Live Oak Bancshares Inc (LOB) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2020 Live Oak Bancshares, Inc. Earnings Conference Call. (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.

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 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's 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 2 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's core earnings, post PPP 1.0 fees, post PPP 2.0 fees. What will charge-offs be? Will Live Oak release reserves, et cetera, et cetera?

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 watch list ratio from about 8% to 9.5% is quite predictable.

And now to the middle of the page in 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 on 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, it's worth between $140 million and $170 million in pretax earnings.

And yes, we're going to talk about our tech investments. We put up $18 million to invest in these companies today, 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 6 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 6 industries and verticals that we believe are the most impacted by COVID. We started our analysis of the 6 at-risk verticals by bucketing all of the typical bank-wide portfolio statistics and examining the characteristics of these COVID 6 vertical borrowers, which comprise about 17% of the total bank portfolio or $439 million of unguaranteed exposure.

Noteworthy here related to the 6 verticals is that, while the category criticized and classified assets has 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, a downgrade to Risk Grade 5 and a trip to the criticized asset category or on our watch list. We continue to recognize risk in the COVID 6 verticals as state and local restrictions impact these businesses.

Looking at nonaccruals. In the hotel category, there are actually 3 hotel borrowers on nonaccrual. One suffered a fire, 3 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 3 borrowers on nonaccrual, all of which experienced some stress prior to COVID. Of those, the largest exposure by far has now received a Main Street loan as well as other CARES Act benefits and 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%. Well, not all of the appraisals have been completed. We're missing 4 out of 40, I think. The new LTV is roughly 67%, so up slightly.

On those -- 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.

Oh. Thanks, Kate. 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, of $500,000. Today, they have $65,000 in cash and a $100,000 line of credit, so about 4 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 million to the bottom line.

And it was fun in telling the note that, of the 22 leagues that these folks operate, in the 8 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're also excited about. Last week, I went to Eugene, Oregon; Portland, Oregon; Seattle; Denver; and Houston. There were $27 million of loan on defense, and we're going to get every one of them, 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 a 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 6 quarters, we've averaged origination of about $500 million; in the last 2 quarters, about 875 -- $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. The wonderful thing about 15% is it doubles every 5 years. So yes, 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're 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 domain expert, the vet, the pharmacies, et cetera, et cetera. So of that $808 million, about $332 million were the original folks. And then 2017 to 2020 are gaining huge momentum, almost $500 million of originations. We're 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.

And I guess I'd call this slide -- next slide, Micah -- the object of the exercise today. So really excited about growth in the loan portfolio: 34% year-over-year, $3.6 million to $4.8 million. But -- well, even more exciting than that are the growth in non-GAAP, pretax, 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. That's over $10 million. Times 4 for the year is $40 million. That's about $1 a share pretax. Very excited about that.

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

[Yes, I mean, those were my words]. The Live Oak Ventures portfolio really continues to perform. Super excited with Finxact live. It's opened up a ton of doors for even the Canapi bank, going into contracts or implementation. Payrailz and DefenseStorm [signing 5 to 10 new banks] a quarter. Greenlight with record -- a December record month. Apiture, you've heard about the $10 million.

So again, I think we're excited to update you every so often. But certainly, the $155 million number is subject to change given the up rounds that are forthcoming.

Huntley, over to you. Take us home.

Thanks, Chip. As we put 2020 in the rearview mirror and focus all of our energy on the year ahead, our priorities remain unchanged. We're still laser-focused on helping our small business 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 spans each of these that we're really excited about is driving more inclusive small business growth, 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's CFO highlights. He does a masterful job of going through all the details. At a high level, we're incredibly proud of what our team has been able 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 of 7% linked quarter and 34% year-over-year. The guaranteed loan portfolio, 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 given the SBA subsidy program. But we still managed to grow that portfolio 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 originated about 1,000 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're 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% from the prior quarter, even adjusting for PPP of about 15%. Our flexible balance sheet funding model allowed us to regain much of the margin declines 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 of that drove the number that we look at as core profitability, the mouthful that Chip mentioned of our adjusted, pretax, pre-provision income to that $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. And 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 the vesting of a series of market-based restricted stock units, which was 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 was associated with their total of $30 million of capital raised in the back half of the year and then the ongoing impact of our PPP activities.

Let's spend a minute on the market RSUs. 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 laddered vesting based on stock price triggers between $34 and $55. In the fourth quarter, 2.5 million of those satisfied the required trading levels and vested. Subsequently, since the start of the year, another 200,000 have vested, leaving just shy of 400,000 remaining. From a financial perspective, there's an increase in salary expense with the acceleration of the remaining unrecognized income and the associated payroll tax.

