Ladies and gentlemen thank you for standing by and welcome to the Q2 2020 Live Oak Bancshares, Inc. Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Greg Seward, General Counsel for Live Oak Bancshares. Thank you, sir. Please go ahead.

Thank you and good morning everyone. Welcome to Live Oak’s second 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, go to today’s call in our Event Calendar 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 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 and commentary. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Thanks, Greg and good morning, all. I am now on slide three, the agenda. So as always, we’re going to - Steve and I am going to talk about safety and soundness. And then I am going to give you a snapshot of what some of our customers are saying. A couple of quarters ago, we said enough is enough. And look, I've done a terrible job of explaining to you, our shareholders, about our investments in other businesses. So last Tuesday, one of those investments that were spun off to you, nCino went public. So we're going to take for those folks that have been with us from the very beginning a wee bit of a victory lap. And then I'm going to turn it over to Huntley to review what is a - confusing as the wrong word, let's just call it a complex quarter. So moving on to the next slide, slide four, our focus. So, you know, what's been going on at Live Oak Bank these last 90 days? Well, it's a lot. So when the virus hit, lots of things began to happen. We did deferrals for 1288 customers. PPP came on, the government decided that they were going to make principal and interest payments for six months to 100% of our - of the country's SBA borrowers. So there was massive outreach, outreach to us and from us, from all of our customers. And then the PPP, so on April, the 3rd, we launched in the battle, and in three weeks, we made about 10,000 loans totaling about a $1.8 billion. Huntley, is going to tell you a little bit about what Brett told you last night about $60 plus million in fees of which we gave 7 of that back to our folks.…

Yeah, thanks, Chip. So I'm going to talk about the diversification of our portfolio in just a bit. But for the moment, stress levels are manageable, even in our most at-risk industries, which you see on slide seven. Based on our diligent outreach, that Chip touched on. However, that's in part, thanks to the government intervention and loan accommodation, such as payment deferrals. So 60% of our borrowers across our entire portfolio are having the SBA make their monthly payments in full. That's certainly impactful. 75% of our existing borrowers requested and received from us a PPP loan, which is helping them cover payroll, rent and other interest expenses. And to date, we've granted payment deferrals to approximately 9% of our borrowers. The real unknown that Chip had mentioned is the long term challenges facing these businesses. It's inevitable that we'll see some losses, some will simply give up. They'll not have the resources or to resolve to weather through the storm in front of them. But by and large and based on our diligent outreach, we're comfortable that our borrowers are well positioned to work through the challenges facing them going forward. The hospitality is certainly concerned. And while at this point I'm not anticipating huge losses in that portfolio, they are facing challenges and that could take years to overcome and build back to where they were pre-COVID. Our hospitality portfolio is for the most part well positioned to weather these challenges. We had focused on low loan to value first mortgage financing, so we have a good collateral cushion in anticipation for possible valuation declines. Many of the projects are in tertiary markets, and these actually are starting to see some uptick in occupancy, probably most likely benefiting from the domestic traveling uptick and road tripping. In addition, we'll also proactively look at other government programs, such as the USDA 90% guaranteed Vica [ph] loans. We've actually approved several 90% guaranteed USDA Vica loans to some hoteliers that are well positioned to be able to continue to use that working capital to get back on their feet and grow. So we'll do that in a very thoughtful way. It's just another lifeline. Slide eight. We have built a well diversified portfolio mix, which bodes well for us as we focus on minimizing losses. In addition, we have lots of tools in our belt from the SBA to the USDA, to ABL lending to specialty lending, we're really well positioned to provide access to capital in a thoughtful way to help small businesses rebuild, grow and even take advantage of opportunities that present themselves as they also navigate through in past these uncertain times, Chip back to you.

Thanks, Steve. So I think I've got a little order problem here. The next slide that I want to talk about says nCino bank operating system. So folks, and again, I have done a terrible job these last 10 or 12 years. So this industry has 280 billion lines of old code. Many of you listening today are traditional owners of community bank stocks, and some analyze traditional banks for a living. We cannot be put in that box. We make investments in infrastructure. We think there's going to be massive changes in applications on cloud-based infrastructure. We have no branches, and we have no traditional boundaries on where we lend money. So let's go back and use nCino, our first effort in cloud-based software, as a use case. So we began writing code in 2010. Neil and his brother Pete [ph] picked the force.com platform because we had a challenge. We had 158 documents per loan and we needed to get all the data in one place, to treat every customer like the only customer in the bank and enable our lenders, our underwriters, our closers and our services to do the best job of any bank in the land. So if you look at this slide, that's fundamentally loan origination. So on September the 30th 2012, we hired Pierre Norde [ph] from a company Neil and I used to work for, and he began to take that code and make it elegant for use and other banks. I have no idea how many nCino banks are now, but several hundreds if not more. And their thesis has always been to create a bank operating system, land and expand first its loan origination, as you see at the top of this graph, deposit account opening, compliance and risk management,…

