Live Oak Bancshares - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered solid growth and operating leverage: total revenue rose to $146.10M, diluted EPS was $0.55, NIM expanded 5 bps to 3.33%, and pre-provision net revenue increased 8% q/q and 12% y/y.
• Loan production of $1.65B and deposit growth of $695.9M drove total assets to $14.67B (+6% q/q, +16% y/y); noninterest-bearing deposits rose to $494.0M (+26% q/q) and business checking balances reached $363M (≈4% of deposits).
• Provision for credit losses declined for the fourth consecutive quarter to $22.2M as credit normalized; NCOs fell to $16.8M and ACL/loans stood at 1.65%.
• Consensus context: S&P Global consensus EPS was $0.60* vs actual Primary EPS of $0.5866* (company diluted EPS $0.55); S&P consensus “Revenue” $147.94M* vs S&P actual $123.52M* (company-reported total revenue $146.10M) — definitional differences for banks likely drove the gap. Values retrieved from S&P Global.
• Catalysts: preferred offering (~$96.3M net proceeds) boosts Tier 1 capital; Apiture sale closed post-quarter with ~$24M pre-tax gain, removing ~$6M annual pass-through losses — both accretive to capital and earnings trajectory.

What Went Well and What Went Wrong

What Went Well

• Strong production and deposits: $1.65B originations; deposits +$695.9M; assets +6% q/q to $14.67B.
• Operating leverage: NII +5.7% q/q (+19.1% y/y); NIM +5 bps to 3.33%; PPNR +8% q/q (+12% y/y).
• Strategic capital actions: ~$96.3M preferred proceeds and ~$24M gain from Apiture sale (closed subsequent to quarter), positioning for continued growth and resilience.
• Management quote: “We delivered strong loan production… significant deposit growth… strengthened our capital position… These strategic moves position Live Oak for continued growth and resilience” — James S. (Chip) Mahan III.

What Went Wrong

• Noninterest income down 11% q/q with weaker equity securities gains and lease income; loan servicing asset revaluation remained negative.
• NPAs rose: nonperforming historical cost loans increased to $456.3M; unguaranteed NPL ratio at historical cost rose to 0.68%.
• Salaries and benefits increased 7.5% q/q amid growth investments; tech expense +1.7% q/q; though total noninterest expense fell 2.2% q/q.

Transcript

Operator (participant)

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

Greg Seward (General Counsel and Chief Risk Officer)

Thank you. Good morning, everyone. Welcome to Live Oak's third 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 to GAAP measures, can also be found in our SEC filings and in the presentation materials. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Chip Mahan (Chairman and CEO)

Good morning all, and BJ is going to kick us off.

William Losch III (President and COO)

Good morning, everybody. Let's get started with a big shout out to all of Live Oakers and our customers on slide four. We're proud to be recognized as the number one SBA 7(a) lender for 2025 and by an impressive margin. Not only did we provide over $2.8 billion of loans to small businesses, but we also increased our production by 44% over last year, and our market share increased from 6.4% to 7.7%. Yet we still have plenty of room to grow in the program. Turning to slide five, we know what we are good at, and we're keeping the main thing the main thing by ensuring our existing vertical lending and deposit gathering activities are our number one priority. This performance is top of the class from a growth perspective. Loan production up 22%, loan outstandings growth up 17%, customer deposit growth up 20%, and PPNR up 24%.

These results reflect the hard work all our teams have done to create outcomes that are more consistent and sustainable over time. That's our goal. To ensure our profitable growth trajectory continues over the medium term, we are extending our customer product offerings by adding checking and small dollar SBA loan capabilities. Both of these efforts launched in early 2024, and in a little over 18 months, our teams have made significant gains in winning customer checking relationships and serving more small business borrowers. On the checking front, we ended the quarter with $363 million of checking balances, or 4% of our total deposit base, up from only 2% this time last year. This increase is even more impressive when you consider that our total deposit base grew 17% year-over-year.

We have about one third of our new loan customers opening a checking account with us each quarter, and we expect that percentage to increase as we add more capabilities such as merchant services. At the beginning of 2024, only roughly 6% of our customers had both a loan and deposit relationship with us. Today, that percentage is 20%. All this is leading to deeper relationships with customers, better insight into customer cash flows, and meaningful reductions in the cost of deposits, both now and over time. On the small dollar 7(a) front, what we call Live Oak Express, production is ramping up meaningfully and will continue to do so. These loans are also very desirable on the secondary market and are leading to a nice gain on sale increase.

