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Edited Transcript of LOB earnings conference call or presentation 25-Jul-19 1:00pm GMT

Q2 2019 Live Oak Bancshares Inc Earnings Call

Wilmington Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Live Oak Bancshares Inc earnings conference call or presentation Thursday, July 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory W. Seward

Live Oak Bancshares, Inc. - General Counsel

* Huntley Garriott

Live Oak Bancshares, Inc. - President of Live Oak Banking Company

* James S. Mahan

Live Oak Bancshares, Inc. - Chairman & CEO

* Neil Lawrence Underwood

Live Oak Bancshares, Inc. - President & Director

* Steven Brett Caines

Live Oak Bancshares, Inc. - CFO

* Steven J. Smits

Live Oak Bancshares, Inc. - Chief Credit Officer

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Christopher William Marinac

Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Live Oak Bancshares Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Greg Seward, General Counsel, Live Oak Bancshares. Mr. Seward, you may begin.

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Gregory W. Seward, Live Oak Bancshares, Inc. - General Counsel [2]

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Thank you and good morning, everyone. Welcome to Live Oak's Second Quarter 2019 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 and commentary that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today's call on our Event Calendar for supporting materials. Our second quarter earnings release is also available on our website.

Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings.

I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [3]

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Greg, thanks, and good morning all dialing in today. I just have a few brief comments before turning over the call to Huntley for much more detail. And I would direct you to look at the great job that Brett Caines did in his CFO highlights.

I had a chance to read those a few days ago and I thought, hmmm, boring. We just kind of did what we said we did -- we're going to do. We layered in more recurring revenue. And I even thought about not having this call today. But then this is ridiculous. Enough is enough. This stock is a bargain. It's cheap. We're trading at 1.3x tangible book. And the world, the world defined as the $4 billion to $4.5 billion banks, are trading at 1.5x tangible book. So I will ask you shareholders at the top of this presentation, what $4 billion bank has this asset quality generating engine? So Q1, we did a little under $400 million; Q2, $525 million. We're highly confident we'll exceed $2 billion for the year. What $4 billion bank has $673 million of floating rate government-guaranteed paper, which you could put a mark on that, at $50 million to $60 million.

Let's talk about funding. Everybody on this call or many on this call know Tom Brown. You read his weekly report. And I read last week's report with great interest as he talked about the famous Bank of America and how Brian Moynihan has done a wonderful job of bringing his cost of fund deposits from 300 basis points to 150 basis points. I then went to the Investor Relations BofA quarterly release and it's impossible. You got the global bank. You got the consumer bank. So I went to SNL Securities to find their cost of funds is 123. So 150 and 123 gets you to about 270.

And about 3 or 4 years ago, we wrote 57 calls to a Fiserv core at Live Oak Bank and we have 15 to 20 folks today that have generated $3.7 billion in deposits. It was exactly 4 years ago that we took the company public this week as an $800 million bank, and our cost to originate these deposits is 11 bps. Huntley is going to talk about taking care of our customer and paying a fair and equitable rate just like Mark Hurst does, and some interesting things we're creating and developing for the future.

What $4 billion bank have multiple call options on next-gen technology companies. In October of '17, you will recall, we did a joint venture with First Data. We dedicated 50 engineers, really talented folks. They put up the old FundsXpress business. We picked up $68 million of Tier 1 capital. And in October of last year, SunTrust bought into our partnership at a -- for -- at a valuation of $210 million after writing a check for $10 million for 4.9% of the business.

As of today, we have written checks for $15.4 million and have equity interest in Finxact, Payrailz, DefenseStorm and Greenlight, the last round of financing or the mark-to-market on that is about $55 million. No other $4 billion bank can say any of those things. And I apologize for that diatribe, but let's move on to Slide 4 and be a little more circumspect in our future comments.

