Live Oak Bancshares Q1 2026 Earnings Call - Scaling Through Small Dollar SBA and AI-Native Operations

Operator: Good morning, ladies and gentlemen, and welcome to the Q1 2026 Live Oak Bancshares, Inc. earnings conference call. At this time, note that all participant lines are in the listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Thursday, April 23rd, 2026. I would like to turn the conference over to General Counsel, Greg Seward. Please go ahead, sir.

Greg Seward, General Counsel, Live Oak Bancshares, Inc.: 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.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 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.

Chip Mahan, Chairman and CEO, Live Oak Bancshares, Inc.: 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 Loesch, 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 Pfeiffer, our CFO, for some numbers. All of us, including Michael Karns, our Chief Credit Officer, will be available for questions at the end. BJ, over to you.

BJ Loesch, President, Live Oak Bancshares, Inc.: 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. 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.

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. 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. While default rates have moved higher over the last two years, Live Oak’s performance has been modestly improving, despite a difficult backdrop for small businesses. 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 two 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 this so important to us? Well, two 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. 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 non-interest-bearing accounts two years ago. We now have over $400 million and growing. That means we don’t have to raise $400 million of market-rate savings, CDs, or broker deposits to fund our growth. If you do the math on that cost of funds impact, it’s meaningful.

We are only at 4% of non-interest-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. With Live Oak Express, we are serving more small businesses that need capital to grow. These smaller loans are highly desirable on the secondary market, with premiums in the 9%-13% range. As you can see on slide 8, we 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.

As always, 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. With that, Walt, how about running through some of the financial highlights?

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: 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. 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.

As BJ mentioned, we continue to be proud of the growth in our non-interest 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 that 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. 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 pipeline’s 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. 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 three verticals and were largely anticipated. We view this level of paydowns as an outlier and not as something that should persist 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 1st, 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 seven 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 2025 and Q1 of 2026 to 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 sale 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 continued to be a meaningful contributor. Our gain on sale has remained between 10%-13% of our total revenue over the last 12 quarters, generally with a slight stairstep upwards 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 stairstep 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 non-interest expense was approximately $85 million in Q1, down from $89 million in Q4, while our Q1 efficiency ratio was 59%, which is about seven 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. 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 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 10-30 basis points. The non-accrual ratio was 102 basis points, up modestly quarter-over-quarter, with 27% of the non-accruals 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.

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. The fact that our coverage ratio, along with our provision expense trends, have been relatively stable to improving over the last five 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 remains stable.

As highlighted on the left side of this page, we also continue to think 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 marks, 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 continued 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.

With that, I’ll turn it back over to BJ.

BJ Loesch, President, Live Oak Bancshares, Inc.: Great. Thanks, Walt. Let’s go to the questions.

Operator: Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. Should wish to decline from the polling process, please press star followed by two. If you’re using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. Thank you. First will be Eric Spector at Cantor Fitzgerald. Please go ahead, Eric.

Eric Spector, Analyst, Cantor Fitzgerald: Hey, good morning, guys. This is Eric dialing in for Dave. Thank you for taking the questions.

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Morning, Eric.

Eric Spector, Analyst, Cantor Fitzgerald: Hey, good morning. 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? Just talk us through the dynamics of specifically how much is coming from growth, wider loan spreads or funding mix improvement.

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Yeah, great question. Hey, Eric. This is Walt. A flat Fed environment helps 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. Put that in context to 2026, keeping consistent with commentary from our last call and assuming those flat rates, we’d expect that margin to stabilize here in the near term and then allow the 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 spend quite a time monitoring and making sure that our flows make sense and are supporting our growth. We feel really good about our positioning in that space as well. From a growth perspective, I think that the vast majority of any expansion kind of moving forward will be highly growth driven. If you’ve kind of followed our story, which I know you have over your career, growth for us is pretty impactful from a margin standpoint. We expect that to continue, and I think you can look at prior years and flat interest rate environments to get a sense of what the impact would be.

