Q2 2020 Live Oak Bancshares Inc Earnings Call

[music], ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 live Oak Bank shares.

Inc. earnings Conference call.

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I would now like to turn the conference over to Mr., Greg Seward General Counsel of live Oak Bank shares. Thank you. Sir Please go ahead.

Thank you good morning, everyone welcome to White Oak second quarter 2020 earnings conference call when capital Ivy Internet in 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 that My Bank Dotcom go to todays call it or event.

Owner for supporting materials.

Our second quarter earnings release is also available on our website.

Before we get started I would like to caution you that we may make forward looking statements. During today's call that are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and interestingly 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 that are actually see filings and in the presentation materials in commentary.

I'll now turn the call over to chip Mayhem, our chairman and Chief Executive Officer.

Thanks, Greg and good morning, all I'm now on slide three the agenda.

So as always we're going to Steven Argo talk about safety and soundness, and then I'm going to give you a.

Snapshot of what some of our customers are saying.

Couple of quarters ago, we said enough is enough and.

Look I've done that terrible job of explaining to you our shareholders about our investments in other businesses.

So last Tuesday.

One of those investments that were spun off do you Encino went public so we're gonna take.

Those folks that have been a with us from the very beginning a wee bit of a victory lap and then I'm going to turn it over to hot money to review what is a confusing is wrong, we're let's just call it a complex core.

So moving onto the next slide shot Slogs for our focus so you know what's been going on at live Oak Bank. These last 90 days well, it's a lot.

So when the the virus hit lots of things began to happen. We did deferrals for 1200 88 customers PPP came on the government decided that they were going to make principal and interest payments for six months to 100% over of the country's SB a borrowers.

So there was massive outreach outreach to us and from us for all of our customers.

And then the PPP. So on April the third we launched into Battle in three weeks, we made about 10000 loans totaling about 1 billion eight.

Currently is going to tell you a little bit about wouldn't bretts told you last night about 60 plus million dollars in fees of which we gave seven to that back our folks.

We focus first on our customers about 3000 to those we then jump to our verticals to help customers customers in the future or channel partners.

And probably most proud that we affected 8500 jobs in Wilmington, North Carolina, we made 725 loans totaling $60 million that covered 56, nonprofits and 11 churches.

I think what's happening here in the origination areas, we have a chance to move up market and it is true and some verticals that the Darwinian theory prevails that the strong will survive, which will provide opportunities to the larger folks in our vertical.

Technology and products currently is going to talk a bit more about this but I am tickled to death.

My friends in Nashville, Tennessee, Terry Turner, the founder co founder with few cleaner.

Pinnacle Bank invested $10 billion of aperture as did our long term friends that a t. Rowe price Cwynar is going on that board as we take that business to the next level.

Probably is going to talk about.

Deposit launches and everything fins Act here shortly.

So now I'm going to move on to slide five credit and fair value loan metrics and.

You know, whereas you know, we're really proud of the far right column, we're keenly aware of the government assistance previously talked about.

Steve and his credit team added $18 million last quarter, and $14 million to our reserves and fair value adjustments.

And yeah, I mean zero past dues because of the government intervention watch list is the same classified assets down a little non accruals down a little.

Charge offs 21 bips.

Loan loss reserve, roughly 70 million Bucks.

But folks you know, we just don't know what we don't know.

When all of this ends and who knows when the virus is going to end, who knows when the vaccine is going to begin and who knows whether be effective what's going to be on the other side. So when the abundance of caution we always proved to be conservative which is further outlined in the box in the middle which we talk about every quarter you have $500 million and kept on this back.

Roughly a $70 million reserve and only 2.173 billion of Unguaranteed paper.

So the way my math works, that's about a 20% capital ratio in about a 3.1% loan loss reserve ratio and on top of that just for grounds, we got to be in one of government guaranteed paper and where those capital markets coming back you put a margin on that and I don't know what canes will tell you. It's 60 70 $80 million worth of value there.

Giving us.

I've been a bit of an interesting cushion compared to other banks.

So now this has been incredibly fun for me folks to shareholders. Other interested parties. If you look at the next slide slide six and the column on the right. The last 72 hours I had a chance to visit with.

Many folks and every one of our 34 verticals. So I decided to pull the top 10, which you see on the left our largest exposures and AG moving down to senior housing. So those 10 total 1.52 billion of Unguaranteed exposure compared to two to overall, which is about 70% of what we do.

