Live Oak Bancshares, Inc. Aktie

Hello everyone, thank you for joining us and welcome to the second quarter 2026 Live Oak Bancshares, Incorporated earnings conference call. After today's prepared remarks, we will host a question and answer session. [Operator Instructions] I will now hand the conference over to Greg Seward, General Counsel. Greg, please go ahead.

Thank you. Good morning, everyone. Welcome to Live Oak's second quarter of 2026 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.liveoak.bank 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 calls 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 in the presentation materials. I will now turn the call over to our president, BJ Losch.

Thanks, Greg. Good morning, everybody. Thanks for joining us. Let's get started on Slide #4. Our strategy to create more sustainable earnings momentum here at Live Oak continues to work, and you see it across all five themes on this slide. Reported EPS of $0.74 for the quarter even -- with even stronger performance from the core operations. Our lending businesses continue to put up strong, diversified numbers, $1.5 billion of loan originations across 33 industries this quarter. Our broader credit trends are stable to improving.

Live Oak Express and Business Checking are both ramping and having a very meaningful impact on our results with far more to come. And as you'd expect from Live Oak, our urgency on AI activation continues to accelerate. Turning to Slide #5, you see the earnings momentum continues. And as proud as I am of our loan production results, what matters most is how you translate that into profitable operating leverage and credit quality. And you can see on Slide #5 that those results are simply outstanding with adjusted PPNR of 23% Q2 2025 and adjusted EPS of $0.77 of 20% from this time last year. Core revenue grew 11% year over year, while expenses grew just 3%. And our efficiency ratio improved 8 points from 61% last year to 53% on an adjusted basis.

Over the last several quarters, turning to Slide #6, We've been sharing with you progress on two key initiatives, Live Oak Express, our small dollar 7(a) program and Business Checking. Both of these efforts launched in early 2024, and in just over two years, our teams have made significant gains. On Slide #6, Live Oak Express posted a record quarter of $82 million in originations, up 63% from a year ago. These smaller loans are highly desirable on the secondary market. And we've generated $19 million of gain on sale over the last six quarters, about $0.30 of earnings accretion and growing.

Our goal at Cruise Altitude is to produce at least $750 million annually supported by an AI native run origination platform. If you do the math on that kind of volume with those kind of premiums, the future earnings impact on the way is substantial.

Turning to Slide #7, business checking continues to build deeper, more profitable customer relationships. Checking balances are up 63% year-over-year to $469 million, and total checking and other DDA balances are now at $744 million. So now at roughly 5% of checking and other DDA balances to total deposits from about 4% last quarter and from virtually zero 2.5 years ago. What makes this even more impressive is that the deposit base has been growing 10% to 15% a year over that timeframe as well. And now, over one-third of our new loan customers each quarter open a checking account with us, and 25% of our customers have both a loan and deposit account.

Just four years ago, that was only 3%. This is absolutely phenomenal work by our lenders and our treasury management teams, and there's a lot more to come. And again, if you do the math, we've got $744 million of balances in just over 2.5 years that are 325 basis points or more better than the rest of our portfolio. This has improved our NII and pre-tax earnings by $25 million, or $0.40 cents of EPS annualized and growing.

The industry average has about a 25% DDA to total deposits mix. Our goal is just a minimum of 10%. On our current $14.5 billion deposit base that's growing 10% to 15% a year, that's massive upside to come as we become the primary bank for our customers and significantly improve our funding profile. On Slide #8, you can see our credit trends over 10 years relative to all other SBA lenders. While default rates have moved higher across the industry over the last two years, Live Oak's performance continues to significantly outperform with a 10-year net charge off ratio of 40 basis points compared to over 120 basis points for the industry as a whole.

As Walt will discuss, our provision expense this quarter was driven roughly 45% by growth, 40% by an exited distillery portfolio and 15% by macro and other factors. Let's pause on that for a second. 45% of our provision this quarter or roughly $12 million is from new loans that we haven't had an opportunity to earn a penny on yet. CECL is not kind to growing companies like ours. I'd much rather have our growth, which adds future revenue, driving higher provision than low growth and lower provision all day, every day. Yet despite the CECL growth penalty, our production and revenue engine is more than powering through it, generating significant and sustainable earnings growth.

I feel very good about our broader deposit credit trends. Aside from our exited distillery portfolio, which is only about one half of 1% of our total portfolio, trends are positive as evidenced by our metrics, particularly our total reserve coverage. Sitting here today with 87% of our loan portfolio originated at current or higher interest rates, we expect continued durability of these trends. I'm very proud of our lending and credit teams for what they are delivering.

Turning to Slide #9, as you might expect, Live Oak is incredibly forward leaning on the opportunities to harness the power of AI. Our AI activation and embrace of the technology is high. 100% of our employees now have access to AI native tools. We have 150 Claude super users, or roughly 15% of the company, actively experimenting with Claude for Enterprise and 90% of the groups across the company represented in that pilot.

Our teams have now built more than 640 agents and skills across all our AI platforms. And our approach is multi-dimensional by design. First, to gain expertise and proprietary advantage through in-house efforts directly with AI providers. Second, through select co-design engagements meant to provide unique competitive advantages and knowledge building. And third, active use of frontier technology by AI industry leaders.

At Live Oak, this is executive-led, not delegated. It's offensive, not defensive, and it's being executed like a massive merger integration and transformation to unlock the most long-term value by creating AI nativity across the organization. And as excited as I am about our plans to create AI nativity across Live Oak, I'm even more jazzed about our starting position as we head into what is the most transformational, technological change in my career, certainly.

While we will generate plenty of productivity and efficiency gains from AI, so will everyone else eventually. And many will have efficiency and cost reduction as their primary focus. That will not be a competitive differentiator, nor will it grow any business sustainably. Through incredibly hard work and dedication from our people, we have fundamentally changed the business model at Live Oak over the past three years and have created a much more consistent and sustainable business model, customer experience, earnings trajectory, and return profile with a long runway to go.

In other words, our current strategy is working without AI. So therefore, AI is an accelerant to our strategy, not the strategy itself. And this is going to allow us to play much more offense with AI, with new capabilities, new products, new customer acquisition, and new distribution. As Chip says, second pitch, first inning, and we're ready to go.

Thank you to all Live Oakers. I couldn't be more proud of how our people are taking care of customers, making our operations better and profitably growing our company. With that, Walt, how about running through some of the financial highlights?

Thanks, BJ. Good morning, everyone. Before I get into the numbers, let me frame the quarter this way. What you see in our Q2 results is not a single strong quarter. It's a continuation of a deliberate multi-quarter trend. The same drivers we've talked about for several quarters now, things like growing revenue faster than expenses, compounding our earnings power, and scaling our strategic initiatives showed up again this quarter and in some places accelerated. To us, that is what real momentum looks like, sustained and building across the business.

Now let's dive into Slide #12, as this breaks down the quarter across the six headlines we think matter most. Starting on the left-hand side of the page with our compounding earnings power and operating leverage, reported EPS in Q2 was $0.74, up 23% linked quarter and 45% year-over-year. And as BJ just noted, our adjusted EPS was $0.77 in Q2, up 20% from the prior year. This is excellent year-over-year growth.

The key to this EPS growth is improved operating leverage. And if you've tuned into our story over the past few years, you have heard that this has been an intentional focal area for us. Reported revenue grew 12% year-over-year, while expenses declined 1%. As a result, with the year-over-year lens, Q2 reported PPNR of $72 million was up 32%, our adjusted PPNR of $76 million was up 23%, and our efficiency ratio improved by 7 percentage points down to 54%.

The middle of the page highlights our broad-based organic growth and expanding returns. Our loan book grew 4% linked quarter and 16% year-over-year to approximately $13 billion, while our loan pipeline has climbed to $4.6 billion, a record high for the bank. Our lending teams continue to do a great job replenishing the pipeline to ensure future growth.

And to fund that growth, we've also grown our deposit portfolio 16% year-over-year. We were very proud of these growth levels in a highly competitive market from both fronts. We're even more proud of the return on average common equity expansion of 251 basis points from just a year ago.

High growth is great, but high growth with improving returns is even better. Sustainable 15% ROE and 15% plus annual EPS growth is our goal, and with our current trajectory that looks to be achievable in the next several quarters. Focusing on the right-hand side of the page, we are highly encouraged by the early success of our two key strategic initiatives, Live Oak Express and Checking. As BJ mentioned, both of these initiatives continue to ramp nicely, with Live Oak Express having their best quarter ever in Q2, with $82 million of loan originations and $5 million of gain-on-sale contribution.

And Checking balances increased 15% linked quarter and 63% compared to this time a year ago. Our Q2 provision expense of $26 million was driven by both our strong quarterly loan growth that was approximately 3x the balance growth we generated in Q1 and our exited distillery portfolio. Excluding this distillery portfolio, our broader portfolio credit trends improved, as evidenced in our unguaranteed ACL coverage of 2.01%, down 13 basis points from last quarter.

Before moving on, there is one quick call-out on the unique items front as noted on Slide #11. Our effective tax rate was 19.9% this quarter, which included $2.7 million of benefit from purchase tax credits and other one-time tax adjustments. Our adjusted EPS of $0.77 normalized for that at a 24% tax rate.

So, with that framing in mind, let's dive into some of the select key highlights on the remaining slides. Jumping down to the net interest income and margin trends on Slide #15, net interest income in Q2 was $125 million, up 5% in the quarter and an impressive 15% year-over-year. The net interest margin expanded 6 basis points in the quarter to 3.33%. As the roll forward on the right shows, the quarter-over-quarter expansion was driven primarily by loan volume and mix, more than outweighing deposit funding impact.

As I mentioned on our last earnings call, our primary focus is on controlling what we can control by aspiring to maintain spread discipline on the lending front and funding the bank's growth as efficiently as we can in a highly competitive market. From a macro perspective, we currently expect rates to remain flat in the near term, and we believe that is a favorable backdrop for the bank's net interest income and NIM profile. And we expect our margin to remain generally stable, as it has over the last three years, while volume growth continues to be healthy.

A quick note on guaranteed loan sales highlighted on Slide #16. Gain on sale from guaranteed loans was $17 million, up 13% linked quarter and in line with the prior year. SBA premiums remain steady, and Live Oak Express was a meaningful contributor at its highest quarterly gain on sale level to date of $5 million. Live Oak Express continues to provide both efficiency income as well as optionality in our loan sales strategy. That's a great place to be.

I'm proud of the expense and efficiency trends detailed on Slide #17. Total non-interest expense was $85 million in Q2, down 1% compared to both linked quarter and prior year quarter. This, coupled with our 12% year-over-year revenue growth that I spoke of earlier, is operating leverage in action, and it's how we have improved our efficiency ratio to 54% in Q2, the 7 points better than a year ago.

As a high growth and innovative bank, we remain committed to investing in key areas such as lending and Live Oak Express, Checking, Risk Management, and AI and Technology. But our focus is doing so in a way that drives better scale, better efficiency, and a stronger earnings profile over time.

Lastly, turning to the credit trends detailed on Slide #18, the primary metric and trend to focus on this page is the unguaranteed ACL coverage ratio, shown in the top left graph, as this is the most holistic metric in how we think directionally about the total loan portfolio's credit health. The declining trend represents improving broader portfolio trends, strong high quality growth, and our focus on proactively identifying and then exiting troubled credit.

Three other notable items on this page include the Q2 provision attribution summarized on the top right. As BJ mentioned, Q2's provision expense was largely driven by two factors. Strong loan growth, what we refer to as good provision, which was almost half of the provision for the quarter, as well as specific impairments related to our exited distillery portfolio. As you can see in the table on the bottom of the page, over 30 days past due remain very low and nonaccruals remained largely flat quarter-over-quarter.

The net charge-off increase was driven by the exited distillery portfolio, which accounted for approximately 50% of the loan charge-off in the quarter. The net charge-off trends otherwise were very encouraging. And lastly, given the possibility of additional rate hikes, we do find comfort in that approximately 87% of our loan portfolio has been originated at current or higher rates.

To wrap up, our earnings momentum is sustainable and building. Operating leverage is increasingly working in our favor. Our growth engine and strategic initiatives are gaining traction, and our credit profile remains sound. Thank you to the Live Oak team for another strong quarter. And with that, back to BJ for his closing remarks before Q&A.

Thanks Walt. Great summary. Let's go to questions.

We will now begin the question and answer session. [Operator Instructions] Please stand by while we compile the Q&A roster. Your first question comes from the line of Janet Lee with TD Securities.

This is actually Bill Young stepping in for Janet. Just to elaborate on your relatively stable NIM outlook in the near term, how -- I think you previously had [indiscernible] Should we expect it to just generally remain in that range over the back half of the year?

Hey, Billy, this is Walt. Sorry about that. I think you cut out on that question. Could you do us a favor and repeat?

I apologize about that. Can you hear me now?

Yes. Yes. Thanks, Billy.

I just wanted you to articulate just the comment on the relatively stable NIM outlook relative to your prior expectation of just low to mid-3.30s. It seems you expected generally to kind of remain in this range over the back half this year.