We are continuing our efforts to make it simpler, easier, faster, and more efficient for our people to serve our customers. In Live Oak Express, we will be piloting an AI-enabled loan origination solution to do just that, which will significantly improve our speed to close for the borrower and the efficiency of our process from the lender all the way through to servicing and loan operations. The tangible result of our efforts is showcased on slide six. As you can see, the true earnings power of the company is strong in PPNR, revenue, and pretax income on both a quarter over quarter and year-over-year basis. We continue to be very focused on building more consistent and sustainable profitability. Healthy revenue growth continues, and with appropriate supportive expense growth, operating leverage is strong.

With credit impacts moderating in line with our expectations, a significant improvement is evident in our pretax income results. In short, our momentum continues with more to come. Walt, how about running through some of the financial highlights?

Walter Phifer (CFO)

Thanks, BJ. Good morning, everyone. Diving into the quarter on page eight, our Q3 earnings per share of $0.55 increased 8% in the quarter and almost doubled compared to Q3 of 2024. This outstanding growth was aided by the 7% link quarter and 24% versus prior year increase in core operating leverage that BJ just highlighted, as well as a lower quarterly provision expense. The 7% quarter over quarter improvement in core operating leverage was driven by a 6% quarter over quarter increase in net interest income, aided by $551 million or 5% link quarter in loan balance growth and five basis points of margin expansion to 3.33%. On the growth front, our small business and commercial banking lenders, as well as our loan support teams, continue to generate high caliber loans while replenishing their pipelines. Our deposits business continues to fund the bank in an extremely competitive market.

As BJ mentioned, we continue to be encouraged by the momentum in our two focus initiatives of growing non-interest-bearing business checking balances and originating small dollar SBA 7(a) loans via our Live Oak Express product. Quarterly provision expense was $22 million and was lower for the fourth consecutive quarter. Our reserve and resulting quarterly provision expense continue to be driven by strong loan growth and our navigation of the small business credit cycle that we have discussed over the past few quarters. Lastly, on the capital front, we successfully raised $100 million with our inaugural preferred offering, generating quality tier one growth capital to support our growth aspirations. Next quarter, we will have another earnings and capital accretive event with Aperture's recent sale, which will result in a $24 million one-time gain while also removing approximately $6 million of annual pass-through losses from our income statement.

Page nine provides a financial snapshot of our Q3 earnings results on the top left, with quarter over quarter demonstrated improvement across all major profitability and growth metrics highlighted on the bottom left. I'd like to briefly highlight two other items on this page, the first being the bottom right corner of this slide where we capture notable non-core items each quarter as they arise. Specifically, in Q3 of 2025, these items collectively had an estimated negative impact of approximately $1.5 million on our reported earnings. The second item is the tax expense line. Similar to last year, we had a seasonal increase in the third quarter effective tax rate that was driven by compensation-related accounting treatment in the tax calculation. Slide 10 highlights our loan originations by vertical and business units. A few things to note here.

As shown on the right-hand side of the page, our Q3 2025 loan origination totaled approximately $1.65 billion and an 8% increase link quarter driven primarily by our commercial banking segment. Production momentum in 2025 remains strong across our spectrum of verticals, with approximately two thirds of our verticals originating more production year to date in 2025 than they did in year to date 2024. Lastly, the bottom right of the page highlights the link quarter over quarter and year-over-year loan portfolio growth trends by lending segment, with both segments providing double-digit year-over-year growth rates. Slide 11 illustrates quarter over quarter loan and deposit balance growth, highlighting the strong, consistent growth trends on both fronts. Our total loan portfolio grew approximately 5% in the quarter, with year-over-year loan balances increasing approximately 17%.

Outstanding, durable growth that you don't often see across the current industry landscape. The approximately 3% link quarter increase in customer deposits was consistent with Q2 2024's customer deposit growth rate, while our year-over-year customer deposit growth rate was an outstanding 20%. As you can see in the second half of 2024's growth rates on the bottom of the page, we typically experience a slower seasonal growth rate in the second half of the year on the customer deposit front, and expect the second half of 2025 to be no different. Year to date growth in customer deposits has primarily been driven by our consumer and business savings products, as we have remained competitively priced in the market to support our aforementioned loan growth and be our business checking growth, which we highlight on our growth trends on page 12.

We saw a nice ramp in business checking in Q3 of 2025, with checking balances increasing 26% link quarter to $363 million. Our total low-cost deposits, including non-interest-bearing checking balances, as well as low-cost collateral construction and loan reserve accounts, now total approximately 4% of our total deposit basis, a 2% or 2x increase year-over-year. As BJ highlighted, adding non-interest-bearing deposits to our primarily competitively market-priced customer deposits and wholesale deposit portfolio is substantially accretive to our earnings profile. These deposits not only enhance our margin efficiency, but also strengthen the overall resilience of our funding mix with deeper customer relationships. As such, they remain a key strategic priority for us as we head into 2026 and beyond. Net interest income and margin trends are highlighted on slide 13.

