Live Oak Bancshares Inc
NYSE:LOB
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Earnings Call Analysis
Q4-2023 Analysis
Live Oak Bancshares Inc
Underpinning the company's success is a steadfast commitment to credit quality. Impressive figures such as $6 million in overdue loans against a $5.6 billion portfolio and a mere $40 million in nonaccrual loans exemplify this. Contrastingly, loan loss provisions have been fueling growth rather than addressing impaired credits, a clear indication of a healthy financial environment. The bank's customer base has also expanded significantly, growing by 48% over five years from 5,000 to 7,500 businesses, showing not only growth but also a deeper penetration into the lending market.
The bank has observed a trend within the industry of an increase in deposit beta, with customers chasing higher rates aided by technology. Despite this, the company has managed to keep its own cost of funds increase to 1.47%, which is favorable compared to regional bank averages. A key differentiator is the bank's business model, which has started to form a 'moat' against industry competitors, paving the way for sustainable and organic growth.
The bank's strategy has already been paying off as evidenced by the flattening of expenses and the rise in revenues. An environment fostering steady performance is reflected in their impressive loan book, customer base growth, and moderate increase in cost of funds. This impressive combination of leveraging both sides of the balance sheet and maintaining market rate payouts to customers is a testament to the bank's prudent management and strategic positioning.
With recent policy changes, such as eliminated origination fees on loans under $1 million and waived collateral requirements on loans under $500,000, the bank sees a great potential to provide capital to underserved businesses. This pivot aligns with government guarantees on smaller loans, allowing the bank to expand its reach to a new segment of businesses that has historically not been their target market.
Strong financial indicators, such as earnings per share of $1.64, a net interest margin of 3.35%, and adjusted PPNR growth of 6% year-over-year, emphasize the bank's robust position. Loan and deposit portfolios both saw significant year-over-year increases of 14% and 56%, respectively, showcasing the bank's resilience and steady credit quality in a challenging economic landscape.
The bank has maintained a strong credit quality with a low level of net charge-offs and a high reserve on guaranteed loans—twice the industry average—as well as 38% of the total loan portfolio being government guaranteed. Furthermore, essential to their lending practice is its commercial real estate portfolio, which primarily consists of owner-occupied properties, showcasing prudent lending strategies that mitigate risk.
The bank holds a bullish position on its future, citing its diverse loan production, above-industry growth rates, managed expenses, and strong capital positioning to continue providing growth capital to customers. With nearly 40% of their portfolio government-guaranteed and a culture centered on exceptional customer service, the bank anticipates thriving in any economic environment ahead.
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Good morning, ladies and gentlemen, and welcome to the Live Oak Bancshares Q4 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, January 25, 2024. I would now like to turn the conference over to Greg Seward, Chief General Counsel and Chief Risk Officer. Please go ahead.
Thank you and good morning, everyone. Welcome to Live Oak's fourth 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 material that we will reference on the call, please visit our website at investor.liveoakbank.com and go to the Events and Presentations tab for supporting materials. Our fourth 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.
Thanks, Greg, and welcome to our Q4 earnings call. First of all, I want to introduce to investors our new CFO, Walt Phifer. Walt joined the bank in 2015 and brings 18 years of experience in the financial industry, including various finance, treasury, accounting, audit, and deposit analytic roles. Prior to joining our bank, Walt served as the Deposits Finance Manager at Barclays USA, where he managed the finances and data analytics of a $10 billion deposit portfolio. Of course, BJ and Steve Smits join us and will be active participants in the Q&A session.Before I turn things over to Walt, I just wanted to touch on a few nonoperating observations on Slide 4. It will always be our intent to lead with credit quality. As many of you on this call believe, small business enterprises will be the tip of the spear if a downturn occurs. We will examine the numbers and let you be the judge.Next, I thought we should look at our loan book over the last 5 years to check in on organic growth. We then will examine deposit pricing across our industry and, yes, the BofA Securities group announced that [ evil ] deposit beta accelerated from 48% in Q3 to 52% in Q4. Technology has made it easy for folks to seek higher rates and they are doing it.On the next bullet, I will examine our business model versus the industry's and unpack what appears to be a moat forming in our favor. Lastly, a comment or 2 on operating leverage, before we move on to the most surprising development at the SBA since we started this bank.Moving to Slide 5. My takeaway on this slide would be steady as she goes. I cannot tell you how proud I am of our lenders and the credit team. $6 million in over 30 day past