Live Oak Bancshares, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Live Oak Bank Shares, Inc. Earnings Conference Call. At this time, participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Today's call is being recorded. If you require any further assistance, please press star 0. I would now like to turn the conference over to Mr. Greg Seward, General Counsel of Live Oak Bank Shares. 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 Maham, our Chairman and Chief Executive Officer.

Thanks, Greg, and good morning, all. I am now on slide three, 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, Encino, 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 four, our focus. So, you know, 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 six months. to 100% of the country's SBA borrowers. So there was massive outreach, outreach to us and from us, from all of our customers. And then the PPP. So on April the 3rd, we launched into battle, and in three weeks, we made about 10,000 loans, totaling about $1.8 billion. Huntley's going to tell you a little bit about when Brett's told you last night about $60-plus million in fees, of which we gave seven of that back to our folks. We focused 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's going to talk a bit more about this, but I am tickled to death that my friends in Nashville, Tennessee, Terry Turner, the co-founder with Hugh Queener, Pinnacle Bank invested $10 million in Aperture, 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's going to talk about deposit launches and everything Finzact here shortly. So now I'm going to move on to slide five, credit and fair value loan metrics. 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. Yeah, I mean, zero past dues because of the government intervention. Watch list is the same. Classified assets down a little. Non-accruals down a little. Charge-offs, 21 bips. Loan loss reserve, roughly $70 million. But, folks, you know, 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 will 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've got a billion one of government guaranteed paper, and with those capital markets coming back, you put a mark on that, and I don't know what Keynes will tell you, it's 60, 70, 80 million dollars worth of value there, giving us a bit of an interesting cushion compared to other banks. This has been incredibly fun for me, folks, shareholders, other interested parties. If you look at the next slide, slide six in 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 overall. which is about 70% of what we do. So I'm going to pack this and just stay with me on this brief, because I think it's kind of fun. So vet 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 abound, and the price of the businesses is about 150% to 200% aroused. This is about a consistent $100 million-a-year business for us. Healthcare 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, B of A 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, you know, what the heck, 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. This is about $100 million a year business for us. Death Care, another essential business, 244 customers, probably three times that in number of rooftops out there. Revenues are higher. This is our lowest reserved vertical. Chickens, this is interesting, $265 million of unguaranteed pay for 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, now it's 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. We find that our customers are moving stuff out of the house because they're working from home. Therefore, their occupancy rates are higher. Wine 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 nine, Micah, which is... The Encino – no, no, Steve, this is over to you, my bad. This is over to you. Please take over.