Q4 2020 Live Oak Bancshares Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the fourth quarter 2020 live Oak Bancshares incorporated earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow.
At that time, if anyone should require assistance during the conference. Please press Star then zero on your thoughts on telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your house. They started Greg Seward General Counsel live Oak Bancshares do you mean.
I'll begin.
Thank you and good morning, everyone. Welcome to live Oak's fourth quarter 2020 earnings Conference call. We are webcasting live over the Internet on this call is being reported 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 LIBOR banks Dot Com and go to today's call on.
Our event calendar for supporting materials, our fourth quarter earnings release is also available on our website.
Where 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.
Or is that may cause actual results to differ materially from our expectations are detailed on 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 day to today's call information about any non-GAAP financial measures referenced including reconciliation of those measures to GAAP measures can also be found in our SEC filings and in the presentation materials and commentary I will now turn the call over to chip Mahan, our chairman and chief.
Decorative officer.
Good morning, all and thanks, Greg.
Suddenly and I could not decide this morning, whether we were more excited about unpacking the accomplishments of 2020 or more optimistic about 2021, and the new products, we have to sell.
So here's today's agenda as always hear it starts and ends with safety and soundness, we will discuss our fortress like balance sheet and the many arrows that we have on our quiver.
And yes, the federal government has come to the aid of small business America.
The Smiths, our chief credit officer likes to say, our borrowers have been kicking the can down the road and I will give you an example, or two of that and how that works.
We're going to talk about real core earnings.
Everyone that owns our stock is trying to figure out post this horrible Covid thing what are live Oaks core earnings.
P. P P. One dot O fees.
<unk> P. P. Two data fees, what we will charge offs fee.
We'll live oak release reserves et cetera et cetera.
Any of you always ask about how our technology investments are doing and Neil will provide some color on that and as always Huntley will dig deep into the details of our operations and give you a glimpse into the future.
On to the next slide Micah.
Of course, there are highlights here.
No past dues in the second quarter, no past dues in the third quarter.
Helpful from the subsidy from the SBA.
Steve has 50 young folks that report to him that are on the phone every single day with our 4200 customers.
And the jump in our watch list ratio from about eight 5% is quite predictable.
Yeah.
And now to the middle of the page on our fortress like balance sheet debt, we I always like to talk about so sure were $522 million of capital and ever increasing loan loss reserve and fair value marks of another $75 million.
We have two and a half a billion dollars of Ungird deep paper. So that gives you an effective capital ratio on the exposure that we have at this bank of about 24% and boost the reserve and fair value marked about 3% up on guaranteed paper, but wait there's more.
Our treasure chest was about flat this year at $1 7 billion. If you Mark that the market is worth between 140 on a $170 million on pre tax earnings and yes, we're going to talk about our tech investments.
We put up $18 million to invest in these companies today, a carrying value of 82 last round of financing at $1 55, So tier one equity of 74 on just that alone when you add all that together, it's a very unusual.
A fortress like balance sheet.
Now.
Anderson and I had been in business together for more than 30 years.
She helped me start the bank and I asked her about six months ago to dedicate.
Her life to what where you essentially called the Covid six so in keeping with what we said in Q3, Jay will you let the investors know how things are go on with the Covid six.
Sure.
As chip mentioned I've been tested keeping my finger on the pulse of what's happening with the six industry verticals that we believe most impacted by Covid.
We started our analysis on the sixth at risk verticals buy back a day all of the typical bank wide portfolio statistics and examining the characteristics of these COVID-19 six vertical borrowers, which comprised about 17% on the total bank portfolio or $439 million up on guaranteed X.
Those yet.
Noteworthy here related to the six verticals is that while the category criticized and classified assets has increased slightly during Q4 as compared to Q3.
Classified assets have actually stabilized the increase being almost totally attributable to borrowers who have requested a second deferral due to COVID-19 necessitating in some cases, a downgrade to risk rate pie.
And I chip to the criticized asset category or on our watch list.
We continued to recognize the risk in the Covid six verticals and our state and local restrictions impacting these businesses.
Looking at non accruals in the hotel category there are actually three hotel borrowers on non accrual.
One suffered a fire three hurricanes an earthquake and non COVID-19.
One transaction one hotel note will likely be resolved by the end of January and one is in foreclosure.
Turning to the entertainment vertical again, there are three borrowers on non accrual all of which experienced some stress prior to COVID-19 on that we're still.
Largest exposure by far.
<unk> received the main street long as well as under cares Act benefits and is well positioned to come through COVID-19 emerge and return to profitability.
This reflects the breakdown of assets held for investment by exposure and the credit reserves, including fair value marks for the Covid six as well as the balance on the bank's portfolio.