In Q2 of 2025, sorry, Q3 of 2025, we saw our quarterly net interest income increase $6 million, or 6% link quarter, and $23 million, or 19% compared to Q3 of 2024. Our net interest margin also expanded another five basis points to 3.33%. Our third consecutive quarter of margin expansion aided both by growth as well as continued deposit repricing, as highlighted on the bottom of the table in the middle of the page. As the Fed cut in September, and we expect more cuts to come in the very near future, perhaps as early as next week, here is a general reminder of how this impacts our net interest income and margin trajectories. The first is we have an asset-sensitive balance sheet with approximately two thirds of our loans being variable and tied to either SOFR or PRIE.

The second is our funding basis predominantly in liquid savings accounts, short-term customer CDs, and broker deposits. Since the Fed began easing last December, our blended savings cumulative downward beta is approximately 44%. This is largely a result of us not pricing to the top of the market while the Fed was tightening, and as such, we have let the top of the market reprice down towards us through 2025. Ultimately, we monitor both deposit market and funding levels closely, ensuring that we continue to support our loan growth appropriately while also adjusting pricing to support margin aspirations and profitability. Our current outlook is that the Fed cuts 25 basis points in October and December of 2025, followed by three additional 25 basis point cuts in March, June, and September of 2026. Yet Fed forecasts vary, and as such, so do net interest income and margin outlooks.

We evaluate a gauntlet of forward-looking scenarios to assess the potential cone of net interest income and margin outcomes. Generally speaking, larger or more frequent Fed cuts provide more margin depression in the near term, while flat interest rates, less cuts, and less frequent cuts provide more margin opportunity. Ultimately, assuming that the deposit market is rational and reprices appropriately, our margin typically recovers relatively quickly due to the short-term nature of our funding base. What really matters, however, is not simply the margin, but the net interest income generated. Our net interest income performance is more resilient due to our strong growth. To drive this point home, over the last six years, 24 out of 26 quarters experienced stable or growth in net interest income, despite our net interest margin peaking at 4% and valuing at 2.56% over the same timeframe.

Moving to guaranteed loan sale trends on slide 14, the secondary market continues to provide consistent earnings while acting as a good source of recycled liquidity. We added some depth to this page this quarter to provide insight into our gain on sale composition and to highlight the accretive contribution we are already realizing from our small loan SBA origination efforts. Our quarterly gain on sale remains primarily driven by our typical larger SBA loan sales, which have provided a consistent $13 million-$15 million a quarter of gain on sale at an average premium in the $106-$107 range. We've now had two consecutive quarters of USDA loan sales, which is encouraging. Yet ultimately, the timing and execution of these sales is driven by the completion of the underlying projects, rate environment, and investor demand.

Similar to my comments on growing checking balances, our focus on ramping our Live Oak Express origination is providing immediate results, with our small loan SBA sales providing for $12 million in year-to-date gain on sale, approximately 4x or $9 million more compared to year-to-date 2024, while also providing for approximately 20% of our year-to-date total gain on sale compared to only 8% in year-to-date 2024. To help ramp this product going forward, we remain focused on both filling the top of the funnel through partnerships and lender referrals, while also leveraging AI to make the origination and servicing more efficient for our people and our customers. Expense trends are detailed on slide 15. Q3 reported non-interest expense of $87 million decreased approximately $2 million, or approximately 2% link quarter. We remain focused on supporting our growth via good calls, while also working to improve efficiency.

This renewed focus on growing revenues faster than expenses and improving operating leverage really began back in the third quarter of 2023. You can see the results of that focus on the right-hand side of this page, with loan production, core operating leverage, and revenue growth all significantly outweighing our expense growth when comparing the third quarter of 2025 to the third quarter of 2023. We are keenly focused on improving both our customer and employee experiences, embracing the automation and AI wave across our entire business, and enhancing our current technology stack, all with the resulting goal of creating internal and external raving fans, improving efficiency, and providing for a solid, mature foundation that will support our growth.

Turning to credit, slide 16 provides insight into the portfolio with a view of key credit ratio trends in the table at the top, with visualization of over 30-day past dues, non-accruals, and provision trends on the bottom. Our over 30 days past dues remain low for the fourth consecutive quarter, with $16 million or 14 basis points of our held for investment loan portfolio past due as of September 30th. The amount of non-accrual loans increased to $85 million or 73 basis points of our unguaranteed held for investment loan portfolio in Q3. Non-accrual balances remain very manageable as our servicing team continues to support SBA customers impacted by the small business credit cycle. Provision expense of $22 million improved in Q3 and was influenced by strong $551 million quarter over quarter loan growth, what we often refer to as good provision and portfolio performance.

