Thank you for standing by, and Welcome to Live Oak Bancshares third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. I would now like to hand the conference over to General Counsel and Chief Risk Officer at Live Oak Bank, Greg Seward. Please go ahead.
Thank you and good morning, everyone. Welcome to Live Oak's third quarter 2022 earnings conference call. We're webcasting live on the internet, and this call is being recorded. To access the call over the internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today's call on our event calendar for supporting materials. Our third quarter earnings release is also available on our website. Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings.
We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.
Thanks, Greg, and good morning, all. I will kick off today's earnings call describing how we think about capital in a potentially declining economy, followed by BJ on results, and we'll close with Huntley describing how we operate the business and where we are going. Let's move to the next slide. Here are some household names indicating a recession may be around the corner. Bezos says batten down the hatches, Goldman Sachs's CEO says there's a good chance for a recession, and Jamie Dimon says a recession is likely in the next six to nine months. Next slide. Certainly, the world is not coming to an end. It is our belief that capital is king in any environment. Therefore, a properly managed balance sheet yields a flight to quality for our customers, our folks, and you, our shareholders. None of us has a crystal ball.
There is little doubt that uncertainty is everywhere, from runaway inflation to higher interest rates to an unsettling political environment, and we could go on and on. The truth is, we operate one of the most highly leveraged, highly regulated businesses on the planet. In the baseball business, batting 400 gets you into the Hall of Fame. Making 60% of your shots in basketball does the same thing. In our business, making good loans over 99% of the time is essential. Let's talk about recessions on the next slide. Reflecting on the recessions that I have lived through, one glaringly comes to mind, and that is the third from the bottom, the recession in the early 2000s.
I had started an internet banking software company in the late 1990s, and I was sitting on the runway at Atlanta's Hartsfield Airport en route to meet with a senior management team at the ABN AMRO Bank in Amsterdam. We were number 25 for takeoff. My company's market cap was higher than Delta's, and we were losing $60 million a year. How could that possibly be? I met with the ABN AMRO team at the airport for an hour, took the same plane back to Atlanta, and called an emergency board meeting. In the next several weeks, we raised over $300 million from our customers that were using our software and not from Wall Street. The dot-com crash. Without that capital, I'm not sure the company would have survived. Recessions provide lessons learned. We are often asked, "How will your small business customers handle a downturn?
How will your origination engine operate? If the past is a proxy for the future, how have we managed your balance sheet these past 14 years?" Let's take a look at that on the next slide. Organic growth in our equity account is accelerating. Let me unpack this slide for you a bit. If you'll follow the blue boxes above the timeline, you can see that since inception, we have grown considerably while absorbing little dilution. The bank was capitalized in 2008 with $13 million. Shortly thereafter, we issued $5 million in preferred stock, followed by the sale of 24.9% of the business in 2014 to Wellington Management, while we converted from an S to a C corp. A $50 million dividend was paid to the original shareholders, thereby recouping their original investment plus some.
We then took the company public in the summer of 2015 and completed a secondary offering in the fall of 2017. Along the way, we created nCino and spun off its 65% ownership in the early days to existing shareholders. From inception, we have raised $243 million, and the shareholders equity at the end of Q3 was a little over $800 million. Note the blue line from our fintech investments had a great deal to do with our non-dilutive capital generation. Let's examine that on the next slide. Here's a bit more color on our fintech profits. Since 2015, we have invested $52 million in all companies noted above.
We have received $163 million in cash from the exits of Finxact and Payrailz and the sale of $15 million of Greenlight shares at a cost basis of $1 million. In addition, the value of all other private companies total $158 million based on the last round of financing. We are confident of investor support at those levels, notwithstanding current market conditions. Moving on to the next slide. Just as we did last quarter, we would like to reiterate just how good we are at lending to small businesses. The average charge-off ratio for other SBA lenders is over thirteen times ours, while 66% of the $20 billion in loans we have originated since inception have been within the SBA 7(a) program.
