Earnings call transcript: Live Oak Bancshares Q3 2024 misses EPS, revenue

Live Oak Bancshares reported its Q3 2024 earnings, revealing a miss on both EPS and revenue forecasts. The company posted an EPS of $0.22, falling short of the expected $0.5467, while revenue reached $128.07 million, below the anticipated $132.4 million. Despite these misses, the stock saw a 1.23% increase in premarket trading, reflecting cautious optimism among investors.

Key Takeaways

• EPS and revenue both missed analyst expectations.
• Stock saw a slight uptick in premarket trading, up 1.23%.
• Strong PPNR growth and net interest income reported.
• Loan portfolio and deposit growth remain robust.
• New product innovations introduced, including SBA (LON:SBA) lending.

Company Performance

Live Oak Bancshares demonstrated solid growth in its loan portfolio and deposits during Q3 2024, despite missing earnings expectations. The firm's net interest income and margin saw increases, reflecting strong operational performance. The company's focus on small business lending and innovative financial products continues to drive its market position, even as it faces challenges in meeting forecasted financial metrics.

Financial Highlights

• Revenue: $128.07 million, down from the forecast of $132.4 million
• Earnings per share: $0.22, below the forecast of $0.5467
• Net interest margin: Expanded by 5 basis points to 3.33%
• Loan balances: Up 7% quarter-over-quarter, 16% year-over-year

Earnings vs. Forecast

Live Oak Bancshares reported an EPS of $0.22, missing the forecast by $0.3267, and revenue of $128.07 million, falling short by $4.33 million. This marks a significant deviation from expected performance and may raise concerns about the company's ability to meet future targets.

Market Reaction

Despite the earnings miss, Live Oak Bancshares' stock increased by 1.23% in premarket trading, reaching $41.26. This movement suggests that investors may be focusing on the company's growth prospects and strategic initiatives rather than the immediate shortfall in earnings.

Outlook & Guidance

Looking ahead, Live Oak Bancshares remains optimistic about its growth potential. The company expects loan production to stabilize and aims for significant growth in its small dollar SBA lending program. With a focus on innovation and strategic partnerships, the company is positioning itself for future success, despite current earnings challenges.

Executive Commentary

Chairman Chip Mahan emphasized the company's focus on soundness, profitability, and growth, noting, "We have always believed that the key to operating a bank was to focus on soundness, profitability and growth in that order." This commitment to core principles is reflected in the company's strategic initiatives and market positioning.

Q&A

During the earnings call, analysts inquired about specific loan impairments and the company's deposit repricing strategy. Executives addressed these concerns, highlighting the isolated nature of the impairments and the strategic approach to managing deposit costs.

Risks and Challenges

• Economic conditions and potential rate cuts could impact future performance.
• The company faces challenges in meeting earnings expectations.
• Loan impairments, although isolated, may raise investor concerns.
• Competitive pressures in the financial services sector require ongoing innovation.
• Maintaining growth momentum in the face of macroeconomic uncertainties.

Full transcript - Live Oak Bancshares Inc (NYSE:LOB) Q3 2024:

Conference Operator: Good morning, ladies and gentlemen, and welcome to the Q3, twenty twenty four Live Oak Bancshares 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. This call is being recorded on Thursday, October 24, 2024. I would now like to turn the conference over to Greg Seward, General Counsel and Chief Risk Officer.

Please go ahead.

Greg Seward, General Counsel and Chief Risk Officer, Live Oak Bancshares: Thank you, and good morning, everyone. Welcome to Live Oak's Q3 2024 Earnings Conference Call. We're webcasting live over the Internet and this call is being recorded. To access the call over the Internet and review the presentation materials 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 Q3 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.

Chip Mahan, Chairman and Chief Executive Officer, Live Oak Bancshares: Good morning, everyone. As we did last time, D. J. Is going to kick things off. He will then turn things over to Walt, who will dig into the details on the quarter.

I'll make a comment or 2 before we go to Q and A, and we'll dig in on your questions at the end.

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: P. J? Thanks, Jeff. Good morning, everyone. Let's get started on our slide deck on Slides 45.