Yes, thanks again, Billy, for repeating that as well. Yes, I think that's right. I think there's two primary factors influencing the margin here in the near term. So you have the heavy growth, which is great, and that tends to help with the expansion. And then on the deposit front, the competition there has been pretty intense. seen in multiple ways, different competitors are attacking that, whether it's cash promotions, exception-based pricing, and so forth. So, growth will help expand NIM, deposit competition helps compress NIM. I think largely given where we've been and given where we've been over the last, say, two to three years, with an average NIM, let's call it, 3.30% to 3.35%. That feels appropriate given where we're at today.

Got it. Thank you for that. And then just secondly, your net charge off trends are very encouraging. Though, we have seen some continued upward pressure on non-guaranteed MPLs. So can you maybe just comment on your line of sight on just negative risk migration in your book at this point, and then any update thoughts about where we sit with respect to the small business credit cycle?

Yeah, this is Michael Cairns, happy to take that question. So when I look back, I mean, there's a lot of discussion on the call already about the distillery portfolio, which is a really small component of our loan assets. So I take a broader view and take a step back and look at how the portfolio as a whole, where we're actively lending is performance. So we've got $13 billion worth of loans. We're very active in SBA and Commercial. And looking across the quarter, our credit metrics are very stable, even including those distillery loans. We saw a substantial improvement over the quarter in our criticized and classified loans, particularly in our commercial portfolio, but our SBA portfolio continues to outperform the industry as well on default trends.

We saw positive risk rate migration kind of across the board to answer your question specifically and our past dues remain very low. So all of that is a good signal to us that we think that our bank is past the credit cycle that we've been discussing in prior quarters, and we're in a good position to move forward.

That's great to hear. Maybe just one quick follow up on that. Do you see any other near-term opportunities to perhaps exit any other portfolio similar to the distillery exit?

No, you know, obviously I've spent a lot of time -- a lot of my time in the credit team thinking about all of those macroeconomic risks that exist out there. We're watching interest rates and thinking about that. We build in assumptions in our underwriting to anticipate rising rates. If tariffs are back in the news, we're looking at fuel costs and inflation and how that impacts our customers and potential customers. If there's any area that I watch more specifically, it's anything that's related to consumer discretionary spending. So -- but our portfolio is held up really well, and I haven't seen any particular segment that has shown outside deterioration so far.

Your next question comes from the line of Eric Spector with Cantor Fitzgerald.

Maybe just starting off on loan growth. Production was impressive this quarter. I appreciate the color on the record pipelines. Just curious how you think about that, 10% to 15% growth, in a flat, slightly higher rate environment, how we should think about the cadence of growth through the back half of the year and can we potentially see upside to, you know, that 10 to 15% growth level?

This is BJ. I feel great about it. And I'm continue to be pleasantly surprised and impressed with our lenders and our people. They constantly find ways. to find new referral sources, to network across existing customers, to get more production, to build partnerships. And so activity remains very, very high. Chip and I were talking about it the other day. I think it was not two years ago, where pipelines were half of where they are today, half. And to continue to build that pipeline and keep it strong is fantastic.

So looking forward, we see continued momentum. We can see three to six months out in our pipeline, in terms of what's going to ultimately turn into production. And we feel really, really good about that. So we expect that to continue. One thing I'll add when Walt was talking about margins, I'm also very impressed with what our lenders are doing with pricing and pricing discipline.

We have seen an increase in new origination pricing, even as production has continued to rise, particularly on the small business side. And so that's not taking more risk. That's not remixing our portfolio. That is simply our lenders understanding the marketplace, understanding the value of what we provide to customers and customers recognizing that and being willing to pay for our services. So I'm very pleased with the discipline that the lenders have and the pipelines that they're building.

That's helpful color. And then maybe -- the funding story was a real standout this quarter with impressive NIV growth and lower deposit costs. Just how much room do you see to bring deposit costs down further in a stable rate environment, and maybe just some color on the competitive environment for new deposits?.

Yes, I'll start with that, Eric. Thanks for the question. Look, I think our deposit team is doing a fantastic job in this environment. There's multiple ways to continue to grow our deposits. Obviously, you got to be competitive in pricing, and I think they do a really good job understanding the market and both on our consumer and business savings side, as well as our customer CDs.

They're also really creative in how they think about marketing strategies, especially in an AI age of you combating Google Gemini and all those things. You know, where we see the most pressure is actually things that are not in stated rates. It's more in exception-based pricing from our competitors. So we do what we can to combat that when we need to.

But broadly, we think our deposit strategy is working. It's not a silver bullet. There's not one channel. There's not one product. It's pretty diversified with what we have. And then, you know, as we mentioned earlier in the call and BJ really hit on in his section, you know, the checking story for us is just substantial upside. And that's where we continue to lead in, building that product out, adding merchant services and things like that. So, we're really confident we can continue to fund our growth here going forward. And thanks to the deposit team for what they're doing.

Great. And then one last one for me, just on expenses, we talked about kind of mid single digit expense growth in the past. Expenses were down this quarter, but I know you're continuing to invest in innovation and new initiatives and AI. Can you talk about how you think about the expense outlook here going forward?

Yes, I'll start again. Thanks, Eric. For the expense outlook, I still think the low single digits -- low to mid single digits outlook is still appropriate. It's a really fine line in terms of how we're balancing it, but we're really focusing on, you know, creating capacity through finding efficiencies elsewhere in the bank and then taking that capacity and reinvesting it in, especially on the AI side. and the two strategic initiatives that we have with Live Oak Express and Checking.

So I see -- you know, what we've seen over the last six quarters or so is an average quarterly expense of about $85 million. That's where we were here in Q1 and again in Q2. And I think that's appropriate right now looking forward.

Congrats on a great quarter.

Thank you.

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

I wanted to circle back to the credit front for a minute. You know, it really does feel like things are stabilizing looking at your numbers, especially just given the distillery book runoff. You mentioned being past the credit cycle. Is that commentary specific to the SBA credit cycle? Or is that broad? And maybe just what are you seeing, maybe on that more traditional commercial portfolio and underlying credit trends in that book? Yes.

Yes, Michael here. Yes, that's a great question. So for sure, when I was referencing the SBA credit cycle, our commercial portfolio has held up very well outside of this distillery segment. And so, you know, that's how I'm looking at that. You think about if we didn't have this distillery segment in our portfolio today, we'd be sitting here talking about, you know, a $12 million net charge-off quarter in provision that's up well below $20 million. And so feel really good about where our portfolio is landing on both the Commercial and the SBA side. And from my view, the bottom line is just a strong credit quarter for us.

Okay, that's helpful. And then, switching over to the funding side again, you guys have done a great job on this business checking initiative. It sounds like there's still more investments that are coming there, you know, we talked about a third of your new clients that are opening checking accounts. What do you think it's going to take to get a real step change in the growth rate and balances within that business checking?

David, it's BJ. I think we're seeing big step changes in growing those balances. If you think two and a half years ago, we really didn't have a checking account, and today we have 5% of our deposits in non-interest or other DDA, that's incredibly impressive. And I think, you know, on our path to getting to 10 plus percent, I'm feeling increasingly confident that we can do that.

A lot of our initial growth, let's say the first 18 months, was really driven more on the commercial side and some of the larger balances as we were trying to mature our treasury management offering to be more attractive to small business customers, fit their needs, and, quite candidly, allow our lenders to understand how to sell Checking. We've done all that. We're introducing merchant services as we speak, which obviously is very important to a large swath of our small business customers. That's kind of a lifeblood of how they do business and, therefore, what needs they have for checking accounts. So going forward, particularly with merchant services, we see that as a further tailwind to our ability to continue to grow checking balances.

So I feel really, really good about the trajectory to be really candid. You know, someone had told me two years ago that we'd be at 5% of our deposit base in checking, you know, as impressive as our teams are, I would have probably taken the under, so I'm incredibly pleased with where we are, and I expect that to continue.

And then going back to the expense side, I mean, look, I think what you've done on the expense control front and driving positive operating leverage is, I think, extremely underappreciated by the market. I was hoping you could maybe talk a bit about where these savings are coming from. Like is this trimming some fat or just being more tactical with investing and spending or your AI initiatives that are really starting to enable you to optimize expenses?

And then again, maybe just talk a bit about some of the investments. I mean, obviously the SBA Express, you know, or -- excuse me, Live Oak Express. But, what are some of the other initiatives that you're working on? Again, I haven't heard you talk about embedded finance in a bit. I know you've got a lot of things cooking as always, but just kind of curious what else you guys are investing in at this point.

Thanks Dave, I'll start on -- this is Walt. On the efficiency side, we're requiring capacity. I think it's pretty much looking across the bank in pretty much every direction that we can. Some of that is looking at organizational structure that we have. Some of it's looking at different vendors and consolidating different systems. Some of us being very intentional about where we decide to invest in new headcount. We're thinking marketing strategies to make sure that they're effective. We've been very deliberate diving into KPIs across all of our different departments to make sure that we can measure where, historically where -- how those have trended and where those efficiencies are going.

So it's just much more intentional how we think about expenses than we have probably over the history of the bank. And a lot of times focus -- when you focus your attention on things, you tend to live around the fine pennies here and there. On the investment side, I'll start, I'll let BJ add on. Some of it's just, we've mentioned Live Express, we mentioned the AI data platform that we're working on there, we're also mentioning on expanding that team. On the checking side, make sure we have the right products, we have the right marketing strategies in place. So that's kind of pure strategic initiative investment.

On the AI stuff, I would say a lot of the efficiencies we've seen over the past year, call it, 1.5 years has nothing to do with AI yet. It's really just driven from our intentional focus on it. Where our investment in AI now, or things like BJ mentioned, giving enterprise licenses to AI platforms across the company, and partnering with different AI companies to help them think about or help us think about, call it process transformation, right? How do you get from step 1 to step 9 without having to go through step 2 through 8.

Yes, David, I'd also add, Live Oak is not your typical bank. You know, Chip has created a culture here in the DNA that is so far away, forward leaning and innovation led and you know that's what makes it special. But what Chip and the founders have also done is created a culture of care here where people love this place. One of the mantras that we have is how do we make it simpler, easier and faster for our people to serve our customers.

And that shows up every day in how they're looking at whether or not to hire somebody, how to look at a process, where can we take costs out, how can we streamline something? And so, you know, kind of creating that kind of care takes a long time. It's not learned overnight, and we've had it for 17 years. So it sounds a little trite, but it's true. That's what a lot of our people are doing day to day.

On the flip side, because we are forward-leaning and innovation-led, we're spending millions and millions and millions of dollars on forward leaning stuff. Live Oak Express, we spent several million dollars standing that up, Checking as you might imagine to stand up an entire treasury management platform and team, several million dollars. Risk Management, and our ability to scale, we spent several million dollars. AI native platform, a new loan origination platform with Casca several million dollars. So we've done all this because our people are taking care of our company and taking care of our customers and recycling it into what's going to make us successful in the future.

And, one more thing I'll add. Yes. It's very impressive what this team and this company has done on expenses, but if you look and do the math on the first half of 2025 versus the first half of 2026, our total revenue is up 15% and our expenses are up two. And so we're not sacrificing customer experience. We're not sacrificing loan pipelines and production. We're not sacrificing the ability to grow revenue in anything that we're doing.

And so, you know, that type of ability to understand what bad costs might be that aren't driving revenue or customer experience and putting money into good costs, I think is a very, very special quality of this place.

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

This is Ben Graham in for Crispin Love. You're obviously very close to small businesses and I'm just wondering if you could discuss what you're seeing now related to the health of the small business owner today. Given the monthly and quarterly financials you get, survey work, you do, et cetera. And just the conversations you have, I'm wondering if it's improving, stable and just curious on what you're seeing there. Thanks.

I'll start. Michael can jump in as well, or Chip. But I'd say the one word I continually use, and it's very apt today for our small business customers, is resilient. So we do a quarterly poll survey. Ben, as you know, kind of referenced, we see portfolio trends and quarterly financials all the time and small business customer, this is their lifeblood. This is what they do. This is what they care about. And so they're going to do whatever they can to make that business as profitable and as prosperous as possible.

And so what we're seeing is when they have -- when a certain industry or a certain customer will have struggles with sales, they're going to optimize their cost structures or they are going to deplete their cash reserves temporarily or delay capital investment. But then other times they are going to use that to their advantage. So we just feel really good about our customers and our people's ability to service those customers, which I think is really, really important.

I mean, the only thing -- this is Michael here, the only thing I would add is that's a big part of what our servicing team does. And the fact that we are so, you know, verticalized gives us insight into what's happening within all of these broader, all these individual segments and then the broader view. And so we have like real conversations with our customers to understand where they're at.

And, you know, I think there is a across the small business community as a whole, there are -- we're experiencing inflation. People are concerned about potential for interest rate increases, but to BJ's point, that's what I always take away from all these conversations as well, is that our small business borrowers are very resilient and that's a trait, the character component behind all of these deals is a trait that we actually look for on the front of transactions to make sure that our customers have that ability to weather some storms. So from my seat, the risk grade migration, the positive improvement in the portfolio is a good representation of how our customers are feeling.

