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Live Oak Bancshares Inc (NASDAQ:LOB)
Q2 2021 Earnings Call
Jul 22, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Second Quarter 2021 Live Oak Bancshares Earnings Conference Call. [Operator Instructions]

I'd now like to hand the conference over to Greg Seward, General Counsel, Live Oak Bancshares. Please go ahead.

Greg Seward -- Executive Vice President-General Counsel

Thank you and good morning everyone. Welcome to Live Oak's second quarter 2021 earnings conference call. We are webcasting live over the Internet and this call is being recorded. To access the call over the Internet and review the presentation materials and commentary that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today's call on our Event Calendar for supporting materials. Our second quarter earnings release is also available on our website.

Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause the 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 and commentary.

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

James S. Mahan III -- Chairman and Chief Executive Officer

Thanks, Greg, and good morning to all. As you stare at the last six quarter results, allow me to review today's agenda. It has proven to be our best quarter ever and what a way for Brett Caines to go out with a bang. Brett, it's been 13 short years since I found you in a chemical plant on the Cape Fear River wearing a hard hat and safety glasses. It goes without saying that it's been an honor to serve with you. In our next call, we will explain Brett's next new and exciting role in our company and yes to all who know how this works. Today's prezo and each quarterly prezo is all Brett. Huntley and I just show up. Brett, thanks again for all your fine work these last 24 quarters as a public company.

And now, back to the best quarter ever. Highlights are $44 million gain in the value Greenlight shares brought on by this cash sale of $15 million, causing a remark of our carrying value. It is important to note that we took $4 million of the $15 million in cash gains and gave it to our folks, once again excluding the senior management team. You will recall that we were distributed $7.5 million to our folks at the end of PPP 1.0 given the long hours they spent helping American small business get through this clunky process. This $44 million one-time non-operating gain is a nice addition to Tier 1 capital.

Secondly originations reached an all time high of $1.1 billion while credit quality continues to improve. Third, as the accountants and PPP make the unpacking of our financials more difficult, we're proud to announce the dramatic increase in pre-tax pre-provision earnings as the operating leverage in our business kicks in. Lastly, Neil Underwood will discuss Live Oak Venture investments as well as a canopy update before we turn things over to Huntley for a deep dive.

Greg, let's move to Slide 5 and talk about credit quality. So as you stare at this, I'm going to ask Steve as we did last time, a couple of questions. Steve, last quarter you discussed where the ACL was going. What is your vision over the next several quarters?

Steve Smits -- Chief Credit Officer

Well, Chip, as I mentioned last quarter, I've been expecting to see reserves trending toward pre-COVID period levels as a percentage of loans. This is proving to be the case and I still expect to see this trend continue and I believe this because, first, we continue to see improvements in the financial condition of some of our most impacted businesses, which is evidenced by favorable trends in the servicing status ratings. Secondly, we've also noticed that many of our most impacted borrowers were actually able to build cash reserves during the pandemic and that's a result of the government stimulus and grant programs. Thirdly, through our servicing efforts, we started to receive encouraging reports as these businesses reopen and as you say, folks are getting back to work. Finally, improving unemployment forecast will, of course, influence our allowance as well. So for all these reasons, I still feel that the allowance will continue to trend toward pre-pandemic levels.

James S. Mahan III -- Chairman and Chief Executive Officer

Steve, other banks reporting or discussing subsidies and deferrals. How we're doing?

Steve Smits -- Chief Credit Officer

Well, as of June 30, we only have 17 loans on payment deferral, 15 of those are due to COVID-related stress. In addition, as of June, 13% of our loans received some level of SBA subsidy payment support for their June payment. Most of this will burn away over the next few months. So in summary, as of the end of June, 87% of our borrowers are back to making regular payments and past dues continue to be an all-time low for us, which is very encouraging.

James S. Mahan III -- Chairman and Chief Executive Officer

Steve, as folks are headed back to work, it appears that our watchlist loans, classified assets and non-accruals are trending down. Thoughts?

Steve Smits -- Chief Credit Officer

Well, I must caution that businesses may not be completely out of the woods yet and we need to be prepared for potential surprises. I am encouraged by the recent trends that we're seeing within non-COVID impacted verticals. We're actually seeing an uptick in upgrades, especially within our debt, our healthcare, investment advisory and our debt care industries. And since the first of the year, we've also seen slightly downward trends in classified assets and non-accruals. Of course, we continue to focus a good bit of our attention toward servicing. But I for one, will remain cautiously optimistic that these trends are going to continue.

James S. Mahan III -- Chairman and Chief Executive Officer

Thanks, Steve.