So yes, I think so. Since the model pivot 3 quarters ago, it looks like we are firing on all cylinders. Our loan portfolio is up from $2.3 billion to a little over $3 billion. That's 35%. As I mentioned earlier, our government-guaranteed portfolio, guaranteed loans eligible for sale are 3x. As of today, it's a little over $700 million. Net interest income is up 22% in the last 4 quarters and noninterest expense is flat.

Now let me warn you on that. We're always going to step on the gas at Live Oak Bank. I just took a look, this time last year, we had 101 folks in the sales organization and today, 122 on this technology lending platform. Again, Huntley will give you a little more data on that in a minute.

Moving on to Slide 5. This is a killer, right? So pricing on SBA loan sales has always been consistent. But the accounting is just too funky. I titled this slide Volatility Subsides and Predictability Increases. So 6 quarters ago, the servicing asset was a little over $53 million. Today, it's $42-ish million, maybe a little bit less now. That was 12% of capital, now 8% of capital.

I draw your attention to the bottom of the slide, loan servicing asset reval loss. This is the killer, right? So $5 million, then you lose $3 million, then you lose $9 million, then it's flat, then it's $2.2 million, then it's flat again. And the last line is the percentage of earnings that this servicing asset reval causes all this volatility. Over a period of time, we're going to wipe that out and increase the predictability of recurring revenue.

Moving on quickly to Slide 6. We did this the last time. All we're trying to say here, since we changed the model and hung on to $250 million to $300 million in loans at roughly a 4.5% spread, you pick up about $0.06 a share. $0.06 a share, call it $0.25 for the year. You layer that in over 4 quarters, you got $1. And hopefully, we can increase that next year for another $1 and another $1 and another $1.

And just lastly, as long as I'm in this seat, we're always going to talk about soundness, profitability and growth. And I guess it's just 11 years into the recovery, but nobody asked us about credit quality. Well, the shape of things to come is classified assets, and we've dogged that like you won't believe. So our Risk Grade 6 and worse is 6% of Tier 1 capital plus the loan loss reserve. The regulators get a little fussy at around 30%, so we're roughly 1/5 of that.

And then I was reflecting on my past of running community banks. So just think about a normal $4 billion community bank and you're running 80%, 90% loan to deposits. You have a thing go bump in the night, you charge off a few loans, you hit the provision with the same amount. Just take a look at the provision that Steve Smits has provided each quarter compared to his charge-offs, and we certainly believe that our $38 million loan loss reserve is quite adequate.

Huntley, over to you.

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [4]

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Thanks, Chip, always a hard act to follow. Look, overall, a really strong quarter. And as we dive into the details, you'll see momentum in each of the kind of the 3 core strategies that we laid out which, namely, increasing recurring revenue in a prudent manner, being mindful of expenses and investing in our platform. And we knew 2019 will be a transitional year and this quarter demonstrates just the result of a lot of hard work from the entire team. And we run through the details, we're hitting on the benchmarks that we aim to achieve and things feel really good across the franchise.

So on Slide 8, all the key metrics that we've shown are all green, which is a good color. Loan portfolio up 35% year-over-year, assets topping $4 billion, over $4.2 billion. As we stated before, we're doing this by holding significantly more of our eligible loan production on the balance sheet and we continue to make high-quality loans across the franchise.

We said earlier in the year our stated goal was to grow assets by $1 billion this year, and we're well on our way with the assets up over $600 million for the first half of the year. So we're kind of doing what we said we're going to do. And you can see the impact on operating leverage with net interest income and loan servicing revenue up over 20% and expenses in a quarterly basis roughly flat.

So if you turn to Slide 9, our lending franchise. And you guys have seen this slide. We continue to add to the places that we're investing. And the expansion of our verticals has been key to our growth, but we're really seeing solid contribution from the more mature verticals as well. The majority of our teams are up year-over-year. And pipeline adjusted, even -- the vast majority of them look to be on track to be up.

