Q1 2021 Live Oak Bancshares Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the first quarter 'twenty 'twenty, One live Oak Bancshares incorporated earnings Conference call.
At this time all participants are in a listen only mode.
Later, we will conduct the 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 Touchtone telephone as of it.
Minder This conference call is being recorded.
I would now like to turn the conference over to your host Mr. Greg Seward General Counsel of live Oak Bancshares you may begin.
Thank you and good morning, everyone and welcome to the let me first quarter 2021 earnings Conference call. We are webcasting live over the Internet and this call is being reported to access the call over the Internet and review of the presentation materials and commentary that we will reference on the call. Please visit our website at Investor day.
The bank's dot com and go to the.
Today's call on our event calendar for supporting materials. Our first 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.
Undertake to update the forward looking statements to reflect the impact of the circumstances or events that may arise. After the date of today's call.
Information about any non-GAAP financial measures referenced including reconciliation of those measures. The GAAP measures can also be found in our SEC filings and in the.
Presentation materials the commentary.
I will now turn the call over to chip Mahan, our chairman and Chief Executive Officer.
Thanks, Greg and good morning, and welcome to our Q1 earnings call.
As you can see from the agenda before you we are kicking off today's call with the tribute to our co founder kill Landis, who passed away on January of the second the.
Your board proudly created the kill land the student excellent fund at his beloved University of North Carolina, Kenan Flagler business School.
We love you kill.
Some things never change.
Once again, Huntley and I will attempt to unpack, a healthy and yes noisy quarter.
As I tried to put myself in your position as to what really matters is the pandemic of government assistance to small businesses whines down Steve Smith from <unk> going to discuss the Covid effect on our customer base and a brief look ahead.
We shall then turn our attention to Q1 loan originations and what loan growth looks like for the rest of the year.
As most other banks reported a decline in loans outstanding and net interest margins.
Trust me that is not our challenge.
Neil Underwood will provide a brief update on live oak venture investments as well as what he sees through his canopy lands.
Lastly back to the noise before I'll turn it over to Huntley for greater detail I'm going to focus on the metric that means the most to me the.
Core earnings of this business, which is a brief examination of our pre tax pre provision income.
So Steve just about a year ago of the world was pretty bleak.
And as I recall, you and your colleagues were predicting potential dire circumstances, and maybe even losses of over 100 million Bucks.
Quickly moved to isolate six of our verticals and disclose that.
The current state of play in each quarter.
Two questions number one what losses have we taken from the Covid six and secondly would have been the COVID-19 losses in the rest of the bank.
Thank you chip, yes. There is certainly was the great deal of uncertainty I was probably in the $34 million loss expectation in the early days, but.
To date, we've taken of 11 $6 million in charges related to Covid. However, nine $8 million of that was related to our hotel markdown. So if you exclude the hotels, we've charged off $1 $7 million in loans instead of directly.
The result of Covid stress and of that $1 2 million was in the Covid six industries and only $600000 has been in the non COVID-19 industry I do think it's important to note. However that we've already reserved the additional $5 billion on top of that for loans that were impacted by code.
Did they may ultimately turn into charge offs, but we're working very closely with them.
We have also reserved another $10 $8 million per loans that are experiencing some level of stress due to COVID-19, but im pretty cautiously optimistic as they are trending favorably today. So the expectation is we can avoid losses of most of this.
So Steve clearly, we will be adding reserves for growth, but what does your crystal ball say about charge offs for the rest of the year.
Well the businesses still are not completely out of the woods and we do need to be prepared for potential surprises based on what I know today I'm expecting charge offs for the remainder of the year to be more reflective of pre COVID-19 levels as.
As I mentioned, we continue to work with borrowers still experiencing stress due to COVID-19, but at the same time, we're seeing the notable gain in credit quality across the rest of our portfolio of many businesses are actually stronger today than they were pre COVID-19 and thanks in large part to the government programs.
So Steve our reserve plus fair value Mark on our total Hill force investment on guaranteed loan portfolio was right at 70 million Bucks at the end of the quarter or two 6% of guaranteed loans down slightly from year end of 3% how.
How do you look at reserves post Covid, so chip I see reserves trending towards pre COVID-19 period levels as a percentage of loans in the barring any surprises I would expect that we will see that trend over the next several quarters.
So two of your verticals in the Covid 60, restaurants, and wine and craft beverage may get assistance from the restaurant rehabilitation fund is administered by the small business administration.
Is my understanding that there is a pool out there of about $28 million Bucks for both restaurants and related businesses.
You've heard of the calculation, but it goes something like this.
The 19 revenues less 2020 revenues less tripled <unk> less triple <unk> equals grant money.