While quarter over quarter provision will fluctuate based on growth and portfolio activity, we remain comfortable with our reserves. Last page for me. Our capital strength was bolstered in Q3 of 2025 with our preferred issuance, as shown on page 17. The $100 million issuance added approximately 90 basis points of total risk-based capital and approximately 70 basis points of tier one leverage, excellent tier one growth capital. Our equity method investment Aperture will provide for an additional capital creative event in Q4 with Aperture's recent sale closing in October. In addition, the removal of approximately $6 million of pass-through losses going forward will largely help fund the annual preferred dividends on the preferred issuance. Thank you again for joining this morning. With that, I'll turn it back over to BJ for his closing comments before we head to Q&A.

William Losch III (President and COO)

Great, thanks, Walt. Momentum's building. We're focused on the biggest and best opportunities, and we're modernizing our activities to take full advantage of the AI-driven possibilities that are right in front of us. With a big thank you to all Live Oakers and our customers, let's take some questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. Should you wish to ask a question, please press star one on your telephone keypad. Should you wish to cancel your request, please press star two. If you are using a speakerphone, please lift your handset before pressing any keys. Once again, that is star one should you wish to ask a question. Your first question is from Dave Rochester from Cantor. Your line is now open.

David Rochester (Managing Director and Senior Banks Analyst)

Hey, good morning, guys.

William Losch III (President and COO)

Hey, Dave.

Chip Mahan (Chairman and CEO)

Morning.

Walter Phifer (CFO)

Morning.

David Feaster (Analyst)

Morning. Can you, just to start with credit, get a little more color around the increase in the NPAs this quarter and talk about the new defaults trends as well? On the charge-offs, I would imagine you're expecting those to decline, but if there's any reason why those would remain elevated, I would love to hear.

Michael Cairns (CCO)

Yeah. This is Michael Cairns, Chief Credit Officer. Happy to take that. I look at this quarter as just a continuation of where we were last quarter. Fortunately, not all credit metrics always move in a perfectly linear way. We saw some non-accrual balances tick up a little bit, but still a very manageable balance there. This all kind of came from our SBA portfolio. Nothing caught us by surprise. These are loans that we've been tracking and are related to similar stress that the small business owners have faced over the last few quarters, which we've talked about quite a bit. I think about non-accruals as far as balances. Not all non-accruals are created equally. When you look at default count, this is also up as well, but not in a dramatic way. The other things I look at are past dues.

With an SBA portfolio as large as ours, having 14 basis points worth of past dues is something I'm incredibly proud of, and how our team has managed that. To me, that's an indication that our servicing team is on the portfolio and taking care of it. Reserve levels came down. Not all non-accruals turn into, you know, charge-offs to your question. While that has ticked down, we still have really healthy coverage on the portfolio. I feel good about where we are in reserves. There's a lot of economic uncertainty out there that has been discussed by other banks. What we control is, or what we focus on is what we can control: sound underwriting, which we continue to have. I talked about that last quarter, and we continue to focus on not stretching our credit quality, which we have not done, and heavily servicing the portfolio.

For an example, we are now going through our annual risk rate process for the entire SBA portfolio, and we will have a servicing team member and a credit officer assessing the risk rate for every meaningful balance within that portfolio. That's above and beyond our day-to-day servicing that we do, which is interacting with our customers, collecting financial information, spreading that, talking through that with our customers, and doing site visits. We've got a lot of hands and eyes on the portfolio. As I sit here today, I think what we're finding is that while there has historically been a little bit of a cycle in the SBA industry, our small business owners have remained relatively resilient in the face of that.

Chip Mahan (Chairman and CEO)

Appreciate that. How are you thinking about the potential for an extended government shutdown, and what that can do for, you know, on both the loan side in terms of loan growth and then credit? When do things start to potentially get rough? You know, what are you guys worried about on this front?

Walter Phifer (CFO)

Yep. Hey, Dave. This is Walter Phifer, our CFO. I'll start on the loan growth side and secondary market side, and then Michael can jump in on the credit. Unfortunately, government shutdowns are something we've had practice with over the years. We have a pretty extensive playbook that we pull out when these things happen. The first and pretty much the initial action that we take anytime there's a potential for a shutdown is we look at our pipeline, especially our SBA loans, and start to pull PLPs, the rates of reserve that SBA funding. Coming into this shutdown, our team really, really pushed in September. We had about $900 million of PLPs pooled so that we could continue to operate business as usual and get that capital out to the small businesses. From a growth standpoint, that feels really good.

