Live Oak Bancshares, Inc. Q3 FY2020 Earnings Call

Thank you for joining us for the Quarter 3 2020 Live Oak Bancshares, Inc. Earnings Conference Call. I will now turn it over to your speaker today, Greg Seward, General Counsel. Please proceed.

Thank you, and good morning, everyone. Welcome to Live Oak's Third Quarter 2020 Earnings Conference Call. We are webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials and commentary that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today's call on our event calendar for supporting materials. Our third quarter earnings release is also available on our website. Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of 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.

Thanks, Greg. Good morning, all. Slide 3. We are extremely excited about talking about the best quarter in our company's history. We acknowledge, as Chris Donat from Sandler Piper noted in his report this morning, that Live Oak is a complicated story. And we're going to attempt to unpack that for you now. Headlines. We're hitting on all cylinders. Margins up, originations all-time high, loan sale prices at or near all-time highs, fintech investments raising money at frothy valuations, even got a break on the servicing asset write-down and with all this production, Huntley was able to keep expenses in check. What could possibly go wrong? Everyone knows that small business in America, the 28 million small businesses in America, create 66% of the new jobs, and they're struggling. Many of you that hold bank stocks are worried about the small business portfolio. The object of this exercise today is we want to create the most transparent bank in the United States relative to showing you the quality of our loan portfolio and the capital that stands behind it. So let's get going. Next slide. You've seen this one before. Capital at the end of the quarter, $532 million, fair mark and loan loss reserve allowance for credit losses, it is these days of $62 million gets you to about a 26% capital ratio adjusted compared to $2.3 billion of unguaranteed paper. I'm happy to report that our guaranteed loan portfolio grew from about $1.1 billion to about $1.7 billion. And with this frothy secondary market, that is worth about $155 million pretax, to put another arrow in our quiver. I guess the third thing I'd like to show you on this slide is the past dues, like, they're not any. This had to do with the SBA subsidy in the spring, where the federal government said they were going to make P&I payments for 6 months to every SBA borrower. And then they also said that if you borrow money on or before September 25, we're going to help you out for 6 months P&I as well, which is, in some part, the reason for our frothy increase in loan originations. Lastly, I would like to point out what we call the examiner's ratio. In the last crisis, federal banking examiners looked very closely at classified assets to capital and reserves. And today, that number for us is a little over 9%. They get a wee bit fussy around 30%. So you see we have a very long runway there. So moving on to the next slide. As you know, we have 45, 22 to 30-year-old loans collect financial statements. Attempt to collect financial statements every quarter. That number as of today is 65% interim and 86% for annual financial statements. Most banks don't do that, but we do. And Steve Smith, who will probably help out later in this call, asked every one of our folks that are in touch with these customers literally every day, to call every one of them and put them in one of these categories, high, medium and low, in terms of stress. So what you see on the left is a 5.5 stress level on the whole portfolio. And then we created what we affectionately call the COVID-6, that would be the pie chart on the right. That would be our more stressful verticals, hotels, early education, family entertainment, wine and craft beverage, fitness centers and quick service restaurants. And again, the point is here, we know our customer. Moving on to the next slide, Loan Portfolio Characteristics. So what we try to do here is break out for you in an open fashion, a transparent fashion, our top 5 or big 5 verticals, that would be mainly chickens, health care is mainly dentist, veterinarian, self-storage and our general lending group, more to come on them in a minute. So compare that to the COVID-6. And I would say, effectively, the COVID-5, quick service restaurants, are doing quite well these days. And really, this is kind of case by case, right? So if you're running anything, whether it's a fitness center or a quick service restaurant in Los Angeles, trouble, New York, trouble, Michigan, trouble. It's almost state-by-state, governor by governor, mayor by mayor. So moving on to the next slide. We wanted to give you more transparency relative to our credit reserves and fair value mark on big 5 and COVID-6. And there's also data here on deferrals and those that received the SBA subsidy. The point here is that this type of data will be published each quarter. And we just don't know what we don't know, is the short of this. So for small business America, will we get more federal funding? How fast will the federal government give us the ability to forgive the $45 million in earnings we have hung up in the PPP product? Will the SBA come back and make P&I payments for our borrowers? Will the SBA do what they did in the last crisis and potentially increase the 7(a) product from $5 million into $10 million accompanied with a 90% guarantee? We just don't know. But we are going to manage this bank as if nothing happens. As always, we're going to take care of our customers. We understand if they have the eye of the tiger and