Live Oak Bancshares Inc

NYSE:LOB

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen thank you for standing by and welcome to the Q2 2020 Live Oak Bancshares, Inc. Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mr. Greg Seward, General Counsel for Live Oak Bancshares. Thank you, sir. Please go ahead.

[Greg Seward, General Counsel]

Thank you and good morning everyone. Welcome to Live Oak’s second quarter 2020 earnings conference call. We are webcasting live over the Internet and this call is being recorded. To access the call over the Internet and review the presentation materials and commentary that we will reference on the call, please visit our website at investor.liveoakbank.com, go to today’s call in our Event Calendar for supporting materials. Our second quarter earnings release is also available on our website.

Before we get started, I would like to caution you that we may make forward-looking statements during today’s call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of 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 Executive Officer.

[Chip Mahan, Chairman and CEO]

Thanks, Greg and good morning, all. I am now on slide three, the agenda. So as always, we’re going to - Steve and I am going to talk about safety and soundness. And then I am going to give you a snapshot of what some of our customers are saying.

A couple of quarters ago, we said enough is enough. And look, I've done a terrible job of explaining to you, our shareholders, about our investments in other businesses. So last Tuesday, one of those investments that were spun off to you, nCino went public. So we're going to take for those folks that have been with us from the very beginning a wee bit of a victory lap. And then I'm going to turn it over to Huntley to review what is a - confusing as the wrong word, let's just call it a complex quarter.

So moving on to the next slide, slide four, our focus. So, you know, what's been going on at Live Oak Bank these last 90 days? Well, it's a lot. So when the virus hit, lots of things began to happen. We did deferrals for 1288 customers. PPP came on, the government decided that they were going to make principal and interest payments for six months to 100% of our - of the country's SBA borrowers.

So there was massive outreach, outreach to us and from us, from all of our customers. And then the PPP, so on April, the 3rd, we launched in the battle, and in three weeks, we made about 10,000 loans totaling about a $1.8 billion. Huntley, is going to tell you a little bit about what Brett told you last night about $60 plus million in fees of which we gave 7 of that back to our folks. We focus first on our customers, about 3,000 of those, we then jump to our verticals to help customers in the future or channel partners. And probably most proud that we affected 8,500 jobs in Wilmington, North Carolina. We made 725 loans totaling $60 million that covered 56 non-profits and 11 churches.

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

Technology and products, Huntley is going to talk a bit more about this, but I am tickled to death that my friends in Nashville, Tennessee, Terry Turner, the founder, co founder with Hugh Cleaner [ph] Pinnacle Bank invested $10 billion in Apiture, as did our long term friends at T. Rowe Price, [indiscernible] is going on that board as we take that business to the next level, Huntley, is going to talk about deposit launches and everything to Finxact here shortly.

So now I'm going to move on to slide five, credit and fair value loan metrics. And, you know, whereas - you know, we're really proud of the far right column. You know, we're keenly aware of the government assistance previously talked about. Steve and his credit team added $18 million last quarter and $14 million to our reserves and fair value adjustments.

And, yeah, I mean, zero past dues because of the government intervention. Watchlist is the same. Classified assets down a little, non-accruals down a little, charge-offs 21 bps, loan loss reserve roughly 70 million bucks.

But folks, you know, we just don't know what we don't know. When all of this ends and who knows when the virus is going to end, who knows when the vaccine is going to begin, who knows whether it be effective, what's going to be on the other side.

So in the abundance of caution, we always proved to be conservative, which is further outlined in the box in the middle, which we talk about every quarter, you have $500 million of capital in this bank, roughly a $70 million reserve and only 2.173 billion of unguaranteed paper. So the way my math works, that's about a 20% capital ratio and about a 3.1% loan loss reserve ratio.

And on top of that, just for brands, we got $1.1 billion of government guaranteed paper and with those capital markets coming back you put a mark on that and I don't know what Caines [ph] will tell, it's $60 million, $70 million, $80 million worth of value, they're giving us a bit, a bit of an interesting cushion compared to other banks.

So now, this has been incredibly fun for me, folks, shareholders, other interested parties. If you look at the next slide, slide six and the column on the right, the last 72 hours, I had a chance to visit with many folks and every one of our 34 verticals. So I decided to pull the top 10, what you see on the left, our largest exposures and ag moving down to senior housing. So those 10 totaled 1.52 billion of unguaranteed exposure compared to 2.2 overall, which is about 70% of what we do.

So I'm going to pack this and just stay with me on this brief because I think it's kind of fun. So that vertical, 650 customers, 175 million of unguaranteed paper, no loans on the watchlist. Many of our vets went to curb service, which led them to become much more expense minded.