If we have proven that we can grow the business organically in a unique way, are there other arrows in our quiver if economic challenges arrive? Let's move to the capital slide. The conservative nature of this slide goes beyond the Tier 1 capital ratio of 13.2%. Our adjusted capital ratio, which equals Tier 1 capital plus allowance for credit losses, plus the fair value mark divided by our unguaranteed loan exposure equals an unprecedented 22.9%. The addition of implied pre-tax value of fintech investments marked to market adds another $158 million to the frenzy. While SBA premiums have declined, our mark-to-market profit on our guaranteed portfolio has historically been in excess of $100 million. Excess capital is freedom and flexibility. Let's move to the continuum cycle. Next slide. What does all this mean?
First of all, there is no evidence of a recession yet. We are loitering in the first column. If the downturn occurs and credit losses begin, bank credit officers typically react, and underwriting guidelines change dramatically. This has always created an enormous opportunity for us to not only stand by our existing customers, but allows us to actively seek new opportunities as the competition pulls flat back. Again, if any of this occurs, there will be a flight to quality, and we will be in the thick of it. BJ, let's talk results.
Excellent. Thanks, Chip. Good morning, everybody. We'll start with quarter highlights on slide 13. As you can see, our earnings per share were $0.96, driven by strong net interest income and loan growth, which we'll talk about a little bit more, and of course, the previously announced Payrailz gain. Net interest margin of 3.84% held up very well again in the quarter, declining just 5 basis points from the second quarter, despite 150 basis points of rate hikes during the third quarter. Our net interest income growth, you'll see, is up 26% year over year on 23% loan growth. Loan production, again, in at $1 billion, and pipelines are still near all-time highs. Credit quality remains quite strong despite the uncertainty of the economic outlook.
Our core business performance, along with continued success with our ventures investing, as Chip highlighted, continues to add significant tangible book value per share at 15% year-over-year. Turning to slide 14, you see our adjusted results and the notable items that make up those adjustments. The biggest switch, of course, is the Payrailz gain. Another one I'll quickly highlight is the renewable energy tax credit impairment, as we've had a few of these over the last several quarters. These investments are a good thing and a net positive. When we make these investments, the accounting treatment is to impair a substantial portion of it immediately, which flows through the expense line. This is more than offset by a larger reduction to our tax expense and effective tax rate over the course of the same year.
That is why we adjust out the expense when looking at adjusted PPNR or pre-tax earnings, and also why our effective tax rate is lower than statutory rates. We'll continue to have more of these investments from time to time, including one in the fourth quarter that we currently estimate to be about $12 million. Adjusted PPNR was up 21% due to strong net interest income growth of 5% linked quarter and higher fee income driven by $9 million of gain on sale income versus $5 million in Q2, which more than offset continued investment in people and technology. As I said earlier, credit remains quite healthy. While our allowance for credit loss reserve coverage stayed steady overall at 123 basis points, net charge-offs were actually lower in the quarter to only $1.7 million.
Provision was up quarter-over-quarter due to strong loan growth, along with portfolio and macroeconomic changes as we proactively look ahead to a potentially less benign credit environment. Breaking down the components of revenue on slide 15, you'll see total revenue growth up 12% year-over-year despite significantly lower gain on sale income, thanks to 26% year-over-year growth in net interest income. As we discussed on last quarter's call, we've seen secondary market dynamics for guaranteed loan sales shifting rapidly due to the current aggressive Fed rate tightening cycle. As you know, we moderated sales in the second quarter. In this quarter, we saw modestly better opportunities in SBA variable rate sales, but the market for fixed rate sales remains unattractive. Again, it's important to understand that this income is not permanently lost.
