ライブ・オーク・バンクシェアーズ（LOB）2026年第3四半期決算説明会：記録的成長を蒸留所向け引当金が相殺

要点

• リブ・オーク・バンクシェアーズが発表した2026年第3四半期のEPS（1株当たり利益）は0.52ドルでした。調整後EPSは0.49ドル、撤退した蒸留所関連ポートフォリオに対する施策の影響（1株当たり0.27ドル）を除くと0.76ドルとなりました。
• 貸倒引当金繰入額は5,500万ドルに達し、その内訳は蒸留所向け融資関連が1,700万ドル、融資増加に伴うものが1,600万ドル、商業銀行部門の主要6取引先関連が1,300万ドル、小口ビジネス銀行部門が900万ドルとなりました。
• 調整後貸倒引当金控除前純営業利益（PPNR）は前年同期比33%増、前四半期比16%増となり、過去最高の8,800万ドルに達しました。調整後収益は15%増加した一方、調整後費用は1%の増加にとどまりました。
• 第3四半期の新規融資実行額は34の業種全体で過去最高の21億ドルに達し、前四半期比で38%増、前年同期比で29%増となりました。期末の融資残高は前年同期比16%増の139億ドルとなりました。
• 純利息収入は前年同期比15%増の1億3,300万ドルとなり、純金利マージン（NIM）は3.30%で安定を維持しました。経営陣は、融資の伸びや預金獲得競争の影響を受けつつも、マージンは比較的安定して推移すると見込んでいます。
• 「リブ・オーク・エクスプレス（Live Oak Express）」の新規融資実行額は過去最高の1億700万ドル、債権売却益は700万ドルに達しました。当座預金・普通預金残高は5億ドルを超え、顧客関係の強化と資金調達コストの低減を目指す同行の戦略を支えています。

主要財務データ

事業および業績の動向

小口ビジネス銀行部門（Small Business Banking）は、引き続きリブ・オークの主な成長エンジンであり続けています。同行は、金額ベースで全米最大のSBA（中小企業庁）保証融資機関の地位を維持したと発表しました。経営陣は、融資の伸びの要因として、30の特定業界分野への専門化、融資実行力、そして競合他社がSBA融資から撤退する中での市場シェア拡大を挙げています。

小口ビジネス銀行部門の信用パフォーマンスは安定していました。延滞債権比率は9ベーシスポイント（0.09%）、不稼働債権比率は1.10%、純貸倒損失（ネットチャージオフ）比率は1.07%となり、最近の四半期とほぼ同水準を維持しました。

「リブ・オーク・エクスプレス」の新規融資実行額は1億700万ドルを記録し、前年同期比173%増、前四半期の8,200万ドルからも増加しました。同部門の債権売却益は前年同期比250%増の700万ドルとなり、四半期全体の売却益の約40%を占めました。リブ・オークは通常、保証部分の75%以上を売却し、無保証部分の約25%を保有します。

当座預金残高は前年同期比39%増の5億ドルを突破し、リレーションシップ預金総額は13億ドルに達しました。リレーションシップ預金の調達コストは184ベーシスポイント（1.84%）であり、全体預金コストの3.47%と比較して低い水準です。当座・要求払預金は預金全体の約5%を占めており、経営陣が掲げる目標である10%以上を下回っています。

同行は当四半期中に約9億2,000万ドルの預金を追加し、その増加額の約75%を顧客預金チャネルが占めました。経営陣は、提示金利、プロモーション、特例金利、リレーションシップ価格設定などを含め、預金市場は非常に競争が激しいと評価しています。

リブ・オークは人工知能（AI）の活用も拡大しました。全従業員がAIネイティブなツールにアクセス可能であり、社内には200名のクラウド・スーパーユーザーが存在します。経営陣は、ポートフォリオのモニタリング、与信データの集約、審査ワークフローの迅速化における活用の可能性を強調しました。

経営陣の見通し

経営陣の基本想定では、純金利マージン（NIM）は比較的安定して推移すると見込んでいます。融資の伸び、資金調達ニーズ、預金競合が引き続き主な変動要因となります。金利がさらに上昇した場合は、同行のアセット・センシティブな構造により、上振れ要因となる可能性があります。