In June were some of the best months they have ever seen. Sales of these businesses continue, consolidators are bound and the price of the businesses is about 150% to 200% res [ph] This is about a consistent $100 million a year business for us.

Healthcare and dentists would be next 254 million of unguaranteed paper, 700 dentists, huge pent up demand here, shocking to the ABA. During the last several months BofA Practice Solutions shut down, addressing the credit quality of their 8,000 dentists, they seem to be back in business now. We're looking at deals we would never see as an SBA lender.

Staffing has been a real challenge for these folks, as they come back to work and you know, what the heck of these dentists may have to actually work on Friday. Pharmacy, we have 434 customers, been in the business 10 years, a $100 million on unguaranteed. Thank goodness that's been deemed an essential business. Most of our customers have seen year-over-year increases. That's about $100 million year business for us.

Death Care another essential business 244 customers, probably three times that a number of rooftops out there. Revenues are higher. This is our lowest reserve vertical.

Chickens. So this is an interesting, $265 million of unguaranteed paper, 333 customers, we do business with 23 integrators, 83 processing plants, 49%, or about half of our customers are public, and 78%, almost 80% are one of the top 10 integrators in this country. We had a couple of challenges with turkeys years ago. It looks like that might be a recovery.

Senior care. Really interesting stuff going on there, moving up market dramatically. We're seeing deals that we would never see. We're doing business with the best operators in the country. We're seeing 10 points more equity here than we saw 90 days ago. Loan to value was 75, down 65. And it looks like some of the regions that are big in their business are retraining their customers, which we would never ever do.

Self Storage, 129 million of unguarantee. What's interesting here as we work from home and plans that we've found that, that our customers - our customers, customers are moving stuff out of the house because they're working from home, therefore their occupancy rates are higher.

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

I - interesting stuff here, 585 customers, $90 million of unguaranteed, paper markets up 15% from the spring. They're finding that clients are nervous and their number of clients are going up because of this anticipated downturn and our customers are actually setting side additional liquidity in anticipation of that downturn in the abundance of caution. Lots of M&A here, more buyers and sellers and our pipe is quite robust.

Now, I think we may have something out of order here. I'm moving to slide nine, Michael, which is the nCino? No, no, Steve, this is over to you. My bad. This is over you. Please take over.

[Steve Smits, Chief Credit Officer]

Yeah, thanks, Chip. So I'm going to talk about the diversification of our portfolio in just a bit. But for the moment, stress levels are manageable, even in our most at-risk industries, which you see on slide seven. Based on our diligent outreach, that Chip touched on.

However, that's in part, thanks to the government intervention and loan accommodation, such as payment deferrals. So 60% of our borrowers across our entire portfolio are having the SBA make their monthly payments in full. That's certainly impactful.

75% of our existing borrowers requested and received from us a PPP loan, which is helping them cover payroll, rent and other interest expenses. And to date, we've granted payment deferrals to approximately 9% of our borrowers. The real unknown that Chip had mentioned is the long term challenges facing these businesses. It's inevitable that we'll see some losses, some will simply give up. They'll not have the resources or to resolve to weather through the storm in front of them.

But by and large and based on our diligent outreach, we're comfortable that our borrowers are well positioned to work through the challenges facing them going forward. The hospitality is certainly concerned. And while at this point I'm not anticipating huge losses in that portfolio, they are facing challenges and that could take years to overcome and build back to where they were pre-COVID.

Our hospitality portfolio is for the most part well positioned to weather these challenges. We had focused on low loan to value first mortgage financing, so we have a good collateral cushion in anticipation for possible valuation declines. Many of the projects are in tertiary markets, and these actually are starting to see some uptick in occupancy, probably most likely benefiting from the domestic traveling uptick and road tripping.

In addition, we'll also proactively look at other government programs, such as the USDA 90% guaranteed Vica [ph] loans. We've actually approved several 90% guaranteed USDA Vica loans to some hoteliers that are well positioned to be able to continue to use that working capital to get back on their feet and grow. So we'll do that in a very thoughtful way. It's just another lifeline.

Slide eight. We have built a well diversified portfolio mix, which bodes well for us as we focus on minimizing losses. In addition, we have lots of tools in our belt from the SBA to the USDA, to ABL lending to specialty lending, we're really well positioned to provide access to capital in a thoughtful way to help small businesses rebuild, grow and even take advantage of opportunities that present themselves as they also navigate through in past these uncertain times, Chip back to you.