Let me add to that just a little bit. A little secret around here is that before Mike was Chief Credit Officer, he was head of Family Entertainment lending at the bank. Two weeks ago, I had a chance to go out to Ames, Iowa and Cedar Rapids, Iowa to see a Family Entertainment center and this guy's all ahead full. These guys do all the work, so I get a chance to have fun every day.

And yesterday I went to see a manufacturing company, not far from here, $13 million revenue business that had fallen on hard times is now knocking it out of the park. So we financed a rather wealthy fellow to buy the business. And a very interesting young couple had turned the business around and now they're very interested in buying the business from him. So we live the American dream every day.

Awesome. Thank you so much for all the color there. And if I could follow up just on Live Oak Express, I know you've touched upon it a bit, but first congrats on the record quarter in originations. And I'm just curious on the $750 million targeted future annual production. I'm just wondering if you could give a little more color on the timeline there. Yes, if anything's possible. Thank you.

Hey, it's BJ. That'll be a multi-year trajectory for us. So to go from nothing two years ago to, we'll probably end the year at $300 million of production or so, um, That's pretty good start over two years. We do think our new loan origination platform is going to help us. We're doing a lot on what we call top of funnel efforts to optimize our marketing and our ability to get referrals from referral sources or the web that are efficient for us to run down. That's going to be helpful.

So, those two things will be in by the end of this year. And so, hopefully we start to see a step change pickup going into next year, but it'll take a couple years for us to get that at -- to that Cruise Altitude. And that's $750 million is hopefully just the beginning. We think that we can go north of that over time.

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

This is Emily on for Tim Switzer. So on Live Oak Express, you know you continue to target that $750 million of annual production as you mentioned over the next few years, just curious where you expect average gain on sale premiums to settle over time with the growth of Express given that the higher premium business.

Yes, Emily, this is Walt. I'll start on there. So our premiums have been very consistent in that kind of 109% to 111% range. I think with our pricing power and our focus there, and if you look historically at the secondary market itself for the small loans, where our spreads are, I think anywhere from 109% up to 113% feels reasonable. So I think that's consistent going forward.

And then, you know, you talked a ton about your approach as it relates to technology and AI innovation, but could you maybe speak more on your partnership with Cascading AI and any progress there? And do you still expect those efficiencies to cut the time it takes to close an SBA loan from its current average 2 months to just 2 weeks.

We're still in pilot with Casca in our Live Oak Express area, our small dollar loan area. And so we've been doing it really componentized, if that makes any sense. If you think about the life cycle of originating a loan, there's lending, underwriting, closing, construction, servicing, you know, there's a lot of pieces to it. And we want to make sure that we get all of those right. So we've been testing those.

So we've put loans through the Live Oak Express platform already and closed some, so we expect to do more over the next few months and then have a full rollout in our Live Oak Express product of Casca by the end of the year. We'll then transition to building that out for the rest of our small business verticals and beyond.

But our teams that are working on this are incredibly excited and impressed with the ease with which they can do their jobs. But then also, most importantly, what the customer experience will be on the front end as well. So more to come on that, but we feel really good about where we are and what we're going to deliver.

And then just my last one, back to credit, with the provision this quarter being primarily driven by growth and giving your commentary on current pipelines and loan momentum, where do you expect the provision to go moving forward?.

So I'll start on that one. Emily, it's Walt. Yes, I think in the past we've talked about some provisions staying somewhere normalizing in the $20 million to $25 million range. So I think, to BJ's point with our growth being the way it is and the pipeline being the way it is, that feels appropriate to me, right? And I think that's a healthy level for us. And I love BJ's comments earlier when he said he would take that all day every day and so would I, given the compounding earnings power that that's going to provide for us in the future.

I think, again, to reiterate, we've done a significant amount of work over the last couple of years to build a more sustainable business model and earnings engine. And so if it's 20% to 25%, it can be low as 15% one quarter, as high as 25% in other, it doesn't really matter because what we're doing on the front end to drive revenue and new customer acquisition, how our teams are being disciplined about good costs versus not, about what they're seeing on the front end and how they're focused on credit quality, I feel incredibly encouraged by our ability to earn through, if you will, any fluctuations in quarterly provisions based on growth or anything else.

Congrats on the quarter.

There are no further questions at this time. I will now turn the call back to Live Oak Bank President BJ Losch for closing remarks.

Chip, any thoughts?

Yes, to our investors, I would close with two words, fun and faster. I was reflecting on this call this morning about how blessed I've been to be 31 years ago, putting the first bank on the internet 15 years ago in an effort to treat every customer like the only customer, we created basically what is nCino today, cloud native API first.

This one is going to be different, folks. These large language models are progressing beyond our wildest imagination. When I sit here and think that we have a focus of $500,000 revenue businesses to $5 million revenue business, of which there are 3.5 million in this country, and we've been at it 18 years, we've got about 10,000 customers. And as we sit in front of our people, I say, BJ allows me to say two words, curious and tedious. And I am 1,000% convinced that all 1,000 of our people have been very curious relative to artificial intelligence.

And I think we could take with this new technology tedious out of this business, which means we're going to have more fun. Every day I see emails from everybody in this company. Well, I used it and I saved an hour. Well, I used it and I saved 1 hour. Well, I used it and I saved 5 hours. Well, 3 of us got together and we saved 10 hours. I don't think our focus would ever be to eliminate staff in this area. But if we can eliminate and have more fun and have more time, then we can get more customers. So I think that is where you see this business today, fun and faster. And we thank you for joining us and we'll see you next quarter.

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

Good morning, ladies and gentlemen, and welcome to the Q1 2026 Live Oak Bancshares, Inc. Earnings Conference Call. [Operator Instructions] Also note that this call is being recorded on Thursday, April 23, 2026. And I would like to turn the conference over to General Counsel, Greg Seward. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to Live Oak's First Quarter 2026 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.liveoak.bank 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 our Chairman and CEO, Chip Mahan.

Good morning, everyone. Team Live Oak is excited to tell you about our performance for the first quarter. Things are a little bit different today. Our President, BJ Losch, is a bit under the weather and predictably, he's dialing in remote. He'll start us off with a few overarching comments, and we'll hand it over to Walt Phifer, our CFO, for some numbers. And all of us, including Michael Cairns, our Chief Credit Officer, will be available for questions at the end. BJ, over to you.

Great. Thanks, Chip. Good morning, everybody. Thanks for joining us. Let's get started on Slide 4. Our plan to create more sustainable earnings momentum is really working. As you can see in our earnings trends with reported EPS of $0.60 for the quarter and even stronger performance from the core operations. Our lending businesses continue to put up strong numbers. Our credit trends are stable to improving. We're continuing to ramp up small dollar SBA lending and checking, which are having a meaningful impact on our results with far more to come. And as you would expect from Live Oak, we are continuing to find ways to innovate and stay at the forefront of technological changes.

Turning to Slide 5, you see the earnings momentum continues. And as proud as I am of our loan production results, what matters most is how you translate that into profitable operating leverage and strong credit quality. And as you can see on Slide 5, those results are simply outstanding with adjusted PPNR up 30% over this time last year and adjusted EPS almost doubled from this time last year.

On Slide 6, you can see our credit trends over 10 years relative to all other SBA lenders. And while default rates have moved higher over the last 2 years, Live Oak's performance has been modestly improving despite a difficult backdrop for small businesses and the steady improvement in our provision, reserve coverage and past dues reflects this. Over the last several quarters, we've been sharing with you progress on 2 key initiatives: Checking and Live Oak Express, our small dollar 7(a) program. Both of these efforts launched in early 2024. And in just 24 months, our teams have made significant gains in winning customer checking relationships and serving more small business borrowers.

That sounds great, and it is, but why is it so important to us? Well, 2 big reasons. Number one, if we are going to be America's small business bank, we've got to offer all the primary products they need. And number two, they are both highly accretive to our earnings profile and will provide a long-term tailwind to our earnings. We started with virtually no noninterest-bearing accounts 2 years ago. We now have over $400 million in growing. That means we don't have to raise $400 million of market rate savings CDs or brokered deposits to fund our growth. If you do the math on that cost of funds impact, it's meaningful.

And we are only at 4% of noninterest-bearing to total deposits. Our goal is over 10%. On a current $14 billion deposit base, that's a huge opportunity to be the primary bank for our customers and significantly improve our funding profile. And with Live Oak Express, we are serving more small businesses that need capital to grow. And these smaller loans are highly desirable on the secondary market with premiums in the 9% to 13% range.

And as you can see on Slide 8, we've sold $140 million of these so far. Our goal at Cruise Altitude is to produce at least $750 million of loan production in these small dollar loans annually. Again, if you do the math on that kind of volume with those kinds of premiums, the earnings impact is substantial. Again, I'm very pleased with our results and momentum. And as always, a big thank you to all Live Oakers. I couldn't be prouder of how our people are taking care of customers, making our operations better and profitably growing our company.

And with that, Walt, how about running through some of the financial highlights.

Thanks, BJ. Good morning, everyone. As outlined on Page 11, our first quarter continued to highlight the strength of our core earnings profile. Diluted EPS was $0.60 in Q1, approximately a 3x increase compared to prior year, and adjusted EPS was $0.70, up 8% from Q4 and 94% from Q1 of last year. Driving this EPS accretion was an outstanding 18% year-over-year growth in revenue, while expenses only grew 6%. As a result, our Q1 reported PPNR of $60 million was 43% higher than Q1 of 2025, while adjusted PPNR was $66 million, up 30% year-over-year.

On the balance sheet front, our loan book grew 2% quarter-over-quarter and was up 14% compared to March of 2025. Customer deposits grew 3% linked quarter and 13% year-over-year. And as BJ mentioned, we continue to be proud of the growth in our noninterest-bearing checking balances, increasing 9% linked quarter and 47% year-over-year. Lastly, credit trends were stable with provision expense improving slightly to $20 million, better than market expectations.

The key takeaways for the quarter are the core earnings were strong. Year-over-year revenue growth was fantastic and mostly driven by recurring net interest income. Expenses were well controlled. Credit trends remained stable and our key growth initiatives, checking and small dollar SBA lending continue to move in the right direction.

Now let's get into the details on the following pages. Page 12 highlights another strong quarter of diversified loan originations with broad-based contribution across our lending teams. We originated approximately $1.4 billion of loans across 35 industries in Q1, which speaks to both the breadth of our platform and the consistency of the demand in the market. Our pipelines are currently at an all-time high, which continues to support our confidence in the forward growth outlook.

While Page 12 focused on loan production, Page 13 illustrates the strong durable balance growth on both sides of the balance sheet. Loans ended the quarter at approximately $12.6 billion, up 2% linked quarter and 14% year-over-year. Our portfolio mix remained very consistent with 64% of our loan book in our small business lending segment and 36% of our loan book in our commercial lending segment. And as a reminder, 30% of our loan book is government guaranteed, a key differentiator of our balance sheet versus the industry.

Customer deposits ended at approximately $9.9 billion and grew 3% linked quarter, roughly in line with our loan growth. The reported loan growth rate was a little more muted than the underlying production would suggest. That was primarily a timing function of elevated payoff activity during the quarter related to some larger loans across 3 verticals and were largely anticipated. We view this level of paydowns as an outlier and not something that should persist in the same -- at the same rate going forward.

Our net interest income and margin trends are detailed on Page 14. In Q1, net interest income was approximately $119 million, and our net interest margin was 3.27%. While we mentioned in our Q4 2025 earnings call that we expected our net interest income and margin to step down following the 50 basis points of prime-based loans repricing on January 1, both our net interest income and margin outperformed expectations.

More importantly, from a year-over-year perspective, net interest income is up 19%, while net interest margin is up 7 basis points, illustrating strong recurring revenue growth and improved pricing discipline. As detailed on the roll forward on the bottom right of the page, the linked quarter move was really a function of several offsetting items. One item to note here is the negative $2.5 million impact from day count in Q1, which is just a product of seasonality, normalizing the number of days between Q4 of 2025 and Q1 of 2026 and the extent the compression would have been muted.

Ultimately, I think our net interest income profile remains very healthy and year-over-year growth is strong. If the forward curve holds true, a flat interest rate environment should be a good backdrop for our net interest income and NIM profile in 2026.

Moving over to guaranteed loan sales trends on Page 15. From an absolute performance standpoint, this was a good quarter. Gain on sale was up 25% linked quarter and in line with Q1 of 2025, as we guided in Q&A during our last earnings call. SBA premiums remained steady and Live Oak Express continues to be a meaningful contributor. Our gain on sale has remained between 10% to 13% of our total revenue over the last 12 quarters, generally with a slight stair step upward trajectory throughout the year. We expect 2026 to be no different.

The bottom line, gain on sale was up linked quarter in line with Q1 of last year as we guided. We expect a slight stair step up each quarter as the year progresses, and we continue to see strong contribution from Live Oak Express.

