add that we did reserve given the uncertainties with commercial real estate valuations. We did put a reserve. So, we're protected on that side. Talked to the team, they're very confident that we're going to be able to trade out that somebody will have an interest in buying this real estate. So, I'm cautiously optimistic that we will most likely not see a loss on that credit.

Second one is, we are actually a participant in another lender's credit facility and it appears that our borrower had fraud perpetrated against them from a primary supplier. This all came to fruition in the final days of the quarter. We had to act real quickly, so we placed it on non-accrual. We put a pretty healthy reserve against it, due to the uncertainty of fraud. I would say, way too early to conclude how that's going to play out, it was a collateralized loan, however, with fraud you never really know. So, that's going to have to play itself out before I have a feel for whether we'll see any losses associated with that credit.

As I pointed out both, we put healthy reserves against them. So, I feel that we did the prudent thing. I will also point out, Steve, that if you pull these out, we actually our non-performers would have been flat, which I think is how I look at the portfolio as a whole. We're just seeing very much stable and consistent, but just a couple of outliers here.

Don't see anything systemic. We continue to watch loans that we originated at the top of the market, specifically in change of ownerships of 2019 or early 2020 originations just to make sure these new owners continue to be able to weather the additional challenges associated with the last couple of years that we went through. But overall, I feel pretty good that the portfolio is very stable.

[Steven Alexopoulos, JP Morgan]

Got it. Okay, that's very helpful color. BJ, I had a question for you on the NIM outlook. You've mentioned excess liquidity of your time, sort of, putting that aside as a variable around NIM, but in terms of getting into the range of 350, 375 range. Do you need to draw down that excess liquidity to get into that range or could you get there if you maintain this liquidity through the rest of the year?

[William Losch]

Obviously, it would be more helpful to get there if we drew down excess liquidity, but we have more than reasonable chance to try to chin that type of level even if we're carrying excess liquidity, but it all depends on how competitive deposit rates get after this next move and if the Fed actually stands flat and we start to see some moderation.

So, I think the point that I want to make sure we get across is we've talked last quarter and I talked a little bit this quarter that we would see a V-shape to our NIM, right, that our NIM would compress into the second quarter, but then start to improve in the back half of the year that dynamic is still intact. And so whether it's up to a 350 level or just up 10, 15, 20, 25 basis points, either way it's margin expansion and I think that's what we'll say.

[Steven Alexopoulos, JP Morgan]

Got it, okay. And on the deposit side of looking at slide 11, you guys didn't change your savings rates in the quarter. CD rates are up a bit, but the rate had slowed, but you had very strong deposit growth. Could you give a sense what's driving such strong deposit growth without needing to lean on rate? And do you think, I am thinking deposits are up somewhere around 20% year-over-year, do you think we finished the year now in that range?

[William Losch]

Yes, I mean it's -- we have quite a strong brand on both consumer savings and the small business savings side and we offer the same rate to both. The dynamics of our competition are a little bit different in each and I think we're a little bit more at the top of the market with the business savings side and that aligns with who we are as America's small business bank obviously, and so I think the combination of us being towards the top already combined with our brand reputation in small Business and our marketing efforts have all led to very, very strong inflows from a business deposit perspective.

The other thing I'll mention as well as over the last several months in particular getting ready for our checking account launch. Our lenders have been doing a really good job of starting to think more about selling deposits and selling savings accounts first, has been kind of step one to try to build that muscle with step two being obviously checking accounts. And so I think the tailwinds of our lenders is doing a really good job selling savings accounts has certainly been helpful as well.

[Huntley Garriott, President, Live Oak Bank]

Yes. Hey, Steve. I'll add just one thing, I think Chip touched on this in his outset. I think especially for business customers, there has been a great awakening over the last six months about -- is my money safe and then what is my money earning? And I think that there's just a flow of business owners and finance folks at businesses who are realizing that they can earn on business savings, which just hasn't really been in dialog in a while. So I think we're seeing -- we're a beneficiary of that kind of macro flow right now.

[Steven Alexopoulos, JP Morgan]

Got it, okay. And then final question, I know you said that a few loan deals, it sounds like were pushed out to the third quarter, but period-end growth about 8% annualized held for investment is a little more muted. How we thinking about the second-half because I think prior guidance was I think mid-to-high teens in that range for full-year? How are you thinking about loan growth now?

