Q3 2020 Live Oak Bancshares Inc Earnings Call
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Inc.'s conference call at this time, all participants lines are in listen only mode. After the speakers person thinking that will be a question answer session and to ask a question. During this session you will need to press Star One gets health and please be advised today's conference is being recorded if you require any further I think that's pretty spread sorry.
I would now like to have the conference over to your speaker today, Greg <unk> General Counsel. Thank you. Please go ahead.
Thank you and good morning, everyone welcome to Bladex third quarter 2020 earnings Conference call.
We are webcasting live over the Internet and this call is being recorded to access the call over the Internet and review the presentation materials and commentary that we will reference on the call. Please visit our website at Investor Dot live Oak Bank Dot Com and go to todays 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 todays 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 and commentary.
I will now turn the call over to chip Mayhem, our chairman and Chief Executive Officer.
Thanks, Greg Good morning, all slide three we.
We are extremely excited about talking about the best quarter in our company's history.
We acknowledge as Chris Donat from Sandler Piper noted in his report this morning that live Oak is a complicated story.
And we're going to attempt to unpack that for you now.
Headlines.
We're hitting on all cylinders margins up originations all time high or low.
Loan sale prices at or near all time highs.
In tech investments raising money at frothy valuations.
Even got a break on the servicing asset rebel.
And with all this production Huntley was able to keep expenses in check what could possibly go wrong.
Everyone knows the small business in America, the 28 million small businesses in America Creek, 66% of the new jobs.
And they're struggling many of you that whole bank stocks are worried about the small business portfolio. The object of this exercise today is we want to create the most transparent bank in the United States relative to showing you the quality of our loan portfolio and the capital that stands behind it so let's go.
Going next slide you've seen this one before.
Capital at the end of the quarter 532 million fair Mark and.
Loan loss reserve allowance for credit losses. It is these days or $62 million gets you to about a 26% capital ratio adjusted compared to $2.3 billion of Unguaranteed paper.
I'm happy to report that our guaranteed loan portfolio grew from about a billion one to about 1 billion seven and with.
And with this frothy secondary market that is worth about $155 million pretax.
Put another arrow in our quiver.
The third thing I'd like to show you on this slide is the past dues like they're not any this had to do with the SP a subsidy in the spring where the federal government said they were going to make PNR payments for six months to every SP a borrower than they also said that if you borrow money on or before September 25th we're going to help you out.
Six months period, as well, which is in some part the region reason for our.
Frothy increase in loan originations.
Lastly, I would like to point out what we call the examiners ratio in the last crisis.
Federal Bank Examiners look very closely at the classified assets the capital in and reserves and today that number for US is a little over 9% they get a wee bit fussy around 30. So you see we have a very long runway there.
So moving on to the next slide.
As you know we have 45 22 to 30 year olds to collect financial statements.
Attempt to collect financial statements every quarter that number as of the day, 65% interim and 86% for annual financial statements. Most banks to do that but we do and Steve Smith, who will probably help out later in this call asked every one of our folks that are in touch with these customers literally every day to call every one of them.
And put them in one of these categories high medium and low in terms of stress. So what you see on the left is a 5.5 stress level on the whole portfolio and then we created we affectionately call. The cobot six that would be the the pie chart on the right that would be our more stressful verticals hotels early education.
Asian family Entertainment wine and craft beverage fitness centers and quick service restaurants.
And again the port is here, we know our customer.
Moving on to the next slide loan portfolio characteristics.
So what we tried to do here is breakout for you in an open fashion transparent fashion, our top five or big five verticals that would be mainly chickens healthcare is mainly Dennis veterinarians self storage and our general lending group more to come on them in a minute so compare that to the coast.
Six and I would say you know factually the covert five quick service restaurants are doing quite well these days.
And really this is kind of case by case right. So if you're running anything whether it's a fitness center or a quick service restaurant in Los Angeles Trouble, New York Trouble, Michigan trouble, it's almost state by state Governor by Governor Mayor by Mayor.
So moving on to the next slide we wanted to give you more transparency relative to our credit reserves and fair value Mark on Big five included six.
Theres also data here on deferrals and those that receive the SP a subsidy.
The point here is that this type of data will be published each quarter and we.
And we just don't.
I don't know what we don't know is the is the shorter this so for small business America will we get more federal funding.