Expense and efficiency trends are detailed on Page 16. Total noninterest expense was approximately $85 million in Q1, down from $89 million in Q4, while our Q1 efficiency ratio was 59%, which is about 7 points better than Q1 of last year. Our focus on operating leverage continues to be the primary driver of our efficiency improvement year-over-year. Since Q1 of last year, our revenue growth has outpaced expense growth by about 3x. That's exactly the trend line that we want to see. We are continuing to invest in growth, technology and innovation opportunities across the business, but we are doing so in a way that is driving better scale, better efficiency and a stronger earnings profile over time.

Turning to credit on Page 17. The key message on this page is that we view our credit trends as stable and our reserve position remains healthy. As you see highlighted at the top of the page, our unguaranteed allowance for credit losses to unguaranteed loans and leases held for investment ratio was 2.14%. Provision also moved down to approximately $20 million compared to approximately $22 million in Q4 and $29 million in Q1 of 2025.

From an underlying credit trends perspective, the over 30-day past due ratio improved to 4 basis points, which is an excellent result and below our typical assumed range of 10 to 30 basis points. The nonaccrual ratio was 102 basis points, up modestly quarter-over-quarter, with 27% of the nonaccruals being derived from verticals that we have since exited over time.

Lastly, in this section, the net charge-off ratio was 63 basis points for the quarter. And while the underlying credit trends are important leading indicators, they don't quite illustrate the true risk as things like collateral and already established reserve coverage on the underlying loans are not reflected within these ratios. However, all of these metrics and underlying factors are considered collectively within our ACL coverage and the fact that our coverage ratio, along with our provision expense trends have been relatively stable to improving over the last 5 quarters, supports our portfolio stability sentiment.

We are, of course, monitoring macro developments closely. But sitting here today, we feel good about the health of our portfolio, the low level of delinquencies and the reserve position we have built.

Capital levels remain healthy and robust, as shown on Page 18, with quarter-over-quarter risk-based capital ratios improving approximately 10 basis points while our Tier 1 leverage ratio remained stable. As highlighted on the left side of this page, we also continue to take the Mahan ratio is a very helpful way to frame the strength of our differentiated balance sheet. as approximately 40% of our assets are in cash, government-guaranteed investments or government-guaranteed loans.

In Q1, our Tier 1 capital plus allowance for credit losses and fair value mark our Mahan ratio totaled 16.7% of unguaranteed loans and leases. Strong capital coverage against the true risk on our balance sheet.

Just to recap the quarter, we view Q1 as another step forward in building sustainable earnings momentum. The core performance of the quarter was strong. Our key growth drivers continue to build. Credit and capital remained stable to improving, and we remain very focused on executing against the opportunities in front of us. Thank you to the Live Oak team for another strong quarter.

And with that, I'll turn it back over to BJ.

Great. Thanks, Walt. Let's go to the questions.

[Operator Instructions] First will be Eric Spector at Cantor Fitzgerald.

This is Eric dialing in for Dave. Maybe just starting off on the NIM. With the Fed on hold, could you walk us through the key drivers of what would allow NIM to kind of stabilize near term and then improve later in the year? And then just talk us through the dynamics of specifically how much is coming from growth, wider loan spreads or funding mix improvement?

Yes, great question. Eric, this is Walt. So a flat Fed environment probably stabilize our NIM and our net interest income and ultimately benefits our profile as it allows loan growth to become the primary driver, not Fed actions. So put that in context of 2026, keeping consistent with commentary from our last call, assuming those flat rates, we'd expect that margin to stabilize here in the near term and then allow loan growth levels to influence the level of expansion as the year progresses.

If you think through the different factors, I think with a flat interest rate environment, loan yields can stabilize because you're not getting that downward repricing pressure that we saw in Q1 and then at the end of last year. Deposit market is competitive. That's an area that we spent quite a time monitoring and making sure that our flows make sense and are supporting our growth. But we feel really good about our positioning in that space as well.

And then from a growth perspective, I think that the vast majority of any expansion kind of moving forward will be highly growth driven. And if you kind of follow our story, which I know you have over your career, growth for us is pretty impactful from a market standpoint. So we expect that to continue. And I think you can look at prior years and interest rate environments to get a sense of what that impact would be.

Great. That's helpful. And then maybe switching gears to loans. I know you mentioned pipeline levels are at all-time highs, and it remains strong and diversified. Can you help us think through how much of the pipeline strength is translating into near-term production? And do you see enough visibility to support low to mid-teens growth in a stable rate environment? And then maybe help us think through the cadence of growth throughout the year.

Yes. So I'll start. Again, Eric, this is Walt. So from a pipeline standpoint, our pipeline today is about $4.5 billion. Typically, what that equates to from a production standpoint, you got moves through and they have expected closings, I would think our production will be very in line or better than Q2 of last year, kind of here in the near term.

Some things will push the right, some things will come in the quarter earlier than we anticipated. I think in the last earnings call, we talked about that low to mid-double-digit loan growth year-over-year. I still think that holds true, just given kind of what we're seeing in the pipeline and how those loans are coming through. So I wouldn't move off of that.

Okay. That's great. And then maybe -- on deposits, you highlighted the continued momentum in business checking and the longer-term goal of getting to NIB over 10% of deposits. Can you talk us through about the progress you expect over the next few quarters and talk about where you're driving success?

Yes, I'll start. BJ, you go ahead and you start.

Yes, I'll take that one. I'm excited about this one. I mean we're building a lot of customer relationships. When I got to Live Oak about 4.5 years ago, only 3% of our customers had a loan and deposit account. Today, that's 23%. And over the last 2 years, we've been anchoring that with checking accounts. And now when we open a loan account, 1 out of every 3 of those has a checking account. And so I'm incredibly excited about what we can do to build customer relationships that are stickier over time. And so really, what we've been doing over the last couple of years is just getting our lenders more comfortable with the notion of selling deposits because we hadn't done that for the first 15 years of our existence.

Our lenders are doing an excellent job doing that, and our treasury management team and our deposits team are doing a fantastic job taking those leads and moving those into actual active accounts. So over the next 3 years, I would expect us to be in the 10-plus percent range by simply just doing more of what we're doing today, selling the checking accounts with the new loans that we're opening. We're looking at different partnerships that we can create with different affinity groups.

We're introducing merchant services, which is obviously very important to many small businesses and commercial customers. That is in launch right now. And so that's going to accelerate our ability to build our checking deposits. So a 10% target is not really heroic. If you look at the industry, the industry is at 20% to 25% for us to just get to 10% or more, we think is very, very achievable, and it's going to have a meaningful impact on the stickiness of our relationships and the funding profile that we have.

Congrats on a good quarter.

Next question will be from Janet Lee at TD Cowen. [Operator Instructions] No response, we will move to Tim Switzer at KBW.

The first one I have is the trajectory of SBA loan sale volume over the rest of the year. Sorry, if you addressed this in your opening comments, but was there any holdback at all this quarter? It was still up year-over-year, but did you guys intentionally retain some loans again this quarter because held-for-sale loans went up. And I'm just trying to get an idea of what the pace of loan selling could look like over the rest of '26.

Sure. Great question. Tim, this is Walt. So we didn't intentionally hold back. What we did see was quite a bit of production come through in the last, call it, 1.5 weeks to 2 weeks of the quarter. So typically, anything that comes through at that point in time, you can't sell and settle within the current quarter, that gives you a nice head start as we go into the next quarter.

So I think that's what you're seeing in the held for sale loan volume. As far as trajectory, I mentioned it in my prepared remarks, and we've shown this kind of over the years where Q1 is our lowest and then we have a slight stair step in Q2 and Q3 and Q4 and so forth. But then kind of you normalized back again in Q1 and then you kind of start that stair step again. So I think you'll -- largely if you look back then or the prior years, now give you kind of a sense of what that stair step to look like.

Okay. Interesting. And any color you can provide on what drove the 1% increase in the gain on sale premium?

Yes. This is Walt again. It's really just a function of mix. We did see a little bit higher Live Oak Express origination in Q1, as you saw in the deck. So as BJ mentioned, Live Oak Express gets 9% to 13% premium, that helps. USDA loans, the guaranteed portion, we were able to sell quite a few more of those loans again in Q1. They've been getting a nice premium as investors that buy those loans typically start to think of potential downward rate protection. So there's a little bit more of a demand for that space right now as well. But broadly, I think that 106% to 107% range from a premium standpoint as we've averaged over the last 4, 5 quarters, I would maintain that going forward.

Okay. Got it. And then the last one for me real quick on -- I mean, I guess, basically, just how has Live Oak Express been trending towards your expectations? You guys talked about the $750 million annual target. I think previously, you guys have mentioned $1 billion is kind of an aspirational goal. Has that changed? Or is it more just like a time line on when you'll achieve these?

I think we're just being conservative, Tim. I do expect us to go past the $750 million production in annual.

And you guys are kind of seeing the demand that you were expecting so far.

Yes, for sure. So if you look at the slide that we had, the SBA changed the SOP back in midyear of 2025, which it essentially went back to what the rules had been before. So they had loosened the rules for smaller dollar loans, then they tightened them back up. So it just caused a little bit of a backup in our ability to generate those loans efficiently. But as you can see, we're on the rise again. So I feel highly, highly confident in our ability to generate that kind of volume.

And as you'll see on this slide as well, we are now in pilot with an AI-native loan origination platform, which is huge. And so once that is fully rolled out, it's going to make it so much simpler, easier, faster and more efficient for our people to serve our customers and for our customers to get the capital that they need. And so with all the changes in the SOP and competitors dropping out of the market, particularly on the lower end because of credit quality issues, we're finding more opportunities to do more business in the $500,000 and below. And so I think that, that number is going to reaccelerate sooner rather than later.

[Operator Instructions] next, we will hear from David Feaster at Raymond James.

I wanted to start -- go back to the credit side for just a second. You talked about how over 1/4 of the nonaccruals are in verticals that you've exited. Could you -- what verticals are those? How much remaining balances do you have in those verticals? And kind of what led you to exit those? Is it risk that's just structurally too high in those segments as we've gotten into it or we didn't have the right team? Just kind of curious if you could touch on that.

Yes. Michael Cairns here. Happy to talk about that. So one of the advantages about being in all of these different specific verticals and having industry expertise is that we have insights to headwinds. We see things coming early. That's a big part of what my job and our credit team is focused on, is working with the servicing team, working with the lenders that are out in those industries and assessing what's going on. And so that's an ongoing process for us. And over the years, we've made the decision to exit several verticals. We've adjusted verticals. We've added new verticals and like that's an ongoing process for us.

The vertical that -- or a segment of a vertical that we're really highlighting the increased small uptick in nonaccrual percentage for the quarter was -- or is this whiskey distillery segment, which is a niche component of our former wine and craft beverage lending group. It's a really small segment of our balance sheet, but it's disproportionately impacting the nonaccrual percentage this quarter, and that was the big mover this quarter. That's not a vertical that we decided to exit this quarter. We exited some time ago when we saw the issues there, the primary driver being the consumer preference change in demand for whiskey and an oversupply in that product coming out of COVID, especially. And so we saw that coming, and we made the adjustment.

This quarter, we had to move some of those loans to nonaccrual as we're working through our workout strategy. Our special asset team has been all over this for some time in our servicing team. So again, it's a small -- really small component of what we do and something we're working through.

And I guess what I would say on nonaccruals as a whole, when you think about that, I do -- and Walt highlighted this a little bit. Those loans are individually assessed by our special asset team and our credit team on an ongoing basis. So once you're classified in our nonaccrual, we're pegging a potential loss there, and that's built into our reserve coverage. So you can look at these components like nonaccruals and past dues, but when you look at the larger picture and you want to know how management credit is feeling about the portfolio going forward, the ACL coverage is a pretty good indication of how we feel and I feel good, and I feel like our portfolio is very stable at this point.

Okay. That's helpful. And you talked about an AI origination platform. I know you guys have a lot of investments ongoing through Canopy, through stuff that you guys are developing. You're always early to leverage new technologies. And importantly, I think you've got the culture and expertise to do so. Where else are you seeing other opportunities to utilize AI? I know we've talked about embedded finance. Just kind of curious some of the -- maybe some of the exciting things on the horizon that you're looking at in both of those areas.

David, it's BJ. So obviously, our biggest platform is lending. And so 1.5 years ago, we started on this journey to get on an AI-native platform because we saw the future coming. And so I feel like we're going to be quite a bit ahead of others by moving quickly on that. And so I feel really, really good about that. So having our most important platform in an AI-native world is going to be really good. But I think the way that we're approaching AI, it may or may not be different, but it's how we're doing it. We wanted to start with a bottoms-up way of introducing AI to our people.

And so we made AI capabilities and tools available to all 1,000 of our employees right away. And we asked them -- Chip asked them, he charged them in our town hall to start iterating, start playing with AI, start doing it in your individual work and in your teams to make it better. And today, we have over 350 AI agents that have been built by our people, not necessarily by our technology team, but by our people themselves because they're curious. So starting with a bottoms-up to make it accessible to people and not just some scary thing that's out there, I think, has been a big deal. But ultimately, we are going to be an AI native bank.

