Live Oak Bancshares, Inc. Q4 FY2024 earnings call

• Live Oak enters 2025 with excellent business momentum, including rising small business sentiment and activity, near all-time high loan pipelines, and growth initiatives like Live Oak Express and checking account acquisition ramping up.
• In 2024, the company delivered strong PPNR growth, excellent loan and deposit growth, record loan production, and well-controlled expenses despite an elevated provision in the second half.
• Credit trends: While default activity increased in the fourth quarter, past dues were reduced to $15 million or 20 basis points, with 0 past dues in the commercial banking portfolio. The company's performance relative to the SBA lender universe is unmatched due to expertise in small business lending.
• Checking balances ended 2024 at $215 million, with the percentage of customers having both loan and deposit relationships increasing to 14%. New loan relationships often included checking accounts.
• The company is heavily investing in people and technology, with AI seen as an opportunity to streamline processes and support growth.

In Q4 2024, Live Oak Bancshares saw strong loan production with $1.4 billion in loan originations, the second largest quarter in bank history, resulting in a linked quarter loan growth of 4% net of loan sales. Customer deposits grew 1% linked quarter, with business checking balances increasing 46% linked quarter to $212 million. Net interest income remained flat to Q3 2024 and was 9% above the prior year despite 18 basis points of NIM compression. Approximately 34% of the loan portfolio is government guaranteed, providing credit quality and capital advantages. Loan production yields were around 8.5%, 100 basis points above the current portfolio yield.

• The company expects to maintain net interest income despite near-term margin compression due to strong loan growth momentum and pipeline.
• There is an expectation of another 50 basis points reduction to variable rate loans taking effect January 1.
• The target margin of 3.50% is still in play towards the end of 2025, depending on Fed actions and deposit market reaction.

• Credit cycles: While default rates are below industry trends, the company experienced an increase in default activity in the fourth quarter, highlighting vulnerability to credit cycles for small business borrowers.
• Impact of new administration: Uncertainty around macro outlook, tariffs, and rate changes poses risks to small businesses and could affect loan pipelines and borrower caution.
• Competitive deposit market: The funding market is highly competitive, with cautious downward repricing in consumer and business savings markets.

Q: How much of the elevated provision is related to growth versus specific relationships? And what's the new normal for provision run rate?

A: Michael Cairns, Chief Credit Officer, said the majority of the provision expense is related to loans in the SBA portfolio. The SBA industry shows weakness, and the company is focused on servicing customers. The provision run rate is related to growth and portfolio performance, with the company being proactive in provisioning for growth and impairments.

Q: Thoughts on net interest margin forward outlook, especially Q1 relative to Q4 and margin target?

A: Walt Phifer said there will be another 50 bps cut on variable loan portfolio in Q1, with a large CD maturity event in Q1 helping. The 3.50% margin target is towards the end of 2025, depending on Fed actions and deposit market reaction.

Q: Impact of new administration on loan pipeline and borrower caution?

A: BJ Losch said it's too early to know, but small business sentiment was high pre-election, and pipelines are near all-time highs. Sentiment is optimistic with expectations of less regulation and more growth opportunity.

Q: Elaboration on being more creative to help borrowers and hiring needs?

A: Chip Mahan gave an example of helping a self-storage customer by having an experienced person assist. BJ Losch said they are hiring revenue-generating talent, beefing up treasury and deposit groups, and leveraging AI for scalability. The company is looking to add lenders and enhance deposit teams to support growth.