Live Oak Bancshares Inc (LOB) 2025 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Live Oak Bancshares second quarter 2025 earnings call. (Operator Instructions)

I would not like to turn a conference call over to Greg Seward, Chief Risk Officer and General Counsel. Please go ahead.

Thank you and good morning, everyone. Welcome to Live Oak's second quarter 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.liveoakbank.com and go to the Events and Presentations tab for supporting materials.

Our 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, the GAAP measures, can also be found in our SEC filings and in the presentation materials. I will now turn the call over to BJ Losch, President of Live Oak Bancshares.

Great, thanks. Good morning, Greg, and good morning, everyone. And in the room here, just so I've got Chip, we've got Walt Phifer and Michael Cairns to go through some brief comments and answer any questions that you've got.

So let's get started on slide 4, 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 and 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. 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.

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% linked quarter and 20% year over year. Why are we seeing this? 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.

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.

Turning to slide 6, 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. 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 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. 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 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. I am very proud of our teams. 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 business with Live Oak is moving back to the forefront, which is where it should be, and there's a lot more to come.

Well, how about running through some of the financial highlights for the quarter.

Thanks, BJ. 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% linked 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 after quarter improvement in core operating leverage was driven primarily by a $14 million or 10% linked 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% linked quarter increase in core expenses.

Growth on both loan and deposit fronts remains strong. Q2 2025 loan origination of $1.5 billion was our largest Q2 of loan production in bank history, excluding PPP. This drove our linked 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 remain outstanding in Q2, growing approximately 6% in linked quarter. Customer deposit balances are now approximately 20% higher than June 30, 2024, and as BJ highlighted, we also continue to build momentum with our business checking products as these non-interest-bearing balances have now increased 36% year-to-date.

Quarterly provision expense of $23 million is approximately 20% below last quarter. Our credit and servicing teams have done an outstanding job in 2025 thanking 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. Slide 11 highlights our loan originations by vertical and business unit. As shown on the right-hand side of the page, our Q2 2025 loan originations total approximately $1.5 billion and 9% increase in linked quarter, 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 originating more production year-to-date in 2025 than they did in year-to-date 2024.

Slide 12 illustrates the quarter over quarter loan and deposit balance growth, highlighting the strong growth trends on both fronts. Q2's linked 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% linked quarter increase in customer deposits was double that of Q2 2024's customer deposit growth rate.

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. 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% in quarter, and our net interest margin also expanded 8 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 CD 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.

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 low yield.

As shown in the middle and the bottom part of the table in the middle of the page, in Q2, we reduced our consumer's 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.

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.

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 7% average premium, generating approximately $22 million of gain on sale.

About half of the $3 million increase quarter to quarter and gain on sale was related to $20 million of USDA loan sales, our first USDA loan sales 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 well as our small loan platform, Live Oak Express.

Expense trends are detailed on slide15. Q2 reported non-interest expense of $89 million included approximately $3 million of one-time expenses outlined within the appendix. Core recurring expenses increased approximately $2 million or approximately 3% in the quarter and were primarily growth related.

We remain focused on supporting our growth via good cost 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.

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. Both BJ and I mentioned earlier that we are encouraged by the credit moderation and improvement in key metrics as evidenced by the 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 health for investment loan portfolio past due as of June 30. The number of new defaults has subsided, treading down from the second consecutive quarter to 40 new defaults in Q2.

Live Oak has consistently had lower default rates on our SBA loans and 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 trending down for the first time over the last five quarters, with now $69 million or 63 basis points of our health for investment loan portfolio currently on non-accrual.

The increase in our net charge offs and related net charge or ratio to 2025 was intentional as we aim to reduce the number of loans on our balance sheet that we feel are unlikely to recover.

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. Lastly, capital strength is shown on page 17. Risk-based capital levels were relatively flat quarter over quarter and remain well above regulatory minimums.

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 guaranteeing loan that is approximately eight times the industry levels.

And our main ratio, which measures the strength of our tier one capital compared to the true unguaranteed loan risk on our balance sheet, remains healthy at 16.5%. I appreciate you all for your time. With that, I will turn it back over to BJ for his closing comments before we head to Q&A.

Great, thanks, Walt. But 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.

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

Thank you, ladies and gentlemen. We will now begin the question-and-answer session.

(Operator Instructions)

David Feaster, Raymond James.

Hey, good morning, everybody.

Hey, David.

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 pay downs increased pretty materially too. I'm just curious, maybe how do you think about the growth outlook, 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 the competitive landscape from your view?

