Earnings Call Transcript - LOB Q1 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Q1 2024 Live Oak Bancshares Earnings Call. This call is being recorded on Thursday, April 25, 2024. I would now like to turn the conference over to Greg Seward, General Counsel and Chief Risk Officer. Please go ahead.

Greg Seward, General Counsel and Chief Risk Officer

Thank you, and good morning, everyone. Welcome to Live Oak's First Quarter 2024 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 and 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.

Chip Mahan, Chairman and Chief Executive Officer

Thanks, Greg. Good morning, fellow shareholders, and welcome to our Q1 call. I'm going to kick things off this morning and discuss several areas noted on Slide 4. We will touch on first quarter loan originations and our pipeline of future loans to be generated. As always, we will present a credit quality update along with a view of increased operating leverage based on investments we have made. Then we will discuss growth drivers by way of adding new lending officers and a new way of underwriting small loans. Then we will wrap up with a few thoughts from our annual report as we look back these last 10 years. Moving to Slide 5. Before we dig in on asset quality, a word on originations in Q1. Originations this quarter were $805 million, a $176 million decrease from Q4 of last year and $226 million less than Q1 of 2023. That said, a number of larger loans slipped at the last minute. As of today, many of those have closed. We expect to catch up to our original budget by the end of this quarter. We expect a nice increase in originations over last year. Our overall pipeline is at an all-time high, up 23% over last year. Back to this slide, again, steady as she goes as it relates to the top portion of this slide. The bottom half requires further explanation. Steve and his credit team have quarterly watch list meetings with all 75 baggers. As you recall, these folks are recent college graduates responsible for gathering financial statements on all 6,000 customers every 90 days. This deep dive includes a healthy portion of all of our employees who touch the customer. He leaves no stone unturned. As we examine our charge-offs as it relates to our provisioning on the next slide, Steve has a proven track record of conservatism. The real answer to credit quality exists on Slide 6. Let's dig in on actuals these last 13 quarters. Our unguaranteed ACL reserves are almost 2.5% of unguaranteed loans and leases or twice industry norms. As the nation's number one SBA lender, we have also evolved as one of the nation's preeminent cash flow lenders. With interest rates rising over 500 basis points in a very short period of time, our approach seems prudent. We have added $101 million to our reserves these last 7 quarters while charging off just $27 million. This includes $7 million in a fraudulent national participation in Q3 of last year. One needs to let this marinate a bit. Steve will be happy to answer any questions in our upcoming Q&A session. Walt will walk you through the nonoperating adjustments as we move to Slide 7. Needless to say, we're quite pleased to see a 26% increase in operating leverage from the first quarter of last year to Q1 of this year. This $8 million increase year-over-year should accelerate in the future. Our investments in next-gen technology allow us to better answer the question we constantly hear from our customers: am I approved and when do I get the money? Our goal of never touching data twice is around the corner. Treating each customer like our only customer is how we are built. We are in constant search of ways to raise our NPS score, and we look forward to this year's results. As discussed on our last call, we are incredibly excited about changes made at the SBA that affect loans under $1 million and particularly loans under $500,000. Our tech teams are working 24/7 to automate this process in a way never before contemplated. Those loans will be sold on the secondary market. As we scale, those gain on sale dollars will have a positive effect on this ratio. Moving to Slide 8. In this year's annual report, we thought it would be informative to look back over the last 10 years. In 2013, we were a $400 million bank with $50 million in capital. Just after receiving our charter in May of '08, the FDIC restricted our growth to no more than 25% per year until 2015. We took the company public 2 months later. In 10 years, we have grown to an $11 billion bank with almost $1 billion of capital. Assets have grown 39% year-over-year, while capital has grown a compounded 34% in those 10 years. Tangible book value has grown from $2.36 per share to $20.32 per share, a 10x increase over the period. While we're not suggesting that the past is a proxy for the future, steady organic nondilutive growth has been our mantra from inception. The rest of this slide shows how we got there. About $0.5 billion of organic earnings growth since the last time we had to access the capital markets back in 2017, driven by our core business earnings along with $207 million in gains from fintech activities related to Finxact, Greenlight, and Payrailz. Lastly, on Slide 9, our increase in tangible book value compared to others in the KBW coverage universe is in a class by itself. We are up over 700% while the KBW coverage median has grown 1/10 of that. And with that, I'll turn things over to Walt.

