Ladies and gentlemen thank you for standing by and welcome to the First Quarter 2020 Live Oak Bancshares, Incorporated Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Greg Seward, General Counsel for Live Oak Bancshares. Thank you and please go ahead, sir.

Thank you and good morning everyone. Welcome to Live Oak’s first quarter 2020 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 and commentary that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today’s call in our Event Calendar 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. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Greg, good morning, and thanks. In these trying times you find out what you're made of. What do we Live Oak as an institution stand for? Are we just a bank? Yesterday a top core bank account officer told their customer, we don't know anything about the PPP program, call the home office. What do each of our folks stand for? Well we found out. We reverted to our original guiding principles and we stood tall. We have always thought of the three legged stool of business: our folks, our customers, and our shareholders. With this thesis that if you do everything humanly possible for folks [technical difficulty] and you tell them they have one job and one job only, treat every single customer like the only customer in the bank. And simultaneously you tell your very talented credit folks that rule number one is soundness, rule number two is profitability, and rule number three is growth. Then all three groups will win. Shareholders will win. I cannot begin to tell you what all 600 of our folks have done. All 600 have been going at it 24/7 since the situation began. Here are some responses from the field customer. What we're facing right now might be characterized as an economic meltdown. We have prided ourselves in never laying anyone off due to lack of work in 30 years of business until we were forced to curtail operations this March. We can't tell you how thankful we were to see that loan amount in our business checking account this morning. Today we spent hours planning on how we will bring our employees back and resume our full operations as soon as it is acceptable to do so. Number two, Wow!! double exclamation. I just logged into my bank account and…

Thanks Chip. To follow up on his comments in times of stress thanking fundamentals always seem to come back to liquidity, capital and credit quality. And we believe we've always run a conservative balance sheet. But as the quarter unfolded, we took some cautionary steps to strengthen that even further. As Chip mentioned, $1 billion of liquidity on our balance sheet that increased by almost 25% over the quarter. We also saw an incremental about $50 million of 7(a) loans to show up a little more capital here at the end of the quarter. Our risk capital stands at a healthy almost 15%. And times like this it's also nice to have $1.7 billion worth or nearly half of our loan portfolio guaranteed by the government. You might have seen in March, we authorized the small share repurchase program to better position ourselves when we get to the other side of this. We have not repurchased any shares and we don't anticipate doing so until the world settles down. Our dividend is reasonably small, just $0.03 a share and we plan to maintain that unless things get really rough. Chip talked about credit quality, I’ll cover in more detail. We always follow the guiding principle, the safety and soundness comes first. And we believe we've been prudent in our credit decisioning. But you only can really tell that prudence in time of stress when you see how well your customers with the help of their bank are able to navigate a crisis. As a small business bank, we find ourselves in the last few months squarely in the eye of the storm. From the time the pandemic started, we’ve been in touch with 100% of our over 4,000 borrowing customers. As Chip, mentioned we processed deferrals for over a quarter…

We’re ready for questions.

[Operator Instructions] And our first question comes from the line of Jennifer Demba with SunTrust. Your line is now open.

So many question so, just starting with credit, you guys do you have only about two dozen or so verticals that you work with. Just curious as to what you feel like the most vulnerable industry bar that you're talking to right now. I know - you've got a unique borrower base with the SBA guaranteed and what they're going to do be it above and beyond right now, but who do you feel like the most vulnerable right now?

So Jennifer, this is Steve Smits, thank you. So we've identified what we would call our most impacted industries, as you can imagine dentists, family entertainment centers, early childhood education, wine and craft, fitness centers that makes up just north of 20% of our portfolio. Now what we've done with them is first and foremost where it's come and handy is that we've been very diligent about collecting quarterly financials. So the first thing we do is we look at the most recent pre-crisis financials that we have in each of these businesses. And take a look at their balance sheet, see what their fallback position, their liquidity positions look like. We map that against their income statements and their historical fixed cost overhead. And we've run the analysis on how many months can they sustain based on the pretty material impact to their topline revenue. And then as the government programs and interventions kick-in, we map against the impact that they will have. So we did reach out first and foremost besides just these most impacted businesses. To Chip's point, 100% of every small business borrower by vote bank on a phone call. We had a very detailed spend a good bit of time talking to them assessing how they felt. We immediately reacted with the deferrals, about 19% of our clients expressed the need for a deferral. And then - as the government started kicking in with these programs we saw that flat line and even go down in some of them opting to hold off on deferral and not the least of which the impact is the six months of payments by the SBA. So 76% of our portfolio are SBA 7(a) loans that will have the full P&I payments made - for them on behalf of the U.S. government. So that's created some confidence among these folks. PPP every small business borrower of Live Oak Bank that expressed the need and a desire for a PPP loan received one. So that also then created some confidence in this group as well. So we continue to map what their liquidity positions look like how impacted the revenues are and then try to assess the impact of these enhanced programs that are coming out from the government to monitor them very closely.