How fast with the federal government give us the ability to forgive the $45 million and earnings we have hung up in the triple Pete product will do.
Well the SP a.
Come back and make PNR payments for our borrowers will the SP a do what they did in the last crisis and potentially increase the seven a product from 5 million to $10 million a company with a 90% guarantee we just don't know, but we are going to manage this bank as if nothing happens.
Yes.
As always we're going to take care of our customers. We understand if they have the other tiger and they want to fight and then some.
Unfortunate situations, we're going to have to have tough conversations.
There will be more losses.
So continuing on with the credit analysis, let's look at our hotel portfolio.
39 properties about $130 million of exposure today, 59% occupancy the average daily room rate in our portfolio was $116 with revenue per available room of about 74 in.
In the new show on the right you can see our top 10 exposures as of today and more importantly, see the products the SBC.
Bible four is prominent here along with some us the paper and importantly, the loan to value ratios you see on the right.
Now let me walk you through what we did in the quarter, we had about $190 million of exposure, we put $81 million of these loans up for sale, we actually sold 55 million face amount of the note at a $5.2 million loss. We kept five that we didn't want to sell at those prices and we wrote.
Let them down to the prices that we received so the five two in the four seven gets you to.
Brett told you in last night's write up of $9.8 million charge offs.
And again the theme here is we're going to give you as much data quarter to quarter.
On this portfolio and anything else that gets in trouble as we move forward through this crisis.
Next slide.
We've shown this in the past we want to continue to highlight our geographic diversity and lack of concentration risk and obviously, where the population is where we have the most exposure you probably take North Carolina, There, California, Texas, Florida, New York largest states in the United States and 212 million exposure in our home state.
In North Carolina.
Moving on to originations and soon profits.
As you can see take the PPP out of it we typically do about 500 million and originations per quarter and this time, we did almost a billion dollars and you see the granularity of that in the box up top seven eight was $639 million.
And so the real question is which we're not going to disclose which is what is after this and I will tell you that after the billion in originations our pipeline is at an all time high.
Next slide.
Again.
The graphic diversification and lack of concentration in the billion dollars. We put on the books this quarter little bit smaller loans. This time 46 states $790000 worth of exposure of Unguaranteed paper.
Moving on to the next slide.
So and this is this is this has been fun. So how did all this happen right $966 million for the quarter.
Clearly the SP, a subsidy had something to do with this I guess is.
Steve 40% to 33% would probably be from the subsidy and the rest would be from.
From hard work and.
And really kicking in this time, where our general lenders and sponsor finance people add.
And certainly the PPP basket had a lot to do with this we did almost 12000 PDP loans totaling $1.8 billion and that gave us.
Many more looks than we would have had.
Moving on to the next slide here is a little more discussion of our general lenders on our sponsor group right. So we've built this bank until about three years ago on the theory of Verticality.
Higher domain expert have that domain experts sit down with Steve and his credit guys create a credit box tell the sales guys go get that because we'd rather think that our customers care about two things have improved and when are you going to give me the money. So evidence encino and all that work flow that allows that to happen to treat every customer like the only customer and the bank.
And then we stepped outside of that said well you know the former number one SP a lender in the country had a lot of folks that were unhappy and as you can see from the map on the right we have hired.
Total of 19 lenders.
From Los Angeles to to Austin, Texas, Miami, Florida to Boston and you see these folks all over the country, making loans this quarter and 17 separate industries totaling some $228 million and if you go to the next slide we.
We are continually proud of maintaining our number one position as a top SB eight lender in the country and you can make a case that were pulling away from the pack this year.
And if in fact, our general lenders and sponsor group again outside the theory of Verticality were on their own they would be top 10 in and of themselves.
Worthy of note is the tiny little noted the bottom about seven a program gross loan approvals per quarter jumping to almost $8 billion. Maybe just maybe this will get the attention to the folks in Washington that maybe just maybe we'll get a little more help as we get through this crisis from them.
So you know.
My last slide is on profits and hopefully it's going to really jump into before I turn it over to Neil to talk about our finance.
In Tech investments, but you know we're finally here take the second quarter out of a lot of noise. There were bumping along at 17 million a pre tax pre provision and earnings and now were 24 million.
So finally, all those investments are kicking in those investments and in the general lenders that I just discussed because it's just not those folks the architect of the deal behind them. They are underwriters closer servicers. So all of the investments that we've made all the money that we spent to get to this point are finally, beginning to translate to the to the profit line.