[William Losch]

Yes. So, I mentioned briefly that pipelines were still pretty healthy, Steve, probably up until the last two weeks of the quarter. We thought we were going to be at $1 billion. In terms of production, we ended at 860 and the vast majority of those loans, well over 90% of the loans that we thought were going to close by 630 that didn't, have already closed in July.

So it just did move to the right. So all of that to say is, we feel like pipelines and production are still going to be pretty healthy in the second half of the year and that should drive continued loan growth. Whether it gets to the upper end of the range that you commented on, probably not. It's probably in the low-teens, maybe mid-teens by the end of the year.

[Steven Alexopoulos, JP Morgan]

Got it, okay. Thanks for taking all my questions.

[William Losch]

Thank you, Steve.

[Operator]

Your next question comes from David Feaster at Raymond James. Please go ahead.

[David Feaster, Raymond James]

Hey, good morning everybody.

A - Huntley Garriott

Hey David.

[William Losch]

Hey Dave.

[David Feaster, Raymond James]

Maybe just kind of following up on the growth side, you guys have had a lot of success on the hiring front and attracting folks just given the unique business model and the culture. Is the disruption that's going on in the market and you clearly being open for business giving you more opportunity for additional hiring opportunities and I guess as you think about it, is now a good time for you guys to maybe be a bit more greedy while others are starting to pull back?

[Chip Mahan, Chairman and Chief Executive Officer]

It's a good question, David. I think we agree with your sentiment that we're open for business and we do have the opportunity and lots of folks call us and are interested and maybe joining what we're doing. But at the same time, I think we recognize with what's going on in the industry and where we are, that we do want to be more mindful around adding folks and so we're going to be really selective. We're going to add great folks when it's the right time and place to do that in specific spots.

But I don't think as we sit here now, we have an ambition to kind of go on a great talent land grabs as we sit here. I think we feel really, really good about the team that we've got and if we find a few opportunities, we're willing into those.

[David Feaster, Raymond James]

Okay, that's helpful. That makes sense. And then maybe just touching on the, you talked about a checking account rollout, we're obviously starting to see some growth in the non-interest bearing side, which is great. I think last quarter you said you had 10 clients on-boarded. I'm just curious where are you having success? Are you starting to see more clients getting on-boarded there? And then ultimately, how does that play into the conventional lending side too because I know that's been another big initiative? So, just curious what you're seeing on that side as well.

[Huntley Garriott, President, Live Oak Bank]

Yes. So I think the last count, we've got 50 customers live and then continuing to make sure everything works, which it does well and continuing to roll this out. The next step for us is going to really be as BJ said, marrying the deposit accounts with the loan opportunities and having folks on the road every day talking about this. And that's true for conventional lending where there's typically as you know larger balances, but it's also true in our day-in, day-out SBA business as well. So, that's really the next phase of this and then I think the third phase is where we go blast out to everyone kind of outside of our existing customers and prospects.

[David Feaster, Raymond James]

Okay. And then last one from me, you've obviously got an incredibly diverse production engine. You got loans across the country in a lot of different verticals. So, you've got a really good pulse on the market and I'm just curious you talked to borrowers, it's tough out there. It sounds like you're still -- you're pretty cautiously optimistic if I'm hearing to Chip, but at the same time you talked about higher rates, low in demand.

So, I'm just curious maybe as you look into your crystal ball on what you're seeing, how do you feel about the economy? Are there any segments that you're looking at, as you see these that you're, maybe, seeing a bit more pressure that's maybe any red flags that you're seeing? And just where from a growth side or are you seeing the best risk adjusted returns right now?

[William Losch]

I got to tell you that over the past 50 calls that I've had on the road, I cannot remember one customer and mainly prospects. I'm focused mainly on prospects, saying the world is coming to an end. They're not saying that to me. Now that said, of our 35 industries, if I'm worried about one, it would be the pharmacy space.