純利息収入は、貸借対照表の拡大とほぼ連動して増加すると予想しています。経営陣の試算によると、融資成長や預金価格設定次第であるものの、通常の25ベーシスポイント（0.25%）の利上げにより、年間純利息収入が約500万ドルから1,000万ドル増加する可能性があります。

経営陣は、「リブ・オーク・エクスプレス」、当座預金、新商品への投資を継続しつつ、費用増加は緩やかなものにとどまると見込んでいます。また、収益成長、自動化、AIの導入、業務効率化を通じて、効率性比率（OHR）は時間をかけて改善していくと予想しています。

「リブ・オーク・エクスプレス」は、長期的な年間融資実行額目標として7億5,000万ドル超を掲げ続けています。また、同行は中小企業顧客を中心に当座預金取引を拡大する取り組みの一環として、加盟店決済サービス（マーチャント・サービス）の導入を計画しています。

経営陣は、新たな巡航速度（ノーマライズド）の貸倒引当金範囲を設定せず、次四半期における引当金費用の減少を約束しませんでした。商業銀行部門における減損、貸倒損失、回収額は、四半期ごとに変動しやすいことを強調しました。

リスクと注視すべき点

撤退した蒸留所向けポートフォリオが依然として主な信用上の懸念事項となっています。リブ・オークは、個別引当金および純貸倒損失を通じて、同ポートフォリオに対し年初来で2,900万ドルの貸倒引当金費用を計上しました。ポートフォリオの約98%が「問題債権（classified）」に分類されていますが、残存する13件の融資のうち8件は依然として利息を生んでいます（正常返済中）。

同行には、引当金を計上していない蒸留所関連のエクスポージャーが約6,000万ドル残っています。経営陣はこの残高について、保守的な担保評価によって裏付けられていると説明しましたが、今後の結果は担保の換金処分、借入人の業績および協力姿勢に依存します。一部の借入人が返済を続けているため、同行は明確な撤退スケジュールを提示しませんでした。

商業銀行部門の貸倒引当金費用には、3つの特定業界における6つの取引先が含まれています。経営陣は、これらの問題が特定の分野に集中しているわけではないものの、1件当たりの融資規模が大きいため、四半期ごとの減損、貸倒損失、回収額にブレが生じる可能性があると述べました。

高金利の継続も、小口ビジネスの借入人にとっての考慮事項です。リブ・オークは、融資期間全体を通じて債務返済能力の保護を強化するため、より高いストレステスト金利を用いて新規融資の審査を行っていると述べています。

預金コストも引き続きマージンの主な変動要因です。第3四半期の平均預金コストは3.47%でしたが、9月の連邦準備制度理事会（FRB）による利上げを受けて、提示金利は上昇傾向を示していました。

アナリストQ&Aの主なポイント

• 蒸留所向け与信エクスポージャー：経営陣は、残りの約6,000万ドルについて、回収不能と見込まれる金額を貸倒処理した後の引当未計上部分であると述べました。同行は、返済を継続している借入人を強引に排除することなく、現実的な範囲で速やかにこれらの与信から撤退する意向です。
• 広範な与信状況：経営陣は、SBAポートフォリオや商業銀行ポートフォリオ全般において広範な悪化は見られないと報告しました。小口ビジネスの借入人は堅調であると評され、より規模の大きい商業与信の背景にいるスポンサーは、事業再生計画のために追加の自己資本を注入するケースが多いと述べています。
• 融資需要：SBA融資の成長は、リブ・オークの確立された市場ポジション、他行の参加減少、小額融資商品「リブ・オーク・エクスプレス」の追加による恩恵を受けました。商業分野の成長は、特にプロジェクトファイナンスや動産・不動産担保融資によって支えられました。
• マージン感応度：経営陣は、現在の前提条件のもとではNIM（純金利マージン）が比較的安定して推移するとの見解を改めて示しました。金利がさらに上昇した場合はアセット・センシティブな特性がマージンを支える可能性があるものの、預金獲得競争や資金調達ニーズがそのプラス効果の一部を相殺する可能性があります。
• 費用の見通し：同社は、戦略的取り組みへの投資を維持しつつも、費用の伸びは緩やかになると見込んでいます。経営陣の焦点は、コスト規律と収益成長の両方を通じて効率性を向上させることに引き続き置かれています。
• 預金戦略：リブ・オークは、加盟店決済サービス、資金管理（トレジャリー・マネジメント）、統制勘定（コントロール・アカウント）や現金担保勘定を含む低コストの商業口座を通じて、当座預金取引を拡大する計画です。

決算説明会 文字起こし全文

決算説明会の完全なトランスクリプト

経営陣による説明

Operator

Hello, everyone. Thank you for joining us, and welcome to the Third Quarter 2026 Live Oak Bancshares, Inc. Earnings Conference Call. [Operator Instructions]. I will now hand the conference over to Greg Seward, General Counsel. Greg, please go ahead.

