Live Oak Bancshares Inc

NYSE:LOB

Earnings Call Transcript 2020-Q4

[Operator]

Good morning ladies and gentlemen, and welcome to the Fourth Quarter 2020, Live Oak Bancshares Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Mr. Greg Seward, General Counsel, Live Oak Bancshares. You may now begin.

[Greg Seward, General Counsel]

Thank you and good morning everyone. Welcome to Live Oak's Fourth 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 and go to today's call on our event calendar for supporting materials. Our fourth 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 a 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, Chief Executive Officer]

Good morning all and thanks Greg. Huntley and I could not decide this morning whether we were more excited about unpacking the accomplishments of 2020 or more optimistic about 2021 and the new products we have to sell; so here is today’s agenda.

As always here, it starts and ends with safety and soundness. We will discuss our fortress like balance sheet and the many arrows that we have in our quiver. And yes, the Federal Government has come to the aid of Small Business America. As Steve Smits, our Chief Credit Officer likes to say, our borrowers have been kicking the can down the road and I will give you an example or two of that and how that works.

We're going to talk about real core earnings. Everyone that owns our stock is trying to figure out post this horrible COVID thing, what are Live Oak core earnings. Post PPP 1.0 Ps, post PPP 2.0 Ps, what will charge offs be? Will Live Oak release reserves, etcetera, etcetera. Many of you always ask about how our technology investments are doing and Neil will provide some color on that, and as always, Huntley will dig deep into the details of our operations and give you a glimpse into the future.

On to the next slide Micah. Of course there are highlights here, no past dues in the second quarter, no past dues in the third quarter, helpful from the subsidy from the SBA. Steve has 50 young folks that report to him that are on the phone every single day with our 4,200 customers and the jump in our watchlist ratio from about 8% to 9.5% is quite predictable.

And now to the middle of the page and our fortress like balance sheet that we/I always like to talk about. So sure, $522 million of capital and ever increasing loan loss reserve and fair value mark of another $75 million. We have $2.5 billion of unguaranteed paper. So that gives you an effective capital ratio of the exposure that we have at this bank of about 24% and boost the reserve and fair value mark to about 3% of unguaranteed paper, but wait there's more.

Our treasure chest was about flat this year at $1.7 billion. If you mark that to market its worth between $140 million and $170 million of pretax earnings, and yes, we're going to talk about our tech investments. We put up $18 million to invest in these companies today at a carrying value of $82 million, last round of financing at 155, so Tier 1 equity of 74 on just that alone. When you add all that together it's a very unusual state of a fortress like balance sheet.

Now Kay Anderson and I have been in business together for more than 30 years. She helped me start the bank and I asked her about six months ago to dedicate her life to what we essentially call the COVID 6. So in keeping with what we said in Q3 Kay, will you let the investors know how thing are going with the COVID 6.

[Kay Anderson, Senior Vice President of Emerging Markets]

Sure. As Chip mentioned, I've been tasked with keeping my finger on the pulse of what's happening with the six industries and verticals that we believe are most impacted by COVID. We started our analysis of the sixth at risk verticals by bucketing all of that typical back wide portfolio statistics and examining the characteristics of these COVID 6 vertical borrowers, which comprise about 17% of the total banks portfolio or $439 million of unguaranteed exposure.

Noteworthy here related to the six verticals is that while the category criticized and classified assets have increased slightly during Q4 as compared to Q3, classified assets have actually stabilized. The increase being almost solely attributable to borrowers who requested a second deferral due to COVID, necessitating in some cases the downgrade to risk grade five and a trip to the criticized aspect category who are on our watch list. We continue to recognize risk in the COVID 6 verticals as state and local restrictions impact these business.

Looking at non-accruals, in the hotel category there are actually three hotel borrowers on non-accrual. One suffered a fire, three hurricanes, an earthquake and now COVID. One transaction, one hotel note will likely be resolved by the end of January and one is in foreclosure.

Turning to the entertainment vertical, again there are three borrowers on non-accrual, all of which experienced some stress prior to COVID, of those the largest exposure by far has not received the Main-Street loan, as well as Other Cares Act benefits, as well positioned to come through COVID, emerge and return to profitability. This reflects the breakdown of assets held for investment by exposure and the credit reserves including fair value mark for the COVID 6, as well as the balance of the bank's portfolio.

Of note, during Q4 the majority of the hotels in our portfolio were reappraised, which somewhat impacted what you see here. On a weighted average basis the loan to value of the hotel portfolio as of the original credit approval date was about 59%. While not all of the appraisals have been completed where we are seeing 4 out of 40 I think.

The new LTV is roughly 67%, so up slightly. Those on payment deferrals and receiving subsidy payments are reflective of the Cares Act benefits received by our borrowers. As of 12/31 the total portfolio exposure on payment deferral was as you can see, about 11%. Today that number is 4%.

Back to you Chip.

[Chip Mahan, Chairman, Chief Executive Officer]

Thanks Kay. Moving on to the next slide Micah. So, since Huntley does such a wonderful job running the bank day-to-day, I've had the chance in the last 90 days to go to 22 cities, and I'm going to give you a glimpse into what's going on in small business America right here, right now.