Conversely, 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 settle 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 the vesting in the first quarter, we have a little less than 15% of these original RSUs remaining. And we've replaced this market-based RSUs over the last couple of years with issuance of time vested, so those should be a little more predictable on the balance sheet and income statement.

So turning 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 earnings through amortization and forgiveness. Forgiveness acceleration a little bit to start the year, but then it took a bit of a pause with the new documentation requirements and then concurrent launch of the new PPP program that we'll talk about. So as Chip mentioned, new stimulus bill came into 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 SBA flagship programs, namely the 7(a) and the 504. And the 7(a) guaranteed increases from 75% to 90%, fee waivers both to the lender -- or to the borrower and to the lender and then additional subsidies, which you can see on this chart are a little complicated based on the origination date but provide more payments up to a massive $9,000 a month, which will affect the majority of our portfolio and give them additional support for between 3 and up to 8 more months. So we're really excited about what that is going to do for our origination volume and 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 events that we mentioned, we calculate that non-GAAP, pretax, pre-provision earnings number of $28 million in the quarter. And that's year-over-year a 40% increase despite a 150 basis point rate cut.

We mentioned those 3 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 through 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 mean reversion from the third quarter as prepayments jumped up a bit post the SBA's first round of subsidies, and then a little dip in the secondary market at the end of the year as the TALF program expires. But overall, this is really the metric that we look at, the growth that we drive here from an earnings perspective.

If you 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 8 quarters of core loan growth. Chip talked about our origination franchise. Pipelines remain consistently high and broadly across our core small business, across the core renewable energy platform and then really throughout the bank.

So we mentioned the guaranteed eligible for sale portfolio that was flat quarter-over-quarter, sitting at about $1.7 billion. 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 below 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 sold 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 in the back half of the year. Going forward, we still think the 35% hold on 7(a) is at about the right level, and we'll sell most of the USDA production as those are typically longer fixed rate.

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

We expect to generate significant operating leverage throughout 2021 with continued growth, and we'll invest more in the franchise but try to keep our expenses 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 noninterest 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 us a great deal of balance sheet control. Total retail deposits ended the year at $4.3 billion and about 62,000 accounts. That's up substantially from a year ago but is flat this quarter, and that was intentional as we were reinvesting excess 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 1/3 a couple of years ago. So we really like the mix, as you can see, 7 basis points of noninterest cost of 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 and repricing this year. All in all, at current market rates, that should generate an additional $25 million of annual net interest income from those continued effects this year. So we're really excited about that as well.

On Page 26, that repricing, along with the continued deployment of our excess liquidity, led to significant margin expansion in the quarter. Margin recovered 56 basis points to 3.33%. We've gotten most of the way back from what we lost from the market declines -- or the interest rate declines in the beginning of the year. The margin trends 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 deposit repricing happens 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.

The loan growth has allowed our liquidity levels to return to pre-COVID levels. We probably have a bit more run -- room to run there given the amount of liquid assets and guaranteed asset on balance sheet, but we're really pleased with the ability to deploy that cash that we raised in the first part of the year as quickly as we did. All that leads to a balance sheet that, as Chip mentioned, feels very fortress-like, with over half of our assets guaranteed by the government, and that's not including PPP. We feel really good about our capital and our liquidity positions.

The one capital ratio we pay 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 the third quarter. Probably track that at 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 metrics 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, lead 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, in Apiture and the rest of our partners, and we're closing in on almost 1,000 deposit accounts on the system as we sit here today. You combine that with the over 11,000 PPP loans and counting, and we're confident in 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're really ready to start scaling it into the market.

Looking forward, we're well aware of the rate of change that's taking place in financial services and 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'll stay laser-focused on them every day. We know the industries 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 product available, the 7(a) SBA loan program. And we have a next-gen technology platform that is 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 ways 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 available to help them when they need it. And that's exactly how we've designed our business model. As we go forward, our road map 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 verticals.

We truly believe the future of banking will marry our traditional lending capabilities with these technology-driven solutions and all of that to 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 for questions?

Let's go to Q&A.

(Operator Instructions) Your first question comes from Jennifer Demba with Truist Securities.

There was a lot of noise in fourth quarter results, so thank you for going over everything so comprehensively. So let's talk about what -- 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?

I'll take the front end of that, and Huntley, you can take the back end. So 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, 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 bowler that I told you about, the bowling alley. People seem to be so excited on what's going to happen on the other side that the pent-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 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. 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 on some teams to help expand some footprint. But the lending side is largely, we think, in place.

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 if the balance sheet is growing 20-plus percent, number of customers that we're servicing, we just got to keep up with that across some of the functions, whether it's the servicing, 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 functions, and it will be kind of on the front line.