they want to fight. And then some unfortunate situations, we're going to have to have tough conversations. There will be more losses. So continuing on with the credit analysis, let's look at our hotel portfolio: 39 properties, about $130 million of exposure to date, 59% occupancy. The average daily room rate in our portfolio is $116 with revenue per available room of about $74. In the minutia on the right, you can see our top 10 exposures as of today and, more importantly, see the products; the SBA 504 is prominent here along with some USDA paper. And importantly, the loan-to-value ratios you see on the right. Now let me walk you through what we did in the quarter. We had about $190 million in exposure. We put $81 million of these loans up for sale. We actually sold $55 million face amount of the note at a $5.2 million loss. We kept 5 that we didn't want to sell at those prices, and we wrote them down to the prices that we received. So the $5.2 million and the $4.7 million gets you to what Brett told you last night's right of a $9.8 million charge-off. And again, the theme here is we're going to give you this much data quarter-to-quarter on this portfolio and anything else that gets in trouble as we move forward through this crisis. Next slide. We've shown this in the past. We want to continue to highlight our geographic diversity and lack of concentration risk. And obviously, where the population is, is where we have the most exposure. You could probably take North Carolina out of that, California, Texas, Florida, New York, largest states in the United States and $212 million in exposure in our home state of North Carolina. Moving on to originations and soon profits. As you can see, take the PPP out of it, we typically do about $500 million in originations per quarter. And this time, we did almost $1 billion, and you see the granularity of that in the box up top, 7(a) was $639 million. And so the real question is, which we're not going to disclose, which is what is after this? And I will tell you that after the $1 billion in originations, our pipeline is at an all-time high. Next slide. Again, geographic diversification and lack of concentration in the $1 billion we put on the books this quarter, a little bit smaller loans this time, 46 states, $790,000 worth of exposure of unguaranteed paper. Moving on to the next slide, and this has been fun. So how did all of this happen, right? $966 million for the quarter. Clearly, the SBA subsidy had something to do with this. My guess is, Steve, 40% to 33% would probably be from the subsidy, and the rest would be from hard work and really kicking in this time where our general lenders and sponsor finance people. And certainly, the PPP basket had a lot to do with this. We did almost 12,000 PPP loans totaling $1.8 billion, and that gave us many more looks than we would have had. Moving on to the next slide. Here's a little more discussion of our general lenders and our sponsor group, right? So we built this bank until about three years ago on the theory of verticality, hire a domain expert, have that domain expert sit down with Steve and his credit guys, create a credit box, tell the sales guys go get that, because we rather think that our customers care about two things: Have I approved and when are you going to give me the money? So evidence and technology and all that workflow that allows that to happen to treat every customer like the only customer in the bank. And then we stepped outside of that and said, well, the former #1 SBA lender in the country had a lot of folks that were unhappy. And as you can see from the map on the right, we have hired a total of 19 lenders from Los Angeles to Austin, Texas, Miami, Florida to Boston, and you see these folks all over the country, making loans this quarter in 17 separate industries, totaling some $228 million. And if you go to the next slide, we are continually proud of maintaining our number one position as the top SBA lender in the country. And you can make a case that we're pulling away from the pack this year. And if, in fact, our general lenders and sponsor group, again, outside the theory of verticality, were on their own, they would be top 10 in and of themselves. Worthy of note is the tiny little note at the bottom about 7(a) program gross loan approvals per quarter, jumping to almost $8 billion. Maybe, just maybe, this will get the attention of the folks in Washington. And maybe, just maybe, we'll get a little more help as we get through this crisis from them. So my last slide is on profits and Huntley's going to really jump into before I turn it over to Neil to talk about our finance fintech investments. But we're finally here. Take this second quarter out, had a lot of noise there. We're bopping along at $17 million of pretax pre-provision in earnings, and now we're at $24 million. So finally, all those investments are kicking in. Those investments in the general lenders that I just discussed because it's just not those folks, the architect of the deal behind them, there are underwriters, closers, servicers. So all of the investments that we've made, all the money that we spent to get to this point are finally beginning to translate to the profit line. So let your mind wander on post-COVID. What is the provision going to be with all the arrows we have in our quiver? What is the tax rate going to be when we manage that in the past with our leasing income to somewhere in the mid-teens? And I think you're going to see that we're going to get to some of the things that Huntley puts in every slide at the end of the day of what is the ultimate object of the exercise. So Neil, why don't you jump in and talk about investments, and let Huntley take us home.

