Live Oak Bancshares, Inc.

Thank you for joining us. 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. Here in the room, we have Chip Mahan, our Chairman and CEO, and Michael Carnes, our Chief Credit Officer, who will be available for Q&A after our President, D.J. Losch, and CFO, Walt Pfeiffer, finish their prepared remarks. I'll now turn it over to Paul to BJ.

Great. Thanks, Greg. Good morning, everybody. Let me start where you'd expect me to start. We reported EPS at 52 cents. That is obviously not the number we wanted to print and not the number you expected from us. The driver was 17 million of additional provision on our exited distillery portfolio, about 27 cents of EPS. Excluding that action, adjusted EPS was 76 cents. Later on, Walt will walk you through that bridge on slide 15. So I'll spend time right up front on that this morning, but then I'm going to spend quality time on what is at risk of getting lost this quarter, which is our operating performance and momentum underneath these results, which is simply outstanding, one of the strongest operating quarters in our company history. Let's get started on slide four. Five themes in the quarter. One, the decisive action on the distillery portfolio. Two, outstanding operating leverage momentum with record-adjusted PPNR of $88 million, up 33% year over year. Three, the main Live Oak engine, our small business banking model, is humming. Four, Live Oak Express and business checking are now generating meaningful profit and have a long runway ahead. and five deploying AI is front and center for us. And our adoption continues to accelerate. We've only scratched the surface of what's possible. First of those five is about actively dealing with a challenge head on, which is who we are. And the others are about continuing to build a company with strong, sustainable operating earnings and growth. Overall provision this quarter was $55 million. Four pieces, and they shouldn't be looked at the same way. And you can see that on slide five. First, 17 million or 31% on the exited distillery portfolio. More on that in a moment. Second, 16 million or 30% of the total from loan growth. We added more than 700 million of loan balance growth this quarter, a record. As I've said before, CECL is not kind to growing companies like ours. That $16 million is a reserve against loans we haven't had a chance to earn a penny on yet. I'll take that trade over low growth and lower provision all day, every day. The third $13 million, or 24%, of the provisioning was in commercial banking from six relationships across three verticals, not concentrated. Since these are larger loans, we will see more of a mix of impairments, charge-offs, and recoveries in any given quarter. making results more lumpy. Fourth, 9 million or 16% of provisioning was in small business where it was diversified with no single industry driving it and consistent with the history of our book. Turning to slide six on distillery, as we talked about last quarter, we exited this vertical in 2024 over two years ago and we're at workout only. and while eight of the 13 loans are still accruing, we have 98% of the portfolio classified and have dedicated workout resources for all of them with every remaining loan under enhanced monitoring. What happened industry-wide is pretty straightforward if you've read the news. Second straight year of declining U.S. spirits demand resulting in further excess barrel inventory across the industry which is driving a sharp decline in collateral values. We've now recognized $29 million of provision year-to-date on this portfolio through specific reserves and net charge-offs. That portfolio is about one-half of 1% of our total loan book, so of course this hurts, but it's manageable given our PPNR strength. We have a saying at Live Oak that when you have to eat something unpleasant, you don't take small bites, and that's exactly what we've done here. Every quarter, We've taken every charge and every impairment we can reasonably support as soon as we could support it. We have not spread this out to smooth the quarter, and we're not going to with this or any challenge we have. From here, what we watch is collateral realization versus our current estimates, ongoing performance of those businesses, and active cooperation from our borrowers. We've been proactive with each relationship and exposure and will continue to be. and we've made significant progress working the book in the last six months. We'll continue to be transparent as we work through the rest of the exposures. Now turning to slide seven, let's move beyond the distillery noise and look at the fantastic operating earnings, which are outstanding. Adjusted revenue grew 15% year over year to 172 million, while adjusted expenses grew only 1%, 15 in one. 15x operating leverage. That produced record adjusted PPNR of $88 million, up 33% from a year ago and 16% from just last quarter, with our adjusted efficiency