So I'm going to pack this and just stay with me on this for you, but I think it's kind of fun.

So that vertical 650.

Customers 175 million of Unguaranteed paper no loans on the watch lists many of our best went to curb service, which led them to become much more expense minded.

In June were some of the best months they have ever seen.

Sales of these businesses continued consolidators abound in the price of the businesses is about 150% to 200% of rose. This is about a consistent $100 million year business for us healthcare and Dennis would be next 254 million of Unguaranteed paper 700, Dennis.

Page pent up demand here shocking to the A.B.A. during the last several months B of a practice solutions shutdown.

Addressing the credit quality or there are 8000 Dennis.

Seem to be back in business now we're looking at deals we would never see as an SBK lender.

Staffing has been real challenge for these folks as they come back to work and what the Heck. These Dennis may have to actually work on Friday.

Pharmacy, we have 434 customers band the business 10 years $100 million of Unguaranteed. Thank goodness, thats redeemed and essential business most of our customers have seen year over year increases. This about a 100 million dollar year business for us.

Care another essential business 244 customers, probably three times that a number of rooftops out their revenues are higher this is our lowest reserve vertical.

Chicken. So this is interesting $265 million of Unguaranteed paper 333 customers, we do business with 23 integrators.

Three processing plants, 49% are about half of our customers are public and 78% almost 80% or one of the top 10 integrators in this country.

We had a couple of challenges with turkeys years ago. It looks like that may be a recovery.

Senior care really interesting stuff going on there moving up market dramatically, we're seeing deals that we would never see we're doing business with the best operators in the country, we're seeing pinpoints more equity here than we saw 90 days ago loan to value was 75 down 65, and it looks like some of the regions that are big in that business or re trading there.

Customers, which we would never ever do.

Self storage 129 billion of Unguaranteed, what's interesting here as we work from home at bonds that we find that that our customers.

Our customers customers are moving stuff out of the house, because they're working from home therefore their occupancy rates are higher.

Wine and craft beverages were glad we picked the right winners everything at the upper end of that market is doing quite well, we do see some some of our smaller operators struggling.

Hi, interesting stuff here 585 customers $90 million of Unguaranteed paper markets up 15% from the spring.

Theyre finding that clients are nervous and their number of clients are going up because of this anticipated downturn and our and our customers are actually setting side additional liquidity in anticipation of that downturn than the abundance of caution lots of M&A here more buyers and sellers and our pipe is quite robust.

Now I think we may have something out of order here I'm moving to slide nine Mike which is.

The Encino no no. Steve this is over to you my bad this year is already please please take over yeah. Thanks chip.

So I'm just talk about the diversification of our portfolio and just a bit but for the moment stress levels are manageable even in our most at risk industries, which you see.

On slide seven.

Based on our diligent outreach the chip touched on however.

That's in part thanks to the government intervention and load accommodations, such as payment deferrals.

So 60% of our borrowers across our entire portfolio are having the espeed make their monthly payments and fall.

Certainly impactful.

75% of our existing borrowers requested in received from US PPP loan, which is helping them cover payroll rent and other interest expenses.

And to date, we've granted payment deferrals to approximately 9% of our borrowers.

The real unknown that chip and mentioned is a long term challenges facing these businesses. It's inevitable that we'll see some losses, some will simply give up.

I will not have the resources or the resolve to whether through the storm in front of them, but by and large and based on our diligent outreach, we're comfortable that our bars are well positioned to work through the challenges facing them going forward.

The hospitality is certainly a concern and while at this point I'm not anticipating huge losses in that portfolio. They are facing challenges and that could take years to overcome and build back to where they were pretty coated.

Our hospitality portfolio is for the most part well positioned to whether these challenges.

We had focused on low loan to value first mortgage financing. So we have a good collateral cushion in anticipation for possible evaluation declines many of the projects are in tertiary markets and these are actually are starting to see some uptick in occupancy probably most likely benefiting from the domestic traveling up.

Tick and road trending.

In addition, we'll also proactively look at other government programs such as the Usthirty, 890% guaranteed Derica loans, we've actually approved several 90% guaranteed you Sta vicar loans to some hoteliers that are well positioned to be able to.

Continue to use that working capital to get back on their feet and grow so we'll do that into very thoughtful way. It's just another lifeline.

Slide eight.

We have drilled a well diversified portfolio mix, which bodes well for us as we focus on minimizing losses.

