Q2 2025 Live Oak Bancshares Inc Earnings Call

Operator: At this time, all lines are in a lesson only mode.

Operator: Following the presentation, we will conduct a questioning answer session.

Operator: If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time.

Gregory Seward: I would now like to turn the conference call over to Greg Seward, Chief Risk Officer and General Counsel. Please go ahead.

Good morning, ladies and gentlemen, and welcome to July Oak Bank shares. Second quarter 2025 earnings call at this time, all lines are in a lesson. Only mode following the presentation, we will conduct a questioning answer session. If anyone has any difficulties hearing the conference? Please press star zero for operator assistance at any time.

Gregory Seward: Thank you, and good morning, everyone. Welcome to Live Oak's second quarter of 2025 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 that we will reference on the call, please visit our website at investor.liveoakbanks.com and go to the events and presentations tab for supporting materials. Our earnings release is also available on our website.

I would now like to turn the conference call over to Greg Stewart, Chief risk officer and general counsel. Please go ahead.

Speaker Change: Thank you and good morning everyone. Welcome To Live Oak second core to 2025 earnings conference call. We are webcasting live over the internet and this call is being recorded.

Speaker Change: To access the call over the internet and review the presentation materials that we will reference on the call. Please visit our website at investor.metlife.com

Gregory Seward: 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.

available on our website.

Speaker Change: Before we get started, I would like to call you that we may make 4 looking statements. During today's call that are subject to risks and uncertainties.

Gregory Seward: Information about any non-GAAP financial measures referenced. including reconciliation of those measures to gap measures, can also be found in our SEC filings and in the presentation material.

Speaker Change: Factors that may cause actual results to differ materially from our expectations. Our details in the material is accompanying this call and interests. You see filings, we do not undertake to update the 4 looking statements to reflect the impact of circumstances or events that may arise after the date of today's call.

William Losch: I will now turn the call over to B.J.

Speaker Change: Information about any non-gaap Financial measures reference including reconciliation of those measures to gaap measures, can also be found in our SEC filings and in the presentation materials.

William Losch: Losch, President of Live Oak Bancshares. Great, thanks. Good morning, Greg, and good morning, everyone. And in the room here, just so you know, I've got Chip. I've got Walt Pfeifer and Michael Cairns to go through some brief comments and answer any questions that you've got. So let's get started on slide four. And I am excited about this quarter. The promise of the Live Oak business model was displayed this quarter, resulting in very positive momentum across all areas of the company, from lending production, to checking relationships, to credit improvement, to importantly, revenue, PPNR, EPS growth. Key initiatives such as relationship building through checking accounts continue to both improve our customer experience and provide a tailwind to our funding mix and our net interest margin.

BJ Los: I will now turn the call over to BJ Los president of Vivo bankers.

BJ Los: Great, thanks. Good morning. Greg here and good morning everyone. And in the room here, just so you know, I've got chip, I've got Walt Pfeiffer and Michael KS to, uh, go through some brief comments and answer any questions that you've got.

BJ Los: So let's get started on slide 4.

BJ Los: Uh and I am excited about this quarter. Uh the promise of the Live Oak business model was displayed uh this quarter resulting in very positive momentum across all. Areas of the company, from lending production, to checking relationships to credit Improvement to importantly revenue, ppnr, and EPS growth.

William Losch: Live Oak Express, which is our small dollar loan strategy, continues to ramp up nicely, providing strong gain on sale premiums and a long runway for continued market share growth. And as we've discussed, we've seen a bit of a small business credit cycle the last few quarters. By definition, cycles have a beginning and an end. And with key credit indicators showing meaningful improvement, we feel increasingly confident that the end of the current small business credit cycle is near.

BJ Los: Key initiatives such as relationship building through checking accounts. Continue to both improve our customer experience and provide a Tailwind to our funding mix and our net interest margin.

BJ Los: Live Oak Express, which is our small Dollar Loan strategy, continues to ramp up nicely, providing strong, gain on sale premiums and a long runway for continued market share growth.

BJ Los: And as we've discussed, we've seen a bit of a small business credit cycle. The last few quarters by definition Cycles, have a beginning and an end.

William Losch: The tangible result of our efforts is best showcased on slide 5. And as you can see, the true earnings power of the company is strong on a year-over-year basis, but even stronger quarter-to-quarter, driven by top-line revenue growth of 10% link quarter and 20% year-over-year. Why are we seeing this? Well, it's three things. first is a focus on what we call keeping the main thing the main thing, generating profitable loan and deposit production to drive core earnings. Second is what we call modernizing the engine, how we make it simpler, easier, faster, and more efficient for our people to serve our customers.

BJ Los: Confident that the end of the current small business credit cycle is near.

BJ Los: The tangible result of our efforts is best. Showcased on slide 5.

BJ Los: And as you can see, the true earnings power of the company is strong on a year-over-year basis, but even stronger quarter to quarter driven by top-line Revenue, growth of 10% link quarter and 20% year-over-year.

William Losch: What that looks like in practice is improving processes, narrowing the focus of our activities to those that really matter, and positioning the company to transform what the employee and customer experience looks like in an AI-driven world. And third is picking our spots with new revenue-generating investments that are making the business model profitability and growth opportunity more sustainable and resilient over the medium to long-term. Things like Live Oak Express, the small-dollar loan program, which has gone from essentially zero in 2023 to $300 million or more in 2024 with a very long runway to go.

BJ Los: We seeing this it's 3 things. First is a focus on what we call keeping the main thing. The main thing generating profitable loan and deposit production to drive core earnings second is what we call modernizing the engine, how we make it simpler easier, faster, and more efficient for our people to serve our customers. What that looks like in practice is improving processes narrowing. The focus of our activities to those that really matter, and positioning the company to transform what the employee and customer experience, looks like in an AI driven world.

