Good day, everyone, and thank you for standing by. Welcome to the Q1 of 2022 Live Oak Bancshares Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, General Counsel for Live Oak Bancshares, Mr. Greg Seward. Thank you. You may begin.
Thank you, and good morning, everyone. Welcome to Live Oak's Q1 2022 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, 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 reference 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.
Thanks, Greg. It has certainly been an interesting last few months in the capital markets, and Live Oak Bancshares has participated in that volatility. Welcome to our Q1 earnings call, or should I say, stay the course call, or better said by Winston Churchill, "Stay calm and carry on call." Greg, let's go to slide five. I cannot tell you how pleased we are with the growth in the core earnings of our business. Variances with PPP and the marks on the Live Oak Ventures investments make it difficult to understand the true operating earnings of the business. Key in this analysis lies in the understanding the risk in our loan portfolio.
At this point in the cycle, I am still proud and amazed that our loans over 30 days past due were just a little over $4 million on a loan book of almost $7 billion. BJ's credit quality slide also notes non-accruals of $25 million. Interestingly, over half are making payments as agreed or in the process of being placed back on accrual. All expected losses have been charged off or are properly reserved. This metric tells us more than any other relative to the growth in the true earnings of our business, given how we lend money to small business America. Moving on to the next slide 6, Greg. This was our best Q1 ever. As you can see, although Q1 is historically our slowest quarter, we grew 29% over last year.
Over the last four years, our compounded annual rate of growth for the Q1 was a healthy 21%. Just a couple more comments before I turn the call over to BJ and Huntley. I wanna talk a little bit about the future of our business and the future of our industry in general. All 280 billion lines of software code that run every bank on the planet is gonna get swapped out over the next decade. To support this point, we need to look no further than the Microsoft and Amazon recent earnings releases. Amazingly, two days ago, Microsoft announced earnings of $17 billion on $49 billion in revs. Revs on a very large base grew 18% year-over-year and earnings of 8% year-over-year.
Shockingly, the cloud business was up 32% with $23 billion in revenue, so $23 billion of the $49 billion was cloud-based. Microsoft now has 20% of that market, up from 7% in 2016. Market leader Amazon Web Services owns 40% of that market. In Q1, Amazon's cloud infrastructure services business grew a whopping 46%. Relative to taking advantage of these cloud-native API first initiatives and building banking products on next gen core processors, we were first. The sale of Finxact to Fiserv obviously created a $120 million gain, $125 million in pre-tax cash. We started that business with the Sanchez brothers in December 2016 with the help of Frank Bisignano, who at the time was CEO of First Data.
First Data sells to Fiserv, Frank assumes the helm there, and immediately acquires the company as Fiserv's next gen core processing platform. Fiserv will provide the Sanchez brothers the capital, over $100 million, and importantly, related implementation capabilities to allow the beginnings of the digitization of our industry. For affirmation of a change in our industry, one needs to look no further than the Wall Street Journal article last week outlining the efforts of one William Hockey. William is the co-founder of Plaid, a fintech payments company. The article is titled Plaid Co-founder Takes Aim at Rickety Banking Tech. He bought Northern California National Bank for $50 million. He renamed the bank Column. He developed his own banking platform from scratch over the last three years, primarily to serve fintechs. Let's review the success of his first company, founded in 2013 while a student at Emory University.
Raised capital in July of 2013 at a $13 million valuation. Two years later, $53 million. June of 2016, $225 million. December of 2018, value of the business is $2.6 billion. Tried to sell to Visa for $5 billion. That was canceled in January of 2020. Raised, one year ago, $425 million in cash at a $13.4 billion valuation. For our industry to take an OCC-regulated Silicon Valley startup lightly would be a mistake. The point is we have been building toward this since 2016. We are going to stay the course. BJ and Huntley are going to tell you just where we have been and how we're gonna do it. BJ?
Great. Thanks, Chip. Appreciate that. Good morning, everyone. We'll look at the quarter and talk about how we did and what we're looking like going forward. Starting on slide five, you'll see that our Q1 earnings per share were $0.76. On a year-over-year basis, we generated 91% growth in adjusted PPNR, driven by 44% revenue growth on 24% expense growth. The revenue growth was driven by loan production of $865 million, as Chip said, up 29% from Q1 last year and our highest Q1 of production ever. We generated 30% loan growth on the balance sheet and the outstanding core business performance, along with continued success with our ventures investing resulted in 19% year-over-year growth in tangible book value per share. Excellent value creation.
