Live Oak Bancshares, Inc.

good morning ladies and gentlemen and welcome to the live oak bank shares 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 require immediate assistance please press star 0 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.

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 material 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.

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

Good morning, everybody. Let's get started with a big shout out to all of LiveOakers and our customers on slide four. We're proud to be recognized as the number one SBA 7 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%. And 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 7A 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. And 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 pre-tax 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 pre-tax income results. In short, our momentum continues with more to come. So with that, Walt, how about running through some of the financial highlights?

Thanks, BJ. Good morning, everyone. Diving into the quarter on page 8, our Q3 earnings per share of 55 cents increased 8% in the quarter and almost doubled compared to Q3 of 2024. This outstanding growth was aided by the 7% link order 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 order and 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 7.8 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've 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 9 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 captured notable non-core items each quarter as they arrived. 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 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. Few things to note here. As shown on the right-hand side of the page, our Q3 2025 loan originations totaled approximately $1.65 billion, an 8% increase length 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 linked quarter-over-quarter and year-over-year loan portfolio growth trends by lending segment, with both segments providing double-digit year-over-year growth space. 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 late 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% late 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 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% linked 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 totals approximately 4% of our total deposit basis, a 2x increase year-over-year. As Vijay 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, Q3 of 2025, we saw our quarterly net interest income increase $6 million, or 6% late 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 PRIME. The second is our funding base is 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, we 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. And generally speaking, larger or more frequent Fed cuts provide more margin suppression 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. Ultimately, what really matters, however, is not simply the margin but the net interest income generated, and 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 experience 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 to $15 million a quarter of gain on sale at an average premium in the 106 to 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 known SBA sales providing for $12 million in year-to-date gate-on sales, 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 grant 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% in the 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 with 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-day 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 health care 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-recorded 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 1 leverage, excellent Tier 1 growth capital. Our equity method investment aperture will provide for an additional capital accretive event in Q4 with Aperture's recent sales 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. And with that, I'll turn it back over to BJ for his closing comments before we head to Q&A.

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. So with a big thank you to all LiveOakers and our customers, let's take some questions.

Thank you. We will now begin the question and answer session. Should you wish to ask a question, please press star 1 on your telephone keypad. Should you wish to cancel your request, please press star 2. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star 1, should you wish to ask a question. Your first question is from Dave Rodster from Kantor. Your line is now open.

Hey, good morning, guys.

Hey, Dave. Good morning.

Morning. Can you just start with credit? Can you get a little more color around the increase in the NPAs this quarter and talk about the new defaults trends as well? And then just 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.

Yeah, that's Mike Carnes, Chief Browser, happy to take that. So 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. So we saw some non-accrual balances tick up a little bit, but still a very manageable balance there. And 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 small So, I think about non-accruals as far as balances. Not all non-accruals are created equally. So, when you look at default count, it's also up as well, but not in a dramatic way. The other things I look at are past dues. So, with an SBA portfolio as large as ours, having 14 basis points worth of past dues 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, so not all non-accruals turned into charge-offs, to your question. And so while that has ticked down, we still have really healthy coverage on the portfolio. I feel good about where we are in reserves. Um, and so there's a lot of, you know, economic uncertainty out there that has been discussed by, you know, other banks. Um, and what we control is, or what we focus on is what we can control. Um, sound underwriting, which we continue to have, I talked about that last quarter and we continue to focus on not stretching on credit quality, which we have not done, uh, and heavily servicing the portfolio. So 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. And 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. So a lot of hands and eyes on the portfolio. And I think 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 remain relatively resilient to face that.

I appreciate that. And then, you know, 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. And when do things start to potentially get rough? What are you guys worried about on this front?

Hey, Dave, this is Walt, CFO. I'll start on the loan growth side and secondary market side, and then Michael can jump in on credit. You know, unfortunately, government shutdowns, you know, something we've had practice with over the years. So, you know, we have a pretty extensive playbook, you know, that we pull out when these things happen. And the first and pretty much, you know, it's kind of 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 to reserve that SBA funding. Coming into this shutdown, our team really, really pushed in September. We had about $900 million of PLPs pulled so that we could continue to operate business as usual and get that capital off to the small businesses. You know, so from a growth standpoint, that feels really good. Now, obviously, the longer the shutdown, you know, you kind of get in through, you know, the end of the quarter, you know, the PLPs there, you know, a bunch of run out and then Michael and his team will assess bridge loans, you know, as appropriate. The other big impact for us is on secondary markets. Now, we typically don't sell any of our loans in the first 30 to 45 days of any given quarter. So right now, you know, we haven't seen an impact at all of the current shutdown. Once the shutdown ends, we, you know, the secondary market opens up pretty quickly and, you know, we get our loan sales out, we settle. I'd say right now, you know, the shutdown extended past Thanksgiving. You know, that may impact us here in near term in the Q4 in terms of secondary market sale execution. You know, but once the market opens, we, you know, we get back out there and we catch up, you know, later in the quarter or going into Q1 next year.