So let your mind wander on post Cove it.
What is the provision going to be with all the arrows, we have in our quiver what is the tax rate going to be when we manage that in the past with our leasing income to somewhere in the mid teens and I think you're going to see that we're going to get to some of the things that huntley puts in every slot at the end of the day endpoint is the ultimate object to the exercise so Neil why don't.
Why don't you jump in.
About investments and let Huntley take us home down, giving a couple of slides with some of the Fintech investments both in the context of live Oak ventures, and canopy. Seven you mentioned right place right time, right model I'd, probably add right test to that we're finally live with the deposit.
The deposits platform after five years in the shop and it is really exciting because it's the new tech stack package or the next Gen. Onboarding system Fintech has an excellent core off outdated effort, probably going to talk more about this but a shout out to dinner for Denver, because you've been more than patient on this particular topic.
Relative to live as banks look we've been really excited we get some write ups based upon some of the recent valuations. This.
It should be seen as precious nondilutive tier one capital to the bank.
In that live Oak Bank decides to upstream into the holding company that downstream into the bank.
There is a significant advantages there are the most notable this quarter, obviously is green light, where we took a $13.7 million mark to the good.
If you recall, we invested $3 million and 2018 of the series, a and 2 million in 2018 in the B.
And I agree and I continue to perform at record levels as you know.
That is a visa debit card for kit, but its a mission based theme, where it's really helping families with financial literacy.
Audit can't be as you guys know canopy as the successor of live ventures that really allows us to invest that scale I mean, given it's a $600 million fintech fun powered by Bank limited partners with its super busy in quarter, three as well and as you. All know is a highly competitive market and valuations are frothy, even still we went through.
Deals against the best names in Silicon Valley, we led or co led alloy blend and Green light and we go further into these.
I believe your part as good or website understanding technologies, but suffice to say these are led by the industry that all bringing next gen fintech capability to bank and as important as the financial upside.
I hope I can now use these assets and the first off with the latest and Fintech technology.
Moving on to the next slide.
Yes, just six live ventures companies and as you can see on the $18.6 million invested the current carrying value on our books is $90 million. We feel it is conservative given the accountants and their view of how this has to sit on our books.
If you actually do the math and look at them valuations.
These companies in the most recent valuations in our in our ownership.
Well, you are closer to about $150 million and value.
We feel it's a good progress, but given the growth rate of each of these companies. We do expect these numbers to grow over time and again, just providing fresh as tier one non dilutive capital to the bank, while giving us access to the latest and tech advances so over to you.
Okay, great. Thanks, Neil.
Let's turn to page 19, I mean to say, it's been a challenging year for everybody would be a massive understatement.
And especially for small business owners.
No in the face of everything that was going on this year live Oaks, roughly 600 people accomplish some pretty amazing things in the third quarter, just like we did in the second quarter when the PPD program with live our focus throughout the year has been content that of our customers. Our employees. The communities that were in and then supporting small businesses.
With our personal service, our capital and our technology.
Well, we've all been affected by then to this year were exceptionally proud of how the dedication of our people the commitment to our industries and our brand have resonated across small businesses.
Hopefully you all got a chance to review our earnings release, and Brett CFO highlights and as Jeff said, it's a really strong quarter financially across the board on pages 20, and 21, well try to unpack some of the headline numbers that all of these are adjusted for PPP. Both both allows any excess liquidity to give a bit more view into it.
To the core will run through these relatively quickly and then get into some more detail on subsequent slides. So as Kip said, our loan portfolio grew $600 million in the quarter driven by our origination as well as lower prepayment speeds across the portfolio total assets were relatively flat as we were able to redeploy a substantial amount of the.
Liquidity, we stockpiled earlier this year.
You had a really strong capital belt, driven by our core earnings plus a fintech activities and as the PTP earnings flow into capital as well with our capital ratios are you can see there increasing across the board.
Page 21, the earning side core earnings were driven by Eni growth as we replaced that excess liquidity with loans and our deposit repricing.
Went down loan yields remained strong at just under 5.5% across the portfolio and our margin recovered nicely. After the Q2 impact of the rate cuts.
Gain on sale benefited from a stronger market secondary market, allowing us to sell less loans and still generate higher gains and we're back on.