Obviously, the longer the shutdown, you kind of get in through the end of the quarter, the PLPs there eventually run out, and then Michael and his team will assess bridge loans as appropriate. The other big impact for us is on secondary markets. We typically don't sell any of our loans in the first 30 to 45 days of any given quarter. Right now, we haven't seen an impact at all of the current shutdown. Once the shutdown ends, the secondary market opens up pretty quickly, and we get our loan sales out, and we settle. I'd say right now, if the shutdown extended past Thanksgiving, that may impact us here in the near term in Q4 in terms of secondary market sale execution. Once the market opens, we would get back out there, and we'd catch up later in the quarter or going into Q1 of next year.

David Rochester (Managing Director and Senior Banks Analyst)

Appreciate all the color there. Maybe just one last one, if I could, just switching gears to the AI enhancements you've been talking about, in terms of processing times and whatnot. Can you just quantify what those benefits could be? It sounds like you guys just overall look very favorably at what AI can do to the expense base and how you can potentially keep that more stable. If you could just talk about that a little bit, that'd be great. Thanks.

William Losch III (President and COO)

Sure. The history of Live Oak and the gentleman sitting next to me is one of innovation and looking at what's coming down the pike in terms of technology, technology enhancements, and the art of the possible. AI, we think, could be bigger than any of the meaningful step changes in technological advancement from the internet to cloud computing. They were big. We think AI is even bigger. What we're doing is we're spending a significant amount of time educating our people on all the tools available. Developers are all using Cursor and understanding how to code in AI, but the rest of our organization is learning to use prompts and build agents for specific processes.

We have people in our insurance group that are literally building their own agents to automate a lot of the follow-up that we have to do with insurance companies to ensure that our borrowers have the appropriate insurance. That's being done at an individual level, not just an institutional level. Renato Derraik and his technology team are way out in front of what a lot of others are doing, and we're building significant agentic AI solutions both in-house and with partners to drive across the company. I think a unique opportunity that we have at Live Oak is that we are growing so fast. I think there's a lot of both excitement and trepidation about what AI might do and how that impacts the employee base and what that means for them.

I think because we have so much growth opportunity over the next several years, what that'll mean is AI will help the productivity of our people over time, and maybe we have to grow our employee base and our expense base a lot less to generate the same level of revenue as opposed to maybe some others, particularly in our industry, that aren't seeing nearly as much top-line growth and have to use AI to reduce cost. I think our operating leverage because of our use of AI could exponentially grow our profitability while also making it easier for our people to do business, have more capacity to serve customers, and make the customer experience far better. The world of opportunity is endless out there, and we're already working on capturing a lot of it. I know I've talked a long time, but very excited about this.

I did mention we're doing a lot of piloting, particularly around our loan origination platform, starting with our small dollar loans and looking at a platform that is completely AI-driven and incredibly, incredibly easy to use, all the way from the lender back to servicing and operations. A little bit more to come on that, but that's just one example where we're already ahead and putting major things in practice that are going to help us over the long term.

David Rochester (Managing Director and Senior Banks Analyst)

Sounds like that'll be a pretty solid competitive advantage for you guys. Thanks again. Appreciate it.

William Losch III (President and COO)

Thanks, Dave.

Operator (participant)

Thank you. Your next question is from Tim Switzer from KBW. Your line is now open.

Tim Switzer (VP and Equity Research Analyst)

Good morning. Thank you for taking my question. The first question I have is on the trajectory for the margin. We're reentering the rate cut cycle, and I think you guys are long-term beneficiaries from rate cuts as long as, assuming we get a steeper yield curve. Assuming we get one or two more in the back half of this year and maybe another one next year, how does that impact the near term? Maybe what's the timeline for when we start to see it rebound and reflect back higher?

Walter Phifer (CFO)

Yep. Hey, Tim. This is Walt. I'll jump in on that one. I think you got to leverage a lot of the comments I made earlier. I think if you look at the models you see out there, I think that they were appropriate coming into this before there's an October cut. Now there's an October cut, so you have to flush that through. From a margin specifically, being an asset-sensitive bank, you see some margin variation. You take that plus our growth, it limits what you do in terms of quickly repricing deposits. We tend to take the approach of we see where the market goes, and then we slot ourselves there appropriately to make sure that we can continue to fund that growth, but obviously help with profitability.

As you think about when it recovers, I think if you look at the past few years and anytime we've had the Fed ease, it's pretty quickly, right? I think you can see even on the page on 13, in the middle of that page, you saw the same thing where net interest margin compressed, but then it recovered pretty much next quarter, started to grow again, and got back there within a year. That's really a testament to, one, our deposit team, as well as our treasury team, but as well as our short-term funding nature. Most of our CDs and our brokered deposits are within a year in terms of terms. It recovers pretty quickly. Again, as I mentioned, I reorient you to net interest income and growth, right? BJ always has this saying that you can't spend margin. That kind of always stuck with me.

