Bill Young

Bill Young asked for more insight into the future loss trajectory and confidence in managing the credit mini-cycle, particularly given the step down in net charge-offs despite increased NPAs. He also inquired about the sustainable path for returns on tangible equity and EPS growth over the next one to two years. Lastly, he asked if the pending Aperture sale and peer activity signal a larger near-term opportunity to harvest Live Oak Ventures investments.

Answer

Chief Credit Officer Michael Cairns reaffirmed the proactive philosophy on charge-offs, stating the Special Assets team continues to work with borrowers even after charge-off, expressing confidence in managing the trajectory. President and COO William Losch III outlined the goal of '15 and 15' (15% ROE and 15%+ EPS growth annually), driven by checking accounts, Live Oak Express, expense discipline, and credit moderation, with high confidence in achieving this within 18-24 months. William Losch III noted Aperture was one of the largest exits, with GreenLight Technologies as another significant holding, and expects the Ventures portfolio to remain stable for exits, with continued additions for internal technology use. Chairman and CEO Chip Mahan added that Canopy provides early insight into opportunities, but they are cautious about the high valuations of pre-revenue AI companies.

Bill Young asked for an update on the credit mini-cycle, specifically regarding the proactive approach to charge-offs and visibility into future loss trajectory. He also inquired about the sustainable path for returns on tangible equity and EPS growth, and the near-term opportunities to harvest investments from Live Oak Ventures, including the Aperture sale.

Answer

Michael Cairns, Chief Credit Officer, affirmed the proactive philosophy of charging off loans when recovery is unlikely, while continuing to track and work with customers. William Losch III, President and COO, outlined the goal of achieving consistent and sustainable 15% return on equity with 15% or more EPS growth, driven by checking accounts, Live Oak Express, expense discipline, and credit moderation. He also noted that Aperture was one of the largest exits from the Ventures portfolio, with GreenLight Technologies being another significant holding, and that Ventures will continue to incrementally add companies for internal technology use, with Chip Mahan, Chairman and CEO, commenting on the current venture funding environment.

Bill Young asked how the company's 2025 return targets compare to longer-term goals and whether there is room for optimization. He also questioned what provides confidence in achieving the 5% loan growth target for 2025, given recent elevated payoff activity.

Answer

CFO Tom Lyons stated there is a continued ability to gain efficiencies and scale to improve returns. CEO Tony Labozzetta added that the company has built a foundation for growth that can scale without proportional expense increases. Regarding loan growth, Labozzetta expressed confidence due to strategic changes in the commercial bank, a strong leadership team, and significant growth in C&I and specialty lending. He noted that amping up CRE lending to traditional levels would help achieve or exceed targets. Lyons also highlighted a strong market position and the end of merger-related distractions as positive factors.

Bill Young of RBC Capital Markets asked about the drivers for the 2025 net interest margin guidance, the reasons for a higher expense guide, and whether the growing loan pipeline signals an inflection point in client demand.

Answer

CFO Tom Lyons explained that NIM expansion is driven more by organic loan repricing than Fed actions, projecting 3-5 bps of core margin expansion quarterly. He attributed the higher Q4 expense guide of ~$110M to the timing of merger cost saves and forecasted a $112M-$115M run rate for early 2025. CEO Anthony Labozzetta noted that loan pipeline momentum is strong due to post-merger focus, client optimism from rate cuts, and capturing business from larger banks, expecting good growth into 2025.

Bill Young of RBC Capital Markets asked about the outlook for core deposit growth, the drivers for loan growth in the upcoming year, customer sentiment, and near-term expense expectations, particularly in the context of the pending merger with Brookline.

Answer

CEO Nitin Mhatre highlighted that recent deposit growth was broad-based across products and channels, with the new digital channel contributing over 15% of retail generation. He also noted that C&I loans grew faster than CRE, and the loan pipeline is up 20% year-over-year. CFO Brett Brbovic added that the bank expects decent balance sheet growth and NIM expansion in Q1 and that the positive momentum on expense control is expected to continue into 2025.