William Losch: Turning to slide six, our other new growth investment has been in checking. Again, starting with virtually zero in 2023, we now have $290 million and almost 7,000 customers. 2021, the percentage of Live Oak customers with both a loan and deposit relationship was 3%. Today it is 18% and growing. And it's not just about new checking accounts. Those customers have also brought an incremental half a billion dollars of interest bearing deposits. So we're deepening relationships while improving our funding profile. And here again, as with Live Oak Express, we have a long runway of growth to come.

BJ Los: And third is picking our spots with New Revenue, generating Investments, that are making the business model profitability and growth opportunity, more sustainable, and resilient over the medium to long term, things like Live. Oak Express the small Dollar Loan program which has gone from essentially zero in 2023 to 300 million dollars or more in 2024 with a very long Runway to go

BJ Los: Turning the slide 6 or other New Growth investment has been in checking.

William Losch: And lastly on credit, where our metrics continue to improve. In a few minutes, Walt will highlight some of the positive trends for key indicators of future credit quality, past dues, number of defaults, and non-accruals. And they are all moving in a favorable direction. We've proactively moved problem loans through to resolution and significantly stepped up our front-end monitoring of emerging issues.

BJ Los: Again, starting with virtually zero and 2023, we now have 290 million and almost 7,000 customers in 2021. The percentage of Live Oak customers with both a loan and deposit. Relationship was 3% today, it is 18% and growing and it's not just about new checking accounts. Those customers have also brought an incremental, half of a billion dollars of interest bearing deposits. So we're deepening relationships, while improving our funding profile and here again, as with Live Oak Express, we have a long Runway of growth to come

William Losch: I am very proud of our team. Over the last few quarters, the excellent performance from our lending and deposit activities that have been driving that strong new customer activity and profitable revenue growth has been overshadowed by what we've experienced in credit. And as the skies start to clear, the work our people have been doing to continue profitably growing our company, improving the consistency of the business model, and making it simpler, easier, faster, and more efficient to do with Live Oak is moving back to the forefront, which is where it should be. And there's a lot more to come.

BJ Los: And lastly on credit, we're our metrics continue to approve in a few minutes while we'll highlight some of the positive trends. For key indicators of future, credit quality, past, dues number of defaults and non-accruals and they are all moving in a favorable Direction. We've proactively moved problem loans, through to resolution and significantly, stepped up, our front-end monitoring of merging issues. I am very proud of our teams

BJ Los: Over the last few quarters, the excellent performance from our lending and deposit activities that have been driving that strong new customer activity and profitable. Revenue growth has been overshadowed by what we've experienced in credit.

William Losch: Walt, how about running through some of the financial highlights for the quarter? Thanks, BJ.

BJ Los: And as the Skies start to clear the work, our people have been doing to continue profitably growing, our company improving the consistency of the business model and making it simpler easier, faster. More efficient to do business with Live Oak is moving back to the Forefront, which is where it should be and there's a lot more to come.

Walter Phifer: Good morning, everyone. Let's get started on slide 10 with an overview of our Q2 performance. Our Q2 earnings per share of $0.51 is substantially better than the prior quarter, aided by the 22% late quarter increase in core operating leverage that BJ highlighted, as well as a lower quarterly provision expense as our credit quality continues to moderate. The 22% quarter-over-quarter improvement in core operating leverage was driven primarily by a $14 million or 10% late quarter increase in revenue. driven by both improvement in net interest income from volume and margin expansion, as well as incremental loan sale activity, all set by a $2 million or 3% link order increase in core expenses.

BJ Los: Well, how about running through some of the financial highlights for the quarter?

Speaker Change: Thanks BJ. Good morning, everyone. Let's get started on flight 10 with an overview of our Q2 performance.

Speaker Change: Our Q2 earnings per share of 51 cents is, is substantially better than the prior quarter ended by the 22% link quarter increase in core operating. Leverage that BJ highlighted as well as a lower quarterly provision expense as our credit quality continues to moderate.

Speaker Change: The 22% quarter-over-quarter Improvement in Coeur. Operating leverage was driven primarily by a 14 million or 10% link quarter increase in Revenue.

Walter Phifer: Growth on both loan and deposit fronts remains strong. Q2 2025 loan originations of $1.5 billion was our largest Q2 of loan production in bank history, excluding PPP. This drove our late quarter loan growth, net of loan sales and payments of just above $300 million, or approximately 3%, and our pipeline remains very healthy. Similar to the first quarter, our customer deposits growth remained outstanding in Q2, growing approximately 6% in the quarter. Customer deposit balances are now approximately 20% higher than June 30th of 2024, and as BJ highlighted, we also continue to build momentum with our business checking product, as these non-interest bearing balances have now increased 36% year-to-date.

Speaker Change: Driven by both Improvement and net interest income from volume and margin expansion. As well as incremental, loan sale activity all set by a million dollar or 3% length quarter increase in core expenses.

Speaker Change: Growth on both loan and deposit. Funds remain strong.

Speaker Change: Q2 2025 loan originations of 1.5 billion dollars was our largest Q2 of Loan Production in Bank history. Excluding PPP.

Speaker Change: This drove, our link quarter loan growth, net of loan, sales and payments of just above 300 million for approximately 3%, and our pipeline remains very healthy.

Speaker Change: Similar to the first quarter. Our customer deposits growth remain outstanding in Q2 growing approximately 6% in Lake quarter.

Walter Phifer: Quarterly provision expense of $23 million is approximately 20% below last quarter. Our credit and servicing teams have done an outstanding job in 2025, staying close to our borrowers, controlling what we can control, and navigating through the small business credit cycle. And we are encouraged by the recent improvement in our portfolio trends. Now let's unpack the quarter performance a bit more on the following slides.

Speaker Change: Customer deposit balances are now approximately 20% higher than June 30th of 2024. And as BJ highlighted, we also continue to build momentum with our business. Checking product as these non-interest. Bearing balances have now increased 36% year to date.