Gregory Seward

Thank you. Good morning, everyone. Welcome to Live Oak's Third Quarter 2026 Earnings Conference Call. We are webcasting live over the Internet, and this call is being recorded. To access the call number over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank and go over the Events & Presentations tab for supporting materials. Our earnings release is also available on our website.

Before we get started, I'd 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 of ID 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 Cairns, our Chief Credit Officer; who will be available for Q&A after our President, BJ Losch; and CFO, Will Phifer, finished their prepared remarks. I'll now turn it over the call to B.J.

William C. (BJ) Losch III

Great. Thanks, Greg. Good morning, everybody. Let me start where you'd expect me to start. We reported EPS of $0.52, 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 $0.27 of EPS. Excluding that action, adjusted EPS was $0.76 and later on, Walt will walk you through that bridge on Slide 15. So I'll spend time right upfront 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 4. 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 5. 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 $0.01 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 6 on Distillery. As we talked about last quarter, we exited this vertical in 2024 over 2 years ago and were at worked out only. And while 8 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 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 6 months. We'll continue to be transparent as we work through the rest of the exposures.

Now turning to Slide 7. 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 1, 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 7 points year-over-year from 56% to 49%. We've built an operating model that produces $88 million of pre-provision earnings this quarter and grown. 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 8 demonstrates just how much we have improved the business over the last 2 years. So go back 2 years to the third quarter of 2024, adjusted PPNR was $53 million. Today, it's $88 million, up 64%. Adjusted revenue was up 31% over that stretch while expenses are up 9%, 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 pretax income. This quarter, we took $55 million, $20 million more and still delivered $33 million. of pretax income. That is 74% more pretax income in just 2 years, while absorbing substantially more provision.

And excluding distillery was $50 million, 163% above where we were just 2 years ago. That's excellent operating leverage, and it earns us the flexibility to deal with the problem and keep momentum moving forward, flexibility we did not have 2 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 9. The biggest driver of that performance continues to be our small business franchise, the engine of this company. We are the #1 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, our default performance continues to significantly outperform the broader FBA 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 at ] 7(a) business posted another record with $107 million of originations and 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 and strong gain on sale premiums, which recycles liquidity. We are in 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, up 250% year-over-year. and we've now generated $18 million over the last 5 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 attitude 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 $0.5 billion 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 costs us 184 basis points compared with our overall deposit cost of $3.47. And the relationship depth keeps building of our customers now have both a loan and deposit account, up from 20% a year ago. And 4 years ago, that number was only 3%. We're at roughly 5% of checking and DDA 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 flawed 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'd 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 live bookers. I could not be more proud of how our people are taking care of customers, making our operations better and profitably grow in this company. With that, Walt, why don't you take us through a few more financial details?

Walter Phifer

Thanks, BJ. Good morning, everyone. BJ had to highlight all go straight to the numbers behind them, the EPS bridge, growth and 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 of $0.52. And driven by reported PPNR of $90 million, up 26% linked quarter and 53% year-over-year. and offset by an elevated provision that supported record loan growth, distillery reactions 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 $0.49 in the quarter, and the bottom right shows that excluding the $0.27 drag from the distillery actions, adjusted EPS would have been the $0.76 BJ referred to. Slide 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% linked quarter and 29% year-over-year and a record quarter of production for the bank. That production drove period-end loans of $13.9 billion, up 6% linked 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% linked quarter to 15% year-over-year, in line with our balance sheet growth. Net interest margin of 3.30% remained in line with the last 5 quarters. Loan volume and mix added about 14 basis points, offset by higher funding costs, reflecting both our need to fund our strong number 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 topics. 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 variable for the margin performance.