Eric Spector, Analyst, Cantor Fitzgerald: Great. That’s helpful. 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? Do you see enough visibility to support low- to mid-teens% growth in a stable rate environment? Maybe help us think through the cadence of growth throughout the year.

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Yes. I’ll start again, Eric. This is Walt. From a pipeline standpoint, our pipeline today is about $4.5 billion. Typically, with that equation from a production standpoint, they got to move through and they have their expected closings. I would think our production will be very in line or better than Q2 of last year, could have been here in the near term. Some things will push to the right, some things will come into 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. I want to move off of that.

Eric Spector, Analyst, Cantor Fitzgerald: Okay. That’s great. 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?

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Yeah. I’ll start.

BJ Loesch, President, Live Oak Bancshares, Inc.: Yeah.

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Go ahead, BJ. You go ahead. You start.

BJ Loesch, President, Live Oak Bancshares, Inc.: Yeah. I’ll take that one. I’m excited about this one. 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%. Over the last 2 years, we’ve been anchoring that with checking accounts. Now, when we open a loan account, one out of every three of those has a checking account. I’m incredibly excited about what we can do to build customer relationships that are stickier over time. 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. Over the next three years, I would expect us to be in the 10-plus% 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. A 10% target is not really heroic. If you look at the industry, the industry’s at 20%-25%.

For us to just get to 10% or more, we think is very achievable, and it’s going to have a meaningful impact on the stickiness of our relationships and the funding profile that we have.

Eric Spector, Analyst, Cantor Fitzgerald: Great. That’s helpful color. I’ll step back. Thanks for taking the questions, and congrats on a good quarter.

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Thanks, Eric.

Operator: Next question will be from Janet Lee at TD Cowen. Please go ahead, Janet. Janet, can you please unmute your line? Getting no response. We will move to Tim Switzer at KBW. Please go ahead, Tim.

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

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Morning, Tim.

Tim Switzer, Analyst, KBW: The first one I have is the trajectory of SBA loan sale volume over the rest of the year, and sorry if you addressed this in your opening comments. Was there any holdback at all this quarter? It’s 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 2024.

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Sure. Great question. Hey, Tim. This is Walt. We didn’t intentionally hold back. What we did see was quite a bit of production come through in the last week and a half to two weeks of the quarter. 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 going into the next quarter. I think that’s what you’re seeing in the held-for-sale loan volume. As far as the trajectory, I mentioned it in my prepared remarks. We’ve shown this over the years, where Q1 is our lowest, and then we have a slight stair step in the Q2 and Q3 and Q4 and so forth. With that, you normalize back again in Q1, and then you start that stair step again.

I think largely if you look back then or at prior years, and that’ll give you a sense of what that stair step could look like.

Tim Switzer, Analyst, KBW: Okay. Interesting. Any color you can provide on what drove the 1% increase in the gain on sale premium?

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Yeah. 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 on the deck. As BJ mentioned, Live Oak Express gets 9%-13% premiums. 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. There’s a little bit more of a demand for that space right now as well. Broadly, I think that 106%-107% range from a premium standpoint, as we’ve averaged over the last five quarters, I would maintain that going forward.

Tim Switzer, Analyst, KBW: Okay. Got it. The last one for me real quick on, 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 as kind of an aspirational goal. Has that changed, or is it more just like a timeline on when you’ll achieve these?

Michael Karns, Chief Credit Officer, Live Oak Bancshares, Inc.: I think we’re just being conservative, Tim. I do expect us to go past the $750 million production in annual LOE.

Tim Switzer, Analyst, KBW: Got it. You guys are kind of seeing the demand that you were expecting so far.