Of note during Q4, the majority of the hotels in our portfolio were reappraised, which somewhat impacting what you see here on a weighted average basis the loan to value on the hotel portfolio.
On the original credit approval date was about 59%.
Not all of the appraisals have been completed where we're seeing for on a 40 I think.
The new LTV is roughly 67% so up slightly.
And those those on payment deferrals and receiving subsidy payments on <unk>.
Reflective of the cares act benefits received by our borrowers as of 12 31, the total portfolio exposure on payment deferral was as you can see about 11%.
Today that number is 4%.
Oh, Thanks, Kelly moving on to the next slide Michael.
So since Huntley does such a wonderful job running the bank day to day I've had the chance in the last 90 days to go to 22 cities.
And I'm going to give you a glimpse into what's going on in small business America right here right now.
We made a.
Alone in one of these cities.
<unk>.
Bowling Lane group right.
This was a $4 million loan this business has been shut down all but eight weeks since the second week in March.
They received $242000 of PPP loans.
I got on deal or a disaster loans 500000 today, they have $65000 in cash and $100000 line of credit so about four months to cover their $35000 a month.
However, helped us on the way <unk> is $250000 250, and 165 score 15, so thats about 12 months to see this through the end of this vaccine to see if this business can get back to where it was and where it was was it $2 5 million dollar revenue business.
Rob at 500 to the Bottomline.
It was fun and telling day note that of the.
22 leaks that these folks operate.
And the eight weeks that they were up and running but you have 100% participation of their over 70 Lee These folks wanted to get out of the house and back to Poland.
So there is an example, now on the brighter side.
In terms of new originations, which we're also excited about last week I went to Eugene, Oregon, Portland, Oregon, and Seattle, Denver, and Houston, There were $27 million loan on defense and we're going to get everyone on.
Offense in 'twenty 'twenty, one moving on to the next slide.
I would call this on.
Underpinnings of optimism optimism slide and a daunting of a new product.
And just a word on the new products. So in the last several days. The SBA has increased the guarantee on their 708 products. So 90% guarantee on 4.1 $67 million, which covers about everything that we do and a waiver of their fee in their fee on that would be 114th.
This gives us the ability to compete up and down the line even with conventional lenders.
So the essence of this slide you see the last six quarters, we've average origination of about 500 million Bucks in the last two quarters about 870 879 billion.
Very excited about year over year growth of originations from 2 billion to $2 $7, that's a 34% increase all.
All the time around this place we talk about 15% on whether its origination through EPS.
Wonderful thing about 15% is it doubles every five years. So yeah. That's right 3 billion to 3 billion won that's doable for 2021, and we're excited about it.
Moving on to the next slide.
So here's a glimpse of originations in Q4, you'll immediately see that the $1 4 million average on guaranteed balanced per loans as a bit high for us and this was skewed a little bit about senior lending on which we're getting into senior housing and some main street loans, which are one offs and this should regress to the norm in the future.
<unk>.
On the right side, you see what the original.
Vertical again, the domain experts about the pharmacies et cetera, et cetera, so of that Ada rate about $3 32, where the original folks and then 2017 to 2020 are gaining huge momentum almost $500 million originations were very excited about our general lending group last year. The general lender group about 18 folks through.
The country.
<unk>.
Would have been a top tier on SBA lender on there on a lot of excitement about that going forward.
And then.
I guess I'd call. This slide the next slide Mike as the.
The object of the exercise today.
So really excited about growth on the loan portfolio.
34% year over year, three 6% to four eight.
But even more exciting than that.
The growth in non-GAAP pre tax pre provision excluding PPP activities from a little over $17 million in Q4 19 to almost $28 million in 2020. So this is real simple math folks that's over 10 million Bucks Toms for for the year is 40 million.
Box, that's about $1 a share pre tax.
Very excited about debt so.
So my last slide before we turn it over to Huntley.
Neil as I look at our technology investments.
These folks are raising capital with the exception of aperture every 12 to 18 months and some just completed some of them on in process all at higher valuations, but my view is they're all doing well.
Those are my words ventures portfolio really continues to perform.
Science interact live.
It's opened up some doors for you can't be bank go into contracts or implementation.
On payrolls and defense storm, signing five to 10 community banks quarter Greenlight with record.
At December record month aperture, you rip out of 10.
So again I think.
We're excited to update you every so often.
But certainly the $155 million numbers.
Subject to change given the up rounds that are common.
Huntley over to you to take US all thanks chip as we put 2020 in the rearview mirror and focus all of our energy on the year ahead priority remains unchanged, we're still laser focused on helping our small business customers navigate on the remainder of this pandemic supporting our employees on our community.
Providing capital to small business is they helped drive this economic recovery and delivering innovative technology solutions. One common effort that spans each of these that we're really excited about is driving more inclusive small business growth or with dedicated a team specifically to serve underserved communities.