In the new areas, the SBA generalist team that we've talked about, including a couple of offers outstanding, were up to about 14 people on that team, all of whom average 15 years or more of small business lending experience. And we think that we have a pretty unique offering in the market relative to the platform and the technology that we're providing and so we're getting a lot of inbounds. And that allows us to be pretty selective and to pick folks that are both culturally a good fit and that are truly going to move the needle for us. So we're excited about where that's going.

We also indicated last quarter that we started looking into the venture banking sector. We've handpicked just an outstanding team there. We've got 5 people on board right now with -- averaging over a decade of experience from some of the best names in the industry. We have a couple of great transactions in the pipeline. Momentum there feels pretty good. When you think about our company and a history of using technology and kind of understanding the DNA of innovation and growth and then providing banking services to that sector.

So if you turn to Page 10 and you look at the loan production, as Chip said, $525 million of production spread across a really diverse set of both product offerings, so SBA, USDA and, increasingly, conventional; and over almost 30 verticals, both the mature ones and the newer. You can see in the picture the balance between the production from the more mature verticals versus the new ones, and you see there's a couple of small dots in there of things we've just gotten off the ground that we expect to grow into larger bubbles as well.

The pipeline remains really good. We indicated that in the first quarter. We think it paves the way for a really strong second half of the year. There's no lack of competition, but we're still finding great opportunities. And we're really doing so without compromising what we consider to be the 3 main components of quality, which is our granularity, our credit quality and pricing.

If you look at what that does to our overall portfolio, as Chip mentioned, over $3 billion of loans, again, spread across a lot of industries. The loan portfolio up by a little more than $300 million quarter-over-quarter. It's actually a little better than we anticipated. We held the higher end of the guaranteed loans from the range that we specified and prepayment speeds continue to be a bit slower than what we anticipated kind of coming into the end of last year. So that's a positive as well.

As you look -- the quality of the loan book and you look on Page 12, it remains a really granular portfolio. And you'll see that the exposures continue to be small which, we think, helps diversify both across geography and then across industry as well. So really spread out a bunch of little loans which is -- look, they're hard to find and we're running around the country with 120 folks every day trying to bring them in. But we think it helps us, sort of insulate us from some potential macro events with this kind of granularity.

So as you turn and look at the credit stats. Despite the growth, we're continuing to hold our standards really high in terms of loan structure and what we are approving. When you look specifically at the numbers on Slide 13, the portfolio continues to perform really well, annualized net charge-offs of 10 basis points, nonperforming loans declining a little bit, criticized percentage quite low and actually trending in the right direction, too. Chip mentioned this at the outset. We're over a decade into an economic recovery. We continue to remain really vigilant as it relates to our lending standards and not getting ahead of ourselves.

So moving to the deposit side. Chip kind of gave the preamble of this strategy, and Q2 remained consistent with solid growth. 43,000 retail accounts now, up, call it, 9% over the prior quarter. Retention rates, we manage those pretty intentionally as it relates to pricing and CD rollovers. And the market was pretty rational as it relates to pricing. And we saw a couple of the largest players in the savings market drop their rates, potential anticipation of a rate cut, but the overall operating efficiency of our platform remains steady, around 13 basis points of expenses. And we think it's really efficient source of funding for us. We'll talk a little more about where we're headed with some new products, but this continues to be a great source of low-cost funding for us all-in.

So back to the income statement. And we talked about the recurring revenue, so I won't harp on this too much. Topped $40 million when you include the net interest income and the servicing revenue. Meaningful growth. Linked quarter up 11%. You'll see the servicing revenue declining as we're selling less loans and no longer pulling and replenishing that, but that's by design. And you also see a positive story on the NIM side. It improved 7 basis points, up to 3.70%, which is a testament to the continued discipline on pricing on the lending side, the stable funding costs and then a little bit of a reduction in liquidity as we deployed some of that cash into the lending book.

We think the margin is going to stay stable this year. Depending on what the Fed does, we'll stay in the range we were between Q1, Q2, so 3.60% to 3.70% on that. And we remain asset sensitive, we've added a little bit of duration to the balance sheet in anticipation of potential Fed moves.