Michael Karns, Chief Credit Officer, Live Oak Bancshares, Inc.: Yes, for sure. If you look at the slide that we had, the SBA changed the SOP back in mid-year of 2025, which it essentially went back to what the rules had been before. They had loosened the rules for smaller dollar loans, then they tightened them back up. It just caused a little bit of a backup in our ability to generate those loans efficiently. As you can see, we’re on the rise again. I feel highly confident in our ability to generate that kind of volume. As you’ll see on this slide as well, we are now in pilot with an AI-native loan origination platform, which is huge.

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. 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. I think that number is going to re-accelerate sooner rather than later.

Tim Switzer, Analyst, KBW: Great. That’s good to hear. Thanks for the color.

Chip Mahan, Chairman and CEO, Live Oak Bancshares, Inc.: Thanks, Tim.

Operator: Ladies and gentlemen, a reminder to please press star one if you have any questions. Thank you. Next, we will hear from David Feaster at Raymond James. Please go ahead, David.

David Feaster, Analyst, Raymond James: Hey, good morning, everybody.

BJ Loesch, President, Live Oak Bancshares, Inc.: Morning, David.

Good morning.

David Feaster, Analyst, Raymond James: I wanted to start, go back to the credit side for just a second. You talked about how over a quarter of the non-accruals are in verticals that you’ve exited. What verticals are those? How much in 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? We didn’t have the right team? Just kind of curious if you could touch on that.

Michael Karns, Chief Credit Officer, Live Oak Bancshares, Inc.: Yeah. Good morning. Michael Cairns here. Happy to talk about that. One of the advantages about being in all of these different specific verticals and having industry expertise is that we have insights into 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. That’s an ongoing process for us. Over the years, we’ve made the decision to exit several verticals. We’ve adjusted verticals, we’ve added new verticals, and that’s an ongoing process for us.

a segment of a vertical that we’re really highlighting the increase, small uptick in non-accrual percentage for the quarter 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. It’s disproportionately impacting the non-accrual 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 it some time ago when we saw the issues there. The primary driver being the consumer preference change and demand for whiskey and an oversupply in that product coming out of COVID especially. we saw that coming, and we made the adjustment. This quarter, we had to move some of those loans to non-accrual as we’re working through our workout strategy.

Our special asset team has been all over this for some time, and our servicing team. Again, it’s a really small component of what we do and something we’re working through. I guess what I would say on non-accruals as a whole, when you think about that, 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. Once you’re classified as a non-accrual, we’re pegging a potential loss there, and that’s built into our reserve coverage. You can look at these components like non-accruals 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.

I feel good, and I feel like our portfolio is very stable at this point.

David Feaster, Analyst, Raymond James: Okay. That’s helpful. You talked about an AI origination platform. I know you guys have a lot of investments ongoing through Canapi, through stuff that you guys are developing. You’re always early to leverage new technologies, and importantly, I think you 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 maybe some of the exciting things on the horizon that you’re looking at in both of those areas.

BJ Loesch, President, Live Oak Bancshares, Inc.: Hey, David, it’s BJ. Obviously our biggest platform is lending. A year and a half ago, we started on this journey to get on an AI native platform because we saw the future coming. I feel like we’re going to be quite a bit ahead of others by moving quickly on that. I feel really, really good about that. Having our most important platform in an AI native world is going to be really good. 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. We made AI capabilities and tools available to all 1,000 of our employees right away.

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. 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. 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. 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. With that said, I think frankly, over time, everybody’s going to do that.

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. Having an engine in our back office that is streamlined in the most effective and efficient way possible with AI. There’s lots going on there. We’ve got all kinds of use cases like everybody else does. 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.

David Feaster, Analyst, Raymond James: That’s awesome. 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 a larger NIB contribution and more checking account growth. Live Oak Express does $750 million plus in production. Growth remains in that 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?

BJ Loesch, President, Live Oak Bancshares, Inc.: 15 and 15. That’s what we talk about all the time, David. 15% return on equity with 15% earnings per share growth. 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. I just feel like we’re about to hit our stride and our plans that we put in place over two years ago to make that happen are starting to happen. I’m pretty excited about our ability to do that. Hitting a 15% return is one thing. Having a 15% earnings growth in one year is one thing. Being able to do it over a sustained period is something pretty unique.