Sounds good. We have a couple of slides on some of the fintech investments, both in the context of Live Oak Ventures and Canopy. Chip, you've mentioned the right place, right time, right model, I'd probably add right tech to that. We are finally live with the deposits platform after 5 years in the shop. And this is really exciting because it's the new tech stack aperture of the next-gen onboarding system, Finxact, as a next-gen core, all validated, API first. Huntley is going to talk more about this, but a shout out to everyone that has been more than patient on this particular topic. Relative to Live Oak Ventures, look, we've been really excited to get some write-ups based upon some of the recent valuations. This should be seen as precious non-dilutive Tier 1 capital to the bank. When Live Oak Bank decides to upstream into the holding company and then downstream into the bank, there are some significant advantages there. The most notable this quarter, obviously, is Greenlight, where we took a $13.7 million mark to the good. If you recall, we invested $3 million in 2018 in the Series A and $2 million in 2019 in the B. And Greenlight continues to perform at record levels. As you know, these are debit cards for kids, but it's a mission-based theme, where it's really helping families with financial literacy. On to Canapi, as you guys know, Canapi is the successor of Live Oak Ventures, and it really allows us to invest at scale. I mean, given it's a $600 million fintech fund powered by banks as limited partners. We've been super busy in quarter 3 as well. And as you all know, it's a highly competitive market and evaluations are frothy. Even still, we won 3 deals against the best names in Silicon Valley. We led or co-led Alloy, Blend and Greenlight. And we go further into these at a later part, just go to our website to understand these technologies. But suffice to say, these are led by the industry's best, all bringing next-gen fintech capability to banks. And as important as the financial upside, a lot of those banks can now use these assets and be first up with the latest in fintech technology. Moving on to the next slide. This shows 6 Live Oak Ventures' companies. And as you can see, on the $18.6 million invested, the current carrying value on our books is $90 million. We feel this is conservative given the accountants and their view of how this has to sit on our books. If you actually just did the math and looked at the valuations of these companies, the most recent valuations in our ownership, I believe it's closer to about $150 million in value. We feel this is good progress, but given the growth rates of each of these companies, we do expect these numbers to grow over time. And again, just provide a precious Tier 1 non-dilutive capital to the bank, while giving us access to the latest in fintech advancements. So Huntley, over to you.

