Live Oak Bancshares, Inc. Q1 FY2023 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Q1 2023 Live Oak Bancshares Earnings Call. This call is being recorded on Thursday, April 27, 2023. I would now like to turn the conference over to Mr. Greg Seward, Chief Risk Officer and General Counsel. Please go ahead.

Thank you, and good morning, everyone. Welcome to Live Oak's First Quarter 2023 Earnings Conference Call. We are webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank.com and go to the Events & Presentations tab for supporting materials. Our first-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 Q1 earnings call. We are obviously not pleased with $0.01 a share, but let's look under the covers and see if there is more. Moving to Slide 4. I'll make a few comments relative to these questions. What do deposits look like? How liquid are you? Credit quality? What happened with earnings this quarter? Are you on a path to grow? I will then turn the call over to Huntley and BJ to dig in. It is my belief that the events surrounding the closure of Silicon Valley Bank and Signature Bank will prove to be a seminal moment for this industry. It has been almost 28 years ago, in October of 1995, that we launched the first pure Internet bank in the United States. Since then, I have never seen the need for physical branches and the inherent cost to support that particular deposit franchise. Technology that affects bank infrastructure support has made exponential gains over the last several years. It almost feels like Moore's Law is creating Banking 2.0. Many will recall that Gordon Moore, the co-founder of Fairchild Semiconductor and the former CEO of Intel, predicted in 1965 that fundamentally computing power or the number of components on an integrated circuit would double every year. He revised that in 1975 to double every 2 years. He was right. It feels like this decade-long presence of cloud-native API-first solutions is finally creeping into the day-to-day operations of commercial banks. Four years ago, we spent a great deal of time perfecting online account opening at Live Oak Bank. Most banks can now do the same. Since it is so easy to move money digitally, why leave your money with a bank that offers less than market rates? As deposit betas increase and as rates continue to rise, we are thankful that the potential repricing of an entire book of lower-cost deposits is not part of our business model. That trend has begun and it is irreversible. Customers deserve and will find market rates for their savings and operating accounts. Inside our own Canapi initiative that has raised over $1.5 billion from 70 banks, we see it every day. Next-gen fintech companies are building software in a cloud-native API-first environment that can get to market very quickly and provide a wide range of solutions to everyday bank customers. Additionally, there is a massive amount of capital sitting on the sidelines to reward the winners in this space. It is fun to have a front-row seat. So yes, what do deposits look like and how liquid are you? After the SVB and Signature event, it was published that the average bank in America had uninsured deposits of 44% of their total deposits. We were at 18%. Many banks were scrambling to prepare for a run on their bank. In a matter of hours, we had between 3x and 4x the amount of all uninsured Live Oak deposits in cash, thus checking that box. Relative to deposits in general, Huntley and BJ are going to describe our growth for the quarter and immediately thereafter. Check that box. Relative to credit quality, all metrics remain positive. Nonaccruals of 65 basis points and over 30-day past dues of only 13 basis points, which in dollar amounts is just under $7 million for a $10 million bank, not bad. Check that box. Lastly, on earnings and growth. I wish I had not taken accounting pass/fail in college. We had the best quarter ever for loan originations, which in large part caused another quarter with an outsized CECL provision. The last weeks of the quarter impacted fair value in servicing asset revaluations by $6.3 million, and that is before another $3 million one-time increase in the reserve for unused lines of credit. Accounting black boxes and mumbo jumbo that translates into excuses. Tom Brown has a consulting firm and a hedge fund that issues a weekly letter read by most of us on this call. Last week, he did a piece on my friend, Terry Turner, Co-Founder of Pinnacle Bank in Nashville. Brown points out that Pinnacle in its first decade provided the second-best total return to shareholders of publicly traded banks. In Terry's first quarter call, he made the point that analysts go from one worry to another, while Pinnacle Bank keeps running the company with its core principles. It feels remarkably the same here. Here’s what I can tell you. We have the most technologically advanced small business lending franchise in America. The platform for growth is proven. The technology is proven. The results are proven. The culture is proven. As this next-generation technology unfolds, our focus walking across the balance sheet to the liability/deposit side will result in future results that will speak for themselves. Over to Huntley and BJ for more details.