Walter Phifer, Chief Financial Officer

Thank you, Chip, and good morning, everyone. I'll start today with a high-level review of Q1 on Slide 11. Our core financial objectives remain consistent with what we have discussed over recent calls: protect our credit vault, utilize pricing discipline to expand our net interest income and net interest margin, moderate expense growth yet remain opportunistic to add good costs and grow the business. Top line figures show EPS of $0.36, a healthy net interest margin of 3.33%, a 42% quarter-over-quarter growth in reported PPNR, a 2% quarter-over-quarter loan growth, and a 7% increase quarter-over-quarter in our business deposits portfolio. From a soundness perspective, our small business borrowers continue to be resilient and maintain the eye of the tiger mindset despite a challenging higher for longer rate environment, thus putting pressure on some of the loans originated back in the lower rate years of 2020 and 2021. Our credit performance continues to remain within our expectations, and we remain confident in our portfolio strength and proactive monitoring. More on credit shortly. Our liquidity profile remains robust, with low uninsured deposits compared to the rest of the industry and a 3:1 available liquidity capacity to those uninsured deposits. Our capital levels remain strong and have seen 3 consecutive quarters of capital ratio accretion. From a profitability perspective, our core business continues to perform well, as Chip mentioned, with a 26% year-over-year increase in core operating earnings. This growth reflects our focused initiatives to grow revenues at a faster pace than our expenses as we scale into the strategic hiring investments made over the past few years. Our 1% quarter-over-quarter increase in net interest income and 1 basis point quarter-over-quarter increase in net interest margin was in line with our expectations. We will speak more on them in the upcoming slides. From a growth perspective, on the lending front, we remain the nation's largest SBA lender in terms of balanced volume thus far in the SBA fiscal year. Loan originations have a seasonal component with Q1 typically resulting in the lowest quarter of originations each year. And as Chip mentioned, a good portion of the loans that pushed to the right have already closed thus far in Q2. Our $3.2 billion pipeline remains at all-time highs as our lenders continue to do a fantastic job at sourcing new opportunities in a very competitive environment. Our ability to calibrate deposit growth to support our loan growth remains a strength. Customer deposits grew 4% quarter-over-quarter, primarily in our business deposit sector. This allowed us to reduce our more expensive brokered funding by 7% quarter-over-quarter. A couple of quick notes on Slides 12 and 13. Slide 12 highlights that roughly two-thirds of our $805 million of loan origination in Q1 2024 was in our small business banking space. As you can see on the top right, the bulk of the difference versus Q1 2023 was in the specialty and energy infrastructure business units. We also view this as a timing difference as these deals tend to be larger and more fluid in their estimated closing dates, and as such, can easily push from one quarter to another quarter. We are also in the early days of our focus on small SBA 7(a) loans. Thus far, we have generated $13 million of small loan SBA 7(a) production year-to-date and continue to see that pipeline increase. As Chip mentioned, as we work to automate the application documentation and decisioning process of our SBA origination platform, we are excited about what possibilities that provides for small loan 7(a) originations and the subsequent gain on sale income. Slide 13 highlights the quarter-over-quarter loan growth by component. It's important to note that prior to our typical sales and participations activity, our loan portfolio growth was 5% quarter-over-quarter as new fully funding originations and construction loans continue to drive balanced growth. Our pipeline and portfolio activity suggest that a low double-digit full year growth rate remains a reasonable loan growth expectation. Our deposit trends are highlighted on Slide 14. I've long viewed our funding model as a