And Jennifer so I would look at that kind of forward tranches you know the number one would be payment deferral. Number two would be PPP. Number three would be as Steve mentioned the government making payments on their behalf. And then number four, we do feel like there's a good shot of more money coming at 9% guarantee. So our average loan is about $1.3 million. So 25% would be either guaranteed percentage towards a $3.750 million bucket - having additional financing capabilities with a 9% guarantee for working capital to take them beyond this challenge I think would be you know where, but we'll see.

Can you elaborate on the economic scenario that was factored in your provision, you mention it very quickly Huntley, but could you say that again and just give a little more color?

Yes Jennifer, this is Steve Smits again. So clearly, the most impacted impactful was the quantitative factor that we used for unemployment that we assumed an immediate impact to an increase in unemployment write-off the bat and then sustained an increased unemployment throughout the year. So that was pretty impactful. That was probably just shy of an $8 million impact to the provision just by making that assumption. Time will tell, but right now and because CECL looks at lifetime loss scenarios that had a pretty meaningful impact to the provisions.

How much participation do you expect to have in the second round PPP? Will you go beyond your current client base or what do you expect in there?

Well Jennifer, we're going to go like a bat out of hell. So, we have partners that we're working with some substantial partners and we're trying even - predict rapid - a bit more technology. Round one was kind of the concierge's brute force get it done for our customers tranche, who knows when they're going to hit the starting gun you know maybe some have said at 12:01 a.m. tomorrow, but we're ready and we're going to go as fast and hard as we can.

And what kind of a Huntley you mentioned that some of the hiring that you’ve done late in the year obviously came through in the first quarter expenses, but do you feel like first quarter expenses are get run rate going forward. What kind of expense control will there be to put in place to kind of offset some of - your provision needs?

It's a great question Jennifer. I think you know obviously things are a little hard to predict right now clearly things like travel expenses are going to be down for the near future. Our team is in place we don't expect that to grow at all, but it will stay - it will stay what it is. When we're going to be redeploying folks we might have folks going out and finally checking account customers here before along with folks who historically have been in some other roles. Clearly some of those folks are going to shift into more portfolio management work. I think my gut tells me there was a little bit of noise on the expense side this quarter, but we always have a few puts and takes. So, I don't want to face some dramatically lower, but I don't think you should expect to increase much through the course of the year.

Right. And what about future loan sales? What is the market look like right now? Is there any market for SBA 7(a) loans?

Hey, Brett.

Yes hi, Jennifer this is Brett. Right now the secondary market is - it’s a little bit tough. The buyers that are out there are typically just the buyers that want to buy and portfolio, government-guaranteed loans. There's a bit of - a bit slowdown with any buyers who are pooling loans. And that's just sort of during the time of difficulty getting a pooling certificate. So there is activity, loans are moving by given the reduced number of players in the market premiums are compress a bit as Huntley mentioned, referencing the roughly a four percentage point drop on average for loans that are being sold right now.

My last question for Chip, Chip what do you think the long-term implications of all this are for your company and for the banks, in general. You just already talked about, you think this certainly underscores the need for more technology, but any other implications do you see?

Jennifer, when I put my head on the pillow at night, I just think about our customers. And as you know, we go see 100% of our customers before we make them a loan to try to determine if they have the eye of the tiger. And so, now we're going to find out, because they didn't ask for this, we didn't ask for this. But we're going to swarm them after this PPP thing is over. And who knows where all that's going to end. But we have a geographic dispersed portfolio. We're in 33 separate industries, but yes, I actually think we're in the best position of any bank in the country because of the nature of the SBA program and everything that we’ve talked about previously. And I think we'll be better on the other side. We have spent the latter part, best part of the last three years working on these next-gen technology platforms. We were right on the precipice of launching FinXact. We’re booking loans on a FinXact core today in the PPP program. So America will be back, our customers will be back, Live Oak’s not going anywhere.