Speaker Change: Below last order our credit and servicing teams have done an outstanding job in 2025. Stay close to our borrowers, controlling, what we can control and now getting through the small business credit cycle and we are encouraged by the recent improvement in our portfolio trends.

Walter Phifer: Slide 11 highlights our loan originations by vertical and business. As shown on the right-hand side of the page, our Q2 2025 loan appreciations total approximately $1.5 billion, a 9% increase in length order, and approximately 30% increase compared to Q2 of 2024. The strong growth continues to be driven by both our small business banking and commercial lending segments, with approximately 70% of our verticals across both teams. were originating more production year to date in 2025 than they did in year to date 2024.

Speaker Change: Now, let's unpack the quarter performance a bit more on the following slides.

Speaker Change: Slide 11 highlights our loan, originations buy vertical and business unit.

Speaker Change: As shown on the right hand side of the page, our Q2 2025 Luna registrations total approximately, 1.5 billion and 9%, increase in quarter, and a proximately 30% increase compared to Q2 of 2024.

Speaker Change: The strong growth continues to be driven by both our small business banking and commercial lending. Segments with approximately 70% of our verticals to cross both teams.

Speaker Change: Originating more production year to date in 2025 than they did in year to date 2024.

Walter Phifer: Slide 12 illustrates the quarter-over-quarter loan and deposit balance growth, highlighting the strong growth trends on both fronts. Q2's link quarter loan growth rate of approximately 3% is consistent with our average quarterly loan growth rate range since 2021. With year-over-year loan balances increasing approximately 19% following four consecutive quarters of strong loan originations and loan growth. The 6% link quarter increase in customer deposits was double that of Q2 2024's customer deposit growth rate.

Speaker Change: Slide 12 illustrates the quarter of a quarter alone and deposit. Balance growth highlighting the strong growth Trends on both fronts.

Speaker Change: Q2's link quarter alone. Growth rate of approximately 3% is consistent with our average quarterly loan growth rate range since 2021

Speaker Change: with the year-over-year loan balance is increasing, approximately. 19% following 4 consecutive quarters of strong, loaner loan, originations and Loan growth.

Walter Phifer: Growth in customer deposits has been primarily driven by our consumer and business savings products, as both have remained competitively priced in the market to support our aforementioned loan Net interest income and margin trends are highlighted on slide 13. In Q2 2025, we saw our quarterly net interest income increase $9 million, or 9% linked And our net interest margin also expanded eight basis points, our third consecutive quarter of margin expansion. The quarter-to-quarter roll forward for both net interest income and margin is detailed on the bottom right. As you can see, loan growth and the decline in cost of funds, primarily driven by the continued downward repricing of both our business and consumer savings portfolios, our short-term CDE portfolio rolling over into lower rates, and the tailwinds provided by the increase in non-interest-bearing checking growth that BJ highlighted, are the primary drivers of the quarter-over-quarter improvement.

Speaker Change: The 6% lead quarter increase in customer deposits was double that of Q2 2024 is customer deposit growth rate.

Speaker Change: Growth in customer. Deposits has been primarily driven by our consumer and business savings products as both have remained competitively, priced in the market to support our aforementioned loan growth.

Speaker Change: Net interest income and margin Trends. Are highlighted on slide 13.

Speaker Change: In Q2 2025, we saw our quarterly, net interest income increase, 9 million, or 9%, link quarter.

Speaker Change: And our net interest margin also expanded 8 basis points, our third consecutive quarter of March and expansion.

Walter Phifer: Our loan production yields of approximately 8.05%, noted in the third bullet on the top right. is 74 basis points above our current portfolio yield of 7.31%, as shown in the top of the table in the middle of the page. Said another way, our new production continues to be accretive to our overall portfolio loan yield. As shown in the middle, in the bottom part of the table, in the middle of the page, in Q2, we reduced our consumers rate, offering 10 basis points. Our business savings rate offering decreased by 15 basis points, and our maturing CDs were renewed or replaced at an average rate that was 72 basis points below the maturing rate.

Speaker Change: The quarter to quarter roll forward for both net interest income and margin is detailed on the bottom, right? As you can see, loan growth in the decline and cost of funds primarily driven by the continued. Downward repricing of both our business and consumer savings portfolios, our short-term CD portfolio. Rolling over into lower rates and the Tailwind provided by the increase in non-interest bearing, checking growth at BJ. Highlighted are the primary drivers of the quarter of a quarter Improvement

Speaker Change: Our Loan Production yields have approximately 8.05% noted in the third bullet, on the top, right?

Speaker Change: Is 74 basis points above our current portfolio of yield of 7.31% as shown in the top of the table in the middle of the page.

Speaker Change: Set another way, our known, our new production continues to be accretive to our overall portfolio loan yield.

Walter Phifer: As highlighted in past earnings calls, we monitor both the deposit market and our funding levels very closely, ensuring that we continue to support our loan growth appropriately while also adjusting pricing to support margin aspirations and profitability.

Speaker Change: As shown in the middle on the bottom, part of the table in the middle of the page. In Q2, we reduce our consumer's rate offering 10 basis points. Our business savings savings rate offering decreased by 15 basis points, and a maturing CDs were renewed or replaced and an average rate. That was 72 basis points below the maturing rate as highlighted in the past earnings calls. We monitor both the deposit market and our funding levels. Very close to closely, and sure that we could continue to support our loan growth appropriately, while also adjusting pricing to support margin aspirations and profitability.

Walter Phifer: Guaranteed loan sale trends are shown on slide 14. The demand for government guaranteed SBA loans on the secondary market remains strong, providing consistent gain on sale revenue and recycling liquidity back into the bank. We sold $322 million of guaranteed loans in Q2 for a 70% average premium. generating approximately $22 million of gain on sales.

Speaker Change: Guaranteed loan sales are shown on slide 14, the demand for government guaranteed, SBA Loans on the secondary Market remains strong, providing consistent gain on sale revenue and recycling liquidity back into the bank.