This was a big quarter for Live Oak. Really pleased that our strategy is working. Our momentum is excellent. Our continued ability to acquire new small business relationships and control what we can control are on full display. We again delivered strong PPNR growth on both a reported and adjusted basis, excellent loan and deposit growth and record loan production.

On the lending front, our teams delivered exceptional production and balance sheet growth results had healthy spreads in the quarter and yet pipelines are still near all time highs, both of which bode well for continued growth. We did see elevated provision with about 35% of it driven by what I call good provision due to the record loan growth and about 40% of it from 3 specific impairments on the conventional lending side of our business, the overall portfolio across both small business and commercial banking remains healthy and my confidence in our credit quality processes and people remains high. With the improving prospects of a soft landing and lower rates, which will benefit customer and revenue growth along with credit performance, we believe that our momentum is accelerating at a very opportune time. As you can see on Slide 6, our focus on the profit basics growing revenues faster than expenses while still investing in good costs such as new lenders, products, technology and risk management has resulted in accelerating PPNR growth, up 18% on an adjusted basis versus last quarter and 22% since this time last year. In fact, if you as you look on Slide 7, our PPNR over the last 12 months versus the prior 12 months is up 29%, driven by 10% revenue growth and only 1% expense growth.

Particularly encouraging is the activity we are seeing on the lending front with loan production this quarter topping our previous high watermark by 50% and should continue with pipeline still near all time highs. A big shout out to our lenders and our vertical heads along with our underwriters, closers, loan operations people, construction and our credit officers to get this capital into the hands of our customers. On Slide 8, while we again saw low levels of charge offs, as mentioned earlier, we did build a reserve due to the record loan growth in the quarter along with the impairment of those three relationships. With our disciplined credit box, our deep understanding of government guaranteed lending requirements and an unmatched in-depth servicing and watch list activity process, we have the systems to get ahead of borrower stress and we're doing that. As we discussed previously, we are proactive with provisioning for growth, changes in our portfolio performance and impairments of specific loans when warranted, so we are well reserved when charge offs occur.

Our reserve levels remain very healthy. Turning to Slide 9. While I'm pleased with this quarter's results, as a growth company, I'm much more excited about where we're headed. There's a lot of gas remaining in the loan pipeline tank. Our new small dollar SBA lending efforts ramping up quickly and will be a meaningful contributor to our results over time.

Checking balances, which were immaterial a year ago, continue to build as do full relationships with our customers. Our brand and our reputation continues to attract and retain the highest quality talent and customers, and we continue to heavily invest in our future. So with a big thank you to all Live Oakers and our customers, Walt, how about running through some of the financial highlights?

Walt Kadosh, Chief Financial Officer, Live Oak Bancshares: Thanks, BJ. Good morning, everyone. Let's start with our summarized Q3, 2024 metrics shown on Slide 11. There are a few highlights that I would like to specifically call out on the right hand side of the page. Modded 8 basis points of annualized net charge offs relative to our average loans and leases held for investment.

The strong linked quarter reported PPNR growth of 9% and net interest margin expansion of 5 basis points and the 50% increase linked quarter in loan originations and 7% increase linked quarter in loan balances net of loan sales. On the bottom of the charts on the left, you will also see that our total loan and lease portfolio across the $10,000,000,000 mark in the 3rd quarter and our deposit portfolio continues to grow at similar pace. Now let's spend the next few pages on the leading drivers of this quarter's strong PPNR performance and growth. Slide 12 highlights our loan originations by vertical and business unit. As BJ mentioned, loan production crested all time highs in Q3 with approximately $1,800,000,000 of loans closed.

This was driven by strong pipeline entering the quarter, an outstanding effort by our lending, funding and operational teams to get the loans closed and approximately $320,000,000 of project finance loan production driven primarily by solar energy and hotel deals. Our project finance team has a slow start in the first half of the year, but rallied in Q3 to reach its highest single quarter of loan production in its history at the banks. $811,000,000 or 46 percent of Q3's loan production came via our small business banking team, primarily in the form of SBA 7 loans, a 26% increase linked quarter and a 35% increase year over year. The remaining $947,000,000 or 54 percent of Q3's loan production came via our commercial lending team, a 79% increase linked quarter and doubled the commercial production compared to the prior year. You can see the year over year momentum across our vertical on the left hand side of the page with approximately 60% of our verticals originating more production through the 1st 9 months of 2024 than they did in 2023.