In addition, we have lots of tools in our fell from the SBH of the you Sta to ABL lending to specialty lending, we're really well positioned to provide access to capital in a thoughtful way to help small businesses rebuild grow and even take advantage of opportunities that present themselves as they also navigate through in past these answer.

Certain times chip back to you.

Thanks, Steve So I think I've got a little order problem here. The next slide that I want to talk about says Encino Bank operating system.

So folks.

And again I have done a terrible job. These last 10 or 12 years. So this industry has 280 billion lines of own code.

Many of you listening today, our traditional owners of community bank stocks and some analyze traditional banks for a living.

We cannot be put in that box, we make investments in infrastructure, we think theres going to be massive changes in applications on cloud based infrastructure.

We have no branches and we have no traditional boundaries on where we lend money.

So let's.

Let's go back and use Encino, our first effort and cloud based software as a use case.

So we began writing code and 2010.

Neil in his brother Pete pick the forced on calm platform because we had a challenge we had 158 documents per loan and we needed to get all the data in one place to treat every customer are likely only customer in the bank and enable our lenders are underwriters are.

Losers and our services to do the best job of any bank in the land.

So if you look at this slide that's fundamentally loan origination.

So on Sept September Thirtyth 2012, we hired peer not day from a company deal and I used to work for and he began to take that code and make it elegant for use in other banks.

I have no idea how many encino banks are are now, but several hundreds if not more.

And there are thesis has always been to create.

A bank operating system.

Land and expand first this loan origination that you see at the top of this graph deposit account opening.

Appliance in risk management artificial intelligence.

This is incredibly sticky software and as you move across the enterprise from the wholesale side of the back to the retail side of the bank.

You can see.

Why this company has become so interesting.

Because of the massive opportunity.

In seen those team had we decide is spend that business off on June Thirtyth 2014, six years ago.

Because if you go to the next slide that I'm looking at which is in Cnos numbers as published in there as one.

The company did.

58 million in Roes for fiscal year, ending 131, 18, 138 in 2020 and you can see the losses at the bottom those losses could not be tucked under a bank holding company.

In our opinion.

But.

Yesterday.

Stock closed about $75 a share the company has about 90 million shares outstanding so because of the land and expand and the growth in the fact that only 8% of the revenues of the company our or in the us.

Investors have put a value of this business of 6.75 billion as of last night.

So how does that compare in the next slide to other SaaS based companies.

Well, a heck of a lot better if you're looking at slide.

12, you'll see that public SaaS companies with over 30% revenue growth traded 16 times 21 estimates 22 times 22 estimates.

Those that are efficient with a 20% to 40% margin of free cash flow to revenue or about 10.

And you can just let your mind wander around and seen those multiple on future revenues.

So now how the world does that relate to the rest of our investments. So I am now on the slide It says technology investments.

So all of these companies that you see is a mark on the portfolio of some months if not two years ago. All of these companies in the next 12 months or so we'll be raising additional capital.

We own 16% of Hinzack, 15% of pay rails, 6% of defense storm, 3% of Savannah, and 4% a green light fins Act next generation core processor pay rails cloud based Checkfree killer defense storm for cyber security Savannah, as part of transact and Greenlights interesting right. So when we.

Invested in Green light they had 100000 customers as of last night, they have 2 million.

There are lots of very sophisticated investors looking at putting more capital and that these businesses and as you know we use the software and lot of these businesses for for ourselves.

Hi, a slide before turning it over to hotly.

Because the non-GAAP earnings slide.

And so if you just take all the noise out pretax pre provision pre fair value.

Adjustments pre servicing asset reval pre losses for Fintech activities.

You can see kind of true cash flow of this business 17 17 in this quarter were up a couple of million Bucks and that feels that feels pretty good relative to the capital that we have relative to talking with our customers are where we are in terms of credit quality.

And with that I'll turn it over to Huntley to try to unpack what has been a complex quarter.

Thanks, Jeff.

We're all painfully aware of how impactful. This pandemic has been to small businesses and we've taken our responsibility pretty seriously to help support.

Founders entrepreneurs throughout the country and our people have risen vacation working tirelessly to help our existing customers ticket funds into the hands of new customers and to build products and technology designed to make their lives easier.

My programs directed to small businesses have provided essential liquidity and breathing room to our customers, but we know that our works not yet done as the impact. This pandemic continue to impact every facet of our lives and those are customers.

