Live Oak Bancshares, Inc.

Thank you and good morning, everyone. Welcome to Live Oak's fourth quarter 2021 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.

Thanks, Greg, and good morning to all who have joined to review our performance for 2021. I am speaking to you by recording as cell coverage in my current location is a bit spotty. I will kick things off with a few brief overarching comments on the state of our business, with a peek into the future, and then turn things over to BJ and Huntley to describe our best quarter and best year since inception. We're going to talk a lot about growth today, both in the past and in the future. That said, we never stray from our guiding principles of soundness, profitability, and growth in that order. We're beginning to see a few things. Our government-guaranteed lending platform is scalable. We have grown from lending money to veterinarians, one industry, one vertical, and now it's 35. We've accomplished this. Credit quality for these small businesses with very little or no capital is unprecedented. Total non-accrual loans in this bank today are $23 million or 67 bips on a total unguaranteed portfolio at year end of $3.5 billion. $15 million of our non-accruals are continuing to pay as agreed. This is remarkable in this segment. It has taken us 14 years to prove it. And more recently, over the last few years, we've expanded beyond our theory of verticality. Our general lending group has grown from eight highly skilled Wells Fargo lenders to 22 adding similar quality individuals from other banks. So where does that leave us on the loan side of the balance sheet in terms of the future SBA opportunity? In the last 24 months, 1,800 banks have made an SBA loan. My guess is that there are at least 4,000 SBA lenders trained with primarily two skills. One, is it a good loan? Does my bank want to lend money to a small business operator that has no capital? The SBA prefers that their banks prove that the borrower cannot find credit elsewhere. Secondly, Does the loan meet the highly technical and stringent requirements of the SBA's 500-page standard operating procedure book? My guess is that 100% of the 4,000 lenders in this country have heard of Live Oak Bank. My secondary guess is that their view of us, in all likelihood, is favorable. Given that, we're going to launch a new business unit to determine who are the best and the brightest of this lot. And yes, we will be searching for the appropriate support staff of underwriters, closers, and servicers. This group will also support growth in our conventional specialty lending group that has grown nicely following our customers upmarket. You've got to spend money to make money. We've proven we can do that over the last 14 years, and more recently with our general lending expansion. And we're going to do a lot more of it. But is it worth it? Here's how we look at it. Assume a lender can produce $30 million of loans a year. In five years, that lender's portfolio has grown to $150 million. Expected payoffs begin in six years. Let's assume the portfolio levels out at the $150 times a 4% net interest margin, yields pre-tax, pre-provision earnings of $6 million. This is a highly liquid, highly profitable book of business supported by a staff of only five live ogres. Now on to phase two. What about deposits? Here's the way we're thinking about the future of the liability side of the balance sheet. Huntley and Renato will tell you where we are on completing the cycle of the total FinZac conversion. That is door number one and essential to create the product factory that we have discussed before. Door number two is to build out a bespoke bank for each of our deposit-heavy verticals. Door number three is our developer portal, which will make banking as a service the easiest to use in the industry today. Yes, creating non-interest-bearing deposits at scale is just around the corner. But what does it mean? Here's what I think. Take First Republic Bank. Jim Herbert has created an organic growth machine by creating unmatched service to the right customer. Those customers grow on their own and then refer like-kind friends, which enhances that growth. Only a small percentage of FRC's growth comes from strangers. As Jim says, spend more money on service, not advertising. All of that for his bank translates into the NPS score of 73. Our overall lending NPS score is 67. Our overall deposit score is 42. The combined is 47. So what's going on here? Our loan repeat customers are 20%. But why? We're an SBA lender, the agency's proclaimed lender of last resort. Our borrowers want to graduate. We're building more that they can graduate to. FRC surrounds you with service from day one. Most interaction is on the deposit side, wires, overdrafts, notary work, et cetera, et cetera. Imagine opportunities to excel when Renato fully digitizes our customers' experience by tying together bank stuff. like loans, access to the payment system, plus elegantly interfacing with practice management software, plus budgeting and forecasting, plus tax prep, plus payroll, etc., etc. So many touch points. So much stickiness. And remember, a recent McKinsey study reminds us the loan-to-deposit ratio of small businesses with revenues under $5 million is 20%. That's right. Deposits are five times what they borrow. Our industry has done a terrible job of taking care of these businesses. We have the capital and the earnings power to finish our mission and build this new platform to enhance the performance of small business America. BJ and Huntley will provide details on our financial performance for last year and how we're going to get there. BJ, over to you first.