How do you see that so.
If the program funds remained available.
There is a small number of our most impacted restaurant bars that actually we will see really significant benefits from the programme now the good news is that our portfolio and our quick serve restaurants have actually fared really well.
To their delivery of their drive through services. They may not even Nida grant now with regards to our wine and craft borrowers. This program can be very meaningful to our really our smallest breweries, who have historically relied pretty heavily on the onsite sales and tap rooms for example, so.
Barring.
The funds being available for the program, we're pretty optimistic that are most in need of borrowers can see significant benefit from this program.
So let's move on to the site visit slide. Thank you Michael there it is.
I call. This.
Stand by our customers slide we try to treat every customer like the only customer in the bank and when you are in of JM, we're going to be there for you. So the support Steve's lack of charge offs through the pandemic.
In the last four months, we made in the pandemic of 121 site visits to these folks and the losses predicted as Steve just did a rather de minimus. So when you net all of this mess out rate, we generated about $100 million of fees, including spread income from Triple T and the losses were just like we did.
Just so let's move on to the next slide.
Let's let's focus on originations and growth so.
How did it go first quarter. So we did originate and close $1.180 billion in loans 672 was non PPP.
<unk> was triple peaks, so that reconciles of the $1 billion $1 80 and.
In addition to that so far in the month of April we've closed of another $280 million. So $280 million plus 672 gives us the 952 for the year, which is just about $1 billion and if you add the five of weight and Triple P. That gets you to $1 billion for 60 or about 1 billion five.
Things are good.
Moving onto the next slide.
So we rarely do this.
And we're not going to disclose actual dollars of map of what you have here is a bifurcation of our pipe.
<unk> proposal to underwriting is the blue and credit approval to closing as the grain both are up 60% year over year.
Just another word I had the <unk>.
Wonderful circumstance yesterday afternoon to split of about an hour with our closures.
And to say that we're burning the midnight oil and attempting to keep up with this volume of treat every customer like the only customer of the bank would be an understatement also had the chance to visually zoom in and meet six new closures.
And another six new or coming on in the middle of May.
So in the last couple of quarters. We've added five lending officers 13, underwriters 25 closures 16 services from a total of 59.
So when the business is there we're going to go get it.
Moving onto the next slide this is our diversification slide and the trend continues one of these quarters were going to make loans in all 50 States 45, Inc. Too bad for 90 days and it looks like that are our new verticals. After 2017 of gaining on our legacy verticals.
$2 80 versus almost $400 million by the legacy of articles.
Yes.
Neil.
Talk to us about investments inside of the holding company and some of these valuations that youre seeing at canopy brother.
Certainly touch on of it well first of all of that a huge update here only to say that things are tracking nicely and.
And the lack of a portfolio of ventures portfolio.
Most importantly, the software is actually really working with them for years as you guys know how they will give you the the live Oak bank update but in the terms of the companies themselves. They are experiencing greater market adoption net new logos with larger annual contract values.
The cloud based and API first are proving himself out offering better customer experiences more optimal economics really lowering the total cost of ownership.
All of these companies continue to raise capital at appreciating values in fact to at least two of these companies you see on this Pedro.
Reyes currently as a reminder of the thesis of Lilac ventures was to leverage the collective R&D budgets of all of these companies re Architected bank infrastructure infrastructure, which we all know of as many decades old.
Equity appreciation is certainly nice the secondary to our first out to being first out with the new cloud based tech.
Switching gears the canopy last quarter, we finally closed out the final totaling $660 million with 40 Bank Lps, the Ava and the ITV and the thesis is working here as well as we continue to win deals away from Blue Chip Silicon Valley venture funds, most notably in Q1, we led the $130 million rounded notarized.
Alongside capital G, which you know its googles venture arm and one of our Digitizes, the notary workflow, bringing gig economy notaries together with large enterprises in their clients, but it's even bigger than that in our view. We think of Notarize is the Uber of trust in.
In terms of the market.
We arent indeed chip seeing just massive valuations, it's super frothy out there one thing that we're able to do though is actually invest at good valuations given our limited partner base of the 40 bank of the ITV in the EMEA and Thats Super.
So we're able to get access to good deals, where maybe others won't we're also able to wedge of ourselves in where there is not a formal round, we can actually go in and given our LP base.
So strategic create around creative.
Net.
And again, it's back to live oak and how it can affect LIFO and our rule of canopy. We define success by the surfacing the best in Fintech and sharing of Hollywood product teams economics are also very real.
The fund structure, but they too are secondary.
No I got one more site deal, but that's a good trial.
Over the year yeah.
So my last slide.
Most important slide and I'm going to attempt to.
