Live Oak Bancshares Q4 2025 Earnings Call - Record loan production and operating leverage as Live Oak Express and checking scale amid manageable credit

Speaker 5: Good morning, ladies and gentlemen, and welcome to Live Oak Bancshares’ fourth quarter 2025 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would now like to turn the conference call over to Greg Seward, Live Oak’s general counsel. Please go ahead.

Greg Seward, General Counsel, Live Oak Bancshares: 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.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’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 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 President, B.J. Losch.

B.J. Losch, President, Live Oak Bancshares: Great. Thanks, Greg. Good morning, everybody. Thanks for joining us. Let’s get started on slide four. 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 the uncertain economy, and ultimately three rate decreases from the Fed late in the year. We continued 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 five.

A few of the biggest highlights were record loan production, 17% loan growth, 27% core PP&R 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 two-year view of our production on slide six: 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 seven that those results are simply outstanding, with adjusted PP&R of 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 is always important. On slide eight, you can see our credit trends over 10 years relative to all other SBA lenders. While default rates had moved higher over the last two years as PPP and stimulus tailwinds had 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 7A 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 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?

Greg Seward, General Counsel, Live Oak Bancshares: Thanks, B.J. Good morning, everyone. As outlined on page 11, we had an outstanding end to our 2025 campaign, with Q4 producing $44 million in net income and $0.95 of earnings per share, both of which were approximately three times Q4 of 2024. Our strong performance was aided by excellent growth and core profitability trends, as seen in both our reported and adjusted PP&R improvement year over year, generally improving credit trends in our fourth consecutive quarter of lower to stable provision expense, and $28 million in 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 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.

We love to see the progress across our two focus initiatives of growing Business Checking and originating Live Oak Express loans. Business Checking balance is $377 million doubled year over year, materially benefiting our interest expense line, while Live Oak Express contributed $12 million towards our gain on sales 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 to our donor-advised fund.

I continue to be very excited about our operating leverage trends highlighted on slide 13, as was B.J. Q4’s adjusted PP&R of $64 million, as detailed in slide 28, is 21% higher in the 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 to 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’s 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 B.J.

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 account in Q4. Our total low-cost deposits, including non-interest-bearing checking balances, low-cost collateral construction, and loan reserve accounts now total 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 increase $8 million, or 7% late 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 five basis points quarter over quarter, aided by our deposit portfolio repricing downwards in response to the 50 basis points of Fed cuts in Q4, while our variable quarterly adjusted loan portfolio did not reprice until January 1st. As in the past, when we have seen large Fed moves downward of 50 basis points in a 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 down as our deposit pricing adjusts. Currently, our base outlook for the Fed consists of three Fed cuts in March, June, and September of 2026.

Any less cuts or cuts later in the year will provide an earnings opportunity for the bank. Moving to guaranteed loan sale 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 until a future quarter while increasing our held-for-sale loans 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 at 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, providing for a meaningful 20% of our gain on sale, or $12 million, a 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. Q3 reported non-interest expense of $89 million included approximately $6.6 million of one-time expenses, detailed within a 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 remain 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 31st.

The amount of non-accrual loans increased to $110 million, or 91 basis points, of our unguaranteed held-for-investment loan portfolio in Q4. The late 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 decline modestly, in line with the improving trends in past dues, classified assets, and net charge-offs. Altogether, improvements across these metrics show that the uptake in non-accruals 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 late 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 two strategic initiatives in business checking and Live Oak Express are ramping nicely, with plenty of runway to continue to drive deeper relationships, increased 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 irreplaceable. With that being said, thank you again for joining this morning.

B.J., back to you for closing comments before we head to Q&A.

B.J. Losch, President, Live Oak Bancshares: Excellent. Thanks, Walt. Let’s just take some questions.

Conference Operator, Moderator: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. Should you wish to cancel your request, please press the star followed by the two. If you’re using a speakerphone, please lift the handset before pressing any keys. Once again, it is star one should you wish to ask a question. Your first question is from Crispin Love from Piper Sandler. Your line is now open.

Thank you. Good morning, everyone. Just first, NII and the NIM very strong in the quarter, nice expansion there. But can you just talk about some of the dynamics into the first quarter, the impact of the last two 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 the fourth? Well, I believe you mentioned some compression in the NIM, but higher NII, but if you could just flesh that out a little bit, that’d be great.