ratio improving seven points year-over-year from 56% to 49%. We've built an operating model that produces $88 million of pre-provision earnings a quarter and growing. That's the number that matters most to me because it is the number that allows us to absorb actions like we did this quarter. And on that last point, slide eight demonstrates just how much we have improved the business over the last two years. So go back two years to the third quarter of 2024. Adjusted PPNR was $53 million. Today it's $88 million, up 64%. Adjusted revenue is up 31% over that stretch. while expenses are up nine over 3X operating leverage and total assets are up 35%. Now look at the provision. Q3 2024, we took 35 million in provision and delivered 19 million of adjusted pre-tax income. This quarter, we took 55 million, $20 million more and still delivered 33 million of pre-tax income. That is 74% more pre-tax income in just two years while absorbing substantially more provision. And excluding distillery was 50 million, 163% above where we were just two years ago. That's excellent operating leverage, and it earns us the flexibility to deal with a problem and keep momentum moving forward, flexibility we did not have two years ago. It is the reason we can take the big bite and still earn money, still grow 16%, and still fund every initiative that matters to us. Turning to slide nine, the biggest driver of that performance continues to be our small business franchise, the engine of this company. We are the number one SBA lender in the country by dollar amount again, and it's not even close. Our deep expertise across 30 verticals, along with an unmatched speed and quality of execution, is why. The business is clearly demonstrating soundness and profitability along with that growth. and our default performance continues to significantly outperform the broader SBA industry. This is a portfolio we have underwritten through multiple cycles and is doing exactly what we expect it to do. A key initiative to extend our SBA scope is on slide 10. Live Oak Express, our small dollar S7A business, posted another record with 107 million of originations, up 173% from a year ago and up from 82 million last quarter. This is a fee generating capital efficient engine for us. We sell more than 75% of the guaranteed portion at strong gain on sale premiums, which recycles liquidity. We earn servicing fees and we retain the roughly 25% unguaranteed portion on the balance sheet, which earns recurring net interest income. Gain on sale from Express was 7 million this quarter, of 250% year over year. And we've now generated $18 million over the last five quarters, about $0.30 of earnings accretion and growing. This is just fantastic work by our Live Oak Express team and everyone involved. Our target at cruise altitude remains over $750 million annually in this business. And again, do the math on that kind of volume at those premiums. The earnings impact still in front of us is substantial. Turning to slide 11, our second key initiative, growing checking to deepen relationships and lower our funding costs. Checking balances crossed a half a billion dollars this quarter, up 39% year over year, with total relationship deposits at now 1.3 billion. Why it matters is cost and stickiness. Our relationship deposit base only cost us 184 basis points compared with our overall deposit cost of 347. And the relationship depth keeps building. 25% of our customers now have both a loan and deposit account up from 20% a year ago, and four years ago that number was only 3%. We're at roughly 5% of checking and DBA to total deposits with our target at 10% and above. on a deposit base of about $15.5 billion, growing 16% a year. That is an enormous amount of funding improvement still ahead of us. Phenomenal work by our lenders and our treasury management teams, and there's a lot more to come. Moving to slide 12, our AI efforts continue to accelerate. 100% of our employees have access to AI-native tools, and we now have 200 cloud super users across the company. with a bank-wide rollout of Claude for Enterprise kicking off this fall, which will unlock even more capabilities. Our people are building real things, as you can see on the bottom left, but we have been smart about it, building common skills and prompts and requiring training while also encouraging innovation. And I'd point you to the credit side of that list on purpose, better portfolio management, better aggregated credit data, and Faster Credit Worker exactly would help us see things earlier. What I like to say about AI is today is not tomorrow. The technology is advancing rapidly, so we're dreaming big about how to use it to accelerate our strategy. Thank you to all LiveOakers. I could not be more proud of how our people are taking care of customers, making our operations better and profitably growing this company. With that, Walt, why don't you take us through a few more financial details?