We delivered and continue to do so on key accomplishments across the three dimensions of our business, verticality, our core lending business, scalability, which is growth in our lender platform, our products, and our technology, and our optionality, which is our Fintech ventures activities that foster innovation and create organic capital. Turning to slide nine, you'll see more detail on our adjusted earnings highlights. On a linked-quarter basis, adjusted PPNR was down 5% on revenue growth of 3% and expense growth of 10%. I'll get into revenue and expense growth drivers in more detail starting on the next slide. The loan loss provision was again modest and credit quality remains strong.
Turning to the revenue slide on slide 10, you'll see total revenue growth of 3% linked-quarter and 44% year-over-year was driven by the strong loan growth and resulting net interest income, which was up 5% linked-quarter and 44% year-over-year. Net interest margin expanded again, up another eight basis points linked-quarter to 3.91% with a reported net interest margin of 4.02%. On the fee income side, we saw healthy sale premiums on our guaranteed loan sales in the Q1 , with the average net gain of 109%. As you can see in both the table in the bottom left and the commentary in the bottom right, we sold $220 million of total guaranteed loans in the quarter, disproportionately weighted towards SBA sales.
Two things we saw during the quarter led us to lean into SBA sales this quarter. Number one, as you can see in the table, USDA volume was very light. Eligible USDA sales volume shifted out of the Q1 into future quarters. Secondly, while premiums remained relatively stable with recent trends during the first 45-60 days of the quarter, we did start to see some meaningful changes in demand and pricing due primarily to shifting market sentiment on the Fed's rate and economic outlook. With the fintech gain of $120 million booked in the second quarter, we will take the opportunity to moderate our guaranteed sales in the Q2 and allow the markets to further digest the Fed's rate moves. Turning to expenses on slide 11.
As we discussed on the Q4 call, we anticipated another strong hiring quarter, and we had one. We added 44 net new Live Oakers in the Q1 . As we discussed on the last few earnings calls, we've been working hard to help our lender support teams, underwriters and closers primarily, to catch up to the significant ramp-up in volume we saw in 2021. Good news on that front, we have caught up and have already seen a 10-day improvement in average time to close from last year's level. In 2022, there will be more of a hiring emphasis on technology talent, which you can see in the chart on the left. 35% of our net new hires in Q1 were in technology, with 45% in lender and lender support.
Huntley's going to give you a little more color on the tech hires in just a moment. Turning to the balance sheet and returns on slide 12. Growth was again strong, both linked and versus prior year quarter, as were returns on equity and assets and tangible book value growth year over year. Slide 13 has more information on originations, which Chip discussed and Huntley will cover in a bit more detail. Turning to slide 14, this shows a waterfall of our loan growth quarter- quarter, where it came from, with net loan growth before sales at 7% linked quarter, very solid performance. Turning to slide 15, strong loan and deposit growth has been achieved with well-disciplined pricing.
Average core loan yields have remained stable and our deposit costs declined over the course of 2021, leading to strong net interest margin expansion of 45 basis points adjusted for PPP to 3.91 and a reported NIM of just over 4%. While we're clearly headed into a much different interest rate environment, a NIM starting point of 4% is surely a nice one to have. Turning to credit on slide 16, our long-standing practice of frequent contact with existing customers and strong underwriting remains a top priority. As Chip talked about, you'll see that our non-accruals and past dues remain low, and we had very low net charge-offs again in the quarter. On slide 17, you see in the upper right capital ratios remain strong.
Note the green 21.3% bubble we call out on the graph, which is the capital plus reserve coverage of the unguaranteed portion of our loan portfolio, which is almost two times higher than most other banks. This plus the $2.9 billion of highly liquid guaranteed loans on our books give us both comfort and balance sheet flexibility. Slide 18 shows continued top quartile performance versus industry peers in soundness, profitability, and growth metrics. Before I hand it over to Huntley, I just wanted to wrap up with a few slides that might help provide some context for the future environment. Sometimes it's helpful to take a look back before we take a look forward.