Slide 13 illustrates the quarter over quarter loan and deposit balance growth highlighting strong growth trends through the 1st 3 quarters of 2024. While many banks across the industry continue to see minimal, if any loan growth, our loan balances are up 7% linked quarter and 16% compared to the prior year. This elevated growth rate in Q3 was primarily driven by the aforementioned strong loan production. Also let's not forget before loan sales and participation, our loan balance growth was actually 11% linked quarter. Deposit growth of 7% linked quarter and 14% compared to prior year continues to be driven by our customer deposit platform as well as our utilization of broker deposits to help fund short term liquidity needs.

In addition to providing flexibility in our customer deposit repricing strategy in an uncertain rate environment. Lastly, on the slide, our business deposits have grown 6% linked quarter and 22% compared to prior year and continue to be a focal point of our funding strategy. As BJ mentioned, we are extremely excited about the momentum that we are seeing in building fuller relationships with both our loan and business deposit customers as shown on Slide 14. You may recall that we fully launched our first true operating account offering to customers in Q1 of this year. Since then, the percentage of customers with both a loan and a deposit account tripled to approximately 12%.

Our business checking balances have increased to $145,000,000 and these savings and CD balances related to businesses with a checking account at Live Oak have increased approximately 2 times to $232,000,000 The result of expanding our business relationships with our customers is stickier deposits with an average blended cost of funds in Q3, 2024 of 2.45%, approximately 40% less than our total bank blended cost of funds. We continue to build upon these trends and our deposit efforts will provide substantial tailwinds to our net interest income and net interest margin over time. Speaking of net interest income and NIM, 3rd trends are highlighted on Slide 15. Starting with the graph at the top of the page, our net interest income increased 6% linked quarter and is up 9% compared to Q3, 2023. Net interest margin increased 5 basis points quarter over quarter to 3.33%.

Improvement in both our net interest income and NIM were primarily driven by our loan growth as highlighted on the bottom right hand side of the page. Now moving to the table below the graph, our net spread increased 2 basis points linked quarter to 3.68 percent driven by our loan portfolio yield which expanded 4 basis points to 7.83% from the previous quarter, while our cost of funds only increased 2 basis points to 4.15%. I continue to feel really good about the things that we can control, such as our loan growth momentum and pipelines remains robust. Growth is the essential component of our net interest income and NIM expansion going forward. We continue to demonstrate good pricing discipline on new loan origination with new loans coming on at approximately 100 basis points above our average portfolio yield and thus remaining accretive.

And our increase in cost of funds since early 2023 has largely been driven by maturing CDs renewing into a higher price offering. You can see in the middle of the page that the substantial headwinds this has generated in prior quarters as that portfolio is approximately 1 third of our customer deposits and 1 5th of our total deposits. As noted on our last call with current CD offering rates now below maturing rates, these headwinds have converted to tailwinds and we expect this favorable spread between our maturing rates compared to our current rates to increase over the next year as the Fed continues along a decent cycle. And while we expect the Fed easing will be a tailwind to our growth, net interest income and margin over time, the timing and magnitude of the Fed can be impactful to our net interest income and margin from quarter over quarter perspective. As we discussed in our last call, more than 50% of our loans are variable and primarily quarterly adjust, meaning that they reprice the 1st business day following the quarter.

The Fed cutting 50 basis points at the end of the quarter creates a timing difference in the very near term as it does not provide time for the deposit market, specifically the consumer business savings markets to reprice down before our loans reprice. This timing difference is further supported by our negative 1 year repricing gap of approximately 19% Or said another way, we have approximately $2,000,000,000 more of liabilities that will reprice or mature and be replaced at lower rate offering compared to assets that will reprice over the next 12 months. We will see margin compression in the very near term and then we are confident it will expand as the Fed continues to ease in the online deposit market along with our deposit pricing adjusted to the lower rate environment. While at the same time, we still remain well positioned on the net interest income front as our strong quarter over quarter loan origination and subsequent loan growth will help maintain our net interest income on its up into the right trajectory. Moving on to quarter over quarter fee income on Slide 16.

