Live Oak Bancshares, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2020 Live Oak Bank Shares Incorporated Earnings Conference call. At this time, all participants' lines are in a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Greg Seward, General Counsel for Live Oak Bank Shares. Thank you, and please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Live Oak's first quarter 2020 earnings conference call. We are webcasting Live Oak over the internet, and this call is being recorded. To access the call over the internet and review the presentation materials and commentary that will be referenced on the call, please visit our website at investor.liveoakbank.com and go to today's call on our event counter for supporting materials. Our first quarter earnings release is also available on our website. Before we get started, I'd 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. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Chip Mahan, Chief Executive Officer of the SEC Greg, good morning and thanks. In these trying times, you find out what you're made of. What do we, Live Oak, as an institution stand for? Are we just a bank? Yesterday, a top four bank account officer told their customer, we don't know anything about the Triple P program. Call the home office. What do each of our folks stand for? Well, we found out. We reverted to our original guiding principles, and we stood tall. We have always thought of the three-legged stool of business, our folks, our customers, and our shareholders, with this thesis that if you do everything humanly possible for your folks, hire the right folks, and you tell them they have one job and one job only, treat every single customer like the only customer in the bank, and simultaneously you tell your very talented credit folks that rule number one is soundness, Rule number two is profitability, and rule number three is growth. Then all three groups will win. Shareholders will win. I cannot begin to tell you what all 600 of our folks have done. All 600 have been going at it 24-7 since the situation began. Here are some responses from the field. Customer. What we're facing right now might be characterized as an economic meltdown. We have prided ourselves in never laying anyone off due to lack of work and 30 years in business until we were forced to curtail operations this March. We can't tell you how thankful we were to see that loan amount in our business checking account this morning. Today, we spent hours planning on how we will bring our employees back and resume our full operations as soon as it is acceptable to do so. Number two. Wow! Double exclamation. I just logged into my bank account and the money is there. Triple exclamation. I feel like crying. I am so happy. Triple exclamation. Payroll is Thursday and everyone will get 40 hours. Six exclamation points. Number three and lastly. Live Oak took it upon themselves to try to save the lives of over a dozen restaurants in Wilmington. I mean emails at 3 a.m., kind of attempts to help keep these family businesses afloat. You know the military gives medals for this sort of service. I cannot say enough. Now let's take a step back before the virus. We were on our way to achieve what we set on the last call. We were highly confident we were going to exceed and maybe substantially exceed $2 billion in originations. On the liability side, we were moving all of our savings and CD customers to FinZact on the 13th of April. The loan portfolio was growing. Next-gen deposit platforms were being delivered. Credit quality was excellent. Then, boom, the virus. Who could have predicted that the United States government would choose the SBA platform to distribute what might be $1 trillion in capital to American small business? So now it's game time, and we leapt into action. How can America's number one SBA lender help? First of all, get the rules right. As everyone knows, the SBA has lots of rules. Rules for the Express program, rules for 7A, rules for 504. My gracious, the book is 550 pages long, but that was not the object of the exercise. How can Treasury and the SBA stand up a product overnight to be distributed by banks and fintechs alike to literally millions of small businesses? I will remind you that in a normal year, about 3,000 banks make about $25 billion in SBA loans. The first 350 went in 13 days. Your team here and other experienced SBA lenders had a lot of input into that product that was launched at 12.01 a.m. on the 3rd of April. Now, the absolute key to this stripped-down SBA loan is to get a loan authorization number. This platform is called eTRAN. Well, eTRAN is kind of like my grandfather's jalopy. Sometimes you just have to whack old Betsy with a hammer. Well, we know SBA's Betsy better than anyone. Many knew that and asked for our help, and we gave it to a top four bank, to several top ten banks, to Canopy banks, and to some of the largest systems integration firms on the planet. So everyone could win. So small business could win. So America could win. So what has happened here at the bank to level set? We have 4,400 customers. We service 5,600 loans. Before the CARES Act, 1,128 customers asked for a 90-day deferral of principal and interest, and it was granted. In the CARES Act, the U.S. government will pay all principal and interest for six months to 100% of SBA borrowers. This should give our customers some breathing room. This is highly fortunate for Live Oak Bank. After the launch of PPP, we had the following goals. Get cash in the hands of 100% of our borrowers that needed it. Help small businesses in the communities that we operate. And focus on partners in our verticals. That has happened. As of this moment, we have close-funded 4,826 loans totaling $953 million. We have eTRAN numbers for an additional 131 businesses totaling $28 million, and 116,000 jobs were saved by these 4,960 businesses. As we await the starting gun on round two, our pipeline to help others is substantial. Lastly, It is our belief that help is on the way on the other side. The Express program has been temporarily increased from $350,000 to $1 million. It is our understanding that the House version of Phase 4 of the CARES Act includes an increase of the guarantee percentages from 50% in the Express program to 90% and an increase in the 7A program from 75% to 90%. Both increases would be temporary, and there is absolutely no certainty that this would happen. It would be good for our customers and good for America. As always, my opening comments discuss credit quality, historically, and everybody listens. This time, I think you'll listen. So I'm moving to slide four. I don't think there's a banker in the land or a board that wouldn't be pleased with the ratios noted above. And as always, we like to note our effective capital ratio, $500 million in capital at the bank level, $61 million before the accountants mess with the loan loss reserve that Huntley's going to tell you about, about $2 billion of unguaranteed paper for an adjusted capital ratio of about 26%. And on top of that, almost $1 billion of SBA guaranteed loans, which if you slap whatever premium one on that is substantial additional capital. In addition to that, We have about a billion dollars prepared on the balance sheet before the Fed allowed us to finance these loans differently. We took down $50 million in a credit facility at the holding company, bringing the holding company's cash position to about $60 million in cash to begin to attack this challenge. Huntley, over to you.