Let's move to Slide 6. Relative to the last 12 months/the pandemic, I believe this slide tells it all. On the left, you see losses, on the right, income. On the left, we took $14 million in COVID-related charge-offs, of which $10 million was a self-inflicted wound, relative to the sale of $15 million of hotel paper at a discount. Through COVID, losses of businesses that went down were $4 million noted under that. So, for a total of $14 million. On the right, you see income. Government assistance accounted for $2.3 billion in PPP loans and $80 million in fees, plus $8 million in net interest income. So far, COVID-related activities have resulted in a non-dilutive capital raise.

Moving on to Slide 7, I have noticed that many reporting banks are having challenges growing their loan book and NIMs are struggling as well, not for us. Excluding PPP, we've grown the loan portfolio, almost 37% compounded annually over the last 10 quarters.

Moving to Slide 8. In the last 11 quarters of 14 quarters, we originated roughly $400 million to $600 million in loans. In Q3 and Q4 of last year, we did almost $1 billion and somewhat surprisingly this quarter we originated $1.1 billion. I get that the investments are going well and happy to put almost $50 million of Tier 1 capital on the balance sheet from Greenlight. But my gracious, this loan, well, [Indecipherable] lost your ever loving mind.

So let's examine what is going on here with more granularity. Let's go to Slide 9. What we have here is a graphic depiction of the second quarter of 2019, second quarter of 2020, second quarter of 2021 of our legacy verticals that is those started between 2008 to 2017 compared to our more recent verticals started in 2018 to present. While legacy verticals have proven a bit lumpy, the newbies have grown quite nicely, producing $600 million in this quarter alone. Again, we operate in 32 industries nationwide.

Moving on to Slide 10, this slide provides more data on product types. The percentages of loans have remained remarkably similar as production has increased dramatically. Again, government-guaranteed loans remained about half of our loan book and we remain confident that originations for 2021 should be in the $3.3 billion to $3.5 billion range.

Slide 11's interesting. Highlights of this slide of newer verticals yield $426 million in production with an interesting mix of products. On the left, the orange, bioenergy and community facilities are almost exclusively government-guaranteed USDA loans. In the middle, green, you have 18 general lenders and 16 cities which are almost all 7(a) SBA loans. And just for grins on the right side and for the first time in our history, we're lending money to small businesses with our balance sheet with real capital in the senior housing and sponsor finance space. Given the collective use of these five groups, credit quality at this point seems stellar.

Slide 12. Lastly, in an effort to close out our deep dive relative to the exciting growth in originations, we are proud of this geographic diversity. As you can see, our geographic diversity has not changed in the last 2.5 years. Sticking to our guiding principles has worked and we shall stay the course.

Slide 13. This is by far the most telling slide of the call, which Huntley will describe in a bit more detail. Our investments and lenders, underwriters, closers and servicers over the last six quarters is now paying off. Pre-tax pre-provision income eliminates a great deal of the noise that always seems to surround us. Our ability to double pre-tax pre-provision earnings since 3/31 just five quarters ago in the middle of the pandemic gives us an important base to grow from, in the future.

Neil, over to you.

Neil Underwood -- President-Live Oak Bancshares

Thanks, Chip.

This next slide represents most of our direct investments at the holding company. While the big news this quarter is around Greenlight, it's really important to note that the entire portfolio continues to thrive. Each of these companies solves a major problem in financial services.

The footer really summarizes the opportunity where we've invested $26 million at very early stages and the implied value today is $182 million. We expect these companies to continue to raise growth capital at elevated valuations. For all you modelers out there, we know this is a really difficult thing to forecast, but as you can see, this quarter it's real and it's tangible. Perhaps more important than the economics is Live Oak Bank's adoption to these technologies forming next-generation cloud-based tech stack that allows us to build best-in-class FinTech life products.

Let's move on to the next slide, I'll do a quick Canapi update. As you know it's the successor to Live Oak Ventures and as a reminder, we closed out $650 million at the end of last year with 44 banks at the ABA and the ICBA. We've been operating for about 18 months and as you can see, we've been very, very busy. The thesis is working and Canapi continues to win leads on strategic deals. All these companies offer services that really help banks. Much like Live Oak Ventures, our banks benefit by implementing best-in-class technology. We've either already implemented or in the process of implementing companies such as Built, Alloy, Neuro, MX, Finxact, Notarize and Orum.

One highlight this quarter is Blend's IPO. We're obviously super excited about that. We actually are [Indecipherable] starting the harvest phase of the fund and as a reminder Live Oak not only invested a significant amount in the fund itself, but recieves management fees and carry all which will be earned and realized over the years to come.

Huntley, Over to you.

Huntley Garriott -- President-Live Oak Bank

Thanks, Neil. Thanks, Chip. Pretty remarkable quarter across the board. Well, I'll start on Page 16 and we'll get to the financial results in a minute, but really first wanted to highlight just the consistency of our strategy which is shown in this slide for a while and we tweak the key messages that always remains kind of anchored on the same topics. And the other thing I want to do is just take a minute to recognize the tireless effort of all of our folks to execute this. Since PPP, we have been running flat out across every aspect of the Company and it's really showing up in these results.