Okay. And Brett, currently mentioned you guys think, with more deposit repricing, 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 on the net interest margin?

Yes, sure. I would probably reiterate what Huntley said. We feel good that we can maintain our -- a lot of our rate offerings on our loan products as we're seeing our existing deposit portfolio continue to reprice down. I'd say, for 2021, you're looking at 3.5% and then 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 trends you're seeing. What prompted you to kind of get out there and do the mass visit?

The what?

The mass 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 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 piling on with me. And we're usually going 2 to 3 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.

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

Yes. As Huntley mentioned, we are looking at some renewable 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 RSUs. But rather than an effective tax rate around 25%, that's probably something in the mid-teens -- mid- to high teens, most likely.

Okay. And do you think you can still grow PPNR this year ex PPP loans?

Absolutely. Yes, sure.

Okay. It sounds like you can hold expenses…

Yes.

Certainly below revenue growth. Okay.

Your next question comes from the line of Ammar Samma with Raymond James.

The first question is a follow-up on Finxact. I believe we've 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 your overall outlook for that product line here in '21?

Yes. So this is Neil here. Yes, so I think the pipeline of Finxact looks quite robust. They're in the process, actually, of a raise. And that's one of the up rounds that I was referring to and much of the up round's due to regional and super regional banks committing both contractually and now is in, in some cases, implementation. And actually, there's probably a pretty large overlap between some of the Canapi LPs and some of those banks that are selected in implementing.

Yes. And Ammar, for us at the bank, I think we continue to march along. For us, it becomes a general availability of checking, when are we ready to blast that out broadly; the conversion of our existing 60,000 deposit customers, which will happen middle of this year; and then we move to the broader loan suite beyond the PPP loans to the rest of our loans. So we will hit these sort of in these stages and just continue 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 that's really exciting, that sort of conversion of loan deposits, onboarding and servicing and 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? If so, what are your thoughts there?

We have indeed. I think it's one of the major initiatives for Canapi. We just had a presentation from a really unique firm [but it was 9 days] and you'll probably hear about them if you haven't already. And other firms that are really focused not necessarily on crypto themselves are perhaps enabling banks to be a custodian or to offer crypto to their end customers. And so it's something that we're leaning into pretty heavily.

Okay. And then one last question for me on the core banks. The reserve plus mark as a percentage of unguaranteed exposure was up a little bit this quarter, back to that 3% number. Just given your commentary, how should we expect this number to trend in 2021? And where does it stabilize in a "normal environment"?

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

This is Steve Smits, Chief 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. Chip mentioned it tends to push things to the right. However, that is precisely what most of these businesses need. If we 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 will track fairly consistent with how the economy does in 2021.

Your next question comes from the line of Michael Perito with KBW.

I wanted to just start on Slide 19 for a second here, 2 questions. I guess, one, on the left-hand side, when we think about the -- some of the changes from the SBA program, I mean, in terms of the fees waived for the borrower, is the right way to think about that in terms of just making this product even more attractive and potentially 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 6 to 8 months however long that this program lasts? Or is that the right way to think about both those pieces of it?

Steve, that's about 55 bps, isn't it?

Correct.

Yes. So we got to pick that up as well. And that, again, is 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 of the above.

Okay. And in terms of the second -- 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 or a little higher? Any kind of early indications of what that might look like in a range?

Yes. It's a good question, Mike. We originally thought that number would be north of 50% of our initial production. Over the last couple of weeks, I think we've tempered that a little bit, and so somewhere between 30% to 50% of our initial production. So $500 million to $700-ish million of volume feels about right. But it's interesting because there was a mad rush a year ago, and I think people are a little bit more calm in terms of how they're approaching this. So it's unclear if we're 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.

Right. But is it fair to -- and just given kind of the confines and structure of this round of the program though, I mean, the loan sizes are likely smaller on those 3,000 applications. Is that fair? Or is it not really much different?

Well, so you've eliminated the large loans, right? The cap is $2 million, not $10 million. So you've eliminated definitionally some of those large loans, although those were the less fee -- had a lower fee on them. But our average balance is running a little lower than the first round, but they're 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.

Right. Understood. You…

And then, Mike…

Yes, sorry. Go ahead…

Sorry, Mike. This is Brett. I have one point of clarification. The 55 basis points on the SBA loans, you framed the question as does that benefit yield. And from a reporting perspective, that actually -- it will not be reflected in noninterest expense for those loans. The 55 basis points is not an interest income or a yield item.

I got it. So it's a temporary, maybe a 2-quarter, a little -- slight relief on expense essentially until it goes away, presumably.