The demand for government guaranteed SBA and USDA loans on secondary market continues to be strong and our gain on sale volumes reflect that. We sold $267,000,000 in Q3, 2024 for an average premium of 7%, largely in line with the last three quarters. Expense trends are detailed on Slide 17. Our Q3, twenty twenty four expenses of $78,000,000 have been flat for the 1st 3 quarters of the year, thus aiding and driving our efficiency ratio down to approximately 60%. Our teams continue to show great expense discipline over the last year, even while adding 43 FTEs, primarily within growth oriented sectors focused on revenue generation and funding growth, as well as investing in our risk and technology divisions within the bank.

Key credit trends are shown on Slide 18. Shown on the top right are unguaranteed classified loans as a percent of unguaranteed held for investment loans. Unguaranteed classified loans increased to 2 40 basis points as of Q3, 2024 with about 40% of the increase driven by the same 3 relationships Vijay mentioned earlier. Dollars 73,000,000 or 109 basis points of over 30 day past dues as of Q3 2024 are noted on the bottom left graph. I'll note that this has been reduced to $56,000,000 or 84 basis points of our unguaranteed balances as of this morning.

The main theme driving the increase over the last two quarters was largely borrowers still working through the elevated rate environment. And we do think lower rates will be an aid to our borrowers. Non accrual trends on the bottom right are largely in line with the historical 8 quarter trend and net charge off levels remain modest at approximately $2,000,000 in Q3 or 3 basis points of our held for investment on guaranteed loans. Broadly speaking, movements in our credit performance continue to be driven by either the highest rate environment in decades or by isolated non thematic circumstances surrounding a few relationships. Lastly, Slide 19 highlights our capital profile, which remains healthy.

We like our current position and we'll continue to ensure that capital levels remain appropriate for our robust growth trajectory. Overall, we are happy with our strong PPNR performance and growth trends. We remain comfortable and confident in our credit quality and processes. And we are excited about our continued momentum as we head into the end of the year and into 2025. I will now turn it over to Chip to add a final comments before Q and A.

Chip Mahan, Chairman and Chief Executive Officer, Live Oak Bancshares: Thanks, Walt. On most of our previous quarterly calls, I kick things off and discuss credit quality. Just a word on that before we go to Q and A. We have always believed that the key to operating a bank was to focus on soundness, profitability and growth in that order. Just as a reminder, we go see all of our customers before we make a loan.

Our lenders sit around the kitchen table, go over budgets and understand our customers' plan for success. Other SBA lenders do not. Another reminder, we have 72 22 year olds reviewing quarterly financial statements on all 7,412 loan customers. Because BJ does such a great job of operating this bank, I'm on the road a couple of days away calling on prospects and customers, usually with a plane fully on folks. This provision is a blip.

It is not systemic. Lastly, we have always thought capital is king. Our adjusted capital ratio, as well just pointed out, is over 18% and our loan loss reserve is twice industry averages. I have never been more excited about our prospects for growth in this bank in the future and now we're happy to take your questions.

Conference Operator: Thank you. Your first question comes from Kristen Love of Piper Sandler. Please go ahead.

Kristen Love, Analyst, Piper Sandler: Thank you and good morning everyone. I hope you're well. First, just can you dig a little bit deeper into the originations for the quarter and the outlook there? Very strong quarter for originations. For many quarters, you've been around that $1,000,000,000 mark.

But so first, are there any specific industries where the originations were concentrated? And then how do you think about originations in coming quarters compared to the 3rd? Could $1,500,000,000 or so be a more normalized level going forward just given on pipelines? Just curious on how you're thinking about that after a record quarter. Thank you.

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: Thanks, Crispin. It's BJ. Good morning. Fantastic quarter. And if you look at what some of the slides that Walt showed, it was really pretty broad based.

We had really strong performance in our small business verticals. And in our commercial banking, we saw a pretty significant increase. What we saw earlier in the year from our solar business in particular was projects moving to the right. And Q3, we really saw a lot of that pent up origination hit in the Q3. So that was kind of a significant step up on the solar side.