We simply earn it over time in the form of spread income, as evidenced by our strong loan and net interest income growth. Because of the flexibility we have with strong capital and liquidity levels, we are more than happy to hold more high-quality assets and will remain patient with secondary market sales until further normalization. Turning to slide 16, you'll see our loan originations remain diverse across our multiple verticals with particular strength in both some of our most established small business verticals such as vets, investment advisors, and agriculture, and in some newer verticals such as our SBA General Lending group and our middle market sponsor finance group. In energy and infrastructure, solar remains quite strong. While bio energy lending is down from last year, both of these should benefit significantly going forward due to the clean energy incentives in the recently passed Inflation Reduction Act.
Balance sheet trends look great as discussed on slide 17 and 18. As you can see on slide 19, and as I mentioned earlier, the net interest margin again held strong at 3.84%. While we still expect some compression as the Fed continues to raise rates rapidly, we continue to be encouraged by the resiliency of the margin. Our lenders have done a great job adjusting loan pricing upwards with market funding costs, and our deposits team has continued to fund our growth with disciplined yet competitive pricing with betas remaining just under our assumed range of 70%. Turning to expenses on slide 20, we've been incredibly pleased with the quality of talent that has joined Live Oak in our various groups across the company.
Going forward, while our need for talent will continue as we grow, we've largely worked through our hiring bubble to right-size our lender support to accommodate our significant step-up in production post-pandemic. In addition, as we've discussed, we accelerated our technology hiring this year thanks to the FinTech gain. That is also largely complete. Going forward, we will continue to be opportunistic on hiring, particularly for revenue producers, but we expect to see our expense growth moderate into 2023. Credit trends, as I discussed on slide 21, look great. Having 43% of your total loan portfolio government guaranteed is both a great comfort and a great responsibility that we take very seriously. Non-accruals and past dues remain at historic lows, as do net charge-offs. We know there's clouds on the horizon, so we'll continue to be proactive with our outreach to existing customers.
We have strict, well-established concentration limits for higher risk portfolios and verticals, and we're doing stress testing on those portfolios with various recession scenarios to anticipate impacts. To recap, production topped $1 billion, pipelines are strong, balance sheet is profitable and growing, guaranteed loan sales opportunities are modestly improved but still muted, expense growth is moderating, credit quality is great, and our ventures investments have and should continue to provide us with organic capital and optionality. With that, I'll turn it over to Huntley for some additional color on the business. Please, Greg.
Thanks, BJ. I'm gonna wrap up today by focusing on three questions. The first is, how are small businesses doing overall? The second is, what's the opportunity for us at Live Oak to serve them? The third, what are we doing to address that? We get a lot of questions about the overall health of small business given where we sit. Three years ago, we started a quarterly survey of small businesses along with Barlow Research Associates. It's one of the preeminent research firms serving small businesses. We wanted to share a bit of information from their most recent survey to give you a sense of how small businesses are feeling, but also it indicates some of the opportunity that we have to serve them. People say that we're at the tip of the spear as it relates to small business America.
If that's the case, so far, small businesses are waging a pretty impressive battle. On page 23, you can see the overall sentiment certainly has deteriorated, which shouldn't come as any surprise, although interestingly, it looks as if views on the economy may have bottomed out recently, although they still remain decidedly negative. Expectations of the financial performance of companies have also deteriorated but remain more positive than views of the overall economy. It's clear that the majority of small businesses expect a slowdown and are positioning themselves for a weakening economy. That's still in contrast, as Chip and BJ referenced, with our current credit performance, which remains outstanding. Looking at the right-hand side of this page, we see that only 20% of the surveyed small businesses applied for credit in the past year.
If you drill down a layer deeper into that data, you'll see that the majority of those that applied for working capital, not the growth capital that we typically provide. The opportunity for us to serve small businesses with working capital products and deposits can dramatically expand our addressable market. You've likely heard the term silver tsunami to reference the generational shift among small business owners occurring in the U.S. On the bottom right, you can see that almost a third of small business owners expect to transition ownership of their company in the next five years. These change of control transactions are right in our wheelhouse, both for lending, but also an opportunity to change primary banking relationships.