At 330 margin, 333 margin is pretty healthy. If you can grow your net interest income quarter over quarter, despite that margin variation, that's a fantastic story in my mind. We think about that on margin, but also think about it on the net interest income side.

Tim Switzer (VP and Equity Research Analyst)

Gotcha. That was very helpful. Thank you. I also want to ask about kind of the competition you're seeing broadly in the SBA space. You know, with, I guess, the government shutdowns impacting things. You obviously have the credit cycle that seems to be hitting some of your competitors harder than you, and all the rule changes that were implemented, I guess almost two quarters ago. Have you seen easing competition at all, and has that created some opportunities for you?

William Losch III (President and COO)

Yeah. Tim, this is BJ. The way I would describe it is this is what we do. This is how we grew up, and we know the SBA market, we think, better than anybody. We've seen tons of things. We've seen SOP changes, government shutdowns, non-bank lenders come into the market, and non-bank lenders go out of the market. We've seen big banks try to do SBA, and we've seen them pull out of SBA. All the while, all we're doing is growing the number of verticals and the number of customers that we serve through the SBA. We don't believe that we have a peer in SBA lending. We will see different pockets of competition in different verticals, and some competitors are better than others in those verticals.

By and large, we actually just control what we can control in terms of making ourselves better all the time, every day. I think, obviously, it's showing up in our results and in our numbers, and we'll continue to do that.

Tim Switzer (VP and Equity Research Analyst)

Got it. The last question I have is, you know, it seemed like previously most of your commentary around the credit out or the credit performance was that it was pretty broad-based and more related to certain vintages rather than industries. Now that we're a little bit, you know, had a little bit longer time for the kind of the impact of tariffs and everything else going on, have you seen any industries that are maybe struggling or under a little bit more pressure than others?

William Losch III (President and COO)

Yeah, I think, Tim, on the tariff side, really very little, I'd say. It's a little bit more, yes, the rise in rates in the vintages from 2021 and 2022 showed some significant stress. I think where we see more stress than not, and by the way, it's not broad-based across all of our verticals, it's a handful where they don't have as much pricing power, yet their cost of goods sold are going up. The struggle of trying to just maintain profitability is where we've seen a little bit of stress. As Michael kind of talked about, there isn't anything that is surprising us at this point. We kind of know where that tension is, and everything is kind of performing relative to our expectations.

Tim Switzer (VP and Equity Research Analyst)

Interesting. Good to know. Thank you for answering my questions.

William Losch III (President and COO)

Sure.

Operator (participant)

Thank you. Your next question is from David Feaster from Raymond James & Associates. Your line is now open.

David Feaster (Analyst)

Hi. Good morning, everybody.

William Losch III (President and COO)

David.

Chip Mahan (Chairman and CEO)

Hey, David.

David Feaster (Analyst)

I wanted to talk about the credit and tech side in one sense. You talked about maintaining strong underwriting and that you guys are going to be going through the risk weighting, updating some of those. I'm just curious, given the broader uncertainty and pressures that we're seeing, we talked about the tariffs and all these different things. Have you adjusted underwriting standards or your criteria at all? Using technology and AI, we talked about the growth side and improving profitability, but is there opportunity to use tech or AI or whatever it may be to help underwriting or earlier credit identification and help mitigate the credit risk?

William Losch III (President and COO)

Yeah. Hey, David. I'll start. Michael, I'm sure we'll jump in. On underwriting standards, we try to be pretty consistent with our customers so they understand, and our lenders so that they understand what we're interested in and what we're not. With that said, there will be times when we'll modify the credit box, let's say. For instance, we'll say we really want to require direct management experience or direct operating experience in a certain vertical if we're going to end credit in that vertical. That's an example of how we might, quote, "tighten underwriting," to make sure that we have borrowers that are going to be able to operate their businesses successfully. We're constantly tweaking that across our 40 verticals, and we've always done that. I think that will continue. In terms of AI, absolutely.

For instance, one of the things that we're looking at in pilot, from a new loan origination and servicing platform, is the ability to actually ingest documents and have them read by AI and start to do spreads and create a credit memo. Imagine we've got all this documentation from an HVAC company, and AI is ingesting all this information specifically on this HVAC customer in a certain market. At the same time, it's going out and using Copilot or ChatGPT to actually build a business analysis around what that market looks like, what the demand in the market looks like, what the overall industry is doing, and how it's performing, how that looks relative to the financials that we're ingesting, how that looks relative to our existing HVAC or service contractor portfolio that we have in credit. That's what we're piloting.

