Live Oak Bancshares, Inc. Q3 FY2025 earnings call

• SBA 7(a) Leadership: Recognized as #1 SBA 7(a) lender, provided over $2.8B in loans, production up 44%, market share increased. • Vertical Lending Focus: Prioritized existing vertical lending and deposit gathering, with loan production, outstandings, deposits, and PPNR growth. • Checking and Small Dollar SBA Efforts: Checking balances up, Live Oak Express production ramping up, piloting AI-enabled loan origination. • Financial Highlights: EPS up 8% QoQ, almost doubled YoY; core operating leverage up; provision expense lower; preferred offering raised $100M. • Net Interest Income and Margin: NII up 6% QoQ, 19% YoY; margin at 3.33%, asset-sensitive balance sheet, funding base in liquid accounts. • Guaranteed Loan Sales: Gain on sale from SBA loans, USDA loan sales, accretive contribution from small loan origination. • Credit and Reserves: Nonaccrual balances ticked up but manageable; provision expense $22M; reserves comfortable. • Capital: Preferred issuance boosted capital; Apiture sale to provide capital accretive event.

The company's segment performance includes: In SBA 7(a) lending, they were recognized as the #1 lender for 2025, providing over $2.8 billion in loans, with production up 44% and market share increasing from 6.4% to 7.7%. For vertical lending, loan production was up 22%, loan outstandings growth 17%, customer deposit growth 20%, and PPNR up 24%. Checking balances ended the quarter at $363 million, 4% of total deposits (up from 2% last year). Live Oak Express (small dollar SBA loans) production is ramping up, contributing to gain on sale. Loan originations in Q3 2025 totaled ~$1.65 billion, an 8% QoQ increase, driven by Commercial Banking. Total loan portfolio grew ~5% QoQ, with year-over-year loan balances up 17%, and customer deposits up ~3% QoQ, 20% YoY.

• Fed Rate Cuts: Expected cuts in 2025 and 2026; net interest income resilient due to growth. • AI Initiatives: Piloting AI-enabled loan origination for Live Oak Express to improve speed to close and efficiency. • Growth Plans: Extending customer product offerings, adding checking and small dollar SBA capabilities; expecting more customer checking relationships and merchant services.

• Government Shutdown Impact: Potential effect on loan growth, secondary market sales; need to pull PLPs to reserve SBA funding. • Credit Cycle Risks: Nonaccrual balances ticked up; small business credit cycle stress; industry-specific stress in some verticals. • Interest Rate Risk: Impact of Fed rate cuts on net interest margin; potential margin compression in near term.

Q: Can you give more color around the increase in NPAs this quarter and talk about new default trends?

A: Mike Cairns discusses nonaccrual balances, manageable, related to SBA portfolio, stress from small business owners.

Q: Trajectory for the margin with rate cuts?

A: Walt Phifer talks about margin recovery due to short-term funding, net interest income resilient with growth.

Q: Credit and tech impact on underwriting?

A: BJ Losch talks about adjusting underwriting standards, using AI for loan origination and servicing.

Q: Government shutdown impact on growth?

A: Walt Phifer explains pulling PLPs to maintain SBA loan production, minimal impact if shutdown is short.

Q: Credit mini cycle and charge-offs?

A: Michael Cairns talks about proactive charge-offs, changing philosophy to charge off loans past recovery point.

Q: Return on tangible common equity and sustainable path?

A: Michael Cairns talks about aiming for 15% ROE and EPS growth.

Q: Ventures and Apiture sale?

A: Michael Cairns and James Mahan discuss Apiture sale, ventures portfolio, and Canopy's role in evaluating investments.