Thanks, BJ. Good morning, everyone. BJ hit the highlights, so I'll go straight to the numbers behind them. The EPS bridge, growth in funding, our margin performance, credit trends across our two lending business units, and capital. Turning to slide 15, as BJ noted, reported figures are on the left, with reported EPS at 52 cents. drew in by reported PPNR of $90 million, up 26% late quarter and 53% year-over-year, and all set by an elevated provision that supported record loan growth, distillery actions, and the portfolio changes across the two lending business units. The right-hand side of the page walks you from the reported to adjusted EPS. Adjusted EPS was 49 cents in the quarter, and the bottom right shows that, excluding the 27-cent drag from the distillery actions, Adjusted EPS would have been the 76 cents BJ referred to. Slides 16 and 17 highlight our consistent outstanding growth trends. Q3 originations were well diversified across 34 different industries and totaled $2.1 billion, up 38% in late quarter and 29% year-over-year, and a record quarter of production for the bank. That production drove period end loans to $13.9 billion up 6% in the quarter and 16% year-over-year. While we funded that growth with approximately $920 million in new deposits, with our customer deposit channels contributing about 75% of that growth in a highly competitive market. Moving to slide 18, net interest income grew to $133 million, up 6% in the quarter and 15% year-over-year, in line with our balance sheet growth. That interest margin of 3.30% remained in line with the last five quarters. Loan volume and mix added about 14 basis points, offset by higher funding costs reflecting both our need to fund our strong loan growth as well as that very competitive deposit market. We will take that trade every day. A relatively stable margin and substantially more net interest income dollars. Looking ahead, we still view a flat to rising rate environment as a favorable backdrop for our balance sheet. with volume growth remaining the primary driver of net interest income and funding competition and growth needs the key variables for the margin performance. Highlighted on slide 19, gain on sale of guaranteed loans was $19 million for the quarter, up 12% both late quarter and year-over-year while premiums held steady overall. Live Oak Express contributed a record $7 million, nearly 40% of Q3's total gain on sale, The success of Live Oak Express in the third quarter also provided us with the opportunity to sell more seasoned, larger SBA loans while still growing the gain-on-sale line and maintaining an average premium of 7% on total sales for the quarter. Earlier, BJ gave you the adjusted view of operating leverage, while slide 20 shows our operating leverage on a reported basis. Reported revenue grew 23% year-over-year, while expenses grew 3%. and the reported efficiency ratio improved to 49%, approximately 1,000 basis points better than a year ago and 500 basis points better than just late fourth. Credit trends are detailed on slide 21 with further granularity provided this quarter by splitting out trends across our two lending business units. Small business banking credit performance remains stable. Past dues remain low at nine basis points and non-approvals of 1.10% and net charge-offs of 1.07%. were consistent with recent quarters. In commercial banking, past dues are essentially zero, non-approvals of 1.17%, and net charge-offs of 86 basis points reflect the distillery actions, which the majority of this portfolio sits within this business unit, as well as the six credits BJ reference. The commercial banking ratios have been, and will continue to be, lumpy given the size of these loans and the timing of impairments and recoveries. Our unguaranteed reserve coverage increased five basis points to 2.06% in the third quarter, reflecting growth, portfolio changes, and a more uncertain macroeconomic backdrop. Lastly, capital levels are detailed on slide 22. Roughly 37% of our assets are cash or government guaranteed, with a guaranteed loan mix about nine times the industry. Given our uniquely large guaranteed loan portfolio, we focused on two metrics that measure capital against our true credit risk. The Unguaranteed Loan Book. First, our Mayhand Ratio, Tier 1 Capital plus Reserves and Fair Value Markets at Percent of Unguaranteed Loans, was a strong 15.4%. And second, the Tangible Common Equity version of that ratio, shown on the bottom right of the page, was 14%. We believe that our capital position relative to the true risk on our balance sheet remains healthy. And with that, thank you for your time. I'll turn it back over to D.J. for his bottom remarks before we do that.