To make a case that the $24 million of pretax pre provision income in Q1 really ought to be closer to 30.
And Huntley I was thinking about this earlier today I've been in this business almost 50 years 48 years.
I am convinced myself that you'd almost have to be a certified public accountant to actually understand the bank income statement.
So I'm going to read something that agenda for Dumbo Road last night talking about $3 million of the $6 million of adjustments that I'm recommending that you focus on she says <unk>.
As of Q1, 2021 live Oak will not elect fair value for the and guaranteed retained portion of all of new government guaranteed loans sold this decision reduces volatility and drives more predictable revenue from <unk>.
Under the fair value option. The UN guaranteed retained portion is revalued each quarter. Therefore, the legacy portfolio of the loans at fair value will remain subject to quarterly fair value adjustments.
Not electing fair value generally results in a larger discount on the retained loan portion and decreasing net gain on sale revenue the.
Discount has subsequently accreted into interest income over the remaining life of the world.
Too many of that will sound like gobbledygook, but let me see the Bakken unpack debt and relatively good times, we say.
We can sell of loan from about $100 per million.
Under this new change that 100, we will go to 20 and the <unk> will be accreted into income over the life of the loan or if prepaid accreted instantly. So you can change of forecast.
By that amount over the entire portfolio going forward.
This gives us is Jennifer says more predictable earnings for.
For the quarter that was about 3 million Bucks. So we recorded likely historically recorded that 'twenty four would be 27.
The other 3 million Bucks from legal fees, which are nonrecurring, we certainly hope in the not too distant future relative to a previously disclosed lawsuit.
And here to really drill down on all of those details.
As our President Huntley Gary.
Thanks Chip.
Before we end of the numbers I want to spend just a minute on what has been and continues to be of pretty intense last year.
For our small business customers all of our employees and the communities that we serve more broadly.
Our focus has been and will remain to take care of those customers to take care of our people and to try to serve as an agent of change in those communities. So the.
The areas of focus are the same as chip said hopefully we're emerging from this pandemic and we're all looking forward to to some easier times, but we continue to stay to stay focused.
So on the balance sheet on per.
Page 13.
The overall.
The overall growth trends remained really strong.
Loan growth up 33% year over year, excluding PPP five 5% linked quarter driven by the strong loan originations that chip referenced coupled with slower prepayment speeds as borrowers enjoyed some of the additional subsidies from the SBA.
The eligible for sale portfolio continue to build although at a bit of a more measured pace than last year.
On the income side overall with provision down in fair value of moving in the right direction and the tailwind from PPP. The headline earnings number of <unk> 88.
It feels really solid breaking down the key drivers you talked about loan origination when you combine that with NIM expansion that drove strong growth in net interest income both year over year and linked quarter net gain on sale of impacted by the change in accounting that we can talk about and expenses are up with a few unusual items that will impact as well.
The bottom line the adjusted pre tax pre provision earnings number ex PPP as chip referenced up over 35% year over year down a bit from Q4, but thats still feels really good and the.
The growth rate of that is what's really going to be important and we anticipate the net interest income continues to grow noninterest income and expenses remained relatively stable for the year.
So as chip alluded in his remarks, Theres always seems to be a few moving pieces in the quarter and this one is no different so I'll run through four of them. The good news is two of those items are ones that where we think we're going to reduce the noise.
Then PPP, we all hope is behind us. So maybe three of these we don't need to spend a lot of time with on the go forward.
In April of the last tranche of the market price of RF used that day, we talked about those in December and we had two more tranches of those divested in the first quarter and then finalize those sales so those are behind us.
Going forward, we'll use the more traditional time vested arent used to continue to reward our people and those have a more predictable impact on earnings.
And then on the accounting side of chip referenced.
We.
We began the effort to reduce the amount of loans that we measure at fair value.
And historically given the reliance on the guaranteed loan sales fair value accounting made sense as we've transformed the balance sheet and reduce the amount of loans, we sell electing to carry these newly original loan originated loans at historical cost will reduce volatility and drive more predictable revenue, but as chip the chip referenced and as Brett talked of.
And the CFO of highlights that result of typically a reduction in the upfront gain on sale.
And that then is reflected in the carrying value of the portion of the loan. So we actually end up at the higher yield and higher.
Net interest income going forward.
The end result of the cash flow is the exact same the timing difference less volatility.
And again that was about $2 $7 million for of the quarter and going forward.
Another quarter and another PPP program to navigate.
Again, our team just did an extraordinary job standing up another set of systems and workflows $500 million got into the hands of AUM of 4000 customers. So just really proud of the work. There. We think that this program one point I'll answer you pointed out did exactly what it was designed to do and as Steve mentioned, how it helped our customers, but just help countless.
