Live Oak Bancshares Inc (LOB) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Live Oak Bancshares, Inc. Earnings Conference Call. (Operator Instructions) Today's call is being recorded. (Operator Instructions)

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

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

Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials and commentary.

I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Thanks, Greg, and good morning all. I am now on Slide 3, the agenda. So as always, we're going to -- Steve and I are going to talk about safety and soundness, and then I'm going to give you a snapshot of what some of our customers are saying. A couple of quarters ago, we said enough is enough. And look, I've done a terrible job of explaining to you, our shareholders, about our investments in other businesses. So last Tuesday, one of those investments that were spun off to you, nCino went public. So we're going to take for those folks that have been with us from the very beginning, a wee bit of a victory lap. And then I'm going to turn it over to Huntley to review what is a -- confusing is the wrong word, let's just call it a complex quarter.

So moving on to the next slide, Slide 4, our focus. So what's been going on at Live Oak Bank these last 90 days? Well it's a lot. So when the virus hit, lots of things began to happen. We did deferrals for 1,288 customers. PPP came on. The government decided that they were going to make principal and interest payments for 6 months to 100% of our -- of the country's SBA borrowers. So there was massive outreach, outreach to us and from us for all of our customers. And then the PPP. So on April 3, we launched in the battle, and in 3 weeks, we made about 10,000 loans, totaling about $1.8 billion. Huntley is going to tell you a little bit about -- when Brent told you last night about $60-plus million in fees, of which we gave $7 million of that back to our folks. We focus first on our customers, about 3,000 of those. We then jumped to our verticals to help customers in the future or channel partners. And probably most proud that we affected 8,500 jobs in Wilmington, North Carolina. We made 725 loans, totaling $60 million that covered 56 nonprofits and 11 churches.

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

Technology and products, Huntley is going to talk a bit more about this, but I am tickled to death that my friends in Nashville, Tennessee, Terry Turner, the Founder -- Co-Founder with Hugh Queener of Pinnacle Bank invested $10 million in Apiture as did our long-term friends at T. Rowe Price, Hugh Queener is going on that Board as we take that business to the next level. Huntley is going to talk about deposit launches and everything, Finxact here shortly.

So now I'm going to move on to Slide 5, credit and fair value loan metrics. And whereas, we're really proud of the far right column, we're keenly aware of the government assistance previously talked about. Steve and his credit team added $18 million last quarter and $14 million to our reserves and fair value adjustments. And yes, I mean 0 past dues because of the government intervention, watch list is the same; classified assets, down a little; Nonaccruals, down a little; charge-offs, 21 bps; loan loss reserve, roughly $70 million. But folks, we just don't know what we don't know. When all of this ends and who knows when the virus is going to end, who knows when the vaccine is going to begin, who knows whether it would be effective, what's going to be on the other side. So in the abundance of caution, we always prove to be conservative, which is further outlined in the box in the middle, which we talk about every quarter. You have $500 million of capital in this bank, roughly a $70 million reserve and only $2.173 billion of unguaranteed paper. So the way my math works, that's about a 20% capital ratio and about a 3.1% loan loss reserve ratio.

And on top of that, just for grins, we got $1.1 billion of government-guaranteed paper. And with those capital markets coming back, you put a mark on that, and I don't know what [things] will tell you, it's $60 million, $70 million, $80 million worth of value there, giving us a bit of an interesting cushion compared to other banks. So now this has been incredibly fun for me, folks, shareholders, other interested parties.

If you look at the next slide, Slide 6, and the column on the right, the last 72 hours, I had a chance to visit with many folks in every one of our 34 verticals. So I decided to pull the top 10, which you see on the left. Our largest exposures in Ag, moving down to senior housing. So those 10 total $1.52 billion of unguaranteed exposure compared to $2.2 billion overall, which is about 70% of what we do.