So looking at page 15, and looking at the highlights for the quarter overall posted some pretty solid numbers, albeit as chip mentioned, there's a lot of moving pieces and the reported numbers were meaningfully impacted by PPP and the excess liquidity that we put on during the first half a year our balance sheet grew 92% year over year and 56.

<unk> percent quarter over quarter.

Net interest income increased modestly over the first quarter as the positive impact of PPP was offset by 100 basis point drop in interest rates.

We're really proud of the expense at first of all our company as you can see noninterest expense was down 3% linked quarter. Despite accruing a $7 million performance bonus that chip mentioned for folks who have literally work around the clock since the beginning of March.

Bonus is offset by an increase in deferred expenses from the PPP and about $4 million that decrease salaries and benefits, but overall just about every one of our expense line items is down quarter over quarter.

While our customers have been adapting to these changes in their businesses so of ways and we pivoted most of our organization to help with PPP loans in the second quarter, but we also had to position our balance sheet to make sure we had to liquidity in capital needed support the small businesses we serve.

Not sure how many banks could have originated loans in a quarter equal to 60% of their outstanding loan balances at the beginning of the quarter.

PPP was a huge part of that but the impact on our people and on all our resources with immense.

For a bank that originated 1200 loans and all of last year originating over 10000 PDP lands in three months was an impressive feet.

And as you may recall when the PPP program started on April 3rd there was no fed funding facility in place. So realizing that we would have an opportunity to play a meaningful on this program, we sourced a significant amount of funding in the market in the beginning of the quarter. The PDP I'll ask turned out to be a really efficient funding vehicle. So we took advantage of that which left us with close to $1 billion an excess liquid.

The on our balance sheet, we just had a big impact on margin liquidity and capital ratios.

Slide 16 attempts to lay out some of those key metrics and how they are impacted by PPP in excess liquidity.

Our balance sheet growth as you can see with almost entirely driven by these factors with the core loan portfolio up 3% quarter over quarter.

Not surprisingly core loan origination was down a little bit in the quarter, although as chip mentioned still pretty strong.

NIM declined 99 basis points about half of which with PPP and liquidity related.

As our liquidity ratio jumped almost 15%.

The impact of PPP, an excess liquidity also drove the vast majority of changes in our tier one leverage ratio and I don't see in a minute had virtually no impact on our risk based capital ratios.

We expect margin liquidity to trend back to normalized levels over the next year as the PDP loans are forgiven or run off and we deploy excess capital well spent more time going through that in a few minutes.

So next on slide 17, if you try to break down the impact of PTC has on our income statement.

You will see the total originations as chip mentioned to the ended the quarter at $1.75 billion, which generated origination fees at about $60 million, which along with the deferred costs will be recognized over the life of those loans through interest income primarily at the time of loan forgiveness in the second quarter, we recognize $5.4 million it doesn't.

Fees and $3.3 million of gross interest income not including the funding costs.

With the timing of loan forgiveness has been pushed back. We currently expect the majority of these loans to be forgiven by the end of the year or the beginning of next year.

We we kept originating PPP loans in the third quarter, and we continue to that today, but the volumes have been pretty minimal.

Turning to slide 18, despite all the attention on the PPD program. Our overall franchise performance was solid our core loan portfolio was up modestly as the flowing a prepayment speeds helped offset the decline in origination volumes.

We still close $430 million in core loans across a range of some of our least impacted verticals.

Our guaranteed loans available for sale as chip mentioned increased 20% in the quarter to $1.1 billion, providing stable earnings as well as a great source of contingent liquidity and capital.

Slide 19 further breaks down the origination in the quarter as you can see the 1.74, PPP and the 430 million of core alone.

That you'll see the year in key loans.

Okay, and have a $180 million and conventional loans that we closed the majority was comprised of renewable energy solar and bio energy products as well as a strong quarter and checking lending.

Across our franchise as we've seen some pullback in the market from competitors and we're getting some really good looks it's a much stronger credits as chip mentioned, our pipeline remains strong although yes, Steve talked about we're being extraordinarily thoughtful about the types of deals that were willing to finance in this market.

On the funding side, our deposit model continues to be incredibly efficient as we took advantage of the influx in liquidity that enter the market. This year slide 20 show some of the key metrics.

Dropped our savings rate 85 basis points, and our one year CD 145 basis points since it started a year and despite that we grew retail balances over 20% in the quarter and accounts by 15%.