We made a loan in one of these cities to a Bowling Lane Group, right. This is a $4 million loan. This business has been shut down all but 8 weeks since the second week in March. They received $242,000 of PPP 1.0. They got an EIDL or a disaster loan for $500,000. Today they have $65,000 in cash and $100,000 line of credit. So about four months to cover their $35,000 a month burn.

However, help is on the way. PPP 2.0 is $250,000, $250,000 and $165,000 is $415,000. So that's about 12 months to see this to the end of this vaccine; to see if this business can get back to where it was. And where it was, was a $2.5 million revenue business dropping 500 to the bottom line. And it was fun in telling the note that of the 22 leagues that these folks operate, and the eight weeks that they were up and running, they had 100% participation of their over 70 league. These folks wanted to get out of the house and back to bowling, so there is an example.

Now on the brighter side, in terms of new originations which we are also excited about, last week I went to Eugene Oak and Portland Oregon, Seattle, Denver and Houston. There were $27 million of loan on defense and we are going to get everyone, offense in 2021.

Moving on to the next slide, I would call this underpinnings of optimism slide and a dawning of a new product and just a word on the new product. So in the last several days the SBA has increased the guarantee on their 7(a) product. So 90% guarantee on $4.167 million, which covers about everything that we do, and a waiver of their fee and their fee on that would be $114,000. This gives us the ability to compete up and down the line even with conventional lenders.

So the essence of this slide, you see the last six quarters we've averaged origination about $500 million. In the last two quarters about $879 million. Very excited about year-over-year growth of originations from $2 billion to $2.7 billion, that’s a 34% increase. All the time around this place we talk about 15%, whether its originations or EPS, a wonderful thing about 15% as it doubles every five years. So yeah, that's right, $3 billion to $3.1 billion, that's doable for 2021 and we're excited about it.

Moving on to the next slide. So here is a glimpse of originations in Q4. You'll immediately see that the $1.4 million of average unguaranteed balance per loan is a bit high for us and this was skewed a little bit about senior lending which we are getting into, senior housing, and some Main-Street loans which are one-offs and this should progress to the norm in the future.

On the right side you see what the original verticals did. Again, the doorway [ph] expert event, the pharmacies, etcetera, etcetera. So of that 808, about 332 were the original folks and then 2017 to 2020 are gaining huge momentum, almost $500 million of originations. We are very excited about our general lending group. Last year the general lending group about 18 folks throughout the country would have been a top 10 SBA lender on their own, a lot of excitement about that going forward.

You know I guess I'd call this slide, the next slide Micah the object of the exercise today, so really excited about growth in the loan portfolio. 34% year-over-year at 3.6 to 4.8, but even more exciting than that are the growth in non-GAAP pre-tax, pre-provision, excluding PPP activities from a little over $17 million in Q4 ‘19 to almost $28 million in 2020. So this is real simple math folks, you know that's over $10 million, times four for the year is $40 million. That's about $1 a share of per tax; very excited about that.

So my last slide before we turn it over to Huntley, you know Neil as I look at our technology investments, you know these folks are raising capital with the exception of aperture every 12 to 18 months and some just completed, some are in process, all the higher valuations, but my view is they are all doing well.

[Neil Underwood, President, Live Oak Bancshares]

I mean those are my words, that our venture portfolio really continues to perform. It’s super exciting in that line. It’s sort of the kind of doors so you can carry back when you go into contractors or implementation, pay rolls and defense storm signed by the [inaudible] a quarter, green light with record at December record month, average rate about $10 million. So again, I think we are excited to update you every so often, but certainly $155 million numbers is subject to change given the stock grounds that are forthcoming.

[Chip Mahan, Chairman, Chief Executive Officer]

Huntley, over to you. Take us home.

[Huntley Garriott, President, Live Oak Bank]

Thanks Chip. As we put 2020 in the rear view mirror and focus all our energy on the year ahead, you know our priorities have remained unchanged. We are still laser focused on helping our small customers navigate the remainder of this pandemic, supporting our employees and our community, providing capital to small businesses, as they help drive this economic recovery and delivering innovative technology solutions. One common effort that stands, each of the these that we are really excited about is driving more inclusive small business growths, where we’ve dedicated the team specifically to serve, underserved communities.

If you haven't had a chance yet, I’d encourage you to review Brett, CFO highlights. He does a masterful job of going through all the details. At a high level we are incredibly proud of what our team has been to accomplish in 2020 and the momentum that we carry through the fourth quarter and into ’21. As Chip mentioned, strong loan origination and our strategy of holding more loans on balance sheet drove core loan growth ex-PPP at 7% linked quarter and 34% year-over-year.

The guaranteed loan portfolios as Chip mentioned was flat quarter-over-quarter as we pulled forward a significant amount of those loans eligible for sale in the third quarter give the SBA subsidy program. But we still managed to grow that portfolio of 80% year-over-year. Our balance sheet remains strong and well equipped to continue to provide capital to our small businesses as they grow.