We are going to have everything that we can possibly put on an AI platform. We are going to have that in our operations. But with that said, I think, frankly, over time, everybody is going to do that. And so our end goal is not just to be AI-native. Our end goal is to make it better for the customer and create a customer experience using AI partnered with our people that nobody else can match and having an engine in our back office that is streamlined in the most effective and efficient way possible with AI. So there's lots going on there. We've got all kinds of use cases like everybody else does. But I think what we're doing is starting to go department by department to figure out how to create the most unique customer experience that we possibly can while building an AI-native franchise.

That's awesome. And maybe just last one for me, another kind of high level one. Look, you guys have a lot going on, right? This is all going to support growth, operating leverage and profitability. I guess how do you think about a longer-term profitability target for the bank, assuming that we do get -- we get a larger NIB contribution and more checking account growth. Live Oak Express does $750 million plus in production. Growth remains in that mid -- low to mid-teens pace, rates stabilize, AI starts to really materialize. How do you think about the profitability profile of Live Oak as this all starts to hit stride?

15 and 15. That's what we talk about all the time, David. 15% return on equity with 15% earnings per share growth. And so I think we are on the precipice of really starting to be able to do that. Our credit quality is getting better. Our key initiatives are accelerating. Our lending engine continues to be one of the strongest in the industry. Our expenses are well controlled. And so I just feel like we're about to hit our stride and our plans that we put in place over 2 years ago to make that happen are starting to happen.

So I'm pretty excited about our ability to do that. And not -- hitting a 15% return is one thing, having a 15% earnings growth in 1 year is one thing, but being able to do it over a sustained period is something pretty unique. And that's exactly what we're trying to build. We're trying to constantly be looking for things that will augment our core lending engine, but add on to it so that over time, we always have something next that's going to drive the next generation of our growth.

And so we firmly believe that we've got it right now with checking and LOE carrying us over the next several years. We're still working on embedded banking, which we're very excited about. And we've got endless possibilities with AI. So I think Live Oak is better positioned than we have been in years to generate top-tier returns.

Next question will be from Janet Lee at TD Cowen.

Could you talk to us a little bit more about where you think we are in the small business credit cycle, if I were to say that. It looks like you're pointing to some improving and stable small business default trends. The non-guaranteed NPAs uptick a little bit, maybe some of -- it looks like a lot of that is driven by the verticals that you exited. So where do you think we are in the process? Is it getting better or because of the macro uncertainty that we're in? Are they -- are you seeing a little bit more pressure, if at all?

Yes. Michael, again here to take that question. So I'll go back to that slide that BJ walked us through where you could see the industry trends. And you see that the industry is still grappling with some headwinds here, whereas we have been flat for some time. And I credit that to a couple of things: one, being pretty proactive in addressing and recognizing the environment we were in. And the environment was and the driver of that credit cycle was really about rapidly rising interest rates on our customer base. So we were underwriting loans in record low interest rates and then experiencing really high interest rates.

That for us, at least, I can't speak to the rest of the industry, but for Live Oak, that component of this cycle is largely behind us. 85% or more of our portfolio was underwritten at interest rates that are higher or at least on par with where we are today. And so we've gotten past that interest rate risk that was part of the big component of the cycle. And the economic uncertainty out there. Every morning, you wake up and there's a different headline, and we're talking about that. And so we're having conversations with our customers on the front end in our portfolio, just talking about fuel costs, how that could impact their business.

It certainly -- if this is prolonged, could impact -- it will impact the business community, the small business community and all of us across operating expenses. But we don't have verticals that are focused in industries that are heavily dependent on fuel cost is a big component of their operating expenses. So it will be an indirect impact to all of our businesses. But that's why we underwrite to higher debt service coverage covenants. We build in that cushion because we know inflationary events will happen. And so that's a big part of what our underwriting credit team do.

So I'm watching it closely. We're talking about it a lot. But right now, I feel pretty good about where we sit.

And Michael, you'll remember, if you look at Slide 6, that in the previous administration, the SBA loosened the rules. And there are a lot of lenders that took advantage of that in the gain on sale of dollars. And we stuck as always, to our guiding principles of soundness, profitability and growth. And that is part of the reason for that slide being there.

Got it. And for the first quarter, expenses came in much better than where the Street was despite some typical seasonal headwinds there. Obviously, you're also investing into your franchise and you talked about the AI initiatives. Can you speak to any updated thoughts on your expenses, how the expense trajectory should look like for the rest of 2026 or whether there's like an efficiency ratio target? How should we think about that aspect?

Yes. Janet, this is Walt. I think you hit the nail on the head. I think we -- Q1 expenses -- we had some things internally that we're working through at the end of last year that kind of help bring that down here in Q1. But if the average over the last, call it, 5 quarters or so, it's been just above $85 million, that's kind of in line with what you see here in Q1 as well. That's a good run rate kind of moving forward for us with maybe slight upticks here and there as we think about potential areas where we can invest.

And kind of how I think about that, right, there's always a balance, right? We are an innovative company that's the high growth, and we want to make sure that we're supporting that growth and we're supporting our key initiatives, especially Live Oak Express and business checking.

And really, the way we evaluate kind of potential investment in that space is what can we do to accelerate that because as BJ mentioned, there's quite a bit of earnings accretion that those 2 initiatives specifically can drive. So those are things that we think about as you invest in that space, there's always opportunities to get it more efficient in other spaces, and that's where AI comes into play.

So largely through 2026, I think that balances out. I think you kind of stay where we're at now, plus or minus on a quarterly basis through the rest of the year. That will help with that, coupled with the revenue growth, we'll see our efficiency ratio kind of trade down to the, call it, low to mid-50s. And like I mentioned in my prepared remarks, that's exactly the trend that we've really been positioning ourselves to achieve and hopefully continue that trend past 2026 and outperform as we get to 2027 and beyond.

And at this time, we have no other questions registered. I would like to turn the call over to Chairman and CEO, Chip Mahan.

That's a wrap, guys. We enjoyed it. See you next quarter.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.

Good morning, ladies and gentlemen, and welcome to Live Oak Bancshares Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference call over to Greg Seward, Live Oak General Counsel. Please go ahead.

Thank you, and good morning, everyone. Welcome to Live Oak's Fourth 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 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'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 our SEC comments. 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 trials. I will now turn the call over to our President, BJ Losch.

Great. Thanks, Greg. Good morning, everybody. Thanks for joining us. Let's get started on Slide 4. 2025 was quite an interesting year. And here at Live Oak, I'm really, really proud of the way we navigated through those interesting times. Macro uncertainty persisted throughout the year, whether it was DOGE or tariffs or uncertain economy and ultimately, 3 rate decreases from the Fed late in the year.

We continue to navigate through a small business credit cycle, and our loan portfolio showed continued credit stabilization over the course of the year. We significantly improved our operating processes and controls. We successfully executed on our first preferred offering. And we finished the year nicely with some outsized venture gains from our ventures portfolio. And yet, even with that busy and potentially distracting backdrop, we produced some excellent results, as you can see on Slide 5.

A few of the biggest highlights were record loan production, 17% loan growth, 27% core PPNR growth, 17% revenue growth and 13% tangible book value growth in addition to accelerating our momentum in our key growth initiatives of Live Oak [ Express ] and [ checking]. I'm particularly proud of this 2-year view of our production on Slide 6.

The 57% growth in loan production across both our small business and commercial groups, and importantly, strong pipelines heading into 2026. And as proud as I am of those production results, what matters most is how you translate that into profitable operating leverage.

And you can see on Slide 7 that those results are simply outstanding, with adjusted PPNR up 27% over 2024 and adjusted EPS up 49%. New customer acquisition and growth like this doesn't just happen by accident. Our people and how we deliver excellent customer service make the difference. Our goal is to continue this momentum and deliver earnings outcomes that are more consistent and sustainable over time. While credit has been top of mind for us and for investors over the past year, perspective, it's always important.

And on Slide 8, you can see our credit trends over 10 years relative to all other SBA lenders. And while default rates have moved higher over the last 2 years as PPP and stimulus tailwinds have burned off and rates rose rapidly. Live Oak's performance has consistently been well ahead of peers. Thankfully, we know small businesses and are great credit managers, and we're hopeful that these trends start to moderate back towards the long-term trend lines sooner rather than later.

Finally, we continue extending our customer product offerings with checking and small dollar SBA loan capabilities. Both of these efforts launched in early 2024, and in just 24 months, our teams have made significant gains in winning customer checking relationships and serving more small business borrowers. At the beginning of 2024, only roughly 6% of our customers had both a loan and deposit relationship with us. Today, that percentage is 22%, and we've got a lot more runway to travel.

On the small dollar 7(a) front, what we call Live Oak Express, production is ramping up meaningfully and will continue to do so. These loans are also very desirable in the secondary market that are leading to nice gain on sale increases. There's a lot more upside to this business as well. We're just starting. I couldn't be prouder of how our people are taking care of customers, making our operations better and profitably growing our company. Thank you to all Live Oakers for the momentum that they have built heading into 2026 and with that, Walt, how about running through some of the financial highlights for the quarter.

Thanks, BJ. Good morning, everyone. As outlined on Page 11, we had an outstanding end of our 2025 campaign. With Q4 producing $44 million of net income and $0.95 of earnings per share, both of which were approximately 3x Q4 of 2024. Our strong performance was aided by excellent growth in core profitability trends as seen in both our reported and adjusted PPNR improvement year-over-year, generally improving credit trends and our fourth consecutive quarter of lower to stable provision expense and $28 million of net gains in our Ventures investment portfolio, primarily driven by the $24 million gain from the Apiture sale.

Growth remains excellent. As Q4's loan production of $1.6 billion capped off our highest year of loan production in the company history with $6.2 billion, driving the 17% annual loan balance growth. Outstanding loan origination that you just won't see replicated broadly across the industry. And we love to see the progress across our 2 focused initiatives to growing business checking and originating Live Oak Express loans.

Business checking balances of $377 million doubled year-over-year, materially benefiting our interest expense line, while Live Oak Express contributed $12 million towards our gain on sale totals in 2025. Now let's get into the details on the following pages.

Page 12 provides a financial snapshot of our Q4 earnings results, with quarter-over-quarter demonstrated improvement across all major profitability and growth metrics. On the bottom right of the page, you will see several notable items included within our reported results, headlined by the $28 million net investment gains from our Live Oak Ventures investment portfolio. In addition, we had approximately $11 million of offsets from warrant losses, capitalized software accelerated depreciation, severance and allocation of funding for our donor advised [ fund].

I continue to be very excited about our operating leverage trends highlighted on Slide 13, as was BJ. Q4's adjusted PPNR of $64 million as detailed in Slide 28. It's 21% higher than Q4 of 2024, while our adjusted EPS has doubled over the same time period, and that doesn't tell the full story as it includes approximately $5 million of accelerated depreciation of capitalized software and severance expenses, as well as an intentional decision to delay some loan sales until 2026, which we'll touch on more shortly due to the large aforementioned investment gains.

Slide 14 breaks down the $1.6 million of loan originations by vertical and business unit. A few quick things that hit on here. Approximately 70% of our verticals originated more production in 2025 than they did in 2024 and both small business and commercial lending teams delivered double-digit year-over-year balance sheet growth rates.

Slide 15 illustrates our loan and deposit balance growth, highlighting the strong, consistent trends on both fronts. Our total loan portfolio grew approximately 4% linked quarter with year-over-year loan balances increasing approximately 17%. That's just outstanding durable growth. Q4 customer deposit growth was slightly down linked quarter as was expected due to typical Q4 seasonality, yet our year-over-year customer deposit growth rate was 18%, which is fantastic growth in a very, very competitive market.

As I mentioned earlier, we continue to be very excited about the momentum we are seeing in business checking as highlighted on Page 16. We saw our fourth consecutive quarter of growth with checking balances increasing 4% linked quarter to $377 million and are highly encouraged by our progress in deepening customer relationships.

As BJ noted, 22% of our customers now have both a loan and a deposit account with us and 37% of new loan customers also open a checking count in Q4. Our total low-cost deposits, including noninterest-bearing checking balances, low-cost collateral construction and loan reserve accounts, now totals approximately 4% of our total deposit base, a 2x increase year-over-year and tremendously accretive to our earnings profile.

Our net interest income and margin trends are detailed on Slide 17. In Q4 of 2025, we saw our quarterly net interest income increased $8 million or 7% linked quarter and $26 million or 26% compared to Q4 of 2024. Driving the Q4 increase in net interest income were both our continued outstanding growth as well as our net interest margin expansion of 5 basis points quarter-over-quarter, aided by our deposit portfolio repricing downwards in response to the 50 basis points of head cost in Q4, while our variable quarterly adjusted loan portfolio did not reprice until January 1.