strength. Our branchless funding platform is extremely efficient with a ratio of approximately 5,000 deposit accounts to 1 customer success representative and the expense of funds that typically ranges from 10 to 20 basis points. Our customer calls are typically answered within a minute by a live customer service team that has a 93% plus first call resolution average, all while our competitive rate position ensures our customers are receiving market pricing regardless of the interest rate environment. As evidence of this strength, our total deposits increased to roughly $10.5 billion in Q1 2024, a $1 billion or 10% increase year-over-year. Customer deposit growth has been predominantly driven by our business deposits both in savings and CDs. Our overall customer deposit funding mix of 63% savings, 34% CDs and 3% noninterest-bearing has held constant over the past year. Given the uncertainty of the Fed outlook, we continue to like our funding portfolio's short-term positioning. Our business checking product launched in Q4 2023, and while we are in the early days of rolling this product out, we have seen positive momentum thus far. Our expectation was that this was going to be a crawl, walk, run sort of pace, and we are optimistic regarding this product's trajectory and its potential impact on our profitability as it scales to a larger portion of our funding mix over time. Slide 15 highlights our net interest income, NIM, and yield trends. As mentioned earlier, our Q1 2024 net interest income was slightly up linked quarter, and our net interest margin improved by 1 basis point to 3.33%. As mentioned in our last call, pressure on net interest income growth in Q1 was expected as we had a large CD maturity event with an average renewal rate increase of 61 basis points. On the pricing front, our lenders continue to hold the line on spreads in a tougher, higher for longer rate environment, while many of our competitors are pricing well below prime. Our average yield on new production in Q1 was 9.12% or just above prime plus 60 basis points. Our average portfolio loan yield increased to 7.77% in Q1, up 16 basis points from Q4. As for deposit pricing, the average cost of funds increased over the last 2 quarters has largely been a result of our CD portfolio maturities and repricing. These maturity events have provided net interest income and net interest margin headwinds in Q4 2023 and Q1 2024, but they could ultimately provide future tailwinds if the Fed cuts later in 2024 or 2025. We have not raised our business savings rate since March of 2023 and have not raised our personal savings rate since November of 2023. At the same time, we have been fortunate to begin lowering our CD rate offerings recently as the market has begun to reprice its CD rates downward as they try to shorten their funding portfolio, discourage funding migration to term deposits, and push customers to their more variable deposit offerings. Make no mistake that the market remains highly competitive, but it continues to show signs of rational pricing, which is encouraging. So what happens to our funding costs if or when the Fed cuts rates? Many banks throughout the industry still expect rising funding costs even if the Fed cuts rates, as the current offerings are still well below market competitive. This is evidenced by the national average savings rate still remaining just shy of 50 basis points, while most digital banks have offerings north of 400 basis points. We will assess the drivers of the Fed cuts, the competitive market, and our funding needs, yet ultimately expect the digital deposit market to react fairly quickly and its downward repricing and we'll do the same. Lastly, given the recent inflation and Fed outlook news, let's quickly revisit our net interest income and margin expectations communicated by BJ and myself over the past few calls. We've communicated that our net interest income and margin are expected to migrate up and to the right over 2024, albeit not in a linear fashion with more improvement in the back half of 2024. This expectation included returning to a NIM range of 3.50% to 3.75% by the end of the year and a high single-digit to low double-digit growth in 2024 net interest income relative to full