And we're back on track for our targeted 65% holes of the FDA allowed to come available. Despite increased activity at the beginning of the year and as Jim mentioned is great story on the expense side as well and with travel curtailed we found creative ways to engage with our customers and partners and dramatically increased our productivity.
All that led to a core pre tax pre provision profitability of $24 million and we'll go through that and a lot more detail here in a little bit.
So let's spend a minute on the PPP page 20 kill as folks know level $1.7 billion of origination and you account that with the excess liquidity that we stockpiled had added balance sheet impact into the second quarter of $2.6 billion and has come down a bit as we deploy that excess liquidity, but still over accumulate.
Others have impact on our balance sheet.
From an income income perspective, we recognized $13.6 million income from both the deferred fees and interest income offset by a bit of that now.
Negative carry on excess liquidity, so about $13 million of net impact in the income statement as well as Kim.
As Jim mentioned, we booked a total of about $60 million of those deferred fees are still about $43 million remaining on the balance sheet as of September thirtyth that will come through.
With forgiveness and as it relates to forgiveness, we're off to a solid start we've got about 1500 of those 11000 loans loans that are in flight that are in process of being forgiven and our friends and see now have been helpful building out the portal and we've actually use that as an opportunity to advance the ball on some other cup customer facing technology.
Shifts we expect we'll start to see some forgiveness come through in the fourth quarter, but the bulk of that will still probably be the first half of next year and as Kim mentioned, there's still significant funding available in that program that was on used over a $130 billion and so we think that we could see additional funds released in some form.
To the benefit of our customers, but predicting things in DC pretty tricky right now so so we'll wait and see.
Turning to page 23.
A lot to unpack here. This is really all the adjustments that we've made to get to that core number of 24 million that we mentioned so we'll just run through it.
For starters, if you looked at the top two rows the stated pre tax earnings up considerably.
The headline number $45 million you add the provision to that which is $10 million, which was largely driven by our origination growth and the sale of the hotel loans that chip mentioned that gets you to about $56 million of pre tax pre provision earnings.
There's still a lot of noise in there so let's get through the.
And most of them broke our way this quarter right. So we've been at beginning of the year, we faced some headwinds around valuations and mark to market you can see those that effectively we reversed or got some other back that we take those out.
We had a million dollars of an expense.
For the pending sale of an aircraft Neil.
Neal touched on the 13 plus million dollars of Fintech gain.
And then you've got the $13 million of PPP activity that we mentioned as well so all of that that dropped to about 23.7 point $3.8 million of core pre tax pre provision earnings which is up 40% from from this time last year and Thats. The result of a ton of.
Hardware and other commitment we made a couple of years ago to strengthening our balance sheet and driving sustainable profitability and when you couple that with the growth that we still believe we have we think its pretty its pretty unique.
The turn the page to the franchise fundamentals chip covered a lot of this ground already found repeated but a couple of things to note in the first is operating leverage if you look at.
If you look at those two lines on the top of the page net interest income increasing by 25% in the quarter and then.
And honestly expect decreasing by 11% in the quarter, obviously massive operating leverage even if you adjust for the PPP impact into Q2 special bonus related to PDP, there's still a roughly 17% increase in Eni in flat expenses. So.
Continuing to drive that that that API.
That operating leverage and the second thing to note is as chip mentioned, yes, the increase in our guaranteed loan portfolio of $1.7 billion from 1.1 last quarter and over doubled over the course of the year. That's a great driver of low risk earnings, but also a really nice source of contingent capital and you add that to the unrealized gains in the fintech portfolio the Nielsen.
Talked about and we like having those levers from a capital perspective in an uncertain time.
So originations inkjet hit that pretty well, so I'll just add one or two comments how did we do we accomplish this level of origination in the course of in the course of the quarter and I think importantly, we did that without sacrificing any of our credit standards any of our closing processes and any delayed gigabit.
Business, we feel really good that we didnt have any corners across the board and in some cases, we tightened our credit standards you look across our credit scores of our borrowers the equity injection debt service coverage ratio, there consistent with or or tracking above the balance of the portfolio. So we feel really good about the quality of the portfolio.
You can see on the top of the page the originations skewing towards these newer verticals a lot of that that chip said, our business is coming online that we've invested and whether thats general as well as some of the bio energy community facilities.
The things that are coming online here over the last couple of couple of years that are really hitting on all cylinders.
And in the final comment is.