As in the past, when we have seen large Fed moves downward of 50 basis points in the quarter, you will see near-term compression as our deposit pricing and strong volume catch up, and we continue our upward trajectory on net interest income. Historically, our model operates well in a lower interest rate environment. Once we navigate the [ journey day unless ] our deposit pricing adjusts. Currently, our base outlook for the Fed consists of 3 Fed cuts in March, June and September of 2026. Any less costs are cut later in the year will provide an earnings opportunity for the bank.

Moving to guaranteed loan sales trends on Slide 18. [ Gain ] on sale was intentionally down this quarter as our large investment gains provided loan sale flexibility, essentially allowing us to delay sales into a future quarter while increasing our loans held for sale by approximately $60 million quarter-over-quarter to maximize net interest income for a few additional months. This is a similar tactic that we have deployed in the past when we have large investment gains.

Looking back to 2025, we are more than pleased with the momentum that we are seeing in our Live Oak Express product and the immediate impact it has had on our earnings. [indiscernible], providing for a meaningful 20% of our gain on sale or $12 million, at 2x what it contributed in 2024. We remain very focused on ramping our Live Oak Express originations as that will continue to be the primary driver of our gain on sale growth going forward.

Expense and efficiency trends are detailed on Slide 19 and Q3 reported noninterest expense of $89 million included approximately $6.6 million of onetime expenses detailed within the notable item section back on Slide 12. We remain heavily focused on improving both our customer and our employee experiences and implementing technology and operational improvements across our entire business, all with the goal of creating raving fans moderating expense growth and thus improving efficiency and providing a solid mature foundation to support our growth.

Taking a look at credit on Slide 20. Over 30 days past due remained low for the fifth consecutive quarter with $10 million or 9 basis points of our held for investment loan portfolio past due as of December 31. The amount of nonaccrual loans increased to $110 million or 91 basis points of our unguaranteed held for investment loan portfolio in Q4. The linked quarter increase in here was primarily driven by SBA credits and is consistent with the broader SBA industry trends, which Live Oak continues to outperform.

Our reserve levels declined modestly in line with the improving trends in past dues, classified assets and net charge-offs. Altogether, improvements across these metrics show that the uptick in nonaccruals is manageable. Capital levels remain healthy and robust as shown on Page 21. Q4 strong results matched our asset growth, keeping our capital levels relatively flat linked quarter.

A few thoughts on the forward outlook. We are very optimistic about the opportunity in front of us in 2026 and beyond. On the revenue front, we generally see a stable or low rate environment, coupled with continued strong loan growth as a favorable backdrop for our bank's growth, margin and credit outlook.

Our 2 strategic initiatives in business checking and Live Oak Express are ramping nicely with plenty of runway to continue to drive deeper relationships, increase fee revenue and lower funding costs. We have refocused our expense base and investments on the best opportunities, which will moderate the growth rate while better supporting strong revenue growth.

The possibilities that AI and tech innovation provides across the bank are enticing and will enhance our customer service and efficiency with active efforts ongoing. And above all else, we have an amazing culture, team and brand here at Live Oak Bank that is irreplicable. With that being said, thank you again for joining this morning. BJ, back to you for closing comments before we hit the Q&A.

Excellent. Thanks, Walt. Let's just take some questions.

[Operator Instructions]. Your first question is from Crispin Love from Piper Sandler.

Just first, NII and the NIM, very strong in the quarter, a nice expansion there. But can you just talk about some of the dynamics into the first quarter, the impact of the last 2 cuts, the impact of loan yields as there's likely some lag also deposit costs and then just consequently NII and the NIM in the first quarter relative to fourth? Well, I believe you mentioned some compression in the NIM, but higher NI, but if you just flesh that a little bit, that would be great.

Yes. Chris, it's Walt. Thanks for the question. Yes, I think you hit the nail on the head and kind of go back to some of the comments I made in the prepared remarks. Typically, any time you see 50 basis points of Fed cuts in the quarter or the following quarter. As you know, we have a large favorable quarterly adjusted loan portfolio that reprices in the first business day.

So that will drive both NIM and net interest income compression in the near term. The good news, which is essentially the beauty of live and our growth engine is that as the deposit -- in-deposits continues to adjust growth really pushes us back to that up and to the right migration in both net interest in NIM coming in fairly quickly. Really and the steepness of that slow on the up and to the right migration is largely going to depend on what -- whatever Fed outlook or forward curve you're taking or taking a look at.

But I think a good proxy if you kind of looking for a guide for what Q1 could look like in terms of NIM, back in Q3 of '24, we had 50 basis points of Fed compression -- or a Fed rate, plus rate at the end of right at the end of September. And you can see kind of the quarter-over-quarter change in Q4 of 2024 as a result of that.

Okay. Great. Helpful color there. And then just on gain on sale income down materially in the fourth, not a major surprise, at least directionally because of the shutdown. And then you also mentioned the Apiture gain drove some of that decision to hold more. I think you typically sell more in the back half of quarters.

But is that changing in the first quarter because of the shutdown, have you been active selling in early '26? And then just when you look at the first quarter, how would you think gain on sale income should trend? Just as you look at more normalized quarters like the first 3 of 2025, I would expect that it would be kind of higher than that, just when you look at the fourth, but I just want to kind of check see what you're thinking there?

Yes. Thanks, Cris. It's Walt again. I think the government shutdown really did impact us much in Q4. I think we saw a little bit of a timing delay in certain loans, but as you can saw that strong SBA production in the quarter, so we're able to get kind of all our loans, as we talked about in the last earnings call, kind of positioned to close once the government opened up, and that's exactly what we did.

As you think about gain on sales trajectories, I don't think anything will change between when we sell loans versus January versus February or March. I think it'll still be much more to the mid to the back end of the quarter. That's our typical approach. I think Q1 historically for us, is our lowest quarter of the year. I know Q4 of 2025 was a little bit different because of the fintech gains. But I would expect our Q1 to be much more in line with the Q1 of 2025 and then that's typically when we saw our up in the right stairstep momentum within the [ gate ] on field line.

All right. So if I'm looking at 1Q '25, so even though that there was a little bit of a lag there, it could be below that kind of 2Q, 3Q level?

I think it will be closer to what you're seeing in Q1 Yes. So our Q1 2026 will be closer to what you see Q1 2025, so it will be a step up versus what you saw on Q4 and then that gets us back into -- I think Q1 of 2025 was in the $15 million rate total gain on sale that feels, that feels appropriate.

Your next question is from David Feaster from Raymond James.

I wanted to -- not to beat a dead horse on the margin outlook, but I just wanted to maybe get some thoughts on the trajectory. I appreciate the commentary on the first quarter. you've got 3 cuts embedded in your guidance. Obviously, there's some -- there's just going to be a lot of moving parts, you've got the tailwinds from the deposit repricing in the prior cuts, the headwinds on the assets repricing lower on the rate sensitive stuff.

I just was curious if you could help us think through with the 3 cuts that you've got embedded, how do you think about the margin trajectory over the course of the year? Do you think we can -- given the tailwind from the prior cuts, we can actually see some expansion? And kind of just help us think through that trajectory over the course of the year.

Yes. I think David, this is Walt again. Really, the thing that we think about is not only what the Fed cut is going to do. It's the -- it's the timing and severity of those cuts. Stable environments work really well for us. So if you saw Q4 of 2024, we saw compression. And then with a stable environment, we saw nice NIM expansion throughout the year.

With [ 25 ] basis points of Fed cut assumptions, that allows our deposit pricing to catch up relatively quickly. Ultimately, we'll expect that step down here in Q1 and then our expectation is to go back on that, start seeing the up in the right trajectory or NIM expansion as we move through the year largely is going to be driven by growth.

Now obviously, the positive market is very competitive and what kind of -- we have to do what we need to do to continue to fund our outstanding growth. And David, like we talked about in the past, we [ love ] -- I mean even with -- you call it anywhere from a 315 to 350 NIM, we think that's really attractive. We focus a lot on net interest income. And that's the beauty of kind of the life of model, right, where you can have a double-digit net interest income growth year-over-year even with some variations from your margin trajectory.

Absolutely. Terrific. That's helpful. And then obviously, there was a lot of noise on the expense side this quarter. You alluded to some of the things, just was hoping you could give us some puts and takes on expenses. You've got a lot of investments on the horizon. We talked about the Live Oak Express ramping up. We talked about embedded finance. Could you just help us think through a good core expense run rate from here, what you're investing in? And how you think about funding those investments just as I know you've really been focused on expense management.

David, it's Walt again. Thanks. Great question. We're really trying to do our best to make sure that we're balancing both revenue and expense growth. As BJ mentioned and I mentioned kind of looking at the operating leverage side, we've done a really good job of that, especially over the last few years.

But even to the extent of past 5 years with our PPNR our PPNR trajectory, I think from where we're investing the 2 strategic priorities for us of both business checking and Live Oak Express are our heavy focal points. The areas with AI and the application and kind of across our operational areas of the bank, it's -- and our loan origination platform is really exciting.

I think from expense growth rate, we typically -- we mentioned in our prepared remarks, we expect that to moderate quite a bit. That's something probably likely in the single digits year-over-year just as we think through -- it's just making sure that we're putting our money strategically in the right places.

Okay. That's helpful. And then just quickly touching on credit. There's mix trends there. Just wanted to get your color on what are you hearing from your clients? Where are some of the pressure points that you're seeing as you look into the portfolio? Are there any segments that there's more pressure? And what drove that increase in nonaccruals? And just how do you think about credit? How do you think credit trends near term? And any color on the classified asset trends specifically would be helpful as well.

Yes. Michael Cairns here. I'm happy to talk about credit a little bit here. And my view on this quarter was it was a fairly uneventful and stable quarter when you compare it to where we were last quarter. The past dues are low. And to your point or your question, classified loans are flat to slightly improving over the quarter.

And when you think about nonaccrual loans, those live within our classified loan portfolio. And so when we determine that they're a classified loan, at that point, we're assessing the reserve potential losses against that -- those loans and natural progression of a classified loan or the reason we identify it as a potential [ problem ] loan is because payment defaults could happen.

So you're seeing that in the nonaccrual balances, but you're not seeing a spike in reserve or provision expense because we've already assessed the potential losses within that pool. And then when you look at, and I know Walt touched on this already, but when you look at the SBA data, 2025, we still saw higher industry defaults. Live Oak wasn't immune to that, but we also fared significantly better than the industry.

And when I think about that, I think about the fact that we have always maintained our credit culture. We don't stress on underwriting standards and a lot of credit really to our lending staff who are out there historically and today, finding loan growth without sacrificing credit quality. And I think that's what has set us up to the favorable position to the industry and also what will pay dividends for us in the future.

And then when you also think about the interest rate cuts that happened in the back half of 2025, our borrowers haven't felt the benefit of that quite yet, but they should in 2026. So I expect some relief there, especially if we see some additional cuts. And again, I don't know if I touched on this or not, but the SBA portfolio that makes up the chunk of the nonaccrual balances and the classified. So with all that, I felt like it was a pretty stable quarter.

Your next question is from David Rochester from Cantor.

Walter, I just want to go back to your comments on the margin. You mentioned down similar to that trend in 4Q '24, I believe. And so it looked like that was down about 18 basis points that quarter. So I just wanted to make sure that, that was sort of the magnitude that you were thinking about.

And then on Slide 17, you guys included a newer line in that, some income from this other loan income. That was about 6 basis points on the margin for the quarter. I was just wondering what that was exactly? And is that something that's going to reverses that rolls off in 1Q? Or does that stay in the margin? Just trying to figure out if that's incremental to what you guys saw in terms of the trend in 4Q '24?

Sure. Dave, this is Walt. Thanks for that for the question. On the other loan income, I'll start there. So that line was inflated more than we typically see in any given quarter. This really relates to a few large solar and senior housing loans that paid off that had pretty high prepayment penalties. So that's something that we don't expect to see the run rate moving forward and especially not to that degree.

And then as you think about the trajectory back in Q4, after the 50 basis points of cost. Yes, I think that's in a reasonable range. I think the one thing that's helping us this year is that we were able to get out front of the variable loan portfolio repricing on January 1 with some deposit rate reductions there at the end of Q4. And also we're able to already start to reduce some pricing again here in Q1. So we're doing what we can to mitigate it. But I think the other factor there is our pipeline hasn't really slowed down at all. So we're expecting a pretty strong Q1 in terms of growth, that's going to hopefully help manage that NIM compression that you're taking a look at.

Okay. Great. Appreciate that. And then just on expenses, I just want to make sure I heard you right. Were you saying mid-single-digit growth for expenses next year slower than what we saw this year?

Yes.

Great. And then just on Live Oak Express, it was good detail you had in here of the $12 million of gain on sale for '25. Are you thinking I guess, bigger picture, what are you thinking for the trajectory there? Is that something that I could double in '26? Could it go even higher than that? What are your thoughts there?