Speaker Change: We sold 322 million of guaranteed loans in Q2 for a 7%, average. Premium

Walter Phifer: About half of the $3 million increase quarter-over-quarter in gain on sale was related to $20 million of USDA loan sales, our first USDA loan sale since Q2 of 2024. The remaining quarter-over-quarter increase was driven by the timing of SBA sales in both our larger SBA loans as well as our small loan platform, Live Oak Express.

Speaker Change: Generating approximately 22 million of gain on sale.

Speaker Change: About half of the 3 million dollar increase quarter of a quarter in gain of sales, was related to 20 million dollars of USDA loan sales. Our first USDA loan sales since Q2 of 2024

Speaker Change: The remaining quarter of a quarter increase was driven by the timing of SBA sales in both our larger SBA Loans, as well, as well as our small loan platform, Live Oak Express.

Walter Phifer: Expense trends are detailed on slide 15. Q2 reported non-interest expense of $89 million, included approximately 3 million of one-time expenses outlined within the impendence. Core recurring expenses increased approximately $2 million or approximately 3% in the quarter and were primarily growth-related.

Speaker Change: Expense Trends are detailed on slide, 15, Q2 reported non-interest expense of 89 million included, approximately 3 million of 1 time. Expenses outlined within the appendix.

Walter Phifer: We remain focused on supporting our growth via good cost, while also working to improve efficiency. It's a unique time and industry with a rapidly evolving AI landscape providing banks with the opportunity to organically grow their business, improve efficiency, and significantly enhance both the customer and employee experiences all at the same time.

Speaker Change: Core recurring expenses increased, approximately 2 million dollars or approximately 3% in Lake quarter and were primarily growth related.

Walter Phifer: To say that we are excited about the application of this evolving technology and its potential impact on our customers, employees, and profitability would be an understatement.

Speaker Change: We remained focused on supporting our growth via good calls while also working to improve efficiency. It's a unique time in the industry with a rapidly evolving AI landscape. Providing banks with the opportunity to organically. Grow their business, improve efficiency, and significantly, enhance. Both the customer and employee experiences all at the same time.

Speaker Change: To say that we are excited about the application of this evolving technology and its potential impact on our customers employees and profitability would be an understatement.

Walter Phifer: Both B.J. and I mentioned earlier that we are encouraged by the credit moderation and improvement in key metrics. as evidenced by the trends detailed on slide 16. Our current loan portfolio remains split 65%-35% in favor of small business banking over a commercial lending segment, with approximately one-third of the portfolio government guaranteed. The bottom three graphs help visualize the waterfall in our credit performance, whereas over 30 days past due becoming a leading indicator for the number of new defaults, which then in turn become a leading indicator for non-accruals. Over 30 days past dues remain low for the third consecutive quarter, with $13 million or 11 basis points of our held for investment loan portfolio past due as of June 30.

Speaker Change: Both BJ and I mentioned earlier that we are encouraged by the credit moderation and Improvement in key metrics.

Speaker Change: Detailed on slide 16.

Speaker Change: Our current loan portfolio remains split 65% 35% in favor of small business banking over a commercial lending segment with approximately 1/3 of the portfolio of government guarantee.

Speaker Change: The bottom 3 graphs help visualize the waterfall, and our credit performance, whereas over 30 days past due becoming a leading indicator for the number of new defaults, which then in turn become a leading indicator for non across.

Walter Phifer: The number of new defaults has subsided. treading down from the second consecutive quarter to 40 new defaults. Live Oak has consistently had lower default rates on our SBA loans than all other SBA lenders, as highlighted in slide 27 within the appendix, and our outperformance has increased further thus far in 2025. The amount of non-accrual loans trended down for the first time over the last five quarters, with now $69 million, or 63 basis points, of our held-for-investment loan portfolio currently on non-accrual. The increase in our net charge offs and related net charge operation Q2 2025 was intentional, as we aim to reduce the number of loans on our balance sheet that we feel are unlikely to recover.

Speaker Change: Over 30 days, past dues remain low for the third consecutive quarter with 13 million or 11 basis points of our health for investment loan portfolio, the past 2, as of June 30th.

Speaker Change: The number of new defaults has subsided.

Speaker Change: Treading down from the second consecutive trading day for the second consecutive quarter to 40 new defaults in Q2.

Speaker Change: Live Oak has consistently had lower default rates on our SBA Loans and all other SBA lenders as highlighted and slide 27 within the appendix.

Speaker Change: And our outperformance has increased further thus far in 2025.

Speaker Change: The amount of non-accrual loans trended down for the first time over the last 5, quarters with now, 69 million or 63 basis points of our health, for investment loan, portfolio currently on non-approval.

Walter Phifer: The timing of our charge-offs has historically been choppy, yet as I noted last quarter, we generally reserve specific impairments in the quarters ahead of charging them off, and this quarter was no different.

Speaker Change: The increase in our net charge offs in related to net charge of ratio in Q2, 2025, was intentional. As we aim to reduce the number of loans, on our balance sheet that we feel are unlikely to recover

Speaker Change: the timing of our charge offs has historically been choppy yet as I noted last quarter, we generally reserved specific impairments in the quarters ahead of charging them off, and this quarter was no different

Walter Phifer: Lastly, capital strength is shown on page 17. Risk-based capital levels were relatively flat quarter-over-quarter and remained well above regulatory minimum. Our balance sheet consisting of 41% of assets in cash or government guaranteed investments and loans continues to be a unique and favorable outlier compared to the industry. especially our Government Guaranteed Loan Decks that is approximately eight times the industry level.

Speaker Change: Lastly, Capital strength is shown on page 17. Risk-based Capital levels were relatively flat for a recorder and remain well above regulatory minimums.

Walter Phifer: And our Mahan Ratio, which measures the strength of our Tier 1 capital compared to the true unguaranteed loan risk on our balance sheet, remains healthy at 16.5%.