Thanks, Chip. You know, we're all painfully aware of how impactful this pandemic has been to small businesses, and we've taken our responsibility pretty seriously to help support business owners and entrepreneurs throughout the country and our people have risen vacation, working tirelessly to help our existing customers to get funds into the hands of new customers, and to build products and technology designed to make their lives easier. Government programs directly to small businesses have provided essential liquidity and breathing room to our customers. But we know that our work is not yet done, as the impact of this pandemic continues to impact every facet of our lives and those of our customers. So looking at page 15, and looking at the highlights for the quarter. Overall, posted some pretty solid numbers, albeit as Chip mentioned, there's a lot of moving pieces. The reported numbers were meaningfully impacted by PPP and the excess liquidity that we put on during the first half of the year. Our balance sheet grew 92% year-over-year, and 56% quarter-over-quarter. Net interest income increased modestly over the first quarter, as a positive impact of PPP was offset by the 100 basis point drop in interest rates. We're really proud of the expense efforts of our company. As you can see, non-interest expense was down 3% linked quarter, despite accruing a $7 million performance bonus that Chip mentioned for our folks who have literally worked around the clock since the beginning of March. That bonus was offset by an increase in deferred expenses from the PPP of about $4 million. That decrease salaries and benefits, but overall, just about every one of our expense line items is down quarter-over-quarter. While our customers have been adapting to these changes in their businesses, so have we and we…

That's it. Let's listen.

[Operator Instructions] Your first question comes from the line of Jennifer Demba with SunTrust.

Good morning.

Morning, Jennifer.

Hi, your commentary was really, really helpful. And I have some questions on a few topics. I guess I'll start with credit. In slide seven, you outlined what you feel are the higher risk industries right now, relative to the pandemic challenges, wondering if Chip you could go down the line of those industries and tell us what you're seeing from your clients in those industries, much like you did for the other grouping at the top of the call?

So Steve is going to help me with this. So we have a $12 million – I’ll start from the bottom, we have $12 million exposure in quick service restaurants, about $4 million of that happens to be one business on the West Coast. It's a breakfast outfit that had $4 million worth of EBITDA last year. Totally shut down now. Those businesses are trading out at about 15 times EBITDA, so a very viable business, no matter what it takes to get to the other side with someone like that, we're going to be there to help and we just don't know what government programs there will be available. In fitness centers, specifically the larger customers are doing just fine. I mean, they're doing everyday stuff like wiping things down. It's really state-by-state, Steve on that one, on who's open and who's not. Steve, you be better off talking about hotels. I can talk a little bit more about [indiscernible] that I’ve already touched on. Why don't you take the hotels more specifically and the WBC or the - and the FEC?

Certainly, Yeah, I touched on hotels a little bit. So we are fortunate in that a good bit of our portfolio, you know, our loan to value real estate secured first position, so we have some cushion. The tertiary market projects are doing - actually seen some improvement in occupancy. So again, that's positive. We do have a handful of projects that are going to be a long road to recovery. They're, you know, more full service in nature, events have been cancelled, which is a big component to their revenue. It's going to be a long road. I mentioned that I not anticipating huge losses, but I do anticipate needing to continue to look for accommodations in order to help them through the other side. Again, huge unknown. They're beholden to restrictions that the government puts out there, depending on how COVID plays itself out. But they seem to be focused on trying to work themselves through to the other end, but you may see some noise as we get to that side. The winding – do you want me to touch on…

FEC.

FEC? Yes. So family entertainment centers, this is truly an impacted industry.

Yeah.