Yes, Dave, this is Walter again. I'll start and then BJ, you want to add into from the Live Oak Express efforts. I think we're doing what we can to really make sure that we're building top of the funnel in that space. We saw -- we did see a slowdown in our live work expense originations in the back half of 2024 after the SBA SOP changes in June that we had essentially reset kind of our expectations to make sure that we rebuild that pipeline with borrowers or rebuild the pipeline with borrowers after just essentially updating them, educating them on what those SOP changes were. Look, I think doubling is very aspirational. I think it will be something less than that. I'll let BJ talk and add in if you have any comments.

Yes. I think at cruise altitude, I think we're our aspirational goals are $1 billion a year of production at [ crews ] attitude. That's not next year. That's over time. When we started down the road of building out a Live Oak Express product, it was really by brute force. I think we've talked about it before that we just never really focused on the small dollar lines that we our average loan size was more in the $1.2 million or $1.3 million average loan size range.

And so we started just kind of trying to see how we could do it. What we're doing now is intentionally building capabilities so that we can fill the top of funnel, so to speak, and get a lot more leads that we can then work in a much more efficient manner. So for instance, we are building and codeveloping a next-generation loan origination platform, which will make it simpler, easier, faster and more efficient for our people to serve our customers much more quickly and get to decisions and funding a lot faster.

We have engaged outside expertise in our marketing group that are expert in performance marketing to find ways to better target customers that are out there searching for loans that we can do through our Live Oak Express product. And we are making sure that our lenders, which have been carrying the bulk of the water up to now in terms of referrals can even find more avenues for those referrals and we're encouraging them to do that both through how we provide them resources but then also making it part of the incentive plans that we have for them to grow the business.

So we've kind of got a multifaceted way of going after this intentionally. So we think that we'll continue to see growth over the next several years towards that aspirational target of $1 billion a year.

Your next question is from Tim Switzer from KBW.

My first one is kind of a follow-up on the discussion around Live Oak Express, and we're more than 6 months now into the SOP changes regarding the smaller dollar loans which I think we're now starting to see how that has pressured volume on maybe some of your competitors.

So is there any way you're able to -- maybe not quantify, but characterize the impact that has had on your competitors? And has that made it a little bit easier for you to win some market share in the smaller dollar space and also like has that impacted pricing yields, anything like that?

On the latter, I don't think that we've seen an impact on pricing or yields quite yet. On the former, I think we started to see that. we've started to see some lenders back away. First, the nonbank lenders because they were seeing a lot of the biggest credit pressures and we're starting to see bank lenders be a little more choosy on what they do, which makes a lot of sense.

We want a healthy SBA 7(a) industry. And we have always been very intentional from the outset on our small dollar lending products. We don't play at the highest, highest end of the pricing game. We don't chase spotty credit. We want businesses, small businesses to succeed. And so our total addressable market, so to speak, on the smaller side is going to be reduced somewhat because we're going to be cheesier about who we do business with.

But on the flip side, we're going to make it so easy for customers to do business with us, and we're going to target people that have a propensity to do business with us like they want to, and they are going to get the full power of our brand and our people and our technology over time such that we think that, that's going to be a huge differentiator between what they currently get today, particularly on the small dollar side and what Live Oak is going to deliver.

So I'm really excited about how we're actually thoughtfully building out this business, and I think it will be quite substantial and a huge part of what we do on the SBA side for years to come.

Interesting. That was great color. I was also wondering like on the flip side of this, since everyone has not required you basically full underwriting and the upfront guarantee fees and everything is essentially equal for the larger loans. Are you seeing some of your competitors now kind of move back to Live Oak's more traditional loan side at all?

Not necessarily, not that we can discern. We haven't seen much change from that perspective, Tim.

Okay. And then I was also looking for maybe an update on the opportunities and internal development you guys are doing with regards to AI. Chip has brought this up a few times on conference calls. I was looking for an update there, what are kind of the tangible use cases you're exploring and what are the benefits that can provide you, whether that's internal efficiency efforts or creating a better experience for customers.

Sure. I'll just give a quick update on that. I think starting with our technology and our labs teams all of our developers are using cursor, next-generation AI-based developing software. And I'm not sure that, that's going on across the rest of the industry, but having all of our people well versed in that. We made that pivot very quickly. So that's number one, and that's helpful.

We are intentionally educating and introducing our people to AI first with things like CoPilot but then also things like putting our information into proprietary large language models that they can then query and use for analytics, specifically related to our customer information, our portfolios and our business. So that's kind of fundamental and maybe a lot of people are doing that.

But then what we're looking at is a multipronged approach on how we go after this. I think if you just look at modernizing what you do in technology or in operations or revenue-generating parts of an organization and just simply say, we want to put in AI. AI is going to solve everything. It's not. What we're looking at is a way to say, how do we go to major parts of the organization understand what the pain points are that don't make it easy or simple or fast or efficient for our people and our customers.

And to fix those, sometimes with just better process sometimes with eliminating manual process and then more and more with AI. And it's a combination of being intelligent around that. So we're going to major departments and groups like loan operations and secondary markets and deposit operations and those areas to modernize those using AI and other tactics. We're also asking everybody in our organization to be knowledgeable about just doing things better and more efficient, whether it's using AI or not using AI.

And then thirdly, we're going to create a dedicated team that is thinking about how over the next 3 to 5 years, we create an AI-native bank. What does that mean? What does that look like? We have the innovative history here and technology that was born out of our founders, and we're constantly thinking about how to do that better. And so you'll see more and more use cases, tangible use cases from us over time as we start to build out what that means to be a native bank.

Got it. That was great. If I get one more question, kind of a follow-up on the credit discussion. I think Michael mentioned we're not seeing any kind of spike in the provision expense. Is that -- what should we expect going forward in terms of provision? If credit continues to gradually improve over the course of the year like it has over the last few months. Should provision be stable? Could it moderate a little bit further? Or is this kind of where it's going to stay?

I'll start. Sorry, Tim, it's Walt, I'll jump into it and then Michael can add on. I think if you think about stabilizing credit trends. I think one thing you have to remember for us as being a high-growth bank, that growth in CECL typically don't get a long go well. So growth will continue to drive our provision expense, along with our portfolio trends as well. But I think kind of what you've seen over the last 3 quarters is a really good view of kind of stabilizing or kind of stabilizing portfolio with stabilizing credit trends. And that should give you kind of a broad view of what you could expect kind of going forward, assuming the same level of growth.

That's a fair point on the provision. So I guess we should think about maybe the reserve percentage staying about level.

Yes, that's about right.

Your next question is from Bill Young from TD Cowen.

Just a question on your business checking initiatives. Given the strong momentum in your comments and the strong performance you had over the past year, do you have any updated thoughts about how we should think about the funding mix looking out over the next year or 2 given the increased growth in NIB?

Yes. So I'll start there, Bill. I think the -- we've been able to get about 4% of our noninterest-bearing deposits, as I mentioned earlier. Ultimately, our aspirational goal over just like kind of BJ mentioned with Live Oak Express is, over time, to get up towards in that 15% of our deposit base. But again, that's not going to happen next year. I think we saw 2% of noninterest bearing a year ago, 4% this year. I think that trajectory makes sense as we kind of move into 2026, if you just think about leveraging that growth rate.

That's helpful. And then just a couple of housekeeping items on the decision to hold on to more of your gain on sale loans. Just did you size up how much the benefit was to the margin or NII from holding on to the higher held-for-sale loans this quarter? And then also did you use this opportunity to maybe portfolio some more production in 4Q?

Yes, I'll jump in on that, Billy. The benefit for NII of about $60 million of HFS given our spreads and our margins as likely in the, call it, $1.8 million to $2.5 million range a year, sorry, yes, that's correct. So divide that by 4, that kind of gives you, so it's not overly material for Q4 itself.

As far as portfolio, I don't think that's what we'll likely do. I mean, I've always kind of aspire to get to the point where we're building a kind of what we used to call a treasure trash, but essentially, it's a portfolio of held-for-sale guarantee loans that we can sell at a given point gives us some good momentum going into Q1. So we'll likely monetize that additional $60 million here in Q1. And then that gives us some flexibility for remote that we originated in Q1 to then kind of give us a head start into Q2 and so forth.

There are no further questions at this time. I will now hand the call back over to Chip Mahan, Chairman and CEO, for the closing remarks.

See you next quarter. Thanks.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.

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.

Good morning, all, and BJ is going to kick us off.

Good morning, everybody. Let's get started with a big shout out to all of Live Oakers and our customers on Slide 4. We're proud to be recognized as the #1 SBA 7(a) lender for 2025 and by an impressive margin. Not only did we provide over $2.8 billion of loans to small businesses, but we also increased our production by 44% over last year, and our market share increased from 6.4% to 7.7%, and yet we still have plenty of room to grow in the program. Turning to Slide 5. We know what we are good at, and we're keeping the main thing, the main thing by ensuring our existing vertical lending and deposit gathering activities are our #1 priority. This performance is top of the class from a growth perspective. Loan production up 22%, loan outstandings growth up 17%, customer deposit growth up 20% and PPNR up 24%.

These results reflect the hard work all our teams have done to create outcomes that are more consistent and sustainable over time. That's our goal. To ensure our profitable growth trajectory continues over the medium term, we are extending our customer product offerings by adding checking and small dollar SBA loan capabilities. Both of these efforts launched in early 2024. And in a little over 18 months, our teams have made significant gains in winning customer checking relationships and serving more small business borrowers. On the checking front, we ended the quarter with $363 million of checking balances or 4% of our total deposit base, up from only 2% this time last year. This increase is even more impressive when you consider that our total deposit base grew 17% year-over-year.

We have about 1/3 of our new loan customers opening a checking account with us each quarter, and we expect that percentage to increase as we add more capabilities such as merchant services. At the beginning of 2024, only roughly 6% of our customers had both a loan and deposit relationship with us. Today, that percentage is 20%. All this is leading to deeper relationships with customers, better insight into customer cash flows and meaningful reductions in the cost of deposits, both now and over time. On the small dollar 7(a) front, what we call Live Oak Express, production is ramping up meaningfully and will continue to do so. These loans are also very desirable on the secondary market and are leading to a nice gain on sale increase. We are continuing our efforts to make it simpler, easier, faster and more efficient for our people to serve our customers.

And in Live Oak Express, we will be piloting an AI-enabled loan origination solution to do just that, which will significantly improve our speed to close for the borrower and the efficiency of our process from the lender all the way through to servicing and loan operations. The tangible result of our efforts is showcased on Slide 6. As you can see, the true earnings power of the company is strong in PPNR, revenue and pretax income on both a quarter-over-quarter and year-over-year basis. We continue to be very focused on building more consistent and sustainable profitability. Healthy revenue growth continues and with appropriate supportive expense growth, operating leverage is strong. With credit impacts moderating in line with our expectations, a significant improvement is evident in our pretax income results. In short, our momentum continues with more to come. So with that, Walt, how about running through some of the financial highlights.

Thanks, BJ. Good morning, everyone. Diving into the quarter on Page 8. Our Q3 earnings per share of $0.55 increased 8% linked quarter and almost doubled compared to Q3 of 2024. This outstanding growth was aided by the 7% linked quarter and 24% versus prior year increase in core operating leverage that BJ just highlighted as well as a lower quarterly provision expense. The 7% quarter-over-quarter improvement in core operating leverage was driven by a 6% quarter-over-quarter increase in net interest income, aided by $551 million or 5% linked quarter in loan balance growth and 5 basis points of margin expansion to 3.33%. On the growth front, our small business and commercial banking lenders as well as our loan support teams continue to generate high-caliber loans while replenishing their pipelines. Our deposits business continues to fund the bank in an extremely competitive market. As BJ mentioned, we continue to be encouraged by the momentum in our 2 focused initiatives of growing noninterest-bearing business checking balances and originating small dollar SBA 7(a) loans via our Live Oak Express product. Quarterly provision expense was $22 million and was lower for the fourth consecutive quarter. Our reserve and resulting quarterly provision expense continue to be driven by strong loan growth and our navigation of the small business credit cycle that we have discussed over the past few quarters.

Lastly, on the capital front, we successfully raised $100 million with our inaugural preferred offering, generating quality Tier 1 growth capital to support our growth aspirations. Next quarter, we will have another earnings and capital accretive event with Apiture agree to sale, which will result in a $24 million onetime gain while also removing approximately $6 million of annual pass-through losses from our income statement. Page 9 provides a financial snapshot of our Q3 earnings results on the top left with quarter-over-quarter demonstrated improvement across all major profitability and growth metrics highlighted on the bottom left. I'd like to briefly highlight 2 other items on this page. The first being the bottom right corner of this slide, where we capture notable noncore items each quarter as they arise.

Specifically, in Q3 of 2025, these items collectively had an estimated negative impact of approximately $1.5 million on our reported earnings. The second item is the tax expense line. Similar to last year, we had seasonal increase in the third quarter effective tax rate that was driven by compensation-related accounting treatment in the tax calculation. Slide 10 highlights our loan originations by vertical and business units. A few things to note here. As shown on the right-hand side of the page, our Q3 2025 loan originations totaled approximately $1.65 billion, an 8% increase linked quarter, driven primarily by our Commercial Banking segment. Production momentum in 2025 remains strong across our spectrum of verticals with approximately 2/3 of our verticals originating more production year-to-date in 2025 than they did in year-to-date 2024.