Highlighted on Slide 19, [indiscernible] sale of guaranteed loans was $19 million for the quarter, up 12% both linked quarter and year-over-year, while premiums held [ City ] 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%. The reported efficiency ratio improved to 49%, approximately 1,000 basis points better than a year ago and 500 basis points better than just like food. 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 remained stable. Past dues remained low at 9 basis points, and nonaccruals of 1.10% and net charge-offs of 1.07% were consistent with recent quarters.

In Commercial Banking, past dues are essentially 0, nonaccruals of 1.17% and net charge-offs of 86 basis points reflect the stellar actions, which the majority of this portfolio sits within this business unit as well as the sixth credit speedier. 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 5 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 and government guaranteed with a guaranteed loan mix about 9x the industry. Given our uniquely large guaranteed loan portfolio, we focus on a measured capital against our true credit risk, the [indiscernible] loan book. First, our [indiscernible] ratio. Tier 1 capital plus reserves and fair value mark as a percent of unguaranteed loans was a strong 15.4%. And second, the tangible common equity version of that ratio is 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 BJ for his final remarks before Q&A.

William C. (BJ) Losch III

Great. Thanks, Walt. Just quickly, let me close where I started. So this quarter -- had we realized something unfortunate $17 million on Distillery we took it head on, and that's how we'll always operate on any challenge, you can count on us for that.

And at the same time, record originations of $2.1 billion across 34 industries, record adjusted PPNR Loans and deposits each up 16%, a sub-50% efficiency ratio and improving and record quarters in both of our key initiatives. So the franchise we have in our building is stronger than the quarter we just reported, and the quarter we just reported is the proof because it took a $17 million hit and kept moving. We understand that the best way out is through on things like this, and we'll continue to build our momentum while we do it. So again, with a big thank you to all Live Oakers and our customers, let's take some questions.

Operator

Your first question comes from the line of David Feaster with Raymond James.

質疑応答

David Feaster

Let's maybe just dig in a little bit more on the credit front. Obviously, some pretty aggressive actions here. I was hoping you could touch on -- we've talked about the distillery book for a while. I guess, could you maybe just elaborate on what led to the changes you saw this quarter? And what lessons you've learned as you've gone through this process since we exited the book, we've had some lagging credit issues. And then -- so touch on that a bit and then the other migration that you saw. Any color on those loans? And just how you think about credit here as rates are rising and what you see on the horizon as you stress the book from higher rates?

Michael Cairns

It's Michael. I'll take all of that. So as BJ and Walt, highlighted on the call, Distillery is obviously the biggest mover for our book during the quarter. And whatever you would classify an entire loan portfolio, you're going to see that in the metrics, and we've done that, we've also reserved heavily in anticipation of exiting every single one of these credits. We have about $60 million in exposure remaining to work out of.

And as BJ mentioned, some of these customers continue to pay us. So we're working with the customers hand-in-hand. The $60 million is backed by conservative collateral estimates, and we're going to work towards exiting that safely and quickly as possible. When you look at the bigger picture, our SBA portfolio actually performed pretty well this quarter. It was a really quiet quarter from that book. We didn't see a lot of risk rate migration. Our borrowers are really resilient. I think we're doing a good job under [indiscernible] I think that's a sign of that. Where my focus is on the SBA book, particularly because of the fact that these are small businesses. I'm thinking a lot about interest rates and where interest rates are headed.

At underwriting, we are being pretty conservative with our shocking of interest rates at origination and assuming that these borrowers are going to be operating at some point over the life of their loan and an elevated interest rate environment. And so we're making sure we have that cushion on the front end and our commercial book carries larger exposures than our SBA book. But what comes with those larger exposures is a more sophisticated borrower that has significant capital investment into these businesses. And in almost every case, those sponsors are contributing additional equity toward the turnaround plan at the business level. And so there's a potential pathway for recovery in virtually all of those loans. But when a few of them move, you're going to see them in the numbers. And as I look at everything that we've just talked about, industry specific to distillery. But within our commercial and SBA book, we're not seeing broad signs of credit deterioration, just some risks playing out that we underwrite to that we're going to have to navigate through on an individual loan level. And like I said, our customers are working with us through that.

Unknown Analyst

Okay. That's helpful. And then maybe switching gears to loan growth. I mean loan growth has been tremendous. We saw a pretty sharp increase in production, especially on the commercial front. I guess, curious what drove that? How demands trending as rates are rising both in the SBA book and the commercial book? And just kind of the health of the client from your perspective and just again, as rates are rising and where you're seeing demand today?