If you haven't had a chance yet I would encourage you to review Brett CFO highlight Pete on the masterful job of going through all the details at a high level. We're incredibly proud of what our team has been able to accomplish in 2020 and the momentum that we carried through the fourth quarter and into 'twenty one.
You mentioned strong loan origination and our strategy of holding more loans on balance sheet drove core loan growth ex PPP or 7% linked quarter and 34% year over year. The guaranteed loan portfolio as chip mentioned was flat quarter over quarter as we pulled forward a significant amount of those loans eligible for sale in the <unk>.
Third quarter, given the SBA subsidy program, but we still managed to grow that portfolio, 80% year over year or.
Our balance sheet remains strong and well equipped to continue to provide capital to small businesses as they grow on.
On the earning side the biggest contributor remained our loan originations as chip discussed second half of the year we are.
Originated about 1000 loans totaling $1 $75 billion.
That's exclusive of the PPP that spread across the nation and verticals as chip mentioned small business America is proven themselves to be incredibly resilient through this pandemic and overall optimistic we're proud to have been able to serve as many as we did last year.
The loan origination coupled with our efficient deposit model drove net interest income growth up over 20%.
Prior quarter, even adjusting for PPP of about 16% or.
Our flexible balance sheet funding model allowed us to regain much of the margin decline, we faced with the rate cuts from earlier. This year expenses are up this quarter, mostly predictable as we return to a bit more of a normal operating environment and we'll cover that in a couple of slides and all of that drove the number that we look at our core profitability on the mouthful that chip mentioned of our adjusted pre tax pre provision.
Income.
About $28 million in the quarter, which is a 4% increase from last quarter and a 60% increase year over year.
So we know we don't make it easy for you all to track our core profitability in this quarter. We have a couple of items that warrant discussion you can see them listed here on page 16, first and most material with divesting of a series of market based restricted stock units, which is a function of the increase in our stock price during the quarter.
Followed that by the impact of the C Corp conversion by aperture on which was associated with their total of $30 million of capital raise in the back half of the year and then the ongoing impact of our PPP activities.
Let's spend a minute on the market Rfu's on page 17, we go through some details as we previously disclosed the total of $3 1 million of these restricted stock units that were held by employees.
With ladder vesting based on stock price triggers between 34% and $55.
In the fourth quarter to $5 million of those satisfied the required trading levels and debt.
Subsequently since the start of the year. Another 200000 have vested leaving just shy of 400000 remaining.
From a financial perspective, there is an increase in salary expense with the acceleration of the remaining unrecognized income and the associated payroll tax.
Conversely, there is an income tax benefit derived from the value of the delivered stock relative.
To the amount estimated for book purposes.
And you can see those numbers here in.
In addition, as we net settle those shares on behalf of our employees, we have a cash and equity reduction as well.
All in all a modest reduction in book value and the issuance of about one 4 million shares.
After the vesting in the first quarter, we have a little less than 15% of these original <unk> remaining and we've replaced this market based on our Skus over the last couple of years with issuance of time basket could actually be a little more predictable on the balance sheet and income statement.
So turning to PPP of the $1 $75 billion that we originated we have about one 5 billion remaining drove about $15 million of earnings in the quarter as we continue to recognize those earning through amortization and forgiveness.
Forgiveness accelerated a little bit to start the year, but then it took a bit of a pause with the new documentation requirements and then concurrent launch of the new PPP program that we'll talk about.
So as chip mentioned, new stimulus bill came into path at the end of the year.
Which funded almost $300 billion of additional into the PPP program at.
That reopened the original program and also introduced our second draw for small businesses with more than 25% revenue decline.
We've been actively focused to support our small business customers on that program and have about 3000 applications currently in flight.
Chip mentioned that Bill also made some significant enhancement to the SBA flagship programs, namely the seven day on a $5 four and a seven day guarantee increases from 75% to 90% fee waivers both to the lender on.
On to the borrower and the lender.
And then some additional subsidies, which you can see on this chart are little complicated based on the origination date, but provide more payments up to a max of $9000, a month, which will affect the majority of our portfolio and give them additional support for between three and up to eight more months.
So we're really excited about what that is going to do for our origination volume and pipelines.
Putting all these pieces together on page 20. This is the details of our core earnings. It's obviously a lot going on here, but it's really the way we think about the core earnings power of the bank adjusting for PPP, which we talked about some of the unusual events that we mentioned and we calculate that non-GAAP pre tax pre provision pre provision earnings number.
$28 million in the quarter.
And that's year over year, a 40% increase despite a 150 basis point rate cut.
We mentioned those three large adjustments aside from that we.
Got the provision.
That we continue to feel really good about the performance of our loans will remain.
