Live Oak Bancshares, Inc. Q2 FY2025 earnings call

• The Live Oak business model showed positive momentum in Q2 across lending production, checking relationships, credit improvement, revenue, PPNR and EPS growth. - Key initiatives like relationship building through checking accounts improved customer experience and funding mix. - Live Oak Express small dollar loan strategy is ramping up, providing strong gain on sale premiums. - Saw a small business credit cycle, with key credit indicators showing improvement, feeling end of cycle is near. - On Slide 5, top line revenue grew 10% linked quarter and 20% year-over-year driven by 3 factors: focus on profitable loan and deposit production, modernizing the engine, and new revenue-generating investments. - Checking accounts went from virtually 0 in 2023 to $290 million and almost 7,000 customers in 2024, with 18% of customers having both loan and deposit relationships today vs. 3% in 2021, and bringing $0.5 billion of interest-bearing deposits. - Credit metrics improving, with past dues, number of defaults and nonaccruals moving favorably; proactively moved problem loans and stepped up front-end monitoring of emerging issues. - Focus on modernizing activities across the company to take advantage of AI-driven possibilities, seeing opportunity to organically grow business, improve efficiency and enhance customer and employee experiences.

1. Loan Originations: Q2 2025 loan originations totaled approximately $1.5 billion, the largest Q2 loan production in bank history (excluding PPP), with a 9% linked quarter increase and ~30% increase compared to Q2 2024. Linked quarter loan growth net of loan sales and payments was just above $300 million or approximately 3%, and pipeline is ~$3.8 billion. 2. Deposits: Customer deposits grew approximately 6% linked quarter, with noninterest-bearing business checking balances up 36% year-to-date. Customer deposit balances are now ~20% higher than June 30, 2024. 3. Net Interest Income and Margin: Quarterly net interest income increased $9 million or 9% linked quarter, and net interest margin expanded 8 basis points, third consecutive quarter of margin expansion. Drivers include loan growth and decline in cost of funds. 4. Guaranteed Loan Sales: Sold $322 million of guaranteed loans in Q2 for a 7% average premium, generating approximately $22 million of gain on sale. ~Half of the $3 million quarter-over-quarter increase in gain on sale was related to $20 million of USDA loan sales. 5. Expenses: Q2 reported noninterest expense of $89 million, with core recurring expenses increasing approximately $2 million or ~3% linked quarter. 6. Credit: Over 30 days past due was $13 million or 11 basis points of held-for-investment loan portfolio; number of new defaults trended down for second consecutive quarter to 40 in Q2; nonaccrual loans were $69 million or 63 basis points of held-for-investment loan portfolio.

• Expect loan growth to continue strong, with historical quarterly loan growth rate averaging 3%-5% (12%-20% annually), currently 20% year-over-year and ~15% annualized growth rate year-to-date. Pipeline is ~$3.8 billion. - Continue to adjust deposit pricing to support loan growth, margin aspirations and profitability as market reprices, depending on forward curve.

• Factors that may cause actual results to differ materially from expectations are detailed in materials accompanying the call and SEC filings. - Market波动, interest rate changes, and potential credit quality deterioration could impact business.

Q: Started on the growth side, originations were strong, net growth strong but payoffs and paydowns increased materially. How to think about growth outlook, driving payoffs and paydowns, and pricing trend?

A: Walt Phifer said paydowns in Q2 were ~$100 million higher than average in past couple of quarters, driven by 7 loans with no thematics, no expectation of higher trend continuing; expects loan growth to continue strong with pipeline ~$3.8 billion; William Losch III added color on verticals like commercial banking and SBA/small business banking showing strong growth.

Q: Competition in market, pricing trend?

A: Walt Phifer said market remains competitive, will continue to reprice deposits to support loan growth, with opportunities to bring pricing down over time depending on Fed actions.

Q: Confidence in end of small business credit cycle, based on what, and pulse of clients?

A: Michael Cairns said confidence from credit metrics like customers paying as agreed, declining defaults, manageable nonaccrual balances; continued to step up servicing, monitoring borrowers' financials well, and hold to high underwriting standards.

Q: Gain on sale volume, pickup in USDA loan sales, projection?

A: Walt Phifer said USDA market awakened by investors seeking downward rate protection, USDA market is choppy but expect some consistency going forward.

Q: SBA market demand, competition?

A: Walt Phifer said SBA market demand consistent, driven by spread and prepayment, rule changes caused competitors to pull back, creating opportunities for Live Oak on small dollar and larger dollar sides.