So the expense side, I think Chip summed it up nicely, which is we continue to be really thoughtful in how we manage expenses, but we continue to find places to invest as well, and so it's a little bit of a redeployment of the expenses. And that work happens across many segments of our noninterest expense.

Overall growth, the headline number, $1.4 million over the first quarter, a couple of adjustments gets you to a little bit less than $1 million of sort of core operating expense growth. We'll continue to stay focused on being good stewards of the resources of the company. But we're continuing to invest and we're investing with new people and new products. We talked about some of the lending teams. We've also brought on some great folks to help us build out on the technology side and on the deposit side. And they're adding value and we'll continue to as well.

Speaking of technology, every day the drumbeat kind of gets louder that the infrastructure of the banking industry is primed for a disruption. You see new challenger banks from the U.K. launching in the U.S. and others making incremental progress. And largely, these are all built on next-generation platforms which allows them to design products, go to market with things that are easier to use. They're simpler. And as you all know, our investment in financial technology, both in some of these companies that we've invested in and the work we've been doing here, has all been designed around building an ecosystem of new infrastructure, right, of open API, cloud-native infrastructure. And that's been a multiyear journey and we're seeing that road map become significantly clear.

Putting all these pieces together is really hard and it's taken a heavy lift from a lot of people to do it. As we've said before, this year is really an infrastructure build. Next year, we're expecting to see the benefits of those lower-cost deposits and products in our financial results. So we'll go through various stages of friends and family and testing and -- with kind of pre-general availability and whatnot this year. And into next year, you're going to see some real launches in the first part of next year, real launches of products, and we think that'll make its way into the financial results.

So to kind of wrap up. We shared this slide on financial metrics and where we're looking to go on Page 18. And we made solid incremental steps to get to those targets. You look and you see, just quarter-over-quarter, taking the efficiency ratio down over 600 basis points. Basically doubling our ROE, about 200 basis points of increase there. We'll continue to layer that on quarter-after-quarter and we're confident that we'll achieve these targets as we continue to scale.

We remain committed to delivering consistency, growth and profitability. We'll execute our core strategy and that's going to help us drive some exciting new opportunities across the franchise.

Chip, any final thoughts before we open up to questions?

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [5]

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No. Let's go.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jennifer Demba with SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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A few questions. You mentioned you'd had hired a venture banking team. Just wondering if you could give us some more detail there on what kind of loans you're looking for in that segment, whether it be by size or type or subsegment? And then I have a question on kind of how much hiring you've done over the last 3 months and what the pipeline looks like in the next bit?

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [3]

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Sure.

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [4]

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So Huntley, why don't you take the front end of that. And then certainly relative to the credit box, Steve, if you want to weigh in on there, please feel free to do so.

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [5]

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Sure. So in the venture space, we've brought in a team, like we said, 5 people out of Silicon Valley, the old Square 1. And the thesis that we have is not dissimilar to the thesis we have in a lot of our small business lending verticals that there are niches of places that are perhaps a little underpenetrated or underappreciated. In venture, there is a lot of capital and a lot of talent that are flooding to the coasts, that are flooding to the New York market, the Boston market, the San Francisco market, the L.A. market. And we think that some of the second-tier markets, just like in our small business lending, have some really interesting companies and opportunities that aren't necessarily as well covered.

And so the smaller end of the market, which as you know can be a couple million dollar relationship, $5 million or $10 million relationship, those, we think, are right in the sweet spot. And those that are in some markets that have a lot of innovation going on but maybe aren't quite as heavily penetrated. And as you know, that business, you sort of lead with making good credit decisions, but there can be an interesting deposit opportunity that comes along with that as well in terms of cash management that we're building as well.

So I don't know, Steve, do you want to make any comment about sort of how we're thinking about the credits?