Pretty conservative until we come through the other side of this virus, we've got the usual mark to market items, which were down a little more than usual, partially as a mean reversion from the third quarter.
As prepayments jumped up a bit post the sba's first round of subsidies and then a little get in the secondary market at the end of the year as the top program expired.
But overall this is really the metric that we look at the growth that we drive here from an earnings perspective.
If you go to 'twenty, one just one more look at the growth of our loan portfolio and how that drives net interest income really nice trajectory over the last eight quarters of core loan growth.
Chip talked about origination franchise pipelines remain consistently high and broadly across our core small business across the court renewable energy platform and then really throughout the bank.
So we mentioned the guaranteed eligible for sale portfolio that was flat quarter over quarter sitting at about $1 7 billion.
We really do like the way that those guaranteed assets sit on our balance sheet. They provide us with not only earnings but contingent capital and liquidity.
For the year, our loans sales were a little below our stated target of selling 35%.
The SBA because we ended up retaining about 70% and then we sold about 20, we retain about 20% of our USDA loans.
We sold heavily in the beginning of the year as we position the balance sheet defensively and then we really made up for that with the outstanding loan production in the back half of the year going forward, we still think that 35% hold on <unk> without the right level and we will sell most of the USDA production has those are typically longer fixed rate.
So a couple of comments on expenses, our operating noninterest expense, we pegged at about $48 million the largest adjustment being on those.
Salary payroll taxes from the market Rs use.
Q3 expenses were unusually low we talked about it a bit last quarter and as we got back in on a more normal operating environment travel and marketing pick back up and we also invested in some resources at the end of the year to support our growth, including salaries and technology and professional services.
And we expect to generate significant operating leverage throughout 2021 with continued growth and we will invest more in the franchise, but try to keep our expenses.
Well well below the growth level in our in our earning the other thing. We expect is that we'll return to some of the renewable energy tax investing that we've done in the past that will show up in the noninterest expense line item, but it'll be more than offset in the tax line to the extent that we do that.
Our deposit model continues to be a huge driver of value for us in this current environment. The market remains liquid and competition rational our rates have come down significantly with interest rate in our current product pricing between 60, and 65 basis points customers across the industry are increasingly transacting digitally and our service model.
Quite equipped to deal with remote operations.
<unk> also allows us a great deal of balance sheet control total retail deposits ended the year at $4 $3 billion, but 62000 accounts, that's up substantially from a year ago, but it's flat this quarter and that was intentional as we were reinvesting excess liquidity.
We also you can see increased the mix of our portfolio. So our savings balances are now up to about 50% of our book and that's that.
Well up from closer to a third a couple of years ago. So we really like the mix.
As you can see seven basis points of non interest cost of funds, we think that the blended cost of debt is incredibly competitive relative to funding in the industry.
So our CD book continues to roll down the curve with almost $2 billion maturing and repricing. This year all in all at current market rate that should generate an additional $25 million of annual net interest income from those continued effects. This year. So we're really excited about that as well.
On page 26 that repricing along with the continued deployment of our excess liquidity led to significant margin expansion in the quarter margin recovered 56 basis points to 333% we've gotten most of the way back from what we lost from the market decline or the interest rate declines at the beginning of the year.
The margin can trend continue to look favorable as we head into this year, we should be above three and a half by the back half of the year. After that the majority of the deposit repricing happened in the first half of the year.
And even though we anticipate a little more competition on the lending side overall, we've been really pleased with our ability to maintain our loan yields.
On the loan growth has allowed on liquidity levels to return to pre COVID-19 levels, we'd probably have a bit more run room to run there giving.
Given the amount of liquidity liquid assets and guaranteed assets on our balance sheet, but we're really pleased with the ability to deploy that cash that we raised in the first part of the year as quickly as we did.
All of that leads to a balance sheet debt as chip mentioned feels very fortress like with over half of our assets guaranteed by the government and that's not including PPP we.
We feel really good about our capital and our liquidity positions.
The one capital ratio, we pay the most attention to remains our leverage ratio given the amount of government guaranteed assets, we have and that dropped at the beginning of the year with PPP and the excess liquidity, we built it back up a bit in the third quarter, the RFU investing lower debt leverage ratio back almost about 50 basis points and while we had planned to be closer to nine.
Sent by the end of the year, we ended up relatively flat from a third quarter, probably track that at about eight and a half maybe a bit more as we head into next year, but feel really solid about that and where we stand overall from a capital perspective.
Just quickly on page 29, each quarter, we share our progress towards the metrics that we consider to be high performing in the banking industry.
If you sort of overlay that with the growth that we're seeing we think lead to a really really attractive story will continue to improve that core profitability each quarter on share. These with you.
