Q4 2023 Live Oak Bancshares Inc Earnings Call

Presentation

Operator

One more person a person.
Good morning, ladies and gentlemen, and welcome to the Live Oak Bancshares Q4 earnings. At this time, all lines are in listen only mode following the presentation we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the This call is being recorded on Thursday, January 25th, 2020.
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 materials that we will reference on the call. Please visit our website at investor dot Live Oak Bank.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 expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update 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.
So 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'm wondering, introduce to investors our new CFO, Walt Clyde.
Well, I 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 or you manage the finances and data analytics of a $10 billion deposit portfolio. Of course, VJ and Steve Smits join us and we'll be active participants in the Q&A session.
Before I turn things over to Walt, I just wanted to touch on a few non operating 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 Nexstar thought we should look at our loan book over the last five years to check in on organic growth. We then will examine deposit pricing across our industry. And yet the B of A. Securities Group announced that Eagle deposit beta accelerated from 48% in Q3 to 52% in Q4 ticked up. Technology has made it easy for folks to see 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 mode forming in our favor.
Lastly, a comment or two on operating leverage before we move on to the most surprising development at the SBA since we started this back.
Moving to Slide 5. 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 and over 30 day past dues on a loan book of over 5.6 billion 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 provision 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 Q three 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 five, 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 back 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%. That shows a number of regional banks to look at as opposed to the industry in general. Those comparisons always seem to be skewed skewed by the big five. The cost of funds in the group was slightly higher than Live Oak, both for the year at 1.57% linked quarter of 18 bps versus LabOne at 15.
So why do we bring this up? We are paying a 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 bps between their cost of funds and higher 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 bps less than the level are we really talking about the essence of self-service technology versus full-service bank 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 book so let's have some fun recently. A famous bank analyst did a podcast and interviewed a lot of our customers. Let's see how things well. So famous bank analyst says to our Montana pharmacy owner. What is your relationship with Live Oak?
So she says I was introduced to shale at Live Oak through Luke, who is at adaptive financial and he's the one who broken our pharmacy deal. And he has been working with 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 shareholders as our pharmacy stocking. I was just blown away didn't because I have to teacher about pharmacy. She got to teach me how easy the SBA loan process can be. And I was just to stop. I've heard honestly not familiar 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 on never failed uneducated. They just made it so easy for me. So you lose use LabOne back. They financed 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 EFT.s through them. I do all my ACH is through them all my big payments, anything like that. One thing, I don't do them as cash deposits. So the few checks that we get which we don't get a lot more 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 lower the cash deposits would just use them. I don't feel like that because they're not right here and that there's anything less of a relationship, everybody that I work with has been absolutely amazing in the customer service department and the knowledge deposits, famous bank analyst says, got it until 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 you heard what I heard. So for that, I'll do that 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 a lot of accounts.
So what is my takeaway 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's burnt hard turnover even in good times. I like our model a lower oil, 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 at a recent podcast on autos, 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 and pay 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 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 as of now, our 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 two meetings at the White House to understand some very significant changes that have been put in place to give access to capital have 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, all loans are well under 1 million have been eliminated and all loans under 500,000. All collateral requirements have been way unusual shocking if one can use one's own underwriting standards as they do for non-SBA loans, gold 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 100,500 thousand net revenues as the agencies Number one, the winter logs averaging over the past six 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.
Walk over to you to talk about the numbers, but thank you, Chip, and good morning, everyone. Thank you for joining the call. 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 $1.64, net interest margin of 3.35%, the 6% year over year adjusted PPNR growth of 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 profitability trends from a seller's perspective. As Jim mentioned, our credit quality is healthy with positive trends in past dues and classified assets and only 29 bps of net charge-offs in a six bits of unguaranteed nonperforming loans, both as a percent of held for investment on guaranteed loans. Our liquidity profile remains robust as it has been throughout the entire year. With three to one available liquidity capacity to uninsured deposits funded through a strong deposit origination engine. Our capital levels remain strong and have seen two 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, remain healthy at 3.35%, even though our cost of funds remain higher than industry averages proving that long as you are maintaining pricing discipline on the asset side, banks can still have an attractive name while paying their depositors at competitive rates. Our expense growth in recent years was driven by investing in our operations and technology team. Flip 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 Jim have said in the past, we remain a growth organization and as such, we will continue to continue to invest in our future and our revenue generation side of the house. What we refer to as good call from a growth perspective on the lending front, inclusive in our 4 billion a year of loan production was a sixth consecutive year of being the nation's largest SBA lender, take our origination engine with the recent changes that Jim 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 year end 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 or 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 levels.