Speaker Change: Our balance sheet consisting of 41% of assets and cash or government, guaranteed Investments, and Loans continues to be a unique and favorable outlier compared to the industry. Especially our government guaranteeing loans that is proximately 8 times the industry levels.

Walter Phifer: I appreciate you all for your time.

William Losch: With that, I will turn it back over to BJ for his closing comments before we head to Q&A. Great. Thanks, Walt. That, hopefully you can see, momentum's building. We're focused on the biggest and best opportunities. and we're proactively modernizing our activities across the company to take full advantage of the AI-driven possibilities that are in front of us and we're really excited about that.

Speaker Change: And our Mayhem ratio, which measures the strength of our Tier 1 Capital compared to the true ongar. Gene loan risk on our balance sheet remains healthy at 16.5%. I appreciate you all for your time. And with that, I will turn it back over to BJ for his closing comments before we head to the Q&A, great. Thanks, Walt.

BJ Los: That hopefully you can see momentum's building. We're focused on the biggest and best opportunities.

William Losch: So with a big thank you to all Live Oakers and our customers, let's take some questions. Thank you.

BJ Los: And we're proactively, monetizing your activities across the company to take full advantage of the AI driven possibilities that are in front of us. And we're really excited about that. So with a big, thank you to all live ochres and our customers. Let's take some questions.

Operator: Ladies and gentlemen, we will now begin the question and answer session. Would you wish to cancel your request, please press the star followed by the. If you are using a speakerphone, please lift the handset before pressing any button.

Operator: Once again, that is floor one, should you wish to ask a question.

Speaker Change: Thank you, ladies and gentlemen, we will now begin the question and answer session. Do you have a question please? Press the star followed by the 1 on the top down the Jewish to cancel your request. Please press the star followed by the 2 if you're using a speaker-phone. Please listen handset before pressing any Keys. Once again that is star 1. Should you wish to ask a question?

David Feaster: And our first question comes from David Fister from Raymond James. Your line is now open. Hey, good morning, everybody.

Speaker Change: And our first question comes from David Pfister from Raymond James, your line is open.

Walter Phifer: Hey, David. Um, you know, I wanted to start on the growth side. Originations were really strong. You talked about a record 2Q number. And obviously, net growth is really strong, but payoffs and paydowns increased pretty materially, too. I'm just curious, maybe, how do you think about the growth outlook? What's driving those payoffs and paydowns that you saw in the quarter? And if you could just maybe touch on how pricing's trending in the competitive landscape, from your view?

David Pfister: Hi, good morning everybody.

David Pfister: Hey, David. Hey, David. Um, you know, I wanted to start on on the growth side. Originations were were really strong. You talked about a record 2q number, uh, and obviously net growth was really strong, but payoffs and pay Downs, increase pretty materially too. I'm just curious. Maybe how do you think about the growth, Outlook, what, what's driving? Those payoffs, and pay Downs that you saw in the quarter and if you could just maybe touch on how pricing is trending in in the competitive landscape from your view.

William Losch: Yeah, I'll start. Hey, David, it's Walt. So, from a paydown perspective, we'll start there. So, paydowns for Q2 were about $100 million higher than we saw on average in the past couple quarters. Really, that was driven by seven loans. Really no thematics on those loans. They were paid off for different reasons. One was through refinancing. One was taken out by a HUD loan and another was a venture banking borrower that was acquired. So, no thematics, no expectation that that higher trend continues going forward. Historically, our quarterly loan growth rate averaged somewhere between 3% to 5%, so call it 12% to 20% annually.

David Pfister: Yeah I'll start, hey, David's well. Um so you from a pay down perspective, we'll start there. Uh, so pay Downs for Q2, we're about a hundred million dollars higher than we saw. You know, on average in the past couple quarters really that I was driven by 7 loans. Um, really notice thematics on those loans, they're paid off for different reasons. Um, you know, uh, 1 was true refinancing

William Losch: I think that's appropriate. We're 20% where we were over last year. If you think year-to-date for this year, we're up about just shy of $800 million, and you annualize that compared to where we landed at the end of last year, it would be about a 15% growth rate. So, we still expect growth to be strong at those levels. Our pipeline is about $3.8 billion. And as we continue to have these great loan origination quarters, our lenders have done a fantastic job replenishing that as well. So, I hope that helps answer your question, but I think we feel pretty confident and strong that that growth continues.

David Pfister: Um and you know, as we continue to have these great loan, origination quarters, you know, our lenders, have done a fantastic job replenishing that as well. So um, hope that helps answer your question but you know, but I think we feel, you know, pretty confident and strong. Um, you know, that that growth continues.

William Losch: And David, I might just give a little bit more color. I always like looking at slide 11, which we always put in the quarterly deck, which, you know, we call it the bubble chart, that looks at what our originations are across all our different verticals. And so you can see the green, which is more of our commercial banking businesses and project finance businesses, you know, solar and senior housing have been really leading the way this year with some really strong growth, which has been great. And so, you know, seniors is also going to have, you know, a faster turn cycle in terms of turnover on the balance sheet, you know, typically three to four years versus maybe something a little bit longer in our other portfolios.

Speaker Change: And David David, I might just give a little bit more color. I I always like looking at slide 11, uh, which we always put in the quarterly deck, which you know, we call it the bubble chart.

William Losch: But we've seen real strength in those two areas this year. And then as Walt mentioned earlier, if you look at the purple bubbles, those are all of our SBA and small business banking verticals. And over 70% of them, as Walt said, have higher originations this year than last year. And, you know, there's various reasons within those different verticals in terms of industry dynamics, but in a word, I would say consistency is one of the primary reasons why you continue to see us growing production when there's choppiness in the market. There's been a lot of changes, as we've talked about in prior quarters with the SOP and what was going on with the SBA program, but this is what we do.

