Live Oak Bancshares, Inc. Q4 FY2020 Earnings Call

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.

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 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 boosts 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, it's 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 million, so Tier 1 equity of $74 million 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 things are going with the COVID 6.

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 six at-risk verticals by bucketing all that typical back wide portfolio statistics and examining the characteristics of these COVID 6 vertical borrowers, which comprise about 17% of the total bank's 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 businesses. Looking at non-accruals, in the hotel category there are actually three hotel borrowers on non-accrual. One suffered a fire, three hurricanes, an earthquake and 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, is 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, 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.

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 a $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 $500,000 to the bottom line. And it was fun to tell the note that of the 22 leagues that these folks operate, during 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’s 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 loans on defense and we are going to get everyone offense in 2021. Moving on to the next slide, I would call this an 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 it’s originations or EPS, a wonderful thing about 15% is 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 by 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 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 pretax; 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.

Our venture portfolio continues to perform strongly, which is very exciting. This success allows us to engage more effectively with contractors in areas like implementation, payroll, and defense. We had a remarkable quarter, especially in December, achieving an average rate of about $10 million. While we're thrilled to keep you updated, it's important to note that the $155 million figure is subject to change based on upcoming stock developments.

Huntley, over to you. Take us home.

Thanks Chip. As we move past 2020 and direct our efforts toward the year ahead, our priorities remain the same. We continue to focus on assisting our small customers as they navigate the pandemic, supporting our employees and community, providing capital to small businesses driving economic recovery, and delivering innovative technology solutions. A key initiative that we're excited about is fostering inclusive small business growth, with a dedicated team to serve underserved communities. If you haven’t had the chance yet, I encourage you to review Brett's highlights. He provides a comprehensive overview of our achievements. Overall, we are immensely proud of our team's accomplishments in 2020 and the momentum we carry into the fourth quarter and into 2021. As Chip pointed out, strong loan origination and our strategy of retaining more loans on our balance sheet resulted in core loan growth, excluding PPP, of 7% linked quarter-over-quarter and 34% year-over-year. The guaranteed loan portfolios, as Chip noted, remained flat quarter-over-quarter as we accelerated many loans eligible for sale in the previous quarter due to the SBA subsidy program. However, we still grew that portfolio by 80% year-over-year. Our balance sheet is robust and well-positioned to continue supplying capital to small businesses as they expand. On the earnings side, the primary contributor remains our loan originations, as Chip highlighted. In the second half of the year, we originated approximately 1,000 loans totaling $1.75 billion, excluding PPP loans, which spanned across the country and various sectors. Small businesses in America have shown remarkable resilience throughout this pandemic and display overall optimism. We are proud to have served so many customers last year. Loan origination, combined with our effective deposit model, boosted net interest income growth by over 20% compared to the previous quarter, even accounting for PPP adjustments of around 16%. Our flexible balance sheet funding model helped us recover much of the margin decline we experienced due to earlier rate cuts. Expenses increased this quarter, which was anticipated as we re-enter a more typical operating environment, and we will address that in a few slides. This resulted in what we consider our core profitability metrics, which we define as adjusted pretax, pre-provision income, reaching about $28 million this quarter, reflecting a 4% increase from the previous quarter and a 60% increase year-over-year. We understand we don't make it easy to track our core profitability, and this quarter, we have a few items worth discussing. They are outlined on Page 16. The most significant was the divestment of a series of market-based restrictive stock units due to the increase in our stock price over the quarter. Additionally, the conversion of Apiture to C-Corp status, which is associated with their $30 million capital raise in the latter half of the year, and the ongoing effects of our PPP activities. I want to talk briefly about the market RSUs. On Page 17, we present more details. As previously reported, a total of $3.1 million in restricted stock units held by employees became vested based on stock price triggers ranging from $34 to $55. In the fourth quarter, $2.5 million of these met the required training levels and since the start of the year, an additional $200,000 has become vested, leaving just under $400,000 remaining. Financially, this resulted in an increase in salary expenses due to the acceleration of unrecognized income and the associated payroll tax. Conversely, there's an income tax benefit from the value of the stock delivered versus the estimated book value. You can see those figures here. Furthermore, as we net settled shares on behalf of employees, we experienced a reduction in cash and equity as well, resulting in a slight decrease in book value and the issuance of about 1.4 million shares. After the first quarter divestment, we have less than 15% of the original RSUs remaining, and we have replaced these market-based RSUs over the past couple of years with time-vested stock units, making them more predictable on our balance sheet and income statement. Regarding PPP, out of the $1.75 billion we originated, around $1.5 billion remains, which generated approximately $15 million in earnings this quarter through amortization and forgiveness. Forgiveness accelerated slightly at the beginning of the year but then paused due to new documentation requirements and the launch of the new PPP program, which we will discuss. As Chip mentioned, the new stimulus bill was enacted at the end of the year, allocating almost $300 billion to the PPP program. This reopened the original program and introduced a second draw for small businesses experiencing a revenue decline of more than 25%. We are actively supporting our small business customers in this program, and we currently have about 3,000 applications in progress. Additionally, the bill enhanced the SBA's flagship programs, specifically the 7(a) and 504 loans, increasing the 7(a) guarantee from 75% to 90%, waiving fees for lenders and borrowers, and providing additional subsidies, as seen in this chart. While it's somewhat complex based on the origination date, these enhancements offer additional financial support for most of our portfolio, extending payments for three to eight additional months. We are genuinely enthusiastic about the impact this will have on our origination volume. Turning to Page 20, we dive into the details of our core earnings. There’s a lot happening here, but it