[Chip Mahan, Chairman and CEO]

Thanks, Steve. So I think I've got a little order problem here. The next slide that I want to talk about says nCino bank operating system. So folks, and again, I have done a terrible job these last 10 or 12 years. So this industry has 280 billion lines of old code. Many of you listening today are traditional owners of community bank stocks, and some analyze traditional banks for a living.

We cannot be put in that box. We make investments in infrastructure. We think there's going to be massive changes in applications on cloud-based infrastructure. We have no branches, and we have no traditional boundaries on where we lend money.

So let's go back and use nCino, our first effort in cloud-based software, as a use case. So we began writing code in 2010. Neil and his brother Pete [ph] picked the force.com platform because we had a challenge. We had 158 documents per loan and we needed to get all the data in one place, to treat every customer like the only customer in the bank and enable our lenders, our underwriters, our closers and our services to do the best job of any bank in the land.

So if you look at this slide, that's fundamentally loan origination. So on September the 30th 2012, we hired Pierre Norde [ph] from a company Neil and I used to work for, and he began to take that code and make it elegant for use and other banks. I have no idea how many nCino banks are now, but several hundreds if not more.

And their thesis has always been to create a bank operating system, land and expand first its loan origination, as you see at the top of this graph, deposit account opening, compliance and risk management, artificial intelligence. This is incredibly sticky software and as you move across the enterprise from the wholesale side of the bank to the retail side of the bank, you can see why this company has become so interesting.

Because of the massive opportunity that nCino’s team had, we decided to spin that business off on June 30th, 2014, six years ago, because if you go to the next slide that I'm looking at, which is nCino’s numbers as published in their S1, the company did 58 million in revs for fiscal year ending 1/31/18 to 138 in 2020. And you can see the losses at the bottom those losses could not be tucked under a bank holding company, in our opinion.

But yesterday, stock closed about $75 a share. The company has about 90 million shares outstanding. So because of the land and expand and the growth and the fact that only 8% of the revenues of the company are in the US, investors have put a value in this business of $6.750 billion as of last night.

So how does that compare the next slide to other SaaS based companies? Well, a heck of a lot better. If you look in slide 12, you'll see that public SaaS companies with over 30% revenue growth traded 16 times, 21 estimates, 22 times 22 estimates. Those that are efficient with a 20% to 40% large and free cash flow of the revenue are about 10. And you can just let your mind wander on nCino's multiple future revenues.

So now how the world does that relate to the rest of our investments. So I am now on the slide that says technology investments. So all of these companies, that you see is a mark on the portfolio of some months if not years ago. All of these companies in the next 12 months or so will be raising additional capital.

We own 16% of Finxact, 15% of Payrailz, 6% of DefenseStorm, 3% of Savannah and 4% of Greenlight. Finxact next-generation core processor, Payrailz’s cloud-based, CheckFree Biller [ph] DefenseStorm for cyber security, Savannah’s part of Finxact and Greenlight’s interesting, right. So when we invested in Greenlight, they had 100,000 customers. As of last night they have 2 million.

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

Last slide, before turning it over to Huntley, is the non-GAAP earnings slide. And so if you just take all the noise out. pre tax, pre provision, pre fair value adjustments, pre servicing asset reval, pre losses for FinTech activities, you can see kind of the true cash flow of this business, 17, 17 in this quarter were up a couple of million bucks.

And that feels - that feels pretty good relative to the capital that we have, relative to talking with our customers or where we are in terms of credit quality. And with that, I'll turn it over to Huntley to try to unpack what has been a complex quarter.

[Huntley Garriott, President]

Thanks, Chip. You know, we're all painfully aware of how impactful this pandemic has been to small businesses, and we've taken our responsibility pretty seriously to help support business owners and entrepreneurs throughout the country and our people have risen vacation, working tirelessly to help our existing customers to get funds into the hands of new customers, and to build products and technology designed to make their lives easier.

Government programs directly to small businesses have provided essential liquidity and breathing room to our customers. But we know that our work is not yet done, as the impact of this pandemic continues to impact every facet of our lives and those of our customers.

So looking at page 15, and looking at the highlights for the quarter. Overall, posted some pretty solid numbers, albeit as Chip mentioned, there's a lot of moving pieces. The reported numbers were meaningfully impacted by PPP and the excess liquidity that we put on during the first half of the year.

Our balance sheet grew 92% year-over-year, and 56% quarter-over-quarter. Net interest income increased modestly over the first quarter, as a positive impact of PPP was offset by the 100 basis point drop in interest rates.