Margins in that business had consistently come down over the past 10 years and while the 23,000 independent family pharmacist make a nice living, that's just about it, right? So, it's a $3 million revenue business with a 2% or 3% margin business and it's just tough out there with the PBMs. I don't see it and Huntley, maybe you have another…

[Huntley Garriott, President, Live Oak Bank]

No, I think you said it perfectly. We just don't see a macro issue. I think there are still some pockets and I think as Chip said in his intro, business acquisition is a big part of what we do. And those deals, buyer, seller, interest rates, trying to figure out the right deal structure. We've seen that a little bit slow, but they're still really good deals out there and then everybody talks about real estate, we obviously don't do sort of office real estate, which is I think what everybody is most concerned about, but we have seen situations where it feels like banks are pulling back from all real estate. And so we see some more opportunities in places that are secondary, tertiary related to that and so in some ways, we see maybe some interesting opportunities there.

[David Feaster, Raymond James]

And I guess kind of with the whole idea that the -- most of the conventional lending could be slowing and a lot of banks kind of pulling back. Do you expect that to push more folks into the SBA and ultimately we could really potentially see growth accelerate kind of into next year and through next year?

[Chip Mahan, Chairman and Chief Executive Officer]

I would say it would be more on our conventional space, BJ, that you spent some time in. I don't know that the SBA space is going to be much different than it always has been. I will say that I want to get my hands on every great SBA lending officer in the country. So as we can get qualified A&B players, we will continue to hire those folks, but the sponsors that we do business with primarily focused on the $5 million to $10 million EBITDA businesses and those folks have a lot of capital. So, we're seeing that area grow substantially.

[William Losch]

Yes.

[Huntley Garriott, President, Live Oak Bank]

But I do think the more you read and we haven't seen this maybe in practice yet, but if banks do start to tighten up pullback, etc., it ought to open up the market for SBA, right, in theory. We haven't seen it in practice yet, but we like the thesis, David. We're ready for it.

[David Feaster, Raymond James]

Yes. All right, sounds good. Thanks everybody.

[Operator]

Your next question comes from Brandon King at Truist Securities. Please go ahead.

[Brandon King, Truist Securities]

Hey, good morning. Thanks for taking my questions.

[William Losch]

Hey, Brandon.

[Brandon King, Truist Securities]

Yes. So, BJ, I wanted to get your updated outlook on the secondary market. You mentioned how premiums were stable quarter-over-quarter, but what do you kind of expecting or baking in for the second half of the year?

[William Losch]

Yes, I think we kind of see steady as our outlook for the second half, we're a little bit concerned after what happened in mid-March. A couple of the large buyers exited the market for a couple of different reasons. And so we were wondering what that would do to supply-and-demand dynamics, but the premiums have stayed fairly stable. So we expect that to continue throughout the rest of the year.

[Brandon King, Truist Securities]

Okay. And you also mentioned that there was a little uptick in fixed rate in the secondary market as well. And just wanted -- just curious were the premiums on those attractive enough to kind of restart that engine going or just wanted to get more color and context around that?

[William Losch]

Yes, probably not. I mean the vast majority is still variable rate. We did sell a little bit of fixed, which is encouraging. We actually sell little fixed in the first and the second quarter, but it's not, it's certainly not where it used to be. So, most of the volume that we sell is going to be variable.

[Brandon King, Truist Securities]

Okay and then lastly just a broad strategic question. I've seen couple of reports of other banks trying to push their presence into, let's say, SBA small business lending and Chip, I just wanted to get your thoughts on that and if there's any concerns in your part from more competition in this space or just kind of where they play is different from where at Live Oak place.

[Huntley Garriott, President, Live Oak Bank]

Yes. So, Brandon, again we like where we are positioned. We like our team. We like the folks who do business with. We feel really good about where we are. I think, we certainly see competition all the time and we see it from banks based on wherever the VSOP may fall out. We might see it from technology companies and we'll be fine. We just -- we're pretty comfortable with the level of competition and we'll do our best against it.

[Brandon King, Truist Securities]

All right, that's all I had. Thanks for taking my questions.

[Operator]

Your next question comes from Michael Perito at KBW. Please go ahead.

[Michael Perito, KBW]

Hey, good morning everyone. Thanks for taking my questions. I just had a couple of quick ones. Obviously, a lot's been asked already here. I just wanted to clarify on the expense side, so just to put some numbers around it, so you guys expect to hold steady kind of around $77 million a quarter of near-term.