On the earnings side, the biggest contributor remains our loan originations as Chip discussed. Second half of the year we’ve originated about 1000 loans, totaling $1.75 billion, that’s exclusive of the PPP that's spread across the nation and verticals as Chip mentioned. Small Business America has proven themselves to be incredibly resilient through this pandemic and overall optimistic. We are proud to have been able to serve as many as we did last year.

The loan origination coupled with our efficient deposit model drove net interest income growth up over 20% to the prior quarter even adjusting for PPP of about 16%.

Our flexible balance sheet funding model allowed us to regain much of the margin declined we faced with the rate cuts from earlier this year, expenses are up this quarter, mostly predictable as we return to a bit more of a normal operating environment and we’ll cover that in a couple of slides. And all that drove the number that we look at as core profitability, the mouthful that Chip mention of our adjust pretax, pre-provision income, to about $28 million in the quarter, which is a 4% increase from last quarter and a 60% increase year-over-year.

So we know we don't make it easy for you all to track our core profitability. In this quarter we have a couple of items that warrant discussion. You can see them listed here on Page 16. First and most material was divesting of a series of market based restrictive stock units, which is a function of the increase in our stock price through the quarter. Follow that by the impact of the c-Corp conversion by Apiture, which is associated with their total of $30 million of capital raise in the back half of the year and then the ongoing impact of our PPP activities.

I want to spend a minute on the market RSU. On page 17 we go through some details. As we previously disclosed, the total of $3.1 million of these restricted stock units that were held by employees, with latter vesting based on stock price triggers between $34 and $55. In the fourth quarter $2.5 million of those satisfied that required training levels and that subsequently since the start of the year another $200,000 have vested, leaving just shy of $400,000 remain.

From a financial perspective, there's an increase in salary expense with the acceleration of the remaining unrecognized income and the associated payroll tax. Inversely there's an income tax benefit derived from the value of the delivered stock relative to the amount estimated for book purposes. And you can see those numbers here.

In addition, as we net settled those shares on behalf of our employees, we have a cash and equity reduction as well; all-in-all a modest reduction in book value and the issuance of about 1.4 million shares. After divesting in the first quarter we have a little less 15% of these original RSUs remaining and we’ve replaced this market based RSUs over the last couple years with issuance of time vested, so they should be a little more predictable on the balance sheet and income statement.

Returning to PPP, of the $1.75 billion that we originated, we have about $1.5 billion remaining, drove about $15 million of earnings in the quarter as we continue to recognize those earning through amortization and forgiveness.

Forgiveness accelerated a little bit to start the year, but then it took a bit of a pause with the new documentation run rate requirement and then concurrent launch of the new PPP program that we’ll talk about.

So as Chip mentioned, new stimulus bill came in to pass at the end of the year which funded almost $300 billion of additional into the PPP program. That reopened the original program and also introduced a second draw for small businesses with more than 25% revenue decline. We've been actively focused to support our small business customers in that program and have about 3,000 applications currently in flight.

Separately as Chip mentioned, the bill also made some significant enhancements to the SBAs flagship programs, namely the 7(a) and the 504 and the 7(a) guarantee increases from 75% to 90% fee waivers, both to the lender – to the borrower and the lender, and then additional subsidies which you can see on this chart. A little complicated based on the origination date, but provide more payments up to a max of $9,000 a month, which will affect the majority of our portfolio and give them additional support for between three and up to eight more months. So we are really excited about what that is going to do for our origination volume pipelines.

Putting all these pieces together on page 20, this is the details of our core earnings. There’s obviously a lot going on here, but it's really the way we think about the core earnings power of the bank. Adjusting for PPP which we talked about, some of the unusual event that we mentioned, we calculate that non-GAAP, per-tax, pre-provision earnings number of $28 million in the quarter, and that's year-over-year a 40% increase despite 150 basis point rate cut.

We mentioned those three large adjustments. Aside from that we've got the provision that we continue to feel really good about the performance of our loans. We’ll remain pretty conservative until we come though the other side of this virus. We've got the usual mark-to-market items which were down a little more than usual, partially as a meaner version from the third quarter as prepayments jumped up a bit post the SBAs first round of subsidies and then a little dip in the secondary market at the end of the year as the [inaudible] program expires. But overall, this is really the metric that we look at, the growth that we drive here from an earnings perspective.

Let’s go to ’21; just one more look at the growth of our loan portfolio, and how that drives net interest income; really nice trajectory over the last eight quarters of core loan growth. You know Chip talked about origination franchise, pipeline remained consistently high and broadly across our core small business, across the core renewable energy platform and then really throughout the bank.

We mentioned the guaranteed eligible for sale portfolio and that was flat quarter-over-quarter sitting at about $1.7 billion. You know we really do like the way that those guaranteed assets sit on our balance sheet. They provide us with not only earnings, but contingent capital and liquidity. For the year our loan sales were a little bit lower our stated targets of selling 35% of the SBA. So we ended up retaining about 70% and then we sold about 20 – we retained about 20% of our USDA loans.

We fell heavily in the beginning of the year as we position the balance sheet defensively and then we really made up for that with the outstanding loan production at the back half of the year. Going forward we still think that 35% hold on 7(a) is about the right level and we’ll sell most of the USDA production as those are typically longer fixed rates.