While the uncertainty in the economy and volatility in the markets has put some of these transactions on hold, we believe the overall macro trend of small business acquisitions will continue to provide us significant opportunities. Anecdotally across our portfolio, we hear a consistent set of concerns: labor markets, inflation, supply chains being at the top of the list. While we see overall sentiment more cautiously, we also witness every day the resiliency and entrepreneurial spirit of our small business owners as they navigate this cycle. What's the opportunity for us? Turning to page 24, the SBA data says there's 32 million small businesses in the U.S. We know the majority of these are very small solopreneur businesses.
We look at our primary market as the roughly six million small businesses in the U.S. that have between two and 500 employees, which generate on average $100,000-$10 million of revenue each. Currently, across our small business lending, our savings and our new checking businesses, we serve about 17,000 small business customers. You can see our market share is pretty tiny. If you add to that very few of our customers do we actually have multiple products with our repeat customers, and you can see that despite being pretty good at what we do, we still have a lot of runways to better serve small businesses and deepen these relationships. What are we doing to address this? On slide 25, first and foremost, we continue to invest in our lending franchise.
Over 15 years, we've built a small business lending platform that effectively marries great people and great technology, and we continue to work to improve that every day. You've seen over the last year expense growth related to hiring, not only in new lenders, but also in folks needed to support the process. While we still will be opportunistic on new hires, we're in a really good place overall. You can see the production numbers and our pipelines reflect that. You'll also see that headcount and expense growth, as BJ mentioned, are gonna slow down into next year. We're also in the process of finalizing the migration to a new loan origination platform, still leveraging Salesforce and nCino, but with some pretty high-powered enhancements that we've built in-house.
The new platform is designed to further reduce application to funding cycle time, improve efficiency, and deliver a best-in-class portal for our customers and partners. We're already observing some enhancements in key areas, and we're excited about what we can accomplish on modern architecture. The timing of this couldn't be better, as it allows us to better react to potential changes in the SBA programs that are being contemplated. Turning to the deposit side, we're particularly excited about the success we've had generating business savings and CDs. With over 10,000 customers now and over $1.8 billion in deposits, it's becoming an increasingly important part of our funding at almost 30% of our total deposits, but also a critical component of our customer acquisition strategy. As we introduce more products and services, we have a growing base of customers to better serve.
The wait is finally over. We officially have a checking account in the market. This product offers balance protection, improved account funding, next gen bill pay, and QuickBooks integration, among other features. Our marketing efforts have really just started, but we're seeing on average 40-50 new accounts a day, and we currently sit at over 1,300 accounts and about $10 million in balances. We're off to a good start. While this product serves the smaller end of the small business market, our next milestone is to deliver a treasury management product, which we expect in Q1 that will allow us to serve the upper end of our customer base as well. We're also excited about the start of our first specialty deposit vertical, serving 1031 exchanges.
We ended the quarter with about $60 million in checking balances, and we're actually close to $100 million already as we move into the fourth quarter. A couple of big wins on the technology front, but we're certainly not slowing down. Bringing our entire platform together on modern architecture, anchored by our modern FinTech core, remains our top priority. We believe that'll open up incredible opportunities for us in areas like embedded banking, customer insights, and payments. In the short term, we'll continue to deliver treasury management capabilities, working capital solutions, and our initial embedded banking partnerships. Where does that leave us? On page 26, and I think, BJ summed this up well, our lending platform's solid, credit quality is excellent, although we remain vigilant and are certainly not declaring victory. Secondary markets are strong enough to support our balance sheet.
We remain a premier destination to work in both banking and in financial technology. Deposits businesses are starting to yield tangible results, and we remain confident in our technology strategy, both on the investing and the software development fronts as we continue to build the small business bank of the future. With that, let's move to questions.
As a reminder, to ask a question, you will need to press star one one on your telephone. Again, that's star one one to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steven Alexopoulos of JPMorgan. Your line is open, Steven.
Hey, good morning, everyone.
Good morning, Steve.