So, taking care of our customers has always been kind of vital to our DNA and we continue to do that even as our customer base has grown dramatically. We mentioned the COVID six verticals that we've been concerned about and watching. We've visited in person over half of those customers and just remarkable to see sort of their positive response to that and an overall sort of strength that portfolio. Customer outreach continues to differentiate across all of our markets, both in terms of sales and in terms of our portfolio. It has never been more important to take care of our team as it is today, and we continue to stay laser focused on that. As we've grown, we've continued to invest in them. Chip mentioned the bonus that we paid in this quarter. We've also focused on supporting them with flexible hybrid work models and incremental resources. We've also invested more heavily in giving back to our community with an exciting equity investment in a FinTech company call Philanthropy designed to help democratize donor-advised funds and we've developed new models of impact investing and driving inclusive small business. Our mission to be America's small business bank continues and our relentless quest to define the bank of the future reaches an important upcoming milestone with our deposit conversion fast approaching.

So flip to 17. It's an extraordinary balance sheet growth this quarter, both linked quarter and year-over-year. As the PPP loans run off, our stated balance sheet remained roughly flat, but our core loan growth, 10% linked quarter and over 40% from a year ago. Through our retained earnings and success in our FinTech investing, we've been able to grow our capital base to support this as well.

Revenue and earnings growth on the next page really solid as well. The record loan originations that Chip mentioned drove our balance sheet. Core revenues up 13% quarter-over-quarter and adjusted pre-tax pre-provision earnings as Chip mentioned, up 50% over the prior quarter. So talk about notable events and what's notable about these is that there's less of an unusual. So again, our efforts to try to reduce volatility in our earnings and increased consistency. The Greenlight gain clearly stands out, dominates the headlines. Aside from that, loan origination, really strong gain on sale margins that drives the revenues. And then the last of these market priced RSUs that we've talked about over the last number of quarters vested this quarter and so those are behind us now and reduce that ongoing income statement volatility.

Turning to PPP, Chip summarized these impacts, so we don't need to go into too much detail. We still have over $900 million of PPP loans on our balance sheet. Forgiveness was about $500 million in the quarter, but they've really slowed. And as you can see, the revenue is starting to trail-off in the last couple of quarters. The impact of this will continue to decline as that program winds down.

Turning to our franchise fundamentals, loan growth is what really stands out here, 10% linked quarter growth again. The other thing that really stands out is our guaranteed loans that are eligible for sale. The treasure chest as we've called it, which has now broken through the $2 billion barrier and it has basically doubled in the last year, so an incredible source of earnings for us, but also a great contingent source of safety and capital. Excluding PPP, all of this drives net interest income growth of 15% linked quarter and 70% year-over-year. Achieving these levels of loan origination is a combination of all the investments that we've made in our people, our products and our markets. We found ourselves well positioned to leverage the government programs that were designed to support small businesses in difficult times. And as the economy rebounded, we've seen a notable increase in business activity beyond the SBA, as well. As Chip mentioned, our loan origination remains balanced by product, vertical and geography. We continue to attract great talent to the bank and all of our folks continue to rise to the occasion.

We recognize that we are the beneficiaries of some tailwinds from fiscal stimulus and SBA enhancements in our business, but we've not compromised our underwriting or our credit standards in any way to achieve this growth. As we look at the franchise today, our loan pipeline continues to be near our all-time high, even after the quarter we just came off. As the SBA enhancements are scheduled to end this quarter, we expect that to impact volume to some extent and our secondary market pricing to some extent as well, but we feel really confident our franchise in a great spot to continue to provide capital to small businesses.

So looking at our secondary market activity, we sold slightly less loans in the quarter, but at a meaningfully higher gain per million. The market overall remained relatively flat at historically high levels. The difference in the increase in our gain per million being that we sold more loans that had these SBA enhancements, namely no guarantee fees and the impact that had on pricing. We expect that to continue to see those loans through the third and into the fourth quarter as they run through our pipeline, but once those enhancements run their course, we do expect to see some compression in that gain on sale number. Looking at the amounts we are selling, we're still really in line with our overall targets, actually holding a little more of those SBA and USDA than our target but really no overall strategy shift there.

On the expense side on Page 23, really solid story. We continue to grow the team, adding over 60 new positions already this year net. Otherwise, expenses are pretty well contained. You'll see the special bonus that we accrued for $4 million this quarter to our employees other than senior management to participate in the Greenlight gain as Chip mentioned and also just recognize their extraordinary work We continue to gain efficiency overall with an adjusted expense base of about $52 million coupled with strong balance sheet growth drove that adjusted expense asset number down another 5 basis points to 71 basis points.