Switching to Q4 with 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 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 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 lumber. Net interest income was up slightly quarter over quarter and NIM. while down five points 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 5% increase and was up $13.1 million or 40% compared to Q4 2020. Our credit quality remains steady and continues to perform well. Provision was down quarter over quarter as the health of our of the portfolio remained strong. We had $4 million of net charge-offs in the quarter relate to four loans spread across three verticals and the bulk of our Q4 provision was related to our loan growth. What we would refer to as good provision. Primary noise in the quarter, as BJ indicated in our prior quarter call was really to 15 million of renewable energy tax credit impairments within non and 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 three 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 five points quarter over quarter lifting and 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 nine in quarter, a testament to the outstanding job. Our lenders continue to do on the pricing discipline front, our total loan portfolio yield increased nine 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, 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, they have to maintain their discipline.
On the asset side, we have done. 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 was an $875 million CD maturity that are roughly 36% of our customer CD portfolio. The rate on these renewing CDs at replacement funding was 112 basis points higher. We also repositioned our customer savings portfolio 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 bid.
On the business savings front, the retail deposit market remains highly competitive, with three aspects that play large digital banks remain impressive 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 the soundness and liquidity will always be paramount at levels that we will position ourselves from a deposit rate perspective to ensure that our funding levels support our growth aspirations as we head into what it what is an unclear 24 rate and macroeconomic the macro economic environment.
Let's revisit our past guidance and expectations. We expect no further major industry disruption related deposits or liquidity through outlets very, we currently expect no additional rate hikes and anticipate the Fed to cut three times in the second half of 2020 for our interest rate risk profile remains in plus or minus net neutral position in the near term, if 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 jobs that reprice on the first business day of the month following each quarter end. Therefore, a June rate cut would provide less benefit than April rate cut as there is less time for our deposits reprice downwards ahead of the decrease to our variable rate loan portfolio, the opposite would hold true at the Fed cuts earlier in the quarter.
So to recap our priorities and guidance holds true, we expect the trajectory the trajectory to be up and to the right over time, although not in a linear fashion, given the seasonality of deposits coming to maturity events early in the year and our expected Fed actions we largely expect to see more expansion in the back half of 2024.
Okay. Moving on from my dissertation, let's turn to slide 14 and loan origination. Our year-over-year loan production in 2023 was diverse across multiple areas, with particular strength in our specialty health care of solar, senior care and self storage verticals, as others may pull back on lending and 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 focused on growing our revenue generating capabilities.
Slide 15 details our quarter over quarter deposit trends. The deposit growth has intentionally moderated in half two 2023 as we soaked up some of the excess liquidity we have built coming out of March or 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 repositioning, brand awareness campaigns and quality customer service. Most notable, most notably, as I mentioned, our business customer deposits our strategic focus were up 40% to 56% year over year or approximately 1.7 billion. Excellent job our deposits and marketing teams in a challenging environment quarter over quarter fee income, as outlined on slide 16, our SBA sales activity and gain on sale premiums were set in Q4. Gain on sale fell by roughly 8% to 10% of quarterly total revenue continues to feel like the right range.
One notable item to report is that in January, January 2024, we sold our first two USDA loans in over seven quarters. While too early to celebrate, we are excited about this development, having the ability to sell USDA loans, provide our team with additional optionality, liquidity and balance sheet management tactics Turning to expenses on Slide 17. Our core expenses in Q4 2003 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 as the recipe of operating leverage expansion going forward. While while we will remain opportunistic with hiring revenue producers and ensuring that we are investing in areas to support our growth and growth complexity. We will do so intelligently to manage our expenses. 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 Tim 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 and 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 they have been over the last five quarters as expected, in current environment, we moved some more loans to nonaccrual status during the quarter. But on the bottom left of this slide, you see a five-quarter trend of non-accruals. And you can see that this quarter's nonaccrual 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 three 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 30% of our total loan portfolio is government guarantees.
Lastly, we recognize the commercial real estate is the focus in the industry, given the shift in working behavior and more employees working remotely. However, it's more into is more. It's important to note that not all commercial real estate lending is created equal, our commercial real estate portfolios primarily owner-occupied, think dentist, office vendors and veterinarians. 17% of our CRE portfolio is non-owner occupied, but primarily senior housing and storage. And lastly, 45% of our CRE portfolio is government guaranteed.
Slide 19 highlights our cap overall capital strength, which continues to give us greater 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 all on slide 20, I'm proud of what the organization's 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 second market sales is producing solid double digit loan growth. Solid 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 we are a successful attracting noninterest-bearing checking accounts. We will be able to expand our customer relationships, providing 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 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 and whatever credit environment that we may face, having close to 40% of our government of our portfolio of government guaranteed when the industry is about one-tenth 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 there that when the 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 one.
Thank you.