represents how we assess the core earning power of the bank. After adjusting for PPP and other unusual items, we calculated our non-GAAP pretax, pre-provision earnings at $28 million for the quarter, which is a 40% year-over-year increase despite a 150 basis point rate cut. We've noted those three significant adjustments. Beyond that, we remain optimistic about our loan performance and will maintain a conservative approach until we overcome the challenges posed by the virus. We also faced typical mark-to-market fluctuations, down a bit more than usual, partly due to the increase in prepayments following the SBA's first round of subsidies and a slight dip in the secondary market at the year's end as the program was set to expire. Overall, this growth in earnings remains the focus for us. Looking ahead to 2021, we see continued growth in our loan portfolio driving net interest income. The trajectory over the past eight quarters of core loan growth has been impressive. Chip mentioned our origination pipeline, which continues to remain strong, spanning across our core small business operations and renewable energy sectors as well as throughout the bank. We noted that the guaranteed eligible-for-sale portfolio was flat quarter-over-quarter, around $1.7 billion, and we feel positive about those guaranteed assets on our balance sheet, contributing not only to earnings but also to contingent capital and liquidity. For the year, our loan sales were slightly below our goal of selling 35% of our SBA loans, resulting in retained loans at around 70%, while we sold only about 20% of our USDA loans. We had a defensive approach at the year's start, which we later compensated for with strong loan production in the second half. Looking ahead, we believe maintaining a 35% hold on 7(a) loans is appropriate, while we plan to sell most USDA production as those are typically longer fixed rates. Regarding expenses, we've tagged our operating non-interest expense at about $48 million, with the largest adjustment being salary payroll taxes from the market RSUs. Your Q3 expenses were particularly low, as we discussed last quarter, and as we return to a more normal operating environment, travel and marketing expenses have increased, alongside investments in resources to support our growth, including salaries, technology, and professional services. We expect significant operating leverage throughout 2021 with continued growth and we aim to keep expenses below the growth level in our earnings. We also plan to resume some renewable energy tax investments that have historically showed up in the non-interest expense section, but these will be more than offset in the tax line item. Our deposit model continues to be a vital driver of value for us in this environment. The market remains liquid, and competition remains rational. Our rates have decreased significantly, with interest rates, and our current products are priced between 60 and 65 basis points. Customers across the industry increasingly transact digitally, and our service model is well-suited for remote operations, offering substantial balance sheet control. Total retail deposits ended the year at $4.3 billion. We acquired 62,000 accounts, a considerable increase from a year ago, but remaining flat this quarter intentionally as we reinvested our liquidity. We also adjusted our portfolio mix, raising our savings balances to about 50% of our book, well above about a third from a couple of years ago. We appreciate this improved mix, with a 7 basis point non-interest cost to funds, making our blended cost incredibly competitive within the industry. Our CD book is nearing maturity, with nearly $2 billion set to mature or reprice this year, which should generate an additional $25 million in annual net interest income based on current market rates. We're excited about this potential. On Page 26, the re-pricing, combined with the growing rate of liquidity, resulted in significant margin expansion this quarter, with the margin recovering 56 basis points to 3.33%. We have nearly regained the ground lost due to interest rate declines earlier in the year, and the trend in margin looks promising as we proceed into this year. We anticipate exceeding 3.5% in the second half of the year, following most of the positive re-pricing in the first half; despite expected increases in competition on the lending front, we are pleased with our ability to maintain loan yields. The loan growth has allowed our liquidity levels to return to pre-COVID status, and we likely have more room for growth given the liquidity and guaranteed assets on our balance sheet. We are pleased with our capacity to utilize the cash raised in the early part of the year effectively. This culminates in a balance sheet that, as Chip mentioned, feels well-fortified, with over half of our assets guaranteed by the government, not including PPP loans. We have strong confidence in our capital and liquidity position. Our main focus remains on our leverage ratio, considering the significant amount of government guaranteed assets we hold. Initially dropping early in the year due to PPP and excess liquidity, we managed to rebuild it somewhat in the third quarter. RSU vesting reduced that leverage ratio by approximately 50 basis points. While we planned for it to be closer to 9% by year-end, we ended up flat relative to the third quarter, tracking around 8.5%, potentially a bit more as we enter next year, but we feel confident about our overall capital standings. Quickly on Page 29, we share our progress towards metrics we believe signify high performance in the banking sector. Overlaying this with our observed growth suggests an attractive offering. We remain committed to enhancing core profitability each quarter and will continue to keep you updated. We have emphasized our technology platform, with our new core Finxact and Apiture now operational, and we are approaching nearly 1,000 deposit accounts on the system as we speak. Along with over 11,000 PPP loans and counting, we are confident in our development and the flexibility it provides to serve our customers. While we have a limited number of checking accounts in production, we briefly diverted to focus on the new PPP program at the beginning of the year, and we will soon resume rolling out exciting enhancements to this product, making it more appealing to small businesses as we prepare for market scaling. Looking ahead, we are cognizant of the rapid changes in the financial services landscape, and we believe we are well-positioned to benefit from the merging of banking and FinTech. We thoroughly understand our small business clients, remaining focused on them daily, familiar with the industries they operate in and the unique challenges they encounter. We have been providing these small businesses with complex financial products for over a decade, particularly through the 7(a) SBA loan program. Our next-generation technology platform will enable us to expand these offerings and deliver an exceptional customer experience. At the core of small businesses' banking relationships, as highlighted on Page 31, are essential needs: efficient payment solutions, easier access to capital, consolidated account management, business owner-centric information, and a modern digital experience, all backed by a dedicated partner ready to assist when needed; that's the essence of our business model. As we move forward, our strategy focuses on developing products and solutions that address these core elements: improved payment tools, quick small dollar loans, actionable data insights, and partnerships within specific verticals. We firmly believe the future of banking will integrate our traditional lending functions with technology-driven solutions, enhancing support for small businesses. We have significant momentum within our core business and are equally excited about our future prospects. Chip, do you have anything else before we take questions?