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Steven J. Smits, Live Oak Bancshares, Inc. - Chief Credit Officer [6]

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Taking a very disciplined strategic approach, we've put a lot of work into developing the policies already. So a lot of forward work before launching the team has been put in place. We do feel that there is an opportunity, as Huntley mentioned, and it also starts with hiring the right people. So we feel pretty good about some very seasoned folks in the space that we brought on board with Live Oak, which I think is the second part of your question. So I'll turn it over to you guys to talk about it.

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [7]

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Yes. So on the people front, I'll put it in 2 categories. So on the technology side, as Chip mentioned, about 50 people at the end of 2017 headed down the street to Apiture, and we've been pretty slow to backfill that. Over the course of this year, we've been a little more intentional and have put probably a dozen people into that to really enhance the effort there. And so that should lead to more product innovation, design ability, things like that.

On the lending side, the venture team, we talked about. I think we might add a few more there. We're being really selective. We're not trying -- this isn't a land grab in that space. It's a very intentional view of folks that can help us build kind of in the category we're looking for.

On the generalists side, that's an interesting question because we continue to see resumes kind of coming in probably at an accelerating pace. And there's a lot of really interesting markets that we're not in right now. In the Northeast, we're not in Boston. We're not in D.C. or Philly in the Mid-Atlantic. There's a lot of places that are big markets and to think that you can put somebody in those markets that has relationships and can do $30 million or $40 million or $50 million a year of production per person is not a stretch.

And so we are being selective about who they are. They got to fit culturally. They've got to have -- their experience has to be in specific types of credits that we like. They have to be in -- brought those business in by themselves and not through a branch network. And so the bar is high, but I think you'll continue to see us make progress in building that team. And then we continue to look at other verticals as well. The -- what we call emerging markets isn't slowing down either and in niches that we think are interesting. And where there's expertise, you may see us continue to add on in that space as well.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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One more question. Your credit quality continues to be excellent. We are seeing costs, net charge-offs and provision, problem loans go up for the industry, some more than others. What is a reasonable level of what you would call normalized net charge-offs for your business mix right now in your view?

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [9]

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Steve, why don't you take that one, partner.

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Steven J. Smits, Live Oak Bancshares, Inc. - Chief Credit Officer [10]

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I'm not going to give you a number because I just really can't, that would be foolhardy. What I will tell you is, as you see in the recent trends in the portfolio, as far as how I feel, I feel like we're very stable. I'm cautiously optimistic. I feel really good right now about the portfolio. We do stress for scenarios of changing economic conditions and always think about that and plan for it. I feel that we've provisioned correctly. I feel really good about that. And you probably can see that I tend to lean towards provisioning for an expectation that there's going to be a cycle that we're going to go through and we're going to lead into it in a good place. So I -- but to give you an actual figure, I feel really good with where we are. We have room for some more losses that we could take, but I don't see them right now but we think about that all the time.

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [11]

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Yes. And it's a good -- the other part of that question is, what are we seeing? We've got 4,000 small businesses that we look at every day in terms of how they're performing across 30 industries, across 50 states. And to Steve's point, we're very sort of cognizant of what's going on. But we're not seeing macro degradation, right? And so have certain folks in the quarter had selective misses in credit? Sure. We think the granularity really helps that idiosyncratic losses. But as we sit here, we're not really seeing any macro real degradation.

I think when I got to the bank and sat down with Chip and Steve and David Lucht and others, they said, look, we think that through a cycle, we could see as much as 1% losses in the portfolio, and that's sort of how they think about it. And obviously, haven't seen anywhere near that in this portfolio over the last decade and don't see any reasons why it would go that way. So I think to Steve's point, it's hard to put a number as to where we expect it to go because we're taking a pretty conservative approach around it.