Growers and small businesses get to the other side of this so we're all hopeful. This is the last of these programs as we look forward.
And that is the flow through earnings again that volatility will will subside and then finally the other noteworthy event, we re entered into the investment tax credit market, which supports our renewable energy lending. These investments are generally in solar projects expected IRR of about 20%.
Oftentimes helped fuel our relationship and our lending business, but the income statement geography is a little unusual the benefit run through the tax line and then there's a corresponding.
Increase in noninterest expense, so you see those numbers as well.
It is of Great investment grade project projects and but they show up in some interesting places so.
We got more detail on page 16 on the market price Rfu's I don't think we need to go into those here in too much more detail Q1.
Q2, we have that <unk>.
Last tranche of about 100000 shares that we settled and that will have a little bit more modest impact on the income statement the balance sheet in the next quarter and will be and it will be done.
So page.
Page 17 detailed numbers on PPP again originated just over $500 million in the second draw generated a bit more than $21 million in deferred fees over the course of the quarter after amortization and forgiveness, we recognized about $19 million through net interest income we ended the quarter with about $1 billion of have outstanding.
And PPP loans at about $33 7 million of.
Deferred fees remaining on the balance sheet. So forgiveness continues to roll along where about 60% complete with the first of on balance as of now we've got the second to add to that as well, but thats going well.
So turning to the franchise highlights we've really already touched on all of this.
The solid loan origination balance sheet growth margin and Thats the recipe for our net interest income growth.
On the credit side as Steve described we really feel good about what we're seeing and the opportunities that we're seeing for new originations in the market and from everything we can see it feels like it will keep this momentum up we've hired a handful of new lenders already this year and we're circling around a couple of new verticals that we hope to update you all on the next quarter, so continuing to them.
Instead of really the power of our of our lending franchise as it relates to the small businesses.
So on the loan sales the market continues to strengthen throughout the first quarter and we touched on the accounting election. So we're going to go into that in more detail.
We did choose to sell a little bit more paper into the market strength and then also we elected to sell from fixed rate loans that manage the balance sheet and the interest rate risk a bit.
The fixed rate loans had a bit lower premiums than the typical floaters. So when you look at our total gain per million it's down.
Over 30000 per million and Thats.
A little more than half of that is from the accounting change and then and then from that mix shift on the USDA side. We did have some loans that closed late in the quarter that we weren't able to sell before quarter end, but that market remains really strong and will continue to be active there and overall as you can see on page 20, we've remained pretty close to our targets.
Selling about a third of 35% of the loans that become eligible on the SBA side in most all of the of the USDA loans. So again that can bounce around on any given quarter, but our long term targets remain the same and then the bottom of page 20, you can see the loan portfolio and the amount of fair value loans that we have in our <unk>.
Intention to have less of those as we choose not to elect fair value going.
Going forward.
So turning to expenses a few items to unpack here page 21 has the headline number and trends and then back in the appendix on 35, you've got some detail, it's worth, noting namely the $3 $1 million and investment tax credit impairment is in there of $900000, which is an impairment charge on a solar project that's taken.
Longer to get out of the ground than we would like to think of that more on the on the credit side and then the $2 $6 million for the market price to RF use all of those gets you to an adjusted number around 53, which we think is that kind of more of the number that we think about chip mentioned that there is the elevated professional services.
Fees in there and then theres of severance of about <unk>.
$130000 in there so when you net all of that out and compare that to an adjusted number of about 48 in the fourth quarter.
Chip mentioned the growth that we're seeing on the lending side of the balance sheet side, and we've been working hard to keep up with that growth operationally and hiring over the course of last year. We just ran incredibly lean so we've invested a bit more across the franchise. As you look forward that 53 number should probably stay around there maybe drift up to about the mid.
<unk> on a quarterly expenses going forward when you take out the tax equity investments.
On the deposit side, just a really really solid story the franchise here feels a little bit like garden style of investing so growth at reasonable prices.
<unk> 4000 accounts opened thats $4 $8 billion of retail deposits, which is up from $4 3 billion at the end of the year all of that we pay $60 to 65 basis points and all of the new money and we just dropped rates another five basis points for the majority of our products today I think we still have a little more room likely to for that.
Down over the course of the year retention rates have been high on the savings accounts given the overall liquidity trends you see our mix has shifted away from Cds more on the savings, which we like and the cost of the operate the franchise is still under 10 basis points, even with some investment on the checking side, so $850 million.
For price over the last quarter, another $2 billion of pricing in the next 12 months, we expect to continue to enjoy the benefits of this operating environment for our for our deposit model.
