Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2019 Live Oak Bancshares Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Greg Seward, General Counsel of Live Oak Bancshares. Please go ahead, sir.

Thank you and good morning everyone. Welcome to Live Oak’s fourth quarter 2019 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 reference on the call, please visit our website at investor.liveoakbank.com and go to today’s call on our event calendar for supporting materials. Our fourth quarter earnings release is also available on our website. Before we get started today, 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.

Thanks, Greg and good morning all. So I am going to kick off today’s call and reflect on our accomplishments over the last 4 years, discuss our excitement about this year and then we are going to have some fun and put ourselves in your shoes and discuss our views of the community bank of the future versus other bank stocks you can own. Then Neil is going to explain how we are going to accomplish this from a technical standpoint before Huntley takes us home on the bank’s financial performance in 2019. Moving to Slide 3, whereas we are tickled the depth of this year’s results here at Live Oak we often refer to marathons and not sprints. It was fun for us to go back and reflect on our first full year as a public company, 2016 that was, so beginning in 2016 we grew assets almost fivefold until the end of this year. The capital account over doubled from $200 million to over $530 million. Recurring dependable revenue quadrupled from about $40 million to almost $170 million, while non-interest expense was up 130% in the 4-year period. Well, by the way and along the way, we originated $7 billion of mostly government guaranteed loans. We sold $3 billion to avoid dilution and charged off just $14 million in 4 years compared to I think almost $55 million to the loan loss reserve. Moving to Slide 4, we are proud to show this slide every quarter. The loan portfolio grew 43%. Credit quality improved. Net interest income was up 32%. And most importantly, we grew the government guaranteed book from $357 million to almost $1 billion. As a shareholder, you should view that as a credit quality buffer. We were excited to continue to grow that into this…

Thanks Chip. To your point, as you have been following the Live Oak Bancshares, you know that one of our core theme centers around financial services technology. This next slide is a reminder of our fin-tech investing over the years. And as you can see, we have been pretty busy. From the spinout of nCino to the joint venture with Apiture to Live Oak Bancshares in assembling strategics, investing and mission-critical banking applications, we feel Live Oak Bank is on the forefront of digital transformation. We are excited to announce our journey continues in this latest endeavor, Canapi, which you might have read about, a fin-tech venture fund built by bankers for bankers. Turning on to the next slide, this close to $600 million fin-tech fund is unique and that the limited partners are highly progressive banks who are deeply interested in understanding the fin-tech landscape. LPs include 30 regional and super regional banks as well as the ABA and ICBA. While we think this is a major milestone for the industry, the benefits of Live Oak Bank are significant. In addition to fee-based income connected to the fund that also receives carry, which comes with the long-term harvesting of the fund, but even more strategically we get to see every fin-tech deal in the market with unprecedented clarity and we feel this will keep Live Oak Bank on the leading edge of digital transformation. Turning the page on to the numbers, as you can see we broke up the fin-tech activities into three buckets for greater clarity: Apiture, Live Oak Ventures and Canapi. Given our ownership in Apiture, we follow equity method accounting. And while we do not consolidate Apiture, our pro rata portion of the losses, do flow through our income statement. As you can see, we are…

Thanks, Neil. Thanks, Chip. Turning to the bank on Slide 17, we are extremely proud of the accomplishments of the bank this past year, which is a direct result of the dedication of our entire team and Q4 really punctuated just a great overall year. We knew that by holding more of our loans in our balance sheet we reduced our near-term earnings, but that will result in a stronger franchise. As you can see over the course of the year, we grew our loan portfolio by ever 40% and ended the year with a balance sheet of $4.8 billion. And we stay true to our strategy of holding 65% of our government guaranteed [indiscernible]. Our net interest grew 3% in the year despite three rate cuts in the year. And we remain disciplined on the expense side despite providing over $2 billion of credit to over 1,100 small businesses nationwide and working to build the next generation of technology in banking. On Slide 18, the lending franchise was strong across the board last year with our $2 billion originations spread across geography and industry. As you can see, our more established vertical continued to perform level and the newer verticals are maturing nicely. Overall, small business activity remains solid throughout the year despite SBA volumes being down industry-wide. In the SBA space, in 7a lending, we are proud once again to be the nation’s largest SBA lender this year extending our lead in that category, the testament to our model which combines deep vertical expertise and efficient technology platform and the dedication of our people to serve the nation’s small business owners and entrepreneurs. We also ended the year on top of the USDA lending list, which is an area where we continue to see a lot of opportunity,…

Thank you. [Operator Instructions] Our first question comes from Jennifer Demba of SunTrust. Your line is now open.

Thank you. Good morning.

Good morning, Jennifer.

Hi. So you said you are pretty optimistic on the economy and credit quality, but you are being a little bit more cautious on hospitality and craft beverage, can you kind of expand on those thoughts?