We also saw some strength in project finance, particularly around seniors housing as well. So they were pretty big meaningful step ups from Q2 to Q3. So I don't think we're going to continue to see $1,800,000,000 Do I think that we're now at elevated levels of loan production in the $1,200,000,000 range or more, yes, I do. And I'm very encouraged about again how broad based it is and that the pipelines

Kristen Love, Analyst, Piper Sandler: as

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: we showed continue to remain very healthy. So I really think there's a lot of good customer activity out there as rates have crested and started to come down. So I think we've got kind of our production engine

Chip Mahan, Chairman and Chief Executive Officer, Live Oak Bancshares: rolling at just the right time. One thing to add to that, Vijay, we have another pipeline, and that's a pipeline of lenders that we're talking to. And our SBA lender pipeline is at an all time high as we see some other banks changing comp plans and things like that. So our existing pipeline of originations is robust as you mentioned before, but so is the lender pipeline.

Kristen Love, Analyst, Piper Sandler: Thanks, C. J. Jeff. Appreciate all the color there. And then just on the 3 relationships that drove $14,000,000 of the provision, just a little bit more color there would be great.

What industries are these companies in? And how large the individual loans? And then, just views on credit broadly in the portfolio, it seems that you're pretty confident here, given that uptick might just be a blip, but curious on your views. Thank you.

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: Sure. Yes, let me start and then I'll kick it to Michael, who looks at our portfolios each and every day in detail with his credit officers. But really they are isolated incidents across our portfolio. 1 was just a poor management transition and oversight by equity sponsors. 1 is, litigation overhang hindering a customer's ability to get new business.

And the third was one that didn't work. And as a bank, we're in the business of taking risk and we get it right 99%, 99.5% of the time and sometimes we don't. But we still like we said, feel really comfortable about our overall portfolio. Michael, what would you add?

Michael, Credit Officer, Live Oak Bancshares: Yes. Good morning. What I would add to that is that, for my seat, I have a lot of confidence in our lending strategy and our loan portfolio and our credit team and our servicing team, our lenders or analysts, we're all meeting orderly to go through all of the loans in our commercial portfolio. We're talking about them and looking at trends on an individual loan basis and in the markets that we serve. And when I look at these three credits, I don't see an underlying theme that is woven into the rest of our portfolio.

I see them as truly one off isolated events.

Kristen Love, Analyst, Piper Sandler: Great. Thank you. And then are you able to share how large the individual credits are?

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: I think we'll kind of pass on that, but if it's $15,000,000 there's 3 credits. Yes, you can kind of guess.

Kristen Love, Analyst, Piper Sandler: Okay. Thank you. Appreciate it.

Conference Operator: Thank you. Next (LON:NXT) question comes from David Feaster at Raymond (NSE:RYMD) James. Please go ahead.

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: Hi, good

Walt Kadosh, Chief Financial Officer, Live Oak Bancshares: morning, everybody.

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: Hey, David.

David Feaster, Analyst, Raymond James: I want to touch on you touched on a bit, D. J, but I wanted to get a sense of the small dollar SBA originations, kind of where we are in the build out there. You talked about it being a material growth driver over time, but where are we there? And when would you start to expect some more significant growth revenues from that?

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: Sure. I'll start. Anybody else can kind of jump in. But a couple of weeks ago, we crested $100,000,000 of production in our what we call Live Oak Express or Small Dollar 7 program, which is primarily loans $500,000 and below. And as you recall, David, we really just didn't focus on that lower end of the market.

We were focused on the higher end, but we redoubled our efforts on that starting at the beginning of the year. And really what's really exciting about it is we stood up essentially a new business to for small dollar SBA and have done $100,000,000 We'll probably do $125,000,000 to 130,000,000 by the end of the year with a modest amount of technology and a heck of a lot of work from people. I think what you're going to see next year is a heck of a lot of work from our people enabled by a significant improvement in our technology for our people and customers. It's going to be a lot easier to do business with us. We are approving loans by and large between 4 business days and 12 business days or getting to approval that quickly, which is a huge, huge benefit to those borrowers.