We're really proud of the expense efforts of our company. As you can see, non-interest expense was down 3% linked quarter, despite accruing a $7 million performance bonus that Chip mentioned for our folks who have literally worked around the clock since the beginning of March.

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

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

I'm not sure how many banks could have originated loans in a quarter equal to 60% of their outstanding loan balances at the beginning of the quarter. And PPP was a huge part of that. But the impact on our people and on all our resources was immense.

For a bank that originated 1200 loans in all of last year, originating over 10,000 PPP loans in three months was an impressive feat. And as you may recall, when the PPP program started on April 3rd, there was no Fed funding facility in place. So realizing that we would have an opportunity to play a meaningful role in this program, we sourced a significant amount of funding in the market in the beginning of the quarter.

The PPP LF turned out to be a really efficient funding vehicle. So we took advantage of that, which left us with close to a $1 billion in excess liquidity on our balance sheet, which has had a big impact on margins, liquidity and capital ratios.

Slide 16 attempts to lay out some of those key metrics and how they're impacted by PPP and excess liquidity. Our balance sheet growth, as you can see, was almost entirely driven by these factors, with the core loan portfolio up 3% quarter-over-quarter.

Not surprisingly, core loan origination was down a little bit in the quarter, although as Chip mentioned, still pretty strong. NIM declined 99 basis points about half of which was PPP and liquidity related, as our liquidity ratio jumped almost 15%.

The impact of PPP and excess liquidity also drove the vast majority of changes in our Tier 1 leverage ratio, and as you'll see in a minute had virtually no impact on our risk based capital ratios.

We expect margin liquidity to trend back to normalize levels over the next year, as the PPP loans are forgiven or run off and we deploy excess capital. We'll spend some more time going through that in a few minutes.

So next on slide 17, if you try to break down the impact of PPP has on our income statement, you'll see the total origination that Chip mentioned to the end of the quarter of $1.75 billion, which generated origination fees of about $60 million, which along with the deferred costs will be recognized over the life of those loans through interest income, primarily at the time of loan forgiveness.

In the second quarter, we recognized $5.4 million of those net fees and $3.3 million of gross interest income, not including the funding costs. With the timing of loan forgiveness has been pushed back, we currently expect the majority of these loans to be forgiven by the end of the year or the beginning of next year. We've kept originating PPP loans in the third quarter and we continue to that today, but the volumes have been pretty minimal.

Turning to slide 18, despite all the attention on the PPP program, our overall franchise performance was solid. Our core loan portfolio was up modestly, as the flowing of prepayment speeds helped offset the decline in origination volumes. We still closed $430 million in core loans across a range of some of our least impacted verticals.

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

Slide 19 further breaks down the origination in the quarter. As you can see the 1.74 of PPP in the $430 million of core loans, of that you'll see the guaranteed loans - excuse me, the USDA volume was up in a meaningful component of the $180 million in conventional loans that we closed, the majority was comprised of renewable energy, solar and bio energy products, as well as a strong quarter in chicken lending.

Across our franchises, we've seen some pullback in the market from competitors and we're getting some really good looks at some much stronger credits as Chip mentioned. Our pipeline remains strong. Although, yeah, Steve talked about, we're being extraordinarily thoughtful about the types of deals that were willing to finance in this market. On the funding side, our deposit model continues to be incredibly efficient as we took advantage of the inputs in liquidity that entered the market this year.

Slide 20 shows some of the key metrics. We've dropped our savings rate 85 basis points and our one year CD 145 basis points since the start of the year. And despite that, we grew retail balances over 20% in the quarter, and accounts by 15%. Our total cost of service or deposits dropped even further to 8 basis points, as the portfolio grew.

Digging in a little deeper, on slide 21, you can see the decline in rates on the left hand side of the page. Where we're currently offering 1% on savings and 70 basis points for a one year CD. While the market took a little bit of time to reprice earlier this year, we have seen it behave pretty rationally overall.

Now look at the right hand side of the page. And you can see that over the next year, we have almost $3 billion of term deposits, both retailed and brokered, that will mature at rates significantly higher than where we are currently booking new product. That's over half of our deposit base. We’ll pick up roughly 145 basis points on the retail book renewals, and will likely lead most of the brokered runoff. As a result, we expect core margin to increase back to our historical levels steadily over the next 12 months.

Turning to capital and liquidity, page 22. I touched on this briefly earlier, but our balance sheet is carrying a significant amount of excess liquidity, as much as a $1 billion of incremental cash and investments, both as a result of the macro trends in deposits, but also due to the actions we took earlier in the year to prepare for PPP origination. So we ended the quarter with over $2 billion of cash and investments and a 36% liquidity ratio.