So I'm going to unpack this and just stay with me on this brief journey because I think it's kind of fun. So that vertical, 650 customers, $175 million of unguaranteed paper, no loans on the watch list. Many of our vets went to curb service, which led them to become much more expense-minded. May and June were some of the best months they have ever seen. Sales of these businesses continue. Consolidators are bound and the price of the businesses is about 150% to 200% of revs. This is about a consistent $100 million year business for us.

Health care and dentists would be next, $254 million of unguaranteed paper. 700 dentists, huge pent-up demand here, shocking to the ABA during the last several months. BofA Practice Solutions shut down, addressing the credit quality of their 8,000 dentists. They seem to be back in business now. We're looking at deals we would never see as an SBA lender. Staffing has been a real challenge for these folks as they come back to work, and what the heck of these dentists may have to actually work on Friday.

Pharmacy, we have 434 customers, been in the business 10 years, $100 million of unguaranteed. Thank goodness that's been deemed an essential business. Most of our customers have seen year-over-year increases, that's about $100 million a year business for us.

Death care, another essential business. 244 customers, probably 3x that in number of rooftops out there. Revenues are higher. This is our lowest reserved vertical.

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

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

Self-storage, $129 million of unguaranteed. What's interesting here is, we work from home and found that -- we found that our customers' customers are moving stuff out of the house because they're working from home. Therefore, their occupancy rates are higher.

Line and craft beverages. We're glad we picked the right winners. Everything at the upper end of that market is doing quite well. We do see some of our smaller operators struggling. Interesting stuff here, 585 customers, $90 million of unguaranteed paper. Market's up 15% from the spring. They're finding that clients are nervous, and their number of clients are going up because of this anticipated downturn. And our customers are actually setting aside additional liquidity in anticipation of that downturn in the abundance of caution. Lots of M&A here, more buyers than sellers and our pipe is quite robust.

Now I think we may have something out of order here. I'm moving to Slide 9, (inaudible) which is the nCino -- no, no, Steve, this is over to you, my bad. This is over to you, please take over.

Yes. Thanks, Chip. So I'm going to talk about the diversification of our portfolio in just a bit. But for the moment, stress levels are manageable, even in our most at-risk industries, which you see on Slide 7 based on our diligent outreach that Chip touched on. However, that's in part, thanks to the government intervention and loan accommodations such as payment deferrals. So 60% of borrowers across our entire portfolio are having the SBA make their monthly payments in full. That's certainly impactful. 75% of our existing borrowers requested and received from us, a PPP loan, which is helping them cover payroll, rent and other interest expenses. And to date, we've granted payment deferrals to approximately 9% of our borrowers. The real unknown that Chip had mentioned is the long-term challenges facing these businesses. It's inevitable that we'll see some losses, some will simply give up. They'll not have the resources or the resolve to weather through the storm in front of them. But by and large, and based on our diligent outreach, we're comfortable that our borrowers are well positioned to work through the challenges facing them going forward.

The hospitality is certainly a concern. And while at this point, I'm not anticipating huge losses in that portfolio, they are facing challenges and that could take years to overcome and build back to where they were pre-COVID.

Our hospitality portfolio is, for the most part, well positioned to weather these challenges. We have focused on low loan-to-value first mortgage financing, so we have a good collateral cushion in anticipation for possible valuation declines. Many of the projects are in tertiary markets, and these actually are starting to see some uptick in occupancy, probably most likely benefiting from the domestic traveling uptick and road-tripping. In addition, we'll also proactively look at other government programs such as the USDA 90% guaranteed [VIKA] loans. We've actually approved several 90% guaranteed USDA VIKA loans to some hoteliers that are well positioned to be able to continue to use that working capital to get back on their feet and grow. So we'll do that in a very thoughtful way. It's just another lifeline.

Now Slide 8. We have built a well-diversified portfolio mix, which bodes well for us as we focus on minimizing losses. In addition, we have lots of tools in our (inaudible) from the SBA to the USDA to ABL lending to specialty lending, we're really well positioned to provide access to capital in a thoughtful way to help small businesses rebuild, grow and even take advantage of opportunities that present themselves as they also navigate through and pass these uncertain times. Chip, back to you.