dues on a loan book of over $5.6 billion. What? And nonaccruals not paying as agreed of a little over $40 million. Unheard of in SBA lending when compared to others.Moving to Slide 6, our loan loss provisions supporting our growth, as opposed to specific reserves for impaired credits, allow this slide to join the steady as she goes club. Please recall that the fraudulent national credit in Q3 was slightly under $8 million. So the way I look at it, total charge-offs of $13 million for 2023, or 22 basis points, was a remarkable performance during trying times. Steve Smits will comment on his current view of the world during the Q&A session.Please turn to Slide 7. For 15 years we have been primarily a lending company. So how have we done over the past 5 years? We grew our customer base from 5,000 businesses to over 7,500, a 48% increase. Not bad. What about the other side of the balance sheet? How are we and others funding their bank? Relative to my earlier comments on deposit betas, customers are moving their deposits no matter what your model is.Let's stare at the right side of Slide 7. Our total cost of funds over the last year went up 1.47%. I chose a number of regional banks to look at as opposed to the industry in general. Those comparisons always seem to be skewed by the big 5. The cost of funds in the group was up slightly higher than Live Oak, both for the year at 1.57% or linked quarter of 18 bps versus Live Oak at 15 bps. So why do we bring this up? We are paying at market rate to our customers across the entire bank and others are not. Could it be that the cost of branches, tellers, and CSRs could make up the difference of 157 basis points between their cost of funds and ours? What goes on in a branch to make them necessary to fund the bank when we fund our bank at 11 bps versus this group at 221 bps, or 157 basis points less than Live Oak? Are we really talking about the essence of self-service, think technology, versus full-service, think branches and call centers? So where are we really? Is there a difference beyond the numbers? Are we building a barrier to entry with our 161 lenders keen as to the nuances of government guaranteed lending? So let's have some fun.Recently, a famous bank analyst did a podcast and interviewed 1 of our customers. Let's see how things went. So, famous bank analyst says to our Montana pharmacy owner, "What is your relationship with Live Oak?" So she says, "I was introduced to Shayla at Live Oak through Luke, who is at Adaptive Financial, and he's the one who brokered our pharmacy deal, and he's been working with the previous owners as a financial advisor. And he was like, 'Hey, I've been having some issues as banks around here don't understand pharmacy.' And even the bank that currently had the loan on this pharmacy for 17 years before still doesn't understand the industry. And so when I started working with Shayla," this is our pharmacist talking, "I was just blown away. I didn't have to teach her about pharmacy. She got to teach me how easy the SBA loan process can be, and I was just astonished. I've heard, honestly, nightmare stories of people buying practices and buying pharmacies, and that wasn't the case for me at all. This was more of a fast-track deal. I never felt overwhelmed. I never felt uneducated. They just made it so easy for me.""So you use Live Oak Bank, they finance the purchase of your pharmacy, right?" She says, "Yes." "Okay. But you also have a deposit relationship with a company?" "Yes, I do. They hold my bank accounts. As far as checking, I do all my EFTs through them, I do all my ACHs through them, all my big payments, anything like that. One thing I don't do through them is cash deposits. So the few checks that we get, which we don't get a lot anymore as everything is electronic, my cash deposits go actually to my local bank that is in our parking lot. However, if there were a way to get Live Oak the cash deposits, I would just use them. I don't feel like that, because they're not right here, that there's anything less of a relationship. Everybody that I've worked with has been absolutely amazing in the customer service department and the knowledge department."Famous bank analyst says, "Got it. So you feel like you have a good relationship, but if there was a branch available, you would have your cash deposits go to Live Oak. I think that's what I heard." "So for that, I do, I'll take my cash deposits over to my local bank, we get our change orders through them, but I just literally take and transfer all that into my Live Oak account."So what is my takeaway? It is that folks in traditional branches have to be all things to all people in a geographic area. Many of our competitors talk about high tech and high touch. Tough to do in a transaction-oriented environment. Even tougher to do in a branch closing environment that spurns high turnover, even in good times.I like our model. I love our model. Deep domain expertise at origination and throughout our entire bank, individual account officers that are responsible for servicing are trained as to that industry. As to our call center deposit team, I ask that you look up a recent podcast done on us. We were floored at the level of knowledge this person had as to our DNA. He is also a customer. Go listen to his interaction with our call center folks and his view of our business model and see for yourself whether or not we are building a sustainable, organic growing bank that would be difficult to replicate.Let's move to Slide 8. The headline here is that our investments in the past have paid dividends, expenses have