Our total cost to service our deposits dropped even further to eight basis points as the portfolio growth.

Digging in a little deeper on slide 21, you can see the decline in rates on the left hand side of the page, where we're currently offering 1% on savings and 70 basis points for one year CD.

Well the market took a little bit of time to reprice earlier. This year, we've seen it behave pretty rationally overall now look at the right hand side of the page and you can see that over the next year, we have almost $3 billion of term deposits, both retail and broker that will mature at rates significantly higher than where we are currently booking new product.

Thats over half our deposit base.

Well pick up roughly 145 basis points on the retail book renewals and will likely that most of the brokered run off as a result, we expect core margin to increase backdoor historical levels steadily over the next 12 months.

Turning to capital and liquidity page 22, I touched on this briefly earlier, but our balance sheet its carrying a significant amount of excess liquidity as much as a billion dollars I.

Incremental cash and investments both as a results of the macro trends in deposits, but also due to the actions we took earlier in the year to prepare for PPP origination.

So we ended the quarter with over $2 billion of cash and investments and a 36% liquidity ratio.

You can also see that over 60% of our assets are in cash investments or other get government guaranteed loans, excluding PPP loans. When you include the PPP loans that number goes to almost 70%.

But all of this liquidity in PDP lands took its toll on two key metrics, our net interest margin and our tier one leverage and while we still have a significant amount of risk based capital as you can see almost 13% common equity tier one.

Given the spike in liquidity as well as the timing of the PPP loans pledged to the PPL laugh our leverage ratio declined significantly on page 23, you'll see the impact to our NIM and our tier one leverage ratio.

On the NIM front, the interest rate environment impacted our NIM to the tune of about 40 basis points with roughly 60% of our loans variable rate.

The fed actions in the first quarter drop those loan yields in the second quarter.

The remaining 51 basis points of margin decline directly related to PPP and excess liquidity.

While our margins get to remain volatile for a couple of quarters as the timing of PPP forgiveness flows through the interest income line, we expect our core margins to return historic level over the next three to four quarters.

Similarly, our tier one leverage ratio saw about 27 basis points of normal capital deployment and the rest of 171 basis points. What are the result of close to $3 billion government backed assets added during the quarter.

Now that all the PDP loans have been pledged to the <unk> I laugh, they will no longer impact our leverage ratio.

The result, though is that although we did see a significant drop in our leverage ratio, we still feel good about our capital ratios and don't expect the need for any capital raising action in the near future.

Despite the focus on Pete on PPP and the impact of interest rate cuts are recurring revenues continued to grow and we continue to reduce our dependency on loan sales and our servicing asset as you can see on page 24.

Importantly, prepayment speeds on Sta loans have slowed dramatically and are probably running at a third of where they were at the beginning of the year not only will this helped drive recurring revenues as our core loan stay on the balance sheet longer.

But it's also positive for our servicing asset and for the secondary market.

Spend a minute on the secondary markets on page 25.

Which as you all know has historically been an important part of our story, but weve deemphasize that as we have helped more loans on balance sheet.

As Bret wrote about in the CFO highlights as the world turned upside down at the end of the first quarter, we elected to sell incremental loans to enhance our capital and liquidity the market as you can see what's stressed for a brief period at the end of last quarter and you saw the depressed prices for our sales in Q1.

Some of those sales carried over into the beginning of Q2. So we continue to realize that lower pricing on a combined sales in the second quarter.

We also had a bit of a different mix of loans, we sold with a larger percentage of U.S. da and slightly lower prices.

Since the lows the beginning of the second quarter, though we've seen a strong recovery in the market consistent with most all liquid credit markets and we're now seeing sales prices back to where they were pre pandemic.

Well, we sold a bit more than our target sta in the first half of the year, we expect to return back to our stated targets of selling roughly a third of our Sps production and all of our you Sta paper going forward.

So for the last number of quarters, we've shared with you our benchmark for high performing banks and the key metrics that were staring at I'm trying to achieve and while it may not look like at this quarter, we continue to make solid progress toward achieving them.

While we do not expect to see total asset growth for a while at the PPP runs off our balance sheet composition will shift that's core loans replaced PPP and excess liquidity, which will drive up our Nam and drive down our efficiency ratio the deposit pricing over the next four quarters will add significantly the bottom line.

At our expense base feels very sustainable.

Once the collectively make it to the other side of this pandemic, we express expect credit cost to normalize grinding higher profitability and returns.