You know the the Atlas verticals in the origination there and as you can see an entertainment centers and hotel.
All that but stopped origination there, but a little bit of capital back into some of our customers to help support them, but in these other verticals, we're actually seeing some pretty interesting opportunities as and a lot of competition has fallen away, we're seeing stronger customers. Some really interesting opportunities. So we'll continue to be selective in those spaces.
As well.
I mentioned, the FDA subsidy, which clearly.
Supporting our customers and drove some of the activity in the third quarter.
That applied to all the fully funded 70 loans that closed prior to September 25th it's worth noting that the FDA say seven eight program is really designed for times like these to support lending to small businesses again periods of uncertainty.
We've been working at it for over a decade to be the best SBS lender, we can be and I think it really it really paid off and then showed in this quarter.
We're also fortunate we don't have some of the issues that other banks are dealing less like income producing theory at retail or office spaces and energy. So I think that helps support that that will take a lot of competition that we've seen.
There as well, we just kept singularly focused on small businesses and avoiding distractions.
So if you flip to loan sales, we touched on this already as well slowing prepayment speeds increased liquidity the capital markets drove spreads significantly higher in the secondary market in both SDN U.S.J. product, we're seeing gains at or near all time highs and we really like the market dynamics, but we also really like the ASP.
At the originating so we elected to sell incrementally less this quarter than we had earlier in the year, where we're really we're kind of stockpiled liquidity in the face of all the uncertainty of beginning of the year and.
And so we were kind of back in line with our long term targets in terms of hold we've deployed a fair amount of that excess liquidity that we had to so we like where we are and I think we'll continue on track from a target perspective in terms of our hold ourselves we've that we've indicated.
Turning to expenses.
Yeah Chip mentioned, a really really solid story, there that's pretty remarkable given all the franchise growth that we've seen the last last quarter, there was a $7 million bonus accrual at a bit of.
Additional deferred origination expenses. So when you net that out core expenses are down a little bit quarter over quarter.
As you travel and expense travel and entertainment expenses were obviously way down.
We had a bump up in FDIC assessment that sort of offset each other so.
We recognize that the pace that we've been running this year is unsustainable, we've driven folks really really hard and Q2, we tackled the once in a lifetime opportunity to serve our customers with PDP loans and then right. After that expired we were looking at at a record pipeline and then a bunch of loan activity in the third quarter as well. So we know that's a flat headcount.
And our folks just delivered right and so we're going to add a little bit to the teams to help load balance a bit as we see continued opportunity and continue pipelines.
So in terms of travel start to come back a little bit we made the expenses creep back up a bit, but where we are real.
We're really excited about how efficiently we have been operating and will stay disciplined on that front as well.
So turning to deposits and this might be the the unsung hero of our model right now, which is our direct deposit platform. So 50000 customers.
$4 billion in retail deposits.
And the efficiency of this portfolio into zero interest rate environment, it's pretty remarkable that we pay 60 basis points on new CD 70 basis points on customer savings and that those numbers are down now deposit cost down 25 basis points in the quarter savings rate down 100 basis points. This year CD rate to 150 basis points. This year.
And all of that being operated with six basis points unallocated expenses. So.
From an earnings perspective, we've got the CD portfolio that that's continued to run off and that ill reprice.
Talk about in a second but close to $3 billion in the next 12 months.
But it really really impressive operation funding in this environment I think it's hard to see even a branch based checking account portfolio with a lower fully loaded costs than that.
We still remain really committed to our technical strategy. We're really excited about all the things we're doing there.
It will drive deeper customer relationships will capture transaction flows will be able to better provide liquidity to our customers, but this funding model right now in this environment is incredibly efficient and incredibly attractive.
Let's turn on stay on deposits for a minute so $3 billion of $3 billion of.
Retail Cds and broker Cds that will reprice in the next 12 months.
That well at today's rates up savings and CE is drop another $30 million of Medidur.
Net interest income noninterest expense net interest expense to to the bottom line apologies to 30.
At $39 to pre tax earnings on annualized basis that 40 to 50 basis points of NIM.
Just on the run off of that stuff. So.
Again really excited about the deposit portfolio, we have and how we're managing that over the course of the next.
12 months that'll be a nice a nice tailwind so.
So looking at NIM.
Obviously, a big drop in the second quarter with interest rates, dropping a 100 basis points and in our floating rate loan book, So we were down.
