Q1 2026 Live Oak Bancshares Inc Earnings Call

April 23, 2026

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, 23 April 2026. I would like to turn the conference over to General Counsel, Gregory Seward. Please go ahead, sir.

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, 23 April 2026. I would like to turn the conference over to General Counsel, Greg Seward. Please go ahead, sir.

Speaker #2: Following the presentation, we will conduct a question-and-answer session, and if at any time during this call you require immediate assistance, please press *0 for the operator.

Speaker #2: Also Please go ahead, 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.

Speaker #2: 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.

Gregory Seward: Thank you and good morning, everyone. Welcome to Live Oak's Q1 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.

Greg Seward: Thank you and good morning, everyone. Welcome to Live Oak's Q1 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.

Speaker #2: 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.

Walt Phifer: 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.

Greg Seward: 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.

Speaker #2: Factors that may cause acts or results of different materially from our expectations are detailed in the materials accompanying this call and in our SEC filings.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: I will now turn the call over to our Chairman and CEO, Chip Mahan.

Speaker #3: 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.

Chip Mahan: Good morning, everyone. Team Live Oak is excited to tell you about our performance for Q1. Things are a little bit different today. Our president, B.J. 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 Phifer, our CFO, for some numbers. All of us, including Michael Cairns, our chief credit officer, will be available for questions at the end. B.J., over to you.

Speaker #3: 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 Kearns, our chief credit officer, will be available for questions at the end.

Speaker #3: BJ, over to you.

Speaker #4: Great, thanks, Chip. Good morning, everybody. Thanks for joining us. Let's get started on slide four. Our plan to create more sustainable earnings momentum is really working.

BJ Losch: Great. Thanks, Chip. Good morning, everybody. Thanks for joining us. Let's get started on slide four. 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 five, you see the earnings momentum continues.

Speaker #4: As you can see in our earnings trends with reported EPS of $60 for the quarter, and even stronger performance than the core operations, our lending businesses continue to put up strong numbers.

Speaker #4: 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.

Speaker #4: 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 five, you see the earnings momentum continues.

Speaker #4: 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.

BJ Losch: 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 SBA program.

Speaker #4: And as you can see on slide five, those results are simply outstanding. With adjusted PP&R up 30% over this time last year, and adjusted EPS almost doubled from this time last year.

Speaker #4: On slide six, 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 two years, Live Oak's performance has been modestly improving despite a difficult backdrop for small businesses.

Speaker #4: 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 two key initiatives: checking and Live Oak Express, our small-dollar 7(a) program.

Speaker #4: 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.

BJ Losch: 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. Why is it 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.

Speaker #4: That sounds great, and it is, but why is it 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; and number two, they are both highly accretive to our earnings profile and will provide a long-term tailwind to our earnings.

Speaker #4: We started with virtually no non-interest-bearing accounts two 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 broker deposits to fund our growth.

Speaker #4: If you do the math on that cost of funds impact, it's meaningful. And we are at only at 4% of non-interest-bearing to total deposits.

BJ Losch: 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, and these smaller loans are highly desirable on the secondary market, with premiums in the 9% to 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: And as you can see on slide eight, 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.

Speaker #4: 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.

Speaker #4: And 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.

BJ Losch: 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?

Speaker #4: And with that, Walt, how about running through some of the financial highlights?

Speaker #2: 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, '51.

Walt Phifer: Thanks, B.J. 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 2023. 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 2023. Customer deposits grew 3% linked quarter and 13% year-over-year. As B.J.

Speaker #2: Approximately a 3x increase compared to prior year. And adjusted EPS was 70 cents, up 8% from Q4 and 94% from Q1 of last year.

Speaker #2: 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 PP&R of $60 million was 43% higher than Q1 of 2025.

Speaker #2: While adjusted PP&R 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.

Speaker #2: Customer deposits grew 3% late quarter and 13% year-over-year and, as BJ mentioned, we continue to be proud of the growth in our non-interest-bearing, checking balances.

Walt Phifer: 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, 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.

Speaker #2: Increasing 9% late 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.

Speaker #2: Expenses were well controlled, credit trends remained stable, and our key growth initiatives—checking and small-dollar SBA lending—continued to move in the right direction.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: 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.

Walt Phifer: 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.