We've spoken a lot about our technology platform. We're pleased that we're live in production on our new core finback, an aperture in the rest of our partners and we're closing in on almost 1000 on deposit accounts on the system as we sit here today.
Combine that with the over 11000, PPP loans and counting and we're confident in what we've built in the flexibility that it provides to serve our customers and yes. We do have a limited number of checking accounts that are in production.
It took another brief detour at the beginning of this year and to tackle the new PPP program and then we will get back to rolling out some pretty exciting enhancements to that product that will make it more attractive to small businesses and we're really ready to start scaling it into the market.
Looking forward were.
Well aware of the rate of change that's taking place in financial services I think we're really well positioned to capitalize on what we see is a convergence of banking and fintech.
We know our small business is inside and out where stay laser focused on them every day, we know the industries. They operate in and the specific challenges that they face we serve the small businesses for over a decade by providing the most complicated our financial product available to seven day SBA loan program.
And we have a next gen technology platform, that's going to allow us to expand these products and deliver a really unique customer experience. We think that at the end of the day small business. It need a few key element in their banking relationships shown on the middle of page 31, better ways to move money.
Easier access to capital consolidated account management information for the business owner not necessarily the on their accountants and a modern digital experience.
And all of that with someone that understands them and is available to help them when they need it.
That's exactly how we've designed our business model as we go forward our roadmap revolves around product and solutions designed specifically to satisfy those core elements better payment tools rapid small dollar lending actionable data insights and integrations with key partners in specific verticals.
We truly believe the future of banking will marry our traditional lending capabilities with these technology driven solutions and all of that to further support small businesses. We've got a ton of momentum in our core business that feels really great and we're equally as excited about what's to come.
Chip anything else, where we open up for questions.
Let's go to Q&A.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your thoughts don't tell US talent. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Your first question comes from Jennifer Denver Wed service security seeming to ask your question.
Good morning.
Good morning, Jennifer.
There was a lot of noise in the fourth quarter results and thank you for going over everything so comprehensively.
So let's talk about what you know.
It sounds like your day ban is still pretty healthy, but you're expecting a bit more lending competition. This year, just curious as to what kind of origination volume do you think it's possible in 'twenty one.
And.
Is hiring skill oh.
Possibility for this year and how many people did you hire last year.
Thanks.
I'll take the front end of that monthly you can take the backend so.
Feel real good Jennifer about 3 billion to 3 billion one for next year.
We have seen some banks sit on the sidelines not many people are traveling.
I indicated in my comments, we are out there all day every day.
Masks on sometimes it's an F b O sometimes at those two companies place a business, but we.
We see it.
I see the demand coming back just like the bowlers that I've told you about the moly price like people seem to be so excited on.
What's going to happen on the other side the pent up demand is going to be absolutely there.
Relative to hiring.
<unk> 3 billion to 3 billion won with the team on the field.
Huntley you can comment on Jennifer's last question sure.
Our head count was roughly flat for the first half of the year through all of that sort.
Sort of turbulence, we ended up hiring.
It is the back end of the year, but not much on the on the on the front end of the lending side Chip's point, we think that team is largely on the field. There is a few spots on that side, we're going to add a couple in the renewable energy space. We think there's a lot of exciting stuff. There are couple more generalists as we continue to find sort of the best in the fee.
<unk>, there and then putting a few more younger people on some teeth to help expand some footprint, but the lending side is largely we think in place.
In terms of the rest of the franchise no probably ended up growing at about 10% overall as you think about what.
What we need to support that kind of production on that kind of growth. So you have to balance sheets growing 20 plus percent a number of customers that we're servicing we just got to keep up with that across some of the functions whether it's the servicing closing teams.
Teams like that so I think 10% total head count growth. This year is a pretty good number I think to peg, but it'll largely be more in some of the support functions and it will be.
Kind of on the frontline.
Okay.
And Bret.
Huntley mentioned you guys think.
On the part more deposit repricing your NIM reached 350 ish.
Later this year second half can you give us a little more color there on what you guys are thinking on the net interest margin.
Yeah, sure I would probably reiterate.
Flight Huntley said.
We feel good that we can maintain our.
A lot of our rate offerings on our online products as we're seeing our existing deposit portfolio to continue to reprice down.
For 2021, Youre looking at three five and then maybe some potential upside to that number maybe a little upside from PPP as well.
Okay.
And you said.
A bunch of markets.
In the last few months.
And you're you're encouraged by the trends you're seeing.
On what prompted you to kind of get out there and do the math visit.
The maps business will catch you on the road.
Look Andreas does Jim you've been down your rate humbly does a great job running the bank 5000 meetings a day I'd like to go see customers and know what's going on out there so K and her colleagues and Steve and his colleagues piling on with me and we're usually go on two to three days a week.
