Live Oak Bancshares - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered accelerating core earnings power: total revenue rose 14.0% QoQ to $143.747M, net interest margin expanded 8 bps to 3.28%, and pre-provision net revenue increased 29.4% QoQ to $54.454M.
• Diluted EPS was $0.51 vs $0.21 in Q1 2025 (QoQ +$0.30); Wall Street consensus (S&P Global) Primary EPS was $0.50, implying a modest beat on EPS*.
• Record Q2 loan originations of $1.53B (+9% QoQ; +30% YoY) alongside strong deposit growth of $198.8M drove linked-quarter loan growth of ~3% and improved funding mix via non-interest-bearing checking momentum.
• Credit costs moderated (provision $23.3M, down ~$5.7M QoQ), with improving leading indicators (lower past dues, fewer new defaults) even as Q2 net charge-offs rose tactically to accelerate resolution of unlikely-to-recover loans.

What Went Well and What Went Wrong

What Went Well

• Record Q2 production ($1.5266B) and healthy deposit growth (+$198.8M) underpinned revenue growth and margin expansion; NIM improved to 3.28% and net interest income rose 8.6% QoQ to $109.221M.
• Gain-on-sale revenue strengthened: $322M of guaranteed loans sold at a 7% average premium, including ~$20M of USDA sales as that market showed signs of reopening.
• Management emphasized momentum and modernization, with BJ Losch highlighting “positive momentum across all areas… positioning the company to transform… in an AI-driven world,” and Chip Mahan underscored AI use cases to do “more business with better customers” rather than simply cut overhead.

What Went Wrong

• YoY earnings still below prior-year levels: net income of $23.428M vs $26.963M in Q2 2024; diluted EPS $0.51 vs $0.59 YoY.
• Net charge-offs elevated at $31.445M (1.19% of average loans, annualized), reflecting deliberate actions to clear unlikely-to-recover loans; total historical-cost nonperforming loans remained high at $396.332M (though improved vs Q1).
• Total noninterest expense increased 6.3% QoQ to $89.293M (growth-related costs and ~$3M one-time items), with other expense and technology expense higher QoQ.

Transcript

Speaker 1

Good morning, ladies and gentlemen, and welcome to Live Oak Bancshares' second quarter 2025 earnings call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If anyone has any difficulties hearing the conference, please press *0 for operator assistance at any time. I would now like to turn the conference call over to Greg Seward, Chief Risk Officer and General Counsel. Please go ahead.

Speaker 4

Thank you and good morning, everyone. Welcome to Live Oak Bancshares' 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 the actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings.

We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials. I will now turn the call over to William C. (BJ) Losch III, President of Live Oak Bancshares.

Speaker 3

Great, thanks. Good morning, Greg, and good morning, everyone. In the room here, just so you know, 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. Let's get started on slide four. I am excited about this quarter. The promise of the Live Oak Bancshares 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 PP&R 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.

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. 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 five. 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. 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 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. In 2021, the percentage of Live Oak customers with both a loan and deposit relationship was 3%. Today, it is 18% and growing. It's not just about new checking accounts. Those customers have also brought in incremental half a billion dollars of interest-bearing deposits. We're deepening relationships while improving our funding profile. Here again, as with Live Oak Express, we have a long runway of growth to come. Lastly, on credit, 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.

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. 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. There's a lot more to come. Walt, how about running through some of the financial highlights for the quarter?

Speaker 4

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-over-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, offset by a $2 million or 3% linked quarter increase in core expenses. 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 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 remained outstanding in Q2, growing approximately 6% in the quarter. Customer deposit balances are now approximately 20% higher than June 30, 2024. 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. 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. 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, a 9% increase in the quarter, and approximately a 30% increase compared to Q2 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 year to date in 2024. Slide 12 illustrates the quarter-over-quarter loan and deposit balance growth, highlighting 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 the 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% linked quarter. 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 declining 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 loan yield.

As shown in the middle and 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. 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-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. Expense trends are detailed on slide 15. Q2 reported non-interest expense of $89 million, including 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 costs 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 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 a waterfall in our credit performance, whereas over 30 days past due becomes a leading indicator for the number of new defaults, which then in turn becomes 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 or investment loan portfolio past due as of June 30th. The number of new defaults has subsided, trending down from the second consecutive quarter to 40 new defaults in Q2. 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. 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-off 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. 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. Lastly, capital strength is shown on page 17. Risk-based capital levels were relatively flat quarter-over-quarter and remained 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-guaranteed loan mix that is approximately eight times the industry levels. Our main hand 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.

Speaker 3

Great, thanks, Walt. 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. With a big thank you to all Live Oakers and our customers, let's take some questions.

Speaker 1

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. If you have a question, please press the star followed by the one on the top down. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please listen and answer before pressing any keys. Once again, that is star one should you wish to ask a question. Our first question comes from David Feaster from Raymond James & Associates. Your line is now open.