year 2023, barring any unforeseen liquidity stress events. That guidance was based on 3 Fed cuts in the second half of 2024. And while we are optimistic that we will continue on an up and to the right journey with our margin over time, the slope of that trajectory for both net interest income and NIM may flatten with less or no rate cuts, driving us towards the lower end of the expected range by the end of the year. Time will tell. Quarter-over-quarter fee income is outlined on Slide 16. We continue to be encouraged by improvement in the SBA secondary market in Q1. There is a good amount of liquidity in the market, and stabilization in February aided the improvement on our average premium from 5 points to 7 points on loans sold. As you can see in the bottom table, our Q1 sales volume is typically lower than the rest of the year, followed by a slight stair-step up in Q2 through Q4. We expect 2024 to be no different. Gain on sale providing for roughly 8% to 12% of quarterly total revenues continues to feel like the right range at this point in time. As I mentioned in our last call, we were able to sell our first 2 USDA loans for the first time in over 7 quarters as asset-sensitive banks begin to consider downward rate protection. We are excited about this development, but one quarter is not a trend. And as the timing of our USDA originations can be choppy, so will our USDA sales activity. Turning to expenses on Slide 17. Our Q1 2024 expenses of $79 million were up 7% quarter-over-quarter, though they were essentially flat to Q1 2023. Quarter-over-quarter growth was driven by incremental personnel costs, such as 2024 hires, our annual salary merit adjustments, 2023 restricted stock unit awards, and accruals related to our 2024 employee bonus expectations. FTE growth for good costs with the addition of 2 senior loan officers, closing staff focused on small SBA 7(a) loans, and servicing internal audit and risk personnel to support our growth and complexity. We continue to operate as a growth organization, and we'll remain focused on adding revenue generators and other good costs as needed. If there are still opportunities to find efficiencies and scale in technology and support areas through automation and process improvements that will help manage expense growth going forward, thus continuing to provide improvement in our operating leverage. Additional credit trends are included on Slide 18. Our $16 million provision was primarily attributed to portfolio macroeconomic changes, specifically the impact on customer cash flows from a higher for longer rate environment. Past dues are not materially out of line with prior quarters and although nonaccruals are up, as expected in the current environment, we still feel that these levels are manageable. As Steve can expand on in Q&A, we continue to actively monitor the existing portfolio, have yet to see any notable surprises outside of our expectations and do not currently see any significant weak spots. Our trademark proactive direct servicing approach has and will continue to serve us well. With 37% of our loan book government guaranteed, a strong capital and liquidity profile, a reserve to unguaranteed loans and leases ratio that is twice the industry median, a predominantly owner-occupied CRE portfolio that is 45% government guaranteed and our historical charge-off rate being a fraction of our current allowance, we remain confident in our reserve and portfolio's credit strength. Lastly, Slide 19 highlights our overall capital strength, which remains robust both in terms of regulatory ratios as well as from the unguaranteed loan perspective, what we call the Mahan Ratio. As you may have noticed in the earnings release, we did originate a $100 million term loan in Q1 2024 with the purpose of downstreaming the funds to our bank subsidiary to position our bank level capital ratios for the anticipated growth to come. Our earnings over the last 3 quarters provide us with confidence in our ability to continue to support our growth through organic earnings as we have over the last 6-plus years, while positioning ourselves to be able to weather whatever storms lie ahead. Thank you for joining us this morning. And with that, we're happy to take questions.