Speaker #2: Loans ended the quarter at approximately $12.6 billion. Up 2% late quarter and 14% year-over-year. Our portfolio mix remained very consistent, with 64% of our loan book in our small business lending commercial lending segment.

Speaker #2: 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% late quarter, roughly in line with our loan growth.

Speaker #2: 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.

Walt Phifer: 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 base loans repricing on 1 January, 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.

Speaker #2: We view this level of paid downs as an outlier, and not as something that should persist in the same rate going forward. Our net interest income and margin trends are detailed on page 14.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: As detailed in the roll forward on the bottom right of the page, the late-quarter move was really a function of several offsetting items.

Walt Phifer: As detailed in 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 -$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.

Speaker #2: 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 and the extent of the compression would have been muted.

Speaker #2: Ultimately, I think our net interest income profile remains very healthy in year-over-year growth is strong. If the forward curve holds true, a flat interest rate environment should be a good bad backdrop for our net interest income and NIM profile in 2026.

Speaker #2: 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% late quarter, and in line with Q1 of 2025.

Walt Phifer: 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% to 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.

Speaker #2: As we guided in Q&A during our last earnings call, SBA premiums remained steady, and Live Oak continued 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 upwards trajectory throughout the year.

Speaker #2: We expect 2026 to be no different. The bottom line: gain on sale was up late quarter, in line with Q1 of last year as we guided.

Speaker #2: 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.

Speaker #2: 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 7 points better than Q1 of last year.

Walt Phifer: 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, 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%.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: Turning the credit on page 17, the key message on this page is that we view our credit trends as stable and a reserve position remains healthy.

Speaker #2: 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%.

Walt Phifer: 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 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.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: 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 five quarters, supports our portfolio stability sentiment.

Walt Phifer: 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. 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 sheets, as approximately 40% of our assets are in cash, government-guaranteed investments, or government-guaranteed loans.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: As highlighted on the left side of this page, we also continue to think the maintain ratio is a very helpful way to frame the strength of our differentiated balance sheets.

Speaker #2: 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 are maintain ratio, totaled 16.7% of unguaranteed loans and leases, strong capital coverage against a true risk on our balance sheet.

Walt Phifer: 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 continue to build. Credit and capital remain 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 B.J.

Speaker #2: 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.

Speaker #2: Thank you to the Live Oak team for another strong quarter, and with that, I'll turn it back over to BJ.

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

Speaker #1: 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. If you 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 Erik Spector at Cantor Fitzgerald. Please go ahead, Erik.

Speaker #3: Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by 1 on your touchdown phone.

Speaker #3: You will then hear a prompt that your hand has been raised. And she wished to decline from the polling process, please press star followed by 2.

Speaker #3: And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star 1 now if you have any questions.

Speaker #3: Thank you. First, we'll be Eric Spector at Cantor Fitzgerald. Please go ahead, Eric.

Erik Spector: Hey, good morning. This is Erik dialing in for Dave. Thank you for taking the questions.

Eric Spector: Hey, good morning. This is Erik dialing in for Dave. Thank you for taking the questions.

Speaker #4: Hey, good morning. This is Eric dialing in for Dave. Thank you for taking the questions.

Walt Phifer: Morning, Erik.

Erik Spector: 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 improvements.

Speaker #5: Morning, Eric.

Speaker #4: Maybe just starting off, 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?

Eric Spector: 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 improvements.

Speaker #4: And then just talk us through the dynamics of specifically how much is coming from growth, wider loan spreads, or funding mix improvement.

Walt Phifer: 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.

Speaker #5: Yeah, great question. Hey, Eric, this is Walt. So flat Fed environment helped stabilize our NIM and our net interest income, and ultimately benefits our profile.

Speaker #5: 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, and assuming those flat rates, we'd expect that margin to stabilize here in the near term, and then allows the loan growth levels to influence the level of expansion as the year progresses.

Speaker #5: If you think through the different factors, I think with the 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.

Speaker #5: The deposit market is competitive. That's an area that we spend quite a bit of time monitoring and making sure that our flows make sense and are supporting our growth.

Walt Phifer: 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. Then 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 that impact would be.

Speaker #5: But we feel really good about our positioning in that space as well. And then from a growth perspective, I think the vast majority of any expansion kind of moving forward will be highly growth-driven.