Uh, that looks at what are, originations are across all our different, uh, verticals. And so you can see the green, which is more of our Commercial Banking, businesses and project Finance businesses, you know, solar and senior housing have been really leading the way this year, with some really strong growth which has been great. And so, you know, seniors is also going to have, you know, a, a faster turn cycle in terms of uh, turnover on the balance sheet. You know, typically 3 to 4 years versus maybe something a little bit longer in our other portfolios. Uh, but we've seen real strength in those in those 2 areas this year. And then, as Walt mentioned earlier, if you look at the purple bubbles, those are all of our SBA uh and S uh small business banking verticals. And

William Losch: And our name brand recognition is very strong, and people understand that when they come to Live Oak, they're going to get a straight answer on, am I approved, and when do I get the money, as Chip has always said. And so that consistency of execution and how we do business, I think, is really driving more activity to us as other players pull back with some of the changes that we've seen over the last several That's great.

Speaker Change: Over 70% of them. As Walt said have higher originations this year than last year and, you know, there's various reasons within those different verticals in terms of Industry Dynamics. But in a word, I would say, consistency is 1 of the primary reasons why you continue to see us growing production when there's choppiness in the market. There's been a lot of changes as we've talked about in Prior quarters with the SOP and what was going on with the SBA program. But we this is what we do.

Speaker Change: And our name, brand recognition is very strong and people understand that when they come to Live Oak, they're going to get uh, a straight answer on. Am I approved? And when do I get the money as chip has always said. And so that consistency of execution and how we do business, I think is really driving more activity to us as other players. Uh pull back with some of the changes that we've seen over the last several quarters.

Walter Phifer: And maybe on the other side, I mean, you know, you've been really proactive, you touched on it about reducing deposit costs, the stated rates.

Walter Phifer: I'm curious, maybe just competition from from your standpoint, in the market and, and whether you see opportunity to continue to push deposit pricing lower and still grow and I'm just kind of curious what you're seeing on the funding costs. Hey, David. This is Walt again. I think you hit on it. I think that the market remains fairly competitive, both on pricing as well as on the marketing side. A lot of banks, including us, have used cash bonus promotions over the past year, and those have been pretty successful. I think on the consumer-saving side, we believe there is potential to continue to our consumer-savings rate over time.

Speaker Change: That's great. And, and maybe on, on the other side, I mean, you know, you've been really proactive you touched on it, uh, about reducing deposit costs to the stated rates. I'm curious, maybe just competition from from your standpoint, um, in the market. And, and whether you see opportunity to to continue to, to push deposit, pricing lower and still grow

Speaker Change: And so just kind of curious what you're seeing on the funding cost side.

Walter Phifer: I think it's important to remember when the rates summited or they peaked, we didn't really have to go all the way to the top of the market. We've been very deliberate in our repricing since then, letting the top of the market essentially come down to us and normalize our position, which is to support that growth that BJ and I just talked about on the loan side. We think that repricing will continue as the market continues to reprice, depending on whatever your view of the forward curve is going to be. On the business savings side, that market is fairly repriced pretty quickly with nice betas.

Speaker Change: Yeah, hey David, this is Walt again. Um, you know, I I think you hit on it. I think the the market remains, uh, you know, you know, fairly competitive, um, both on pricing as well as you know, on the marketing side. Um, a lot of banks including us have used cash bonus promotions, um, over the past year. And, you know, those those have been pretty successful. Um, you know, I think on the consumer saving side, you know, there is, uh, we believe there is, uh, you know, potential to to continue to decrease our consumer savings rate over time. You know, I, I think it's important to remember when, you know, kind of the rate Summit it or they peaked, we didn't really have to go all the way to the top of the market. Um, so we've been very deliberate in our repricing since and letting the top of the market essentially come down to us

Walter Phifer: We continue to proactively look at our growth, but then also reprice on that front as well. That's a long-winded way of saying that we will continue to do what we have done, and that's support that growth. At the same time, we do think that there is opportunities to bring pricing down over time, especially wherever the Fed takes us from here on out. Okay.

Speaker Change: And, you know, normalize our position which to support that growth, you know, that began. I just uh, you know, talked about in the loan side. Um, you know what, we think that the, um, you know, that that pricing will continue as the market continues to reprise depending on whatever, you know, your your, your view of the forward curve uh, is going to be on the business savings side. Um, you know, that market is fairly repriced, um, uh, you know, pretty quickly, um, with nice bettas. Um, you know, we continue to, um, you know, proactively, um, you know, look at our growth but then also re-priced on that front as well. Um, so, uh, that's a long-winded way of saying that, you know, we

Michael Cairns: And then maybe last question from me. I was hoping you could maybe elaborate a bit on and dig a little deeper into what gives you confidence that we're kind of close to the end of that small business credit cycle. You've got pretty unique insights into small business just given the nature of your model. So I guess what gives you that confidence? Is it more just the slowing of the past dues and the delinquencies that you talked about and kind of stabilizing non-accruals? Or is it more digging into the financials of your clients where you're seeing the improvements?

Speaker Change: We will continue to do what we have done and that's the support that growth. Um, at the same time, you know, we do think that there is opportunity to bring pricing down over time, um, especially, you know, wherever the FED takes us from here on out.

Michael Cairns: And then if you could just maybe touch on kind of the pulse of your clients and how their sentiment is as it relates to the impacts of tariffs and the broader uncertainty.

Michael Cairns: Yeah, good morning.

Michael Cairns: This is Michael Cairns. I'll take that one. So, you know, I think that this credit metrics that BJ and Walt walked us through in the deck, walked us through, really do speak for themselves. And that's where we get a lot of confidence from, in that our customers are paying us as agreed. The amount of customers that are defaulting is declining at a good pace, and our non-accrual balances are very manageable. And so I think from the, just the pure numbers standpoint, that's all really positive.