Question and Answer Session

Operator

Ladies and gentlemen, we will now begin the call. Could you have a question, please press the star followed by component and such transfer. You will hear a three-toned prompt acknowledging your request and your questions will be polled in the order that they are received, should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handsets before pressing end first, Chris comes from the line of Steven Alexopoulos of JP Morgan. Please go ahead.
Take one area on safety and Walt Welcome to the call officially, Nikesh, I wanted to start on first, the margin.

So many banks, as you I'm sure you've heard you've outlined quite a few of them on that one slide or talk about this lag, right? What's 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 are do you think about that maybe the first 50 basis point cut? What's the be the range there that may be the next 100? Could you could you walk us through that?

Yes.

Thanks, Steve.
It's a look.
I think when you think of name outlook, it really depends on how rational the US market is. And we generally expect to see similar behaviors going up or going down as we saw going up, we like we had in Q4 were the large CD maturity that we are seeing.
Inventory 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, now that the first 50 basis points will 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 the year that competitors have already started to sell 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 be after that at all, it will move with long-term basis and maybe for you, BJ. or Walt, originally, VJ, you're the CFO.

You talked about maybe getting into a three 53, 75 for our variety of factors are three 30. Could you help us think about, you know, I know him could bounce around a little bit in 2024 given timing right of when the Fed actually moves and what they do but do you think you ultimately is that still?
It's good rate.
Funny, when I look back at you guys, you were like a three, 63, 75 new bank with a normal curve. And I'm trying to figure out where we're headed, maybe 2024 and then longer term with margins, assuming we get class in a normal shape curve.
Yes, I'll start, Steve and then BJ clean me up.

I think the three of the three 75 range still reasonable to 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 the back half of the year on longer term, I think it depends how successful we are on launching our checking product and the balance build on 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 three, low four range. And obviously, we have some potential upside if we were able to really launch our low low-cost deposits.

And then can I pivot to expenses? Historically, the Company was pretty easy to forecast what expenses right at like mid 10s for next year?
Well, you look at the trend this year, you're flat to down, right? How do we think about expense growth 2024?

Yes.

So Steve, I'll take that one. If you look at how quickly we grew our company, it was a pretty massive we've talked in the past about coming out of COVID. We had to really ramp up our lenders, four 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 21st of January 23, we grew the number of Live Oak acres, 55% in two years. That is a massive increase in the number of people, and we needed to digest that we needed to we put those folks into our machine in our organization, get them up to speed to start to realize benefits from some of the technology investments and 2023 was a year of doing that. So we added and front-loaded a lot of people over the last two 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 vendors, new revenue producers, we're working on new products like technology solutions to make it easier for us to do small dollars that may that's going to continue. We are still on the journey that we're very excited about long term on embedded banking. And 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 of years. So if you look at 2024, I still think that revenues are going to be up. But I think you know, they're going to be up far less than what our what our revenues are going to be. Our expenses will be up what revenues will be up much more.