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Operator [12]

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Our next question comes from the line of Aaron Deer with Sandler O'Neill.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [13]

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I appreciate the -- your guidance on margin expectations. Just trying to understand some of the dynamics behind that. I guess first, on the asset side with loans. Can you give us an update in terms of what percentage of the loan book is tied to prime and kind of the reset timing on that, so we kind of understand how that's going to behave if we do get a couple of rate cuts from the Fed? And then on the funding side, obviously you guys are maybe pushing a little less hard on deposit campaigns recently. I saw you guys had ticked down your CD rates a little. Do you suppose that you will continue to let loan growth outpace deposit growth and deploy some of that liquidity that you've previously built that could also give some added support to the margin?

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [14]

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Yes, great question.

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [15]

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Brett -- Brett, that's right up your alley.

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Steven Brett Caines, Live Oak Bancshares, Inc. - CFO [16]

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Thanks, Chip. Yes, to address your first question, Aaron, our current portfolio, just about -- or just under 70% of that is on a adjustment period tied to prime that's less than annually adjusting most of that, call it, roughly 65% is quarterly adjusting, and then we have some other either monthly or annual adjusters in there that bump that up to a little above 65%. And then while we're originating, it's a similar story, but we've seen just from a competition standpoint the need for some fixed rate. So our new originations still tied to prime, you're looking at something closer to low 60s, maybe 60%, that adjust on those time frames less than annually.

And I guess continuing on into your second question. As it relates to the loan-to-deposit ratio, I think we just continue to be really mindful of our liquidity profile, just being in a position where we have a strong, robust liquidity base that is there when we need it. And you're correct, yes, we did use some of that liquidity in Q2. I don't necessarily see steps like that going forward. I probably would view it more as kind of leveling it out, kind of maintaining where we are and we think that's a good base for now. And of course, that could change as the environment changes going forward.

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [17]

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And then on the deposit side, look, I think we've got a very fair offering for our customers. We have not been at the top of the leaderboard, as you've seen, and we continue to get nice flows of deposits. So I don't think we need to either redline or necessarily track the top couple of folks that come in and out of a market in various campaigns. And like I said, we've been probably a little more rational around pricing. And we'll see. You know that the -- we have not seen this amount of direct deposits in the market in a Fed cut environment yet, right? And the last time this happened, ING was probably the only player really in the game. And so it's going to be really interesting. Some of the big guys have already started to make some moves on the savings side. And you will just see how we react, right? So that's obviously going to be the swing factor as it relates to our margin, the Fed cuts.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [18]

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Sure. And then, Huntley, you've talked about some of the new deposit products that you're testing now and hoping to bring online next year. Can you give us maybe some specifics in terms of what types of products those are and what types of customers they'll be targeting?

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [19]

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Yes. So this is going to sound really novel, but we're going to have a checking account. But look, I think we think about it much more as an operating account, as a payment account and as a checking account. And our first view is, what actually do small businesses need to run their business and how do they think about payments and funding and the like? And we will go into some of our verticals that we've been in for a long time where we see a need. We will have integration into places where they do business so we can present information, pretty intuitive, pretty simple interfaces.

So I think it will be -- and look, this is going to be an evolution. We'll come out of the gate with something that will be pretty consistent and we hope better than what the industry has, but our ability to innovate and integrate from that is pretty boundless. And that's where we think the real momentum is going to come, is to build specific use case products for customer segments, and so the community of veterinarians or the community of another industry vertical, where we can actually design some real use cases for them. And that's where we think we're going to make the most progress.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [20]

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Okay. That's great. And then one last question. With respect to your innovation efforts, the -- I believe you guys are still kind of in the midst of your gradual conversion to the Finxact core. I was hoping maybe you'd give us an update on that. And then what kind of cost saves might be applicable as you move away from your prior core vendor.

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [21]

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Neil, why don't you take that one.

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Neil Lawrence Underwood, Live Oak Bancshares, Inc. - President & Director [22]

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Yes. So as we mentioned before, trading out a core is something you don't want to do in a big bang approach. So we have for the past 6 months been in friends and family. We're pretty excited because we're going to make the full commitment in Q4, whereby every net new account will actually go on the Finxact core and every net new savings and CD account will go in the core. So -- and then shortly thereafter, following up with, as Huntley said, not just the checking account but a very different checking account and one that we feel we can represent to the market with no branches.

