Live Oak Bancshares, Inc.

Good morning, ladies and gentlemen, and welcome to the fourth quarter 2020 Live Oak Bank Shares Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. 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 Bank Shares. 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 in 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.

Chip Mahan 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 Smith, our chief credit officer, likes to say, Our borrowers have been kicking the can down the road, and I will give you an example or two of that and how that works. We're going to talk about real core earnings. Everyone that owns our stock is trying to figure out, post this horrible COVID thing, what are Live Oak's core earnings? Post PPP 1.0 fees. Post PP 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 boosts the reserve and fair value mark to about 3% of unguaranteed paper. But wait, there's more. Our treasure chest was about flat this year at $1.7 billion. And if you mark that to market, it's worth between $140 and $170 million in pre-tax 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. Last round of financing at $155. So tier one equity of $74 on just that alone. When you add all that together, it's very unusual. state of a fortress-like balance sheet. Now, Kay Anderson and I have been in business together for more than 30 years. She helped me start the bank and I asked her about six months ago to dedicate her life to what we officially 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.