I would just start, first on the cost of deposits. If we look, the cost of interest-bearing deposits is around 1.5% in the quarter. If we look at your online rates, it looks like it's between 2.75%-3.75%. First, how quick does the overall cost of interest-bearing deposits move into that range? And do you expect more incremental fundings to come from the online savings, right, which is the lower end, or more from CDs, which is the upper end?
Hey, Steve. Good morning. It's BJ. Yeah, we've, our team has really done a great job managing deposit rates up through this point. It started off slow in terms of beta, as we all would have imagined, but it's significantly heated up probably in the last four quarters. What helped in terms of our overall deposit costs both last quarter and this quarter is that a lot of the big moves in rates from the Fed happened towards the latter part of the quarter, which meant that there wasn't not nearly as big of an impact on the overall portfolio in the quarter as, you know, as you would have expected.
I think now with the Fed moving earlier in the quarter, going into the fourth, as well as what they did in the third, you're gonna start to see our portfolio costs move more towards where our spot rates are today. In terms of the mix, we still believe that savings is really where we're seeing most of the volume. We have had and tried some attractive offers more in the 12-24 month range on the CD side, but there hasn't just been a lot of appetite for that given how rapidly online savings rates have been going up. You know, we certainly expect deposit costs to continue to rise.
On the left side of the balance sheet, loan yields, we are very, very pleased with what our lending officers have been able to do to adjust quickly. We're seeing loan yields really start to move. October first was a big deal for us because that's when our quarterly adjusting loans, of which we have quite a bit, adjust up 150 basis points. You know, our loan yields are keeping up with our deposit costs growing, and that's why we've been able to do such a good job on holding the net interest margin, and we expect that to continue.
BJ, if we stay with that, previously we talked about on these calls, 3.50%-3.75% NIM for the fourth quarter. How are you trending in that range? Can you frame for us what 2023 could look like? You know, where could NIM bottom?
Yeah. As we said last quarter, you know, I expected more to be at the higher end of the range. Still feel very good about that, based on, again, what I just talked about a little bit. As the Fed stops its tightening cycle or at least slows it down significantly, we think that our net interest margin starts to stabilize as well. Again, because we're cycling through and readjusting our loan yields in particular, to the market and funding costs, we think the margin stabilizes. Into 2023, depending on when the Fed stops raising rates, you know, we could start to see it modestly moving up again.
Got it. Okay. Finally for me on the expenses, just following up on that slide indicating that spending requirements are moderating a bit. I mean, the growth rate's been very elevated on expenses. Could you help us think about what's a reasonable growth rate of expenses from here?
Yeah. If you look at adjusted expenses up 30% year-over-year because of our, you know, bubble, I think that should come down by, you know, at least 25%, if not more, in terms of the rate of growth. You know, we still see very healthy revenue growth both from net interest income as we just talked about, but then, you know, into 2023, starting to see further normalization on the gain on sale. Strong revenues far outpacing the expense, but the expense will moderate.
Oh, yeah. Okay. Thanks for taking my questions.
Thank you. Our next question comes from the line of Crispin Love of Piper Sandler. Your line is open, Crispin Love.
Thanks. Good morning, everyone. First on the venture portfolio, you've had some nice exits from M&A year to date, but I'm just curious how you're looking at the full portfolio. Chip, you made some comments earlier in the call that make it seem like you're confident in the current valuations there. I'm just curious for the key reasons for that as VC-backed companies broadly are seeing lower valuations and less activity there.
Neil Underwood has joined us on the call, and Neil just got back from Money20/20 for four days worth of what is the current state of the fintech business. I think my comments, Neil, to turn this over to you, are more about you know, how well we know these companies, how well we know the other investors on those boards, and how they seem to be, at least from my perspective recently, very supportive of the current valuation. Some of these valuations are as much as a year old. Why don't you take that and maybe say a word about the future?