On a core basis close to 50 basis points, and then you add the PPP and the excess liquidity, but core margin down close to 50 basis points, we've got almost half of that back.
In in one quarter and with the deposit data that we talked about should continue to see solid tailwind on that on the right hand side, you can see liquidity, which obviously elevated in the course of the second quarter for an average basis, it's still up but we've done a really good job of redeploying that liquidity, we took 10.
Percentage points down on a spot basis over the course of the quarter and we'll continue to redeploy that you know as we can.
As we go forward.
So turning to capital and liquidity.
You know in in an uncertain time, it feels pretty good to have over half your balance sheet guaranteed by the government and in cash.
You add to that that 13% cetone ratio excess liquidity continued capital sources.
And we feel really really solid about where our balance sheet as which also gives us confidence to continue to provide capital to small businesses, which is sort of our mission every day. So.
I feel really good about where the balance sheet positioned as we sit here right now.
And again Kipp mentioned this but our portfolio is really diversified not just across government government programs and across all of these industries as well its granular.
Small loans, we're working really hard to stay in touch with all of them and know where they'll stand, but we like the we like the diversification across that and then finally on capital tier one leverage, which obviously took a big step down in the second quarter of PPP and the excess liquidity. We've got a lot of that if you back all those loans.
Add to that PTCL app into that was a big jump back we still are sitting on a bunch of excess liquidity, but 50 basis points recovery on that tier one leverage. So we're close that each 50 were I don't have a 50 number that we feel pretty good about so.
All right, let's go and look at the slide we show every quarter. These high performing bank metrics and sort of what we see as you know as these targets.
And yes as chip mentioned there is some onetime.
The onetime stuff in there PPP and fintech et cetera, but on a core basis, whereas 6 billion dollar asset bank and moving up pretty quickly in that regard core NIM is over three at quarter end, making its way north.
Income side feels really good efficiency expenses go really good and the capital kind of right in line. So.
All these things with our continued growth we feel really good that we're on track to deliver deliver all of this.
A final note before we open up for questions on the new deposit platform, you know Neal touched on that.
We went live at the end of September with business savings and Cds on the new and the new stack them Nucor in production, we had almost 200 customers and over $10 million and account balances already that's with no marketing basically.
And that provides us the ability to seamlessly open a business account online, which is actually pretty rare and it's got a great mobile app and all these features but thats really just to start with our partners at aperture and Benzaclin others. Our roadmap has new product design enhanced customer experience integrations with software companies and Thats what.
We're really playing for and what we believe will truly improve the lives of the small business owners that we serve.
Yeah, and then on the checking account front. We are currently live with our first debit card carrying production they're working.
And we'll be expanding that pilot group over the next few weeks.
Given the strength of our existing deposits in our in our liquidity base, we can afford to take our time with the roll out to make sure we get it right and I think what you'll see broad market launched a small businesses as well as the conversion of our existing consumer deposits scheduled for early in the new year and we just remain incredibly excited about everything that we can accomplish.
In addition to what we are currently delivering what the core business. So with that why don't we turn it over to questions.
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First question comes from the line of Jennifer Demba.
Your line is now open.
Thank you good morning, congratulations on a good quarter and congrats on the deposit platforms.
Okay.
Yes.
Yes.
You gave a lot of good information in those slides and in your commentary. Thank you.
I want to start with the hotel land sale what.
Brought you to do that and will there be more sales in future periods.
Yes, Steve Smith, our chief credit officers here and I think you could describe a bit Steve give that a shot so Jennifer this is Steve Smits I'll start and certainly chip you can add some of.
Some additional thoughts from your perspective.
To start with it clearly one of our most impacted industries chip talked about the coded six and for US really it's the code five if we look at our portfolio hotels being at the top.
And really we had to look at it as not necessarily that we were expecting to take an immediate loss.
However, the administrative burden.
To work these loans through to the other side.
Is a consideration that we thought about they were certainly many of them very highly likely to go to non accrual before they got better.
That would be an impact and the.
Need for us to hire additional special assets personnel to focus on this portfolio was a reality.
Possible deal with litigations and bankruptcies and other things. So it was a multi year administrative burden that we had to pair that against just taking some risk off the table. So that we could focus on the rest of the portfolio.
And that really was a driver in the decision is really looking at the long term burden to get them through the other side.
And the cost to do that.
And we were in the fourth.