Thank you, Neil. We'll proceed to Page 19. It's been a tough year for everyone, particularly for small business owners. Despite the challenges, our approximately 600 employees at Live Oak achieved remarkable success in the third quarter, similar to our performance in the second quarter during the PPP program. Our ongoing focus has been on our customers, our staff, the communities we serve, and supporting small businesses with our personal service, capital, and technology. While we have all faced significant events this year, we are immensely proud of the dedication our team has shown, and how our commitment to our industries and brand has resonated with small businesses. I hope you've had the opportunity to review our earnings release. As Brett, our CFO, highlighted, it was a strong financial quarter overall. On pages 20 and 21, we'll break down some key figures, adjusted for PPP loans and excess liquidity to provide clearer insights into our core operations. We'll move through these swiftly and then provide more details on later slides. As Chip mentioned, our loan portfolio grew by $600 million in the quarter, thanks to our origination efforts and slower prepayment rates. Total assets were relatively stable as we effectively redeployed much of the excess liquidity accumulated earlier in the year. We saw a significant capital increase, driven by core earnings and fintech activities, with our capital ratios rising across the board. On Page 21, concerning earnings, core earnings were boosted by net interest income growth as we swapped excess liquidity for loans, and our deposit pricing decreased. Loan yields remained strong at just under 5.5%, and our margin rebounded well after the impact of rate cuts in Q2. Gains on sales improved due to a robust secondary market, allowing us to sell fewer loans while still realizing higher profits. We are also on target to hold 65% of the SBA loans available to us, even with increased sales activity early in the year. Additionally, as Chip mentioned, we've had a positive story on expenses. With travel minimized, we found innovative ways to connect with our customers and partners, leading to a substantial boost in productivity. This resulted in core pre-tax, pre-provision profitability of $24 million, which we will elaborate on shortly. Let's take a moment to discuss the PPP on Page 22. As everyone is aware, we originated just over $1.7 billion, affecting our balance sheet with an impact of about $2.6 billion at the end of the second quarter. This number has decreased as we deployed that liquidity but remains above $2 billion. From an income standpoint, we noted $13.6 million from deferred fees and interest income, counterbalanced by minor negative carry on excess liquidity. This results in a net impact of around $13 million on our income statement. We recorded about $60 million in deferred fees, with approximately $43 million still remaining on our balance sheet as of September 30, which will be recognized with forgiveness. We've made solid progress on forgiveness, with around 1,500 of 11,000 loans currently in the process. Our partners at Encino have been instrumental in enhancing our portal, which has also allowed us to advance other customer-facing technology initiatives. We anticipate beginning to see forgiveness in the fourth quarter, with the majority expected in the first half of next year. Chip mentioned that there's still significant unused funding available in the program, over $130 billion, which could benefit our customers, though predicting developments in D.C. can be challenging. On Page 23, we'll look at the adjustments made to reach the core number of $24 million mentioned earlier. We'll quickly review these items. First, you see that our stated pretax earnings increased significantly to a headline figure of $45 million. Adding the provision of $10 million, largely due to our origination growth and the sale of hotel loans mentioned by Chip, brings us to approximately $56 million in pretax, pre-provision earnings. There is still a lot to consider, but most factors in this quarter were favorable. Earlier in the year, we dealt with negative pressures around valuations and mark-to-market effects, which have either reversed or been mitigated. We recorded $1 million in expenses related to an aircraft sale, along with the referenced $13 million in fintech gains, leading to core pretax, pre-provision earnings around $23.7 million to $23.8 million. This marks a 40% increase from last year, reflecting our commitment over the past few years to strengthen our balance sheet and attain sustainable profitability. We are optimistic about continued growth potential. Turning to Page 2, Chip covered much of this already, so I'll highlight a few key points. First, the operating leverage is evident, with net interest income up 25% in the quarter and noninterest expenses down 11%, reflecting significant operating leverage. Even adjusting for the PPP impact and a special bonus from Q2, we still saw a 17% increase in net interest income with flat expenses. Secondly, Chip pointed to the increase in our guaranteed loan portfolio from $1.1 billion last quarter to $1.7 billion, more than double year-over-year. This is a strong contributor to low-risk earnings and provides a valuable source of contingent capital. Coupled with unrealized gains in our fintech portfolio, this gives us valuable flexibility from a capital perspective during uncertain times. Regarding our originations, Chip covered this well, but I want to add a couple more comments. We achieved a high level of origination without compromising credit standards, closing processes, or our business practices. We feel confident that we did not cut corners and, in some cases, even tightened our credit standards. Our borrowers' credit scores, equity injections, and debt service coverage ratios align with or exceed the overall portfolio. The originations have been skewed towards newer verticals in which we've invested over the past few years, including generalists and bioenergy community facilities, which are currently performing strongly. In contrast, we significantly reduced originations in at-risk sectors like entertainment and hotels, providing some capital to support our customers instead. Nevertheless, in the other verticals, we are encountering promising opportunities as competition diminishes, allowing us to engage with stronger