In the deposit market, Page 24, the macro environment and competitive landscape continued to remain rational. Industry wide, customer deposits are up and the preference has shifted decidedly toward more liquid savings accounts. Our deposit business continued to match our loan growth and balance sheet needs. During the second quarter, we added another $200 million of balances while continuing to lower our cost of funds by 23 basis points, driven by continued CD rollover and lowering our savings rate by an additional 10 basis points to 50 basis points. Our savings offering remains well positioned and we do not see much more savings or pricing or mix shift unless something unexpected happened to the market.

We'll continue to see our CD cost of fund decline as lower cost new production replaces the higher cost legacy balances. We look at our total operating cost of funds of 104 basis points and feel if that remains well below industry funding costs when you include all the physical branches and operation cost of running a traditional bank relative to the 10 basis points that it cost us from an operating expected [Phonetic] to run these and that includes all the work we're doing on conversion.

Late last year, we launched our next-generation deposit platform on Finxact by offering savings and CDs to new business customers. In 10 months, we've onboarded nearly 3,000 new business customers providing over $425 million of funding. This quarter alone, we added a 1,000 customers on $270 million of growth. Our new platform provides a simple and elegant user experience and we remain one of the few providers where a business can open an account end to end entirely self-service with no human engagement. In late August, we will convert all 60,000 of our legacy consumer savings and CD customers onto our new platform.

We're very excited for this moment to bring a new generation of banking capabilities to our customers, but we're equally as understanding of the impact change can have on our customers and are 100% focused on providing a smooth transition, that's priority Number 1 for the next couple of months.

Once we're fully on our new Finxact platform, we expect this to unlock our ability to grow even more efficiently and effectively than before. It will allow us the opportunity to offer new competitive savings products for existing customers, continue making progress on our checking account offering, provide the platform to bring deposits and working capital under one umbrella and to deliver increasingly more sophisticated products and services to them.

To date, we've been very methodical with our checking activities and have been fortunate in the strength of our existing deposit products to fund the Bank, focusing only on the offering, the checking account to employees and a small internal pilot. We've done so number one, to maintain strict focus on conversion and number two, to incrementally build services that our future small business customer -- checking customers will demand. Following conversion, we anticipate rolling out beta programs local in Wilmington and some other select areas. Over time, we'll continue to add new products and services to that operating suite that allow businesses to spend, borrow, pay, get paid and manage their business, all in an easy intuitive digital fashion

So, flipping the page to NIM and liquidity, the continued strength in our loan yields coupled with a lower deposit cost led to core NIM expansion of 17 basis points in the quarter, which was masked in the reported numbers by lower PPP fee amortization. We ended the quarter with a bit more normalized liquidity levels just under 20%, which should continue to drop a bit more over the back half of the year.

Putting all that together, we get the eye chart on Page 27, which is our non-GAAP pre-tax pre-provision income, the core earnings as we look at it. There's a lot to uncover here and there is even a bit more in the reconciliation in the appendix, but overall, really great trend across every line item. Core net interest income growth, adjusted for PPP, you can see there, up over $7 million quarter-over-quarter, solid non-interest income growth even without the technology gain, expenses in line when adjusted for the special employee bonus and the final market are a few adjustments, all lead us to $37 million of core pre-tax pre-provision earnings, and that's up $14 million -- $13 million [Phonetic] from last year and over doubling from a year ago. We're extraordinarily proud of these results, but we also remain confident, we can continue to grow this in a prudent manner going forward.

So turning to capital and liquidity, capital remains strong with 12.5% CET1, leverage ratio just under 9%, over half the balance sheet remains government guaranteed and we hold a significant amount of liquidity. To grow the loan book 10% linked quarter and maintain capital ratios is a tall order. Fortunately, this quarter the Greenlight gain helped support that growth. Going forward, we don't expect to keep running it quite that pace for our balance sheet growth, but we do continue to have option to manage our capital efficiently.

So turning to 29. So this is our leverage ratio and you can see the Greenlight gain there being a meaningful driver in supporting that capital base quarter-over-quarter despite the significant balance sheet growth.

I'll wrap up with a chart we've shown you for a while now and we're really proud that this is the first time that every color on here is green on the screen. Even adjusting for the Greenlight gain, we've achieved the metrics that we've been striving for in terms of profitability and growth. It's been almost a three-year journey since we elected to start holding more of our loans on balance sheet. We aren't standing still though, far from it. We genuinely believe the best is yet to come from us as we continue to grow our lending franchise and develop technology and products to further help support small businesses.

With that, let's go to questions.

Questions and Answers:

Operator

[Operator Instructions]

Our first question comes from Steven Alexopoulos with JP Morgan.

Steven Alexopoulos -- JP Morgan -- Analyst

Hey, good morning, everyone.

James S. Mahan III -- Chairman and Chief Executive Officer

Good morning Steve.

