Live Oak Bancshares, Inc.

Thank you for standing by and welcome to Live Oak Bank Chair's third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. I would now like to hand the conference over to General Counsel and Chief Risk Officer at Live Oak Bank, Greg Seward. Please go ahead.

Thank you and good morning everyone. Welcome to Live Oak's third quarter 2022 earnings conference call. We're webcasting live over the internet and this call is being recorded. To access the call over the internet and review the presentation materials 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 third 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 uncertainty. 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. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Thanks, Greg, and good morning, all. I will kick off today's earnings call describing how we think about capital in a potentially declining economy, followed by BJ on results, and we'll close with Huntley describing how we operate the business and where we are going. Let's move to the next slide. Here are some household names indicating a recession may be around the corner. Bezos says batten down the hatches. Goldman's CEO says there's a good chance for a recession. And Jamie Dimon says a recession is likely in the next six to nine months. Next slide. Certainly, the world is not coming to an end. It is our belief that capital is king in any environment. Therefore, a properly managed balance sheet yields a flight to quality for our customers, our folks, and you, our shareholders. None of us has a crystal ball. There is little doubt that uncertainty is everywhere, from runaway inflation to higher interest rates to an unsettling political environment, and we could go on and on. The truth is we operate one of the most highly leveraged, highly regulated businesses on the planet. In the baseball business, batting 400 gets you to end the Hall of Fame. Making 60% of your shots in basketball does the same thing. In our business, making good loans over 99% of the time is essential. Let's talk about recessions on the next slide. Reflecting on the recessions that I have lived through, one glaringly comes to mind, and that is the third from the bottom, the recession in the early 2000s. I had started an internet banking software company in the late 90s, and I was sitting on the runway at Atlanta's Hartsfield Airport en route to meet with a senior management team at the AB and AMRO Bank in Amsterdam. We were number 25 for takeoff. My company's market cap was higher than Delta's, and we were losing $60 million a year. How could that possibly be? I met with the AB and AMRO team at the airport for an hour. took the same plane back to Atlanta, and called an emergency board meeting. In the next several weeks, we raised over $300 million from our customers that were using our software and not from Wall Street. Then the dot-com crash. Without that capital, I'm not sure the company would have survived. Recessions provide lessons learned. We are often asked, how will your small business customers handle a downturn? How will your origination engine operate? If the past is a proxy for the future, how have we managed your balance sheet these past 14 years? Let's take a look at that on the next slide. Organic growth in our equity account is accelerating. So let me unpack this slide for you a bit. If you'll follow the blue boxes above the timeline, You can see that since inception, we have grown considerably while absorbing little dilution. The bank was capitalized in 2008 with $13 million. Shortly thereafter, we issued $5 million in preferred stock, followed by the sale of 24.9% of the business in 2014 to Wellington Asset Management, while we converted from an S to a C corp. A $50 million dividend was paid to the original shareholders, thereby recouping their original investment plus some. We then took the company public in the summer of 2015 and completed a secondary offering in the fall of 2017. Along the way, we created Encino and spun off its 65% ownership in the early days to existing shareholders. From inception, we have raised $243 million, and the shareholders' equity at the end of Q3 was a little over $800 million. Note the blue line from our FinTech investments had a great deal to do with our non-diluted capital generation. So let's examine that on the next slide. Here's a bit more color on our FinTech profits. Since 2015, we have invested $52 million in all companies noted above. We have received $163 million in cash from the exits of Finzec and Payrails. and the sale of $15 million of Greenlight shares at a cost basis of $1 million. In addition, the value of all other private companies totaled $158 million based on the last round of financing. We are confident of investor support at those levels, notwithstanding current market conditions. Moving on to the next slide. Just as we did last quarter, we would like to reiterate just how good we are at lending to small businesses. The average charge-off ratio for other SBA lenders is over 13 times ours, while 66% of the $20 billion in loans we have originated since inception have been within the SBA 7A program. So, if we have proven that we can grow the business organically in a unique way, Are there other arrows in our quiver if economic challenges arrive? Let's move to the capital slide. The conservative nature of this slide goes beyond the Tier 1 capital ratio of 13.2%. Our adjusted capital ratio, which equals Tier 1 capital plus allowance for credit losses plus the fair value mark divided by our unguaranteed loan exposure, equals an unprecedented 22.9%. The addition of implied pre-tax value of FinTech investments mark-to-market adds another $158 million to the frenzy. While SBA premiums have declined, our mark-to-market profit on our guarantee portfolio has historically been in excess of $100 million. Excess capital is freedom and flexibility. Let's move to the continuum cycle. Next slide. So what does all this mean? First of all, there is no evidence of a recession yet. We are loitering in the first column. If the downturn occurs and credit losses begin, bank credit officers typically react and underwriting guidelines change dramatically. This has always created an enormous opportunity for us to not only stand by our existing customers, but allows us to actively seek new opportunities as the competition pulls back. Again, if any of this occurs, there will be a flight to quality, and we will be in the thick of it. BJ, let's talk results.