Thanks, Steve. So I think I've got a little order problem here. The next slide that I want to talk about says nCino Bank Operating System. So folks -- and again, I have done a terrible job these last 10 or 12 years. So this industry has 280 billion lines of old code. Many of you listening today are traditional owners of community bank stocks and some analyze traditional banks for a living. We cannot be put in that box. We make investments in infrastructure. We think there is going to be massive changes in applications on cloud-based infrastructure. We have no branches, and we have no traditional boundaries on where we lend money.

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

So if you look at this slide, that's fundamentally loan origination. So on September 30, 2012, we hired Pierre Naudé from a company Neil and I used to work for. And he began to take that code and make it elegant for use in other banks. I have no idea how many nCino banks there are now, but several hundreds, if not more. And their thesis has always been to create a bank operating system, land and expand. First, it's loan origination. As you see at the top of this graph, deposit account opening, compliance and risk management, artificial intelligence. This is incredibly sticky software. And as you move across the enterprise from the wholesale side of the bank to the retail side of the bank, you can see why this company has become so interesting. Because of the massive opportunity that nCino's team had, we decided to spin that business off on June 30, 2014, 6 years ago.

Because if you go to the next slide that I'm looking at, which is nCino's numbers as published in their S-1, the company did $58 million in revs for fiscal year ending 1/31/18, $138 million in 2020, and you can see the losses at the bottom. Those losses could not be tucked under a bank holding company in our opinion. But yesterday, stock closed about $75 a share. The company has about 90 million shares outstanding. So because of the land and expand and the growth and the fact that only 8% of the revenues of the company are in the U.S., investors have put a value of this business of $6.750 billion as of last night.

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

So now how the world does that relate to the rest of our investments. So I am now on the slide that says technology investments. So all of these companies that you see is a mark on the portfolio of some months, if not years ago. All of these companies, in the next 12 months or so, will be raising additional capital. We own 16% of Finxact, 15% of Payrailz, 6% of DefenseStorm, 3% of Savana and 4% of Greenlight. Finxact next-generation core processor. Payrailz cloud-based check [regular]. DefenseStorm for cybersecurity. Savana is part of Finxact. And Greenlight is interesting, right? So when we invested in Greenlight, they had 100,000 customers. As of last night, they have 2 million. There are lots of very sophisticated investors looking at putting more capital in these businesses. And as you know, we use the software in a lot of these businesses for ourselves.

Last slide before turning it over to Huntley is the non-GAAP earnings slide. And so if you just take all the noise out, pretax, pre-provision, pre-fair value adjustments, pre-servicing asset reval, pre-losses for fintech activities, you can see kind of the true cash flow of this business, 17 17 and in this quarter, we're up a couple of million bucks. And that feels pretty good relative to the capital that we have relative to talking with our customers or where we are in terms of credit quality.

And with that, I'll turn it over to Huntley to try to unpack what has been a complex quarter.

Thanks, Chip. We're all painfully aware of how impactful this pandemic has been to small businesses, and we've taken our responsibility pretty seriously to help support business owners and entrepreneurs throughout the country. And our people have (inaudible), working tirelessly to help our existing customers, to get funds into the hands of new customers and to build products and technology designed to make their lives easier. Government programs directed to small businesses have provided essential liquidity and breathing room to our customers, but we know that our work is not yet done as the impact of this pandemic continues to impact every facet of our lives and those of our customers.

So looking at Page 15 and looking at the highlights for the quarter, overall, posted some pretty solid numbers, albeit, as Chip mentioned, there is a lot of moving pieces. The reported numbers were meaningfully impacted by PPP and the excess liquidity that we put on during the first half of the year. Our balance sheet grew 92% year-over-year and 56% quarter-over-quarter. Net interest income increased modestly over the first quarter as the positive impact of PPP was offset by the 100 basis point drop in interest rates.