Thanks, Chip. Chip highlighted some of the questions in the industry right now around deposits, liquidity, and credit, and we're going to try to unpack those for you in a little more detail this morning. I'm going to start with safety and soundness focusing primarily on what happened since the middle of March and how we're positioned before turning over to BJ to go through the quarter and the outlook. So starting on Slide 5, the stress that we've seen in the industry in the last 6 weeks highlighted what we've consistently said: that safety and soundness comes first, always. We talk a lot about conservative credit underwriting, but safety and soundness also means ensuring we have ample liquidity to protect our depositors, our borrowers, our employees, and our shareholders. You can see some of the highlighted metrics here around the strength of our balance sheet. We ended the quarter with over $4 billion of cash and available liquidity, as Chip mentioned, over 3x coverage for our uninsured deposits. Minimal borrowings, low overall levels of uninsured deposits, and no pledged securities. And despite the events of late March, we ended up growing our customer deposit portfolio for the quarter, and we've seen solid growth thus far in April. We'll talk a little more about credit metrics here shortly, but overall trends are consistent with our expectations. As Chip mentioned, NPAs and past dues are basically flat over the past year on a percentage basis at 65 basis points and 13 basis points. We did see a couple of charge-offs in the quarter that BJ will talk about. But overall, we continue to feel really positive about how our borrowers are navigating this environment. As concerns have grown around investor commercial real estate, specifically in office buildings, we thought we’d highlight that we have basically no exposure there. Our CRE is over 70%, with SBA and USDA and virtually all owner-occupied or in specific operating categories like senior housing and self-storage. After liquidity and credit comes capital, and our ratios remain solid across the board. You've all seen us talk about the Mahan ratio before. Our Tier 1 capital plus fair value mark plus reserves to unguaranteed loans. That ratio at over 20% continues to give us a lot of comfort that we can continue to support small businesses through an uncertain economy. When BJ goes through the quarter, you'll see both a reserve build and a fair value adjustment on loans. And while both of those impact earnings for the quarter, they are noncash items that further support our capital position.