On slide 19, as I talked about a little earlier, related to premiums and what we're seeing in the gain on sale market, here we provide two views of the SBA secondary market and gain on sale premiums over a several year period, including 2016 through 2018, which was a period where the federal funds rate moved up 200 basis points. The first, the top half or the first graph in the upper left, is for variable rate product and the second is for five-year fixed product, two of our most common guaranteed SBA sales. A few takeaways here. Number one is the variable rate product, due to its relatively steady spread characteristics and pooling ability, tends to have relatively steady gain on sale premiums through various rate cycles.
The second takeaway is gain on sale premiums for fixed rate product tend to fluctuate a bit more in different environments, as you can see, driven by a combination of wider spread variability, prepay speeds, and due to its lack of poolability, will be more susceptible to changes in demand due to a smaller set of buyers. What's the point? The point is, in an unsettled market with large moves in funding costs and appetite, we have to continue to be discerning about what we sell versus hold on the balance sheet, particularly until markets digest the large anticipated moves in rates due to the Fed action. Wrapping up on slide 20, perspective on long-term performance is helpful as well.
As you can see, Live Oak through both rising and falling rate cycles has been consistent in delivering strong credit quality, growing loan originations, on our balance sheet leading to healthy NII growth, and we'll continue to strive to do the same going forward. With that, I'll turn it over to Huntley to give a little bit more color on where we're growing and investing. Over to you, Hunt.
Thanks, BJ. Another busy quarter here. You can see some of the highlights on slide 22. I'm gonna touch on a couple of key themes this morning. Again, the strength of our core lending business, the talent acquisition and the strategy there, and then our technology and product roadmap. If you look on 23 on the lending side, you know, we continue to do what we do best, which is provide capital to small businesses. You know, as Chip mentioned, the Q1 does run traditionally a little slower than the rest of the year, but we still originated $855 million across the franchise, up 29% from last year.
Small business division had a great start to the year, as you can see in the bubbles led by some of our flagship verticals, healthcare, veterinarian, investment advisors, and then support from our generalist strategy. We've also seen some success in some of our newer verticals like RV parks, and we have a handful more that we're in the early stage of exploring. The generalist strategy for us has been one, I'll talk about it more in a minute, that's been quite exciting as we continue to add folks around the country focused on business acquisitions. The demographic trends of the aging and retiring small business owners continues, the silver tsunami, as they call it, and we think we're well positioned to support business owners in those change of control transactions.
Our specialty finance business was similarly strong, led by our middle market sponsor and our government contracting teams. As a reminder, we tend to focus on companies with EBITDA between $2 million and $10 million in that sector, and we continue to follow the flows of equity capital that are coming into that space. The renewable energy business was off to a slow start this year with some construction projects impacted by supply chains and some pressure on certain environmental attributes. Overall, though, the demand for and in the investment in clean energy continues to accelerate, and we feel really confident about opportunities for us there, and the pipelines there look really good. Turning the page, we've talked about this in the past.
This is a quick map of the U.S., and the dots are where we have generalists scattered around the country working in those markets and around those markets on business acquisition loans. As you can see, we've got 24 of those lenders currently. Year to date, we've hired 7 folks in towns like Cincinnati and Minneapolis, and there's a lot of great markets that we haven't touched yet, and we will continue to look for putting great people on the field. All in all, the momentum feels really strong. We don't see it in our numbers as it relates to credit or pipelines or anything, but we also are cognizant that we're headed into a more uncertain macro environment with interest rates and the economy.
As we prepare for these environments, I think it's worth noting that our SBA expertise has an element of counter-cyclicality to it. In the past, we've seen conventional lenders tighten their credit boxes, and the SBA products become more prominent in certain markets, and oftentimes with enhanced government guarantees. We think we're ready for whatever comes our way. As it relates to people, across the bank, we just continue to attract incredible folks here. As BJ said, our primary focus has been on lenders, lender support, and increasingly in building out our technology team, but it's really across the company. You know, in a competitive talent market, we're competing not only with banks, but fintech companies, private equity firms, and lots of others. You know, we brought on 48 net new folks in the Q1 .