If I could sneak one more in. Just 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, right? If we think about where the growth has been, call it, mid 10s or so on loans. Can you do better than that at 2024 because of this?
The changes to the program?

Yes, you know, Steve, I don't know. I mean, this was a tectonic change that floor. This all mean for the agency career, people that sit at the door. The ball too fundamentally say to the 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 a million bucks 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 we can scale this and it reminds me of the earlier days because 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 onto more of our $1.5 million average loans and just keep those all 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 rightfully focused on and you think about it, Steve, it's like you know what person ever said. You well, I got a 1.5 million loan from a bank and everything's fantastic. Most people say, well, I've got $100,000 loan from a bank or got $25,000 loan from a bank. Can I really build that business over time and the fact that we can reach down to some of the underserved communities and and take care of them, the ones that are deserving of good, good historic credit quality. So I mean, it's it's a huge difference.

So best guess same growth this year is less like no real changes, correct?
Yes.

Again, I think close to Chip's point, these small dollar ones, we will likely sell pretty close to 100% of them right into the secondary market because the 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 that we're looking at with small dollars on the loan growth side on the balance sheet, you will see it in fee income.

Thanks for taking my questions.

Thanks, Dave, and exceed.
Our next question comes from the line of Brandon King of Truist. Please go ahead.
Hey, good morning, Brendan. So just a follow-up on the changes at SBA and I know just early stages and chip, you're still thinking through this, but the Live Oak is known for such a high touch model. As you think about kind of settling that towards the smaller dollar loans as well. You know, what could that potentially mean as far as the people you have in place in?

Yes.

Hey, Brendan, it's P.J. 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 dollars. 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. Our more on an automated fashion, not 100%, but much more than we typically would own a larger deal today and then build out the appropriate infrastructure to service. This is the right way to it will be much more of a technology solution then than not.
Yes.

And I think one of the new brand and all that, as I said on the call a quarter ago, we have 62 22 year olds that collect financial statements every quarter on every one of our 7,000 customers, we will be doing that on the small dollar loans will get an annual tax return AB., if our borrowers are in a jam our special assets group. He's really a hand holding group. We do everything that we can to help these borrowers if it's deferred this or Loblaw that we want to do that we probably won't do that on these methods could be a massive number of under $500,000 loss. So I think that special asset treatment in the event of material adverse change will be a bit different.
Okay. That's very helpful.
And then what you mentioned, Howard, the CD maturities are chunkier in Q1 and Q4 of each year. Could you give us a sense of the sort of maturities you're expecting or the size of maturities you're expecting this year? We're kind of like the runoff rates in what no potential renewal rates could be?
Yes.

No, thanks for a great question.
On the Q. one is not quite as 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 on the minimum on typically working just the way the deposit seasonality of forms throughout the year. It's typically Q1, Q4 are the heavy quarters, a little bit lighter in Q2 and even go even later than that Q3 and one of the things that we're working on with just our CD strategy is how we can continue to drive a level of CD maturities of probably will start seeing more progress here, 2020 fours is more of a 2025, 2026 benefit. And that's where you have the using channels like wholesale can help you with its energy plan and fine uses. So our maturity gas on the India, you can kind of flat funding into.

Okay.
Then I was actually going to ask I saw noticed though duration of wholesale deposits declined in the quarter. I was wondering if that was intentional, what could be potentially prepare for a down rate 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 2020 for the range of likely on the amount of cuts that could happen on. We really start to leverage some more on the wholesale side for you on maturity of kind of what, nine months, seven months, four months and so forth, just trying to help level that the maturity portfolio of as much as we had guided.
Thanks for taking my questions, Cequint.
Our next question comes from the line of Michael Perito of KBW. Please go.
Hey, good morning, everyone.
Thanks for taking my questions in my mind.
Wanted to follow up on the expense question, just that of the employee bonus. Is that something that will recur annually and be accrued for more evenly going forward? Or is there another Can you maybe just extrapolate that out a little bit as I tried to think about where kind of full year expenses grew year on year?