All right. Thanks, Huntley and Chip. Good morning, everybody. Let's start a discussion on earnings on Slide 11 with a recap of the major drivers in Q1. And to state the obvious, this was quite a quarter for the banking industry. And for Live Oak, it was really the tale of two distinct phases, January 1 through about March 8 and March 8 through March 31. In the first phase through early March, we saw continued strong customer loan and deposit growth, continued improvement in the secondary market environment for gains on sale premiums and asset marks, good expense discipline, and stable credit quality. In the second phase, post the industry panic of the SVB and Signature issues, we saw significant reversals of secondary market pricing improvement we had been experiencing, and we took action to further ensure the safety of our customers and our balance sheet. So all of that netted to not a lot of earnings in the quarter, but actions we have taken to ensure safety and soundness, coupled with our strong customer growth, puts us on a path to a much improved earnings trajectory going forward. I'll quickly hit some highlights here on Slide 11, but get into a bit more detail on each over the next several slides. Our loan production engine continues to generate profitable growth with the $1 billion in loan production in the quarter being the highest Q1 production level in the history of Live Oak at average yields of 8.54% versus current portfolio yield of 7%, driving loan growth up 4% quarter-over-quarter and 21% year-over-year. As Huntley said, deposit growth was up nicely as well. The customer deposit growth was still up almost 3% in the quarter despite the March disruption and continues to grow nicely even through April tax season. I'll get into a bit more detail on our NIM compression this quarter in a few minutes, but I will say that while the trial of the NIM is now lower due to industry stress in March, the resiliency of our NIM and resulting net interest income in the second half of the year should be aided by the strong net loan growth, higher loan production yields we are booking and an anticipated flattening of deposit costs. Expenses are moderating as we discussed on the fourth quarter call, and we expect further discipline here throughout the rest of the year. On reserves, we leaned into the provision for both growth, which I consider good provision, and conservatism given the economic environment. And finally, the impacts of those notable items, which I'll hit on the next slide, had a pretty outsized impact of about $0.20 in the quarter. Turning to Slide 12. Let's take a look at those notable items that added up to that $0.20. In noninterest income, we had two notable items, the largest of which was for our loans held at fair value, which are marked at the end of each quarter. Given the disruption in March, we saw a significant swing in that valuation in just 30 days. We now have roughly a 5% mark on that portfolio, over twice our current allowance for credit loss. So this seems quite conservative. In noninterest expense, we refined our assumptions to be more conservative in how we reserve for unfunded commitments, resulting in a one-time step-up of $2.4 million. And finally, we had a discrete tax item of $2.8 million, which resulted in an abnormally high effective tax rate in the quarter, which we expect will normalize into the 15% to 20% range over the course of the year. Our $1 billion of loan production in the quarter was again diverse across multiple areas, with particular strength in our middle-market sponsor finance vertical, solar vertical, and numerous small business areas. As others pull back on lending, we expect to see good opportunities for new business going forward. Let’s turn to our net interest income and margin trends. Given the market disruption and the decline in our NIM this quarter, I'll go through the dynamics in a bit more detail than usual. You may recall that in response to a question on the fourth-quarter earnings call about our NIM in 2023, I said that deposit pricing ramped up significantly in the back half of '22 and showed no signs of slowing. Therefore, we expected to see downward pressure on the NIM in the first half of the year because the accelerated deposit pricing would be more rapid than the loan repricing. In the back half of the year, however, as our loan repricing flowed through the balance sheet and the Fed near the end of its rate increase cycle, we would expect NIM expansion. All of those things are still true, but the March industry stress further increased deposit pricing pressures in the near term. However, the loan repricing tailwinds are still to come, which should help with NIM improvement in the back half of the year. Said a different way, while we expected a V-shape to our NIM trajectory in 2023, given recent events and our desire to ensure continued customer deposit growth, the decline is steeper than we expected in the first half. However, we still anticipate steady improvement in the NIM and net interest income in the second half of '23. Let’s put a few data points behind what I just said. Let’s take the deposit side first. You see that we provided more information on both Live Oak and the top digital competitors as it relates to deposit pricing in betas, along with the ending Fed funds upper rate for reference. Two things you will notice. In the first half of 2022, our quarterly and cumulative savings betas were tracking with the top digital competitors through the first half of 2022. And second, it was at a lower beta, about 40% than what we have been consistently sharing with you about our expected through-the-cycle beta of about 70%. In the second half of 2022, deposit competition started to heat up significantly. Take a look at the two gray boxes on this slide. In the third quarter, top competitors started moving much higher at a 78% beta in Q3 '22, as you can see in the gray box. Our deposit growth trajectory, however, was still strong and fully supportive of our loan growth. So we remained disciplined about rate increases, and our beta remained lower at 63%. In the fourth quarter, however, top competitors moved up at almost 100% beta, and we had to move accordingly to maintain our balanced growth. And in the first quarter, we saw moderation in deposit rate movements from competitors with very little movement through mid-March. We were growing our customer deposits at our desired pace, so we had no expectation of moving deposit rates up in Q1. When the industry crisis hit in mid-March and we saw customer outflows, we decided to move proactively and aggressively to reverse the trends we were seeing, moving savings rates up a full 50 basis points to move modestly ahead of top digital competitors. As you can see, it worked quite well to put us back on a positive customer deposit growth path. So we sit here today at a modestly higher through-the-cycle beta of about 