Yes.
Turning to margin the state of net interest margin jumped almost 50 basis points largely driven by PPP.
But also the lowering deposit costs, we just talked about but on an adjusted basis. We enjoyed a 13 basis point increase in margin to 346, even with the spike in liquidity that happened in the quarter, given the strong deposit trends and some lending activity of that pushed into Q2, so loan yields remained steady holding around five 4%.
And we expect that margin ex.
PPP to continue to trend up through the balance of the year.
So chip talked about the the metric that we stay laser focused on this adjusted.
Pre tax pre provision income without PPP and there isn't ever one single metric that you can rely on but given all the moving parts of the strategy of this one and we do stay anchored to you've got the details on page 25 on 26, we have a waterfall that just shows the changes year over year of the key drivers and then the linked quarter as well.
The year over year trend, 27% growth driven largely by that net interest income and then on the linked quarter. We've talked about continue to have really good growth of net interest income and then some of the items that we've sort of already talked about that drop that number down again that growth and that of going forward is where we're really.
Both guest and feel good that we'll continue to be able to generate that.
So turning to the balance sheet still feels pretty fortress like with.
The strong amount of government guaranteed assets on the balance sheet ex.
Liquidity solid capital ratios the.
The tier one leverage ratio ticked back up in the quarter after dropping a bit last year.
Right about $8 50 on the tier one leverage ratio, which feels really comfortable now and we think thats kind of continue to tick up over the course of the year.
All in all of these are really good about the performance metrics recognize some of them are influenced a bit by provision of fair value adjustments. What we did on this page that you will see new at the bottom of the page. We added a couple of growth metrics, because we think that as we as we achieve high performance and demonstrate that it comes in three categories safety and soundness as chip.
And Steve talked about profitability that we've been showing here and then growth and we feel really good about what we can deliver on the growth side with the safety and soundness and profitability and focus.
So a quick update on the technology stack, we are live with our pilot of checking accounts, that's going really well between that and all of the new business savings and Cds that we book on the new platform, we have almost 2000 customers in over $150 million on that core. That's in addition to the 1 billion of half of <unk>.
Loans that are on that core so we put almost $100 million of new deposits on the platform since year end I will continue to expand the checking pilot into general availability and were planning on converting our 64000 deposit customers. In Q3, we're just laser focused on getting that right and then adding on the features and.
<unk> that we've talked about that we think are going to be really unique for small businesses.
I'm going to close of the quick note on our ESG efforts I would encourage you all if you haven't seen the impact update in our annual report we've got some great information in there and we recognize that we and all companies and business leaders and all of US play a key role in driving forward efforts of diversity inclusion of climate.
The change.
And while there's always more we can do and that we will do we're really proud of our accomplishments and initiatives as it relates to our employees our board serving the communities that we are in the end.
And then the small businesses that we sort of across the nation plus our renewable energy efforts just feel like they continue to have great tailwind and.
Changes administration and government backed that will make that even more impactful.
We know many of you are increasingly focused on the topic as well and look forward to share any incremental data, but also having increased dialogue with you guys. On this front so with that had the questions let's do it.
Sure.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key touchstone telephone.
Question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Yes.
Okay.
Your first question comes from Jennifer Denver with true Securities.
Okay.
Hi, good morning.
Good morning, gentlemen, Jennifer.
I've got a few questions number one chip.
<unk>.
Do you see of the biggest risks.
To your budget and earnings expectations in 'twenty, one right now.
The biggest risk.
Two of our internal budget.
But you haven't seen.
I would start and say prepayment speeds have been really.
Favorable.
And if we see a big spike in that in the back half of the year that will move some of the fair value numbers around and Thats again the budget numbers.
That also could reduce the growth of the balance sheet of little bit, but that may be the one that's a little bit out of our control but.
That would be the one that I think.
And then I look at but.
Chip.
I would say.
Just the examining the pipeline and originations we still feel really good about what we told you last.
$3 billion to $3 billion one.
And Steve you know probably been with 40 customers of the last 90 days of re.
The firm, which you just it doesn't seem like there.
Many big.
Credit surprises out there the general first question I think.
Pretty much steady as she goes you agree with the I agree yes.
Okay.
Can you give us.
And the update on where the.
Of the lawsuits Dan that you referenced in the.
In the press release.
Okay.
Yes, Jennifer instantly, we put out the disclosure of that debt.
That we've got and that's sort of all of the update we've got right now.
Okay Alright.
Alright.
Of legal fees do you have any.
Any thoughts on what the legal fees might be for the rest of the year.
We'd always like to have less of them.
Okay.
Last question.