And I think our processes and our technology advancements going into next year is going to make that even better. So, 125 in a year without technology is just the start. I think this is a $500,000,000 to $1,000,000,000 a year production business over the next couple of years.

David Feaster, Analyst, Raymond James: That's great. And then maybe just kind of staying on the investment and expansion side, I wanted to touch on 2 things. First, just embedded banking is something we've talked about in the past. I know it's still in its infancy, but curious what you're seeing there, how the pipeline is? And then you saw the announcement with Simply and you guys have been exploring syndications for

Greg Seward, General Counsel and Chief Risk Officer, Live Oak Bancshares: a while. I'm just kind

David Feaster, Analyst, Raymond James: of curious where you are in the build out of that platform and your plans for that?

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: Sure. I'll start again, David. On embedded banking, we still remain really excited about the opportunities there. We've spent really the last couple of years building out what I would call our technology chassis. So building out, a broad array of APIs in a very, professional world class developer portal to be able to eventually take on embedded banking clients across any type of vertical and allow them to integrate with our API seamlessly.

We launched our first partnership with Anatomy Financial, which is a startup in the healthcare industry. We're very pleased with how that's going. We've essentially been co developing our embedded banking efforts with each side learning from each other. I expect that we'll add a second partnership this year to accelerate our efforts going forward. So this to me is kind of a moonshot effort, where we're combining all the innovation that is part of the fabric of Live Oak and bringing it to bear with our customers and figuring out the right partnerships over time to be able to drive deposit growth, loan opportunities and payments growth over the next several years.

So more to come on that, but still very excited about it. On the Simply side, this is kind of the essence of the Live Oak culture. We had one of our developers in house that was doing work for us and came to us with something he was already building and said, hey, I think there's an opportunity here to help the bank, but then also maybe commercialize something that other banks could use. And so we internally incubated that for about a year with some funding and some resources. And then as you saw, just went to the external market to get some more seed capital to allow them to grow and commercialize further.

So just another point of evidence about the innovative nature of what we're doing here at Live Oak. We're very willing to try new things and be able to innovate on behalf of our company first, but then the industry as well.

Chip Mahan, Chairman and Chief Executive Officer, Live Oak Bancshares: The only thing I would add to that certainly, where it's been shot as appropriate, Vijay, in embedded banking and our nascent effort with Anatomy and soon to be others. That business cannot occur on a traditional core. Our proprietary advantage of putting that business on a FinTech core provides a reverse barrier to entry when we get it right over the next several years.

David Feaster, Analyst, Raymond James: That's good color. And last one for me, you touched on the improvement in the secondary market and as rates come down, gain on sale margins likely continue to improve. I'm just curious, how do you think about what's your appetite for additional loan sales into the secondary market, just kind of given where gain on sale margins are and the growth? I mean, you talked about $1,200,000,000 in originations and then the acceleration in the small dollar SBA. I'm kind of just curious how you think about the pace of loan sales going forward versus retaining on the balance sheet?

Walt Kadosh, Chief Financial Officer, Live Oak Bancshares: Hey, David, this is Walt. Thanks for your question. I think you think about secondary market sales and the trajectory year over year, they kind of fall similar pattern. It's kind of up into the right through the year, with Q1 being the lowest and then kind of bridges up as it gets Q4 with each quarter being higher than it was the prior year. So, that kind of gives you a feel for in terms of trajectory, I think $1,200,000,000 $1,300,000,000 origination With the demand in the secondary market and where premiums are right now and where our pricing is, we'll continue to basically sell as much as we can for the SBA loans.

And then obviously with the small loans as that production ramps, that would just be accretive and give us some flexibility for any of those larger loans that we may want to hold. Okay. Terrific. Thanks everybody.

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: Thanks David. Thanks David.

Conference Operator: Thank you. Next question comes from Tim Switzer at KBW. Please go ahead.

Tim Switzer, Analyst, KBW: Hey, good morning. Thank you for taking my question.

Walt Kadosh, Chief Financial Officer, Live Oak Bancshares: Hey Tim. Tim.