We're really proud of the expense efforts of our company. As you can see, noninterest expense was down 3% linked quarter, despite accruing a $7 million performance bonus that Chip mentioned for our folks who have literally worked around the clock since the beginning of March. That bonus was offset by an increase in deferred expenses from the PPP of about $4 million that decreased salaries and benefits. But overall, just about every one of our expense line items is down quarter-over-quarter.

While our customers have been adapting to these changes in their business, so have we, and we pivoted most of our organization to help with PPP loans in the second quarter, but we also had to position our balance sheet to make sure we have the liquidity and capital needed to support the small businesses we serve. I'm not sure how many banks could have originated loans in a quarter equal to 60% of their outstanding loan balances at the beginning of the quarter, and PPP was a huge part of that, but the impact on our people and on all our resources was immense. For a bank that originated 1,200 loans in all of last year, originating over 10,000 PPP loans in 3 months was an impressive feat. And as you may recall, when the PPP program started on April 3, there was no Fed funding facility in place. So realizing that we would have an opportunity to play a meaningful role in this program, we sourced a significant amount of funding in the market in the beginning of the quarter. The PPPLF turned out to be a really efficient funding vehicle. So we took advantage of that, which left us with close to $1 billion in excess liquidity on our balance sheet, which has had a big impact on margin, liquidity and capital ratios.

Slide 16 attempts to lay out some of those key metrics and how they're impacted by PPP and excess liquidity. Our balance sheet growth, as you can see, was almost entirely driven by these factors with the core loan portfolio up 3% quarter-over-quarter. Not surprisingly, core loan origination was down a little bit in the quarter, although as Chip mentioned, still pretty strong. NIM declined 99 basis points, about half of which was PPP and liquidity related as our liquidity ratio jumped almost 15%. The impact of PPP and excess liquidity also drove the vast majority of changes in our Tier 1 leverage ratio, and as you'll see in a minute, had virtually no impact on our risk-based capital ratios. We expect margin liquidity to trend back to normalized levels over the next year as the PPP loans are forgiven or runoff and we deploy excess capital. We'll spend some more time going through that in a few minutes.

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

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

Turning to Slide 18. Despite all the attention on the PPP program, our overall franchise performance was solid. Our core loan portfolio was up modestly as the slowing of prepayment speeds helped offset the decline in origination volumes. We still closed $430 million in core loans across a range of some of our least impacted verticals. Our guaranteed loans available for sale, as Chip mentioned, increased 20% in the quarter to $1.1 billion, providing stable earnings as well as a great source of contingent liquidity and capital.

Slide 19 further breaks down the origination in the quarter. As you can see, the $1.74 billion of PPP and the $430 million of core loans, of that, you'll see the guaranteed loans -- excuse me, the USDA volume was up and a meaningful component. And of the $180 million in conventional loans that we closed, the majority was comprised of renewable energy, solar and bioenergy products as well as a strong quarter in chicken lending. Across our franchises, we've seen some pullback in the market from competitors, and we're getting some really good looks at some much stronger credits as Chip mentioned. Our pipeline remained strong, although, as Steve talked about, we're being extraordinarily thoughtful about the types of deals that we're willing to finance in this market.

On the funding side, our deposit model continues to be incredibly efficient as we took advantage of the influx in liquidity that entered the market this year.

Slide 20 shows some of the key metrics. We've dropped our savings rate 85 basis points and our 1-year CD 145 basis points since the start of the year. And despite that, we grew retail balances over 20% in the quarter and accounts by 15%. Our total cost of servicer deposits dropped even further to 8 basis points as the portfolio grew.

Digging in a little deeper, on Slide 21, you can see the decline in rates on the left-hand side of the page, where we're currently offering 1% on savings and 70 basis points for a 1-year CD. While the market took a little bit of time to reprice earlier this year, we have seen it behave pretty rationally overall. Now look at the right-hand side of the page, and you can see that over the next year, we have almost $3 billion of term deposits, both retailed and brokered, that will mature at rates significantly higher than where we are currently booking new product. That's over half of our deposit base. We'll pick up roughly 145 basis points on the retail book renewals and will likely let most of the brokered runoff. As a result, we expect core margin to increase back to our historical levels steadily over the next 12 months.