flattened and revenues are increasing. That said, as we discussed last quarter, we will forever be in search of great bankers that have the eye of the tiger, that put capital in the hands of small businesses that share that same passion, which is a great segue to my last observation on Slide 9.As many of you know, the SBA was created in 1953 in the Eisenhower administration. It is the smallest agency in the United States government, yet its administrator holds a seat on the President's cabinet. We have recently attended 2 meetings at the White House to understand some very significant changes that have been put in place to give access to capital to smaller businesses in many and potentially underserved areas.Historically, the SBA had its banks charge an origination fee and a 55 basis point trail on each loan to fund the program. Under the revised plan, the origination fees on all loans under $1 million have been eliminated, and on loans under $500,000, all collateral requirements have been waived. Unusual, shocking.One can use one's own underwriting standards, as they do for non-SBA loans. On loans under $150,000, the government guarantee has been increased from 75% to 85%. Traditionally, we would say that our target market would be those businesses with revenues between $500,000 and $10 million. In that group, in 2023, there were 1.5 million such businesses in the United States. There are 5.3 million businesses that generate between $100,000 and $500,000 in revenues. As the agency's #1 lender, Live Oak's average loan over the past 6 years has been about $1.5 million. This will change. We are extremely excited about these changes that will enable us to put capital in the hands of deserving businesses that we had not addressed in the past.Walt, over to you to talk about the numbers, bud.
Thank you, Chip, and good morning, everyone. Thank you for joining the call and spending the time with us this morning. I'll start today with a high-level review of 2023 on Slide 11. Top line figures show EPS of a $1.64, net interest margin of 3.35%, a 6% year-over-year adjusted PPNR growth, a 14% year-over-year loan growth driven by another year of $4 billion of loan originations, and an outstanding 56% increase year-over-year in our business deposits portfolio.Staying true to our soundness, profitability, and growth in that order mantra, we are extremely proud of how our team was able to navigate the fastest rising rate environment in several decades as well as an industry-wide liquidity stress event back in March, while still providing strong year-over-year growth and positive probability trends.From a soundness perspective, as Chip mentioned, our credit quality is healthy with positive trends in past dues and classified assets, and only 29 bps of net charge-offs and 86 bps of unguaranteed nonperforming loans, both as a percent of held-for-investment unguaranteed loans. Our liquidity profile remains robust as it has been throughout the entire year with 3-to-1 available liquidity capacity to uninsured deposits funded through a strong deposits origination engine. Our capital levels remain strong and have seen 2 consecutive quarters of capital ratio accretion in Q3 and Q4 2023.From a profitability perspective, we generated a 6% year-over-year increase in core total revenue, aided by our growth in net interest margin and secondary market stabilization. Net interest margin, which we will speak to more in the upcoming slides, remained healthy at 3.35%, even though our cost of funds remains higher than industry averages, proving that as long as you are maintaining pricing discipline on the asset side, banks can still have an attractive NIM while paying their depositors a competitive rate.Our expense growth in recent years was driven by investing in our operations and technology teams like Chip just pointed out. We took the opportunity to let our expense base begin to scale in 2023 in order to evaluate how we can grow our expense base effectively and efficiently. As such our expenses have been relatively flat quarter-over-quarter through 2023. As BJ and Chip have said in the past, we remain a growth organization, and as such, we will continue to invest in our future and our revenue generation side of the house, what we refer to as good costs.From a growth perspective, on the lending front, inclusive in our $4 billion [Technical Difficulty] year of loan production was a 6th consecutive year of being the nation's largest SBA lender. Take our origination engine, with the recent changes that Chip just mentioned, and we are excited about the opportunity of growing our lending business in the small loan arena.On the deposit front, our belief in our funding model continues to be supported by its year-in and year-out strong performance. Our total deposits have grown 16% year-over-year in a highly competitive market. What is more impressive is that we have grown our business deposits 56% year-over-year, and we have also launched our business checking product that will provide funding diversification, a lower cost of deposits, and an opportunity for our small business customers to expand their relationship with us and begin to fully operate their business through Live Oak.Switching to Q4 results specifically on Slide 12. The key commitments that we have made to you in the past as to our outlook remain true today. Loan growth continues to be strong. Credit quality has remained stable. Excluding the noise in Q4 that I will speak to shortly, expense growth has moderated. And net interest margin outlook remains positive. Our loan portfolio grew 3% quarter over quarter