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Good morning, ladies and gentlemen, and welcome to the Live Oak Bancshares Third Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 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 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.

[Operator Instructions] Your first question is from Dave Rochester from Cantor.

Can you just -- just to start with credit. Can you give a little more color around the increase in the NPAs this quarter and talk about the new default trends as well? And then just on charge-offs, I would imagine you're expecting those to decline, but if there's any reason why those remain elevated, I would love to hear.

Yes. This is Mike Cairns, Chief Credit Officer. 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 nonaccrual balances tick up a little bit, but still a very manageable balance there and not -- 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 the stress that the small business owners have faced over the last few quarters, which we've talked about quite a bit. So I think about nonaccruals as far as balances, not all nonaccruals 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 is 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 nonaccruals 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. And so there's a lot of economic uncertainty out there that has been discussed by other banks. And what we control is -- or what we focus on is what we can control, 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 and heavily servicing the portfolio. So for 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 have remained relatively resilient in the face of that.

Appreciate that. And then how are you thinking about the potential for an extended government shutdown and what that can do for -- 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 Walter Phifer, CFO. I'll start on the loan growth side and secondary market side and then Michael can jump in on credit. Unfortunately, government shutdowns is something we've had practice with over the years. So we have a pretty extensive playbook that we pull out when these things happen. And the first and pretty much kind of the initial action that we take any time 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, we've -- our team really pushed in September. We had about $900 million of PLPs pulled so that we can continue to operate business as usual and get that capital out to the small businesses. So from a growth standpoint, that feels really good. Now obviously, the longer the shutdown, you kind of get in through the end of the quarter. The PLPs there, a bunch of run out and then Michael and his team will assess bridge loans as appropriate. The other big impact for us is on the 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, we haven't seen an impact at all of the current shutdown. Once the shutdown ends, we -- the secondary market opens up pretty quickly and we get our loan sales out, we settle. I'd say right now, the shutdown extended past Thanksgiving. That may impact us here in the near term in the Q4 in terms of secondary market sale execution. But once the market opens, we get back out there and we'd catch up later in the quarter or going into Q1 of 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 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 could just talk about that a little bit, that would be great.

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 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 Derraik 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 will mean is 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 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 very excited about this. I did mention 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 will be a pretty solid competitive advantage for you guys.

Your next question is from Tim Switzer from KBW.

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 1 or 2 more in the back half of this year and maybe another one next year, how does that impact the near-term NIM? And then maybe what's the time line for when we start to see it rebound and inflect back higher?

Hey, Tim, this is Walt. I'll jump in on that one. I think you got to leverage a lot of the comments I made kind of earlier. I think if you look at kind of the models you see out there, I think 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. But from a margin specifically, being an asset bank, you see some margin variation with -- 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 slot ourselves appropriately to make sure that we can continue to fund that growth, but obviously help with profitability from kind of long -- as you think about when it recovers, I mean, I think if you look at the past few years and any time 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 and then it recovered pretty much next quarter, start 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 most of our CDs and our brokered deposits are within a year in terms of near kind of terms. So it recovers pretty quickly. But again, as I mentioned, I kind of reorient you to net interest income and growth, right? BJ always has this saying that you can't spend margin, that kind of always stuck with me. And at 3.30% margin -- 3.33% margin is pretty healthy. And if you can grow your net interest income quarter-over-quarter despite that margin kind of variation, that's a fantastic story in my mind. So we kind of think about that margin but also think about on the net interest income side.

Your next question is from David Feaster from Raymond James.

Okay. That's helpful. 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 it sounds like assuming that this gets figured out pretty quickly that you think that you're still going to be able to kind of sustain this pace of organic growth quarter-over-quarter. I mean, does that imply that the SBA 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 -- 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 Walt. I'll start. I think you -- 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 2, I really don't see an impact really government shutdown driven on our SBA growth or production for the quarter, largely because of pulling the PLPs towards the end of September, like I mentioned...

You might want to explain what pulling the PLP.

Yes, pulling the PLP. So the SBA has a certain amount that they'll allocate each year in terms of funding. Pulling the PLP reserves, it's -- 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, that authorization. So -- but you have to be a preferred lender, yes, that's PLP, preferred lender program to find acronym, which I'm known to use quite a bit of acronyms. But yes, from -- David, from kind of growth standpoint, really don't expect much of a change here in the last quarter if they wrap it up here in the next, call it, week or 2. 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 kind of SBA 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 government relations manager that sits up in D.C. 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 in the know on how things are progressing, and she's keeping us up to date daily at this point.

[Operator Instructions] And your next question is from Steve Alexopoulos from TD Cowen.

This is Bill Young actually on for Steve. Just to circle on the credit mini cycle topic one more time. 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 NPAs. 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?

Yes. I think that -- it's 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 had held some of those in nonaccrual 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. While 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 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 a sustainable path for returns can move to in the next year or 2?

Yes. 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. It 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, with your pending Apiture sale and some activity among your peers 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 Apiture was one of the 2 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 I think Apiture was probably kind of the largest in terms of harvesting. And 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 Apiture 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. We look at probably 4 companies a day in Canopy. So that gives Live Oak a sneak peek 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.

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.