After a year of interest rate hikes in 2023 put pressure on people’s wallets, many were expecting relief in 2024 as the economy cools.

But Federal Reserve Chair Jerome Powell announced in late March that inflation is still too high and “the path forward is uncertain.” Instead of six to seven rate cuts in 2024, an expectation the Fed set in its January call, people can now expect about two cuts this year, if any.

Wilmington-based Live Oak Bank is surfing these uncertain waters, dodging other small business banks’ lending under market value and preparing for an eventual rate cut at some unforeseen time in the future.

“What we do here is, we start with worrying about what we can control,” Live Oak Bank President BJ Losch said. “We’d like to be flexible and see around corners from that perspective.”

The rate environment changes the way Live Oak officials think about their ability to increase or maintain profitability, but it does not change how they do business, Losch said. The Live Oak team must keep a pulse check with their existing loan customers in a quarterly check-in to see how the rate environment is affecting their business, he said.

Customers generally don’t want to take on additional loans in a high-interest-rate environment, Losch said. If a small business owner feels confident in their business, they are more likely to take out an additional loan so their business can grow. The Fed’s periodic Federal Open Market Committee meetings inform the public on interest rate plans, it is difficult to determine when the Fed will eventually lower interest rates. This uncertainty does not spur confidence in business owners.

Some other small business banks are offering loans at a rate below market value during this time, Losch said, but Live Oak maintains its rates. It is a dance, Losch said. A balance between cutting a customer a deal on a loan but not being repaid when the loan is due, versus losing out on business they’d get if they offered a discount.

“There are times where we’ll have to lose a deal based on price,” he said. “Because to us, you know, being in the risk-management business, we’d like to get paid back.”

During Live Oak’s first-quarter earnings call on April 25, CFO Walt Phifer said he expects the company’s net interest income to steadily increase through the end of the year, “albeit not in a linear fashion, with more improvement in the back half of 2024.”

The market sentiment of Live Oak’s first quarter of the 2024 fiscal year was unsatisfactory. The bank’s stock price on the New York Stock Exchange fell 17% percent the following day. Revenue and net income were steady with the prior quarter but missed analysts’ expectations. Bank officials touted year-over-year growth in their earnings release, but Q1 2023 was a tumultuous time for the banking industry, and Live Oak’s Q1 2023 net income was $398,000, so a year-over-year improvement was expected. The bank’s net income in Q1 2024 was $16.5 million.

The tone of the most recent quarter’s earnings call was optimistic, Losch spoke of many small business deals in the works despite stubborn uncertainty from the Fed. Small business buyers and sellers are beginning to come to terms with one another, Losch said on the earnings call. Small business loans, including loans when one small business wants to buy another, make up two-thirds of Live Oak’s business.

There had been disagreements between buyers and sellers due to sellers having expectations that exceeded what buyers were willing to pay considering the high-rate environment. Sellers’ expectations had not caught up to the state of the industry, Losch said. Live Oak associates saw multiple deals fall through over the past year due to these disconnections, he said. But that is slowly righting itself.

“Rates are generally steady, borrowers understand what their cash flow coverage is going to be and can forecast that a little bit better,” Losch said. “So, we’re seeing much better pull-through activity as we look at the pipeline.”

Live Oak’s first-quarter call also demonstrated an eagerness from bank officials to grow revenue. One method of doing so is investing in automation. Live Oak technology teams are working to automate SBA loans, Live Oak CEO Chip Mahan said on the call. Those automated loans will be sold on the secondary market.

The bank has already started originating SBA loans from $150,000 to $500,000 using machine learning and automation with a small team dedicated to that project, Losch said. Officials have not opened the capability to all their lenders yet, he said. Two projects need to be completed before they open the capability to all lenders: a digital application automating the front end of the loan process and an automated credit scoring feature. The credit scoring will not be fully automated, but bank officials want to streamline the processing of small-dollar loans.

“That’s the biggest thing we’re working on,” Losch said.

Other methods of revenue generation are “good old hiring,” he said.

“We’d love to see more lenders come onto our platform, and we’re actively looking for those, so you’ll continue to see us invest there,” Losch said on the earnings call.

Hiring is not a new strategy for the bank. Live Oak grew its employee base by 40% over the past three years. A fourth building on Live Oak’s campus, planned to be complete by the end of the quarter, will accommodate the growing employee population, Losch said.

A new initiative kicking off soon, Losch said, is a renewed investment in Wilmington. The bank was founded in Wilmington 16 years ago and has since grown to be the No. 1 small business lender in the country. Now, bank officials are making a dedicated effort to advertise in Wilmington and add more local businesses to the bank’s portfolio, he said.

“So, if you start to drive around town, you’re going to see a lot of Live Oak billboards,” Losch said. “You’re going to see Live Oak a lot more in Wilmington.”