Mainly understand what the risk on the Covid six but recently trying to get new business, particularly some conventional loans that were working on potentially some very very large USDA loans in the energy Division.
Okay.
Brett why do you think about the tax rate this year.
Yes, certainly.
I mentioned, we are looking at renewable energy.
Tax equity investment.
So we think we'll have some success there and that will lower our.
Base effective tax rate.
Well it won't be lower than 2020, considering the big impact we had from <unk>.
Price sorry, she's Budd.
Rather than an effective tax rate.
And on 25, that's probably something in the mid teens mid to high teens most likely.
Okay.
And do you think you can still grow P. P. N are this year.
Ex PPP loans.
Absolutely sure.
Okay.
It sounds like it.
Can hold expenses.
Yep.
Certainly below revenue growth, Okay, I'll, let some others go thank you.
Thanks, Jennifer.
Your next question Tim is it from the line of Marty St assignment with Raymond James You May now ask your question.
Hey, good morning, everyone.
Hey, good morning Maher.
Hey, So the first question is a follow up on things that I believe we've talked in the past about the pilot program being rolled out here in early 'twenty. One saw the deposit update from you guys is there any update as far as adoption from other banks or just your overall outlook for that product line here in 'twenty one.
Yeah.
So this is Neil here.
So I think the pipeline of Fintech looks quite robust.
We're in the process actually of a race and that's one of the upward on so that was referring to.
Much of the up revenue due to regional and Super regional banks.
Committing both contractually melons, and some cases implementation.
And actually there is probably a pretty large overlap between some of the canopy mlps and some of those banks that are net of selected and implemented.
Yeah, and EMR for us at the Bank I think we continue to March along for US It becomes a general availability of checking when are we ready to blast that out broadly.
Conversion of our of our existing 60000 deposit customers, which will happen middle of this year and then we move to the broader loans suite beyond the PPP loans to the rest of our of our loans. So we will hit the sort of in the stages and just continue to you know to make more progress and move more.
The magic of this for US is when we have that singular view of the customer that single ability to create new products to embed our financing and our products into partnership that's when that thing gets really exciting that sort of convergence of loans deposit on boarding and servicing.
Different servicing channels.
Okay very good and then on overall Fintech have you all done any research or work in the digital asset or cryptocurrency space and if so what are your thoughts there.
We have indeed, I think it's a it's one of the initiatives major initiatives for canopy reset presentation for really need for but it was 90 day Youll probably hear about do you have on ready and other firms that are really focused not necessarily on on crypto themselves or perhaps both enabling banks to be a custodian or total.
Ofer.
Crypto to their end customers and so it's something that we're leaning into pretty helpful.
Okay. Thank you and then one last question for me on the core bank. The the reserve plus Mark as a percentage of on guaranteed exposure was up a little bit this quarter back that 3% number.
Just given your commentary how should we expect this number to trend in 2021, and where does it stabilize in a quote unquote normal environment. Thanks, guys.
I'm going to ask Steve Smits, our chief credit officer to comment on that.
Mark Good morning. This is Steve Smits, Chief credit officers, So I would say.
Have a great deal of confidence in our methodology.
I also am cautiously optimistic.
With how our businesses are going to fare throughout 'twenty 'twenty one.
The reality is there still remains some degree of uncertainty.
I will say I have confidence in our underwriting which provides a strong foundation for our businesses to weather storms.
Confidence in our services and support we had K.
Speak to you all today to showcase our commitment to servicing we've put resources and people and processes to be in front of them I have confidence in the government intervention. It appears to be working chip mentioned it that tends to push.
Things to the right. However that is precisely what most of these businesses need.
If we look at the bowling Alley is a good example, that's exactly what they needed. So while there is some degree of uncertainty of how they warfare, we have confidence that everything that we're doing combined with the intervention and help from the government appears to be working so I will kind of say that I expect our.
Provisions in our bottling or allowance will track fairly consistent with how the economy does in 2021.
That's it for me guys. Thanks for taking my questions.
Thanks Mark.
Your next question comes from the line is Michael Perito with K B W. You May now ask your question.
Hey, good morning, everybody.
Good morning, Michael.
I wanted to just start on slide 19 for a second here on two.
Two questions I guess, one on on the on the left hand side. When we think about the some of the changes from the SBA program I mean is it.
In terms of the fees waived for the borrower is the right way to think about that.
You know in terms of just making this product even more attractive and potentially you know growing your pipeline even further but theres also.
<unk> fees waived for yourselves to rate will that result in some temporary yield pop over the next six to eight months, however, long that.
Graham last or is that is that the right way to think about both those those pieces of it.
Steve that's about 50 bps shouldn't correct, yeah, so we could pick that up as well.
But again, there's another arrow in equivalent for the sales guidance right. I mean, we don't want to give that away, but yes.
Yes, yes to all of the above.