And then just a follow-up, what I guess do you guys need to see to -- I realize I can't really, it's hard to tell me what like the growth rate for 2024 would be, but I guess what do you guys need to see macro or other to kind of reaccelerate the investment rate because I imagine, this is more of just kind of a temporary pause given some of the revenue challenges, but just curious if you can confirm the numbers and then just give a little bit more color longer term about how you're thinking about the rate of investment?

[William Losch]

Yes. Mike, we've talked about over the last year and a half that we had two different types of hiring levels, right? In 2021, we really had a hiring bubble to catch up our lending support staffing to keep up with the increase in loan production we had seen, so hiring a lot of underwriters and hiring a lot of closures and those types of folks that was kind of 2021.

2022, we accelerated our technology investments of people and actual tech spend to again try to leverage some of the FinTech investment gain that we took to move ahead with some of the strategic projects on the tech side that we wanted to get done as quickly as possible, so those two things cause quite an acceleration.

We've always and will always, to Chip's point, be looking for revenue producers because they are going to be very accretive to our PPNR in our earnings and our growth going forward. But right now, we feel like we've got a lot of the right pieces on the field from a people perspective in terms of revenue support as well as the technology side. We've just got to actually put it to work and make ourselves more productive and more efficient, and drive higher revenues.

So, we do think that our expense growth will be steady as we talked about throughout the rest of this year at these types of levels while our revenues continue to expand. And then from there into 2024, we fully expect to keep that kind of operating leverage momentum and take full advantage of the two years' worth of investments in people and technology that we made.

[Michael Perito, KBW]

That's super helpful. Thank you. BJ. And then just one last one from me for Chip. Just you made a comment in your prepared remarks about focus on deposit betas and celebration of deposit betas. And I guess, it's an interesting point of view. I guess my perspective was, I guess historically is a little different. I think deposit betas for analysts is kind of an imperfect way to measure kind of customer stickiness.

And so I guess my question for you, Chip, is just how do you measure kind of customer stickiness for Live Oak customer? I mean obviously, it's not beta. My guess is maybe it's more qualitative than quantitative today, but just kind of would love your thoughts on that as the industry clearly is at a moment year where I think that the unit of measurement around customer stickiness is going to change and just wondering what your kind of internal view as you look at that kind of hard to quantify metric.

[Chip Mahan, Chairman and Chief Executive Officer]

Yes, actually, that's a good question. I'm sitting here in our boardroom where you have been and there is a new addition in our Board. We have a Indigo chair and we copy Chick-fil-A, because when we got close to the senior management team of that company, they have a red chair in every conference room in that business pretending that there is a customer sitting there in that meeting room, right?

So when I think about stickiness of old, right, and deposit betas, it's like -- well, the rates went up 0.5%. I'm just too lazy to go down the branch to move, but when you have 500 bps roughly overnight that's a significant as I've said in my prepared comments. I mean, if you have 10 grand in the bank and you're not a wealthy person, you pick up $400 in cash. My real answer to your question is you have to earn stickiness every day.

That's why I think that our deposit gathering machine gets a little bit viral because of the 30 people we have in our call center. Every one of them actually care about the customer, that's why they answer the phone in 11 seconds. And that's why we get email after email saying you're different, you're different, you really care about me. A lot of our customers, particularly on the consumer side, older people and holding their hands and some of them don't even have cell phones, so I think you have to earn that stickiness on the deposit side every day.

And on the loan side, we've done that for 15-years and seen all and rather thinking from the customer's point of view that only care about two things -- am I approved and when are you going to give me the money. And when I go out there and see these customers and we're in competitive situations with other banks, I mean we just moved probably twice as fast as any other bank can get that answer to those people. So, we're just going to keep on, keeping on the lending side and it's going to be fun as we roll out and for the first time in the history of our company. If you get a loan from us like as of next week, we're going to deposit year loan amount in a Live Oak checking account, which we have never done. So, we'll see how that goes.

[Michael Perito, KBW]

Helpful. It should be interesting to follow how the recent events kind of change your perspective of how people value deposits. So, I appreciate that color, Chip, and thanks for taking my questions in the call this morning.

[Chip Mahan, Chairman and Chief Executive Officer]

Thank you, Mike.

[Operator]

There are no further questions, so I will turn the conference back to Chip Mahan for any closing remarks.

[Chip Mahan, Chairman and Chief Executive Officer]

No closing remarks. We'll see you in October.

[Operator]

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.