through the generation of close to $1 billion in loan originations. Our loan pipeline remains robust and healthy as we head into 2024. Our deposit growth of 3% was tailored to match our loan growth. Net interest income was up slightly quarter-over-quarter and NIM, while down 5 bps versus Q3 2023, held in line with our expectations.Excluding the notable expense items on the right-hand side of the slide, our core expenses were flat quarter over quarter. Our core PPNR increased $2.3 million quarter-over-quarter, or a 5% increase, and was up $13.1 million, or 40%, compared to Q4 2022. Our credit quality remained steady and continues to perform well. Provision was down quarter over quarter as the health of the portfolio remained strong. We had $4 million of net charge-offs in the quarter related to 4 loans spread across 3 verticals and the bulk of our Q4 provision was related to our loan growth, what we refer to as good provision.The primary noise in the quarter, as BJ indicated in our prior quarter call, was related to $15 million of renewable energy tax credit impairments within noninterest expense in Q4. While the benefit from these tax credits, which outweighed the Q4 expense, was experienced throughout the year within the income tax expense line, effectively lowering our annual tax rate to 10.7% for the year. Considering where we started the year, we are pleased with the momentum that we have been able to build over the last 3 quarters and are optimistic as we head into 2024.Moving on to Slide 13 and our net interest margin trends. Q4 2023 net interest income was slightly up linked quarter and up 4% year-over-year. While net interest margin was down 5 bps quarter over quarter, let's dig in here to understand the dynamics given the importance to our revenue position.On the asset front, our average rate on new production increased to just shy of 9.25%, a testament to the outstanding job our lenders continue to do on the pricing discipline front. Our total loan portfolio yield increased 9 bps quarter over quarter to 7.61%. As our newer loans replace older loans over time, our portfolio yields will continue to rise, supporting continued stabilization and then improvement in our net spread. As a reminder, it is important to focus on both sides of the balance sheet in terms of pricing. While cost of funds typically gets the headlines, banks have to maintain their discipline on the asset side. We have done just that.On the funding front, our average cost of funds increased 18 basis points quarter over quarter. The primary driver of this increase was an $875 million CD maturity event, or roughly 36% of our customer CD portfolio. The rate on these renewing CDs or replacement funding was 112 basis points higher. We also repositioned our customer savings portfolios to support targeted cash flows, though as you can see on Slide 13, our betas remain consistent with past guidance as well as below top digital competitors, especially on the business savings front.The retail deposit market remains highly competitive with 3 aspects at play: large digital banks remain in aggressive pricing positions; large traditional banks continue to leverage exception-based pricing to reduce their outflows; and new smaller entrants continue to [ rotate ] into the market with aggressive pricing to fund a certain goal and to establish a brand awareness. It remains a difficult funding market. I want to emphasize that soundness and liquidity will always be paramount at Live Oak, and we will position ourselves from a deposit rate perspective to ensure that our funding levels support our growth aspirations.As we head into what is an unclear 2024 rate and macroeconomic environment, let's revisit our past guidance and expectations. We expect no further major industry disruption related to deposits or liquidity. Though outlooks vary, we currently expect no additional rate hikes and anticipate the Fed to cut 3 times in the second half of 2024. Our interest rate risk profile remains in plus or minus net neutral position in the near term. Yet, the timing of a Fed cut could be beneficial or detrimental to any individual quarter's net interest margin. For example, 49% of our loans are variable quarterly adjust that reprice on the first business day of the month following each quarter end. Therefore, a June rate cut would provide less benefit than an April rate cut as there is less time for our deposits to reprice downwards ahead of the decrease to our variable rate loan portfolio. The opposite would hold true if the Fed cut is earlier in the quarter. So to recap, our prior NIM guidance holds true. We expect the trajectory to be up and to the right over time, although not in a linear fashion. Given the seasonality of deposits, upcoming CD maturity events earlier in the year, and our expected Fed actions, we largely expect to see more NIM expansion in the back half of 2024.Okay. Moving on from my NIM dissertation, let's turn to Slide 14 and loan origination. Our year-over-year loan production in 2023 was diverse across our multiple areas, with particular strength in our specialty healthcare, solar, senior care, and self-storage verticals. As others may pull back on lending in what could be an uncertain year, we expect to see good opportunities for new business going forward. As Chip has repeatedly said, we are open for business and are focused on growing our revenue-generating capabilities.Slide 15 details our quarter-over-quarter deposit trends. Though deposit growth was intentionally moderated in half 2 2023 as we soaked up some of the excess liquidity we had built