It truly is. And this is going to be definitely a challenge for us. They are experiencing stress due to continued restrictions and limitations to what they you know - what – when they can be open and how many folks can be in from the extreme of trampoline parks, for example, that are you know, the question becomes what will customer behavior be going forward even after this, then we're going to have. Now most of these, though are, you know, government guaranteed loan facilities, we are putting a qualitative mark against this industry to reserve appropriately due to the unknown. But this is going to be one that's going to require some work out. Some of our larger ones are well positioned. They've got some resources. And yeah, they'll start to do well…

And I just think in the interest of time, Jennifer, let me just say it this way, if when I went over every one of these with every vertical the last 72 hours, not only in the room with the people that originated the loan, the people that serviced the loan over there. And then our special assets group, when in fact, they were involved were in the room. And the special assets people I mean, you talked about a glass half empty kind of group of folks. I mean, it is un-freaking [ph] believable. I don't think anyone felt like that we were not properly reserved. You know, our reserve on WCB was like 3 million bucks and nobody saw that much in charge offs because the top end operators are still doing it actually. That would be our answer to that question, Jennifer.

Okay. Huntley, you mentioned, you thought the current expense run rate was pretty sustainable. Can you give a little color there?

Sure. So you know, our biggest line item and Brett can jump into, you know, our biggest line item being salaries and benefits. We do not see adding more people, you know, on that on that front, so that should be pretty flat. We obviously had the accrued bonus in the second quarter offset by some deferred fees for the origination. But by and large, that should be pretty constant. You know, you look across our travel line items, our advertising line items, our branding line items, those were all down and I think we'll continue to be pretty efficient in those regards too. But Brett, any other thoughts on moving pieces on that?

We must have lost Jen.

No, I am here.

Do we answer your question, Jennifer?

Yeah, yeah. So, question for you. What, two more questions. One, you mentioned the checking account. What's the exact timing on that at this point?

It is a day by day fight. You know, I would have thought that, you know, checking account looks like a savings account with a debit card. But all the experts tell me there's more - there's more components to that with transactions and disputes and fraud and everything else. We are currently slated to be done by the end of the third quarter in live. And again, we are working through that every day. But I fully expected by the time we meet 90 days from now, to have sent you an email with a link to open up a checking account.

Okay, great. And Chip I am curious what you think about this? So, you did a nice job of giving more information about the FinTech investments? Do you think this crisis, this credit crisis, this economic crisis, this economic crisis, delay some of banks investment, or does it accelerate it, as they hunker down and conserve capital?

So I'm going to start and I'm going to ask Neil Underwood to chime in here. So as you know, Gene Ludwig joined us to create canopy and we have raised some $600 million from I think 37 banks?

37.

37 banks. Neil sits right next to me, Jennifer is you know, and he's on at least four or five calls a day from FinTech, FinTech companies looking for money. And thank goodness, I don't have to be on all those calls, but I am on ones where we want to invest. And it is ridiculous, the valuations of these businesses and the number of people chasing these FinTech companies. So Neil, why don't you take a crack at the digital on slots, so to speak?

Yeah, I think the short answer, Jennifer, first of all, Hey, how's it going? First answer would be accelerating. And I think it's due to the fact that there's a recognition you know, mission critical workflows, digital onboarding have gotten central and in an environment like this and beyond. And so there really are really kind of a tale of to cities, those software companies that are connected to things like you know, cash registers, NCR, you know, those are probably getting a discount in terms of valuation and adoption. However, on the other side of it, anything connected to digitally on - nCino is a great example, digitally onboarding a small business or consumer. And then all this - obviously, on the servicing side servicing and in a self service manner, are just accelerating. And the proof points out there, the public proof points happened last week with nCino, but I could say the private proof points continue, as you know, we had thought that maybe there'd be a discount to valuations companies that are connected to those mission critical workflows, it's quite the opposite. You know, those companies are experiencing no changes, only acceleration in ACV and bookings and therefore, all the private equity money and venture money behind it is seeking to invest. We happen - on the canopy side of it, we happen to be in a really raised position because our story there is quite different than every other venture company. In that we have banks as LPs that intend to use the software and/or service. So we are out there winning deals, you'll see them in the press here imminently from - and away from some of the best venture brands in the business.

Well, I'll give you two examples. I think this is correct from memory, Neil. In the last two weeks, we looked at a $700,000 recurring revenue company. And the best names in the business in the Silicon Valley, put a $100 plus million valuation on that business. This week, we looked at another company that in January had $1 billion of annual recurring revenue - contracted recurring revenue. In June it was six and the value of that business post money was $230 million, again led by one of the most sophisticated Silicon Valley investors, the biggest names in the business. I mean, it is absurd.

Yeah, valuations are frothy, but the model, the sophisticated investors are doing it because they're fine paying a year ahead of revenues because these companies are also growing with triple digits. So…

Correct.

Anyway, you got one more.

Your next question comes from the line of Chris Donat with Piper Sandler.