customers. Chip mentioned the SBA subsidy, which supported our customers and contributed to activity in the third quarter across fully funded 7(a) loans that closed before September 25. The SBA 7(a) program is particularly suited for times like these, facilitating lending to small businesses during unpredictable periods. Our decade-long efforts to become the top SBA lender have proven fruitful, as evidenced by this quarter's performance. We are also fortunate not to face some of the challenges other banks encounter with sectors like income-producing commercial real estate, retail, or office space, enabling us to concentrate solely on small businesses without distractions. On loan sales, we noted that a decline in prepayment speeds and increased liquidity in capital markets have elevated spreads in the secondary market for both SBA and USDA products to near record highs. We appreciate the current market conditions while being selective in the assets we originate. Consequently, we chose to sell fewer loans compared to earlier in the year when we were building liquidity amidst initial uncertainty. We are now aligned with our long-term targets regarding the proportion of loans we hold. Moving on to expenses, as Chip indicated, we have a solid story despite noticeable franchise growth. In the last quarter, we accrued a $7 million bonus alongside additional deferred origination expenses. After accounting for these factors, core expenses have decreased slightly from the previous quarter. Travel and entertainment expenses have significantly dropped, while higher FDIC assessments offset some expenses. We recognize that the pace we've maintained this year is not sustainable. Our team has worked exceptionally hard to meet the once-in-a-lifetime opportunity presented by PPP loans, followed by impressive loan activity in the third quarter. We have managed this with a stable headcount, but will look to add some personnel to better balance workloads as we face ongoing opportunities and robust pipelines. If travel resumes moderately, we may see a rise in expenses, but we are pleased with our operational efficiency and will remain disciplined in that regard. Regarding deposits, our direct deposit platform has been an unsung hero, with 50,000 customers and $4 billion in retail deposits. The efficiency of this portfolio in a low-interest-rate environment is noteworthy, with us paying 60 basis points on new CDs and 70 basis points on customer savings. Deposit costs have decreased by 25 basis points this quarter, with savings rates down 100 basis points this year and CD rates down 150 basis points this year, all managed at a mere 6 basis points in allocated expenses. The CD portfolio continues to run off and will reprice—nearly $3 billion over the next year. This funding operation is impressive for this environment. We remain firmly committed to our technical strategy and are enthusiastic about our initiatives. Our approach will foster deeper customer relationships, capture transaction flows, and enhance liquidity for our customers. Additionally, almost $3 billion of retail CDs and broker CDs will reprice in the next year, contributing an anticipated $30 million in annualized pre-tax earnings, translating to 40 to 50 basis points of net interest margin just from this runoff. Examining net interest margin, we experienced a considerable decline in the second quarter due to a 100-basis-point drop in interest rates impacting our floating-rate loan book, resulting in a nearly 50-basis-point reduction on a core basis. However, we've regained almost half of that in one quarter, aided by the deposit savings previously mentioned, which should continue to provide positive momentum. On the right, you can see that while liquidity rose during the second quarter, we've effectively redeployed this liquidity, reducing our spot basis by 10 percentage points throughout the quarter. Regarding capital and liquidity, it's reassuring to have over half of our balance sheet backed by the U.S. government and held in cash. In addition to our 13% CET1 ratio and availability of excess liquidity, we feel confident in our current capital situation, which empowers us to continue supplying capital to small businesses, aligning with our daily mission. We believe our balance sheet is well-positioned, and Chip noted the strong diversification of our portfolio across government programs and various industries. With a large number of small loans, we are diligent in maintaining close communication with them to understand their statuses. Finally, on capital, Tier 1 leverage, which experienced a considerable decrease in the second quarter due to PPP and excess liquidity, has rebounded significantly, with a recovery of more than 50 basis points. We are pleased to be around the 8.50 mark. Now, let’s look at our key performance metrics for banks and our targets. As Chip mentioned, there are some one-time factors such as PPP and fintech, but on a core basis, we are progressing rapidly as a $6 billion asset bank. Core net interest margin is above 3.25 and trending upwards, fee income is strong, expense efficiency is good, and capital is consistent with expectations—showing solid performance. Before we open the floor to questions, I want to highlight the new deposit platform Neil referred to. We launched business savings and CDs on our new core system at the end of September, already acquiring nearly 200 customers and over $10 million in balances without any marketing. This allows us to open business accounts online seamlessly, which is quite rare. It includes a robust mobile app and numerous features, but this is only the beginning. With our partners at Apiture and Finxact, we have plans for new product designs, improved customer experiences, and integrations with software companies, which we believe will significantly enhance the experience for the small business owners we serve. Regarding checking accounts, our first debit card is now in production, and we will expand the pilot group in the coming weeks. Given the strength of our deposits and liquidity base, we can afford to proceed cautiously to ensure a successful rollout. You can expect a wider launch for small businesses and the conversion of our existing consumer deposit offerings early next year. We are incredibly optimistic about all we can achieve beyond our current core business. Now, let's open it up for questions.