Steven Alexopoulos -- JP Morgan -- Analyst

I wanted to start, so one of the key questions is obviously Chip around the origination growth. What was it about this quarter specifically, when I look at the new verticals and how much they really popped up, what was it about this quarter that caused such strong origination growth?

James S. Mahan III -- Chairman and Chief Executive Officer

I think it's just comprehensive, I don't know. It's just frickin everywhere as we said, the top of the call geography, different verticals, the general lenders, the 18 general lenders are now going to be probably a Top 8 SBA lending group by themselves in the country. So we're just beginning to hit on all cylinders. Even Steve may have something to add.

Steve Smits -- Chief Credit Officer

Yes, I'll agree with that. On the SBA side, clearly the enhancements have driven activity and were in the right places and that's across our verticals, that's across the generalists. And so that business just feels like it is really flattering. And then the renewable energy space, there's just a ton of tailwinds in that space and infrastructure build, we've seen a handful of slightly larger deals there. So that was nice -- some nice wins there, timing of a couple deals we've been working on for a while hit. And then across the specialty finance, the sponsor, finance, these are just we're finding really, really great businesses in the right places.

James S. Mahan III -- Chairman and Chief Executive Officer

Those are the larger deals too. I've spent much time on the road this quarter calling on customers with the sponsor group and the senior lending group. These are much, much larger deals that we're looking at, companies with significant balance sheet. So it's across the board Steve.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay. So, when we look at the guidance, right the $3.3 billion to $3.5 billion of originations for this year, that implies I guess, $750 million, $850 million, somewhere in that range right each quarter, is that just being conservative or do you really expect to step down? It could be fairly material from where we were this quarter.

James S. Mahan III -- Chairman and Chief Executive Officer

Well, we seek not to disappoint Steve. The 90% things coming-off Steve Smits, I mean, that's going to affect it a little bit. Usually, Q4 is a pretty good quarter for us. But I would say that we are highly confident that we will be in that range.

Steven Alexopoulos -- JP Morgan -- Analyst

Okay. Then -- thanks. And then finally. So, when we bake everything in the cake, right, there's so many things going on in a quarter, you have PPP still coming-off, you have the SBA enhancements coming-off, you have all these new verticals, total loan growth period end was down a little bit with the PPP run-off. How should we think about total loan growth for the rest of this year? Thanks.

James S. Mahan III -- Chairman and Chief Executive Officer

Well, I think you got to take the PPP. We don't really pay any attention to that. That's why we try to focus almost all day every day internally on pre-tax pre-provision earnings on how we operate the business. Others may have something to say on that.

Steve Smits -- Chief Credit Officer

Yes, in terms of -- I agree with Chip. The core loan growth, ex-PPP, we grew that from $5 billion to $5.5 billion Q1 to Q2. I think it will be hard to maintain that pace. Although there are variables as you know, pre-payment speeds have ticked up a little bit in the last quarter and we expected that from where we were historically really low level through the pandemic, timing of deals that we have that have been in construction to fully fund, how that affects the balance sheet and then what loans we end up selling. So all of those go into the mix. I think the balance sheet growth will continue to be quite strong, a little less than what you've seen maybe in the Q2, but still really strong.

Steven Alexopoulos -- JP Morgan -- Analyst

Great, thanks for taking my questions.

James S. Mahan III -- Chairman and Chief Executive Officer

Thanks Steve.

Operator

Our next question comes from Jennifer Demba with Truist.

Jennifer Demba -- Truist -- Analyst

Thank you. Good morning, great quarter.

James S. Mahan III -- Chairman and Chief Executive Officer

Good morning Demba.

Jennifer Demba -- Truist -- Analyst

So that coordination topic, everything played on all cylinders. What is the pipeline for future lender hires or any verticals of this? [Phonetic]

James S. Mahan III -- Chairman and Chief Executive Officer

Jennifer, we can't understand you.

Steve Smits -- Chief Credit Officer

I think, Jennifer, you were talking about new hires, right? It was a little scratchy on the phone. Is that right?

Jennifer Demba -- Truist -- Analyst

Am I better now? Is that better?

Steve Smits -- Chief Credit Officer

Little bit.

James S. Mahan III -- Chairman and Chief Executive Officer

Not much.

Jennifer Demba -- Truist -- Analyst

Okay. All right, hold on one second here. How is that?

Steve Smits -- Chief Credit Officer

It's good.

James S. Mahan III -- Chairman and Chief Executive Officer

Little bit better.

Jennifer Demba -- Truist -- Analyst

Okay. Okay. You're hitting on all cylinders? What is the pipeline for new hires and new verticals?