Jennifer, this is Steve Smits. Happy to. Again, we are looking at – those are two examples of industries that we have got our eye on how competition, for example, may impact the craft beverage space making sure that if it’s impacting the revenues and really, it’s about just remaining disciplined in our credit decisions, businesses have solid plans and then we look closely at contingencies that the business has to deal with unexpected bumps, balance sheet strength, cash on the balance sheet, proven ability to raise equity when its needed global support, so just remaining very disciplined in that front. Hospitality again, seasonality, so where we focus on is strong projects, very disciplined loan-to-values, almost our entire portfolio, our loan-to-value is our less than 65%, I would say across the entire portfolio, our weighted loan-to-value is about 40%, 45%. So, we are very disciplined, very conservative in that space.

Have you seen any credit deterioration in either one of those loan buckets?

Nothing that rises to a great concern, we have seen a handful of beer businesses that have had – are missing their arc on their planned revenue growth and that’s due to competition. Most of those are smaller credits, very manageable and we are taking a very – like we do, take a very proactive approach to dig into their plans and see what they are doing around that, but nothing that I would call a macro concern, but there are examples of at a micro level of businesses that are struggling a little bit to ramp up and we are keeping close eye on that.

Okay. Huntley, you said expense control would continue to be a focus, what’s your thought on hiring this year in terms of more producers, you said you might go up market a little bit? And as you look at the mix of loan growth over the next couple of years, how do you see it evolving 24% of your originations last year were conventional, how do you see that mix evolving over time?

Sure. I think we largely have the lending team on the field that we want right now and we are in like a bunch of great verticals. The generalist team is hitting their stride, a bunch of great markets. And so we pickup one or two here and there maybe, but I don’t think you will see us grow the lending side to the same extent that we did last year and we really love the team that we have got right now. In terms of the mix, we look at – we will make all the great 7a loans that we can find and we will continue to chase that as, I think just generally, but the relative size, the opportunity set for us in conventional is larger than it is in 7a. We do still think there is a lot on the USDA front that we can still do as we broaden out across all of the different programs they offer. And so we still think there is more upside in the USDA side. I think more of your incremental growth is likely to come from the conventional side though. They are also a little larger credit. So they will move the needle a little bit more on a relative basis.

Okay. And Neil, I think you said you are rolling out the new deposit product very soon here?

Yes, look, I said that, it takes longer, I am thinking of you, because it had to field your questions on the checking account many times. Rolling out the core in a banking environment takes more time than we expected. So what we are rolling out in Q1 is CD and phasings, on-boarding and servicing and that’s 80% and they were very close to the checking account they are after. I would rather not give you a date on the checking account, but know that a brand new web, mobile on-boarding servicing, CD savings personal and business offerings coming out, limited availability in Q1 and general availability in Q2.

Okay. So the checking account sounds like it’s probably the second half of the year event, is that fair?

That’s right.

Okay. Okay, thank you.

Thank you. And our next question comes from Aaron Deer of Piper Sandler. Your line is now open.

Hi, good morning everyone.

Good morning, Aaron.

Pardon me if you covered this, I got on the call late, but Neil, following up on your discussion there was a drop in the data processing cost, so I am wondering is that tied to the core conversion that you mentioned and is that – are we at a sustainable run-rate on data processing or are there other investments happen in there that’s going to cause that number to come back up?

Yes, I think so. So, I think it – I will turn it over to Brett, relative to that specifically. I think one I don’t know that we have actually seen the benefit of the core conversion and the financial impact there yet. So good news is there is probably more upside. Caines, what would you say there?

Yes, on the data processing side, Aaron, looking at Q4, I would say that’s more of a change in some of the third-party services we were using. There was some internal build-out that we were doing and that did not repeat in Q4 or came to completion in Q3.

Okay. And then also related to the discussion on the deposit products been introduced, is that – does the margin guidance that you provided in terms of some stability here in the first quarter and then some expansion as the year goes on? Does that incorporate the expectation for the deposit flows in these new products or could good success in those products drive even more expansion on the margin?

Well, I think certainly this is Brett. I think certainly success there would lead to upside from a margin standpoint. I do think there is a rollout period for when we have the ability to go after those deposits. So if you are thinking 2020, favorability there is probably going to be good as volumes of those types of accounts build.

But our margin guidance that we just talked about doesn’t have any benefit embedded in there.

Yes, steady state and there is upside.

Yes.

Okay. And then Brett, any – obviously as a pullback on the solar tax investments and the related credits there, if you didn’t already, could you give an update in your expectations for where the tax rate is likely to shake out here heading into 2020?

Yes. Well, I guess for starters, we continue to look heavily at investment in tax credit through solar panel leasing. As everyone knows that’s something that we did a good bit of in 2018 and also early in 2019 pulled back a little bit because of some of the economics. However, we are starting to see trends where that could turn favorable again. So still looking at heavily, it will probably be an update we give later on in the year, but for now, I think as far as your modeling is concerned, something similar to what we experienced in Q4 is the good run-rate going forward kind of in that 25% or just about 25% effective tax rate.

Okay, great. Thanks for taking my questions.

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Chip Mahan, Chairman and CEO for any closing remarks.

We just thank everyone for attending. We will see you in 90 days from now.

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