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? And then it sounds like, you know, 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 just talk about that a little bit, that'd be great. Thanks.

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. And 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. And so what we're doing is we're spending a significant amount of time educating our people on all the tools available. So 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 and You know, 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. And that's being done at an individual level, not just an institutional level. And then Renato Derrick 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. And 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. And I think because we have so much growth opportunity over the next several years, that what that'll mean is, you know, 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. And so I think our operating leverage because of our use of AI could exponentially grow our profitability while also making our, make it easier for our people to do business, have more capacity, to serve customers and make the customer experience far better. So, you know, 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 I'm very excited about this. I did mention, you know, 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 and so 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

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

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

Hey, good morning. Thank you for taking my question. Hey, there. 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. But 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 then? And then maybe what's the timeline for when we start to see it rebound and reflect back higher?

Yeah, hey, Tim, as well. I'll jump in on that one. You know, I think you got to leverage a lot of the comments I made kind of earlier. You know, I think if you look at kind of the models you see out there, I think that they were perfect coming into this before there's an October cut. Now there's an October cut, so you have to kind of flush that through. You know, but from a margin specifically, you know, being an asset, you know, you see some margin variation. And 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 spot ourselves there appropriately to make sure that we can continue to fund that growth, but obviously help with your profitability. As you think about when it recovers, I mean, I think if you look at the past few years and anytime we've had the Fed ease, it's pretty quickly, right? And I think you can see even on the page on 13, kind of in the middle of that page, you saw the same thing where NIM compressed, but then it recovered. Pretty much the next quarter starts to grow again and got back there within a year. And that's really a testament to, one, our deposit team, as well as our treasury team, but as well as our kind of our short-term funding nature. So, you know, most of our CDs and our broker deposits are within a year in terms of, you know, terms. So, it recovers pretty quickly. But again, you know, as I mentioned, you kind of reorient you to net interest income and growth rate. BJ always has to say that you can't spend margin. That kind of always stuck with me. And, you know, at 330 margin, 333 margin is pretty healthy. And if you can grow your net interest income, you know, quarter over quarter, despite that margin kind of variation, that's a fantastic story in my mind. You know, so we, you know, kind of think about that margin balls, think about on the net interest income side.

Gotcha. That was very helpful. Thank you. And 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 shutdown is 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, you know, I guess almost two quarters ago. So have you seen, you know, easing competition at all? And has that created some opportunities for you?

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. And we've seen tons of things. We've seen SOP changes. We've seen government shutdowns. We've seen non-bank lenders come into the market. We've seen non-bank lenders go out of the market. We've seen big banks try to do SBA. 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. So 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. But by and large, we actually just you know, control what we can control in terms of, you know, making ourselves better all the time, every day. And so I think obviously it's showing up in our results and in our numbers and we'll continue to do that.

Got it. And then 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. Um, but now that we're a little bit, um, 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?

Yeah, I think, um, on the tariff side, really very little I'd say, you know, it's a little bit more. Yes, the rise in rates and the vintages from 21 and 22 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. It's where they don't have as much pricing power, yet their cost to get sold are going up. You know, the struggle of trying to just maintain profitability. And, you know, that's where we've seen a little bit of stress. But 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, you know, everything is kind of performing relative to our expectations.

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

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

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

Yeah. Hey, David, I'll, I'll start Michael. I'm sure we'll, we'll jump in, you know, underwriting standards, you know, how to be pretty consistent with our customers. So they understand kind of, and our lenders so that they understand what we're interested in and what we're not with that said, though, there will be times when we'll, you know, modify the credit box. Let's say for instance, we'll say, You know, we really want to require direct management experience or direct operating experience in a certain vertical if we're going to end, you know, credit in that vertical. That's an example of how we might, quote, tighten underwriting is, you know, to make sure that we have borrowers that are going to be able to operate their businesses successfully. So we're constantly tweaking that across our 40 verticals, and we've always done that. And I think that that will continue. In terms of AI, absolutely. So 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 started to do spreads and create a credit memo. So, you know, imagine, you know, we've got all this documentation from, you know, an HVAC company and AI is ingesting all this information specifically on this HVAC customer in a certain market. But 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 doing and how it's performing, how that looks relative to the financials that we're ingesting, how that looks like 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. So 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 customer a lot better experience.