74%, versus the 70% or slightly less we had expected, but are back on track for healthy customer deposit growth to support our continued loan growth. Now let’s take a look at the loan side. Here, we provided you with an additional data point: our loan production yields from Q1. I'll reference that in a minute. Our loan yields have been moving up nicely as you can see in the table, but obviously cannot move as rapidly as the deposit betas we just discussed as about 40% of our current loan portfolio is variable rate. But, two points to make on loan yields going forward. First, loan production yields are currently being booked at rates greater than 150 basis points higher than our portfolio rates. Second, the majority of our variable rate loans are quarterly, not monthly adjusting, meaning that unlike deposit rate changes, which happen intra-quarter, we don’t see intra-quarter increases in loan yields. As of April 1, our quarterly adjusting loans saw another 50 basis point increase in rate. Therefore, as our newer loans replace older loans over time, our portfolio yields will continue to rise, supporting stabilization, then improvement in our net spread. So what does all this mean for the NIM? And how does that relate to the 3.50% to 3.75% range discussed? Pre-crisis, we would have expected NIM to bottom out in the 3.50% to 3.55% range in Q1, and to end Q4 '23 in the 3.75% to 3.80% range, resulting in a full year 2023 NIM in the 3.65% range. With the March events driving deposit costs higher than anticipated, we now expect NIM to bottom out at about 25 to 30 basis points below the prior range one quarter later in Q2 and end Q4 '23 in the lower to middle part of the 3.50% to 3.75% range. This remains an uncertain environment, so let me be crystal clear and transparent with our current assumptions here. The Fed moves 25 basis points in May and then pauses for the rest of the year. Deposit betas move in the 60% to 70% range for that increase, then flatten. Deposit growth continues on pace with the above beta assumptions. Healthy loan growth continues on pace with current pricing and no further major industry disruption related to deposits or liquidity. Remember that if we do decide to hold more on-balance sheet liquidity, it may have an impact on the NIM, but will have minimal impact on net interest income. To recap, deeper V in NIM trajectory in the first half of the year for more rapid deposit rate changes due to the industry stress events, but NIM and net interest income improvement in the back half of the year as deposit costs moderate, loan yields continue to improve and earning assets continue to grow. I hope this helps. Let’s turn to Slide 15 and take a look at noninterest income trends. As I mentioned before, we have been seeing improvement in secondary market conditions, premiums, and valuations before the mid-March events. Our SBA sales activity increased in Q1, as did our gain on sale premium, resulting in $10 million in net gain on sale income versus $7 million in Q4. Though the majority of the sold was variable rate, we saw some fixed-rate SBA sales activity, which was encouraging. And all of our sales activity occurred before mid-March. From February 28 to March 31, our servicing asset revaluation and fair value mark was down almost $6 million or over $6 million, reversing a net gain position we had on those assets as of the end of February. While there will be continued variability as these assets are valued quarterly based on market pricing, spot rates on 3/31 were obviously heavily influenced by the events of mid-March, but we do not expect this level of volatility going forward. Turning to expenses, as we discussed on the fourth-quarter call, we have worked through what I call our hiring bubble, first, to rightsize our lender support to accommodate the significant step-up in balance sheet growth over the past few years. Second, to accelerate our technology build-out in 2022. Going forward, while we will continue to be opportunistic on hiring for revenue producers, we are tightly managing our expense growth to improve our operating leverage. Our core expenses were essentially flat to Q4 with our headcount up only 7 people or 1%. We expect continued lower levels of hiring and strong expense discipline going forward. Turning to credit trends, as Chip and Huntley discussed earlier, credit metrics remain quite strong. We continue to actively monitor the existing portfolio and do not currently see any glaring weak spots. Past dues are down and nonaccruals remain quite low. About $5 million of the $6.7 million net charge-offs in the quarter were driven by two relationships, leaving only $1.7 million of net charge-offs across the entire rest of the $8 billion portfolio. Two relationships is not a trend. Steve can speak more on these and the overall strength of our portfolio during Q&A. Yet the provision remained flat as we leaned into building reserves for both the new loan growth and continued caution about the future economic outlook. Our reserves to unguaranteed loans remain well above the industry. About $7 million of our $19 million provision was for net new loan growth. That, to me, is good provision. If we weren't growing loans and customer relationships, our provision would have been $7 million lower. I'd rather be growing profitable loan relationships. With what we see, combined with a conservative outlook, we feel very well positioned with our reserve levels at over twice industry averages. Slide 18 shows our overall capital strength, which gives us great comfort that we are well positioned to thrive in whatever environment lies ahead. To wrap up on Slide 19, here’s what we are focused on for the rest of '23. We have, and will always start with soundness, and that has served us quite well in the current industry stress. We will continue to do what we do well, know our customers, and keep our balance sheet strong. On the profitability front, we are absolutely focused on controlling what we can control, making high-quality loans, staying disciplined on pricing, and managing our expenses very tightly. On the growth front, we remain incredibly excited about the power of our business model. Our lending businesses continue to provide excellent value to our customers, resulting in strong loan production and growth. We look for opportunities every day to add more revenue producers to our attractive platform. We have our first 10 customers up and running on our new treasury management platform with strong reviews. More are being added each day, and this is a big step in our journey towards fuller customer relationships and attractive lower-cost operating accounts; our people are ready to make this happen. We still remain very confident that our embedded banking platform and all the technology investments that we are making are going to be absolute game changers in this industry. With that, we can open it up for questions.