Hey, good morning, everybody.

Speaker 4

Hey, David.

Hey, David. I wanted to start on the growth side. Originations were really strong. You talked about a record Q2 number, and obviously net growth was really strong, but payoffs and paydowns increased pretty materially too. I'm just curious, maybe how you think about the growth outlook, what's driving those payoffs and paydowns that you saw in the quarter? If you could just maybe touch on how pricing is trending and the competitive landscape from your view.

Yeah, I'll start. Hey, David, it's Walt. From a paydown perspective, we'll start there. Paydowns for Q2 were about $100 million higher than we saw on average in the past couple of quarters. 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 hub loan and another lender, another was a venture banking borrower that was acquired. No thematics, no expectation that that higher trend continues going forward. Historically, our quarterly loan growth rate averages somewhere between 3% to 5%, so call it 12% to 20% annually. I think that's appropriate. We're 20% where we were over the last year. If you think year to date for this year, we're up about just shy of $800 million.

If you annualize that compared to where we landed at the end of last year, it would be about a 15% growth rate. We still expect growth to be strong at those levels. Our pipeline is about $3.8 billion. As we continue to have these great loan origination quarters, our lenders have done a fantastic job replenishing that as well. I hope that helps answer your question, but I think we feel pretty confident and strong that that growth continues.

Speaker 3

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. 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. 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. We've seen real strength in those two areas this year. As Walt mentioned earlier, if you look at the purple bubbles, those are all of our SBA and small business banking verticals.

Over 70% of them, as Walt said, have higher originations this year than last year. There are various reasons within those different verticals in terms of industry dynamics. 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 have 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. This is what we do. Our name brand recognition is very strong. 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.

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. Maybe on the other side, you've been really proactive. You touched on it, about reducing deposit costs, stated 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. Just kind of curious what you're seeing on the funding cost side.

Speaker 4

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 savings side, we believe there is potential to continue to decrease our consumer savings rate over time. 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 have 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 has fairly repriced pretty quickly, with nice betas. 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 are opportunities to bring pricing down over time, especially wherever the Fed takes us from here on out.

Okay. 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. 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? 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.

Yeah. Good morning. This is Michael Cairns. I'll take that one. 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, 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. I think from just the pure numbers standpoint, that's all really positive. As you know, we've really continued to step up our game on the servicing front. 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.

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. 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.

Okay. That's helpful. Thanks, everybody.

Speaker 3

Thanks, David.

Speaker 4

Thanks, David.

Speaker 1

Thank you. Once again, should you wish to ask a question, kindly press star one on your telephone. Your next question is from Tim Pfister from Keefe, Bruyette & Woods. Your line is now open.

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

Speaker 4

Hey, Tim. Morning, Tim.

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. Hey, Tim, this is Walt. I'll start. We'll start with the USDA 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 prepayment penalties. From an investor standpoint, the premiums are worth it really for that downward rate protection. That's really what has started to awaken that market. Going forward on that, the USDA market's choppy. I would say we sold some in Q2 2024. We sold some now in Q2 2025. I think a couple of quarters in two years is not really the trend that we want to see. We want to see a little bit more consistency there.

From a gain-on-sale volume standpoint, what you saw here in Q2 in terms of dollars is pretty consistent from what you would expect going forward here in the near term.

Okay. That's helpful. On the SBA side, could you talk about what's driving such strong demand right now and healthy gain-on-sale margins, given some of the disruption in the industry, at least for the small-dollar loans, but 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 from a demand standpoint, that market is almost insanely consistent if you look historically over the last 10 to 15 years. It really comes down to kind of two things, right? Spread and pricing, which our lenders continue to do a great job maintaining their spreads and hopefully expanding here as the Fed comes down, as well as what the investors are looking for from a prepayment standpoint. Typically, an investor is looking for two to three years of that loan sale envelope, and they'll recoup their premium. 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. 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 created some opportunities for you?

Speaker 3

Yes, it has. Absolutely. On the smaller dollar end, with the SOP changes, this administration went back to what it looked like prior to 2023. We have the processes and everything to underwrite, whether it's more favorable or less favorable standards. 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. On the small dollar side, we've seen a lot. I think that also leaks into the larger dollar side. Like I said earlier, we're consistent. We're always out there. Our name is very well known. People know that we can execute incredibly well on SBA. I think we're seeing even more activity because of that.

Speaker 4

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

Speaker 3

Thanks, Tim.

Thanks, Tim.

Speaker 1

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

Speaker 0

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. 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. Internet banking, cloud-native API first. Because I am co-manager of Canopy with Gene Ludwick, 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.

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. 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, BJ. Do I think about that to reduce overhead dramatically? No, I think we can do more business with better customers across our entire spectrum.

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

Speaker 1

Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect your lines.