That pace will likely moderate a bit in the back half of the year, but we'll continue to take opportunities to bring the best and brightest folks together here, and we think it's a real competitive advantage for us. In that vein, we brought on someone this quarter to launch our first deposit vertical, so that's in the 1031 exchange space, and we're excited about more to come on that space as well. Turning to 2025, Chip went through the rationale of the Finxact sale, but unlocking $120 million of capital allows us the ability to do a few things. First and foremost, it allows us to keep growing our balance sheet without having to raise dilutive equity, which is pretty unique among high-growth banks.
The second is it allows us to accelerate some of our technology initiatives and reemploy some of the capital into fintech investing. The third, it allows us to give a little bit of it back. As in the past, we've shared a portion of special gains, whether it's from PPP or Greenlight with our teammates. We intend to do that again, and we also plan to give a portion of it back to our community to continue the work we're doing to help support underserved small businesses and other community efforts. Turning to technology and product, our small business checking account, which we call Tidal, went live recently, and we have a little over 300 small businesses and a couple million dollars of deposits. Pretty early days, but that's with a basic first-gen product and basically no marketing.
What we have is a baseline to build off of and the ability to add features at a pace that few banks can match. One important feature is an efficient working capital solution, which our customers consistently ask for, and we believe will be important to drive adoption of our overall operating account. We'll start rolling that product out in early Q3, along with incremental checking account features. You've heard us and a lot of folks in the industry talk about embedded banking. Let me spend a minute on what that means to us. At a high level, all the work that we've done to build a cloud-based API-first bank will allow us to create not only unique products and solutions, but also to deliver them in unique locations. We'll do all that leveraging our deep industry expertise.
In this context, if you look at companies that have been successful like Plaid or Stripe, that have made it really easy for technology-first companies to embed financial services solutions, data in the case of Plaid, payments in the case of Stripe, and they embed those into product offerings through a simple developer portal with well-structured APIs. In the small business space, there are literally thousands of verticalized software companies, many of which we know well through the verticals we serve. At the end of the day, embedded banking will provide us with two critical elements. The first is unique distribution channel. You can think of each of these software companies as a branch that will allow us to source low-cost customer acquisition of these small businesses. The second is increased stickiness of these customers as their financial service is embedded in their day-to-day business.
Aside from embedded banking, we also see a lot of opportunity in what we call platform banking, where we can leverage this technology stack to allow third-party fintech companies to build and launch products faster and easier than with their current providers on legacy architecture. We call it platform banking. People have other names for it. We've got a small but growing pipeline there, and we're excited about opportunities as well. We'll continue to build and invest in this platform all anchored on the Finxact core. Ironically, the gain from the Finxact sale to Fiserv will allow us to accelerate our development by continuing to hire world-class technology talent. With this gain, we're able to invest an incremental $10-$15 million per year in technology, some of which is already showing up in our Q1 numbers.
These investments will be spread across all aspects, but specifically around development, cyber, data, and leadership. The major areas of these technology investments for us include customer acquisition, where we already see the benefits of having easy account opening, where we've opened over 10,000 small business savings and CD accounts, and the growth in those balances is over 70% in the last year. Customer experience is another critical area where the challenger banks have truly excelled, and it's critical for us both offensively and defensively to be best in class. As we fully get onboarded onto this new technology system, there are meaningful opportunities for us to improve efficiency, specifically around data quality, data entry, and finally, we're always thinking about disruption.
We think we're still in the early stages of some tectonic shifts that are set to occur in the way small businesses bank, the ease with which they open accounts, they access capital, they move money, and they receive actionable information where they choose to bank, namely within the software they use to run their business. We think of this as effectively building a challenger bank for small businesses within Live Oak Bank, leveraging our deep domain expertise, our incredible teammates, and this next generation platform. While this investment has taken longer than we expected to deliver, we're still equally as excited for what's to come in the back half of this year and beyond. I think we've proven to be reasonably good stewards of capital as it relates to technology investments over time from nCino, Apiture, Finxact, and we view this the same way.
If you turn to page 27 and you look at our investment strategy, we continue to have 2 main areas of focus for our external investing. 1, Live Oak Ventures, which is our direct investing arm, will continue to support the existing investments in our portfolio. We'll augment that with investments in banking infrastructure similar to what we've done in the past, like Finxact. Companies where there's a strategic overlay, like these verticalized software companies that support small business. And then third, we'll also look to incubate businesses internally. In Q1, we made 1 incremental investment in that middle category in the partnership space, and we have more in the pipeline. The other area we continue to be active is in Canapi, where we plan to invest $20 million into the second fund that's currently being raised.