Operator, Operator

First question comes from Steven Alexopoulos from JPMorgan.

Alex Lau, Analyst

This is Alex Lau on for Steve. My first question is on credit. Can you share some color on the loans that you built specific reserves for in the quarter? And what is your outlook for the health of these credits in the related industries?

Steven Smits, CRO

Yes. This is Steve Smits. I'll take that one. So these are predominantly main street SBA borrowers that are struggling with the higher rate environment and the impact on their overall debt obligations. So we've put impairments on these loans as we navigate. But as Walt had mentioned, we continue to stay very focused and close to them in our servicing. And we will continue to work through them. But with the uncertainties in the economic outlook going forward, how long rates will remain high, prudent steps to put the reserves today and continue to work with them to rehabilitate and work through these challenges. What gives me some comfort is that these really were not surprises. And these were borrowers that we were aware were experiencing challenges and struggles. So that bodes well for our servicing and being on top of understanding the challenges our borrowers are working through. So no huge surprises, but we'll continue to work through them.

Alex Lau, Analyst

And I wanted to ask about expenses. So what is your expense outlook range for 2024 considering a baseline growth rate? And if there are opportunities to add more revenue producers, where would that expense range be?

Walter Phifer, Chief Financial Officer

Yes, good question, Alex. This is Walt. From expectations for 2024 baseline, we think a high-single digits range is reasonable, given that we still remain a growth organization. To the extent that if we can hire revenue generators, what does that become? Does it move to low-single digits, perhaps? I think there are still some efficiencies that we can look at. And then obviously, it depends on how many revenue generators we can add. So to the extent that that goes into low-single digits or mid-teens, I personally don't see that as a problem, if it's all revenue generators because it will generate revenue and help with the operating leverage side.

Operator, Operator

Next question comes from Brandon King from Truist.

Brandon King, Analyst

So could you square away the commentary around the pipeline being stronger than ever, but we hear more and more how these higher rates are impacting smaller business demand? So could you talk about what you're seeing within your customer base, what's driving these strong pipelines just relative to these higher rates potentially impacting demand and obviously credit as well?

William C. (BJ) Losch III, CFO

Yes, Brandon, it's BJ. What we're seeing is an expectation level setting or kind of a realization of buyers and sellers, particularly in the SBA space, getting on common ground on what valuation should be given the rapid increase in rates that happened over the last 18 months or so. Last year was an interesting one in terms of sellers having expectations of valuations pre-increase in rates and buyers looking at their borrower base and what they could afford to pay. So there were some disconnects there. There will continue to be high activity. But a lot of what we saw coming through our pipelines actually fell out of closing because buyers and sellers couldn't come to terms. We're seeing that true up a little bit more now. So rates are generally steady. Borrowers understand what their cash flow coverage is going to be and can forecast that a little bit better. We're seeing much better pull-through activity as we look at the pipeline. Now, as Walt said, in the first quarter, our originations were largely flat year-over-year in SBA. They were down meaningfully in specialty finance and E&I, which we've already seen come back here in the second quarter. We do expect stronger SBA small business volume in the second quarter in addition to that specialty and E&I. So we're excited about what we're seeing going forward, and we expect to continue to see more growth with the existing business that we've got. As Walt talked about, we are always in the market for high-quality revenue producers. We're a growing company. We'd love to see more lenders come on to our platform, and we are actively looking for those. So you'll continue to see us invest there.

Chip Mahan, Chairman and Chief Executive Officer

Just one other thing on that, Brandon. I have always felt in our business, the banking business, that banks are sold and not bought. Bank boards have a certain expectation: I'm going to sell my bank for 2.5 times book and market in there, sell the bank. I think that's what has happened, particularly in the M&A business space. The silver tsunami is expecting a certain price. Numbers don't add up. That silver tsunami is running out of runway. Speaking as one of those silver tsunami individuals, it could come with the realization that I'm not going to get 2.5 times book, I'm going to get 2 times book and I better take it now. Our people were saying, and the phones are ringing, and that's the reason that the pipeline is up 26% or 23% or whatever it was.

Brandon King, Analyst

Okay. That makes sense. And then as far as the new commentary, it sounds like if we are in kind of the least stable rate environment, you're going to reach the low end of that 3.50%, 3.70% range by Q4. But what is implied in your outlook for deposit costs within that guidance? Are you expecting deposit costs to be potentially stable from here? Or what sort of creep are you expecting on the deposit cost front?

Walter Phifer, Chief Financial Officer

Brandon, it's Walt. From a savings perspective, we expect it to stabilize on both the personal and business sides. This guidance suggests we will return to the 3.50% to 3.75% range by Q4. We anticipate two Fed rate cuts, which our savings will respond to accordingly. These cuts are projected for September and November according to our current model. Regarding CDs, as I mentioned during the call, we have been able to lower our CD rates so far. The direction will largely depend on market movements. Typically, digital market pricing for CDs adjusts ahead of Fed expectations. The difference between our renewal rates and maturing CD rates has decreased as we progress through the year, primarily because we priced our 12-month CD, which is our largest offering, at the 5.25% to 5.30% level in Q3 and Q4 of last year.

Brandon King, Analyst

Okay. So it sounds like interest-bearing checking and savings and money market are kind of least stable from here until Fed rate cuts, and then CDs are marching towards that 520 would be the best way to frame it.