So wrapping up on page 27 last quarter, we talked about our key areas of focus, which our people and their safety, our customers and their safety and our communities.

Those haven't changed but as chip mentioned, we've drilled a deeper into our customers in the second quarter as we focused on four pillars.

Supporting them and assessing their relative strengths and how and their liquidity.

The PPP program.

New capital and opportunities there.

And the last being delivering technology based products and services.

So I'll wrap up with a few fault thoughts on that.

As we work towards delivering these new products on new technology platforms.

Never has the combination of technology and human touch Ben is critical in banking as it has the small businesses today.

Running a small business has always been challenging it's even more so today now more than ever they need simple products purposely designed to help them manage their finances and run their businesses.

But as we discovered during the PPP process. They also need someone they can reach out and connect with when they need help and device. The intersection of these two great customer service and Great technology is what drives us every day.

Well, we set out to accomplishes a daunting task as chip talked about which has to change the infrastructure of the banking industry to do that we continue to work with a group of best in class partners I can see now fins Act aperture payrolls and others with a laser focus on building the bank of the future.

As of today, we're live on offense that core not only with PPP loans, but weve opened our first savings accounts loans and deposits in production on a next generation platform next step for US is the best in class business checking account with a goal of being able trimble delivered low cost deposits and payment solutions at scale.

It's been a long journey, but one that we're confident it's going be worth the effort.

One final note for returned over for questions you may notice a bit of a different look and feel from live oak as we rolled out new branding. This past quarter importantly, we aligned ourselves around our purpose dedicated to the do worse, we recognize that small business owners are a unique resilient group and they are being uniquely tested in this environment.

In many ways they remain the backbone of our economy, there truly the doors that we serve and now more than ever our focus will be on them.

Chip anything else will open for questions.

Thats it lets listen.

At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.

The Pos is just a moment somehow to give any roster.

Your first question comes from the line, Jennifer Demba with Suntrust.

Good morning.

Okay fair enough.

Hi, your commentary was really really helpful and I have some questions on a few topics I guess I'll start with credit.

In slide seven you outlined what do you feel argue higher risk industry right now.

Relative to the pandemic challenges.

Wondering if you could go down the line up those industries.

Tell us what you're seeing.

Your clients in those industries much like you did for the other grouping at the top of Us Hall.

So Steve is going to help me with this so.

We have.

12 million, let's start from the bottom we have 12 million.

Exposure in quick service restaurants.

About 4 million of that happens to be one business on the west coast.

It's a breakfast outfit that.

I had $4 million worth of EBITDA last year totally shut down now those businesses are trade now at about 15 times EBITDA. So a very viable business no matter what it takes to just to the other side with someone like that we're going to be there to help and we just don't know what government programs there will be available.

In fitness centers specifically.

The the larger customers are doing just fine I mean, they're doing every day.

Stuff like wiping things down it's really state by state Steve on that went on who's open and who's not.

Steve you be better off talking about hotels, I can talk a little bit more about walk the graph that have already touched on it.

Hey, hotels more specifically in the Wi Fi and the WBC or the end the FCC certainly I touched on hotels, a little bit. So we are fortunate that a good bit of our portfolio are low loan to value real estate secured first positions. So we have some cushion.

The tertiary market.

Projects are doing actually seen some improvement in occupancy. So again, that's that's positive we do have a handful of projects that are going to be a long road to recovery.

There were full service in nature events have been canceled the which is a big component to their revenue and be a long road.

I had mentioned that I'm not anticipating huge losses.

But I do anticipate needing to continue to look for accommodations in order to help them through the other side.

Again huge unknown.

They're beholden to restrictions if.

The government puts out there depending on how cold it plays itself out.

But they seem to be focused on trying to work themselves through to the other end, but you may see some new ways as we get to that side.

The wining you, let me touch on FCC FTC, Yes, it's a family entertainment centers.

This is truly impacted industry, yes, it truly is.

This is going to the definitely a challenge for us.

They are experiencing stressed due to continued restrictions on limitations to with a.

What they will be open and how many hopes to be in from the extreme of.

Crippling parks for example that are the question becomes what will customer behavior be going forward even after this.

We have now most of these though our government guaranteed loan facilities, we are putting to qualitative mark against.

This industry to preserve appropriately due to the unknown, but this is going to be.

One that's going to require some work out some of our larger ones are well positioned they've got some resources.