Turning to capital and liquidity, Page 22. I touched on this briefly earlier, but our balance sheet is carrying a significant amount of excess liquidity as much as $1 billion of incremental cash and investments, both as a result of the macro trends in deposits, but also due to the actions we took earlier in the year to prepare for PPP origination. So we ended the quarter with over $2 billion of cash and investments and a 36% liquidity ratio. You can also see that over 60% of our assets are in cash, investments or other government-guaranteed loans, excluding PPP loans. When you include the PPP loans, that number goes to almost 70%.

But all this liquidity and PPP loans took its toll on 2 key metrics: our net interest margin, and our Tier 1 leverage. And while we still have a significant amount of risk-based capital, as you can see, almost 13% common equity Tier 1 given the spike in liquidity as well as the timing of the PPP loans pledged to the PPPLF, our leverage ratio declined significantly.

On Page 23, you'll see the impact to our NIM and our Tier 1 leverage ratio. On the NIM front, the interest rate environment impacted our NIM to the tune of about 48 basis points with roughly 60% of our loans variable rate. The Fed actions in the first quarter dropped those loan yields in the second quarter. The remaining 51 basis points of margin decline is directly related to PPP and excess liquidity. And while our margins are going to remain volatile for a couple of quarters as the timing of PPP forgiveness flows through the interest income line, we expect our core margins to return to historic levels over the next 3 to 4 quarters. Similarly, our Tier 1 leverage ratio saw about 27 basis points of normal capital deployment and the rest 171 basis points was a result of close to $3 billion of government-backed assets added during the quarter.

Now that all the PPP loans have been pledged to the PPPLF, they will no longer impact our leverage ratio. The result, though, is that although we did see a significant drop in our leverage ratio, we still feel good about our capital ratios and don't expect the need for any capital-raising actions in the near future. Despite the focus on PPP and the impact of interest rate cuts, our recurring revenues continue to grow, and we continue to reduce our dependency on loan sales and our servicing asset as you can see on Page 24. Importantly, prepayment speeds on SBA loans have slowed dramatically and are probably running at 1/3 of where they were at the beginning of the year. Not only will this help drive recurring revenues as our core loans stay on the balance sheet longer, but it's also positive for our servicing assets and for the secondary market.

I'll spend a minute on the secondary market on Page 25, which, as you all know, has historically been an important part of our story, but we've deemphasized that as we've held more loans on balance sheet. As Greg wrote about in the CFO highlights, as the world turned upside down at the end of the first quarter, we elected to sell incremental loans to enhance our capital and liquidity. The market, as you can see, was stressed for a brief period at the end of last quarter, and you saw the depressed prices for our sales in Q1. Some of those sales carried over in the beginning of Q2. So we continue to realize that lower pricing on our combined sales in the second quarter. We also had a bit of a different mix of loans we sold with a larger percentage of USDA at slightly lower prices. Since the lows at the beginning of the second quarter though, we've seen a strong recovery in the market, consistent with most all liquid credit markets, and we're now seeing sales prices back to where they were pre-pandemic. While we sold a bit more than our target SBA in the first half of the year, we expect to return back to our stated targets of selling roughly 1/3 of our SBA production and all of our USDA paper going forward.

So for the last number of quarters, we've shared with you benchmarks for high-performing banks and the key metrics that we're staring at and trying to achieve. And while it may not look like it this quarter, we continue to make solid progress toward achieving them. While we do not expect to see total asset growth for a while as the PPP runs off, our balance sheet composition will shift as core loans replace PPP and excess liquidity, which will drive up our NIM and drive down our efficiency ratio. The deposit pricing over the next 4 quarters will add significantly to the bottom line, and our expense base feels very sustainable. Once we collectively make it to the other side of this pandemic, we expect credit cost to normalize, driving higher profitability and returns.