Steve Smits -- Chief Credit Officer

Yes, so we believe that we have a pretty attractive platform right now. We continue to see opportunities to hire great talent. And we now continue to sort of evaluate that. And so finding those great people who have experience in SBA primarily, we continue to think we've got great opportunity. In terms of new verticals, we continue to look at a few here and there, they'll be kind of tuck-in ones if from that perspective, no real major splash in the infrastructure space, in renewables, we still see adjacencies there. And then in the sponsor lending that we're doing, we're broadening that just like the generalist and SBA broaden that aperture of the industry who look at, so do the sponsor lending group as well. So we broaden out of the specific industries a bit as we go into some of those more horizontal businesses that we're into.

Jennifer Demba -- Truist -- Analyst

Okay. And the loan loss reserve, you think it could go down further? Could you just talk about how well you think it could go? I know, it's hard, based on the loan losses of methodology to kind of make that kind of statement but...

Steve Smits -- Chief Credit Officer

Jennifer, again, really hard to hear you. Sounds like the question was about loan loss reserves and maybe provision. Is that right?

Jennifer Demba -- Truist -- Analyst

Yes. So how low do you think that -- how low do you think that loan losses could go?

Steve Smits -- Chief Credit Officer

Okay, Jennifer, this is Steve Smits. I'll take a stab at that because you are correct. As I mentioned earlier on in the call, I continue to believe that is trending back toward the pre-provision which is interesting, because remind ourselves that we went over to seesaw at the first of the year, which is a challenging time to do that. So our -- when you look historically, we were running under a different model. So there's some unknown there and we are getting very close as a percentage of our net flows, I always look at the percentage of our unguaranteed to get a feel for where we're actually reserving against. And we are getting close to where we were before the world changed second quarter of 2020. So how low will it go? Hard to say, because there isn't longevity to the seasonal model and how that reacts. I will say that the reserving that we put in place against unknown stress associated with COVID, businesses being forced to shut down or curtail or pull back, as expected, that is starting to burn away and the nice line behind that is, it's burning away because the businesses are actually showing very positive signs of health. We're not going to spike the ball in the five yard line at all, we are constantly reminded that there could be another shoe to drop, we're watching it very, very closely, we know that their balance sheets are strong, that has a lot to do with the Federal programs. And we've got to see if that has some legs to continue. So again, Jennifer, I think -- I feel very comfortable that we're returning to a normal portfolio and feel very comfortable that historically we've always reserved at a very appropriate level. So I do think that it may chop down a little bit as a percentage. I think we're, about 2.5% of net loans, if anyone would like to look at it that feels comfortable to me and that might give back a little bit.

Jennifer Demba -- Truist -- Analyst

Thank you.

Operator

Our next question comes from Michael Perito with KBW.

Michael Perito -- KBW -- Analyst

Hey, good morning.

James S. Mahan III -- Chairman and Chief Executive Officer

Good morning Mike.

Michael Perito -- KBW -- Analyst

Few questions from me. One, just on the opex side. I think, probably you mentioned kind of the $52 million adjusted run rate for the quarter. Just curious if you have any additional commentary about how we could -- we should think about that near-term here I mean, my guess is that there's some upward pressure just given the growth you guys are having, but just wanted to see if that's kind of fair. And if there's any other kind of one-off items in the back half of the year that you expect could have an impact on the cost side whether [Indecipherable] I think have run their course or anything else that we should be mindful of?

James S. Mahan III -- Chairman and Chief Executive Officer

That's good question. I'll bounce over to Brett for any -- his crystal ball as well. I mean, our headcount growth, probably in the 15% range. And so obviously, salaries and benefits is a pretty decent size of the line item. So that growth, we think will continue just our visibility around franchise growth. The rest of the line items, though, I think are relatively range bound, not sort of seeing anything unusual kind of popping up or down out of that. But Brett what do you have to add?

Brett Caines -- Chief Financial Officer

Yes, probably the one thing I would agree with everything at least that nothing going forward that we know of but that's kind of the point of that chart is it pulls out those things that aren't routine. And like you said, the market price are issues, those have exhausted themselves. But the one thing I would add to that and I think this is really important part of our growth story, which we reported today. In the past, we didn't shy away from investing in or hiring when we saw new opportunities. And in a lot of ways those past expenses are what led to our $1.1 billion of originations reported today. So I think there are potentially opportunities where we will continue to invest and make decisions like that that'll pay-off in the future. So that definitely will impact non-interest expense. But other than those kinds of initiatives, it's pretty steady [Indecipherable].

James S. Mahan III -- Chairman and Chief Executive Officer

Yes, let me let me support that too just a wee bit, right. So you know, our guiding principle is to treat every customer like the only customer in the bank. And for the past nine months or so, that's been hard. I mean, we did $1.1 billion this quarter, and the pipe is about the same. We've hired about 100 people so far this year, and we're going to continue to stay the course of trying to keep treat every customer like the only customer of the bank. We will continue to have opportunities to hire other folks that are experienced SBA lenders as we become a bit more of a nationwide platform in that regard on top of increasing verticals. So, that's all I got to say on that.