Fortunate position, where it made sense that we could take that off so we could focus on the rest of the portfolio I think thats right I think its off into defense, Jennifer I mean.
Jennifer I mean, we have so many arrows in our capital quiver that just to sit here and slug. It out for three years with those $55 million worth alone. There's no doubt, we would have gotten that money back but better.
Better better focus on offense and defense and when we did this because we could we have the ability to do so and we will do that again in the future if necessary I also think that the second the market was incredibly strong and I think we were pleasantly surprised with the levels that we were seeing on these properties and that factored into it.
Well I think we're not actively out marketing a bunch of other assets in the portfolio.
But we'll be we'll be opportunistic to to manage risk as Steve said.
Very helpful. Thanks.
Chip I know, we know one here really knows what's going to happen.
Do you have any guesses as to what your net charge off levels could look like over the next two quarters.
Based on the level of economic activity, we see today.
So I'll turn that on and Jennifer If you can tell me exactly what's going to happen in Washington DC.
Relative to what they are talking about now to help small business than we could probably tell you that the answer is we just don't know I mean, I would say that.
Are we reasonably confident that something is around the corner for small business America, particularly those that have been affected have zero revenues in some cases, I mean, I think theres, probably more help on the way there.
But we as a as I said in an earlier, we're going to operate this might because if there's going to be nothing else and then we'll make those decisions at the time, but I just don't have a clue.
Right.
One more question expenses currently.
Currently you said probably need more staff.
So what kind of.
Expense trends should we see over the next two or three quarters.
Yes are there well it.
Well expenses coming up.
In terms of accruals or whatever.
Yeah, and I can turn this over to Brett to four.
For some details but on the people front, it's really we're seeing more loan activity and I think we ever could have anticipated at the time and so you think about loan closed there's an underwriters.
Things like that that's really where we're seeing the need for some additional people so that will have a modest impact.
On the on the total number.
But I don't think there's anything major.
Accruals up or down that we're expecting on the expense side and so I think it will creep up modestly over the next couple of quarters, but we're going to we're going to fight hard to keep it.
Yes to to keep it pretty flat if we can.
Brad anything you want to add to that.
Maybe the only thing I would add as I think I think you've seen it and we've communicated.
Our shown the actuals in the past when we take on various initiatives such as at the general lending and that means if anything hard.
Expenses that have a future pay off and this quarter specifically using that same example.
You can see the delay in originations by the SP, a generalized on how that initial investment paid off so.
Maybe to definitely point.
Adding nic.
Our staffing et cetera.
As we see opportunity.
I think when when great thing we've done is invested.
And that does have future returns.
Hi, Andy.
Modest increases their quarterly.
Thank you.
The next question comes from the line of Chris <unk>.
From Piper Sandler Your line is now open.
Maybe.
This might be on mute.
Sorry is that better.
Yes, now we got yet sorry about that.
And with that I had nothing to say, but I really do.
Anyway looking at your all at Slide 10 in the originations.
As we think going forward and I realize it's kind of like the net charge off question. If we can tell you what's going on in Washington, and then maybe you could tell us whats going on with with originations, but if I think about scenarios, where nothing happens you should we.
Should we expect originations to be sort of like what they were pre pandemic or.
Do you now have with the deposit platform and the liquidity on your balance sheet and be assume.
Assuming the secondary markets, where it is.
An opportunity to really be meaningfully above where you were with originations pre pandemic.
Yes.
As I said a minute earlier, Chris our pipeline is at an all time high.
Right.
Trying to be somewhat conservative do we have the players on the field today that could originate on an ongoing basis, two and a half plus maybe as much as $3 billion on an annual basis I would say the answer that's probably yes.
I'd be loath to predict anything higher than that.
But we are seeing opportunities right now that six months ago, we weren't seeing right very clearly where competition of pullback in places.
And so we continue to see that I think how long that lasts is an open question as well we will we'll run hard as long as we see it and continue to have some of these businesses mature that'll help support that but.
Feels good right now and will continue but it to chips point I think those numbers are good in terms of what we can we can visibly see.
Okay, and then just just with the six month Pmnine program with the S. BA.
Assuming.
We don't see anything like that again, I mean, I thought I heard the comment from chips that that was like a third of originations was sort of to take advantage of that deadline or did I Miss hear that one yes.