The first question comes from Jennifer Demba.

Congratulations on a good quarter and congrats on the deposit platform. You gave a lot of good information in those slides and in your commentary. I want to start with the hotel loan sale, what brought you to do that? And will there be more sales in future periods?

Yes. Steve Smits, our Chief Credit Officer is here, and I think you can describe it best, Steve. Give that a shot.

Yes. So Jennifer, this is Steve Smits. I'll start, and certainly, Chip, you can add some additional thoughts from your perspective. To start with, clearly one of our most impacted industries. Chip talked about the COVID-6. And for us, really, it's the COVID-5. If we look at our portfolio, hotels being at the top. And really, we had to look at it as not necessarily that we were expecting to take an immediate loss. However, the administrative burden to work these loans through to the other side is a consideration that we thought about. There were certainly many of them very highly likely to go to nonaccrual before they got better. That would be an impact. And the need for us to hire additional special assets personnel to focus on this portfolio was a reality, possible dealing with litigations and bankruptcies and other things. So it was a multiyear administrative burden that we had to pair that against just taking some risk off the table so that we could focus on the rest of the portfolio. And that really was a driver in the decision, is really looking at the long-term burden to get them through to the other side and the cost to do that. And we were in a fortunate position where it made sense that we could take that off so we could focus on the rest of the portfolio.

Yes, I think that's correct. It's about both offense and defense, Jennifer. We have numerous options available in our capital strategy, so there's no reason to struggle for three years with those $55 million in loans. While we definitely would have recouped that money, it’s more advantageous to concentrate on both offense and defense. We had the capability to do this, and we will consider it again in the future if needed.

I also think that the secondary market was incredibly strong. And I think we were pleasantly surprised with the levels that we were seeing on these properties and that factored into it as well. But I think we're not actively out marketing a bunch of other assets in the portfolio, but we'll be opportunistic to manage risk, as Steve said.

Very helpful. Chip, while no one here can predict the future, do you have any idea what your net charge-off levels might look like over the next two to four quarters given the current level of economic activity?

So I'll turn that on you Jennifer. If you can tell me exactly what's going to happen in Washington, D.C. relative to what they're talking about now to help small business then we can probably tell you that. But the answer is we just don't know. I mean, I would say that are we reasonably confident that something is around the corner for Small Business America, particularly those that have been affected, have 0 revenues in some cases. I mean, I think there's probably more help on the way there. But as I said in one slide earlier, we're going to operate this bank as if there's going to be nothing else, and they will make those decisions at the time. But I just don't have a clue.

Okay. One more question, expenses. Huntley, you said probably need more staff. So what kind of expense trends should we see over the next 2 or 3 quarters? Are there full expenses coming up in terms of accruals or whatever?

Yes. I can hand it over to Brett for more details. Regarding our staffing, we are observing more loan activity than we could have anticipated at this point. Therefore, when we consider loan closures and underwriters, that's where we are seeing the requirement for additional personnel. This will have a slight effect on our total staffing numbers. However, I don't foresee any significant changes in our expense projections. I expect a gradual increase in staffing over the next few quarters, but we are determined to keep it relatively stable. Brett, do you have anything to add?

Maybe the only thing I would add is that we've previously communicated or demonstrated when we take on various initiatives like SBA general lending and non-interest expenses that can yield future benefits. In this quarter, specifically, I can see how our initial investment in loan originations by the FDA generalists has paid off. To address Huntley's point about increasing non-interest expenses for staffing, as we identify opportunities, we've made smart investments that are likely to generate future returns. Therefore, we might see modest increases each quarter.

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

I initially had nothing to share, but I do have some thoughts. Looking at Slide 10 and the originations, as we consider the future, I recognize it's similar to the net charge-off question: if we can clarify what's happening in Washington, then perhaps you could give us insight into originations. If I contemplate scenarios where no significant changes occur, should we anticipate that originations will resemble pre-pandemic levels? Or with the deposit platform and liquidity on your balance sheet, coupled with the current state of secondary markets, do you see a chance for originations to be significantly higher than they were before the pandemic?

Yes. As I said a minute earlier, Chris, our pipeline is at an all-time high, right? Trying to be somewhat conservative. Do we have the players on the field today that could originate on an ongoing basis, $2.5 billion plus, maybe as much as $3 billion on an annual basis? I would say the answer to that is probably yes. I'd be loath to predict anything higher than that.