Lastly, the bottom right of the page highlights the linked quarter-over-quarter and year-over-year loan portfolio growth trends by lending segment, with both segments providing double-digit year-over-year growth rates. Slide 11 illustrates quarter-over-quarter loan and deposit balance growth, highlighting the strong consistent growth trends on both fronts. Our total loan portfolio grew approximately 5% linked quarter with year-over-year loan balances increasing approximately 17%, outstanding durable growth that you don't often see across the current industry landscape. The approximately 3% linked quarter increase in customer deposits was consistent with Q2 2024's customer deposit growth rate, while our year-over-year customer deposit growth rate was an outstanding 20%. As you can see in the second half of 2024's growth rates on the bottom of the page, we typically experience a slower seasonal growth rate in the second half of the year on the customer deposit front and expect the second half of 2025 to be no different. Year-to-date growth in customer deposits has primarily been driven by our consumer and business savings products as we remain competitively priced in the market to support our aforementioned loan growth and via our business checking growth, which we highlight on our growth trends on Page 12. We saw a nice ramp in business checking in Q3 of 2025, with checking balances increasing 26% linked quarter to $363 million.

Our total low-cost deposits, including noninterest-bearing checking balances as well as low-cost collateral construction and loan reserve accounts, now totals approximately 4% of our total deposit basis, a 2% -- or 2x increase year-over-year. As BJ highlighted, adding noninterest-bearing deposits to our primarily competitively market priced customer deposits and wholesale deposit portfolio is substantially accretive to our earnings profile. These deposits not only enhance our margin efficiency, but also strengthen the overall resilience of our funding mix with deeper customer relationships. As such, they remain a key strategic priority for us as we head into 2026 and beyond. Net interest income and margin trends are highlighted on Slide 13. In Q2 of 2025 -- sorry, Q3 of 2025, we saw our quarterly net interest income increased $6 million or 6% linked quarter and $23 million or 19% compared to Q3 of 2024. Our net interest margin also expanded another 5 basis points to 3.33%, our third consecutive quarter of margin expansion, aided both by growth as well as continued deposit repricing as highlighted on the bottom of the table in the middle of the page.

As the Fed cut in September, and we expect more cuts to come in the very near future, perhaps as early as next week, here is a general reminder of how this impacts our net interest income and margin trajectory. The first is we have an asset-sensitive balance sheet with approximately 2/3 of our loans being variable and tied to either SOFR or prime. The second is our funding base is predominantly in liquid savings accounts, short-term customer CDs and broker deposits. Since the Fed began easing last December, our blended savings cumulative downward beta is approximately 44%. This is largely a result of us not pricing to the top of the market while the Fed was tightening. And as such, we have blended the top of the market reprice down towards us through 2025.

Ultimately, we monitor both deposit market and funding levels closely, ensuring that we continue to support our loan growth appropriately while also adjusting pricing to support margin aspirations and profitability. Our current outlook is that the Fed cuts 25 basis points in October and December of 2025, followed by 3 additional 25 basis point cuts in March, June and September of 2026. Yet Fed forecasts vary and as such, we so do net interest income and margin outlooks. We evaluate a gauntlet of forward-looking scenarios to assess the potential tone of net interest income and margin outcomes. And generally speaking, larger or more frequent Fed cuts provide more margin compression in the near term, while flat interest rates less cuts and less frequent cuts provide more margin opportunity. Ultimately, assuming that the deposit market is rational and reprices appropriately, our margin typically recovers relatively quickly due to the short-term nature of our funding base. Ultimately, what really matters, however, is not simply the margin but the net interest income generated. And our net interest income performance is more resilient due to our strong growth. To drive this point home, over the last 6 years, 24 out of 26 quarters experienced stable or growth in net interest income despite our net interest margin peaking at 4% and valuing at 2.56% over the same time frame.

Moving to guaranteed loan sale trends on Slide 14. The secondary market continues to provide consistent earnings while acting as a good source of recycled liquidity. We added some depth to this page this quarter to provide insight to our gain on sale composition and to highlight the accretive contribution we are already realizing from our small loan SBA origination efforts. Our quarterly gain on sale remains primarily driven by our typical larger SBA loan sales, which have provided a consistent $13 million to $15 million a quarter of gain on sale at an average premium in the 106 to 107 range.

We've now had 2 consecutive quarters of USDA loan sales, which is encouraging, yet ultimately, the timing and execution of these sales is driven by the completion of the underlying projects, rate environment and investor demand. Similar to my comments on growing checking balances, our focus on ramping our Live Oak Express origination is providing immediate results with our small loan SBA sales providing for $12 million in year-to-date gain on sale, approximately 4x or $9 million more compared to year-to-date 2024, while also providing for approximately 20% of our year-to-date total gain on sale compared to only 8% in year-to-date 2024.

To help ramp this product going forward, we remain focused on both filling the top of the funnel through partnerships and lender referrals while also leveraging AI to make the origination and servicing more efficient for our people and our customers. Expense trends are detailed on Slide 15. Q3 reported noninterest expense of $87 million decreased approximately $2 million or approximately 2% linked quarter. We remain focused on supporting our growth via good costs while also working to improve efficiency. This renewed focus on growing revenues faster than expenses and improving operating leverage really began back in the third quarter of 2023. You can see the results of that focus on the right-hand side of this page with loan production, core operating leverage and revenue growth, all significantly outweighing our expense growth as compared to the third quarter of -- comparing the third quarter of 2025 to the third quarter of 2023.

We are keenly focused on improving both our customer and employee experiences, embracing the automation and AI wave across our entire business and enhancing our current technology stack, all with the resulting goal of creating internal and external raving fans, improving efficiency and providing for a solid mature foundation that will support our growth. Turning to credit. Slide 16 provides insight into the portfolio with a view of key credit ratio trends in the table at the top with visualization of over 30-day past dues, nonaccruals and provision trends on the bottom. Our over 30-day past dues remained low for the fourth consecutive quarter with $16 million or 14 basis points of our held-for-investment loan portfolio past due as of September 30. The amount of nonaccrual loans increased to $85 million or 73 basis points of our unguaranteed held for investment loan portfolio in Q3.

Nonaccrual balances remain very manageable as our servicing team continues to support SBA customers impacted by the small business credit cycle. Provision expense of $22 million improved in Q3 and was influenced by strong $551 million quarter-over-quarter loan growth, what we often refer to as good provision and portfolio performance. While quarter-over-quarter provision will fluctuate based on growth and portfolio activity, we remain comfortable with our reserves. Last page for me on capital -- our capital strength was bolstered in Q3 of 2025 with our preferred issuance as shown on Page 17. The $100 million issuance added approximately 90 basis points of total risk-based capital and approximately 70 basis points of Tier 1 leverage, excellent Tier 1 growth capital. Our equity method investment in Apiture will provide for an additional capital accretive event in Q4 with Apiture's recent sale closing in October. In addition, the removal of approximately $6 million of pass-through losses going forward will largely help fund the annual preferred dividends on the preferred issuance. Thank you again for joining this morning. And with that, I'll turn it back over to BJ for his closing comments before we head to Q&A.

Great. Thanks, Walt. Momentum is building. We're focused on the biggest and best opportunities, and we're modernizing our activities to take full advantage of the AI-driven possibilities that are right in front of us. So with a big thank you to all Live Oakers and our customers, let's take some questions.

[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.

Got you. That was very helpful. And I also want to ask about kind of the competition you're seeing broadly in the SBA space with, I guess, the government shutdowns impacting things. You obviously have the credit cycle that seems to be hitting some of your competitors harder than you and all the rule changes that were implemented, I guess, almost 2 quarters ago. So have you seen easing competition at all? And has that created some opportunities for you?

Yes. Tim, this is BJ. The way I would describe it is this is what we do. This is how we grew up, and we know the SBA market, we think, better than anybody. And we've seen tons of things. We've seen SOP changes. We've seen government shutdowns. We've seen nonbank lenders come into the market. We've seen nonbank lenders go out of the market. We've seen big banks try to do SBA. We've seen them pull out of SBA. All the while, all we're doing is growing the number of verticals and the number of customers that we serve through the SBA. So we don't believe that we have a peer in SBA lending. We will see different pockets of competition in different verticals and some competitors are better than others in those verticals. But by and large, we actually just control what we can control in terms of making ourselves better all the time every day. And so I think, obviously, it's showing up in our results and in our numbers, and we'll continue to do that.

Got it. And then the last question I have is, it seems like previously most of your commentary around the credit performance was that it was pretty broad-based and more related to certain vintages rather than industries. But now that we're a little bit longer time for the kind of the impact of tariffs and everything else going on, have you seen any industries that are maybe struggling or under a little bit more pressure than others?

Yes. I think, Tim, on the tariff side, really very little, I'd say. It's a little bit more, yes, the rise in rates and the vintages from '21 and '22 showed some significant stress. I think where we see more stress than not -- and by the way, it's not broad-based across all of our verticals. It's a handful is where they don't have as much pricing power, yet their cost of goods sold are going up. And so the struggle of trying to just maintain profitability, and that's where we've seen a little bit of stress. But as Michael kind of talked about, there isn't anything that is surprising us at this point. We kind of know where that tension is. And everything is kind of performing relative to our expectations.

Your next question is from David Feaster from Raymond James.

I wanted to talk about the kind of the credit and tech side in one sense. You talked about maintaining strong underwriting and that you guys are going to be going through the risk weighting, updating some of those. I'm just curious, given the broader uncertainty and pressures that we're seeing, again, you talked about the tariffs and all these different things. Have you adjusted underwriting standards or your criteria at all? And then using technology and AI, is there -- we talked about the growth side and improving profitability, but is there opportunities to use tech or AI or whatever it may be to help underwriting or earlier credit identification and just kind of help mitigate the credit risk?

Yes. Hey, David, I'll start. Michael, I'm sure will jump in. On underwriting standards, to be pretty consistent with our customers so they understand kind of -- and our lenders so that they understand what we're interested in and what we're not. With that said, though, there will be times when we'll modify the credit box, let's say, for instance, we'll say we really want to require direct management experience or direct operating experience in a certain vertical if we're going to end credit in that vertical. That's an example of how we might "tighten" underwriting is to make sure that we have borrowers that are going to be able to operate their businesses successfully.

So we're constantly tweaking that across our 40 verticals, and we've always done that. And I think that, that will continue. In terms of AI, absolutely. So for instance, one of the things that we're looking at in pilot from a new loan origination and servicing platform is the ability to actually ingest documents and have them read by AI and started to do spreads and create a credit memo. So imagine we've got all this documentation from an HVAC company. And AI is ingesting all this information specifically on this HVAC customer in a certain market. But at the same time, it's going out and using Copilot or ChatGPT to actually build a business analysis around what that market looks like, what the demand in the market looks like, what the overall industry doing and how it's performing, how that looks relative to the financials that we're ingesting, how that looks like relative to our existing HVAC or service contractor portfolio that we have in credit. That's what we're piloting. Those are the types of things that we're looking at in terms of using AI. So it doesn't replace the human aspect of reviewing all that. But in terms of streamlining the ability to analyze, do data entry, ingest information, do competitive analysis and understand trends, it's going to be incredibly impactful for our ability to get loans closed, approved, not approved, and it's just going to make us a lot better and give customer a lot better experience.

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.

Okay. That's helpful. And then maybe just kind of staying on some of the exciting parts about the business. You guys -- I wanted to get an update on kind of where we are with the embedded finance build-out, how that's going and the growth potential there? And then just maybe on -- you guys are kind of ahead of the curve on most things. How do you think about -- like just given the market expansion of stable coin, how do you expect to play there? Are there opportunities like just kind of curious what you guys are looking at? Is that a potential opportunity for some deposit growth for you all? Just want to touch on those 2 topics.

Sure. David, it's BJ. So embedded continues to be built out, and we think it's one of our moonshots. So something that really could be meaningful over the next 3 to 5 years. We did do a pivot on how we were building it out earlier in the year. We were doing a lot of in-house building. But again, with AI and what's going on in the marketplace, and we found a partner that was quite a bit ahead of where we were, and we thought that we could leverage that partnership to accelerate our embedded banking growth. So we kind of moved to a different platform, which slowed down our pipeline building in terms of relationships. But we've got one live. We've got several in the hopper. And we think over time, we'll talk about that a little bit more. I'd rather actually put points on the board from an embedded banking perspective and then tell you about it as opposed to tell you it's coming. So that's kind of where we are on embedded. It's still very much on our road map. On stable coins, it's very interesting. We have a new Board member, Patrick McHenry, who you would have seen in press release that when he was in Washington and Congress, he was incredibly involved in the GENIUS Act and what's going on with stablecoins. And so we kind of have an inside view, so to speak, of what's going on, how that could impact things and what -- how people are looking to use it. So we are actively studying how we would participate in stablecoins, and we want to stay ahead of that curve as much as we can as it continues to evolve.

[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.

Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect your lines.