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 onto it so that over time we always have something next that’s going to drive the next generation of our growth. 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. We’ve got endless possibilities with AI. I think Live Oak is better positioned than we have been in years to generate top tier returns.

David Feaster, Analyst, Raymond James: That’s pretty exciting. Thanks everybody.

BJ Loesch, President, Live Oak Bancshares, Inc.: Thanks David.

David Feaster, Analyst, Raymond James: Thanks, David.

Operator: Next question will be from Janet Lee at TD Cowen. Please go ahead, Janet.

Janet Lee, Analyst, TD Cowen: Good morning.

BJ Loesch, President, Live Oak Bancshares, Inc.: Morning, Janet.

Janet Lee, Analyst, 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 looks like a lot of that is driven by the verticals that you exited. Where do you think we are in the process? Is it getting better or because of the macro uncertainty that we’re in? Are you seeing a little bit more pressure, if at all?

Michael Karns, Chief Credit Officer, Live Oak Bancshares, Inc.: Yeah. Michael again here to take that question. I’ll go back to that slide that BJ walked us through, where you can see the industry trends. You see that the industry is still grappling with some headwinds here, whereas we have been flat for some time. I credit that to a couple of things. One, being pretty proactive in addressing and recognizing the environment we were in. The environment was, and the driver of that credit cycle was really about rapidly rising interest rates on our customer base. We were underwriting loans at 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. We’ve gotten past that interest rate risk that was part of the big component of the cycle. The economic uncertainty out there, every morning you wake up and there’s a different headline. We’re talking about that. We’re having conversations with our customers on the front end and our portfolio, just talking about fuel costs, how that could impact their business. It certainly, if this is prolonged, it will impact the business community, the small business community, and all of us across operating expenses. We don’t have verticals that are focused in industries that are heavily dependent on fuel costs as a big component of their operating expenses. It’ll be an indirect impact to all of our businesses.

that’s why we underwrite to higher debt service coverage covenants. We build in that cushion because we know inflationary events will happen. that’s a big part of what our underwriting credit team do. I’m watching it closely. We’re talking about it a lot. right now, I feel pretty good about where we sit for this quarter.

Chip Mahan, Chairman and CEO, Live Oak Bancshares, Inc.: Michael, you’ll remember if you look at slide six, that in the previous administration, the SBA loosened the rules. There are a lot of lenders that took advantage of that in the gain on sale dollars. We stuck, as always, to our guiding principles of soundness, profitability, and growth. That is part of the reason for that slide being there.

Janet Lee, Analyst, TD Cowen: Got it. Thanks for all the color. 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 an efficiency ratio target? How should we think about that aspect?

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Yeah. Hi, Janet, this is Walt. I think you hit the nail on the head. I think Q1 expenses, we had some things internally that we’re working through at the end of last year that kind of helped bring that down here in Q1. But if they average over the last call it five 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. Kind of how I think about that, right? There’s always a balance, right?

We are an innovative company that’s high growth, so 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. Really the way we evaluate 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 two initiatives specifically can drive. Those are things that we think about when, 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. Largely through 2026, I think that balances out. I think you kind of stay where you’re at now, plus or minus, on a quarterly basis through the rest of the year. That’ll help with that.

Coupled with the revenue growth, we’ll see our efficiency ratio kind of trend down into the low- to mid-50s. 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 beyond.

Janet Lee, Analyst, TD Cowen: Got it. Thank you.

Walt Pfeiffer, Chief Financial Officer, Live Oak Bancshares, Inc.: Thanks, Janet.

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

Chip Mahan, Chairman and CEO, Live Oak Bancshares, Inc.: That’s a wrap, guys. We enjoyed it. See you next quarter.

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