Michael Perito -- KBW -- Analyst

So helpful, thank you. And then Brett maybe sticking with you just for a second on the margin. It seems like if I'm looking at Slide 26, there's a comment that there -- lot of the -- well, maybe not a lot, but there was maybe a bit of loan production that was toward the end of the quarter and some of the liquidity deployment didn't really manifest in the second quarter NIM that you guys experienced. Just curious if you can maybe take that step further. I mean, is it fair to think that that NIM can maybe bounce back barring something really unpredictable happening on the PPP side in the third quarter and kind of get back up toward where you were in the first quarter or are there other dynamics that we should be considering?

Steve Smits -- Chief Credit Officer

Yes, well, I guess first of all, I say on that -- on the slide, you're referencing Slide 26, I would say focus on the 3.46% to 3.63% trend, just kind of excluding the impact of PPP on Q1 and Q2. And then on the right hand side of that chart, liquidity at 22.2%. That is probably a little bit higher than where we will run as normal ops, just had some things going on in Q2 as part of our liquidity planning that was just there. But probably somewhere sub 20 is probably would be more normal operation for liquidity percent and yes as that's deployed and some of that excess liquidity runs-off, you could see, a pop or maybe not pop isn't the right word, but continued trend on that adjusted liquidity, the green 3.63.

Michael Perito -- KBW -- Analyst

[Speech Overlap] Yes, I could you say differently, the trend of the green line moving upward, there's still some potential more leverage there. I think you guys have said in the past that the core NIM could go to the high 3s, is that still generally a principle that that's still solid?

Steve Smits -- Chief Credit Officer

Yes, I think that's correct. North of 3.5% you know 3.75%, but it's 3.5% to 4% range or high 3s, as we said.

Michael Perito -- KBW -- Analyst

Got it. And then just last from me. I appreciate all the color on the call thus far given but just on the SBA gain on sale. Just curious if you guys have any -- from the first few weeks of third quarter here, have had those margins kind of remained elevated or is there any other kind of market dynamics at play that you guys think could give that higher margin some length here as we move into the back half of the year or is the better base case to-date that there's maybe some normalization there? I'm just curious what you guys think on that.

James S. Mahan III -- Chairman and Chief Executive Officer

Yes, I'll start and Brett can clean up. Market remains really strong, obviously a ton of liquidity everywhere, and kind of a start for assets. If you think about the SBA enhancements, there's about a 55 basis point guarantee fee that is waived right now. And that's a direct passthrough to the loan buyer. And so if the duration of the asset is four plus years, that's a couple points on that gain on sale, that will continue to enjoy until those enhancements run out. Unclear if all of that gets given back just how competitive the bidding market is right now, and we'll say, but we don't see anything that would suggest that that would change as we look at it. Pre-payment speeds have ticked up a little bit, but aren't crazy. That enhancement will be the big driver of the market once it starts to roll-off.

Michael Perito -- KBW -- Analyst

Helpful. I should probably know this, but do you guys know is there a duration that which that enhancement is good through at this point has that been communicated or...

James S. Mahan III -- Chairman and Chief Executive Officer

So the program...

Michael Perito -- KBW -- Analyst

The waiving of the fee...

James S. Mahan III -- Chairman and Chief Executive Officer

The waiver is through September 30, subject to availability of funds. So we'll say it'll be no later than 9/30 it will be exhausted.

Neil Underwood -- President-Live Oak Bancshares

Well, and the 90% is in the infrastructure bill that is being kicked around, but certainly don't even think about spiking that ball.

Michael Perito -- KBW -- Analyst

All right, listen guys, thank you for taking all my questions. As always, I appreciate it.

Steve Smits -- Chief Credit Officer

Okay.

Operator

Our next question comes from Chris Donat with Piper Sandler.

Chris Donat -- Piper Sandler -- Analyst

Good morning. Thanks for taking my question. Just Chip on that -- last time about spiking that ball on the infrastructure bill. I don't want you to handicap the prospects of that bill, but an extension of the waiver is something that Congress is considering, is that fair to say?

James S. Mahan III -- Chairman and Chief Executive Officer

Yes, I talked with our government relations person the other day and believe me, none of that's in our projections.

Chris Donat -- Piper Sandler -- Analyst

Fair enough. I just wanted to see if that's in the realm of possible outcomes. I know you've answered a bunch of questions around expenses. But I just want to double check one thing, because I've heard anecdotes from some FinTech companies about some more elevated expenses around hiring new employees, but with the people that you're going out and hiring, I imagine you're competing more with banks for like SBA expertise, is that a fair assessment of what you're seeing in the hiring market as you're growing your loans originations?