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

But all this liquidity and PPP loans took its toll on two key metrics, our net interest margin and our Tier 1 leverage. And while we still have a significant amount of risk based capital, as you can see almost 13% common equity Tier 1, given the spike in liquidity, as well as the timing of the PPP loans pledged to the PPP LF, our leverage ratio declined significantly.

On page 23, you'll see the impact to our NIM and our Tier 1 leverage ratio. On the NIM front, the interest rate environment impacted our NIM to the tune of about 48 basis points, with roughly 60% of our loans variable rate. The Fed actions in the first quarter drop those loan yields in the second quarter.

The remaining 51 basis points of margin decline is directly related to PPP and excess liquidity. And while our margins going to remain volatile for a couple quarters, as the timing of PPP forgiveness flows through the interest income line, we expect our core margins to return to historic levels over the next three to four quarters.

Similarly, our Tier 1 leverage ratio saw about 27 basis points of normal capital deployment, and the rest 171 basis points was the result of close to $3 billion of government backed assets added during the quarter.

Now that all the PPP loans have been pledged to the PPP LF, they will no longer impact our leverage ratio. The result though is that, although we did see a significant drop in our leverage ratio, we still feel good about our capital ratios, and don't expect the need for any capital raising actions in the near future.

Despite the focus on PPP, and the impact of interest rate cuts, our recurring revenues continue to grow and we continue to reduce our dependency on loan sales and our servicing asset, as you can see on page 24. Importantly, prepayment speeds on SBA loans have slowed dramatically, and are probably running at a third of where they were at the beginning of the year. Not only will this help drive recurring revenues as our core loans stay on the balance sheet longer, but it's also positive for our servicing assets, and for the secondary market.

We'll spend a minute on the secondary market on page 25, which, as you all know, has historically been an important part of our story, but we've deemphasized that as we've held more loans on balance sheet.

As Brett wrote about in the CFO highlights, as the world turned upside down at the end of the first quarter, we elected to sell incremental loans to enhance our capital and liquidity. The market, as you can see, was stressed for a brief period at the end of last quarter, and you saw the depressed prices for our sales in Q1. Some of those sales carried over into the beginning of Q2. So we continue to realize that lower pricing on our combined sales in the second quarter.

We also had a bit of a different mix of loans we sold with a larger percentage of USDA and slightly lower prices. Since the lows [ph] at the beginning of the second quarter though, we've seen a strong recovery in the market, consistent with most all liquid credit markets, and we're now seeing sales prices back to where they were pre pandemic.

While we sold a bit more than our target SBA in the first half of the year, we expect to return back to our stated targets of selling roughly a third of our SBA production and all of our USDA paper going forward.

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

While we do not expect to see total asset growth for a while, as the PPP runs off, our balance sheet composition will shift, as core loans replace PPP and excess liquidity, which will drive up our NIM and drive down our efficiency ratio. Deposit pricing over the next four quarters will add significantly the bottom line and our expense base feels very sustainable. Once we collectively make it to the other side of this pandemic, we expect credit costs to normalize, driving higher profitability, and returns.

So wrapping up on page 27. Last quarter, we talked about our key areas of focus, which are people and their safety, our customers and their safety and our communities. Those haven't changed. But as Chip mentioned, we've drilled a bit deeper into our customers in the second quarter, as we focused on four pillars of supporting them and assessing their relative strengths and how - and their liquidity, the PPP program, new capital and opportunities there, and the last being delivering technology based products and services.

So I'll wrap up with a few thoughts on that. As we work towards delivering these new products on new technology platforms. Never as a combination of technology and human touch, then it's critical in banking as it is with small businesses today. Running a small business has always been challenging, and even more so today.

Now more than ever, they need simple products, purposely designed to help them manage their finances and run their businesses. But as we discovered during the PPP process, they also need someone they can reach out and connect with when they help in device. The intersection of these two, great customer service and great technologies, is what drives us every day.

What we set out to accomplish as a daunting task, as Chip talked about, which is to change the infrastructure of the banking industry. To do that, we continue to work with a group of best-in-class partners like nCino, Finxact, Apiture, Payrailz and others, with a laser focus on building the bank of the future.

As of today, we're live on a Finxact core, not only with PPP loans, but we've opened our first savings accounts, loans and deposits in production on a next generation platform. Next up for us is a best-in-class business checking account, with a goal of being able to deliver low cost deposits and payment solutions at scale. It's been a long journey, but one that we're confident is going to be worth the effort.