William C. (BJ) Losch III

David, it's BJ. I'll take that one. Starting on the small business side, I really think it's two factors. Number one, I said it before is we are the well-known engine, particularly in SBA on the small business side. And so that halo of who we are and what our lenders do is very important. And so that engine continues to deliver excellent production. But on the other side as well is there's been a lot of change in SBA world the last couple of years. SOP changes and going back to the beginning of this administration and a lot of uncertainty. And so what you've actually seen, what we've seen is a lot of lenders exit SBA. And so you have to know how to do this business really well. You have to. And that's who we are. That's what we do. And so we've seen market share come to us in addition to our lenders continuing to do what they do every day. So that has generated further production, not to mention, like we said, introducing a relatively new small dollar loan option for our customers that is driving even more growth. And on the commercial side, we've seen different dynamics because there are different businesses, whether it's on our project finance side, like seniors housing or solar or on the sponsor finance side, which is more private equity based. So there's different dynamics going on over there. Project management, I would say -- or excuse me, project finance, collateral-based lending has probably been a little bit stronger over the last year, and that's where we've seen growth and strength on the commercial side. But it's been pretty balanced and broad-based as well. So we feel really good about the growth, and we monitor it very closely. At the same time, we're celebrating growth. We're also asking the question about soundness and making sure that, that stays front and center. So we think we have a pretty good balance.

Unknown Analyst

That's helpful. And maybe just last one for me. Just wanted to touch on the outlook for the margin here. Obviously, there's a lot of moving parts, right? You're highly asset sensitive. There is some timing differences as loans reset versus funding costs. We've got increasing competition. I suspect you're seeing that on the commercial front and then funding competition is intensifying. Could you just help us think through the margin trajectory kind of just taking all these factors together and where you see things headed?

Walter Phifer

Yes, David, that's a great question. This is Walt. I think you hit on a lot of the variables there. The 30% margin that we had here in the third quarter was right in line with our expectations and what we talked about in the past couple of quarters. Really no changes to the expectations moving forward. As I mentioned earlier, net interest income where I tend to focus a lot on right, the dollars that we earn is really driven by growth. The margin will be influenced buyback growth as well as our deposit market competition. You mentioned our asset sensitivity.

Look, if the Fed continues to raise rates, there's potential for upside to the margin. But the two things I keep focusing on are the growth with [indiscernible], as well as the part that you just made on the deposit market competition and what you're seeing there stated rates but also what you're seeing in exception-based pricing and market promotions. And I don't think any of those things, whether growth or deposit market competition are going to change here greatly in the near term. So where I sit in my seat, my overall assumption is that the margin remains relatively stable and our net interest income will continue to grow at the same pace as our balance sheet.

Operator

Your next question comes from the line of Crispin Love with Piper Sandler.

Unknown Analyst

Hey, good morning. This is Ben Graham for Crispin Love. As you mentioned, you're very close to your small businesses. And just wondering if you could discuss kind of what you're seeing now related to health of the small business owner today given the monthly financials you get, survey work you do, et cetera. Just kind of wondering if it's improving, stable or yes, just curious on what you're seeing there.

William C. (BJ) Losch III

Yes, Ben, it's BJ. Again, I'll use the word resiliency. When we see problems with customers, it's not always, but the majority of the time, it's some kind of life event or business event that causes deterioration in the business as opposed to a small business owner not being able to manage their business through gas prices or higher energy prices. Small business owners, that is who they are. That's their livelihood.

And so we tend to see that they will do everything in their power to make sure that they can keep their businesses active and healthy. So we're not really seeing a ton of change like Michael talked about in the portfolio itself or in the financials that we're seeing right now. Obviously, we -- we're constantly monitoring that and requesting financials every 90 days for all of those small business customers. So we are on top of that. So we feel good right now. But to Michael's point, moving forward, we are underwriting new production at higher rates than where we are today, anticipating potential stress and debt service coverage going forward. And we want to make sure that we and customers are prepared for that. We never want to put a customer in a position to not be able to have a prosperous business or pay us back. So that's what we'll continue to do.

Operator

Your next question comes from the line of Dave Rochester with Cantor.