Hi, good morning. Thanks for taking my questions. Just had two, wanted to follow up on. First on the, the slide seven the - with the COVID-19 higher risk verticals. Just want to make sure I understand what's going on to the 75% of existing borrowers who received a PPP loan. I think I missed the comment. But were those customer borrowers who sought you out or did you reach out to them through outreach? What, triggered the loan getting started there?

So I'll start and Steve can help. So immediately when this thing hits, so remember, we have 45 22 [ph] year olds that collect financial statements every 90 days on for all 4200 of our customers. So we're going over budgets constantly. So when this hits, all out 24x7 calls to our customers, what do you need? What do you need? What do you need? And I think the number that sticks in my brain Steve, as we granted before, PPP, like 1288 deferrals to existing customers trying to help them out.

We received - so we reached just about everybody, every folks that know us know how diligent we are about outreach. So we immediately - that's what we know, that's what we did. We had before PPP was a known, they requested deferrals. And we queued them all up, right. When the six month payment support from the SBA, so this is really, really impactful that 60 plus percent of our portfolio is having the payment not deferred, but fully made on their behalf by the US government as part of the CARES Act. When that came in many of those 1200 that were asking for deferral said hold off, the six months may do the trick for me, I don't want this thing deferred and accrue interest if I don't need it. So most of those actually are kind of in a holding pattern, we will consider providing them three months of support after the six months. But most of the business owners were in a position where they wanted to see if the six months will do the trick. So to be clear, that 90% of deferrals is not equal to 1200, just to be clear, but we have those queued up and that was proactive outreach.

And then about 3000 of our 4200 customers did take PPP…

Correct, yes. 75%.

75%. That's about right. So did we answer your question, Chris?

For the most part, it did more than I was looking for in some ways. But just on the ones who received the PPP loans. Were they reaching out to you? Or was that your outreach? That's what I was trying to get at?

I think it was both. I mean, we're just in constant contact with these people from the lending officer, to the - we're in constant contact with these folks.

Got it. So it's a dialogue that's always going on. So, yeah. Okay. And then just want to ask one question, if you can comment on anything different in the last three weeks that you've seen? You know, there's been more concerns in some states about higher, you know, Corona virus cases. So, really two forward looking things I'm looking for, if you can do it, anything, you know, quarter to date, and also if there's any commentary you might have on the proposals working their way through the house in the Senate in the White House. I know it's early on some of those. But if we're likely to see sort of another version of PPP or kind of how are you thinking about what might come next from the federal government?

Yeah, so I'll try this again. So the - in my conversation the last 72 hours with many, many, many of our folks, I would say that 85% [ph] of our folks that deal with these customers every day, feel like their customers are incredibly upbeat. I mean P&C insurance agents, multiples at all time high. I mean, I can continue to go down all 34 of them. The ones that are having challenges Steve has spoken about, and Huntley may want to – may know a little bit more about the government stuff than I do. But I mean, we have been told by our government relations people for some time that there is across the aisle support for increasing the flagship product, the seven, eight product from a $5 million maximum to a $10 million maximum and increasing the government guarantee from 75 to 90. I know there is - again as of last night, a lot horse trading going on. We have also heard that there may be a chance that [indiscernible] have the SBA make another six months worth of P&I payments just for SBA borrowers, which would be, you know, unbelievable for us. But, you know, we're not going to be Chris spiking the ball on the five yard line here. You know, we've all been through this stuff before and you know, it's never over. So, you know, we'll just keep our heads down and what we do believe that something actually will happen no later than mid-August as of last night. Huntley, do you have any other data on that?

No, I think you said it well, Chip. The other two things that we have heard a little bit about, one, could there be another version of PPP aimed at the severely distressed and most impacted businesses, so think revenue down 50%, something like that, as there's already money, you know, sort of still in the coffers of that program. And then the second is whether or not there'll be any forgiveness, accelerated forgiveness or blanket forgiveness that is signed into legislation to help with the small balance loans. And that from an administrative perspective, obviously would go a long way for the industry. So those are the only other two pieces of stuff we've heard, but at the Chips point we’ll, you know, we’ll react once it becomes law.

Understood. Okay. Thanks very much, gentlemen.

Absolutely.

And at this time, I am showing no further questions.

So, well, thanks, everyone for attending today. And what we hope is that Mike, our Head of Marketing has all of your email addresses and you will be hearing from us to open a checking account before we get together next quarter. Thank you very much for attending.

This concludes today's conference. You may now disconnect.