The the.
The deposits continue to reprice down how do you think about positioning the funding base.
Sure.
Different rate environment with fed funds or higher.
The current funding mix is not as favorable for debt.
Yes that is why we are still laser focused on building out the checking account and operating accounts, because we know that they have.
The real advantages in a rising in higher rate environment. So we love what were funding with now and our goal is to be building out those checking accounts and operating accounts so that.
If and when that cycle turns we can capture.
The advantage.
Okay.
Do you have any specific targets like I want you want to get to ex.
The amount by the end of next year or something something like that to share with us or can you give us any detail there.
I think thats too early right now to do any of that we said we've said that we don't think it's going to have a lot of financial impact this year, and we still standby that but if we get that right. If we start to look into next year I think we can give some some targets as we look at our plan for next year, we still don't have that in there and we still.
I think that we've got a really solid.
Sort of operating model, but we can start to give more detail on our expectations is that as we get closer in the year.
Okay, Great and you did a great job with volume.
Information I think we need in the slide deck from in your.
Monologues. Thanks.
Thanks, Jim.
The next question comes from Michael Perito with <unk>.
Hey, good morning, everybody.
Thanks for taking my questions.
Yeah.
Chip like you I'm a bit more of a plain English guy. So I was wondering if I could maybe just pass through of couple of these items too.
Sure I'm thinking about them the right way.
And I wanted to start sort of is it correct to assume that day.
Given the change on the the fair value I mean, so the.
On the incremental.
Gain on sale margins are going to move down over the course of the balance of this year and then eventually settle down kind.
Kind of lower rate is that directionally, correct or am I misinterpreting.
What's going to happen.
So excited for the first time in over a year the Brett Caines standing next to me the answer that question.
Six feet away.
Hey, Mike.
Yeah, I think as you as you look going forward.
It's going to look.
The more similar to.
The Q1 answer of decay.
You saw in two.
2020, probably in Q3 and Q4 of 2020.
And as chip mentioned about 20%.
The reduction in gain on sale revenue.
Given the accounting election that we've decided to make that's probably a good.
Ford way to look at it.
I will reiterate that the secondary market right now.
Premiums being paid are there any day of favorable.
I think they are probably at an all time high right now.
Of course the.
Market.
The impact.
Which we cannot predict that comes down.
That was it like more of a change.
Downward compared to Q1.
And the steady market.
Just the accounting election change is about a 20% drop in.
The expected revenue from gain on sale, we should have probably done this before Michael I mean, this is kind of like sort of servicing asset of rebound in the servicing at repo down.
Down $9 million linked quarter up $5 million of extra that's why we started holding the bunch of these loans with low holding these loans. This is the same thing we probably should've done it some time ago to give you more predictability and then again just to reiterate we do get all of those cash flow back over the life of the loan and on booking the retained piece probably about one one.
Basis points on average of incremental loan yields on that on that retain piece. So it's not an insignificant benefit overtime in the net interest income.
Got it so so there is.
Net interest income benefit.
The margin over the life of the loan near term the gain on sale margins will be more indicative of the first quarter of in the back half of last year, probably the accounting perspective, and then we'll have to make considerations for the environment and the demand for secondary loan sales over the course of the future ex that seems to be the the general jest.
Please go ahead.
And then on the cost side I was wondering first.
Maybe you could just talk a little bit about the the pipeline for additional kind.
Kind of renewable energy investments and then maybe just spend the second could talk about kind of.
Some of the the risk factors, we should be thinking about as you guys I imagine considering to do more and more of these is it any noticeably different than.
Typical tax credit types of tuition or anything else unique we should be thinking about.
Yes, so when we think about it we want to.
Given the geography of the.
On the income statement, we will be mindful of sort of capacity to do these relative to taxable income that also drives the timing with which that non Ken recognizing that drives the IRR. So.
We'll do maybe you can give you a bit more color about sort of capacity, but I think think of it in the context of what we did in this.
Situation relative to our taxable income so well.
We will continue to look to do a little bit of a programmatic basis nothing that I can have any giant spikes.
But we will try to continue to do something similar to this and then it can be a bit lumpy. These projects take a while to get together. So close one quarter of one of the next quarter, maybe a little bit lumpy, we're going to try to try to avoid that from the credit perspective, Steve you can.
Pilot, we like these projects from a repayment perspective, the project need to stay operational.
In order to secure the tax benefits from the program. So the real risk is that you cant operate the program and we've been in the business long enough feel comfortable that even if something were to happen with an operator, you can find another operator and keep the keep the lights on so I don't know Steve on the credit side for you of any thoughts you are exactly right.