So a couple of comments on expenses. Our operating non-interest expense, we tag at about $48 million, the largest adjustment being of those salary payroll taxes from the market RSUs. Your Q3 expenses were unusually low. We talked about it a bit last quarter, and as we got back in a more normal operating environment, travel and marketing picked back up and we also invested into resources at the end of the year to support our growth, including salaries and technology and professional services.

And we expect to generate significant operating leverage throughout 2021 with continued growth and we’ll invest more in the franchise to try to keep our expenses, you know sort of well below the growth level in our earnings.

The other thing we expect is that we’ll return to some of the renewable energy tax investing that we've done in the past. That will show up in the non-interest expense line item, but it will be more than offset in the tax line to the extent that we do that.

Our deposit model continues to be a huge driver of value for us in this current environment. The market remains liquid and competition rational. Our rates have come down significantly with interest rates and our current products pricing between 60 and 65 basis points. Customers across the industry are increasingly transacting digitally and our service model is perfectly equipped to deal with remote operations.

The model also allows a great deal of balance sheet control. Total retail deposits ended the year at $4.3 billion. We bought 62,000 accounts. That's up substantially from a year ago, but it’s flat this quarter and that was intentional as we were reinvesting except liquidity. We also you can see increased the mix of our portfolio, so our savings balances are now up to about 50% of our book and that's well up from close to a third a couple of years ago. So we really like the mix. As you can see, 7 basis point of non-interest cost to funds. We think that the blended cost of this is incredibly competitive relative to funding in the industry.

So our CD book continues to roll down the curve with almost $2 billion maturing or re-pricing this year. All-in-all at current market rate that should generate an additional $25 million of annual net interest income from this continued effect this year. So we are really excited about that as well.

On page 26, that re-pricing along with the continued appointment of rate of liquidity led to significant margin expansion in the quarter; margin recovered 56 basis points to 3.33%. We've got most of the way back from what we lost from the market decline or the interest rate declines in the beginning of the year.

The margin and trend continue to look favorable as we head into this year. We should be above 3.5 by the back half of the year after the majority of the positive re-pricing has happened in the first half of the year; and even though we anticipate a little more competition on the lending side, overall we've been really pleased with our ability to maintain our loan yields.

So the loan growth has allowed our liquidity levels to return to pre-COVID levels. They probably have a bit more room to run there given the amount of liquid assets, and guaranteed assets on our balance sheet. But we're really pleased with the ability to deploy that cash that we raised in the first part of the year quickly as we did.

All that leads to a balance sheet that as Chip mentioned feels very fortress like, with over half of our asset guaranteed by the government and that's not including PPP. We feel really good about our capital and our liquidity position.

The one capital ratio we paid the most attention to remains our leverage ratio given the amount of government guaranteed assets we have, and that dropped at the beginning of the year with PPP and the excess liquidity. We built it back up a bit in the third quarter. The RSU vesting lowered that leverage ratio back almost about 50 basis points and while we had planned to be closer to 9% by the end of the year, we ended up relatively flat from a third quarter, side tracked that about 8.5, maybe a bit more as we head into next year, but feel really solid about that and where we stand overall from a capital perspective.

Just quickly on page 29, each quarter we share our progress towards the metric that we consider to be high performing in the banking industry and if you sort of overlay that with the growth that we're seeing, we think leads to a really, really attractive story. We’ll continue to improve that core profitability each quarter and share these with you.

We’ve spoken a lot about our technology platform. We're pleased that we're live in production on our new core Finxact and Apiture and the rest of our partners and we're closing in on almost 1,000 deposit account on the system as we sit here today. You combine that with the over 11,000 PPP loans and counting and we're confident with what we've built and the flexibility that it provides to serve our customers. And yes, we do have a limited number of checking accounts that are in production.

Took another brief detour at the beginning of this year to tackle the new PPP program and then we'll get back to rolling out some pretty exciting enhancements to that product that will make it more attractive to small businesses and we are really ready to start scaling it into the market.

Looking forward, we are well aware of the rate of change that’s taking place in financial services. I think we're really well positioned to capitalize on what we see as a convergence of banking and FinTech. We know our small businesses inside and out. We are staying laser focused on them every day. We know the industries that they operate in and the specific challenges that they face.

We’ve served these small businesses for over a decade by providing the most complicated financial products available, the 7(a) SBA loan program. And we have a Next Gen technology platform that was going to allow us to expand these products and deliver a really unique customer experience. We think that at the end of the day small businesses need a few key elements in their banking relationships shown in the middle of page 31: Better way to move money, easier access to capital, consolidated account management, information for the business owner, not necessarily their accountants, and a modern digital experience, and all of that with someone that understands them and is viable to help them when they need it and that’s exactly how we design our business model.

As we go forward, our roadmap revolves around products and solutions designed specifically to satisfy those core elements. Better payment tools, rapid small dollar lending, actionable data insights and integrations with key partners in specific vertical.

We truly believe the future of banking or marry our traditional lending capabilities with the technology driven solutions, and all of that could further support small businesses. We've got a ton of momentum in our core business that feels really great, and we're equally as excited about what's to come.

Chip, anything else before we open up to questions.