The first fund has made 18 investments in some fantastic fintech companies, many of which we're using or evaluating for use in our technology stack today. Turning to page 28 and wrap this up a little bit. You know, regardless of the economic environment, we have the same core components of our strategy, great people that understand and truly wanna serve small businesses, technology platform purpose-built for them. On the technology front, we're willing to admit that we're playing the long game, and that at times is in favor and at times less in favor with investors. In the near term, we have a rock solid balance sheet, a small business lending franchise that's second to none, the best team on the planet, and it allows us to simultaneously grow our core business and drive profitability there and also invest for the future.
We have an enormous sense of urgency to do all this and confidence we're on the right track. With that, why don't we turn over for questions?
Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. Once again, I'd like to remind everyone to ask a question, please press star one. To withdraw your question, press the pound key. Our first question is coming from Steven Alexopoulos of JPMorgan. Your line is open. Go ahead.
Hey, good morning, everyone.
Morning, Steve.
Hey, Steve.
BJ, I wanted to first follow up on the commentary to moderate loan sales in the Q2 . Is this only the Q2 where you plan to moderate sales? Maybe how should we think about the level of gain on sale revenue for 2Q and then for the full year?
Yeah. Steve, as I said, during my commentary, particularly on the fixed rate product, if you think about what's going on there and how we price those loans that then go into the secondary market, they are largely based on a prime plus type rate quote. Prime hasn't moved up as substantially as we know it's going to, but the funding markets have clearly anticipated that. Spreads on that product and yields on that product relative to this have been compressed. The point was is that gain on sale premiums, particularly around fixed rate products, are under quite a bit of pressure until the market moves through the rematch, if you will, of the appropriate spreads between yields and funding costs.
You know, what we'll do is we'll continue to look at the mix of what we wanna sell, variable versus fixed rate and, you know, respond accordingly. Particularly in the Q2 , yes, we do plan to moderate the sales for two reasons. One is the one I just said, you know, let the market settle a little bit because gain on sale premiums have compressed, probably a bit more than what we think they'll ultimately settle at. But then secondarily, because we anticipated the Finxact gain, which flows through noninterest income, you know, we didn't feel the need to be selling into an environment that wasn't favorable to us. We'll moderate the Q2 , and then we'll evaluate third and fourth as we see what the market's shaping up to be.
Okay. I take it you choose not to give us a range for where you think gain on sale revenue could move to?
No.
That would be correct.
Yeah, that would be correct.
Okay.
We'll see where the markets are in the Q2 , and then we'll go from there.
Okay. Does this imply more on balance sheet loan growth? I mean, should we be again, on sale margins going down. If we think about year-over-year, you know, roughly 30% growth in the origination, should we be dialing up the loan growth expectations for this year?
Yeah. I think we start with what our outlook is for production, right? Which we still feel very strong about. Again, Q1 was a very strong record quarter relative to other Q1s. Our pipelines are very, very strong. Not quite at records that we saw at you know, the second half of last year, but pretty close. We're very encouraged by that. Our production outlook still looks pretty strong. To your point, if we're not selling through to the secondary markets, we do maintain more balance sheet, which will obviously generate more carry income over time.
Yes, I mean, it's kinda nice to have the flexibility that we do with the balance sheet plus, you know, a very liquid secondary market to manage both gain on sale income and interest rate risk. You know, we do still feel pretty good about originations at this point.
Okay. Good enough that I think the prior expectation was above $4 billion for 2022. Is that still intact, BJ?
Yeah, I think we still feel pretty good about that.
Okay. Finally, you know, it's interesting with your stock. I think you're more than double my typical bank in terms of short interest, and the thesis has been gain on sale margins are gonna collapse as rates rise, and then NIM will shrink as rates rise. I think you're telling us that, yes, gain on sale margins are going to shrink a lot in the Q2 . Maybe could we at least level set on net interest margin, right? Strong starting point, but assuming the Fed does go maybe 50 basis points per meeting, can you walk us through where that would take net interest margin to? Thanks.
Say that last piece again, Steve, if you could.
If the forward curve plays out, and let's just say we get 50 basis points at each of the May and June meetings, where should we expect net interest margin to move to?