Our experience in the space is incredibly important and we've learned a great deal over the years, we've refined our servicing we have the proper controls in place.
So we feel pretty comfortable that we can identify good projects learn from those projects in order to make smart investments from that side of the equation. So that all comes together.
Brent do you have anything to add brother, Yes, I would say like as you're thinking about and all of the as you're thinking about.
<unk> in these types of head of investments.
Probably the simplest way to think about it is take a look at.
You're forecasting for pre tax income.
And our investments right all of it will be probably around 10% of that number.
And then that helps us target.
<unk> rate kind of in the mid teens.
Got it.
So to take that all on the cost side rate. So I think on Lee you mentioned.
The adjusted I think it was $53 million, obviously, theres still some elevated legal fees in that $53 million.
Hopefully drop off as the year progresses here, but then you know next quarter there'll be some.
Additional small hit all of the on the <unk> on top of that $53 million and then potentially in the back half of the year at some point there could be some more impairment related to any additional renewable projects that could also possibly come in is that.
Can't really fares or anything else significant beyond that debt that you would.
Highlight.
No I think that feels good.
Yes, I think I think of it.
Okay, and then just wondering if the growth rate right because I feel like there is.
The dynamic here of that obviously you guys are building platforms.
The scalable and Youre trying to leverage those economies of scale, but we're clearly there is as you guys mentioned in your prepared remarks.
High need for investment is your bank growth significantly right. So I mean, how should we think about kind of the cost growth dynamic.
We think about adding talent in supported growth, but also trying to leverage platforms that you've built that are highly scalable.
Well I'll tell you the way I look at the Huntley you can add to this pretty simple if we can grow the loan portfolio of 15% and EPS, 15% year over year, that's our goal.
We can beat that a little bit, but that's what we say internally and that's what we shoot for.
Yes, I think kind of balance sheet revenue, 15% to 20% and then if we can keep the expense side closer to 10 than we're creating significant operating leverage to those are kind of metrics again, it gets a little lumpy and but but 15 plus on the on the balancing revenue side and 10 plus 10% on.
The expense side, it feels like pretty good.
Pretty good numbers.
Got it yes, no the PPP.
PPP isn't doing anyone any favors in terms of the kind of tomorrow any of the south but I appreciate all of that commentary. Thank you guys for taking my questions.
Michael.
Your next question comes from Steven Alexopoulos with Jpmorgan.
Good morning, This is Alex Lau on for Steve.
Alex.
On your loan originations ex PPP of $6 70 per quarter.
This was the drop from the prior two quarters from around the $900 million range do you have some color on what drove the lower originations or was it more of the timing.
It's more it's more seasonal Alex that's what we tried to show in that slide I can't remember the percentage we were up over last Q1, Q1s are slow quarter.
We've made it a little bit of a comeback.
The really large loan in April, but I think were standing by.
What we said last quarter of 3 billion to $3 billion, one still feels pretty good. So you shouldn't you shouldn't view that the way you're viewing it because Q1 is slow.
Understood and.
And sorry, if I missed this but can you give some color on the uptick in non performers in the quarter.
Okay.
Yes. This is Steve.
Several loans for which we've impaired over the quarter, but not anything significant I mean, it was actually.
Relatively small number of relationships.
Each of them are tied into challenges that existed pre COVID-19, where COVID-19 just simply.
Was not if it didn't do them of favor so I put it in the category of and influenced by Covid, but had preexisting challenges that we continue to work through.
Sure.
Thank you and just last one.
Can you talk about how you're marketing the the checking accounts and give a target or a sense of the growth potential for the year. Thank you.
Mike of you won't talk about marketing and then turn it over to one of at least the judo market again, yes. So our focus now is to build the pilot out and the.
You get the system stays.
Stable and ready to go so we don't have any definitive plans, yet or definitive budget to marketed but we feel of word of mouth will be really good and existing customers will definitely one of the participants will start there and then our ultimate goal is to leverage.
Partners for distribution and product enhancements through embedded embedded banking and so.
This platform is easily integrate of bowl into other software vertical software.
Partners, so that distribution channel ultimately will be our.
Our strategy win win as Micah said, we're ready to sell.
All of the writer.
I think Alex too, we're going to have an investor day. When this pandemic goes away probably here in Wilmington, where we can describe to you as we've described the most of you in the past what all of that means what is the community better future. So we will march vertical by vertical to create.
A deposit experience embedded in what you would need to operate your business from financial planning the Quickbooks the tax to all of these of the practice management software and the platform that we've been working off of four years with <unk> in the middle of that allows us to do that cloud native API first but that is not something that we can drill down on one question on an earnings call. That's why we're going through.