[Chip Mahan, Chairman, Chief Executive Officer]

Let’s go to Q&A.

[Operator]

[Operator Instructions] Your first question comes from Jennifer Demba with Truist Securities. You may ask your question.

[Jennifer Demba, Truist Securities]

Good morning.

[Chip Mahan, Chairman, Chief Executive Officer]

Good morning Jennifer.

[Jennifer Demba, Truist Securities]

There was a lot of noise in the fourth quarter results. So thank you for going over everything so comprehensively.

So let's talk about what – you know it sounds like your demand is still pretty healthy, but you're expecting a bit more lending competition this year. Just curious as to what kind of origination volume you think is possible in ‘21 and is hiring still a possibility for this year and how many people did you hire last year? Thanks.

[Chip Mahan, Chairman, Chief Executive Officer]

I'll take the front end of that and Huntley you can take the back end. So we feel real good Jennifer, about $3 billion to $3.1 billion for next year. We have seen some banks sit on the sidelines, not many people are traveling. As I indicated in my comments, we are out there all-day every day, you know masks on, sometimes it's at FBOs, sometimes it’s at the company's place of business, but we see – I see the demand coming back just like the bowling that I told you about, the bowling life cycle. People seem to be so excited on what's going to happen with the other side, but the clean-up demand is going to be absolutely there. Relative to hiring, $3 billion to $3.1 billion with the team on the field.

Huntley, you can comment on Jennifer's last question.

[Huntley Garriott, President, Live Oak Bank]

Sure, so our headcount was roughly flat for the first half of the year, through all of that you know sort of turbulence. We ended up hiring a bit in the back end of the year, but not much on the front end of the lending side. You know to Chip’s point, we think that team is largely on the field. There’s a few spots on that side, we're going to add a couple in the renewable energy space. We think there’s a lot of exciting stuff there, a couple more generalists as we continue to find sort of the best in the field there and then putting a few more younger people off in teams to help expand some footprint.

But the lending side is largely we think in place. You know in terms of the rest of the franchise, we’ll probably end up growing at about 10% overall as you think about what we need to support that kind of production and that kind of growth. So you know if the balance sheet’s growing 20%-plus, you know the number of customers that we are servicing, we just got to keep up with that across some of the functions, whether it's the serving and closing teams like that.

So I think 10% core headcount growth this year is a pretty good number I think to peg, but it will largely be more in some of the support function than it will be you know kind of in the front line.

[Jennifer Demba, Truist Securities]

Okay and Brett, Huntley mentioned you guys think, with more deposit re-pricing your NIM can reach 350-ish later this year, second half. Can you give us a little more color there on what you guys are thinking of the net interest margin?

[Brett Caines, Chief Financial Officer]

Yes, sure. You know I would probably reiterate what Huntley said. You know we feel good that we can maintain our – a lot of our rate offering on our lending products as we are seeing our existing deposit portfolio to continue to re-price down. I think for 2021 you are looking at 3.5 and then you know maybe some potential upside to that number, maybe a little upside from PPP as well.

[Jennifer Demba, Truist Securities]

Okay and Chip you said you visited a bunch of markets in the last few months, and you’re encouraged by the trend you're seeing. What prompted you to kind of get out there and do the math visit.

[Chip Mahan, Chairman, Chief Executive Officer]

What’s the math visit? [Inaudible].

Look Huntley, does – Jennifer, you've been down here right? Huntley does a great job running the bank; 5,000 meetings a day. I'd like to go see customers and know what's going on out there. So Kay and her colleagues and Steve and his colleagues have been powering on with me and we’re usually gone two to three days a week, to mainly understand what the risks are in the COVID 6, but recently trying to get new business, particularly some conventional loans that we’re working on, potentially some very, very large USDA loans in the energy division.

[Jennifer Demba, Truist Securities]

Got you. Brett, what do you think about the tax rate this year?

[Brett Caines, Chief Financial Officer]

Yes, as Huntley mentioned, we are looking at some notable energy tax equity investments, so we think we’ll have some success there and that will lower our base effective tax rate. It won’t be lower than 2020 considering the big impact we had from market price issues, but you know running at an effective tax rate around 25, you know that's probably something in the mid teen, mid-to-high teens most likely.

[Jennifer Demba, Truist Securities]

Okay. Do you think you can still grow PPNR this year, ex-PPP loans?

[Chip Mahan, Chairman, Chief Executive Officer]

Absolutely! Yeah, sure.

[Jennifer Demba, Truist Securities]

Okay. It sounds like you can hold expenses certainly below revenue growth. Okay, I’ll let someone else go. Thank you.

[Chip Mahan, Chairman, Chief Executive Officer]

Thanks Jennifer.

[Operator]

Your next question comes from the line of Ammar Samma with Raymond James. You may now ask your question.

[Ammar Samma, Raymond James]

Hey, good morning everyone.

[Chip Mahan, Chairman, Chief Executive Officer]

Good morning, Ammar.

[Ammar Samma, Raymond James]

Hey, so the first question is a follow-up on Finxact. I believe we talked in the past about the pilot program being rolled out here in early ’21. Saw the deposit update from you guys. Is there any update as far as adoption from other banks or just the overall outlook for that product line here in ’21?