Yes, I think, Mike, it's BJ. In 2023 was quite an interesting year, particularly with what happened in March. And so you know, we didn't 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 incentives also appropriately throughout the year. At the end of the year, we saw that we were going to have a one-time fixed asset gains 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 incentives payouts. And so that is included in what our expense expectations are. So, you know, will we have that included in what we're looking at in 2024.
Got it.

Okay.
That's helpful, BJ.
Thanks.
And then on your I realize this is a challenging question. Like asking you guys to find a needle in a stack of needles here, but the renewable energy tax credits, any line of sight on additional projects are investments and you guys have an initial kind of budget range on what you expect the tax burden to be in 24.

As a reminder for yet at right now, we are not planning being another one of these renewable energy ITC. tech investments in 2024 we continue to evaluate what our tax rate is going to be some, which will probably be somewhere in the 25% range given federal and state. I think the you as we think about kind of long-term planning, tax strategy planning, trying to find things you love. It's actually a portfolio of whether it's low income, housing tax credits or things like that all fall within the income tax expense line. So you're not creating that quarterly?

Correct?

Quarter over quarter noise with the noninterest expense and the impairment. That's something that we're aspiring to Yodle at this point, we'll see a lot of movement in 2024, really to bring that tax rate down from that 25% range.

Okay.

All right.
And sorry if I misunderstood this, but I thought when the tax benefit would come after the impairment was recognized, is that not the case as it was the tax benefit before the impairment?
That's correct that we that the tax benefit they see is you see it throughout the current year of the tax impairment.
So we will attack impairment have in Q4. We've seen the tax benefit in Q1, Q2, Q3 and Q4 got all.
The currently open government program to 25% at this point is a pretty clean and test best guess for you guys absent taking any other actions to lower your tax burden that you'll obviously balance once once you do better progress on the loan growth side?

Yes.
Obviously for good reason a lot of focus on kind of the SBA and some of the changes going on there, but put whatever around kind of the non-SBA, the general lending side on any kind of recent additions or updates on that on the team there and thoughts around what type of production you could expect we could expect from that group in 24?

Yes, so if you look back on slide 14, I'm going to invite looking at this because visually it kind of helps with where we're seeing growth in originations and where we are month to up because of the IRA, the inflation Reduction Act in the incentives.
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 organization that rolling up dental practices still very, very healthy business. Seniors Housing had a great 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 that was our view on senior care and self-storage and 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 know 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 kind of the technology investment about the SBA loans sub 500 k., is this going to be a good cash track for further since our core and hopefully being able to accomplish things a lot faster and lower cost than than maybe historically.
And and it would you guys not feel that way. And I'm just kind of wondering, has it generally I don't think we've talked about it a bit since the conversion and maybe I'm forgetting a comment or two here or there, but has the fins at core been kind of working out as you expected? And is it correct for us to assume that like your ability to turnaround on a technology project like this is still going to be enhanced from all those investments made in prior years.
It will certainly And down the road fintech for us is continued to be primarily on the deposit side and where we're doing a lot of development and innovation of public fund side, Findexa itself is still maturing their load capabilities.

Yes.

So well, while this will help down the road as we ultimately migrate everything from a core perspective.
Defense Act, yes, the technology solutions that we're building for small dollar seven a., it will be more standalone innovative as opposed to relying on fintech at this point, Mike, I think the answer is over time, yes, because if you think about grabbing a person's tax return, I mean that's like button operational yesterday.

I mean, you noticed for 2022, 2023, what does that have to do with the current state of the business, integrating Plaid and FINS app together where we have up-to-date transactions and complete understanding of exactly where those small businesses are, we'll be quite helpful in figuring out how to credit score those 100,000 to $500,000 a month.
Excellent.
And thank you, guys, for taking my my questions.
Appreciate it.
It's like doctors like me.
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 at 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.
Yes, today we thank you for participating.