coming out of March. Our 16% year-over-year growth rate outperformed the industry, which has been essentially flat year over year. We continue to be confident in our deposit team's ability to generate deposit growth through competitive rate positioning, brand awareness campaigns, and quality customer service. Most notably, as I mentioned, our business customer deposits, our strategic focus, were up 56% year over year, or approximately $1.7 billion. Excellent job by our deposits and marketing teams in a challenging environment.Quarter-over-quarter fee income is outlined on Slide 16. Our SBA sales activity and gain-on-sale premiums were steady in Q4. Gain on sale at roughly 8% to 10% of quarterly total revenue continues to feel like the right range. One notable item to report is that in January 2024, we sold our first 2 USDA loans in over 7 quarters. While too early to celebrate, we're excited about this development. Having the ability to sell USDA loans provides our team with additional optionality, liquidity, and balance sheet management tactics.Turning to expenses on Slide 17. Our core expenses in Q4 2023 were $74 million, essentially flat to Q3 2023 and consistent with our commitments made in prior quarters. Moderating our expense growth while continuing to grow revenues is the recipe of operating leverage expansion. Going forward, while we will remain opportunistic with hiring revenue producers and ensuring that we are investing in areas that support our growth in growing complexity. We will do so intelligently to manage our expense growth. We remain confident in our ability to consistently grow our PPNR and improve our efficiency ratio as we head into 2024.Turning to credit trends on Slide 18. As Chip discussed earlier, our credit quality remains strong and continues to tell a powerful story about American small business owners. They are financially savvy and resourceful, and our borrowers have adjusted well to changing economic conditions. We continue to actively monitor the existing portfolio, have yet to see any notable surprises outside our expectations, and do not currently see any significant weak spots. Past dues are the lowest that they have been over the last 5 quarters. As expected in the current environment, we moved some more loans to nonaccrual status during the quarter, but on the bottom left of this slide, you see a 5-quarter trend of nonaccruals, and you can see that this quarter's nonaccruals to total loans are still at very manageable levels. Overall, on the top right, you can see that the credit quality trends across all our 3 major business segments are healthy. As mentioned, Q4 2023 provisioning was driven by loan growth. Our reserves on guaranteed loans remains twice as high as the industry average, and 38% of our total loan portfolio is government guaranteed.Lastly, we recognize that commercial real estate is a focus in the industry, given the shift in working behavior and more employees working remotely. However, it's important to note that not all commercial real estate lending is created equal. Our commercial real estate portfolio is primarily owner-occupied, think dentist office, veterinarians. 17% of our CRE portfolio is nonowner occupied, but it's primarily senior housing and storage. And lastly, 45% of our CRE portfolio is government guaranteed.Slide 19 highlights our overall capital strengths, which continues to give us great ability to continue providing growth capital to our small business customers and comfort that we are well positioned to thrive in whatever environment lies ahead.To wrap up on Slide 20, I'm proud of what this organization has been able to accomplish in a challenging 2023, and I'm very bullish on our position over the long term. Our loan production engine, along with reduced reliance on secondary market sales is producing solid double-digit loan growth. That loan growth, coupled with excellent pricing discipline on both the lending and funding fronts, has core recurring revenue on an upwards trajectory. It's early, but as we are successful at attracting noninterest-bearing checking accounts, we will be able to expand our customer relationships, providing a tailwind of lowering funding costs for years to come.We will continue to invest in our growth and be opportunistic in our addition of revenue-generating lenders and products. Yet we will do so intelligently to balance both near-term earnings and long-term growth aspirations. Credit quality is a strength, and we expect it to hold up well on a relative basis in whatever credit environment that we may face. Having close to 40% of our portfolio government guaranteed when the industry is about 1/10th of that, also provides great comfort and confidence. Finally, our not-so-secret weapon has been and will always remain our people and our culture. To us, treating every customer like they're the only customer is not a choice. It's a way of life.Thank you again for joining us this morning. And with that, we are happy to take questions.
[Operator Instructions] Our first question comes from the line of Steven Alexopoulos of J.P. Morgan.
Walt, welcome to the call officially.
Thank you.
I want to start on first the margin. So, many banks, as I'm sure you've heard, you've outlined quite a few of them on that 1 slide, are talking about this lag once the Fed cuts in terms of how quickly they could lower rates, because like you said, many of them are below market still. You guys aren't. How do you think about that? Maybe the first 50 basis point cut, what's the beta range there? And then maybe the next 100, could you walk us through that?
