Live Oak Bancshares, Inc.

Good morning, ladies and gentlemen, and welcome to the Live Oak Bank Shares Q2 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Wednesday, July the 26th, 2023. I would now like to turn the conference over to Greg Stewart, Chief Risk Officer and General Counsel. Please go ahead.

Thank you and good morning, everyone. Welcome to Live Oak's second quarter 2023 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 material that we will reference on the call, please visit our website at investor.liveoakbank.com and go to the events and presentations tab 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 that differ materially from our expectations are detailed in the materials accompanying this call and in our SSD files. We do not undertake to update the forward-looking statements to reflect the impacts 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.

Good morning, and thanks, Greg. Turning to page three, we are pleased to show significant improvements over the last two quarters. Core revenues were up, expenses were down, charge-offs were low, credit quality remained solid, notwithstanding a bump in non-accruals regressing us to our historic norm. BJ and Huntley will unpack the details in just a minute. I'd like to pause here at mid-year and reflect on what has happened so far this year and where our industry is headed. Did you know 9,000 banks failed in this country between 1930 and 1934? Moving to slide four, we see the history of FDIC insurance providing stability to our industry. No more Jimmy Stewart's It's a Wonderful Life runs on the bank. That was until March 8th. A Twitter-led run on SVB took place minutes after they announced a $1.8 billion capital raise, exposing their mark-to-market losses in their bond portfolio. $43 billion went out the door on March 9th, and it was over. Never had news traveled that fast. Never was a bank able to handle $43 billion worth of withdrawals in a matter of hours. Bank tech has changed. We are getting more efficient daily. AI will continue to fuel that fire. So, liquidity reigns. Rates are up 500 basis points. But what about the customer? I have been waiting for this moment for 28 years. It was 28 years ago we put the first bank on the Internet. Can you remember or much less imagine a 28K telephone modem in 1995? I thought then, as I think now, why the need for these expensive branches? Let's take a look at arguably the number one brand in banking. This quarter, the Bank of America released some data publishing a slide on their consumer bank. The rate paid on all consumer deposits was 22 BIPs. The cost to gather those deposits was 137 BIPs through almost 4,000 branches and an untold number of tellers and CSRs. On the self-service side, they have 37 million mobile users. B of A is a $2.5 trillion institution whose deposit beta since 12-31-21 was 35%. Why do you anointed analysts on this call applaud low deposit betas? Are we not, as an industry, celebrating screwing the customer? Our savings rate at Live Oak Bank has been 4% forever for both consumers and small businesses. With Live Oak's simple online account opening technology, aren't these 37 million mobile users vulnerable? I mention Bank of America only as a proxy for our entire industry in general. Quick question. If someone had just $10,000 to their name in a money market or savings account, is not $400 meaningful to them? The fat underbelly of our industry is exposed. Our expensive branch deposit gathering model is broken. Just a word on self-service and full service. My wife works out with a bunch of ladies trained by a wonderful professional. He saw a billboard in Wilmington with our 4% savings rate and opened a savings account. He was astounded when he had a question and someone answered the phone at our bank. He called us back each of the next two days to test us. We answered the phone in 11 seconds each day. You got to do both. I like our model. For 15 years, we've been the best small business lending bank in America by treating every customer as if they were our only customer. We are marching to the deposit side at precisely the right moment in time. Our competition cannot reprice their entire book of savings and money market accounts. We shall nip at their edges as their customers feel less appreciated. The combination of our next generation cloud native API technology will allow us to create new products and build a bespoke community bank for each industry we serve. while our industry remains woefully stuck in the mud, supporting and maintaining billions of lines of agent code that they call technical debt. Moving to slide five, just a word on credit. I call this our CECL slide. Historically, that is pre-CECL, a bank would build a proper reserve, and usually that quarter's provision was about equal to total charge-offs. Not so these days. complexity of building a model to predict lifetime losses in a bank that is growing the way we have is substantial. Here's a fun fact that of last Friday, 76 banks have reported and their collective loan loss reserve to total loans jumped two basis points from 1.21% to 1.23% while we increased our reserve from 183 to 246 or 63 pips. As you can see from slide six, Our provision over the last three and a half years has been four times our charge-offs incurred. Soundness, profitability, and growth in that order. One last word on production. We were not disappointed with our production numbers this quarter, even though we were a little over $100 million less than last quarter. Since Huntley and BJ do such a wonderful job running the bank day-to-day, I get to spend an extraordinary amount of time on the road visiting customers and prospects. We are getting better looks at the basket, higher quality, larger loans are coming our way as the competition seems to be much more discerning, focusing more on existing customers and much less prospecting for new clients. In our government guaranteed lending business, it appears that the silver tsunami or those baby boomers that are of age to sell have seen prices come down as interest rates have risen. Some deals just do not pencil the way they did a year and a half ago. BJ, over to you.