And your first question comes from Brandon King from Truist Securities.

So just wanted to start on credit and the two relationships. Could you elaborate on that to give some more context behind those two relationships?

Certainly, Brandon. This is Steve Smits. Yes, I'll talk about the first. It was a direct-to-consumer e-commerce business and had very specific challenges around the opt-out. Most of their marketing was focused on Facebook e-commerce marketing. So with changes in the opt-out rules around that, it had a material impact on their revenue. So I consider that very much an isolated situation. Also note that we have very small exposure to businesses whose primary revenue driver is direct-to-consumer e-commerce, less than half a dozen relationships to be more specific. Every one of those is actually doing quite well with good cash flow. The second is very specific to supply chain challenges and more specifically, lumber costs. So at the height of lumber costs, this business suffered a significant deterioration in their COGS, which they simply were not able to work through. So that one we charge down. I would conclude that both are very isolated situations. Overall, I don't see any systemic trends that are concerning to me.

Got it. And I guess with that not being systemic, would you, I guess, assume that charge-offs kind of go lower from here throughout the year?

While I don't have a crystal ball and there's always a chance for the unforeseen, I currently feel very confident that the portfolio is quite stable. For those who are newer to Live Oak, I want to emphasize the comments made by Huntley and BJ regarding our strong servicing philosophy and methodology. We maintain close communication with our customers, and I believe I have a good understanding of the health of our borrowers. I can confidently say that the portfolio is quite stable and actually performing well.

Okay. And then just one more question. Could you give us an update on the small business checking and treasury management products? And given the events that happened in March, does that provide even more challenges? Or could you see more opportunities just given all the turmoil in the banking industry?

Sure, Brandon. It's Huntley. I'll start and others can chime in. So we are, as BJ said, live with a full-service checking operating account for small business with a full set of treasury management capabilities. We've got our first 10 customers live on it, moving money, and we're really excited. That's through our partner, Apiture, who you all know we have invested in, and they provide the front-end service. They do that for a couple of hundred banks who use this product. We’re really excited, and we're onboarding more customers. We were strategic in how quickly we came to market because we wanted to ensure it worked, and we're going to that with our first set of customers. Throughout the year, we will continue to ramp and do more. In terms of the industry, I think there are a couple of things to consider. One, as Chip said, the need to pay competitive rates is there and actually is an advantage for us because we've got a savings product that is competitive, which may attract customers to conduct the rest of their banking through their operating account with us. On the flip side, we saw customers who left us to go to one of the largest banks because they felt like there was that implicit too big to fail guarantee. So will there be people who are less willing to transfer to a new bank? Does it reduce some of the switching? Maybe. We haven't seen it yet, but it's early days.

Your next question comes from Crispin Love from Piper Sandler.

First on growth. I'm interested in your thoughts on growth in the current environment. From your prepared remarks, it seems you maintain a positive outlook on growth. However, do you anticipate any reduction or slowdown in loan growth due to the current conditions? Or do you believe that you can still achieve growth at typical historical rates, particularly since the SBA can exhibit countercyclical tendencies?