Yeah, I'LL start. Hey, David, well, so you know from a paydown perspective, we'll start there. So, pay downs for Q2 were about $100 million higher than we saw, on average in the past couple of quarters. Really that was driven by seven loans, really no thematics on those loans. They're paid off for different reasons.

One was true refinancing, one was taken out by a loan and another lender -- another was a venture banking borrower that was acquired.

So, no thematics, no expectation 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. I think that's appropriate.

We're 20% where we were over last year. If you think a year-to-date for this year, we're up about just shy of $800 million and you annualize that compared to where we landed 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's about $3.8 billion. And you know 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.

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, 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.

Solar and senior housing have been really leading the way this year with some really strong growth, which has been great. And so, seniors are also going to have a faster turn cycle in terms of turnover on the balance sheet, typically three to four years versus maybe something a little bit longer in our other portfolios.

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 we, this is what we do.

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 quarters.

That's great. And maybe on the other side, I mean, you've been really proactive, you touched on it about reducing deposit costs, the state of rates. I'm curious maybe just competition from your standpoint in the market and whether you see opportunity to continue to push deposit pricing lower and still grow and so just kind of curious what you're seeing on the funding cost side.

Yeah, 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, there is -- we believe there is potential to continue to decrease our consumer savings rate over time. I think it's important to remember when, kind of the rates summited or they peaked, we didn't really have to go all the way to the top of the market.

So, 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 if the market continues to reprice depending on whatever, your view of the forward curve is going to be. On the business saving side, that market is fairly repriced, pretty quickly, with nice betas. We continue to, proactively, look at our growth but then also reprice on that front as well.

So, 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 are opportunities to bring pricing down over time, especially, wherever the Fed takes us from here on out.

Okay. 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 a slowing of the past dues and the delinquencies that you talked about and kind of stabilizing not accruals, 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, and how their sentiment is as it relates to the impact of tariffs and the broader uncertainty.

Yeah, good morning. This is Michael Cairns. I'll take that one. So, you know, I think that the credit metrics that BJ and Walt walked us through and 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 our non-accrual balances are very manageable. And so, I think from the just the pure numbers standpoint that's all really positive 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, the other piece of this that can't be overlooked is just we were founded on 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.

(Operator Instructions) Tim Switzer, KBW.

Hey, good morning, guys. Thank you for taking my question.

Hey, morning.

My first one is on the gain on sale volume. You mentioned a kind of a pickup in USDA loan sales. Could you talk about what's helping reopen that market for you, and what 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, and hey Tim, this is I'll start, we'll start with the USA market and kind of 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 pre-payment penalties.

So, from an investor standpoint, it's the premiums are worth, really for that downward rate protection. So that's really what, we start to see kind of awaken that market, you're kind of going forward on that, look, the USDA market's choppy. I would say, we sold some Q2 2024, we sold some down in Q2 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 sales volume standpoint, yeah, I think, what you saw here in Q2, in terms of dollars, it's pretty consistent from kind of what you would expect in going forward here in the near term.

That's helpful. And then on the SBA side, could you talk about, what's driving such strong demand right now and healthy gain on sale margins given, I think some of the disruption in the industry, at least 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 hasn't. I think that from a demand standpoint that market is 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? So spread and pricing, which our lenders continue to do a great job, maintain their spreads and you know hopefully expanding here as the Fed comes down.

And as well as, what the investors are looking from a pre-payment standpoint, typically an investor, is looking for two to three years of that loan sale on books and they'll recoup their premiums. So, it really comes down to those two things. We have seen some change in premiums, after the SOP changes in June, replacing or reinstating the guaranteed fees.

That hasn't been as sizable as we originally expected, so that's a good sign, but for the most part, the demand there really has gone unchanged throughout this cycle.

Awesome. Okay, and like from the competition side, has the rule changes and the credit issues -- has that caused some of your competitors to pull back and create some opportunities for you?

Yes, it has absolutely on the smaller dollar end with the SOP changes, they -- essentially, this administration went back to what it looked like prior to 2023, and we have the processes and everything to underwrite whether it's 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 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.

Great, I appreciate all the color. Thank you, guys.

Thanks, Tim.

Thank you. There are no further questions at this time. I would now like to hand a call back over to Chip Mahan, Chairman and CEO for the closing remarks.

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.

So, internet banking, cloud native API first. And because I am co-manager of Canapi 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.

So how does that affect us? I am proud of the fact that we have been forced 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, BJ. 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.

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

Thank you, ladies and gentlemen, the conference has now ended.

Thank you all for joining. You may all disconnect your lines.