[Neil Underwood, President, Live Oak Bancshares]

Hey, so this is Neil here. Yeah, so I think the pipeline of Finxact looks quite robust. They are in the process actually of a raise and that's one of the upper hands that I was referring to and much of the upper hand is due to regional and super regional banks committing both contractually now and is in some places implementation, and actually there's probably a pretty large overlap between some of the Canopy LP's and some of those banks that are selected in implementing.

[Brett Caines, Chief Financial Officer]

Yeah, and Ammar for us you know at the bank, I think we continue to March along. You know for us it becomes a general availability checking, when are we ready to blast that out broadly. The conversion of our existing 50,000 deposit customers which will happen middle of this year, and then we move to the broader loan suites beyond the PPP loan to the rest of our loan.

So you know we will hit these sort of in these stages and just continue you know to make more progress and move more, because the magic of this for us is when we have that singular view of the customer, that single ability to create new products, to embed our financing and our products into partnerships. That's what I think is really exciting, that sort of conversion, so you know loan deposit, onboarding and servicing in different servicing channels.

[Ammar Samma, Raymond James]

Okay, very good. And then on overall FinTech, have you all done any research or work in the digital asset or cryptocurrency space, and if so, what are your thoughts there?

[Chip Mahan, Chairman, Chief Executive Officer]

We have indeed. I think it's one of the initiatives, major initiatives for Canopy, that presentation for a really neat program, [inaudible] that you’ll probably hear about you know ready, and other firms that are really focused, not necessarily on crypto themselves or perhaps enabling banks to be a custodian or to offer you know crypto to their end customers, and so you know it's something that we're leaning into pretty heavily.

[Ammar Samma, Raymond James]

Okay, thank you. And then one last question for me on the core bank, the reserve plus mark as a percentage of unguaranteed exposure was up a little bit this quarter, back at that 3% number. Just give me your commentary, how should we expect this number to trend in 2021 and where does it stabilize in a “normal environment.” Thank guys.

[Chip Mahan, Chairman, Chief Executive Officer]

I'm going to ask Steve Smits, our Chief Credit Officer to comment on that.

[Steve Smits, Chief Credit Officer]

So Ammar, good morning. This is Steve Smits, your Credit Officer. So I would say I have a great deal of confidence in our methodology. I also am cautiously optimistic with how our businesses are going to fare throughout 2021. The reality is there still remains some degree of uncertainty. I will say I have confidence in our underwriting, which provides a strong foundation for our businesses to weather storms. I have confidence in our servicing support.

We had Kay speak to you all today to showcase our commitment to servicing. We’ve put resources and people and processes to be in front of them. I have confidence in the government intervention. It appears to be working. You know Chip mentioned it tends to push things to the right; however, that is precisely what most of these businesses need.

If you look at the bowling alley as a good example, that's exactly what they needed. So while there is some degree of uncertainty of how they will fare, we have confidence that everything that we're doing, combined with the intervention and help from the government appears to be working.

So I will kind of say that I expect our provisioning in our model and our allowance to track fairly consistent with how the economy does in 2021.

[Ammar Samma, Raymond James]

That’s it for me guys. Thanks for taking my questions.

[Chip Mahan, Chairman, Chief Executive Officer]

Thanks Ammar.

[Operator]

Your next question comes from the line of Michael Perito with KBW. You may now ask your question.

[Michael Perito, KBW]

Hey, good morning everybody.

[Chip Mahan, Chairman, Chief Executive Officer]

Good morning Michael.

[Michael Perito, KBW]

Well I’d like just to start on slide 19 for a second here. Two questions, I guess one on the left hand side. When we think about some of the changes from the SBA program, I mean is in terms of the fees waived for the borrower, is it the right way to think about that, you know in terms of just making this product even more attractive and potentially you know growing your pipeline even further. But there's also small fees waived for yourselves too right. Will that results in some temporary yield pop over the next six to eight months however long this program lasts or is that the right way to think about both those pieces of it.

[Chip Mahan, Chairman, Chief Executive Officer]

Steve, that’s about 55 bips, isn’t it?

[Steve Smits, Chief Credit Officer]

Correct.

[Chip Mahan, Chairman, Chief Executive Officer]

Yeah, so we get to pick that up as well. And you know that again was another arrow in the quiver for the sales guys, right. I mean we don't want to give that away, but yes, yes to all the above.

[Michael Perito, KBW]

Okay. And in terms of the second, you know I guess technically the third round of PPP here. I mean you guys said 3,000 applications. Any initial ball park of kind of what that could look like? I mean are we talking like $750 million, $1 billion type volume, a little lower, a little higher; any kind of early indications of what that might look like in a range?

[Huntley Garriott, President, Live Oak Bank]

Yeah, that's a good question Mike. You know we originally thought that number would be north of 50% of our initial production. Over the last couple of weeks I think we tempered that a little bit and so you know somewhere between 30% to 50% of our initial production, so $500 million to $700 million-ish of volume feels about right, but it’s interesting because you know there was a mad rush a year ago, and I think people are a little bit more calm in terms of how they are approaching this. It was unclear if we were seeing that volume that we’re going to see or if it’s just going to keep trickling in for another handful of weeks or months, so we’ll see.