It actually carries forward on those -- on all the loans that are originated in that window. It will carry forward for the [life of that one].

All right. Helpful. 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 the new accounts -- business accounts that you guys have launched and what maybe kind of targeted customers you've had success with growing that account and kind of how you view the rollout of that product set moving into 2021.

And if there's 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 the existing success we've had is our traditional platform. And so those are businesses with excess cash that are [depositing, I guess] on the business, savings and CD side. And there is some overlap with our core customer base but not an extensive amount. 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 saw the mix go to 50-50 savings, CDs, roughly, and start to bring in those noninterest-bearing checking accounts into the mix.

And again, I think it will be relatively slow. Our customer base, they're 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 I think we're a little early still to pick a target in terms of that mix. At cruise altitude, could we be 1/3 checking and then 1/3 savings and CDs, that would be great. It'll take us a bit of time to get there.

And…

Do you guys feel -- sorry. Go ahead, Chip.

Sorry, Mike. Neil and Huntley and I talk about this all the time, right? So I was looking at a firm in Chime yesterday and the day before. And firm's market cap is $25 billion. They had 1,200 employees. They did $500 million in revenues and lost $100 million. And then I looked up Fifth Third the other day. They did $8 billion in revenues [and made $2 billion] been around since 1858, and there were $20 billion. And then you look at Chime and you get prepaid or point-of-sale in the firm, and wow, they have built a beautiful interface and 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're going to see more product innovation from us across all verticals.

Yes. Makes sense. That's great. And then just if I could sneak one 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 partnership, 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, any thoughts -- I mean, Chip, that kind of probably plays into some of the products and things that you were just talking about. But any thought in terms of when we could 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're having a bunch of great discussions with partners, channel, in different verticals, 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 you're really going to start to see the impacts run through the P&L.

And is that something you guys plan on kind of -- this 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 broader updates about the growth of the channel partnerships in general?

I think the answer is yes if they let us.

Yes, we'd like to [in fairness].

We do.

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

Just 2 I wanted to ask here. One is on deposit pricing. I think, Huntley, you commented that it's been rational so far. And 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?

Yes. Look, 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're going to be range bound to 0 for the foreseeable future. And the big banks, as you mentioned, the big players in the market that we see are the same ones, and 60 basis points on savings, 60, 65, somewhere in there, on the CD rate, feels like it's where it is in the market.

If we really hit the growth button, we could move the needle down a little bit. And if the market sort of stays where it is, could we drop it a little bit? Yes. But I mean we're talking 5 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 went back and I looked at the big four and what they pay on interest-bearing deposits in Q4. It's all 4 or 5 bps on all interest-bearing deposits. Most everyone of the money market accounts 1 bp, okay? So we and Goldman and Marcus and [all the others], we're 60.

So when you have these purpose-built cores in fintech companies or like we will be with 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 -- 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 level playing field.

Okay. Well, I guess, related to that, I feel like we've seen some tentative efforts on deposit pricing more from -- almost on the asset management side, some of those, call them, robo advisers 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 excess 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're not really seeing competition from that.

No. We certainly haven't seen any. There certainly is customer acquisition 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 pretty range bound right now.

We might be one to actually go and do that. They do this with account aggregation, using tools like MX, which Canapi happens to invest in. Apiture is implementing MX. So it's not unlikely that Live Oak would jump out to our veterinarians and pharmacists and look to see these balances where they're getting the 1 basis point and bring them over to us.

Got it. That's very interesting. And then just wanted to ask one about the sort of the state of play for not just your fintech investments but Canapi. As we look at the proliferation of SPACs, does that affect, on one end, Canapi's ability to make investments because these SPACs are bidding up the prices of potential investments for Canapi?

And on the other side, is that a positive impact likely on the -- on some of these capital raises you're seeing and ultimately exit valuations for fintech companies? Or do you not really think about your fintech investments as places you really want to ever exit or exit at least in the near term?

Yes. Look, first of all, you mentioned valuation. Certainly, they are high. However, Canapi has never been more active. Last year, we placed $170 million. And with the follow-on, call it, $220 million, so about 1/3 of the fund in blue-chip names like Blend and, as we mentioned, Greenlight. In some cases, some of those have had already up rounds to the tune 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 first look at many of these fintechs. So we see that momentum continuing, quite frankly, at Canapi. And the SPACs, I think, have done their job in just accelerating the excitement around this.

And it's obviously -- look, we've looked at SPAC relative to Live -- SPACs relative to Live Oak Ventures companies as well as our Canapi companies, so there may be a scenario where we leverage a SPAC as a tool. But right now, we see it as a net positive.

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

We appreciate everyone's attendance at this time, and we look forward, as always, to seeing you 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.