So wrapping up on Page 27, last quarter, we talked about our key areas of focus, which are our people and their safety, our customers and their safety and our communities. Those haven't changed, but as Chip mentioned, we've drilled a bit deeper into our customers in the second quarter as we focused on 4 pillars of supporting them and assessing their relative strengths and how -- and the liquidity, the PPP program, new capital and opportunities there, and the last being delivering technology-based products and services.

So I'll wrap up with a few thoughts on that as we work towards delivering these new products on new technology platforms. Never as a combination of technology and human touch been as critical in banking as it is with small businesses today. Running a small business has always been challenging, and it's even more so today. Now more than ever, they need simple products, purposely designed to help them manage their finances and run their businesses. But as we discovered during the PPP process, they also need someone they can reach out and connect with when they need help in device. The intersection of these two, great customer service and great technology, is what drives us every day.

What we've set out to accomplish is a daunting task, as Chip talked about, which is to change the infrastructure of the banking industry. To do that, we continue to work with a group of best-in-class partners like nCino, Finxact, Apiture, Payrailz and others with a laser focus on building the bank of the future. As of today, we're live on a Finxact core, not only with PPP loans, but we've opened our first savings accounts. Loans and deposits in production on a next-generation platform. Next up for us is a best-in-class business checking account with the goal of being able to deliver low-cost deposits and payment solutions at scale. It's been a long journey, but one that we're confident is going to be worth the effort.

One final note before we turn it over to questions, you may notice a bit of a different look and feel from Live Oak as we rolled out new branding this past quarter. Importantly, we aligned ourselves around our purpose, dedicated to the doers. We recognize that small businesses owners are a unique, resilient group, and they're being uniquely tested in this environment. In many ways, they remain the backbone of our economy. They're truly the doers that we serve, and now more than ever, our focus will be on them.

Chip, anything else or you want to open for question?

That's it. Let's listen.

(Operator Instructions) Your first question comes from the line of Jennifer Demba with SunTrust.

Your commentary was really, really helpful, and I have some questions on a few topics. I guess I'll start with credit. In Slide 7, you outlined what we feel are the higher-risk industries right now relative to the pandemic challenges. Wondering if, Chip, you could go down the line of those industries and tell us what you're seeing from your clients in those industries, much like you did for the other grouping at the top of the call.

So Steve is going to help me with this. So we have $12 million -- let's start from the bottom. We have $12 million of exposure in quick-service restaurants, about $4 million of that happens to be one business on the West Coast. It's a breakfast outfit that had $4 million worth of EBITDA last year, totally shut down now. Those businesses are trading out at about 15x EBITDA, so a very valuable business. No matter what it takes to get to the other side with someone like that, we're going to be there to help and we just don't know what government programs there will be available. In fitness centers specifically, the larger customers are doing just fine. I mean they're doing every day stuff like wiping things down. It's really state by state, Steve, on that one of who's open and who's not. Steve, you'd be better off talking about hotels. I can talk a little bit more about wine and craft that I've already touched on. And why don't you take the hotels more specifically, and then WBC or the -- and the FEC?

Certainly. Yes. Well I touched on hotels a little bit. So we are fortunate in that a good bit of our portfolio, our low loan-to-value real estate secured first position. So we have some cushion. The tertiary market projects are doing -- actually seeing some improvement in occupancy. So again, that's positive. We do have a handful of projects that are going to be a long road to recovery. They're more full service in nature. Events have been canceled, which is a big component to their revenue. It's going to be a long road. I had mentioned that I'm not anticipating huge losses, but I do anticipate needing to continue to look for accommodations in order to help them through the other side. Again, huge unknown. They're beholden to restrictions that the government puts out there, depending on how COVID plays itself out, but they seem to be focused on trying to work themselves through to the other end, but you may see some noise as we get to that side.

The wining -- do you want me to touch on...

FEC.

FEC, yes. So family entertainment centers. This is truly an impacted industry.

Yes.