Those are the types of things that we're looking at in terms of using AI. It doesn't replace the human aspect of reviewing all that, but in terms of streamlining the ability to analyze, do data entry, ingest information, do competitive analysis, and understand trends, it's going to be incredibly impactful for our ability to get loans closed, approved, not approved, and it's just going to make us a lot better and give the customer a lot better experience.

David Feaster (Analyst)

Okay. That's helpful. I was hoping you could maybe elaborate a bit on the government shutdown and kind of how all this works. I appreciate your commentary on this already, but it sounds like assuming that this gets figured out pretty quickly, you think that you're still going to be able to kind of sustain this pace of organic growth quarter over quarter. I mean, does that imply that the SBA works through the backlog of loans pretty quickly once we get back up and running? Do you backfill maybe some of that gap with more conventional lending in the short term? Or is it kind of just a timing issue and maybe this quarter might be a little bit weaker and we see some slippage into 2026? Just kind of curious how you think about all that.

There's a lot of uncertainty, so any help on how you think this kind of plays out is helpful.

Walter Phifer (CFO)

Yeah. Hey, David. I'll start. I think you know, from the SBA's perspective, once the government opens, they're pretty quick to catch up. I don't really see if it wraps up here in the next, call it, a week or two. I really don't see an impact, really government shutdown-driven, on our SBA growth or production for the quarter, largely because of us pulling the PLPs toward the end of September, like I mentioned earlier.

William Losch III (President and COO)

You might want to explain what pulling a PLP means.

Walter Phifer (CFO)

Yeah. Pulling a PLP, it's like, the SBA has a certain amount that they'll allocate each year in terms of funding. Pulling a PLP reserves, every SBA loan has an SBA PLP number. It's a reservation for that funding from the SBA program. You can't originate an SBA loan without that SBA number or that authorization.

You have to be a preferred lender.

Have to be a preferred lender. Yeah. That's PLP's preferred lender program, you know, to define the acronym, which I'm known to use quite a bit of acronyms. Yeah, from, you know, David, from kind of a growth standpoint, really don't expect much of a change, you know, here in the last quarter. If they can wrap it up here in the next, call it, you know, week or two, I don't think we'll need to tap into the conventional side. That's always something we do for a much more extended shutdown if we run out of those, you kind of SBA, you know, reservations. That's where Michael and his team come in, and we'll look at, you know, small, short-term bridge loans. Overall, you know, this is, like I said, unfortunately, something that we've kind of gotten used to on, you know, how to deal.

The other last thing I say is we have a Government Relations Manager that sits up in D.C. Her name's Dawn Thompson. She's fantastic. She lets us know kind of what's going on as it's going on. We kind of feel like we, you know, are always kind of, you know, in the know on how things are progressing, and she's, you know, keeping us up to date, daily at this point.

David Feaster (Analyst)

Okay. That's helpful. Maybe just kind of staying on some of the exciting parts about the business, I wanted to get an update on where we are with the embedded finance build-out, how that's going, and the growth potential there. Maybe on, you know, you guys are kind of ahead of the curve on most things. How do you think about, like, just given the market expansion to stablecoin, how do you expect to play there? Are there opportunities? Just kind of curious what you guys are looking at. Is that a potential opportunity for some deposit growth for y'all? Just wanted to touch on those two topics.

William Losch III (President and COO)

Sure. Hey, David. It's BJ. Embedded continues to be built out, and we think it's one of our moonshots, something that really could be meaningful over the next three to five years. We did do a pivot on how we were building it out earlier in the year. We were doing a lot of in-house building. With AI and what's going on in the marketplace, we found a partner that was quite a bit ahead of where we were, and we thought that we could leverage that partnership to accelerate our embedded banking growth. We kind of moved to a different platform. We've slowed down our pipeline building in terms of relationships, but we've got one live, we've got several on the hopper, and we think over time, we'll talk about that a little bit more.

I'd rather actually put points on the board from an embedded banking perspective and then tell you about it as opposed to tell you it's coming. That's kind of where we are on embedded. It's still very much on our roadmap. On stablecoins, it's very interesting. We have a new board member, Patrick McHenry, who you would have seen in the press release, that when he was in Washington in Congress, he was incredibly involved in the GENIUS Act and what's going on with stablecoins. We kind of have an inside view, so to speak, of what's going on, how that could impact things, and how people are looking to use it. We are actively studying how we would participate in stablecoins, and we want to stay ahead of that curve as much as we can as it continues to evolve.

David Rochester (Managing Director and Senior Banks Analyst)

Okay, that's helpful. Thanks, everybody.