Okay.
In terms of the second.
I guess technically the third round of PPP here I mean, you guys said 3000 applications any.
Ballpark of kind of what that could look like I mean are we talking like 750 million billion dollar type type volume will lower a little higher any kind of early indications of what that might look like in a range.
Yes, it's a good question, Mike we originally thought that number would be north of 50% of our initial production over the last couple of weeks I think we've tempered that a little bit and so you.
You know somewhere between 30% to 50% of our initial production tso $500 million to $700 million of volume feels about right, but it's.
It's interesting because you know there was a mad rush a year ago, and I think people are a little bit more calm in terms of how they are approaching this with unclear.
If we're seeing that volume that we're going to see or if it's just going to keep trickling in for another handful of weeks or months, we will say.
But it's fair to just given kind of.
The confines and structure of this round of the program, though I mean, the the loan sizes are likely smaller on those 3000 applications is that fair.
Or not.
The large loans right.
Cap is $2 million not $10 million. So you've eliminated definition on some of those large loans, although those with less fee.
Our fee on them, but our average balances run a little lower than the first round, but they're roughly the same size transactions as they were a year ago for the most part people second draw it's pretty much the same as the first drop with the exception of some of those largest loans, which we didn't do a whole lot of anyway right.
Right.
Understood and then Mike.
Yes, sorry go ahead.
Oh, sorry, sorry, Mike. This is Brad one point of clarification, the 50 basis point on the SBA loans.
<unk> you.
Framed the question and does that benefit yield.
And from a reporting perspective that actually.
It will not be reflected in noninterest expense for the airplanes. The 50 basis points does not on interest income on a yield item.
I got it so it's a temporary.
It's a two quarter.
A little slight relief on expense essentially until it until it goes away.
Well, presumably it actually carried forward on there.
Based on all the loans that are originated in that window and oak.
Carey Ford on the <unk>.
Sampling.
Alright helpful. Thank you.
Our application a couple of other things I wanted to hit one on the deposit growth.
Just curious if you guys have any more feedback you can share about the new accounts business accounts that you guys have launched and you know what.
Maybe kind of targeted customers you've had success with growing that accounts and kind of how you view the rollout of that.
On products at moving into 'twenty, 'twenty, one and if there's any kind of <unk>.
Range bound on early indications you can give us in terms of kind of a positive mix and how it could start to ship that'd be helpful.
Sure. So you know the existing success, we've had is our traditional platform.
So those are businesses with excess cash that are.
You might have on the business savings and CD side and there is some overlap with our core customer base, but not not an extensive amount.
The new product that that we are rolling out this sort of operating accounts checking account is where we really plan to focus on our existing customer base and and that's when we will start to shift. This mix you saw to make go to 50 50 savings Cds roughly and start to.
Bring in those noninterest bearing checking accounts into the mix and again I think it'll be a relatively slow our customer base are not massive dollar balances by and large although there are some areas, we're looking at where it might be able to pick up some.
On larger balances but.
I think we're a little early still to pick a target in terms of that mix.
At cruise altitude could we be a third checking and then a third day because city that'd be great it'll take us a bit of time to get there.
And you know sorry.
Sorry go ahead chip.
Sorry margin, Neil Neil and Huddling on talk about this all the time, so I was looking at a firm in charge.
Yesterday the day before.
And Ah.
Our firm's market gap.
$20 billion.
1200 employees they.
They did $500 million on revenues on lost 100.
And then I looked at fifth third the other day, they did $8 billion on revenues in may to been around since $18 58.
And there were $20 billion.
And then you look at China, and you get prepaid or point of sale in the firm day.
What they have built a beautiful interface on a purpose built core for their customers.
That's what's been sacked allows us to do.
Hardly touched on it but that's that's what's so much fun when dealing with our customers face to face and seeing what do you need to operate your business all the way top to bottom from payroll to this or that and.
As this matures and we continue to pilot depends on core then youre going to see more product innovation from us across all volume.
Yeah makes sense, that's great and then just if I could sneak one last one in here on slide 31.
On the right hand side, you guys mentioned on a few things we're talking about kind of tomorrow for live oak.
I guess the one.
The channel partnership to me is it fair to think of that within kind of that embedded finance angle that you guys have kind of touched upon in the past and if so any thoughts you know I mean chip it probably plays into some of the products and things that you were just talking about but any thought in terms of when we could start to see that initiative take hold it you know in terms of the companies.
All growth rate.
So you're exactly right exactly got embedded finance and we're having a bunch of great discussions with our.
Partners channel.
Verticals.
Enterprise software.
On the light and I think this year really getting our existing product set that we can deliberately are those channels, maybe by the back and we start to get some partnerships on board and then we think it is really going to move the needle next year in terms of when it really going to start to see the impacts run through the P&L.