One final note, before we turn it over questions, you may notice a bit of a different look and feel from Live Oak as we rolled out new branding this past quarter. Importantly, we aligned ourselves around our purpose, dedicated to the doers. We recognize that small business owners are unique, resilient group and they're being uniquely tested in this environment.

In many ways, they remain the backbone of our economy. They're truly the doers that we serve. And now more than ever, our focus will be on them. Chip, anything else or you want to open for question.

[Chip Mahan, Chairman and CEO]

That's it. Let's listen.

[Operator]

[Operator Instructions] Your first question comes from the line of Jennifer Demba with SunTrust.

[Jennifer Demba, SunTrust]

Good morning.

[Chip Mahan, Chairman and CEO]

Morning, Jennifer.

[Jennifer Demba, SunTrust]

Hi, your commentary was really, really helpful. And I have some questions on a few topics. I guess I'll start with credit. In slide seven, you outlined what you feel are the higher risk industries right now, relative to the pandemic challenges, wondering if Chip you could go down the line of those industries and tell us what you're seeing from your clients in those industries, much like you did for the other grouping at the top of the call?

[Chip Mahan, Chairman and CEO]

So Steve is going to help me with this. So we have a $12 million – I’ll start from the bottom, we have $12 million exposure in quick service restaurants, about $4 million of that happens to be one business on the West Coast. It's a breakfast outfit that had $4 million worth of EBITDA last year. Totally shut down now. Those businesses are trading out at about 15 times EBITDA, so a very viable business, no matter what it takes to get to the other side with someone like that, we're going to be there to help and we just don't know what government programs there will be available.

In fitness centers, specifically the larger customers are doing just fine. I mean, they're doing everyday stuff like wiping things down. It's really state-by-state, Steve on that one, on who's open and who's not. Steve, you be better off talking about hotels. I can talk a little bit more about [indiscernible] that I’ve already touched on. Why don't you take the hotels more specifically and the WBC or the - and the FEC?

[Steve Smits, Chief Credit Officer]

Certainly, Yeah, I touched on hotels a little bit. So we are fortunate in that a good bit of our portfolio, you know, our loan to value real estate secured first position, so we have some cushion. The tertiary market projects are doing - actually seen some improvement in occupancy. So again, that's positive. We do have a handful of projects that are going to be a long road to recovery. They're, you know, more full service in nature, events have been cancelled, which is a big component to their revenue.

It's going to be a long road. I mentioned that I not anticipating huge losses, but I do anticipate needing to continue to look for accommodations in order to help them through the other side. Again, huge unknown. They're beholden to restrictions that the government puts out there, depending on how COVID plays itself out. But they seem to be focused on trying to work themselves through to the other end, but you may see some noise as we get to that side.

The winding – do you want me to touch on…

[Chip Mahan, Chairman and CEO]

FEC.

[Steve Smits, Chief Credit Officer]

FEC? Yes. So family entertainment centers, this is truly an impacted industry.

[Chip Mahan, Chairman and CEO]

Yeah.

[Steve Smits, Chief Credit Officer]

It truly is. And this is going to be definitely a challenge for us. They are experiencing stress due to continued restrictions and limitations to what they you know - what – when they can be open and how many folks can be in from the extreme of trampoline parks, for example, that are you know, the question becomes what will customer behavior be going forward even after this, then we're going to have.

Now most of these, though are, you know, government guaranteed loan facilities, we are putting a qualitative mark against this industry to reserve appropriately due to the unknown. But this is going to be one that's going to require some work out. Some of our larger ones are well positioned. They've got some resources. And yeah, they'll start to do well…

[Chip Mahan, Chairman and CEO]

And I just think in the interest of time, Jennifer, let me just say it this way, if when I went over every one of these with every vertical the last 72 hours, not only in the room with the people that originated the loan, the people that serviced the loan over there. And then our special assets group, when in fact, they were involved were in the room.

And the special assets people I mean, you talked about a glass half empty kind of group of folks. I mean, it is un-freaking [ph] believable. I don't think anyone felt like that we were not properly reserved. You know, our reserve on WCB was like 3 million bucks and nobody saw that much in charge offs because the top end operators are still doing it actually. That would be our answer to that question, Jennifer.

[Jennifer Demba, SunTrust]

Okay. Huntley, you mentioned, you thought the current expense run rate was pretty sustainable. Can you give a little color there?

[Huntley Garriott, President]

Sure. So you know, our biggest line item and Brett can jump into, you know, our biggest line item being salaries and benefits. We do not see adding more people, you know, on that on that front, so that should be pretty flat. We obviously had the accrued bonus in the second quarter offset by some deferred fees for the origination. But by and large, that should be pretty constant.