[Michael Perito, KBW]

So, it’s fair that and just given the kind of the timelines and structure of the – this round of the program though, I mean the loan sizes are likely smaller on those 3,000 applications. Is that fair or you’re not seeing much difference?

[Huntley Garriott, President, Live Oak Bank]

Well, so you’ve eliminated the large loans, right. You know the cap is $2 million not $10 m, so you’ve eliminated definitionally some of those large loans, although those were the less fee, you know it had a lower fee on them. But you know our average balance is running a little lower than the first round, but they are roughly the same size transactions as they were a year ago for the most part. People’s second draw is pretty much the same as the first draw, with the exception of some of those largest loans, which we didn’t do a whole lot of anyway.

[Michael Perito, KBW]

Right, understood. And then Mike… [Crosstalk] yes sorry, go ahead.

[Brett Caines, Chief Financial Officer]

Sorry Mike, this is Brett. One point of clarification; the 50,000 basis point on the SBA loans, you framed the question as ‘did that benefit yield?’ and from a reporting perspective that actually – it will not be reflected in non-interest expense for those loans. The 50,000 basis points is not an interest income or yield item.

[Michael Perito, KBW]

I got it, so it’s a temporary, you know maybe it’s a two quarter little slight relief on expense essentially until it goes away or presumably.

[Brett Caines, Chief Financial Officer]

It actually carries forward on those – on all the loans that are originated in that window, it’ll carry forward for the [inaudible].

[Michael Perito, KBW]

Alright helpful, thank you for that clarification. A couple of other things I want to hit, one on the deposit growth. Just curious if you guys have any more feedback you can share about, you know the new accounts, business accounts that you guys have launched and you know what maybe kind of targeted customer you had success with growing that account and kind of how you view the roll out of that product set moving into 2021 and if there is any kind of range bound or early indications you can give us in terms of kind of the deposit mix and how it could start to shift, that would be helpful?

[Brett Caines, Chief Financial Officer]

Sure, so you know the existing success we’ve had is our traditional platform and so those are businesses with excess cash that are you know depositing on the business savings the CD side, and there is some overlap with our core customer base, but not an extensive amount.

You know the new product that we are rolling out, this sort of operating account, checking account is where we really plan to focus on our existing customer base and that's when we'll start to shift this mix. You know saw the mix go to 50/50 saving CDs roughly and start to you know bring in those non-interest bearing checking account into the mix and again, I think it will be a relatively slow. You know our customer base are not massive dollar balances by and large, although there are some areas we're looking at where we might be able to pick up some larger balances.

But you know I think we're a little early still to pick a target in terms of that mix. You know at cruse altitude could we be a third, you know a checking and then a third saving CDs, that would be great. It will take us a bit of time to get there.

[Chip Mahan, Chairman, Chief Executive Officer]

And you know.

[Michael Perito, KBW]

You guys feel – sorry, go ahead Chip.

[Chip Mahan, Chairman, Chief Executive Officer]

Sorry Mike, and Neil and Huntley and I talk about this all the time, right. So I was looking at Affirm and Charm [ph] yesterday and the day before and you know Affirm’s market cap is $25 billion. They have 1,200 employees; they did $500 million in revenue and lost $100 million. And then I looked up Fifth Third the other day. They did $8 billion of revenues and they too have been around since 1858, and they were $20 billion. And then you look at Charm, and you get prepaid or point of sale in the firm that you know a lot. They have built a beautiful interface on a purpose built core for their customers, and that's what Finxact allows us to do.

Huntley touched on it but that’s what’s so much fun in dealing with our customers face to face and seeing what do you need to operate your business, all the way top to bottom, from payroll to this to that and as this matures and we continue to pilot the Finxact Core then you are going to see more product innovation from us across all verticals.

[Michael Perito, KBW]

Yeah, makes sense, that’s great. And then just, if I could sneak last one in here. On slide 31, on the right hand side you guys mentioned a few things talking about kind of tomorrow for Live Oak and I guess the one, the channel partnerships, I mean is it fair to think of that within kind of that embedded finance angle that you guys have kind of touched upon in the past and if so, you know any thought, you know I mean Chip you’ve kind of probably placed some of the products and things that you were just talking about, but you know any thought in terms of when we can start to see that initiative take hold it you know in terms of the company's overall growth rate.

[Huntley Garriott, President, Live Oak Bank]

So, you're exactly right Mike. It is exactly that embedded finance and we are having a bunch of great discussions with partners channel in different verticals, you know enterprise software and the like. I think this year, really getting our existing product set that we can deliver through those channel. Maybe by the back end we start to get some partnerships on board and then we think it's really going to move the needle next year in terms of when we are really going to start to see the impacts run through the P&L.

[Michael Perito, KBW]

And is that something you guys plan on kind of – it might be a stupid question, but in terms of the partnerships as they kind of come to fruition, is that something you guys plan on kind of announcing to the market and keeping us updated on or it will be more just like quarterly, you know broader updates about the growth of the channel partnerships in general.

[Chip Mahan, Chairman, Chief Executive Officer]

I think the answer is yes, if they'll let us.

