Live Oak Bancshares, Inc.

Good day and thank you for standing by. Welcome to the Q4 2022 Live Oak Bankiers, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you'll need to press star 1-1 on your phone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded and I would now like to hand the conference over to your speaker today, Mr. Greg Seward, Chief Risk Officer and General Counselor. Sir, please go ahead.

Thank you and good morning, everyone. Welcome to Live Oak's fourth quarter 2022 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 that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today's call on our events 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 form of open 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 to those dialing in today. If I had your job, Bank analyst extraordinaire. My first question would be, tell me about your loan loss provision. Moving to the next slide, Micah. Before we unpack the provision, in our last quarterly call, we talked about some very famous folks predicting a recession. So are the last two substantial increases in the provision a proxy for the future? Let's drill down. Next slide. Let's go way back to pre-CECL. The provision in 2018 and 19 was between $0 and $7 million, mainly in the $2 to $5 million range. Then, in Q1 of 2020, we implemented CECL at the beginning of the pandemic. We were predictably conservative, providing $10 million per quarter during the COVID peak. We were equally predictable as the government provided PPP funding and our provision came down in 2021, as you can see from this slide. The title of this slide is regression to the norm. We're about back to where we were three years ago as our allowance for credit losses are 2.2% of unguaranteed loans compared to 2.4% in 2019. We do not see the Q4 provision as a proxy for the future at this point in time. Moving to slide six. In the old days of running banks, we typically added to our loan loss reserve that which we charged off that quarter. Not anymore. As you can see, our addition to the reserve has far exceeded actual net charge-offs. BJ will be walking you through some calculations on how growth in the loan portfolio has a great deal to do with these differences. Let's move to slide seven, Michael. As always, back to credit quality and the underpinning of a building of a healthy allowance for loan losses. Once again, soundness, profitability, and growth in that order. So here are the facts. Watch list is down year over year. Past dues are flat. Non-accruals are down 10 biffs. As we discussed last quarter, surprisingly, of the total non-accruals at year end of $26 million, over half, or $15 million, were paying as agreed. Charge-offs in 21 were $9 million and then $10.7 million in 2022. De minimis on a loan book of $4.1 billion of unguaranteed paper. Slide eight. Now that we have examined the past and reconciled the history of our loan loss reserve and our current credit quality ratios, what does the future look like? What better place to turn than our customers? I have known John Barlow for a long time. John started his data-driven consultancy 43 years ago. We asked John and his team to ask our customers a number of questions about the future of their businesses. After a thorough review and list cleaning, 4,600 loan relationship customers were invited to participate in an online survey between late September and early November. 768 customers, or 17% of the total, responded. As you can see from this slide, most were upbeat, and over 60% thought they could grow their revenues in 2023. Nearly 25% of our customers plan to borrow money to finance that growth over the next 12 months. Relative to customer challenges, difficulty in hiring and increased material and supply costs top the list. Half of our customers believe they are understaffed. Over the past 12 months, most customers have increased their prices over 10%. Over the next five years, 25% of our customers believe they could sell their business. This doesn't feel like a recession, does it? Over to you, BJ.