LOB Q3 Deep Dive: Deposit Growth and AI Initiatives Meet Margin and Credit Challenges

Digital small business lender Live Oak Bancshares (NYSE:LOB) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 12.4% year on year to $146.1 million. Its non-GAAP profit of $0.59 per share was 2.2% below analysts’ consensus estimates.

Is now the time to buy LOB? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Live Oak Bancshares’ third quarter results drew a negative market reaction, with management emphasizing strong growth in small business lending and customer deposit expansion as primary drivers. The company’s leadership pointed to a 22% increase in loan production and a 17% rise in loan outstandings, alongside significant momentum in business checking account adoption. Despite these advances, the quarter saw higher nonaccrual loan balances and non-GAAP profit and operating income falling short of Wall Street consensus. Chief Credit Officer Michael Cairns acknowledged the uptick in nonperforming assets, attributing it to persistent stress in the small business sector but described the situation as manageable, emphasizing “a lot of hands and eyes on the portfolio.”

Looking forward, management’s guidance is shaped by expectations for continued expansion in deposit relationships, further ramp-up of small dollar SBA lending, and the strategic deployment of AI to streamline operations. CFO Walter Phifer noted that net interest margin could be pressured by anticipated Federal Reserve rate cuts, but expects net interest income growth to remain resilient due to the company’s asset-sensitive balance sheet and robust loan growth. COO BJ Losch highlighted the potential for AI-driven process improvements in loan origination and servicing, stating these efforts may “exponentially grow profitability” while enhancing customer experience and operational efficiency.

Key Insights from Management’s Remarks

Management identified rapid growth in core lending, deposit gathering, and the launch of new customer products as central to recent performance, while also highlighting the impact of ongoing credit cycle pressures and investments in AI-driven efficiency.

• Small business lending momentum: The company expanded its position as the top SBA 7(a) lender, with loan production rising 22% and market share moving from 6.4% to 7.7% year-over-year. Management attributes this to a focused strategy on vertical lending and deep sector expertise.
• Deposit franchise expansion: Live Oak accelerated its push into business checking accounts, ending the quarter with $363 million in balances, now representing 4% of total deposits versus 2% a year ago. This deepened customer relationships and lowered overall funding costs.
• AI and automation investments: Leadership underscored the pilot of an AI-enabled loan origination platform, particularly for small dollar SBA loans, aiming to speed up processing and reduce manual workloads across lending and servicing teams.
• Credit cycle navigation: Nonaccrual loan balances increased, mainly within the SBA portfolio, reflecting ongoing stress among small business borrowers. However, the servicing team implemented proactive measures, and past-due levels remained low, reinforcing management’s confidence in credit controls.
• Venture portfolio developments and capital raise: The quarter included a $100 million preferred offering to bolster Tier 1 capital and the announced sale of Apiture, a venture investment, which is expected to generate a one-time gain and reduce future losses in the income statement.

Drivers of Future Performance

Live Oak’s outlook centers on deepening customer relationships, scaling AI-powered efficiencies, and maintaining growth despite margin pressures from the rate environment.

• Deposit gathering and product cross-sell: Management expects continued growth in noninterest-bearing checking and deposit relationships, with initiatives like merchant services and embedded banking aimed at driving deeper ties and lowering funding costs.
• AI-driven operational leverage: The company is actively piloting AI solutions to streamline loan origination and risk assessment. Leadership believes these tools can increase staff productivity, moderate future expense growth, and enhance customer experience without sacrificing credit standards.
• Interest rate and credit headwinds: Anticipated Federal Reserve rate cuts could compress net interest margin in the near term, though management views the asset-sensitive loan portfolio and short-term funding base as mitigating factors. Persistent small business credit cycle challenges remain a risk to earnings consistency.

Catalysts in Upcoming Quarters

In coming quarters, the StockStory team will monitor (1) the pace of checking account and deposit growth as Live Oak rolls out new banking services, (2) tangible progress in AI-enabled loan origination and process automation, and (3) stabilization in small business credit quality, especially as the credit cycle evolves. Additionally, we are watching the impact of the Apiture sale on reported earnings and the company’s ability to maintain operating leverage amid changing interest rates.

Live Oak Bancshares currently trades at $34.50, in line with $34.68 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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