[Huntley Garriott, President, Live Oak Bank]

Yeah we like to enter, we do. Yeah.

[Michael Perito, KBW]

Okay, excellent guys! Thank you for taking my questions, I appreciate it.

[Chip Mahan, Chairman, Chief Executive Officer]

Thanks Michael.

[Operator]

Your next question comes from the line of Chris Donat with Piper Sandler. You may now ask your question.

[Chris Donat, Piper Sandler]

Thanks, good morning everyone. Just two I wanted to ask here. One is on deposit pricing. I think Huntley you commented that it’s been rational so far. I'm wondering, as you think about your competitors on the deposit side, what is your outlook for 2021, because it seems to me like there's a lot of banks sitting on excess deposits, so they're probably not going to put much pressure on.

You got some credit card companies talking about some, like tentatively talking about growth and they're typically big payers on deposits. I'm just wondering do you feel pretty confident about the rational state of the market being there or is there even some possibility of some lower deposit pricing going forward given the excess deposits at many institutions.

[Huntley Garriott, President, Live Oak Bank]

Yeah, we feel good as we sit here right now. There is as you said a ton of deposit in the financial system right now, interest rate feel like they are going to be ranged down to zero for the foreseeable future and you know the big banks as you mentioned, the big players in the market that we say are the same ones and you know 60 basis points of savings, 60, 65 somewhere there on the CD rates. Feels like it’s where it is in the market.

If we really hit the growth button you know we can move the needle down a little bit and if you know the market sort of stayed where it is, could we drop it a little bit, yeah, that means we are talking you know five and 10 basis points, not 25 and 50 basis point moves as we look at it.

[Chip Mahan, Chairman, Chief Executive Officer]

Well Chris, I look at that the other way, so like it is amazing to me. So I’ll look back and I’ll look at the big four and what they pay on interest bearing deposits in Q4, it’s all 4 or 5 bips on all interest bearing deposits. Most every one of them, money market accounts one bip, okay. So we and Goldman and Marcus and Allie were 60. So when you have these purpose built cores and FinTech companies or like we will be you know at Finxact, when you can change a checking account while you're sitting and standing in line at Chick-fil-A, why am I paying 60 basis points more than big – why do you leave your money at the big four? I fundamentally don't get it. I think that’s going to ultimately be a very leveled playing field.

[Chris Donat, Piper Sandler]

Okay, I guess related to that, I feel like you’ve seen some tentative efforts on deposit pricing more from, almost on the asset management side, some of us call them robo advisors that have used deposit pricing as a way to grow assets and it’s more of a an open banking play that they've got the access to know that someone has access deposits at place that’s earning 4 or 5 basis points and then they serve up a message on the app that says, ‘hey, you can move here and get 60’ but I imaging that’s a small thing and you are not really seeing competition from that.

[Brett Caines, Chief Financial Officer]

No, we certainly haven't seen any. There certainly is you know customer acquisition you know sort of plays that are going on and then there are companies that have very different sort of goals in terms of profitability and targets and things like that, that can do things for typically shorter periods of time. But the vast majority of the market is staying, is putting the same range balance right now.

[Chris Donat, Piper Sandler]

Got it.

[Chip Mahan, Chairman, Chief Executive Officer]

We might be ones that actually go and do that. They do this with the congregation using tools like MX which we at Canopy happen to invest in Apiture as the following MX. So it’s not unlikely that Live Oak would jump out to our veterinarians and pharmacists who look to see these balance where we are getting to one basis point and bring them over to us.

[Chris Donat, Piper Sandler]

Got it, that's very interesting. And then just wanted to ask one about the, sort of the state of play for not your FinTech investments but Canopy. As we look at the proliferation of facts, does that effect on one end Canopy’s ability to make investments because these facts are bidding up the prices of potential investments for Canopy. And then on the other side is that a positive impact, likely on some of the capital raises your seeing and ultimately exit valuations for FinTech companies or do you not really think about your FinTech investment as places you really want to ever exit or exit at least in the near term.

[Chip Mahan, Chairman, Chief Executive Officer]

Yeah look, first of all you mentioned valuation, certainly they are high. However, Canopy has never been more active. Last year we placed a $170 million and with the follow-on call a $220 million. So about a third of the fund in blue chip names like Blend and you mentioned Green Light. In some cases some of those have had already up rounds, sort of double.

So we're really excited about the model and are awesome bank LP partners. It really is working. We're getting a front row seat; we’re getting a first look at many of these FinTechs. So we see that moment continuing quite frankly at Canopy and its backed. I think they’ve done their job in just accelerating the excitement around this, and it’s not similar. We’ve looked back relative to life cycles, the level of interest of the companies as well as our Canopy company, so there may be a scenario where we leverage this back as a tool, but right now we see it as net positive.

[Chris Donat, Piper Sandler]

Got it. Okay, thanks very much.

[Operator]

I'm showing no further questions at this time. I would now like to turn the conference back to Chip Mahan.

[Chip Mahan, Chairman, Chief Executive Officer]

We appreciate everyone that attended us this time and we look forward as always to seeing you in 90 days from now.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.