Live Oak Bancshares, Inc. Q1 FY2025 earnings call

• Strong PPNR growth with loan and deposit production driving revenue growth. Checking balances stood at $279 million at quarter end, more than four times one year ago, and the percentage of customers with full relationships doubled. - 33% of loans are government guaranteed, providing risk comfort. - Provisioning is elevated due to CECL and small business credit cycle, but allowance for credit losses increased $51 million over the last five quarters. - Capital position strong with Mahan ratio at almost 17%. - SBA rule changes rolled back, including reinstatement of small dollar borrower fees, which are manageable and may give competitive advantage. - Q1 loan originations $1.4 billion, largest Q1 in bank history; deposit growth 8% q-o-q. - Net interest income over $100 million, margin expanded to 3.2%.

In the first quarter, Live Oak Bancshares saw strong momentum. Loan originations in Q1 2025 totaled approximately $1.4 billion, 73% higher than Q1 2024. 60% of Q1 loan production came via the small business banking team (SBA 7(a) loans, 55% y-o-y growth) and 40% via the commercial lending team (110% y-o-y growth). Loan balances were up 5% q-o-q and 20% y-o-y. Customer deposits grew 8% q-o-q, with business checking balances up 31% q-o-q. Net interest income eclipsed $100 million for the first time in Q1 2025, reaching approximately $101 million, and the net interest margin expanded to 3.2%. Loan production yields were ~8.14%, ~80 basis points above the portfolio yield of 7.35%.

• Expect top line growth momentum to continue in 2025 driven by loan production, balance growth, margin expansion, and secondary market sales. - Provision expense expected to remain elevated as working through small business credit cycle. - Margin trajectory uncertain due to economic environment, but asset-sensitive position and focus on controlling what can be controlled. - Confident in loan growth despite macro uncertainty, monitoring credit quality, disciplined in approvals.

• Economic uncertainty impacting small businesses. - Elevated provisioning due to CECL and small business credit cycle. - Potential impact of tariffs and inflation on borrowers. - Uncertainty related to SBA staffing changes and rule changes.

Q: Latest thoughts on margin and NII trajectory?

A: Walt Phifer stated it's an uncertain environment, Live Oak is asset-sensitive, and the focus is on controlling what can be controlled.

Q: Right time to grow loans amid macro uncertainty?

A: BJ Losch said they are comfortable with growth, monitoring credit quality, and disciplined in approvals.

Q: Impact of SBA lender's annual service fee?

A: BJ Losch said it doesn't impact existing loans, paid by borrower, rollback to prior SOP, and Live Oak is better positioned than others.

Q: Impact of SBA underwriting changes on Live Oak Express?

A: BJ Losch said technology is being built to maintain profitability, may take slightly more time to close.

Q: Focus on credit and verticality?

A: Michael Cairns said there's a holistic approach, vertical experts help with tariffs, and they are proactive in building reserves.

Q: Updates on syndication and embedded finance?

A: BJ Losch said focusing on being great lender and building deposits, with innovation ongoing like incubation of initiatives.