Walter Phifer, Chief Financial Officer

Yes. I think I would frame it that they are moving towards our current rate offerings today.

Operator, Operator

Next question comes from Tim Switzer at KBW.

Timothy Switzer, Analyst

I had a quick follow-up on your commentary on the NIM and deposits. What's kind of the deposit beta you guys are assuming on the initial rate cuts, say we get 1 or 2 cuts in the back half of '24? What's your initial expectation there? And then how could the beta possibly accelerate as we move through the cycle if we get a series of cuts?

Walter Phifer, Chief Financial Officer

Yes, great question. From a beta perspective, the bank here has been about 15 years old. So we have seen a lot of robust downward cycles. The last time the rates came down, our deposit pricing in the digital market acted pretty rational. From a beta perspective, early on, it will probably be somewhere in the 50% to 70% range. It could be a potential lag, whether it's 1 month or so. On the CD side, that's typically an 80% beta or so, and we're pretty confident that will hold given the way the CD market typically is very reactive. As you kind of move forward, as you saw, kind of with rates came down – I'm sorry, when rates were rising, cumulative betas rose, we think our cumulative betas will also increase on the savings side as well. But largely that will depend on how the market reacts.

Timothy Switzer, Analyst

Okay, got it. And then I also wanted to ask about your expectations around SBA margins. The secondary market demand kind of a good lift in the premiums this quarter. But now with rate cuts being pushed a little bit further out, interest rates moving higher, has that kind of moderated demand or the premiums for you? And what are your expectations once you get either stabilization or a cut in rates?

Walter Phifer, Chief Financial Officer

Yes. The secondary market tends to look at the forward curve. So the 105, there's a 107 improvement that we saw here in Q1. I think we'll stay in that range, especially now given the potential for later Fed cuts. I think of the last 6 quarters or so and say, hey, that's probably a reasonable expectation for right now. As far as demand, demand is strong. The liquidity is strong in the market. So we're not having issues as far as selling and executing those sales. I think as the rates come down, we typically will see an improvement. It's hard to say right now that improvement is drastic. But I think from a reasonable expectation, sticking that 105 to 107 range at least through the next few quarters feels right.

Operator, Operator

Next question comes from David Feaster at Raymond James.

David Feaster, Analyst

I'd like to discuss the small loan automation. You mentioned it briefly in your prepared remarks. I'm curious about the progress on that build-out. What is still needed? Are there any other investments or back-office developments required? When might we expect to start beta testing or roll it out more widely?

William C. (BJ) Losch III, CFO

David, good morning. It's BJ. So we have already started originating small dollar SBA loans. Right now, it's mainly through a small team that we put together. I think we've got $12 million or $13 million booked to another pipeline about that size. So a good start. We had not opened it up to all of our lenders yet. We're getting ready to do that. But we've got 2 major technology and credit enhancements that we are looking at before we really open up the flood gates. One is a digital application, which we're expecting to have later in the second quarter, early third quarter. This will be a big deal because it will automate the front end, making it very easy for our borrowers, our referral sources, or our lenders to put small dollar loans through our pipeline. That will be very helpful. The second is automated credit scoring. We will not go 100% automated credit scoring, but we are looking at streamlining the process for these small dollar loans to be able to get more through our system. We're really excited about this. This has always been something that was available that other SBA lenders do, but we have tended to do larger dollar credits. We're very happy to provide access to capital for small business owners, and this aligns with what the FDA and the current administration are looking for us from the industry. So we're excited about that. And it just adds to our ability to serve more and more small business customers. So more to come on this, but we expect it to really start to ramp towards the back half of the year.

David Feaster, Analyst

And is the plan still to sell all of that production? And where are gain on sale of smaller dollar relative to what you typically sell?

Walter Phifer, Chief Financial Officer

Yes, the plan is a 100% sales model related to small loan SBA. Premiums, they typically range anywhere from 110 to 113 depending on your spreads. But historically, those have held true. The secondary market views those loans as kind of the gold standard because you can create larger pools with more diversification. So high demand, good premiums historically, and we expect that to continue to go forward.