Yeah. I'll start with what I think I said last quarter on the call when we thought maybe three rate increases were on the horizon for this year. We thought at that point that our net interest margin would float down more towards where we were seeing our core margin at that point, which was the 3.75%-3.80% range. I think with faster rate increases and more rate increases, I think funding costs go up more quickly than loan yields reprice, and so there's more pressure on that in the near term. If rates rise faster, I think we're below that 3.75% range, above 3.50%, but below the 3.75% range.
Once rates start to settle out, we start to see more yield, and spreads kind of normalize, then we should start to see a steady increase from there.
Okay. I'm sorry to monopolize the call. This will be my last question. This might be a dumb question, but I'm gonna ask it anyway. If you look at the industry more broadly, the asset-sensitive banks, whether it be a Zions, Comerica, KeyCorp, Huntington, they're all increasing their use of swaps to pull some of the benefit forward, right? Doing receive fixed swaps to reduce their level of asset sensitivity. Why can't you guys be on the other side of that exact trade, increasing your asset sensitivity?
Yeah, we're looking at different things to do that. You know, it obviously depends on how quickly you think rates are gonna rise, you know, but yeah, we're looking at different options to be able to capture some of that.
Okay. Thanks for taking my questions.
Thanks, Steve.
Our next question is with Crispin Love of Piper Sandler. Please go ahead.
Thank you. Good morning. Last quarter and also this quarter, you talked about investing back into the business and increasing headcount. I'm just curious, have you had any recent issues with recruiting new employees, retaining employees, and then just the impact of having to pay up for employees? Based on Huntley's comments, it didn't really seem like you had too much trouble adding, but just would appreciate if you have any more color there, any more detail.
Hi. Good morning, everyone. This is Renato Derraik. We are actually seeing the opposite of what people would typically expect. Every single position we're opening in the technology space has a range of 60-90 people applying, driven by how modern our architecture is, the passion that people have for velocity and less bureaucracy, and also by the great culture that the organization brings and the new leaders that we brought into the organization. We're actually seeing the opposite effect, and our organization continues to grow, and we have a very large talented pool of folks that are really interested and liable to leverage.
Renato, how many folks have you hired since you? When did you join exactly? What day?
Yeah. Joined in June, second week of June of last year. We hired approximately 30 engineers, leaders in data, technology, cyber across our organization.
Thank you.
I think a similar trend across the lending side of the franchise too. We've got a lot of momentum of people that want to be a part of the platform, the culture. Look, we pay competitively and we will have to do that and, you know, that's a fact that everybody is dealing with. We'll continue to be competitive, but we're seeing great folks across the franchise right now.
All right. Thank you. That's all helpful color. I heard your color on overall production, but I'm just looking to get a little bit more detail on SBA. SBA originations were down sequentially in the quarter. I think that's likely due to some seasonal aspects, considering they were up year-over-year. Curious what your SBA origination expectations are for 2022, at least qualitatively. SBA had a really strong 2021. Would you expect a pullback in SBA in 2022 as there were some tailwinds in 2022 that helped 2021 production, or just how are you thinking about that?
I'll start, Huntley, or you start, and then I'll.
Yeah. Look, I think there's a couple of things. You know, we definitely had a tailwind last year in terms of the SBA enhancements, and those aren't around. So, got that. I think we also look as rates rise, that does affect the eligible market for some deals that don't cash flow as well in a higher rate environment until prices of acquisitions settle out. So again, you could say there's a couple of headwinds. At the same time, we continue to see just, I mean, like BJ said, our pipelines are at or near records. We're bringing on people. You know, we'll bring on a general lender in a market who's got a 20-year experience, and that person will do $40 million of SBA lending for us in a 12-month year.
You know, you think about their ability to do that, we put 7 people on the field so far this year, and, you know, our ability to do that, we add a couple more verticals. You know, it feels like we've got a lot of wind still at our backs to offset that. The macro trends of expansion in certain areas and business acquisition continues to be really strong, and we just continue to try to get, you know, faster and better at what we do, and I think we feel really good about where we are.