And our last question comes from the line of Chris Donat with Piper Sandler. Your line is now open.

So with all the other changes going on in the world, I'm making a small change trying to fill the seat that Aaron Deer has vacated as he takes the CFO position. So thanks for taking my question. What I wanted to have is someone who is new and looking at the story when I look at your dominant position in the SBA market, the $1 billion of loans dispersed under PPP seems sort of small. But can you help me understand that, is it just because you focused on the - on your existing customers that that limited how large you would be in PPP I just want to kind of understand the scope of PPP for you, the first round at least?

Yes, so look I mean the existing customers most of the banking industry was servicing their existing customers which is you know more streamlined with KYC perspective you go outside of that, I mean when you go into new customers and you're [indiscernible] at scale. You got to make sure you're comfortable with fraud you're comfortable with your KYC criteria - you're comfortable with eligibility. And we took a bit of a more manual approach in terms of reaching out and talking to people. And so we went through all of our customers over the course of a couple of days that went really efficiently and then we wanted to actually see where we could have an impact. So we did again you know we did four times more units than we did all of last year in the course of two weeks right. So I think we turn the crank pretty hard. There were some fully automated solutions that I think some folks used to turn massive volume. And we'll see if when the dust settles if they did a good job knowing the customer, knowing the eligibility, making good loans, being able to get the forgiveness up done the right way and ultimately being able to affect the guarantee with some of these loans go bad. We think about all of those things having been in the SBA business for as long as we have. We have banks that are much, much larger than us that did about the same amount or even just a little bit bigger than us that had 10x more people filling out forms all day long. So, we're really proud of what we did.

And Chris just I would remind you that our Chief Credit Officer, Steve Smits who is to run the Office of Capital Access at the SBA, so tell us the number two guy at the SBA in the last crisis. No one knows more about, is that a 100% guarantee or not then Steve and his team. So maybe we were a little conservative early and relative to other banks and just say well - just that's flat on this because it's guaranteed by government maybe, maybe it is and maybe it isn't. We are highly confident that every PPP loan we made is 100% guaranteed by the United States government.

Got it, I appreciate that. And then one of the challenges of this environment is social distancing. And Chip you talked about how you still meet with your clients and you know look in their eyes and see if they got the eye of the tiger. How are you handling one-on-one meetings or on-site meetings in a social distancing environment? Are you capable of doing those meetings through zoom and document exchanges or data rooms or something or just to help us understand how the world shifted following last month?

Steve why don’t you take that one relative to?

I’ll start and let Huntley add to it. We’ve - I’ve been one that is not really tech-savvy in a ways at zoom. So out of diversity comes opportunity right. For me I have embraced technology and found the wonders of other means of communication that can be as effective and meaningful. So you have being able to zoom-in have conversations I would think that actually what we've given up as far as face-to-face, walking in the front door. We gained in expeditiously more conversations with our borrowers that we ever have in the past and we already pretty good at it.

Yes, I also think you know because he has arrived just at the right time in this. We have constructing portfolio right and so they're managing draws and site visits and inspections and those are happening virtually right and we're seeing collaboration happening in that way. We are as Steve said incredibly plugged in and in communication with our customers. Would we like to be doing that and also going and shaking their hands absolutely. For our existing customer’s that's actually not really the requirement we've met them in person, we've shaken their hands. Now our relationship can be totally virtual for net new customers look as the world develops, we will be back to face-to-face. We think that's important too, but we're awfully connected right now there's no question about that.

Got it. And then just last one on the economic forecasts you're using that Huntley talked about, I just want to make sure I got it right. It ends in double-digit unemployment, Huntley did you give us a timeframe for that I was scribbling?

So through the end of the year will be, will still be double-digit through the end of the year in this forecast and then start you know some slow recovery after that.

Thank you. And this does conclude today's question and answer session. I would now like to turn the call back to Chip Mahan, CEO for any closing remarks.

Well, we just appreciate everyone attending today and we look forward to progress in the PPP program and see you on the other side.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.