Speaker Change: Just given the nature of your of your model. So I guess what? What gives you that confidence? Is it is it more just a slowing of the past dues and the delinquencies that you talked about and kind of stabilizing not acrs, or is it more digging into the financials of your clients where you're seeing the improvements? And then if you could just maybe touch on kind of the pulse of your clients, uh, and and how they're, you know, you know, sentiment is as it relates to the, you know, the impacts of tariffs and the broader uncertainty

Michael Cairns: And then, as you know, we've really continued to step up our game on the servicing front. And so we have a great line of sight into how our borrowers' financials look, and we're monitoring that well. We've got great leadership on that team. And then, you know, the other piece of this that can't be overlooked is just, we were founded on, you know, really high underwriting standards, and we continue to hold ourselves to that. And so, if you continue to do the right things, and you focus on the fundamentals of credit and underwriting, the results kind of take care of themselves.

Michael cars: Yeah, good morning. This is Michael cars. I'll take that line. Um, so uh, you know, I think that this credit metrics that BJ and Walt walked us through in the deck, walked us through, really do speak for themselves and that's where we get a lot of confidence from and that our customers are paying us as agreed. The amount of customers that are defaulting, is declining at a good pace and are not approval. Uh, balances are very manageable and so I think from the, just the pure number standpoint, that's all, uh, really positive. And then, uh, as you know, we really, uh, continue to step up our game on the servicing front. Uh, and so we have, uh, a great line of sight to how our borrowers, uh, financials look and we're monitoring that. Well, we've, uh, we've got great leadership on that team and then, you know, the other piece of this that can't be overlooked is just

Michael cars: We were founded on, you know, really high underwriting standards and we continue uh, to hold ourselves to that. And so uh, if you continue to do the right things and you and you focus on the fundamentals of credit and underwriting, uh, the results kind of take care of themselves.

David Feaster: That's helpful. Thanks, everybody. Thanks, David. Thank you once again.

Speaker Change: Okay, that's helpful. Thanks everybody.

Michael cars: Thanks David.

Operator: Should you wish to ask a question, kindly press star 1 on your telephone.

Timothy Switzer: Your next question is from Tim Switzer from KBW. Your line is now open. Hey, good morning, guys. Thank you for taking my questions. My first one is on the... gate on sale volume, you mentioned a kind of a pickup in USDA loan sales. Could you talk about you know, what's helping reopen that market for you?

Speaker Change: Thank you once again. Should you wish to ask a question? Kindly press star 1 on your telephone?

Speaker Change: For next question is from Tim Switzer from KBW, your line is now open.

Tim Switzer: Hey, good morning guys. Thank you for taking my questions.

Speaker Change: Thank you morning.

Speaker Change: Um, my first 1 is on the

Walter Phifer: And you know what your Well, your projection would be over the rest of the year if we can kind of get back to a little bit more volume than you've done over the last couple of years. Yeah.

Speaker Change: Um, getting on sale volume, you mentioned a kind of a pickup in USDA, loan sales. Um could you talk about, you know, what's helping reopen that market for you? Um, and you know what your, uh,

Speaker Change: what your projection would be over the rest of the year, if we can kind of get back to

Walter Phifer: Hey, Tim, this is Walt. I'll start. We'll start with the USDA market and why we're seeing some activity there. From an investor standpoint, given the Fed outlook, investors typically look for downward rate protection. These loans that we originate have typically fixed rates at a healthy spread and also have pretty long, lengthy, high prepayment penalties. From an investor standpoint, the premiums are worth really for that downward rate protection. That's really what we've started to see awaken that market. Going forward on that, look, the USDA market's choppy, I would say. We sold some in Q2 of 2024.

You um, a little bit more volume than you've done over the last couple of years.

Wall: Yeah, and hey, Tim, this is wall. I'll start, um, you know, we'll start with the USDA market and and why we're seeing some activity there. Um, you know, from an investor standpoint, you know, given the FED Outlook. Um, you know, investors typically look for downward rate protection. Um, these, uh, these loans that we originated have, you know, you know, typically fixed rates at, uh, you know, healthy spread. Um, and also um,

Walter Phifer: We sold some now in Q2 of 2025. I think a couple quarters in two years is not really the trend that we want to see. We want to see a little bit more consistency there. But from a gain on sale volume standpoint, I think what you saw here in Q2 in terms of dollars, it was pretty consistent from what you would expect going forward here in the near term. Okay, that's helpful.

Wall: Have you know, pretty long, lengthy, High prepayment penalties. So from an investor standpoint, you know, it's the, you know, the premiums are worth uh you know, really for that downward rate protection. So that's really what, you know, we've started to see kind of awaken that market. Um, you kind of going forward on that, you know. Look, the USDA Market's choppy, I would say, you know, we sold some Q2 2024. We sold some now Q2 2025. Um, you know, I I think, you know, a couple quarters in 2 years is not really, you know, the trend, you know, that we want to see, we want to see a little bit more consistency there. Um, you know, but from a gain on sale, volume standpoint. Yeah, I think, you know what you saw here in Q2, um, you know, in terms of dollars. Um, you know, it's pretty consistent from, you know, kind of what you would expect them to go in forward here in the near term.

Walter Phifer: And then on the SBA side, could you talk about, you know, what's driving such strong demand right now and healthy gain on sale margins given, you know, I think some of the disruption in the industry, at least for the small dollar loans, but then also with the credit issues we're seeing across the space. I'm just curious how that's impacted demand, if at all. Yeah, it really has it. You know, I think from a demand standpoint, that market is, you know, almost insanely consistent, if you look historically over the last 10 to 15 years. And, you know, it really comes down to kind of two things, right?

Okay, that that's helpful. Um and then on the the SBA side, could you talk about? You know what's driving? Such strong Demand right now and healthy gain on sale margins given, you know, I think some of the disruption in the industry at least for the small dollar loans, but then also with the credit issues, we're seeing across the space. Um, I'm just curious how that's impacted demand if at all.

Walter Phifer: So spread and pricing, you know, which our lenders continue to do a great job, you know, maintaining their spreads and, you know, hopefully expanding here as the Fed comes down. And as well as, you know, what the investor, you know, is looking for two to three years of that loan sale on both, and they'll recoup their premium. So it really comes down to those two things. You know, we have seen some change in premiums after the SOP changes in June, you know, replacing or reinstating the guaranteed fees. You know, that hasn't been as sizable as, you know, we originally expected.