Speaker #5: And if you've kind of followed our story, which I know you have, over your career, growth for us is pretty impactful from a market standpoint.

Speaker #5: So 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 that impact would be.

Erik Spector: 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.

Eric Spector: 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.

Speaker #1: 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 in diversified.

Speaker #1: 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?

Speaker #1: And then maybe help us think through the cadence of growth throughout the year.

Walt Phifer: Yes. I'll start again, Eric Spector, this is Walt Pfeiffer. From a pipeline standpoint, our pipeline today is about $4.5 billion. Typically, with that, it equates to 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, kind of in the near term. Some things will push to the right, some things will kind of come into 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. I wouldn't move off of that.

Speaker #5: Yeah, so I'll start again, Eric, this is Walt. So from a pipeline standpoint, our pipeline today is about four and a half billion dollars.

Speaker #5: Typically, what that equates to 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, kind of in here in the near term.

Speaker #5: Some things will push to the right, some things will kind of 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.

Speaker #5: I still think that holds true. Just give them kind of what we're seeing in the pipeline and how those loans are coming through. So I wouldn't move off of that.

Erik Spector: 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?

Eric Spector: 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?

Speaker #1: 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.

Speaker #1: Can you talk us through about the progress you expect over the next few quarters and talk about where you're driving success? Yeah, I'll start.

Walt Phifer: Yeah, I'll start.

BJ Losch: Yeah, I'll-

Walt Phifer: Eric, again. Oh, go ahead, BJ. You go ahead. You start.

Speaker #5: I'm good, BJ. You go ahead. You start.

BJ Losch: Yeah, 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 four and a half years ago, only 3% of our customers had a loan and deposit account. Today, that's 23%. Over the last two 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 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.

Speaker #1: Yeah, 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 four and a half years ago, only 3% of our customers had a loan and deposit account.

Speaker #1: Today, that's 23%. And over the last two years, we've been anchoring that with checking accounts. And now, when we open a loan account, one out of every three of those has a checking account.

Speaker #1: 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.

BJ Losch: 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+% 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% to 25%.

Speaker #1: 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.

Speaker #1: So over the next three 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.

Speaker #1: 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.

Speaker #1: The industry is at 20 to 25 percent. 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.

BJ Losch: 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.

Erik Spector: Great. That's helpful color. I'll step back. Thanks for taking the questions and congrats on a good quarter.

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

Speaker #5: Great. That's helpful color. I'll step back. Thanks for taking the questions and congrats on a good quarter.

Walt Phifer: Thanks, Erik.

Speaker #4: 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 Timothy Switzer at KBW. Please go ahead, Tim.

Speaker #2: Next question will be from Janet Lee at TD Cowan. Please go ahead, Janet. Janet, can you please unmute your line? Getting no response. We will move to Tim Switzer at KBW.

Speaker #2: Please go ahead, Tim.

Timothy Switzer: Hey, good morning. Thanks for taking my questions.

Tim Switzer: Hey, good morning. Thanks for taking my questions.

Speaker #6: Hey, good morning. Thanks for taking my question.

Walt Phifer: Morning, Tim.

Speaker #4: Good morning, Tim.

Timothy Switzer: 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, but was there any hold back 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. I'm just trying to get an idea of what the pace of loan selling could look like over the rest of 2026.

Tim Switzer: 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, but was there any hold back 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. I'm just trying to get an idea of what the pace of loan selling could look like over the rest of 2026.

Speaker #6: 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, but was there any holdback at all this quarter?

Speaker #6: 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 '26.

Walt Phifer: 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, call it a week and a half to 2 weeks of the quarter. Typically, anything that comes through at that point in time, you can't sell and settle within the current quarter, so 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 of the loan volume. As far as trajectory, I mentioned it in my prepared remarks. We've shown this kind of over the years, where Q1 is our lowest, and then we have a slight stair step into Q2, Q3, and Q4 and so forth. Then you kind of normalize back again in Q1, and then you kind of start that stair step again.

Speaker #4: Sure. Great question. Hey, 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, a week and a half to two weeks of the quarter.

Speaker #4: So typically, anything that comes through at that point in time, you can't sell and settle within the current quarter, so that gives you a nice head start going into the next quarter.

