Live Oak Bancshares, Inc.

I would now like to turn the conference over to Greg Seward, Chief... ...fourth 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 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. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Thanks, Greg, and welcome to our Q4 earnings call. First of all, I want to introduce to investors our new CFO, Walt Pfeiffer. Walt joined the bank in 2015 and brings 18 years of experience in the financial industry. including various finance, treasury, accounting, audit, and deposit analytic roles. Prior to joining our bank, Walt served as the deposits finance manager at Barclays USA, where he managed the finances and data analytics of a $10 billion deposit portfolio. Of course, BJ and Steve Smits join us and will be active participants in the Q&A session. Before I turn things over to Walt, I just wanted to touch on a few non-operating observations on slide four. It will always be our intent to lead with credit quality, as many of you on this call believe small business enterprises will be the tip of the spear if a downturn occurs. We will examine the numbers and let you be the judge. Next, I thought we should look at our loan book over the last five years to check in on organic growth. We then will examine deposit pricing across our industry, and yep, The B of A Securities Group announced that evil deposit beta accelerated from 48% in Q3 to 52% in Q4. Technology has made it easy for folks to seek higher rates, and they are doing it. On the next bullet, I will examine our business model versus the industries and unpack what appears to be a moat forming in our favor. Lastly, a comment or two on operating leverage before we move on to the most surprising development at the SBA since we started this bank. Moving to slide five, my takeaway on this slide would be steady as she goes. I cannot tell you how proud I am of our lenders and the credit team. Six million in over 30-day past dues on a loan book of over $5.6 billion. What? And non-accruals, not paying as agreed, of a little over $40 million. unheard of in SBA lending when compared to others. Moving to slide six, our loan loss provision supporting our growth as opposed to specific reserves for impaired credits allow this slide to join the steady as she goes club. Please recall that the fraudulent national credit in Q3 was slightly under $8 million. So the way I look at it, total charge-offs of $13 million for 2023 or 22 basis points was a remarkable performance during trying times. Steve Smith will comment on his current view of the world during the Q&A session. Please turn to slide 7. For 15 years, we have been primarily a lending company. So how have we done over the past five? We grew our customer base from 5,000 businesses to over 7,500, a 48% increase. Not bad. What about the other side of the balance sheet? How are we and others funding their bank? Relative to my earlier comments on deposit betas, customers are moving their deposits no matter what your model is. Let's stare at the right side of slide seven. Our total cost of funds over the last year went up 1.47%. I chose a number of regional banks to look at as opposed to the industry in general. Those comparisons always seem to be skewed by the big five. The cost of funds in the group was slightly higher than Live Oak, both for the year at 1.57% or a linked quarter of 18 bets versus Live Oak at 15. So why do we bring this up? We're paying a market rate to our customers across the entire bank and others are not. Could it be that the cost of branches, tellers, and CSRs could make up the difference of 157 bps between their cost of funds and ours? What goes on in a branch to make them necessary to fund the bank when we fund our bank at 11 bps versus this group at 221 bps or 157 bps less than Live Oak? Are we really talking about the essence of self-service? Think technology versus full service. Think branches and call centers. So where are we really? Is there a difference beyond the numbers? Are we building a barrier to entry with our 161 lenders keen as to the nuances of government guaranteed lending? So let's have some fun. Recently, a famous bank analyst did a podcast and interviewed one of our customers. Let's see how things went. So famous bank analyst says to our Montana pharmacy owner, What is your relationship with Live Oak? So she says, I was introduced to Shayla at Live Oak through Luke, who is at Adaptive Financial. And he's the one who broke in our pharmacy deal. And he's been working with previous owners as a financial advisor. And he was like, hey, I've been having some issues as banks around here don't understand pharmacy. And even the bank that currently had the loan on this pharmacy for 17 years before still doesn't understand the industry. And so when I started working with Shayla, this is our pharmacist talking, I was just blown away. I didn't have to teach her about pharmacy. She got to teach me how easy the SBA loan process can be. And I was just astonished. I've heard honestly, nightmare stories of people buying practices and buying pharmacies. And that wasn't the case for me at all. This was more of a fast track deal. I never felt overwhelmed. I never felt uneducated. They just made it so easy for me. So you use Live Oak Bank. They finance the purchase of your pharmacy, right? She says, yes. Okay. But you also have a deposit relationship with the company. Yes, I do. They hold my bank accounts. As far as checking, I do all my EFTs through them. I do all my ACHs through them, all my big payments, anything like that. One thing I don't do through them is cash deposits. So the few checks that we get, which we don't get a lot anymore as everything is electronic, my cash deposits go actually to my local bank that is in our parking lot. However, if there were a way to get live oak to cash deposits, I would just use them. I don't feel like that because they're not right here and that there's anything less of a relationship. Everybody that I've worked with has been absolutely amazing in the customer service department and the knowledge department. Famous bank analyst says, got it. So you feel like you have a good relationship, but if there was a branch available, you would have your cash deposits go to Live Oak. I think that's what you heard, what I heard. So for that, I take my cash deposits over to my local bank. We get our change orders through them, but I just literally take and transfer all that into my Live Oak account. So what is my takeaway? It is that folks in traditional branches have to be all things to all people in a geographic area. Many of our competitors talk about high tech and high touch, tough to do in a transaction-oriented environment, even tougher to do in a branch-closing environment that spurns high turnover, even in good times. I like our model. I love our model. Deep domain expertise at Origination and throughout our entire bank. Individual account officers that are responsible for servicing are trained as to that industry. As to our call center deposit team, I ask Did you look up a recent podcast done on us? We were floored at the level of knowledge this person had as to our DNA. He is also a customer. Go listen to his interaction with our call center folks and his view of our business model and see for yourself whether or not we are building a sustainable, organic growing bank that would be difficult to replicate. Let's move to slide eight. The headline here is that our investments in the past have paid dividends. Expenses have flattened and revenues are increasing. That said, as we discussed last quarter, we will forever be in search of great bankers that have the eye of the tiger, that put capital in the hands of small businesses that share that same passion, which is a great segue to my last observation on slide nine. As many of you know, the SBA was created in 1953 in the eyes of our administrations. It is the smallest agency in the United States government, yet its administrator holds a seat on the president's cabinet. We have recently attended two meetings at the White House to understand some very significant changes that have been put in place to give access to capital to smaller businesses and many in potentially underserved areas. Historically, the SBA had its banks charge an origination fee and a 55 basis point trail on each loan to fund the programs. Under the revised plan, the origination fees on all loans under $1 million have been eliminated, and on loans under $500,000, all collateral requirements have been waived. Unusual. Shocking. One can use one's own underwriting standards as they do for non-SBA loans. On loans under $150,000, the government guarantee has been increased from 75% to 85%. Traditionally, we would say that our target market would be those businesses with revenues between $500,000 and $10 million. In that group in 2023, there were 1.5 million such businesses in the United States. There are 5.3 million businesses that generate between $100,000 and $500,000 in revenues. As the agency's number one lender, Live Oak's average loan over the past six years has been about $1.5 million. This will change. We are extremely excited about these changes that will enable us to put capital in the hands of deserving businesses that we had not addressed in the past. Walt, over to you to talk about the numbers, bud.