Look, I think when you think of NIM outlook, it really depends on how rational the deposit market is. We generally expect to see similar behaviors going down as we saw going up. Like we had in Q4 with a large CD maturity event, our CD maturity events typically are Q1 and Q4 of each year. So I think largely we will see how the market responds and then we'll position ourselves appropriately.
I do think, Steve, that the first 50 basis points, it'll probably be a little bit slower on the way down, particularly on the savings side, though interestingly enough, we've seen on the CD portfolio inside of a year that competitors have already started to tiptoe their way down the curve and started to reduce rates. So we're being a little bit conservative. We expect a bit of lag the first maybe 50 basis points on the way down of savings, but I think, generally speaking, it's going to -- after that, it'll move with long-term betas.
Maybe for you BJ or Walt. Originally, BJ, you were the CFO, you talked about NIM getting into a 3.50%, 3.75% range. For a variety of factors, they're at 3.30-ish. Could you help us think about -- I know NIM could bounce around a little bit in 2024, given timing of when the Fed actually moves and what they do, but do you think, ultimately, is that still a good range? It's funny when I look back at you guys, you were like a 3.60%, 3.75% NIM bank with a normal curve, and I'm trying to figure out where we're headed maybe 2024 and then longer term with margin, assuming we get cuts in a normal shape curve.
Yes, I'll start, Steve, and then BJ can clean me up. I think the 3.50% to 3.75% range is still reasonable. I expect that to be -- like we mentioned earlier, it won't be in a linear fashion. I think we'll head that direction more so in the back half of the year. Longer term, I think it depends how successful we are on launching our checking product and the balance build. Our lenders continue to do a great job managing their spreads on the asset side. So even if we stayed with our current funding model, I still think it's trending longer term, depending on the rate cycle and the shape of the curve into that high 3%, low 4% range. And then obviously we have some potential upside if we're able to really launch our low-cost deposits.
And then can I pivot to expenses? Historically, the company is pretty easy to forecast with expenses, right? It's like mid-teens for next year. When you look at the trend this year, you're flat to down, right? How do we think about expense growth in 2024?
Yes, Steve, I'll take that one. If you look at how quickly we grew our company, it was pretty massive. We've talked in the past about coming out of COVID, we had to really ramp up our lender support groups, underwriters, closers, servicers, et cetera. And then we made intentional significant investment in technology in '22. So big bubbles there.Over the timeframe from January '21 to January '23, we grew the number of Live Oakers 55% in 2 years. That is a massive increase in the number of people, and we needed to digest that. We needed to put those folks into our machine, in our organization, get them up to speed, start to realize benefits from some of the technology investments. And 2023 was the year of doing that. So we added and front-loaded a lot of people over the last 2 years, which afforded us the ability to moderate that expense growth in '23. Now we've got the right people on the field for the opportunities that we've got.But to Walt's point, we are always, always, in the market looking for new lenders, new revenue producers, we're working on new products like technology solutions to make it easier for us to do small-dollar 7(a). That's going to continue. We're still on the journey that we're very excited about long-term on embedded banking. So you're going to continue to see our expenses go up commensurate with the revenues, but we've been able to moderate what had been pretty outsized expenses over the last couple years. So if you look at 2024, I still think that revenues are going to be up, but I think they're going to be up far less than what our revenues are going to be. Our expenses will be up, but revenues will be up much more.
If I could sneak 1 more in. Chip, going back to the changes to the SBA program you called out, sounds like they're smaller dollar loans, right? And you guys typically did larger dollar SBA loans. As we think about loan growth for 2024, is this a needle mover? If we think about where the growth has been, call it, mid-teens or so on loans, can you do better than that in 2024 because of the changes to the program?
Steve, I don't know. This was a tectonic change that floored us all. For the agency, [ career ] people that sit at the door of the vault to fundamentally say to an entire banking industry that you can make loans under $500,000 and not take all available collateral is shocking to us. We turn down at least $500 million worth of loans under $1 million every year, just from our website. So we have no idea what this is going to be. We're doing a lot of work technology wise to see if we can scale this. And it reminds me of the earlier days because what we'll probably do is sell those smaller loans, like we did when we started the company, so we'll have an even more interesting balance between gain-on-sale dollars and holding on to more of our $1.5 million average loans and just keep those on book and sell some of the smaller ones, but I just don't have any idea of what that number could possibly be, but we are rifle focused on.And you think about it, Steve, it's like what person ever said to you, well, I got a $1.5 million loan from a bank and everything's fantastic. Most people say, well, I got $100,000 loan from a bank, or I got a $25,000 loan from a bank, and I'll really build my business over time. And the fact that we can reach down to some of the underserved communities and take care of them, the ones that are deserving and have good historic credit quality, so it's a huge difference.