David Feaster, Analyst

Got it. And then maybe switching gears back to the business deposit growth. I mean, first off, could you remind us where pricing is on those products? And then where would you characterize we are at this point? We've seen obviously nice growth. But are we still crawling from your perspective? And maybe when do you think we shift to walking or even start running?

Walter Phifer, Chief Financial Officer

I'll start. Yes, Dave, this is Walt. Regarding our business deposit pricing, our savings rate is at 4%. Our CDs match our personal CD rate offerings. Additionally, we have a noninterest-bearing checking account. In terms of our progress, I would say we are still very much in the early stages. We are working as hard as we can to sell these products to both our existing and new customers. However, it will take time to gain traction on the checking side due to the current market conditions where depositors can find attractive rates on interest-bearing accounts.

William C. (BJ) Losch III, CFO

Yes, I think just to clarify, we are on a crawl as it relates to checking. And there is a long runway there. We are absolutely sprinting on business deposits. We've got a very strong offering there. We've got a great brand reputation. The growth in business deposits is incredibly strong. So we expect that to continue.

Chip Mahan, Chairman and Chief Executive Officer

I would just add that we have been primarily a lending company for 15 years. A lot of our SBA, particularly the generalists, have been SBA commissioned loan producers. Now that we have a checking account product that is second to none in the industry, it's been a bit of an educational process, particularly when we are funding an acquisition and the money goes to the seller. We need to convince our customer, who is the buyer, to bank with us and understand that we are a bank this time, not just a lending company. This educational aspect is still in the early stages, and I would categorize it as something we are just starting to develop. We can improve in this area, and we will improve.

David Feaster, Analyst

That makes sense. Honestly, as you engage more in conventional lending, that could contribute to further growth. On the topic of conventional lending, it appears from one of your charts that you've experienced notable growth in that area. There is a strong emphasis on commercial real estate, but I am curious about your current targets for the conventional lending side. How is that going? Additionally, how do you view the growth of conventional production and the changes in underwriting standards and credit quality?

William C. (BJ) Losch III, CFO

We're really excited about what we're doing on the conventional lending side. We've transported our theory of verticality from the SBA side over to the specialty side, which we think is incredibly important to be very expert in the verticals that we go after so we can add value as an $11 billion bank on larger credits relative to just being a bank that's a generalist-type calling effort. I think we've been incredibly successful there so far. We've got an excellent sponsor finance business. We have a venture banking vertical, which makes sense with our organization, seniors housing, commercial real estate, specialty healthcare. So we're trying to be very niche oriented in how we grow that. Over the last 5 years, we have grown our specialty finance business tenfold in terms of outstandings. What this has also allowed us to do is have credit be comfortable with the credits that we're doing in those verticals because we are, by and large, seeing the same types of deals as opposed to having a generalist calling effort on the conventional side. This could be more difficult to underwrite and approve. So we're pretty bullish on what we can do to grow that responsibly. In addition to that, talking back to the deposit side and the checking side, it is very common to do a conventional loan deal and ask for the deposits. From that perspective, we are having great success starting to build out our checking platform on the specialty conventional side because our borrowers are used to being asked for the deposit. We're going to build our book there probably quicker than we're going to build it on the small business side, and we're starting to see the fruits of that labor.

Chip Mahan, Chairman and Chief Executive Officer

Just one addition to that, David, this is Chip, it's been really, really fun for my co-founders, David Lucht, Lee Williams, and me. We kind of view this from our perspective as regression to the norm. We came up with this idea to create a bank that's the Porter-led of the banking business in the SBA area. All of a sudden, we get to use our 50 years' experience of being actually C&I lenders ourselves. So this is a bit, again, a regression to the norm for us.

Operator, Operator

Thank you. We have no further questions. I will turn the call back over to Chip Mahan for final comments.

Chip Mahan, Chairman and Chief Executive Officer

As always, we appreciate your attention today and look forward to seeing you again in 90 days. Thanks for coming.

Operator, Operator

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