B.J. Losch, President, Live Oak Bancshares: Yeah. Hey, Chris and Walt. Thanks for the question. Yeah, 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, anytime you see 50 basis points of Fed cuts in the quarter or the following quarter, as you know, we have a large variable quarterly adjusted loan portfolio that reprices on the first business day. So that’ll drive both NIM and net interest income compression in the near term. The good news, which is essentially the beauty of Live Oak and our growth engine, is that as the deposit pricing continues to adjust, growth really pushes us back to that up and to the right migration in both the interest income and NIM fairly quickly.

Really, and the steepness of that slope on that up and to the right migration is largely going to depend on whatever Fed outlook or forward curve you’re taking or taking a look at. But I think a good proxy, if you’re kind of looking for a guide for what Q1 could look like in terms of NIM, back in Q3 of 2024, we had 50 basis points of Fed compression or of Fed rate cuts 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. Hopeful 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 2026? 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 three of 2025? I would expect that it would be kind of higher than that just when you look at the fourth, but just want to kind of check, see what you’re thinking there.

Yeah. Thanks, Chris. It’s Walt again. I think the government shutdown really didn’t impact us much in Q4. I think we saw a little bit of a timing delay in certain loans, but as you can see 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 sale 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 start our up and to the right stairstep momentum within the gain on sale line.

All right. So if I’m looking at one Q25, so even though there was a little bit of lag there, it could be below that kind of two Q, three Q level?

I think it would be closer to what you’re seeing in Q1 of 2025. Yeah, so our Q1 of 2026 would be closer to what you’re seeing in Q1 of 2025, so it’ll be a step up versus what you saw in Q4, and then that gets us back into, I think, Q1 of 2025 within the $15 million range total gain on sale. That feels appropriate.

All right. Thank you. Appreciate it, Walt.

Sure. Yep. Thanks, Chris.

Conference Operator, Moderator: Thank you. Your next question is from David Feaster from Raymond James. Your line is now open.

David Feaster, Analyst, Raymond James: Hi. Good morning, everybody.

B.J. Losch, President, Live Oak Bancshares: Hey, David.

David Feaster, Analyst, Raymond James: I wanted to not 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 three cuts embedded in your guidance. Obviously, there’s just going to be a lot of moving parts, right? 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 three 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, actually see some expansion and kind of just help us think through that trajectory over the course of the year?

B.J. Losch, President, Live Oak Bancshares: Yeah. I think, David, this is Walt again. Really, the thing that we think about is not only what the Fed cuts are going to do, 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 and right trajectory or NIM expansion as we move through the year. Largely, it’s going to be driven by growth.

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

David Feaster, Analyst, Raymond James: 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.

B.J. Losch, President, Live Oak Bancshares: Hey, David. That’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 B.J. mentioned and I mentioned kind of looking at the operating leverage slides, we’ve done a really good job of that, especially over the last few years, but even if you extend it past five years with our PP&R trajectory. I think from where we’re investing, the two strategic priorities for us of both Business Checking and Live Oak Express are heavy focal points. The areas with AI and application and kind of across our operational areas of the bank and our loan origination platform is really exciting. I think from an expense growth rate, we typically 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 as we think through just making sure that we’re putting our money strategically in the right places.

David Feaster, Analyst, Raymond James: Okay. That’s helpful. And then just quickly touching on credit, there’s some mixed trends there. I 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 non-accruals? 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.

B.J. Losch, President, Live Oak Bancshares: Yeah. Good morning. 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 non-accrual 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 of potential losses against 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 non-accrual 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 be in a 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 makes up the chunk of the non-accrual balances and the classified. So with all that, I felt like it was a pretty stable quarter.

David Feaster, Analyst, Raymond James: That’s great color. Thanks.

Conference Operator, Moderator: Thank you. Your next question is from David Rochester from Cantor. Your line is now open.

Hey, good morning, guys.

B.J. Losch, President, Live Oak Bancshares: Morning, Dave.

Hey, Walt. I just wanted to go back to your comments on the margin. You mentioned down similar to that trend in 4Q24, I believe. And so it looked like that was down about 18 basis points that quarter. So 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 it was other loan income. It was about six basis points on the margin for the quarter. I was just wondering what that was exactly. And is that something that’s going to reverse? Does that roll off of 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 4Q24. Thanks.