And they'll start to do well, but its and I just taking the interest of time Jennifer.

Let me to say this way.

I went over every one of these with every vertical the last 72 hours not only in the room, where the people that originated alone the people that service alone over there and then our special assets group when in fact, they were involved in the room.

And the special assets people I mean, you talk about a glass half empty kind of group of folks I mean, it's on for arguably I don't think anyone felt like that we were not properly reserved.

Our reserve on Wcb was like 3 million Bucks and nobody saw that much in charge offs because of the top end operators are still doing.

Please.

How about that that would be our answer to that question Jennifer.

Okay.

You mentioned you thought the current expense run rate was pretty sustainable can you give a little color there.

Sure. So our biggest line item in Brett can jump in to our biggest line item being salaries and benefits.

We do not see adding more people.

You know on that on that front, so that should be pretty flat. We obviously had the accrued bonus in the second quarter offset by some deferred fees for the origination, but by and large that should be pretty confident you look across our travel line items or advertising line on for branding line items those were all.

Down and I think we'll continue to be pretty efficient in those regards to but Brad any other thoughts on on moving pieces on that.

We posted last June.

No one here.

Oh.

Did we answer your question Jennifer.

Yeah Yeah.

No.

Question for you or.

What you My question would you mentioned the check you count.

What's the exact timing on that at this point.

It is a day by day flight I would've thought that checking account looks like a savings account with a debit card, but all the experts tell me, there's more theres more components to that with transactions and disputes in fraud and everything else.

We are currently slated to be done by the end of the third quarter and live and again, we are working through that every day, but I fully expected by the time, we meet 90 days from now to a sense you an email with a link to open up a checking account.

Okay great.

Sure Kipp I'm curious what you think about this so you did a nice job, giving more information about the Fintech investments you think this crisis. This credit crisis this economic crisis.

Delay.

Thanks investment.

Or just an accelerated.

As they hunker down and.

Conserve capital.

So I'm going to start and I'm going I asked Neal Underwood to two to chime in here.

So as you know gene Ludwig joined us to create canopy.

And we have raised some $600 million from I think 37 banks are 737 bags.

Neil sits right next to me Jennifer as you know and he's on at least four or five calls a day from pin deck and tech companies looking for money.

Thank goodness I don't have to be on all those calls, but I am on ones, where we want to invest.

And it is ridiculous devaluations of these businesses and the number of people chasing these fintech companies. So Neal why don't why don't you take a crack at the digital onslaughts shows so to speak I think the short answer Jennifer first of all Hey, How's it going first answer would be excels.

Rating.

And I think I think it's due the fact that Theres a recognition you know mission critical workflows digital Onboarding has got an essential and environment like this and beyond.

And so there really are really kind of a tale of two cities. The software companies that are connected to things like cash registers NCR those are probably getting a discount in terms of valuation and adoption. However on the other side of it anything connected to digitally on protein is a good example digitally onboarding.

Small business or consumer.

And then on obviously on the servicing side servicing and in a self service manner, our just accelerating and the proof points out there the public Proofpoints happened last week, we can see you know what I can say the private proofpoints continue as we had thought that maybe there would be a discount to valuations companies that are connected.

Those mission critical workflows is quite the opposite.

There those companies are experiencing.

No changes only acceleration in HCV in bookings and therefore, all the private equity money in venture money behind it is seeking to invest we happened on the Kennedy side of it we happen to be in a really great position because our story there is quite different than every other venture.

Company.

In that we have banks is Lps and intend to use the software endorse service. So we are out there are winning deals you'll you'll see them in the press here imminently from and away from some of the best venture brands in the business well I'll give you two examples I think this is correct from memory nail in the last two weeks.

We looked at a $700000 recurring revenue company.

And the best names in the business in the Silicon Valley put a 100 plus million dollars valuation on that business.

This week, we looked at another company that in January billion dollars of annual recurring revenue contracted recurring revenue.

In June it was six and the value that business post money was $230 million again led by the most sophisticated silicon valley investors. The biggest names in the business I mean it is.

Absurd.

Valuations are frothy, but the model the visiting investors are doing into their define paying a year ahead of revenues. Because these companies are also growing triple digits correct correct anyway.

And then make more.

[laughter].

Your next question comes online.

Comes from the line of Chris Donat with Piper Sandler.

Hi, good morning, Thanks for taking my questions.

Just had two wanted to follow up on first on the on.

This slide seven the.