Let’s go to Q&A.

Your first question comes from Jennifer Demba with Truist Securities. You may ask your question.

Good morning.

Good morning Jennifer.

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.

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 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 about 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.

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 are 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.

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?

Yes, sure. You know I would probably reiterate what Huntley said. You know we feel good that we can maintain a lot of our rate offering on our lending products as we are seeing our existing deposit portfolio 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.

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 market visit?

What’s the market visit? Huntley does a great job running the bank, holding 5,000 meetings a day. I want to connect with customers and understand the current situation. Kay and her team, along with Steve and his team, have been actively working with me, and we typically spend two to three days a week focused on identifying risks associated with COVID-19. Recently, we've also been pursuing new business, especially some conventional loans and potentially some significant USDA loans in the energy division.

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

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.

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

Absolutely! Yeah, sure.

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

Thanks Jennifer.

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

Hey, good morning everyone.

Good morning, Ammar.

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?

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.

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.

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

We have indeed. I believe it's one of the major initiatives for Canopy, that presentation for a really innovative program that you'll probably hear about soon, as well as other firms that are focused not necessarily on crypto directly but perhaps on enabling banks to act as custodians or to offer crypto to their end customers. So, it's something we're committing to quite seriously.

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 you guys.

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

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.

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

Thanks Ammar.

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

Hey, good morning everybody.

Good morning Michael.

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 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 result 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?

Steve, that’s about 55 basis points, isn’t it?

Correct.

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.

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 ballpark 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?

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.

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?

Well, so you’ve eliminated the large loans, right. You know the cap is $2 million not $10 million, 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.

Sorry Mike, this is Brett. One point of clarification; the 50,000 basis points 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.

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.

It will carry forward for all the loans that are originated in that window.

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?

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 accounts 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 cruise 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.

And you know.

You guys feel – sorry, go ahead Chip.

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.

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 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 in terms of the company's overall growth rate?

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 channels. 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.

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 will it be more just like quarterly, you know broader updates about the growth of the channel partnerships in general?

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

Yeah, we like to enter, we do.

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

Thanks Michael.

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

Thanks, good morning everyone. Just two I wanted to ask 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?

Yeah, we feel good as we sit here right now. There is, as you said, a ton of deposits in the financial system right now, interest rates feel like they are going to be range 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.

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 basis points on all interest-bearing deposits. Most every one of them, money market accounts one basis point, okay. So we and Goldman and Marcus and Ally 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.

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 an open banking play that they've got the access to know that someone has access deposits at a 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 imagine that’s a small thing and you are not really seeing competition from that.

No, we certainly haven't seen any. There certainly are customer acquisition plays that are going on and then there are companies that have very different 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.

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.

Got it, that's very interesting. And then just wanted to ask one about the state of play for not your FinTech investments but Canopy. As we look at the proliferation of facts, does that affect 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 you're 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?

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 our 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 from 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.

Got it. Okay, thanks very much.

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

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

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