Live Oak Bancshares, Inc.

Good morning, ladies and gentlemen, and welcome to the Q1 2024 Live Oak Bank Shares Earning Call. At this time, online is in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the operator. This call is being recorded on Thursday, April 25, 2024. I would now like to turn the conference over to Greg Seward, General Counsel and Chief Risk Officer. Please go ahead.

Thank you and good morning everyone. Welcome to Live Oak's first quarter 2024 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 the events and presentations tab for supporting materials. Our first 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 Mayhem, our chairman and chief executive officer.

Thanks, Greg. Good morning, fellow shareholders, and welcome to our Q1 call. I'm going to kick things off this morning and discuss several areas noted on slide four. We will touch on first quarter loan originations and our pipeline of future loans to be generated. As always, we will present a credit quality update along with a view of increased operating leverage based on investments we have made. Then we will discuss growth drivers by way of adding new lending officers and a new way of underwriting small loans. Then we will wrap up with a few thoughts from our annual report as we look back these last 10 years. Moving to slide five. Before we dig in on asset quality, a word on originations in Q1. Originations this quarter were $805 million. a $176 million decrease from Q4 of last year, and $226 million less than Q1 of 2023. That said, a number of larger loans slipped at the last minute. As of today, many of those have closed. We expect to catch up to our original budget by the end of this quarter. We expect a nice increase in originations over last Our overall pipeline is at an all-time high of 23% over last year. Back to this slide. Again, steady as she goes as it relates to the top portion of this slide. The bottom half requires further explanation. Steve and his credit team have quarterly watch list meetings with all 75 baggers. As you recall, these folks are recent college graduates responsible for gathering financial statements on all 6,000 customers every 90 days. This deep dive includes a healthy portion of all of our employees who touch the customer. He leaves no stone unturned. As we examine our charge-offs as it relates to our provisioning on the next slide, Steve has a proven track record of conservatism. The real answer to credit quality exists on slide six. Let's dig in on actuals these last 13 quarters. Our unguaranteed ACL reserves are almost 2.5% of unguaranteed loans and leases, or twice industry norms. As the nation's number one SBA lender, we have also evolved as one of the nation's preeminent cash flow lenders. With interest rates rising over 500 basis points in a very short period of time, our approach seems prudent. We have added $101 million to our reserves these last seven quarters, while charging off just $27 million. This includes $7 million in a fraudulent national participation in Q3 of last year. One needs to let this marinate a bit. Steve will be happy to answer any questions in our upcoming Q&A session. Walt will walk you through the non-operating adjustments as we move to slide seven. Needless to say, we're quite pleased to see a 26% increase in operating leverage from the first quarter of last year to Q1 of this year. This $8 million increase year-over-year should accelerate in the future. Our investments in nuts-gen technology allows us to better answer the question we constantly hear from our customers, am I approved and when do I get the money? Our goal of never touching data twice is around the corner. Treating each customer like our only customer is how we are built. We are in constant search of ways to raise our NPS score, and we look forward to this year's results. As discussed on our last call, we are incredibly excited about changes made at the SBA that affect loans under $1 million, and particularly loans under $500,000. Our tech teams are working 24-7 to automate this process in a way never before contemplated. Those loans will be sold on the secondary market. As we scale, those gain-on-sale dollars will have a positive effect on this ratio. Moving to slide eight. In this year's annual report, we thought it would be informative to look back over the last 10 years. In 2013, we were a $400 million bank with $50 million in capital. Just after receiving our charter in May of 08, the FDIC restricted our growth to no more than 25% per year until 2015. We took the company public two months later. In 10 years, we have grown to an $11 billion bank with almost $1 billion of capital. Assets have grown 39% year over year, while capital has grown a compounded 34% in those 10 years. Tangible book value has grown from $2.36 per share to $20.32 per share, a 10x increase over the period. While we're not suggesting that the past is a proxy for the future, steady, organic, non-dilutive growth has been our mantra from inception. The rest of this slide shows how we got there. About a half a billion dollars of organic earnings growth since the last time we had to access the capital markets back in 2017. driven by our core business earnings along with $207 million in gains from FinTech activities related to FinZact, Greenlight, and Payrails. Lastly, on slide nine, our increase in tangible book value compared to others in the KBW coverage universe is in a class by itself. We are up over 700%, while the KBW coverage median has grown a tenth of that. And with that, I'll turn things over to Walt.