It truly is, and this is going to be definitely a challenge for us. They are experiencing stress due to continued restrictions and limitations to what they -- when they can be open and how many folks can be in from the extreme of trampoline parks, for example, that our -- the question becomes what will customer behavior be going forward even after this. And we're going to have -- now most of these, though, are government-guaranteed loan facilities. We are putting a qualitative mark against this industry to reserve appropriately due to the unknown, but this is going to be one that's going to require some work out. Some of our larger ones are well positioned. They've got some resources, and they'll start to do well. But it's...

Well and I just think in the interest of time, Jennifer, let me just say it this way. When I went over every one of these with every vertical the last 72 hours, not only in the room were the people that originated the loan, the people that serviced the loan over there. And then our special assets group, when in fact, they were involved were in the room. And the special assets people, I mean, you talk about a glass half empty kind of group of folks. I mean it's (inaudible). I don't think anyone felt like that we were not properly reserved. Our reserve on WCB was like $3 million and nobody saw that much in charge-offs because the top end operators are still doing -- but that would be our answer to that question, Jennifer.

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

Sure. So our biggest line item, and Brett can jump in too, our biggest line item being salaries and benefits. We do not see adding more people on that front, so that should be pretty flat. We obviously had the accrued bonus in the second quarter, offset by some deferred fees for the origination. But by and large, that should be pretty constant. You look across our travel line items, our advertising line items, our branding line items, those were all down. And I think we'll continue to be pretty efficient in those regards, too. But Brett, any other thoughts on moving pieces on that?

We must have lost Jen.

No, I'm here.

Did we answer your question, Jennifer?

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

It is a day-by-day fight. I would have thought that a checking account looks like a saving account with a debit card, but all the experts tell me there is more components to that with transactions and disputes and fraud and everything else. We are currently slated to be done by the end of the third quarter and live. And again, we are working through that every day, but I fully expect that by the time we meet 90 days from now to have sent you an e-mail with a link to open up a checking account.

Okay. Great. And Chip, I'm curious what you think about this. So you did a nice job of giving more information about the fintech investments. Do you think this crisis, this credit crisis, this economic crisis, delays some of bank's investments? Or does it accelerate it as they hunker down and conserve capital?

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

37.

37 banks. Neil sits right next to me, Jennifer, as you know, and he's on at least 4 or 5 calls a day from fintech companies looking for money. And thank goodness, I don't have to be on all those calls, but I am on ones where we want to invest, and it is ridiculous, the evaluations of these businesses and the number of people chasing these fintech companies. So Neil, why don't you take a crack at the digital on slots, so to speak.

Yes. I think the short answer, Jennifer. First answer would be accelerating. And I think it's due to the fact that there is a recognition -- mission-critical workflows, digital onboarding has gotten essential in an environment like this and beyond. And so there really are really kind of a tale of 2 cities. Those software companies are connected to things like cash registers, NCR. Those are probably getting a discount in terms of valuation and adoption. However, on the other side of it, anything connected to digitally on -- nCino is a good example, digitally onboarding a small business or consumer and then obviously, on the servicing side, servicing it in a self-service manner are just accelerating. And the proof points out there, the public proof points happened last week with nCino, but I can tell you the private proof points continue as we had thought that maybe there'd be a discount to valuations, companies that are connected to those mission-critical workflows. It's quite the opposite. Their -- those companies are experiencing no changes, only acceleration in ACV and bookings, and therefore, all the private equity money and venture money behind this is seeking to invest. We happen on the Canapi side of it. We happen to be in a really great position because our story there is quite different than every other venture company and that we have banks as LPs that intend to use the software and/or service. So we are out there winning deals. You'll see them in the press here imminently from -- and away from some of the best venture brands in the business.

Well I'll give you 2 examples. I think this is correct from memory, Neil. In the last 2 weeks, we looked at a $700,000 recurring revenue company. And the best names in the business in the Silicon Valley put a $100-plus million valuation on that business. This week, we looked at another company that in January had $1 billion of annual recurring revenue -- contracted recurring revenue. In June, it was fix and the value of that business post-money was $230 million, again, led by one the most sophisticated Silicon Valley investors, the biggest names in the business. I mean it is absurd.