Well, I'll start, and then you guys can add on. It seems that when we talk to our leaders in the sales division, they're saying, as late as yesterday, the phones are beginning to ring. I take that as the credit guys running at other banks tightening the screws. We have seen this from time to time over the last 15 years. We will be in the market. Looking at the pipeline, it is relatively strong. I mean, our guys are not backing off their projections from 120 days ago.

Yes, no, that's right. I mean, I think we have seen some situations where a buyer and seller can agree on value given the changing market conditions, leading somebody to decide to pause on an expansion project. So that presents a bit of a headwind. But to Chip's point, we are also seeing perhaps more opportunities in the space, in some areas more than others. It hasn't been broad across the board, so we'll just be opportunistic.

Great. I appreciate the commentary there. And then just on SBA gain on sale margin trends, I'm curious how they've been through the first quarter and then into April, as margins likely compress following the bank turmoil. Do you expect any knock-on effects in SBA secondary markets from the bank closures earlier in the first quarter that could impact SBA gain on sale over the near or longer term?

Cris, this is BJ. Unfortunately, the mid-March stress has kind of stunted the improvement we had been seeing over the course of the year in terms of premiums. Premiums were up probably 100 to 200 basis points or so from late last year. As I mentioned in my prior comments, we actually sold some fixed-rate SBA, which had essentially been closed for several quarters. So the markets were really starting to heal up through mid-March, which was encouraging to see. From the fourth to first quarter, our average net gain on premiums was actually up from quarter-to-quarter, but that kind of backed up and paused at the end of the quarter. Still some uncertainty through April, disruption in the secondary markets, which buyers will be there going forward, et cetera. But we are hopeful that the further we get away from mid-March, things normalize and we expect premiums to continue to improve over the second half of the year. That's what our expectation is.

Your next question comes from Steven Alexopoulos from JPMorgan.

BJ, I want to make sure I have the new NIM guidance correct because we're calculating different numbers on my team. What are you saying for the 2Q NIM?

Down 20 basis points from our prior expectations. We think we bottomed out 25 to 30 basis points below that range and then come back in the second half of the year, more in the lower to middle part of that 3.50% to 3.75% range.

Did you give a range for 2Q, where you think it will be? It sounds like you think NIM will drop in 2Q and then improve in the second half, right? That’s the outlook.

Yes, it will be down in the second quarter because the 50 basis point increase we made in mid-March will have an outsized impact in the second quarter. So second-quarter NIM will be down. In the second half, loan yields will start to flow through the balance sheet, and deposit costs will flatten as we expect. By fourth quarter, the margin will go back up towards the lower to middle part of that 3.50% to 3.75% range. To have this flow through, I would see the peak based on the assumptions that I just gave in the third quarter, maybe the fourth quarter. The real step-up would occur in the second quarter, with moderation in the third and fourth quarters.

That's helpful. And then I want to shift to the reserve for a minute. So I don't know if you guys saw that Bank United did a nice job in their slide deck this week. They put out a stressed scenario for commercial real estate loans, which basically showed that in a period of stress, their reserve on commercial real estate would need to increase materially. I'm curious if you could share with us what a stress scenario on the unguaranteed portion of your loans looks like? If that played out, are you already reserved for that? Or would the reserve need to materially increase?

Yes, Steve, this is Steve Smits. I'll start. BJ, you can certainly add because we did run some stress scenarios. I will say that we feel we are properly reserved for a rocky or macroeconomic environment. We feel we are well reserved. We did run stress on several factors that we considered would be pretty catastrophic. I think that we still came to the conclusion that it would result in a materially significant increase to provision expense going forward.

I think if we focus on four different types of stresses, one was that prepays declined, which meant we had higher average loan balances and therefore needed to hold more reserves. The second was that unemployment increased by over 200 basis points in a year from our current position. The third was that our probability of defaults rose by about 30% across the board. The fourth was that loss given defaults increased by around 30% as well. We examined these factors both individually and collectively. Our reserve levels would have increased if all of these occurred in a worst-case scenario, though we do not anticipate that happening. Even if all of them played out over the next three quarters, which is very unlikely, we believe we have a conservative estimate on our probability of defaults and loss given defaults, as well as our expectations for prepays and unemployment. We feel well positioned with our reserves at this time.