David Rochester

I know you've done a lot of work on the distillery book. This hasn't been the only quarter you've taken other reserves. I was just wondering what the total market is now that you have on that $60 million that you've kept at this point. And then given your outlook on small business credit, which sounds positive in the larger commercial credit overall, how are you thinking about the provision trend in 4Q and next year? And the likelihood that you can return to that $20 million to $25 million normal provision range.

Michael Cairns

Yes. This is Mike. I'll start on the distillery question. So to answer your question, $60 million is our outstanding unreserved balance against that portfolio. What we do is we charge off the excess of what we don't think will be collectible. And so what we're talking about there is $60 million as secured with collateral, and we take, in my view, a very conservative estimate of what that collateral value is.

Walter Phifer

And then, Dave, this is Walt. I'll jump in on the provision expense. Yes. So really to take that $55 million that we have, we'll break it down in kind of 2 halves, right? We had the distillery of the $17 million, and then that leaves essentially $38 million across three different pieces. BJ, kind of, walk through [ 60 million ] of that 38 million is growth related, right, in CECL and record production. We reserve the data loan goes on the books before we even earn $0.01, that piece is always going to move with our volume, and we have no intention to stop growing. Talk about the last 3 quarters.

In the first quarter, we had three new impairments across two verticals, otherwise, pretty stable migration. Second quarter, we had 0 new impairments, positive migration across the rest of the portfolio. And then this quarter, we had 6 impairments with positive migration elsewhere. So same book, really 3 different outcomes across 3 different quarters. And then it kind of runs both directions as well. So if you think about -- that was the focus on impairments, but then you also have recoveries, and they can be very lumpy as well. So net charge-offs in commercial were actually negative in the first quarter because recoveries ran ahead of our charge-offs. We had net recoveries in Q2 as well, but then we had 0 in Q3. So really, the point here is that resolutions can swing in a quarter just as much as an individual impairment. So with respect to the run rate, we've talked about past, I'm not going to replace that range that we've discussed with a new one. And I'm not going to tell you that this steps down next quarter either.

What I think is looking forward, the commercial book is really going to be lumpy in both directions, and that's for a lot of reasons we've talked about loans are larger the nature of that book. What's not going to change is how we handle all of that, right? So every one of these credits is analyzed, reserved on its own facts and as soon as we get to the point where we can reasonably support impairment, we impair. And that's what we did this quarter is what we'll do next quarter and so on. So really, our focus -- and BJ hit on this earlier in terms of PPNR, our earnings power is going to allow us to continue to move up and to the right. It's just not always going to be a linear line. And I think that will be the focus for us this year. It will be a focus for us next year and so on. And I think we've done a pretty good job at.

David Rochester

Yes. All right. I appreciate the color there. And just back on the distillery book, you're saying that any kind of reserve you've already taken has already been short soft. So that 60% is the outstanding balance you have left after the marks with no additional reserve applied to. Is that right?

William C. (BJ) Losch III

Yes, we have charged off everything that we can. There is a small amount of reserve there, but the unreserved component of those loans is about $60 million.

David Rochester

Got it. Okay. Great. And then switching to expenses. How are you thinking about the trajectory here as you head into the end of the year and then next year, you guys have done a great job in keeping a lid on growth there, and you've talked about seeing ways to use AI to keep expense growth more limited, especially, I think, going into next year. So how should we be thinking about that quarterly trajectory going forward?

Walter Phifer

This is Walt again. Thanks for the question. Look, I think our teams did a really great job for the past years like calling in efficiency, implementing automation. And now we're starting to leverage AI. At the same time, we're cognizant to our growth organization and we still want to test heavily into, especially the strategic initiatives that BJ mentioned about Live Oak Express and checking as well as new products. So it's a balance. We work at this pretty hard each and every day.

Look, from an expense outlook standpoint, look, I expect modest expense growth rate as we continue to find ways to really look at supporting those initiatives with continued improvement in our efficiency ratio because we're attacking both sides of that ratio, right? The expenses through finding inefficiencies and opportunities like you mentioned, leveraging AI and things that they like. And then the more fun side of that is really attacking the revenue side. And that's what we're doing really well right now between kind of our main engine as well as Live Oak Express. So modest growth in expenses with continued improvement in our efficiency ratio over time.

Operator

Your next question comes from the line of Emily Lee with KBW.

Emily Noelle Lee

Yes. So just to touch on Live Oak business checking initiatives. Can you just expand a bit more on the progress made? You've been really successful and deepening the relationship with the percentage of customers with both loan and deposit count continuing to move up. So, are there any incremental product capabilities or investments needed to kind of deepen those relationships and just any update there?