All right all you folks of the Wilmington, when things settle down from this damn disease.
Thanks for all of the color.
And again, ladies and gentlemen, if you have a question at this time. Please press the star and the the number one key on your Touchtone telephone.
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The next question comes from Chris Donat with Piper Sandler.
Chip I wanted to review of bidding.
The dialogue you had with Steve on slide five and in the site visits.
I liked what I heard about guardedly optimistic.
But also recognize still not out of the woods.
Can you just give us a little color on how you think.
The world might look as some of the beneficial impacts from.
From PPP and various stimulus programs fade over time.
Like the Youre just talking about in the last question.
There is some some businesses that were challenged before the pandemic I feel like there's going to be some cohort of businesses that really aren't able to bounce back robustly, but I don't know if thats going to.
I mean much for your credit quality, so just trying to understand a bit how this unfolds for small businesses for credit quality as the.
Some of the help is withdrawn.
So I'll start because of.
Steve is the stay back in planning shelf of the door of the board and I'll get the fly around and meet with customers, particularly ones that are challenged.
So I think the programs Chris have worked and I think that our lending officers did a great job of picking folks that had the the tiger now there.
There were a couple of just gave up and threw us the keys, but there weren't many and Steven basically alluded to the charge offs earlier in his comments.
So.
No.
Simply put with all of this government money that's out there the ones that one of flight.
I think just be fine I, just don't see very many losses I mean, whatever that total number you came up with a minute ago was.
Of the minimus compared to what we thought a year ago, and you may want to tag onto that.
The government programs of wonderful yes.
At the same time, we cannot become complacent.
Not lost on the significant percentage of our borrowers that were receiving subsidy payments for example from the government.
We could become very complacent with the payments coming in and lose sight of really what's going on with that business. So I talked about the surprises how do we minimize the surprises the throwing in the keys, we call them the subsidy writers there.
They are riding the subsidy payment, but their plan is the throw in the keys at the end after the government stops. So it's all about servicing of knowing your customer.
<unk> talked about this in.
Higher earnings calls, we put a stress mark and every one of our borrowers as we sit today, 97% of the entire portfolio. We have of stress Mark you can't put of stressed marked unless you have talked to that customer collected financial data.
Measured debt financial data and assess the stress.
So we have a really good Intel on how our borrowers are doing which gives me great confidence, but I am aware that the March payment, 37% of our portfolio in terms of dollars had of subsidy payment made.
One data point is our payments or the fifth of each month. So we felt really really good at most burned off in April. In addition, we see that stress mark from high to medium to low trending towards the low and those are based on real numbers. So what's matters. What is your balance sheet look like have you made the right.
Have you received government support has that wound up on the balance sheet to give you some cushion as you get back on your feet.
What is your credit looks like what is your status with your vendors. So we think about well what's the next shoe to drop it's going to be argued in arrears with your vendors do you have some past.
That youre going to have to make up with what your strategy Whats. Your 13 week burn rate. We're looking at all of those really diligently. So we've invested pretty heavily on our servicing to get as good of field as we can about what our portfolio looks like going forward there will be surprises I've talked about it that's why we've got <unk>.
The reserved for that hopefully it doesn't turn into losses, but we feel that we've done everything we possibly can do to have a good feel for the health of our portfolio at this time.
The conclusion there.
I'm talking here as well.
We're just sort of unusual we have plenty of capital state of capital and you've got another 1 billion of any of the government guaranteed loans. So thats kind of value of 150 plus million you've got all of the needles live oak ventures of some other hotel $50 million.
Basically the PPP numbers close to $100 million as well if you add up all of the fees.
The spread income as I mentioned earlier in my comments. So we have a balance sheet the way different than any other bank that you cover.
Got it okay.
Thanks for all of the color there and then.
Sort of related issue here as we think about the future the.
Pace of PPP round to originations.
It felt like you guys started a little slower than than others.
Im just wondering.
How are you thinking about second quarter of at least through May 31 for PPP originations.
Yes.
We really focus given everything else, we have going on on our existing customers and helping them through.
And sort of got through that.
And are effectively done I mean, there maybe a few other little pieces that come but.
Actively I think we served our customers that.
Now that we could and I feel good about that so it was it was the big effort to stand that up again and.
Quite of the luxury of taking the entire company and turning towards that like we did a year ago. So, but I think for Q2 purposes, where effectively you shouldnt think about much new in the pipe.
Got it okay. Thanks, very much gentlemen.
Thanks, Chris.
And Im showing no further questions at this time all of that now.
Now I'd like to turn the conference about the chip Mahan CEO.
Thank you <unk> and thanks to everyone for attending and we'll see in 90 days.
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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