Sure. First of all, the reason we were out there, as you guys know, Canapi and Live Oak Ventures are two of our investment vehicles. Filling top of funnel for Live Oak Ventures is equally as important as looking at expanding Canapi. When you look at Live Oak Ventures, I think Chip nailed it. It's really the quality of the investors around the table and the timing for which we got into these investments. Many of these investments we've gotten into many years ago. The last valuations, you know, can actually stand up. Clearly there has been a discount across the board on most of what we see are mostly the B2C, heavy discounts. If you recall our strategy is around B2B, selling to banks, bank infrastructure, payments, tech, and so forth, which has held up pretty strong from a revenue perspective and a growth perspective.
Thanks, Tiffany. I appreciate the color there. Just one more on the interest-bearing deposits. BJ, are you able to give any color on what spot rates currently are for deposits?
You mean just what, you know, savings rates are and those types of things?
Yes, exactly. Kind of like what you're seeing right now.
Yeah. Really where we're at in terms of online deposit rates for savings is, you know, more in the 2.25% range is what we're seeing for the more established online banks, moving up pretty quickly. You know, I think we're today, actually it's higher after our recent move. It's 2.75% today, APY, and that's kind of where some of the largest online players are. You know, one year CD rates more in the 3.75% range.
All right. Thank you. I appreciate you taking my questions.
Sure.
Thank you. Our next question comes from Michael Perito of KBW. Your line is open. Mike Perito.
Hey, good morning. Thanks for taking my questions.
Mike. Go ahead, Mike.
I wanted to start on the business checking launch. The customers are already up to 1,300, it sounds like from the 75 at the end of the quarter. I mean, do you guys have a sense of like, what the average balance is on these deposits that are coming over as we try to frame a growth opportunity here over a realistic time period?
Yeah. Mike, sure. You know, we've got about $10 million in balance across 1,300 accounts. You know, they're in the $5,000-$10,000. The majority of them are in the $5,000-$10,000 range. Like we said, the smaller end of small business right now. That's what we're seeing. I think as we go to market, you know, ideally start to push up a bit with that. Like we said on the call, this product doesn't have the treasury management capability that some of the largest small businesses need, and we'll be coming at that end of the market in the first quarter, which we think is where we'll get to, you know, some of the more significant balances in the market.
Does the marketing and like kind of, and branding and sales effort need to change at all as you try to make that transition? Or is it pretty consistent across, you know, both customer bases? It's more just the product capability that needs to evolve as you target the bigger businesses.
Yeah. I mean, look, the marketing itself is pretty, you know, consistent across our brand and who we serve. You know, in certain verticals, we'll be able to go a lot deeper with a broader product set and do some more targeted marketing and sort of, you know, building out these community banks in some of these verticals that we've spoken of. What we have now is a more, call it a mass market small business product, and we're kind of marketing that accordingly.
Okay. The 1031 exchange balances, the $60 million, are there any other verticals that could, you know, become of size that you can share with us at this point? Just secondly, kind of as a backup to that, just on the embedded finance side, any timing updates on when, you know, you think those numbers could start to really maybe impact the NIM and the financials a bit more, or the growth opportunity there, rather?
Sure. On the specialty deposit side, we are looking at a handful of, you know, the HOA space is one that we spent a fair amount of time on. You know, I think, you know, it's obviously a reasonably competitive marketplace, but trying to figure out exactly where our niche could be and where we can differentiate ourselves and have some ideas there we've been spending some time on. That's probably the one that's the next, the closest behind 1031 exchange. It actually dovetails into some of the work we're doing in embedded banking where, you know, looking at areas where, you know, software providers, you know, in a space may lead us to deposit opportunities in some specific industries that maybe we're not in so far.
I think, you know, HOA can be a nice example, you know, of that, for an example. We should have pilots. We're in pilots now. We've got a couple small ones that are up and running. You know, we think it's gonna be into next year before we really start to see, you know, embedded banking numbers that move the needle on, you know, on our balance sheet.