Excellent. Thanks. Chip, good morning, everybody. As Chip said, we finished 2021 on quite a high note, building on the significant momentum we've seen really over the last two years in production, profitability, growth, and talent acquisition. Our quest to be America's small business bank continues, and 2021 was a year that saw significant milestones towards that goal. 2022 will be more of the same. The unique power of our core lending model dedicated to small business creates significant revenue that allows us to both deliver meaningful current earnings and growth while also aggressively investing for the future. As you can see, starting on slide five, 2021 earnings per share were $3.71. We generated 75% growth year-over-year and adjusted PPNR. driven by 37% revenue growth and 19% expense growth. The revenue growth was driven by outstanding loan production of $3.9 billion, up 46% from the prior year. Even with selling about 35% of our guaranteed loan volume, we still generated 32% loan growth on the balance sheet. This outstanding core business performance coupled primarily with the benefit of a $44 million gain on one of our ventures investments, resulted in 23% growth in tangible book value per share, excellent value creation. We delivered key accomplishments across the three dimensions of our business, verticality, scalability, and optionality. First, in our core lending model focused on small businesses, founded and built on the theory of verticality and knowing your customers and their businesses deeply, We saw high quality, profitable, balanced, and sustainable loan growth across our small business, specialty finance, and energy and infrastructure groups. Second, we continue to scale our capabilities, talent, product, and technology-wise, which will enable further growth, deepen customer relationships, increase retention, and provide both a high touch and a high tech experience for our customers. all on a next-generation technology platform. Thirdly, we're uniquely positioned to thrive in the future banking landscape. We have proven capabilities, a focus on innovation and strategic investments in financial technology that we use for both improvement in customer experience and as a source of growth capital. Turning to slide seven, let's take a look at some highlights from the fourth quarter. Reported EPS was 66 cents. in the quarter on 11 percent growth in pre-tax income and 8 percent growth in adjusted PPNR. You may have noted that both net income and EPS for the quarter were impacted by a much higher than normal effective tax rate of 37 percent versus a full-year effective tax rate of 21 percent. This was roughly a six-cent impact to EPS in Q4. Investment tax credits associated with renewable energy investments that were anticipated to close in 2021 and reflected in our tax rates reported in the first three quarters were delayed by supply chain issues related to the pandemic. Therefore, the Q4 effective tax rate was adjusted for this four-year impact. These credits are expected to close in the first half of 2022. A few quick highlights on the fourth quarter. Strong pre-tax earnings and PPNR growth continue to be driven by outstanding loan production and balance sheet growth. We experienced our third consecutive $1 billion loan origination quarter, resulting in 7% loan growth, excluding PPP. Credit quality continues to be very healthy with virtually no net charge-offs in the quarter and a reduction in non-accruals. We continue to attract talent, particularly in our lending and technology groups. We introduced our operating account called Tidal and made loan servicing enhancements that continue to improve our customer experience all moving us towards our goal of building the community bank of the future. And Live Oak Ventures made one investment during the quarter. The fintech space remains very active overall, and we see a lot of exciting innovation occurring across the fintech landscape. Both Huntley and Neil will give you a lot more color on these last two topics in a moment. Turning to slide eight, you'll see more detail on our adjusted earnings highlights. Adjusted PPNR growth of 8% linked quarter was made up of both revenue and expense growth of 8%. The net interest margin expanded nicely again, up 8 basis points linked quarter to 383. And due to the strong positive operating leverage in the business, we again saw a decline in the adjusted efficiency ratio, which has declined 700 basis points since 4-2-20. Diving a bit deeper into the revenue drivers on slide 9, you see the total revenue growth of 8% link quarter and 40% year-over-year was driven by the strong loan growth and resulting net interest income, which was up 7% link quarter and 50% year-over-year. On the fee income side, we continue to see healthy sale premiums on our guaranteed loan sales, with the average net gain in the fourth quarter of 110%. Turning to expenses on slide 10, as we discussed on the Q3 call, We anticipated having a strong hiring quarter, and we did. We added 39 net new LiveOakers, which was the driver of our expense growth in the quarter. And over the course of 2021, we onboarded 164 net new people, growing our employee base by 26%. Importantly, over 80% of those new hires were revenue-generating lender or lender support personnel. Turning to the balance sheet and returns on slide 11, both linked quarter and year-over-year loan growth and deposit growth were excellent. Loan growth, excluding PPP, was up 7 percent and 32 percent linked quarter and prior year quarter, respectively. That strong loan growth was driven by our third consecutive quarter of greater than a billion in originations across our lending platform, well-balanced among SBA and conventional products, as you can see on slide 12. And on slide 13, you can see that the strong originations with 54 percent of that volume fully funded in the quarter, more than offset prepayments and continued PPP runoff, resulting in that 7 percent net loan growth before loan sales. Our efficient deposit platform continues to provide fuel for our loan growth with both strong retention and new balance growth, as you can see on slide 14. The introduction of our new business checking account will positively impact our funding mix over time as well. This strong loan and deposit growth has been achieved with well-disciplined pricing. Average core loan yields have remained stable. Deposit costs declined nicely over the course of 2021, leading to that strong net interest margin expansion of 50 basis points to 383 and almost 70 basis points on a reported basis to just over 4 percent. Turning to credit on slide 16, our longstanding practice to frequent contact with existing customers and prudent underwriting remains a top priority. You see that our non-accruals declined, past dues remained very low, and we had virtually zero net charge-offs in the fourth quarter. On slide 17, you see in the upper right our capital ratios remain very strong. Note the green 22 percent bubble we call out on the graph, which is the capital plus reserve coverage of the unguaranteed portion of our loan portfolio, which is almost two times higher than most other banks. This, plus the $2.9 billion of highly liquid guaranteed loans on our books, give us both comfort and balance sheet flexibility. Wrapping up on slide 18 with a look at our performance versus industry peers, As Chip said earlier, soundness, profitability, and growth in that order is what we strive for, and we're hitting on all cylinders. With that, I'll turn it over to Huntley and Neal to give you a little bit more color.