Steve Smits -- Chief Credit Officer

Yes, we're -- yes look, we're hiring across the board. But specifically, the majority of the growth is in the lending side. And that's lenders, underwriters, closers. And to that competitive, I think all labor markets are competitive right now. But we're really in the market with the banks on that front, we are active in the technology space as well. And there is clearly some pressure around that less of a percentage of our overall hiring than the banking side as we sit here right now.

Chris Donat -- Piper Sandler -- Analyst

Okay. And then just for me one last question on competition. Thinking about your new deposit platform and is there a way to characterize where you think you stand competitively with banks on one hand and then with companies like Square on the other with Square making more of a push into they're already there in small business lending and small business payments, but getting more involved in small business checking, is that something you are watching or deeply concerned about or not so much?

Steve Smits -- Chief Credit Officer

Yes, watching very closely, right, and the market continues to evolve, I think we look at both sides as very viable competitors that we are working toward. And I think what we believe we can do is sort of be the best of both. And so the understanding of the client base, if you think about veterinarians, you think about pharmacists, you think about these industries, we've been in for a decade or more knowing that customer and what we can provide if this technology platform is what we have designed to be, it will be flexible enough that we can create bespoke solutions for industries and these industries that we serve with capital and that we know an awful lot about and that's a slightly different model maybe then Square which obviously has a tremendous breadth among small businesses and what they're trying to do with more of that small balance loan and then moving that into savings and checking, but they're a very, very worthy competitor, no doubt.

James S. Mahan III -- Chairman and Chief Executive Officer

Chris. So we have not talked on today's call much at all about core conversions. But you having been in the banking business for a long time know and understand that a core conversion is something like a heart transplant and brain surgery at the same time. But that said, Neil, relative to our tech stack, as it emerges past that core conversion to 14 separate vendors, the tech stack that you referred earlier in the call and certainly our call this week with one financial, which has a similar tech stack in the neo bank along the lines of Chris's comments, you may just want to comment on how you see all of that playing out.

Neil Underwood -- President-Live Oak Bancshares

Yes, Chris I think that from our view fintechs are actually setting the standard in terms of beautiful onboarding customer journeys for this frictionless onboarding. And so to do that they've built purpose built cores, they've got R&D budgets, hundreds of millions of dollars of R&D budgets. We set down a path in 2016 to incubate what is today Finxact. And, the best testimonial to that is when we looked at putting PPP loans on a core last year, literally it was six days to build the integration and we set up a brand new product on a core and so we believe -- we talked about convergence where fintechs are going to have to become more like banks over time from a licensing cost to fund perspective, you're seeing that with Square, ILC, you are seeing that with Radius and LendingClub, Borrow, I mean, the list goes on. Banks at the same time are going to have to implement these new technology stacks so they can build best-in-class products. And we just see that convergence continuing. We think we're in a really unique spot as a bank because you know, this conversion represents us completely getting off one of the [Indecipherable] and now focusing on this next gen core and this is -- this has been a build a conversion. Now the fun begins. Now we can actually build new innovative products for our small business customers and that's super exciting.

Chris Donat -- Piper Sandler -- Analyst

Okay, sorry. Like I said, that was the last one that wasn't entirely accurate. Just on the notion -- sorry about that. On the notion of building new products and I think someone used the word bespoke, is that that's really the vision, right? You have the customer relationships, and you're not trying to build something that's self-service for small business. You're trying to -- is it fair to say you are trying to build something that empowers your lenders and other people within Live Oak to do new things for their customers, not so much for their customers to just go out and do it themselves. Is that reasonable?

Steve Smits -- Chief Credit Officer

I think convergence is the right word, Chris, that, we have lived in a world with bankers who know our customers really well, a lot of human interaction, high touch for a high value add larger product. There's a lot of products and services that customers want to self-service. We need to provide those. We need to offer those digitally in a beautiful user experience but be able to help them when they want to do something more value add that they need somebody and to seamlessly integrate that, again back to we're in a pretty interesting position where the capabilities to deliver the technology to self-service when they want to and the experience and the knowledge in the industry is in the verticals and in banking to deliver that touch to and that's really where we're headed.

Chris Donat -- Piper Sandler -- Analyst

Got it. Thanks very much.

Operator

I'm showing no further questions in queue at this time. I'd like to turn the call back to Chip Mahan for closing remarks.

James S. Mahan III -- Chairman and Chief Executive Officer

See you next quarter folks. Thanks for dialing in.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Greg Seward -- Executive Vice President-General Counsel

James S. Mahan III -- Chairman and Chief Executive Officer

Steve Smits -- Chief Credit Officer

Neil Underwood -- President-Live Oak Bancshares

Huntley Garriott -- President-Live Oak Bank

Brett Caines -- Chief Financial Officer

Steven Alexopoulos -- JP Morgan -- Analyst

Jennifer Demba -- Truist -- Analyst

Michael Perito -- KBW -- Analyst

Chris Donat -- Piper Sandler -- Analyst

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