That's terrific color. BJ, if I could squeeze one more in. Just following up on your answer to the earlier question on the gain on sale, so given that the market appears to be somewhat disrupted at least right now, do you think gain on sale revenue maybe goes back to where we were in the prior quarter, Q4 '22? Is that what you're thinking?

No. We expect continued premium improvement in the second half of the year. I think that what we are producing is conducive to us being able to sell more in the secondary market. Over 80% of our SBA production was variable rate. Variable rate is still very attractive on the secondary market. As we have more variable FDA eligible loans coming into the company, we have more flexibility to sell. Even if there's a modest backup in premiums, we can sell more and at a higher premium. So all of that to say, I still feel good about the levels of gain on sale income that we're at in the first quarter. Thus, we hope to see growth and improvement over the course of the year.

Your next question comes from David Feaster from Raymond James.

Moving back to the checking and treasury management initiative that we talked about earlier, have your expectations changed for that at all? We previously talked about maybe a couple of hundred million coming on by year-end. Is that still the target? Just kind of hearing your comments on deposit costs, it sounds like that may be reasonable. I'm just curious if that had changed at all.

So Huntley, you can take this. Let me just give you a little background on the product itself, David. This product was created by Funds Express in 1997, which is now Apiture today. Those folks in Austin, Texas lifted and shifted all that code out of a data center in Austin and made it fundamentally cloud-native API-first and transferred to AWS. With the help of Terry Turner's back, who is a 10% equity holder, who is with Pinnacle loans and Apiture, his team said we need the software to do this, this, and this. This was over the last 2 or 3 years. As we lifted and shifted that code to a next-generation environment, we did just that, and then they began to win awards. So that is the product in the marketplace, primarily helping larger customers than ours. Our customers are mainly $2 million to $5 million revenue small businesses. Pinnacle's customers are substantially larger than that. We have a lot of excess capability as our customers use that software and move upmarket. Huntley, you clean that up.

Yes. To your question, I think that number seems about right. We are excited. We're still in the early days, but if we continue to lend out $1 billion a quarter and that’s 500-plus new customers, those are great opportunities for us to convert on a proven platform. So our estimates still feel about right as we sit here in terms of our goals for this year.

Okay. That makes sense. We talked about the tightening of credit possibly pushing more folks into the SBA, but I think you still have a similar concept on the conventional side as well. Is that something that you're seeing? Would you expect the proportion of conventional lending to increase, or would you expect it to stay relatively the same? Where are you seeing opportunities, especially in specialty finance?

Yes. I think the mix feels about right. You could make a case that we'd find more SBA opportunity. You could make a case to the contrary. Right now, it feels like the balance in the mix is about where we are seeing and we will continue to look at pipelines. One of the areas where we think there's going to be some opportunity, obviously we're not in the office commercial real estate space, but there are places that are secondary and tertiary where people paint real estate with a broad brush. Maybe that's senior housing, maybe that's self-storage—places that fall into a real estate bucket. We look at them much more as operating businesses, so we may find some incremental opportunities as folks pull back broadly on real estate. We’re just kind of being opportunistic right now, so we’ll take what comes.

I would say that the guys at Canapi are still looking at 3 to 5 new opportunities a day. That said, somebody said earlier that those valuations of these businesses have dropped dramatically from 20 times forward revenues to 6. Most of these companies are looking to trim overhead and become profitable on their own. We’re being very circumspect, but they're thrilled that our second fund is in the process of wrapping up. We have about $800-plus million of dry powder to choose the winners. So far, so good.

Does the SVB failure impact that business at all? Or could it push more opportunities to you?

To be determined. Hard to say there.

There are no further questions at this time. I'll now turn it back for closing remarks.

No closing remarks, folks. We'll see you in 90 days. Thanks for joining.

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