The only thing I would add to that question would be you have to bifurcate that, which ostensibly Huntley touched on. You have the theory of verticality in 33 verticals, and people in your business have typically asked us, "Well, what is the organic growth per vertical?" Doesn't work that way, right? You just can't map that. It's up one year, it's down one year. That said, on the other side, in the general side, it's completely different. You know, that is where the growth is going to come. 100% of the SBA lenders in this country have heard of Live Oak Bank, and we are actively attacking probably at least 50 markets. We're in 20 some odd markets today.
I would be shocked if we didn't have, you know, well over 100 lenders in a meaningfully short period of time from the 24 or whatever it was on that earlier slide. We are becoming the platform of choice for these very experienced, you know, not only soundness and profitability and growth and debt service coverage ratio and like you do in analyzing a normal credit, but also in understanding how to architect a deal in lines with the SBA guidelines.
All right. Thank you. Thanks for taking my questions and, for all the color.
Thanks.
Our next question is from Michael Perito of KBW. Please go ahead.
Hey, everyone. Good morning.
Mike.
I wanted to drill down on the operating expense line for a second here. You guys were at, you know, just over $65 million in the . Huntley, you mentioned the $10 million-$15 million of annual kind of investment 'cause of the Finxact gain, some of which was in that run rate. I mean, is it reasonable to add maybe another $1 million or $2 million to that run rate for the accelerated tech investment and then grow that kinda low double digits% moving forward as you guys continue to hire and grow, or would you frame it differently?
Yeah, I mean, I'll start, and Huntley can give a little bit more color, but two things. One is last quarter, we did talk about what we thought expenses would grow at. You know, I kinda said the Q4 was kind of a good jumping-off point. You know, we had Q4 2020- Q4 2021, I think it was growth of 25-ish% in salary and benefits. You know, so I think that that's probably still a good pace for us at this point. It may be a little bit heavier because we're leaning into technology investment because of the Finxact gain. You know, I think that that's still a good number. All the other operating expenses generally growing with inflation.
You know, really the bulk of our expense growth is gonna be on the salary and benefits side. I think the other way to look at this as well, and Huntley might give a little bit more color on this, you know, $10 million-$15 million in incremental annual run rate for technology investment that is going to have what we believe large payoff in the future also means that, you know, the core expense line is much lower. It's $10 million-$15 million lower. If we were simply just running a company for the short term, you know, we'd have far less expenses relative to the revenue that we're generating, which obviously would be nice short term, but, you know, we're building something for the long term, and so this investment, we think, is absolutely appropriate.
Understood. That's helpful. Thank you. Secondly, you know, really appreciate, Huntley, your comments around platform banking and embedded banking and the business checking and all these initiatives you guys have going on, which seem to be on track. I guess the question is, you know, when you guys talk about some of the benefits of these initiatives, you know, it would seem to me that one financial benefit over time would be the ability to have lower deposit betas and lower funding costs, you know, relative to what you historically have performed at. I guess the question is that more of a next cycle benefit at this point though?
Do you think, you know, some of these initiatives as they launch over the course of this year, you know, could grow fast enough where you could see some benefits to the deposit equation, you know, towards the middle to latter half of this tightening cycle?
Yeah. Mike, good question. Obviously as rates start to go up, the value equation gets larger and more attractive for lowering deposit costs. We talked for a while about our funding costs in a zero interest rate environment was about as good as anybody's. Now we have the ability to capture some real value. You know, I think that what we're doing here in the back half of the year is gonna set us up really nicely. You know, I think that we will see benefit next year in our cost of funds and in our balances. We are working every day towards it and you know, and it's a little bit of a race against the clock here, but we feel really good about where we are.
I do think that in this cycle, we're gonna see some impact on our balance sheet.
Michael, just a thing. I mean, I thought you had a good point a minute ago about embedded banking and branch. If you think about the Bank of America, where Micah used to work, who's sitting across the table, they have 5,000 branches. Took them 100 years to build 5,000 branches. Renato, when you think about the architecture that you have created here, and you think about Huntley's earlier comment about Plaid and Stripe and how fast those companies grew in a developer-friendly environment, maybe take a minute and explain to Michael Perito what you've built from an architectural standpoint and the speed with which it might answer his question.
Yeah, absolutely. Huntley mentioned briefly about the developer portal and how we're basically structuring our APIs so that it's really easy for third parties to integrate more effectively with us. Our goal is still to allow engineers and chief technology officers from these organizations that we're partnering with to be able to understand how to connect with us and leverage our services within a period of 30 minutes. That's the quality of the technology architecture that we're putting in place. It can lead to an incredible amount of growth at no incremental acquisition costs for the organization.