With that cobot 19 heightened risk verticals, just want make sure I understand what's gone on the 75% of existing borrowers who received a peak p. loan I think I missed the comment but.

Well, we are those customer or borrowers, who who saw you out or did you reach out to them through outreach like what.

What triggered the the loan getting started there.

So I'll start and so you can help are currently getting I'll, let me so.

Immediately when this thing hit so remember we have 45 22 year olds that collect financial statements. Every 90 days on all 4200 of our customers. So we're going over budget is constantly so when this is all while 24 seven calls to our customers what do you need what do you need what do you need.

And I think the number that sticks in my brain. Steve is we granted before PPP like 1200, 88 deferrals to existing customers trying to help them out.

We risk so we.

Reached just about everybody every folks know us know how diligent we are about outreach. So weve median lead thats, what we know thats, what we did.

We had before PPP.

Wasn't been known.

They requested deferrals and we cued them all up right when the six month payments support from the SPS is this is really really impactful that 60 plus percent of our portfolio is having the payment not deferred but fully made on their behalf by the U.S. government as part of the here is that.

With that came in many of those 1200, we're asking for deferrals that hold off.

Yeah. The six months May do the trick for me I don't want.

This thing deferred and accrue interest if I don't need it. So most of those actually are kind of in holding pattern, we will consider providing them three months of support after the six months, but most of the business owners were in a position where they wanted you to six months, we'll do the trick so to be clear.

That 9% of deferrals is not equal to 1200, okay clients just to be clear, but we have those cued up and that was proactive outreach.

And then about 3000 of our 4200 customers did take PPP as our contract gets 75%, 75% Thats about right. So that we answer your Chris' question Chris.

For the most part.

They did more than I was looking for in some ways.

But just on the ones who received the PPP loans.

Were they reaching out to you or was that your outreach outreach, that's what I was trying to.

Yes, I think I think it was both I mean, we're just in constant contact with these people from the lending officers to them, Yes does were constant contact Lisa.

Got it said, yes, so it's a dialogue that's always going on so yeah. Okay. And then just want to ask one one question. If you can comment on anything.

Anything different in the last three weeks that you've seen theres been.

More concerns in some states about hires.

Cronto virus cases, so really Q2 forward looking things I'm looking for if you can do it.

Anything.

Quarter to date and also if there's any commentary you might have on.

The proposals working their way through the house in the standing in the White House I know, it's early on some of those but.

Yes, we're likely to see start another version of PTP or kind of how are you thinking about what might come next from from the federal government.

Yes, so I'll try the this again so the.

In my conversation the last 72 hours with many many many of our folks I would say that.

Of our folks to deal with these customers every day feel like their customers are incredibly upbeat I mean in.

CMC insurance agent you know multiples at an all time high but I could continue to go down all 34 of the ones that are having challenges to use has spoken about and Huntley may want to make no a little bit more about the government stuff than I do but I mean, we have been told.

Our government relations people Ford on time that there is.

Across the aisle support for increasing the flagship product the 70 product from a $5 million maximum today $10 billion maximum and increasing the government guarantee from 75 denied any.

No there is.

Again as of last night it a lot worse trading going on we have also heard that there may be a chance that.

That manoogian may.

Have the SBK make another six months worth of PNR payments, just for SP borrowers, which will be.

Unbelievable for us, but you know, we're not going to be Chris Spike in the ball on the five yard line here. We've all been through this this stuff before and it's never over deliver so.

We're just keep our heads down and we do.

Believed that something actually will happen no later than mid August as of last nine hardly do you have any other data on no you said it well shut the other two things that we have hurt a little bit about one could there be another version of PPP aimed at the severely distressed and most impacted businesses So think revenue.

Down 50% something like that.

As there is already money, you know sort of still in the coffers of that program.

And then the second is whether or not there'll be any.

Forgiveness accelerated forgiveness for blanket forgiveness that is that a signed legislation to help with the small balance loans and that from an administrative perspective.

Obviously, but go long wait for the industry. So those are the only other two pieces of stuff, we've heard but it but the chips point will will react once it becomes law.

Understood. Okay. Thanks, very much on them.

Absolutely.

And at this time I am showing no further questions.

So thanks, everyone for attending today and what we hope is that Mike.

Head of marketing has all of your email addresses and you will be hearing from us to open a check in account before we get together next quarter.

Thank you very much we're doing thanks.

This concludes today's conference you may now disconnect.

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