We are seeing opportunities right now that six months ago, we weren't seeing, right, very clearly where competition has pulled back in places. And so we continue to see that. I think how long that lasts is an open question as well. We will run hard as long as we see it and continue to have some of these businesses mature, that will help support that. But feels good right now, and we'll continue. But to chip's point, I think those numbers are good in terms of what we can visibly see.

Okay. And then just with the 6-month P&I program with the SBA, assuming we don't see anything like that again. I mean, I thought I heard a comment from chip that, that was like 1/3 of originations was sort of to take advantage of that deadline? Or did I mishear that one?

Yes, I think that's probably accurate. If we hadn't had that, we would not have reached $1 billion. However, we likely would have achieved around $600 million or $700 million in the quarter without it.

Yes, I think that's fair. Look, the majority of our origination benefited from that, right, which is great because it will support the borrower. But how many loans would have not happened without that subsidy, I think, is probably closer to 1/3 or less. Most or all of the customers had the opportunity to expand business acquisition, et cetera, and it was a nice to have, not a have to have. So that's the right way to think about it.

Well, and we took some business away from conventional lenders because when the borrower did the math, on an SBA loan at a higher rate, then he came with us because of the P&I payments. And that would be a one-time situation as well.

Okay. And what I just want to ask one more on compensation. I think you've been pretty clear on the creeping up part, but is there any benefit you have from say, the investments you had made in launching the deposit program, do you have some expenses that drop-off in that regard? Or should I think about you is you've got to like you're in the early stages here with the deposit platform. And now you have a lot of other things you want to add to it so there will be continued expenses with that?

No, that's a great question. The benefits that we'll see happen at deposit conversion, let's call that first part of next year. And then ultimately, loan conversion, which will take a little more time. And those will be relatively modest actually, just given we don't have the scale of units, right, that some really big banks do, but it will be meaningful. But really, to your point, is about growth, it's about new product development. So we'll likely reinvest that of savings in continued products. So I don't think you'll see a big move either way as it relates to technology spend over the next 12 to 18 months.

Well, they would be prudent. In other words, we have a number of people that were doing a lot of things to get us at this point, and that job will be done. Then on the other hand, if you think about 100-and-whatever we have on the lending side, right, we may have not that, but a whole lot of folks on the deposit side, calling on practice management software companies to generate new relationships that we have been talking about now for years. And now it's around the corner.

Next question comes from the line of Ammar Samma from Raymond James.

Congrats on a very good quarter. So maybe starting on the all-in reserve coverage. It was down to about 2.66 from the 3.09 last quarter. Can you talk a little bit about the underlying unemployment and GDP forecast in your model and then maybe just your overall comfort with the reserve at these levels moving forward?

This is Steve Smits, Chief Credit Officer. I'll begin by expressing my strong confidence in our strategy. Regarding unemployment, you mentioned a key metric for our model concerning general reserves, and I'd like to remind everyone that we significantly increased reserves in the first half of this year. We have seen some positive changes in the unemployment forecast, which affects our model. Additionally, reflecting on the slide Chip presented regarding our stress measures is crucial because it informs our approach to determining reserves. We take a detailed look at each loan level, which benefits us greatly thanks to our strong servicing platform, especially in uncertain times like these. We contact each borrower individually and assess their stress levels and specific challenges, integrating this information into our qualitative provisioning model. This aligns closely with the trends we observe in unemployment, giving me confidence that our approach is functioning as intended.

Okay. Great. And then maybe a bigger picture, follow-up question. Has the pandemic opened up any opportunities to maybe lend in new verticals? Maybe remind us of the process behind entering a new vertical? And are there any plans in the pipeline right now?

That's a good question. In terms of new verticals, we conduct market analysis and research on credit characteristics, as well as the market structure. We consider the availability of referral sources, influencers, and experts, and we focus on having someone with industry expertise, either in-house or close to us, to help ensure success. We've actually paused on this for the past few quarters while we focused on maturing existing verticals. Regarding the impact of COVID, we believe it has created new opportunities in our verticals, whether due to reduced competition or advantageous market conditions. Our generalists and sponsors are observing some transactions in specific sub-industries that may have emerged because of this, alongside increased activity in technology and services. Overall, we are pleased with our current footprint, which allows certain sectors to perform better than others during this time.

There are no further questions at this time. Mr. Chip Mahan, please continue.

Yes. We thank everyone for joining us today, and look forward to seeing you 90 days from today.