You know, you look across our travel line items, our advertising line items, our branding line items, those were all down and I think we'll continue to be pretty efficient in those regards too. But Brett, any other thoughts on moving pieces on that?

[Chip Mahan, Chairman and CEO]

We must have lost Jen.

[Jennifer Demba, SunTrust]

No, I am here.

[Chip Mahan, Chairman and CEO]

Do we answer your question, Jennifer?

[Jennifer Demba, SunTrust]

Yeah, yeah. So, question for you. What, two more questions. One, you mentioned the checking account. What's the exact timing on that at this point?

[Brett Caines, CFO]

It is a day by day fight. You know, I would have thought that, you know, checking account looks like a savings account with a debit card. But all the experts tell me there's more - there's more components to that with transactions and disputes and fraud and everything else.

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

[Jennifer Demba, SunTrust]

Okay, great. And Chip I am curious what you think about this? So, you did a nice job of giving more information about the FinTech investments? Do you think this crisis, this credit crisis, this economic crisis, this economic crisis, delay some of banks investment, or does it accelerate it, as they hunker down and conserve capital?

[Chip Mahan, Chairman and CEO]

So I'm going to start and I'm going to ask Neil Underwood to chime in here. So as you know, Gene Ludwig joined us to create canopy and we have raised some $600 million from I think 37 banks?

[Brett Caines, CFO]

37.

[Chip Mahan, Chairman and CEO]

37 banks. Neil sits right next to me, Jennifer is you know, and he's on at least four or five calls a day from FinTech, FinTech companies looking for money. And thank goodness, I don't have to be on all those calls, but I am on ones where we want to invest. And it is ridiculous, the valuations of these businesses and the number of people chasing these FinTech companies.

So Neil, why don't you take a crack at the digital on slots, so to speak?

[Neil Underwood, President and Chief Operating Officer]

Yeah, I think the short answer, Jennifer, first of all, Hey, how's it going? First answer would be accelerating. And I think it's due to the fact that there's a recognition you know, mission critical workflows, digital onboarding have gotten central and in an environment like this and beyond. And so there really are really kind of a tale of to cities, those software companies that are connected to things like you know, cash registers, NCR, you know, those are probably getting a discount in terms of valuation and adoption.

However, on the other side of it, anything connected to digitally on - nCino is a great example, digitally onboarding a small business or consumer. And then all this - obviously, on the servicing side servicing and in a self service manner, are just accelerating. And the proof points out there, the public proof points happened last week with nCino, but I could say the private proof points continue, as you know, we had thought that maybe there'd be a discount to valuations companies that are connected to those mission critical workflows, it's quite the opposite.

You know, those companies are experiencing no changes, only acceleration in ACV and bookings and therefore, all the private equity money and venture money behind it is seeking to invest. We happen - on the canopy side of it, we happen to be in a really raised position because our story there is quite different than every other venture company. In that we have banks as LPs that intend to use the software and/or service.

So we are out there winning deals, you'll see them in the press here imminently from - and away from some of the best venture brands in the business.

[Chip Mahan, Chairman and CEO]

Well, I'll give you two examples. I think this is correct from memory, Neil. In the last two weeks, we looked at a $700,000 recurring revenue company. And the best names in the business in the Silicon Valley, put a $100 plus million valuation on that business. This week, we looked at another company that in January had $1 billion of annual recurring revenue - contracted recurring revenue. In June it was six and the value of that business post money was $230 million, again led by one of the most sophisticated Silicon Valley investors, the biggest names in the business. I mean, it is absurd.

[Neil Underwood, President and Chief Operating Officer]

Yeah, valuations are frothy, but the model, the sophisticated investors are doing it because they're fine paying a year ahead of revenues because these companies are also growing with triple digits. So…

[Chip Mahan, Chairman and CEO]

Correct.

[Neil Underwood, President and Chief Operating Officer]

Anyway, you got one more.

[Operator]

Your next question comes from the line of Chris Donat with Piper Sandler.

[Chris Donat, Piper Sandler]

Hi, good morning. Thanks for taking my questions. Just had two, wanted to follow up on. First on the, the slide seven the - with the COVID-19 higher risk verticals. Just want to make sure I understand what's going on to the 75% of existing borrowers who received a PPP loan. I think I missed the comment. But were those customer borrowers who sought you out or did you reach out to them through outreach? What, triggered the loan getting started there?