Not to put you guys on the spot, but let me ask Steve's question a different way here. I mean, what do you guys think? You know, obviously, your non-interest-bearing mix is below where you'd like it to be, right? I mean, are you guys thinking at all about where you think that mix can move next year? Or is there any like kind of framework or guide rails around that you think that's reasonable that we should be thinking about as you kind of like take everything you just said together, Huntley, and think about all the growth opportunities cumulatively?
Yeah. I think we sit today at maybe 3% of our deposit mix in non-interest bearing, which is negligible. You know, next year it moves up modestly, but not meaningfully, you know, maybe a couple percentage points. I think if we're sitting here five years from now, it's probably 10x the size, you know, in terms of mix that we're at today. You know, I think what Huntley just talked about with our, you know, title, you know, mass market, small business type product rolling out early next quarter, our larger Treasury management offering and then embedded, you know. I really think that by the end of 2023, you'll really start to see some momentum, particularly from the first two. Embedded as it layers in over the next 12, 24, 36 months, really driving our future growth and that shift in mix.
Great. Thanks, guys, for spending some time on that. Just lastly for me, maybe a question for Chip, but just from a high level, right? I mean, if you think about the second, third quarter, you know, hopefully we're in the last quarter of, you know, who knows what 2023 has in store, but the last quarter of these 75 basis point Fed hikes, you know, as we move towards end of the year here. Just curious how you guys, as we think about next year, and kind of where the margin environment is, you know, hopefully a stabilization in the SBA secondary market once we're through these massive Fed hikes. You know, I mean, any updated thoughts on the balance between selling and holding loans as we look to next year?
Because, you know, it's been a little choppier on a percentage basis recently, you know, just because of the environment. Just curious if there's any updated thoughts there that we should be mindful of.
I'll start then you guys can add to that. I mean, I think what, you know, we have talked to our lending officers about, and remember our lending officer base is expanding daily. I mean, we've added, what, 12 or 15 lending officers just this year, primarily in the SBA area. Certainly the secondary market for fixed rate SBA paper has been a bloodbath and a disaster recently. Our lending officers are now being quite successful on the variable rate side because there are a number of borrowers out there that are saying, like, "You know, this thing may turn. Maybe I should not take an 8% 25-year fixed rate. Maybe I ought to get a low floater here." Then the prices for those loans in the SBA secondary market have held up and are coming back quite nicely.
I think we're seeing more lending officers being more aggressive on a bit lower, right? You know, not two or 2.5 over prime, but something slightly less than that. I think we'll see that continue over the next several quarters. You guys may wanna add to that.
Yeah. As a matter of fact, Chip, to your point, over the last, you know, three quarters, we've seen our percentage of variable rate production double.
Yeah.
Doubled over the last three quarters. I think, yes, there was a lot of demand for fixed and adjustable production, but to your point, customers are starting to maybe see the crest. Our lenders are doing an excellent job providing customers options, and many times the customer wants the variable rate option because near term the rate is lower, and they also think that it could float down over the course of the term of the loan. All of that I think is pretty good.
Broadly, just thinking about, you know, our gain on sale income and mix, you know, though, you know, we didn't necessarily want the tightening cycle to happen like it did, you know, we've gone from maybe 15%-20% of our income in any given quarter being gain on sale to down to about 6%-8%. We've been intentionally moving that down as we've originated to hold more, but this has given us a step down opportunity, if you will, to kinda reset the base and then be a lot more thoughtful about what we keep and what we sell, and quite frankly, give us a lot more flexibility going forward to, you know, maximize our gain on sale across our different portfolios. You know, I think that's gonna help us in terms of more consistent earnings going forward.
Awesome. Thank you guys for taking my questions. I appreciate it.
Thanks, Mike.
Thank you. At this time, I'd like to turn the call back over to CEO Chip Mahan for closing remarks. Sir?
Thanks, to everyone for joining this morning's call. As always, we'll see you in 90 days.
This concludes today's conference call. Thank you for participating. You may now disconnect.