So best guess, Chip, same growth this year as last, like no real changes to the trend line on loans.
Again, I think, to Chip's point, these small-dollar loans, we would likely sell pretty close to 100% of them right into the secondary market because of the dynamics and the optionality it gives us to hold those larger loans, like Chip said. So I don't think that you would see the opportunity that we're looking at with small-dollar on the loan growth side on the balance sheet. You would see it in fee income.
Our next question comes from the line of Brandon King of Truist.
So a follow-up on the changes to SBA, and I know it's just early stages and, Chip, you're still thinking through this. But Live Oak is known for such a high-touch model. Do you think about extrapolating that towards these smaller-dollar loans as well and what could that potentially mean as far as the people you have in place and the systems and infrastructure?
Brandon, it's BJ. So we will still be as high touch as we have always been, but I think high tech is going to be the emphasis here on small dollar. So what Chip talked about is first and fundamentally very important, the SBA is making it easier for borrowers to be eligible for SBA dollars, which makes it easier for us to get them approved and get them the money. The way that we're going to do that is to really automate as much as possible on the front end for our borrowers and our lenders to be able to get the documentation that we need to make the credit decision more on an automated fashion, not 100%, but much more than we typically would on a larger deal today, and then build out the appropriate infrastructure to service this the right way. So it'll be much more of a technology solution than not.
Yes. And I think 1 other thing, Brandon, on that is, I said on the call a quarter ago, we have 62 22-year-olds that collect financial statements every quarter on every 1 of our 7,000 customers. We won't be doing that on these small-dollar loans. We'll get an annual tax return, A, B. If our borrowers are in a jam, our special assets group is really a handholding group. We do everything that we can to help these borrowers if it's deferred this or blah-blah that we want to do that, we probably won't do that on what could be a massive number of under $500,000 loans. So I think that special asset treatment in the event of material adverse change will be a bit different.
And then, Walt, you mentioned how the CD maturities are chunkier in the first quarter and fourth quarter of each year. Could you give us a sense of the maturities you're expecting or the size of maturities you're expecting this year and like the run-off rates and what potential renewal rates could be?
Yes. So Q1 is not quite large as the $875 million that we saw here in Q4. It's slightly below that. The average rate of renewal will be pretty similar to what we saw in Q4, so I would say plus 100 bps at the minimum. Typically, just the way the deposit seasonality forms throughout the year, it's typically Q1, Q4 are the heavy quarters, a little bit lighter in Q2, and even lighter than that Q3.One of the things that we're working on with just our CD strategy is how we can continue to try to level off those CD maturities. Probably we'll start to see some more progress here in 2024, so this is more of a 2025-2026 benefit. And that's where using channels like wholesale can help you essentially plan and find certain maturity gaps that you can slide funding into.
Okay. Yes. And I was actually going to ask that. I noticed the duration of wholesale deposits declined in the quarter. I was wondering if that was intentional to be potentially preparing for a downrate cycle.
Yes. No, that's exactly right. One of the ways we navigated Q4 was essentially maintaining a competitive rate position. But then, given all the uncertainty with potential Fed cuts in 2024 and the range of likely the amount of cuts that could happen, we really start to leverage some -- more on the wholesale side for [ odd maturity ] kind of 9 months, 7 months, 4 months, and so forth, just to try to help level off that CD maturity portfolio as much as we can.
Our next question comes from the line of Michael Perito of KBW.
Wanted to follow up on the expense question. Just the employee bonus, is that something that will recur annually and be accrued for more evenly going forward or was there another -- can you maybe just extrapolate that out a little bit as I try to think about where full year expenses go year on year?
Yes, Mike, it's BJ. 2023 was quite an interesting year, particularly with what happened in March. And so we didn't have as great of a year as what we thought at the beginning, much like a lot of others. And so, we moderated our incentive pools appropriately throughout the year. At the end of the year, we saw that we were going to have a one-time fixed asset gain and decided that we were going to repurpose that and encourage our employees about navigating through a tough '23 and moving into 2024.We have fully accrued going into this year our normal incentive payouts. So that is included in what our expense expectations are. So, we have that included in what we're looking at in 2024.