So super excited about the progress that we're making thus far. But also to Huntley's point, I'd -- we're integrating not just Finxact but 16 other vendors all on next-gen platforms. And so when we look at the competition out there, we're not necessarily looking at the Big 6 or our peers, we're looking at a lot of the new entrants that are coming -- the new fintech entrants that are coming in. So again, certainly making progress.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [23]

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Okay. And then when that eventual transition does happen in its entirety, what kind of cost saves might stem from that?

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Neil Lawrence Underwood, Live Oak Bancshares, Inc. - President & Director [24]

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The real answer is I don't know. We're still looking. And nor does Finxact because they haven't -- we're the first bank that -- running on it. We have a pricing schedule set that's materially different than our current core provider and materially beneficial, but we'll be able to properly answer that one probably when we're actually live and in production.

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Operator [25]

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Our next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

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Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [26]

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Wanted to follow-up on the criticized asset ratio in the slides. Does that 5.27% compare with a much larger number if we went back 5 years? And anything relatable as we went back kind of in the crisis years? I just kind of want to relate that to where you've been and just kind of get that comparison in your favor.

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [27]

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Steve?

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Steven J. Smits, Live Oak Bancshares, Inc. - Chief Credit Officer [28]

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Yes. So it's lower. Yes. I mean we're -- look, it's -- that's a really healthy number. I would say that it's lower even compared to where we were in the past.

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Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [29]

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I mean industry data would suggest that maybe we're 1/3 of the level we used to be just 5 years ago. Then of course, the numbers aren't really comparable to the crisis years because the -- classifieds are saying criticized weren't disclosed. But just curious if you had any ballpark guesses. So that's helpful, Steve.

And then my follow-up was just back to the deposit cost conversation that Huntley was on a minute ago. The brokered market came down a lot in April, May and June. And I'm curious, does that relate at all to how your pricing may play out the next couple of quarters?

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [30]

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Brett, do you...

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [31]

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I think there's an element of -- sorry, go ahead, Chip.

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [32]

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No. Just Brett, do you have a view on that and then Huntley can certainly weigh in.

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Steven Brett Caines, Live Oak Bancshares, Inc. - CFO [33]

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Yes, Chris. Yes, I don't think -- I think that both move together. I don't think our -- the way we price retail is necessarily a result of what the brokered market is doing or anything like that even though they're -- they have been moving in a similar direction. To Huntley's prepared comments, we have seen rates come down sort of across the board on the brokered and the retail side, probably an anticipation of some moves the Fed may make. And it's really hard to say what's going to happen going forward. I think competition, as we've said on prior calls, will continue to be a factor. That we have to be mindful of. And whether or not a Fed cut is already priced in to what we're seeing now, that's anybody's guess. But we've certainly been pleasantly surprised at how rates -- for the market we compete in on the retail side, we've been pleasantly surprised at how rates have responded recently.

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [34]

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And look, I mean, the fact that brokered funding can be now competitive or even inside in some cases where we're funding in the retail market is great. We're not -- it's never going to be a huge part of our balance sheet, but it certainly makes our tactical decisions easier as we think about pricing on certain products and our need to help fund the growth of the business, right? So it's a benefit, for sure.

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Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [35]

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Great. That's helpful. It just seems that perhaps the Fed cut could be a competitive opening for you and that's kind of what I'm curious about.

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Huntley Garriott, Live Oak Bancshares, Inc. - President of Live Oak Banking Company [36]

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Yes.

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Operator [37]

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Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to Chip Mahan for any further remarks.

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James S. Mahan, Live Oak Bancshares, Inc. - Chairman & CEO [38]

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We just want to thank everyone for joining us today. We look forward to talking to you again in 90 days. Thank you very much.

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Operator [39]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.