Sure. Hey, 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 in a run rate moving forward, especially not to that degree. And then as you think about the trajectory back in Q4, after the 50 basis points of cuts, yeah, 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 in front of the variable loan portfolio repricing on January 1st with some deposit rate reductions there at the end of Q4.

And also, we’re able to already start to reduce the 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 they’re taking a look at.

Okay. Great. Appreciate that. And then just on expenses, 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?

That’s right. Yeah.

Okay. Great. And then just on Live Oak Express, it was good detail you had in here, the $12 million of gain on sale for 2025. Are you thinking, I guess, bigger picture, what are you thinking for the trajectory there? Is that something that I could double in 2026? Could it go even higher than that? What are your thoughts there?

Yeah, Dave. This is Walt again. I’ll start, and then B.J., you want to add in too 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 did see a slowdown in our Live Oak Express origination in the back half of 2024 after the SBA SOP changes in June. We had to essentially reset kind of our expectations to make sure that we rebuilt that pipeline with the borrowers or rebuilt 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’ll be something less than that. I’ll let B.J. talk and add in if he has any comments.

Yeah. I think at cruise altitude, I think our aspirational goals are $1 billion a year of production at cruise altitude. 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 loans, that our average loan size was more in the $1.2-$1.3 million-dollar 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 co-developing 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 a billion a year.

David Feaster, Analyst, Raymond James: All right. Great. Thanks, guys.

Conference Operator, Moderator: Thank you. Your next question is from Tim Switzer from KBW. Your line is now open.

Michael Cairns, Credit Executive, Live Oak Bancshares: Hey, good morning. Thanks for taking my questions. My first one is kind of a follow-up on this discussion around Live Oak Express, and we’re more than six months now into these 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, 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’ve started to see that. We’ve started to see some lenders back away. First, the non-bank 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 7A 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 choosier 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’ll be quite substantial and a huge part of what we do on the SBA side for years to come.

Interesting. That was a great color. Thank you. I was also wondering, on the flip side of this, since everyone has now 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 size 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 it 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 multi-pronged 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 three to five 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 an AI-native bank.

Got it. That was great. Thank you. If I ask 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 we should 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? Can it moderate a little bit further, or is this kind of where it’s going to stay?

I’ll start. Hey, Tim, as well, I’ll jump in too, and then Michael can add on. I think if you think about stabilizing credit trends, I think one thing you have to remember with us with being a high-growth bank, that growth and CECL typically don’t get along real 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 three quarters is a really good view of kind of a stabilizing or kind of stabilizing portfolio with stabilizing credit trends, and that should give you kind of a broad view of what you can expect kind of going forward, assuming the same level of growth.

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

Yeah, that’s about right.

Got it. All right. Well, thank you.

Conference Operator, Moderator: Thank you. Your next question is from Billy Young from TD Cowen. Your line is now open.

Billy Young, Analyst, TD Cowen: Hey, good morning, guys. How are you?

Michael Cairns, Credit Executive, Live Oak Bancshares: Morning, Billy.

Billy Young, Analyst, 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 two, given the increased growth in NII?

Yeah, so I’ll start there, Billy. Yeah, I think we’ve been able to get to about 4% of our non-interest-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. Again, that’s not going to happen next year. I think we saw 2% of non-interest-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.

Thank you. 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 held-for-sale loans this quarter? And then also, did you use this opportunity to maybe portfolio some more of the production in 4Q?

Yeah, I’ll jump in on that, Billy. The benefit for NII of about $60 million of HFS, given our spreads and our margins, is likely in the, call it, $1.8-$2.5 million-dollar range.

Michael Cairns, Credit Executive, Live Oak Bancshares: Very good.

A year. Sorry. Yeah, that’s correct. So divide that by four, that kind of gives you so it’s not overly material for Q4 itself. As far as portfolioing, I don’t think that’s what we’ll likely do. I mean, I’ve always kind of aspired to get to the point where we’re building a kind of what we used to call a treasure, but essentially, it’s a portfolio of held-for-sale guaranteed loans that we can sell at any 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 loans that we originate in Q1 to then kind of give us a head start into Q2 and so forth.

Billy Young, Analyst, TD Cowen: Got it. Thank you for taking my questions.

Sure. Thanks, Billy.

Conference Operator, Moderator: Thank you. 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.