Walter Phifer (CFO)

Thank you.

Operator (participant)

Thank you. Once again, please press star one should you wish to ask a question. Your next question is from Steve Alexipoulos from TD Cowen. Your line is now open.

Bill Young (Analyst)

Hi, guys. This is Bill Young, actually on for Steve. How are you?

Chip Mahan (Chairman and CEO)

Hey, Billy.

Walter Phifer (CFO)

Hey, Billy.

Bill Young (Analyst)

Hey, just to circle on the credit mini-cycle topic one more time. In recent quarters, you've spoken of being more aggressive on getting ahead of problem loans and writing them off with more aggressive charge-offs in your book. We did see a bigger step down in net charge-offs this quarter despite the increase in NPAs. Can you speak to your visibility on the future loss trajectory and your confidence level in terms of how far ahead you've gotten on these issues so far this cycle?

Michael Cairns (CCO)

Yeah, I think that, this is Michael here. I'll take that. I think in past quarters, we had discussed the fact that we had changed our philosophy on being more proactive in charging off loans. Our Special Assets team is, and in spirit with the SBA program, does everything that we can to help our business, our borrowers, navigate whatever challenges are in front of them. We will hold on with our customers longer than most, and do everything we can to help. In the past, we have held some of those in non-accrual and not charged them off. We changed our philosophy. We're charging them off when we feel like it's past the point of, you know, getting back to repayment quickly. Even though those loans are not charged off, they're not out of mind. We track those loans. We still work with our customers.

I would say that we are right on top of where we should be as far as charge-offs, and we'll continue to be proactive in dealing with that and not let them linger on our balance sheet. I think we're doing a good job there.

Bill Young (Analyst)

Okay. Great. It was nice to see the, you know, return on tangible outcome and equity return back to double digits this quarter. Can you just maybe lay out what you see as kind of a sustainable path for returns can move to in the next year or two?

William Losch III (President and COO)

Yeah, I think Billy would. What we talked about a lot here is getting to a 15 and 15, which is consistent and sustainable 15% returns on equity with 15% or more EPS growth a year. To do that, you've got to make sure that your business model can sustain that kind of performance, which means doing things around the checking accounts portfolio to provide more of a ballast for your funding costs. It is always having growth initiatives like Live Oak Express that are going to incrementally move your B income line up further. It looks like expense discipline and a moderation of credit. All of those things the senior leadership team talks about constantly is how do we get back not only to those levels, but consistently build a business model that stays at those levels.

I'm highly confident that we're going to be able to get there in the near term, near medium term, let's say over the next 18 to 24 months.

Bill Young (Analyst)

Great. My last question, with your pending Aperture sale and some activity among your peers, such as MVB with their Victor sale, as you think about Live Oak Ventures and some potential percolation of activity in Silicon Valley, are you beginning to see a bigger opportunity in the near term to harvest some of your investments?

William Losch III (President and COO)

I'll talk a little bit about Ventures, our Ventures portfolio specifically, but Chip knows more than any of us about broadly what's going on in Ventures. I'll let him talk about that. You know, Aperture was one of the two largest portfolio companies that we had in our Ventures portfolio, and obviously, we just exited with a nice, nice gain there. The other largest that we have is GreenLight Technologies, which is a fantastic company. The other ones are smaller and still in growth mode. I think Aperture was probably kind of the largest in terms of harvesting. The portfolio will probably stay the way it is for quite some time in terms of exits. I think that we'll continue to incrementally add Venture portfolio companies as we continue to look at new technology that we want to use inside the company.

That's always been what we use Live Oak Ventures for, and you'll probably see more of that from us. Aperture was probably the largest exit that you'll see in a while. Chip, what do you see more broadly?

Chip Mahan (Chairman and CEO)

I think most of this relates to Canopy. You know, we look at probably four companies a day in Canopy. That gives Live Oak a sneak peek, you know, before anybody else, if there's anything interesting there that we may want to invest in. I would say that the euphoria of the pricing in that business after COVID has reinstated itself with artificial intelligence. Venture firms are throwing an enormous amount of money at these companies where they're fundamentally pre-revenue. We're trying to take a bit of a circumspect view there because, as you know, at Canopy, we raised $1.5 billion from 70 banks, and our bank LPs are right there by our side as we look at interesting opportunities on a daily basis.

Bill Young (Analyst)

Great. Thank you for taking my questions, guys.

William Losch III (President and COO)

Thanks, Billy.

Operator (participant)

Thank you. There are no further questions at this time. I will now hand the call back over to Chairman and CEO Chip Mahan for final comments.

Chip Mahan (Chairman and CEO)

As always, thanks for attending, and we'll see you in 90 days.

Operator (participant)

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