[Chip Mahan, Chairman and CEO]

So I'll start and Steve can help. So immediately when this thing hits, so remember, we have 45 22 [ph] year olds that collect financial statements every 90 days on for all 4200 of our customers. So we're going over budgets constantly. So when this hits, all out 24x7 calls to our customers, what do you need? What do you need? What do you need? And I think the number that sticks in my brain Steve, as we granted before, PPP, like 1288 deferrals to existing customers trying to help them out.

[Steve Smits, Chief Credit Officer]

We received - so we reached just about everybody, every folks that know us know how diligent we are about outreach. So we immediately - that's what we know, that's what we did. We had before PPP was a known, they requested deferrals. And we queued them all up, right.

When the six month payment support from the SBA, so this is really, really impactful that 60 plus percent of our portfolio is having the payment not deferred, but fully made on their behalf by the US government as part of the CARES Act. When that came in many of those 1200 that were asking for deferral said hold off, the six months may do the trick for me, I don't want this thing deferred and accrue interest if I don't need it.

So most of those actually are kind of in a holding pattern, we will consider providing them three months of support after the six months. But most of the business owners were in a position where they wanted to see if the six months will do the trick. So to be clear, that 90% of deferrals is not equal to 1200, just to be clear, but we have those queued up and that was proactive outreach.

[Chip Mahan, Chairman and CEO]

And then about 3000 of our 4200 customers did take PPP…

[Steve Smits, Chief Credit Officer]

Correct, yes. 75%.

[Chip Mahan, Chairman and CEO]

75%. That's about right. So did we answer your question, Chris?

[Chris Donat, Piper Sandler]

For the most part, it did more than I was looking for in some ways. But just on the ones who received the PPP loans. Were they reaching out to you? Or was that your outreach? That's what I was trying to get at?

[Chip Mahan, Chairman and CEO]

I think it was both. I mean, we're just in constant contact with these people from the lending officer, to the - we're in constant contact with these folks.

[Chris Donat, Piper Sandler]

Got it. So it's a dialogue that's always going on. So, yeah. Okay. And then just want to ask one question, if you can comment on anything different in the last three weeks that you've seen? You know, there's been more concerns in some states about higher, you know, Corona virus cases. So, really two forward looking things I'm looking for, if you can do it, anything, you know, quarter to date, and also if there's any commentary you might have on the proposals working their way through the house in the Senate in the White House. I know it's early on some of those.

But if we're likely to see sort of another version of PPP or kind of how are you thinking about what might come next from the federal government?

[Chip Mahan, Chairman and CEO]

Yeah, so I'll try this again. So the - in my conversation the last 72 hours with many, many, many of our folks, I would say that 85% [ph] of our folks that deal with these customers every day, feel like their customers are incredibly upbeat. I mean P&C insurance agents, multiples at all time high. I mean, I can continue to go down all 34 of them. The ones that are having challenges Steve has spoken about, and Huntley may want to – may know a little bit more about the government stuff than I do.

But I mean, we have been told by our government relations people for some time that there is across the aisle support for increasing the flagship product, the seven, eight product from a $5 million maximum to a $10 million maximum and increasing the government guarantee from 75 to 90.

I know there is - again as of last night, a lot horse trading going on. We have also heard that there may be a chance that [indiscernible] have the SBA make another six months worth of P&I payments just for SBA borrowers, which would be, you know, unbelievable for us.

But, you know, we're not going to be Chris spiking the ball on the five yard line here. You know, we've all been through this stuff before and you know, it's never over. So, you know, we'll just keep our heads down and what we do believe that something actually will happen no later than mid-August as of last night. Huntley, do you have any other data on that?

[Huntley Garriott, President]

No, I think you said it well, Chip. The other two things that we have heard a little bit about, one, could there be another version of PPP aimed at the severely distressed and most impacted businesses, so think revenue down 50%, something like that, as there's already money, you know, sort of still in the coffers of that program.

And then the second is whether or not there'll be any forgiveness, accelerated forgiveness or blanket forgiveness that is signed into legislation to help with the small balance loans. And that from an administrative perspective, obviously would go a long way for the industry. So those are the only other two pieces of stuff we've heard, but at the Chips point we’ll, you know, we’ll react once it becomes law.

[Chris Donat, Piper Sandler]

Understood. Okay. Thanks very much, gentlemen.

[Huntley Garriott, President]

Absolutely.

[Operator]

And at this time, I am showing no further questions.

[Chip Mahan, Chairman and CEO]

So, well, thanks, everyone for attending today. And what we hope is that Mike, our Head of Marketing has all of your email addresses and you will be hearing from us to open a checking account before we get together next quarter. Thank you very much for attending.

[Operator]

This concludes today's conference. You may now disconnect.