William C. (BJ) Losch III

Sure, Emily. This is BJ. So we're incredibly pleased with the progress that we've seen in checking for a lending organization for most of our life to in 2 years go from virtually no checking relationships to 5% of our deposit base to be is incredible work by our team. And we have a lot more to go. I think they are accessing new credit. They know that a lot of times, they're going to have to move their operating accounts. And so about 60% of that $50 million or so has come from commercial in the first couple of years, 40% from small business, which, as you might imagine, are much smaller balances, but there's more customers there.

And so one of the key priorities we have this year, certainly going into next year is the introduction of merchant services, which we think will really be compelling time. So I expect over time that 40-60 split to actually move more towards small business over time, and that will continue to accelerate our checking account growth. So very pleased with that. The other side of it that maybe we don't talk about as much for this really important is other DDA. It's things like control accounts or cash collateral accounts on some of our commercial oriented or project finance businesses that are very low cost as well and very sticky through the life of the relationship that we have on this side. And so we're actively pursuing those as well, which obviously is accretive to our cost of funds in addition to checking.

Emily Noelle Lee

That's very helpful color. And then just moving back to the NIM, for a traditional 25 basis point rate hike, is there an expected incremental impact on the NIM more quarterly NII that you guys have?

Walter Phifer

Yes. Emily, it's Walt. Look, that really depends. Broadly in some of the variables we talked about growth and deposit competition. But look, I think our team's done a really good job pricing on the asset side. I think we're doing a good job finding the right positioning on the funding side. I'll speak more to that [indiscernible] typically 25 basis points really kind of equates anywhere to anywhere from $5 million to $10 million on an annual basis of accretion. so I think I'll stop there. I think that's probably the key point for me. I think margin will kind of move up and down really depending on the growth and deposit competition.

Operator

Your next question comes from the line of Janet Lee with TD Cowen.

Unknown Analyst

This is [ Noah Kasten ] on for Janet Lee. Following up with the deposit conversation. Can you provide us with an update on the competitive deposit environment and how you see deposit costs trending from here? And also, if you could provide the spot deposit cost today relative to the 3Q average?

Walter Phifer

This is Walt. I'll start there. Well, sorry, I guess with the overall deposit market. I think you probably heard BJ and I say the word competitive quite a bit here in the call, and I think that's probably the best word to describe it. And it's not just like -- like I mentioned, it's not just competitive and stated rates. There's a variety of ways the banks right now are trying to raise funding. You obviously got to have a stated rate that's competitive with the market, but you're also trying to combat on cash-based promotions or exception-based pricing or relationship-based pricing and marketing campaigns. So there's -- I guess the best way to describe there's a variety of channels that we continue to work and compete on I think our team does a really good job at leveraging and really monitoring where the growth is coming from.

So we'll switch between consumer and business savings or retail CDs using brokered help fund on a short-term basis, some of the gaps that we need to support the strong loan growth. Stated rate, so right now, the average for the quarter was 347, stated rates trending a little bit higher than that, as you would expect, given the September Fed hike. And that's typically what happens, a Fed hike at the end of the quarter. Our deposit pricing really reacts pretty quickly. And that's what we assume in our modeling typically elevated betas and whatnot. And a lot -- like I said, a lot of that is really to support our growth.

Unknown Analyst

Got it. And then just going back to the credit conversation. I know the inflection story has been discussed a lot. Is there any update on that time line and more specifically, any time line you can provide on the distillery portfolio and how long it will take to work this book completely off the balance sheet.

Michael Cairns

This is Michael. Yes. So we identified this vertical as having headwinds back in 2024. And at that time, we stop actively lending. And we have, since that time, been working through this book, our goal is to exit as quickly as possible on every one of these credits. However, as I mentioned earlier, some of our borrowers continue to pay. So I'm not going to walk someone out of the bank if they're paying on their loan. And so the time line there depends significantly on a lot of different variables, but we're taking active measures to exit as quickly as we can.

Operator

There are no further questions at this time. I will now turn the call back to Live Oak Bank Chairman, CEO and -- Chairman and CEO, Chip Mahan for closing remarks.

James Mahan

Thanks to everyone for dialing in today, and we'll see you in 90 days.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.