Okay. That's hopeful. And then 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 you know it sounds like assuming that this gets figured out pretty quickly that you're you think that you're still going to be able to kind of sustain this pace of organic growth quarter of a quarter i mean does that imply that the sba you know works through the backlog of loans pretty quickly once we get back up and running or do you backfill maybe some of that gap with more conventional lending in the short term or just do we 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 just any help on how you think this kind of plays out is helpful.

Hey, David. It's Paul. I'll start. I think 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, week or two. Um, you know, I really don't see an impact, um, you know, really government shutdown driven, uh, on our SBA growth or production, uh, you know, for the quarter, largely because of, you know, pulling the PLPs, um, you know, to work in a September, like I, you know, you might want to explain what, uh,

Pulling a PLP.

Yeah, pulling a PLP. So 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. So you can't originate an SBA loan without that SBA number or that authorization. But you have to be a preferred lender. Have to be a preferred lender. Yeah, that's PLP's preferred lender program, you know, to find acronym, which I'm known to use quite a bit of acronyms. But, 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 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 SBA new reservations. And that's where Michael and his team come in and we'll look at small, short-term bridge loans. But overall, this is, like I said, unfortunately, something that we've kind of gotten used to on how to deal. And the other last thing I'd say is we have a government relations manager that sits up in DC. Her name is Dawn Thompson. She's fantastic. She lets us know kind of what's going on as it's going on. So we kind of feel like we 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.

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

Sure. Hey, David, it's BJ. So embedded, uh, it continues to be built out and, and we think it's one of our moonshots. So 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. Uh, we were doing a lot of in-house building. But again, with AI and what's going on in the marketplace, and, you know, 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. So we kind of, you know, we kind of moved to a different platform which slowed down our pipeline building in terms of relationships. But we've got one live. We've got several on the hopper. 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 uh so you know that's kind of where we are on embedded it's it's still very much on our on our roadmap on uh on stable on stable coins you know it's very interesting we have a new uh board member patrick mchenry who you would have seen and press release that when he was in Washington in Congress, he was incredibly involved in the Genius Act and what's going on with stable coins. And so, you know, we kind of have an inside view, so to speak, of what's going on, how that could impact things and what you know, how how people are looking to use it. So 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.

Okay. That's helpful. Thanks, everybody. Thank you.

Thank you. Once again, please press star 1 should you wish to ask a question. And your next question is from Steve Alexopoulos from TD Cowen. Your line is now open.

Hi, guys. This is Bill Young actually on for Steve. How are you? Hey, Bill. Hey, Bill. Hey, just to circle on the credit mini cycle topic one more time. You know, 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. And we did see a bigger step down in net charge-offs this quarter despite the increase in MPAs. So can you speak to your visibility? on kind of the future loss trajectory and your confidence level in terms of how far ahead you've gotten on these issues so far this cycle?

Yeah, I think that, this is Michael here, I'll take that. So 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, 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. So 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 getting back to repayment quickly. Well, even though those loans are not charged off, they're not out of mind. We track those loans. We still work with our customers. But so I would say that we are right on top of where we should be as far as charge-offs. We'll continue to be proactive in dealing with that and not let them linger on our balance sheet. But, you know, yeah, I think we're doing a good job there.

Okay, great. And then it was nice to see the return on tangible common equity return back to double digits this quarter. So can you just maybe lay out what you see as kind of sustainable path for returns can move to the next year or two?

Yeah, I think, Billy, what we talk 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. And 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 portfolio to provide more of a balance for your funding costs. is always having growth initiatives like Live Oak Express that are going to incrementally move your fee 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 and so 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 great and my last question

know with your pending aperture sale and some activity among your peers you know 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 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, so I'll let him talk about that. But Aperture was one of the two largest portfolio companies that we had in our Ventures portfolio, and obviously we just exited with a 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. And so, you know, I think Aperture was probably, you know, kind of the largest in terms of harvesting. And, you know, the portfolio will probably stay the way it is for quite some time in terms of, 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 so you'll probably see more of that from us. But, you know, Aperture was probably the largest exit that you'll see in a while. Chip, what are you seeing more broadly?

Well, I think most of this relates to Canopy. You know, we look at probably four companies a day in Canopy, so 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 enormous amount of money at these companies where they're fundamentally pre-revenue. And 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.

Great. Thank you for taking my questions, guys. Thanks, Billy.

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.

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

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