And then realize this is a challenging question, like asking you guys to find a needle and a stack of needles here. But the renewable energy tax credits, any lines of sight on additional projects or investments? And do you guys have an initial budget range on what you expect the tax burden to be in '24?
Mike, this is Walt. Yes, right now we are not planning another one of these renewable energy ITC tax investments in 2024. We continue to evaluate what our tax rate is going to be, which will probably be somewhere in the 25% range given federal and state. I think as we think about long-term planning, tax strategy planning, trying to find things essentially a portfolio of whether it's low-income housing tax credits or things of the like that all fall within income tax expense line, so you're not creating that quarter-over-quarter noise with the noninterest expense and the impairment. It's something that we're aspiring to do. I, at this point, don't see a lot of movement in 2024 really to bring that tax rate down from that 25% range.
And sorry if I misunderstood this, but I thought the tax benefit would come after the impairment was recognized, but is that not the case? Was the tax benefit before the impairment?
That's correct. So the tax benefit that you see, you see it throughout the current year of the tax impairment. So even though the tax impairment happened in Q4, we've seen the tax benefit in Q1, Q2, Q3, and Q4 of the current year.
Got it. Okay. So the 25% at this point is a pretty clean and best guess for you guys, absent taking any other actions to lower your tax burden. That you'll obviously tell us once you do.
That's correct.
Okay. On the loan growth side, obviously for good reason, a lot of focus on the SBA and some of the changes going on there, but what about on the non-SBA, the general lending side? Any recent additions or updates on the team there and thoughts around what type of production we could expect from that group in '24?
Yes. So if you look back on Slide 14, I really like looking at this because visually it helps with where we're seeing growth and originations and where we aren't. But because of the IRA, the Inflation Reduction Act and the incentives in our solar business, which has always been very strong, had a particularly strong year. You can see the green bubbles, if you look at, those are our more conventional lending businesses, and particularly specialty healthcare, which a lot of that is our lending to DSOs, dental service organizations, as they're rolling up dental practices, still very, very healthy business. Seniors housing had a great year because, as you might imagine, a lot of other banks were trimming their commercial real estate concentrations and not doing as much. And so our teams took great advantage of some really, really high-quality developer relationships and putting some loans on the books there.But if you look at the purple, which is where our small business banking verticals are, our traditional bread and butter, you can see that while a few like senior care and self-storage had really good growth year over year in 2023, the majority of our small business verticals were actually down in originations from 2022 to 2023. 2023 was just a grind. It started tough in the first half of the year, rapid rate rises, borrowers and sellers still not on the same page in terms of valuations. We started to see that come back in our small business areas in the last half of the year, and we expect that small business verticals across our company are going to have quite a good year in 2024. As rates have stabilized and likely come down, we think there's going to be a heck of a lot of activity in 2024.
Helpful. And then just lastly for me, following up on the technology investment about the SBA loans sub $500,000, is this going to be a good test track for the Finxact core and hopefully being able to accomplish things a lot faster and lower cost than maybe historically? Or do you guys not feel that way? And I'm just wondering, I don't think we've talked about it a bit since the conversion, and maybe I'm forgetting a comment or 2 here or there, but has the Finxact core been working out as you expected? And is it correct for us to assume that like your ability to turn around on a technology project like this is still going to be enhanced from all those investments made in prior years?
It will certainly, but down the road, Finxact for us has continued to be primarily on the deposit side, and where we're doing a lot of development and innovation is on the deposit side. Finxact itself is still maturing their loan capabilities. So while this will help down the road, as we ultimately migrate everything from a core perspective to Finxact, the technology solutions that we're building for small-dollar 7(a) will be more standalone, innovative, as opposed to relying on Finxact at this point.
Yes. Mike, I think the answer is over time, yes, because if you think about grabbing a person's tax return that's like betting on a race from yesterday. It's 2022, 2023, what does that have to do with the current state of the business? Integrating [ PLAD ] and Finxact together where we have up-to-date transactions and complete understanding of exactly where those small businesses are will be quite helpful in figuring out how to credit score those $100,000 to $500,000 loans.
There are no further questions at this time. So I'll hand the call back to Chip Mahan, Chairman and CEO.
We enjoyed talking to you, investors, on our Q4 call and look forward to talking to you the end of April in the new year. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.