LIVE OAK BANCSHARES INC earnings calls

Credit, loan growth, and margin

Q (David Feaster · Raymond James): Analyst asked about recent credit actions, especially the distillery portfolio and loan migrations, and how credit looks as rates rise. He also asked what drove strong loan growth and the outlook for margin.

A: Management said distillery was the biggest mover and they reserved heavily, leaving about $60 million of exposure to work out backed by conservative collateral estimates. They said the SBA portfolio performed well and underwriting is conservative for elevated rates; commercial migrations were limited and many sponsors are adding equity. On margin they said the 330 margin in third quarter was in line with expectations and they expect margin to remain relatively stable while net interest income grows with the balance sheet.

"As BJ and Walt highlighted on the call, distillery's obviously the biggest mover for our book during the quarter." — Michael Cairns

Small business health

Q (Ben Graham · Piper Sandler): Analyst asked how healthy small business owners look today based on the bank's monthly financials and surveys — improving, stable, or worse?

A: Management described small business borrowers as resilient and said problems are usually from life or business events, not general inability to manage higher costs. They said the portfolio is stable, they monitor customers closely and request financials every 90 days, and they underwrite new loans assuming higher rates to build a cushion.

"we're constantly monitoring that and requesting financials every 90 days for all those small business customers" — BJ Losch (PRESIDENT)

Distillery reserves, provisions, expenses

Q (Dave Rochester · Cantor): Analyst asked what marks remain on the distillery exposure and how to think about provision trends for Q4 and next year, including the chance to return to the prior $20 million-$25 million provision range. He also asked about expense trajectory and AI savings.

A: They said $60 million is the outstanding unreserved balance on the distillery portfolio and they have charged off what they do not expect to collect, using conservative collateral estimates with a small remaining reserve. On provision trends they broke down a $55 million total: $17 million tied to distillery and about $38 million across growth, small business and commercial (about $9 million small business and $13 million commercial), and said provisions will be lumpy so they will not commit to a new steady-range now. On expenses they expect modest expense growth while continuing automation and leveraging AI, investing in strategic initiatives and targeting continued efficiency ratio improvement.

"To answer your question, $60 million is our outstanding unreserved balance against that portfolio." — Michael Cairns

Business checking and NIM impact

Q (Emily Lee · KBW): Analyst asked for an update on progress building business checking relationships and whether more product or investment is needed to deepen these. She also asked how much NIM or NII changes for each 25 basis point Fed hike.

A: Management said checking grew from almost nothing to about 5% of the deposit base in two years (roughly $500 million), with about 60% of that from commercial and 40% from small business so far. They plan to add merchant services to deepen small business relationships and expect that to increase sticky balances; on rate moves they said a 25 basis point move typically equates to about $5 million-$10 million of annual net interest income accretion.

"We're incredibly pleased with the progress that we've seen in checking." — BJ Losch (PRESIDENT)

Deposit competition and distillery timeline

Q (Noah Castanon · TD Cowen): Analyst asked for an update on the competitive deposit environment and current spot deposit cost versus the 3Q average. He also asked for any timeline to fully work off the distillery portfolio.

A: Management said the deposit market is very competitive across stated rates, promotions and relationship pricing, and they use a mix of channels to fund growth. They said "right now our average for the quarter was 3.47%" and stated rates are trending a little higher after the September Fed hike. On the distillery timeline they said they stopped lending to that vertical in 2024 and their goal is to exit as quickly as possible, but the timing depends on many variables and some borrowers are still paying so they will work with them.

"Stated rate, so right now our average for the quarter was 3.47%." — Walt Phifer (CFO)

Closing remarks

Q (Chip Mahan): No question — closing remarks from management.

A: The CEO closed the call and thanked listeners, noting they will report again in 90 days.