And is that something you guys plan on kind of debt.
It might be a stupid question, but in terms of the partnerships as they kind of come to fruition or is that something you guys plan on kind of announcing to the market and keeping us updated on or will be more just like quarterly broader updates about the growth of the channel partnerships in general.
I think the answer is yes, if they'll let us.
Yes, we like to rate.
Yeah.
Okay.
Excellent guys. Thank you for taking my questions appreciate it.
Thanks Margaret.
Your next question comes from the line of Chris Donat with Piper Sandler you May now ask your question.
Thanks, Good morning, everyone just.
Two I wanted to ask you one is on <unk>.
Deposit pricing I think Huntley you commented that.
It's been rational so far and I'm wondering.
As you think about your competitors on the deposit side.
What is your outlook for 2021, because it seems to me like there's a lot of banks sitting on excess deposits. So they're probably not going to put much pressure on you've got some credit card companies talking about some like tentatively talking about growth and they're typically big payers on deposits.
Wondering if you.
You feel pretty confident about the the rational state of the market being there or is there even some possibility of some lower deposit pricing going forward given the excess deposits at many institutions.
Yeah look we feel good as we sit here right now there is that you set a ton of deposits in the financial system right now interest rate feel like theyre going to be range bound and zero for the foreseeable future and you know the big banks.
As you mentioned the big players in the market that we see are the same ones and 60 basis points on savings 60, 65 somewhere in there on the CD rate feels like it's where it is in the market.
If if we really hit the growth button you know, we can move the needle down a little bit and if.
You know if the market sort of stays where it is because we drop it a little bit yeah.
We're talking.
And 10 basis points, not 25, and 50 basis point moves as we look at it.
Well, here's how I'm looking at Chris I'm looking at debt.
It is amazing to me so I went back and I looked at the big four and what they pay on interest bearing deposits in Q4, it's all four five bps on all interest bearing deposits most everyone on money market accounts one bill.
Okay, So, we and Goldman and Marcus on Alex like all of them or 60.
So when you have these purpose built cores in fintech companies or like we will be Vincent when you can change a checking account, while you're sitting and standing in line of chip <unk>.
What.
Why am I paying 60 basis points more than B why do you leave your money at the Big four I fundamentally don't get it I think that's going to ultimately be a very level playing field.
Okay, well I guess related to that I feel like we've seen some tentative efforts on deposit pricing more from.
On almost on the asset management side.
Collyn Robo advisers that have used deposit pricing as a way to grow.
Grow assets.
More of a.
And open banking play that they've got the access to know that someone has excess deposits at a place that's earning four or five basis points and then they serve up a.
Our message on the App that says Hey, you could move here and get 60.
But I imagine that's a small thing and you're not really seeing competition from from that.
No. We certainly haven't seen any there certainly is now.
Customer acquisition.
Sort of plays that are going on and then there are companies that have very different sort of goals in terms of profitability and targets and things like that that can do things for typically shorter periods of time, but the vast majority of the market is staying just bring saying pretty range bound right now.
You only got it we might we might be ones that actually go and do that.
They do this with the kind of aggregation using tools like amex.
If we happen to invest and aperture a simple thing so it's not unlikely.
That live Oak would jump out to our veterinarian since pharmacist look see these balances where we're getting to the one basis point and bring them over to us.
Yeah.
Got it that's that's very interesting.
And then just wanted to ask one about the sort.
The state of play for not just your Fintech investments, but can it be.
As we look at the the proliferation of Spacs does that effect on one and canopies ability to make investments because.
These facts are bidding up the prices of potential investments for canopy.
On the other side is that a positive impact likely on the.
On some of these capital raises youre seeing and ultimately exit valuations for <unk>.
For for Fintech companies or do you not really think about the your fintech investments as places you really want to ever exit or exited at least in the near term.
Yes look first of all you mentioned valuation certainly they are however cannot be has never been more active last year.
Placed $170 million.
And with the.
The follow on call. It $2 20, so about a third of the fund in Blue Chip names like blends as we mentioned green light on.
Some cases some of those events already up rounds to the tune of double so we're really excited about our model and our Awesome LP partners. It really is working we're getting a front row seat. We're getting first look on many of these fintech. So we see that momentum continuing quite frankly, it cannot be as fast.
Done their job and just accelerating the excitement around this.
And it's absolutely we've looked back relative to alliance factual to live Oak Bancshares companies as well as our Cayman company. So there may be a scenario, where we leverage is back as a tool.
But right now.
We see it as a net positive.
Got it okay. Thanks very much.
I'm showing no further question at this time I would now like to turn the conference back to chip in Manhattan.
We appreciate everyone's attendance at this time and we look forward as always to see you 90 days from now.
Okay.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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