Tim Switzer, Analyst, KBW: My first question is a follow-up on some of the credit discussions and the outlook there. Can you discuss some of the challenges your borrowers are experiencing right now? And like how you expect that to change over the next year or so? And how lower rates might be to help? And is some of the credit migration you've seen this quarter, is that primarily due to like struggles with the higher rates and inflation or more idiosyncratic issues?

Michael, Credit Officer, Live Oak Bancshares: Yes, I'll take that. It's Michael. So when I look at the portfolio as a whole, I don't see an area of particular stress. Our team is real focused on credit quality and portfolio monitoring as I mentioned earlier. I kind of look back at where we have been and our small business borrowers have been over the last couple of years and they've had to navigate some challenges and the interest rate environment obviously is a big part of that.

And we've seen loans that were underwritten 2 years ago that were at much lower rates than where they are today. So to your point, I agree that the rate environment that we're in today with that's declining should provide some breathing room for our borrowers. So yes, I would say that's probably the biggest impact on our small business owners today.

Tim Switzer, Analyst, KBW: Okay. Thank you. And the other question I have is more in kind of like the deposit beta trajectory. How do you expect that to change over the course of the cycle? And like what has kind of been the initial customer reaction to lower deposit costs, and I guess the competitive dynamics you've seen recently as well?

Walt Kadosh, Chief Financial Officer, Live Oak Bancshares: Hey, Tim, this is Walt. I think to kind of get a feel for that beta trajectory, you're going to have to go back to pre COVID, I think July 2019 where the Fed cut I think it was July, August, September of that year. And what you essentially saw was early in the cycle, banks were cautious in the repricing, assessing their liquidity and their growth needs and really what the whole deposit market how the deposit market will behave, especially on the savings front. And then with time, as banks start to reprice downward, it's kind of this ratcheting effect, right, where a couple of major banks come down and then others would follow and then it was kind of back and forth for a while. It took about 5 to 6 months to get back to what we would say would be our kind of a close to our assumed cumulative betas, which is in that 50% to 70% range for savings.

CDs on the other hand, they've repriced pretty quickly back then and they're doing the same again in this cycle. We've been able to reprice our 12 month term, which is our most productive CD offering, down 40 basis points already. Most of that was leading up to the Fed. That's 80% beta. That's right in line with our historical.

This cycle, I would say so far on business and consumer savings, we repriced 10 bps, so 20%. We have this great problem. That's just strong as you see in Q3, the strong quarterly loan growth. So we can't be aggressive or overly aggressive to reprice down quickly. But what we do is we essentially evaluate our market position, see what other banks do and then we kind of slot ourselves in at the right levels to support our growth with the thought of being as efficient as we possibly can.

Customer reaction has been pretty much a non reaction, which I think is a good thing, right? I think they've largely expected rates are going to come down. I think it's widely publicized that the Fed is going to cut rates. Banks are going to drop the rates as well. We haven't really seen any reaction or negative flows to our early changes.

We don't expect to. The market itself is basically balancing their rate reductions with other promotions, whether it's cash bonuses, we're no different. We've seen some competitors do what we think what we call bait and switch, where they sunset an old product and they launch new product, that's not the Live Oak way. I don't think that's kind of in our DNA. And we've seen others do kind of promotional rates where you're locked in for 3 to 6 months and then it drops down to 25 or 50 basis points.

Again, I think that's a bakerswitch. It's not a long term play. It's not doing the right thing by the customer. So largely in line of what we're seeing now is what we expected early on in the cycle. We do think it's going to ramp up.

I'm encouraged, especially over the last few weeks of seeing some major digital competitors come down, which is allowing some of these smaller competitors at the very top of the market to reprice, essentially resetting the entire product down.

Tim Switzer, Analyst, KBW: That was great. Appreciate all the detail. Thank you.

Walt Kadosh, Chief Financial Officer, Live Oak Bancshares: Sure.

Conference Operator: Thank you. We have no further questions. I will turn the call back over to Chip Mahan for final remarks.

BJ Lohrman, Executive (likely President or COO), Live Oak Bancshares: Thanks to everyone for attending today and we shall see you in January.

Conference Operator: Ladies and gentlemen, this concludes your conference for today. We thank you for participating and we ask that you please disconnect your lines.

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