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

Correct, correct, anyway. You had one more.

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

Just had two, wanted to follow up on. First, on the Slide 7, the -- with the COVID-19 higher-risk verticals. I just want to make sure I understand what's going on with the 75% of existing borrowers who received a PPP loan. I think I missed the comment, but were those borrowers who sought you out? Or did you reach out to them through outreach? What triggered the loan getting started there?

So I'll start, and Steve can help or Huntley can help. I mean so immediately when this thing hit -- so remember, we have 45 22-year olds that collect financial statements every 90 days on all 4,200 of our customers. So we're going over budgets constantly. So when this hits, all out 24/7 calls to our customers, what do you need, what do you need, what do you need. And I think the number that sticks in my brain, Steve, is we granted before PPP like 1,288 deferrals to existing customers trying to help them out.

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

Right.

When the 6-month payment support from the SBA, so this is really, really impactful that 60-plus percent of our portfolio is having the payment not deferred, but fully made on their behalf by the U.S. government as part of the CARES Act. When that came in, many of those 1,200 that were asking for deferrals said hold off. The 6 months may do the trick for me, I don't want this thing deferred and accrue interest if I don't need it. So most of those actually are kind of in holding pattern. We will consider providing them 3 months of support after the 6 months. But most of the business owners were in a position where they wanted to see if the 6 months will do the trick. So to be clear, that 90% of deferrals is not equal to $1,200. Just to be clear, but we have those queued up, and that was a proactive outreach.

And then about 3,000 of our 4,200 customers did take PPP as I recall.

Correct, yes. 75%.

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

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

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

Got it. Yes. So it's a dialogue that's always going on. So -- yes. Okay. And then I just want to ask one Question, if you can comment on anything different in the last 3 weeks that you've seen. There's been more concerns in some states about higher coronavirus cases. So really, two forward-looking things I'm looking for, if you can do it. Anything quarter-to-date? And also if there is any commentary you might have on the proposals working their way through the House and the Senate and the White House. I know it's early on some of those, but if we're likely to see sort of another version of PPP? Or kind of how are you thinking about what might come next from the federal government?

Yes. So I'll try this again. So in my conversation the last 72 hours with many, many, many of our folks, I would say that [85%] of our folks that deal with these customers every day feel like their customers are incredibly upbeat. I mean P&C insurance agents, multiples at an all-time high business. I mean I can continue to go down all 34 of them. The ones that are having challenges Steve has spoken about, and Huntley may want to -- maybe know a little bit more about the government stuff than I do. But I mean we have been told by our government relations people for some time that there is across-the-aisle support for increasing the flagship product, the 7(a) product from a $5 million maximum to a $10 million maximum and increasing the government guarantee from 75% to 90%. I know there is -- again, as of last night, they had a lot of horse-trading going on. We have also heard that there may be a chance that (inaudible) may have the SBA make another 6 months' worth of P&I payments just for SBA borrowers, which would be unbelievable for us. But we're not going to be, Chris, spike in the ball on the 5-yard line here. We've all been through this stuff before, and it's never over until or so. We'll just keep our heads down in way. We do believe that something actually will happen no later than mid-August as of last night. Huntley, do you have any other data on that?

No, I think that you said it well, Chip. The other 2 things that we have heard a little bit about: One, could there be another version of PPP aimed at the severely distressed and most impacted businesses, I think revenue down 50%, something like that. As there is already money sort of still in the coffers of that program. And then the second is whether or not there'll be any forgiveness -- accelerated forgiveness or blanket forgiveness that is signing legislation to help with the small balance loans and that, from an administrative perspective, obviously, would go a long way for the industry. So those are the only other 2 pieces of stuff we've heard but to Chip's point, we'll react once it becomes law.

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

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

Thanks, all.

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