Yes, I think thats, probably right I mean, if you didnt have that maybe we would not have done a billion dollars, but we probably would have been six or 700 million in the quarter would be I think thats fair.
The majority of our origination benefited from that right, which is great because it helps support the borrower.
But how many loans would have not happened without that subsidy I think is probably closer with order last most at most all of the customers will have the opportunity to expand business acquisition et cetera, and it was a nice to have not to have to have so.
Yes, that's right way to think about.
Well and we took some business away from conventional lenders because when the borrower did the math on an SP a little at a higher rate than he came with us because of the PNR topic.
That will be a onetime situation as well.
Okay and.
Well I'm just wondering one more on compensation I think I've been pretty clear on that the creeping up part but.
Is there any benefit you have from say.
Say the investments you have made in launching the deposit program do you have some expenses that drop off in that regard or or should I think about you is you got to like.
You are in the early stages here with a deposit platform and now you have a lot of other things you want to add to it. So there will be continued expenses.
Okay, Great. That's a great question the benefits that we'll see will happen at deposit conversion, let's call that first part of next year, and then ultimately loan conversion, which will take a little more time.
And those will be relatively modest actually just given we don't have the scale of units right that that's some really big banks do but it will be meaningful but.
But really to what to to your point is about growth, it's about new product development. So we'll likely reinvest that savings and continued product I don't think you'll see a big move either way as it relates to technology spend over the next 12 12 to 18 months.
Well it would be talking off in other words, when we have a number of people that were doing a lot of things to get us to this point and that job will be doing that on the other hand, if you think about 100 and whatever we have on the lending side right. We may have not that but a whole lot of folks on the deposit side comment on practice management software companies generate.
New relationships that we have been talking about now for years and now it's around the corner.
Okay, all right thanks very much.
Next question comes from the line of summer Summer from Raymond James.
Your line is now open.
Hey, good morning, Congrats on a very good quarter.
Thanks Amar welcome to the call. Thank you.
Thank you I appreciate that.
Maybe starting on the all in reserve coverage. It was down about 266 from the 309 last quarter can you talk a little bit about the underlying unemployment and GDP forecast in your model and then maybe just your overall comfort with the reserve at these levels moving forward.
So this is Steve Smith, Chief Credit Officer, So I'll start.
First of all my confidence in our strategy very confident.
And talk.
Talk a little bit about unemployment you hit on a metric thats very important to our model for our general reserves. So we and reminder, that we heavily reserved in the early half of this year.
We've seen some improvements in the forecast for unemployment that impacts our model also I'll point out you reflect on that side the chip discussed on our stress measures.
That is important because we use that strategy to put a mark on the level of that.
Flows right into our model for what we're reserving against so we are taking a micro low levels. So we're very fortunate that we have a very robust servicing platform it bodes very well.
In environments like today with uncertainties so.
So we reach out to every single borrower on a low level, we place a mark based on their level of stress based in some very specific challenges.
That they may be finding and that rolls into a qualitative factor that we plug into.
Our provisioning model and that.
And that correlates very closely to what we're seeing in unemployment. So that gives me confidence that it's doing what we expected to do.
Okay, Great and then maybe a bigger picture follow up question.
The pandemic opened up any opportunities to maybe lend to new verticals, maybe remind us of the process behind entering new vertical and are there any plans in the pipeline right now.
So great question look in terms of new verticals we.
We do analysis the research around the market the credit characteristics and then importantly, the the market structure. So are there.
Referral sources influencers experts et cetera, how can we have somebody either in house or that we're very close to with that expertise in that industry to help us drive.
Success, and so we really I didn't hit the pause button on that for the last several quarters as we've had a lot of them that were maturing and we wanted to sort of see that through.
I think that these what is covidien done and has it opened up anything.
We look at our verticals and I think some of them have more opportunity.
Either because of less competition or because of the market there and so I think we sort of like the breadth of what we have.
Our general less than our sponsor or seeing some transactions in certain sub industries that may be taking place as a result, as well see a little more technology, a little more services stuff.
But overall I think we really like the footprint that we have in some are growing the diversification of that allows them to thrive a little more than others in this time.
Okay.
Okay very helpful. Thanks, a lot appreciate the time.
Thanks Mark.
There are no further questions at this time Mr. chip Merritt. Please continue.
Yes, and we thank everyone for joining us today and look forward to see you 90 days from today.
Yes.
Okay.
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