Great. Thank you guys for all the color there. Just lastly, I'll hop back in the queue and listen. Just on the platform banking, can you guys give us a sense of what that pipeline looks like? Are we looking at, you know, fintechs that are more likely to be like in your venture investment arm, like early mid-stage? Are you guys looking at more larger companies, you know, even broader than fintechs that are looking to offer services? Just how do you guys think about that pipeline and the types of opportunities within it? Thanks for taking all my questions.
Absolutely. I'll start with this one. Look, there is at least one company that's in our ventures investing right now that we're looking at. I think what we started as a framework is are there ways that we can help small businesses out? Are there Fintech companies that serve small businesses? That's a natural extension of what we do. There's a body of Fintechs out there, clearly that are serving small businesses in one way or another, and can we help partner and leverage that? That's not exclusively the case.
I think we've been less apt to go after the largest Fintech companies in that realm to date and really focus on where maybe we can have a bit more of a strategic relationship, but also drive the economics either on a per unit basis or by generating sort of low-cost funds, et cetera.
Thank you.
Our next question is from Jennifer Demba of Truist Securities. Please go ahead.
Thank you. Good morning.
Hey, Jennifer.
Wonder if you could kind of give us some more color on where exactly you are with the embedded banking and the plans for the second half of the year rollout, where you are, and is that product still going to be for vets?
Yeah, we're basically in the process of building our critical foundation in this quarter. It has to do with the safe and secure way of exchanging communications, the developer portal that I was just describing. Starting in Q3, we're going to basically be putting specific services in our new portal and establishing the initial partnerships with the companies that Huntley was describing.
Jennifer, to your point, the first couple of partnerships and companies that they're spending a lot of time with are in our traditional vertical. Veterinary healthcare, still the place. There's some others as well, but it will be consistent with, I think, what you've heard before in terms of those early, you know, pilots and partnerships.
When you move on to other industry verticals after you have the vet product rolled out, how much faster do you think the development can go in those subsequent verticals?
It can take less than a week for us to onboard a new partner with the new technology foundations that we're creating.
My other question, most of my questions have been asked, but just curious, your asset quality's, you know, been terrific. What do you see as the most vulnerable loan buckets as rates go up in terms of the higher targets?
Steve Smits, in your purview.
Jennifer, thank you. This is Steve Smits. First of all, my comment is I have pretty good confidence in the health of our portfolio today. Also really good confidence in what it is going to look like going forward because we know our customers very, very well. We've always been best in class in servicing. We continue to do so. If anything, we've gotten even sharper throughout the past two years. We feel like we have a good, I would say less about specific verticals because we really don't see right now any systemic trends to a specific vertical. More about themes that we watch very closely. Labor market, of course. Every vertical to some degree has some challenges around the labor market that we need to understand.
We're very specific about understanding that with each of our customers. Of course, inflation and fuel. We have small exposure to businesses that have a heavy reliance on fleet, for example, but certainly a few customers that we look at very closely and how they're navigating, how sensitive is their pricing to their end customers, if they can keep up with the inflation pressures. I would say those are the pressures that we look very closely at. However, I will say, we feel even with the labor market, while they're all experiencing some degree of stress, I feel really good that they're navigating quite well, and I don't have really a huge concern that they're not doing the right things and that we're gonna be in good shape there.
I would just add to that, Jennifer. I mean, this is blasphemy, right? You know, you think about. We were a much smaller company in the last recession. It was wonderful for us. You know, typically in a year, we'll go to 450 trade shows. If we do have a recession and the credit guys are running the bank, we will continue to stay the course. I mean, yes, an SBA lender theoretically is the lender of last resort. Yes, somehow our charge-offs have been one-tenth of every SBA lender in the country over the last 13 years. Knowing and understanding the industry and staying in the business when the credit guys run the bank and the sales guys are sitting at home, throw us in that briar patch, we're ready.
Great. Thanks a lot.
Thanks, Jennifer.
Well, right. There are no more further questions on the queue. At this point, I would like to turn over the call to Chip Mahan for some closing remarks.
As always, my closing remarks are thanks for attending today, and we'll see you next quarter.