Wall: Yeah, it really has it. Um, you know, I think the from a demand standpoint that market is, you know, almost insanely consistent, if you look historically over the last 10 to 15 years. Um, and, you know, it really comes down to kind of 2 things, right? So, spread and pricing, um, you know, which our lenders continue to do a great job. Um,

You know, not, you know, maintaining their spreads and, you know, hopefully expanding here as as the FED comes out. Um, and as well as, you know what the investors are looking from a prepayment standpoint typically, an investor

Walter Phifer: So that's a good sign. You know, but from the most part, you know, the demand there really has gone unchanged throughout this cycle.

Wall: Sizable. As, you know, we originally expected. So that's a good sign. Um, you know, but from the most part, um, you know the the demand there really has gone unchanged throughout this cycle.

Walter Phifer: Awesome. Okay.

Walter Phifer: But from the competition side, has the rule changes and The credit issue, has that caused some of your competitors to pull back and create some opportunities for you? Yes. It has, absolutely on the small dollar end. With the SOP changes, they, you know, essentially this administration went back to what it looked like prior to 2023, and You know, we have the processes and everything to underwrite, whether it's, you know, more favorable or less favorable standards. So, you know, we've, again, been very consistent with how we underwrite, how we process, how we close, how we price, and others have had to.

Awesome. Okay. Um and like from the competition side, has the rule changes and

Wall: The, the credit issues has that caused some of your competitors to pull back and create some opportunities for you.

Wall: Yes, it has absolutely on the small dollar end.

Wall: Uh, with the SOP changes. They, you know, essentially this Administration went back to what it looked like prior to 2023.

Wall: and,

Walter Phifer: meaningfully adjust and or exit the market. And so small dollar side, we've seen a lot. And I think that also leaks into the larger dollar side. So like I said earlier, we're consistent. We're always out there. Our name is very well known. And so people know that we can execute incredibly well on SBA. And I think we're seeing even more activity because of that.

Wall: You know, we have the processes and uh, everything to underwrite whether it's, you know, more favorable or less favorable standards. So you know, we've again, been very consistent with how we underwrite, how we process, how we close, how we price, uh, and others have had to

Meaningfully adjust Andor exit, the market, and so small dollar side. We've seen a lot and I think that also leaks into the larger dollar side. So like I said, earlier, we're consistent.

Wall: We're always out there. Our name is very well known and so people know that we can execute incredibly well on SBA. And I think we're seeing even more activity because of that.

Timothy Switzer: Great. I appreciate all the color. Thank you guys. Thanks, Tim. Thanks, Kevin. Thank you.

Wall: Great. I appreciate all the color. Thank you guys.

Speaker Change: Thanks Tim. Thanks Tim.

Operator: There are no further questions at this time.

Chip Mann: I would now like to hand the call back over to Chip Mann, Chairman and CEO for the closing remarks. You know, BJ, if I may, I was driving in this morning and thinking about three tectonic shifts in technology that I have had a front row seat to observe. And it was euphoria the day that we took security first network back on the market almost 30 years ago, beat Wells Fargo to market by 30 days. It was euphoria again, 15 years ago when we signed the OEM agreement with Salesforce inside our bank to fundamentally create Encino.

Speaker Change: Thank you. There are no further questions at this time. I would now like to kind of call back over to Chipman fehrmann and CEO for the closing remarks.

BJ Los: You know, BJ.

About 3 tectonic, shifts and technology that I have had a front row. Seat terms are

And it was Euphoria, the day that we took Security. First Network back on the market, almost 30 years ago, be Wells Fargo to Market by 30 days.

Chip Mann: So internet banking, cloud native API first. And because I am co-manager of Canopy with Gene Ludwig, I have had a front row seat on the latest innovation, which is artificial intelligence, and spent an incredible amount of time with a number of bank CEOs and their technology experts. And it is incredible to me to see fledgling companies less than two years old with under $20 million in revenues have term sheet after term sheet. of billion-dollar valuation, raising hundreds of millions of dollars.

BJ Los: It was Euphoria. Again, 15 years ago, when we signed the OEM agreement with Salesforce, inside our bank to fundamentally create an SEO.

BJ Los: So internet, banking Cloud native API first.

And because I am co-manager of canopy with Gene lug. I have had a front row seat on the latest Innovation, which is artificial intelligence and spend an incredible amount of time with a number of Bank CEOs and their technology experts

BJ Los: And it is incredible to me to see fledgling companies less than 2 years old with under 20 million dollars in revenues have term sheet after term sheet.

Chip Mann: So, how does that affect us? I am proud of the fact that we have been first a number of times. Will this technology help us go faster and take care of our customers? As BJ alluded to, am I approved? And when do I get the money? I think the answer to that is yes. Do we have a number of use cases at this bank today with artificial intelligence? Yes, we do. But do I think that about that to reduce overhead dramatically? No, I think we can do more business with better customers across our entire spectrum.

BJ Los: Of billion dollar valuation, raising hundreds of millions of dollars.

BJ Los: So, how does that affect us? I am proud of the fact that we have been first a number of times.

Speaker Change: Will this technology? Help us? Go faster and take care of our customers as BJ alluded to am I approved? And when do I get the money? I think the answer to that is. Yes.

Chip Mann: So those would be my closing comments, and we look forward to seeing and talking to you in 90 days.

BJ Los: Do we have a number of use cases at this bank today with artificial intelligence? Yes, we do BJ. But do I think that about that to reduce overhead dramatically know? I think we can do more business with better customers across our entire Spectrum. So um those would be my closing comments and we look forward to seeing and talking to you and 90 days.

Chip Mann: Thank you, ladies and gentlemen.

Operator: The conference has now ended. Thank you all for joining. You may all disconnect your lines.

Speaker Change: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.