Speaker #4: 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 Q1s are lowest and then we have a slight stair step, kind of Q2 and Q3 and Q4 and so forth.

Speaker #4: But then kind of you've 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 prior years, and that'll give you kind of a sense of what that stair step could look like.

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

Timothy Switzer: Okay, interesting. Any color you can provide on what drove the 1% increase in the gain on sale premium?

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

Speaker #6: Okay. Interesting. And any color you can provide on what drove the 1% increase in the gain on sale premium?

Walt Phifer: 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 B.J. mentioned, Live Oak Express gets 9% to 13% premiums. That helps. USDA loans, the guarantee 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% to 107% range from a premium standpoint as we've averaged over the last, call it five quarters, I would maintain that going forward.

Speaker #4: 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.

Speaker #4: So as BJ mentioned, Live Oak Express gets 9 to 13 percent premiums. That helps USDA loans. I have the guaranteed portion we were able to sell quite a few more of those loans again in Q1.

Speaker #4: 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.

Speaker #4: But broadly, I think that 106 to 107 percent range from a premium standpoint as we've averaged over the last qualified quarters I would maintain that going forward.

Timothy Switzer: 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 this?

Tim Switzer: 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 this?

Speaker #6: Okay. Got it. And then the last one for me real quick on I mean, I guess basically just how is Live Oak Express been trending towards your expectations?

Speaker #6: You guys talked about the 750 million dollar annual target. I think previously you guys have mentioned a billion dollars is kind of an aspirational goal.

Speaker #6: Has that changed or is it more just like a timeline on when you'll achieve these?

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

Speaker #5: I think we're just being conservative, Tim. I do expect to go past the 750 million dollar production. In annual LOE.

Timothy Switzer: Got it. You guys are kind of seeing the demand that you were expecting so far?

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

Speaker #6: Do you think you guys are kind of seeing the demand that you were expecting so far?

BJ Losch: 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 the slide as well, we are now in pilot with an AI-native loan origination platform, which is huge.

Speaker #5: Yes, for sure. So 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 they the rules had been before.

Speaker #5: 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.

Speaker #5: 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.

Speaker #5: And as you'll see on the 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.

BJ Losch: 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.

Speaker #5: 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 dollars and below.

Speaker #5: And so I think that that number is going to re-accelerate sooner rather than later.

Timothy Switzer: Great. That's good to hear. Thanks for all the color.

Tim Switzer: Great. That's good to hear. Thanks for all the color.

Speaker #6: Great. That's good to hear. Thanks for all the the color.

Michael J. Cairns: Thanks, Tim.

Walt Phifer: Thanks, Tim.

Speaker #4: 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.

Speaker #2: Ladies and gentlemen, a reminder to please press star one if you have any questions. Thank you. Next, we will hear from David Fiester at Raymond James.

Speaker #2: Please go ahead, David.

David Feaster: Hey, good morning, everybody.

Speaker #7: Hey, good morning, everybody.

Michael J. Cairns: Good morning, Dave.

Michael Cairns: Good morning, Dave.

Speaker #4: Good morning, David.

David Feaster: 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? 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.

Speaker #7: 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.

Speaker #7: Could you what verticals are those? How much in remaining balances do you have in those verticals? And kind of what led you to exit those?

Speaker #7: 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 J. Cairns: Yeah. Good morning. Michael J. 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 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. 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.

Michael Cairns: Yeah. Good morning. Michael J. 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 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. 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.

Speaker #4: Yeah. Good morning, Michael Kearns 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.

Speaker #4: We see things coming early. That's a big part of what my job and our credit team is focused on—working with the servicing team, working with the lenders that are out in those industries, and assessing what's going on.

Speaker #4: 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.

Speaker #4: And that's an ongoing process for us. The vertical, or a segment of a vertical, that we're really highlighting the increased small uptick in non-accrual 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.

Michael J. Cairns: A segment of a vertical that we're really highlighting, the small uptick in nonaccrual 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, but it's disproportionately impacting the nonaccrual percentage this quarter. 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 in 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 nonaccrual as we're working through our workout strategy.

Michael Cairns: A segment of a vertical that we're really highlighting, the small uptick in nonaccrual 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, but it's disproportionately impacting the nonaccrual percentage this quarter. 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 in 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 nonaccrual as we're working through our workout strategy.

Speaker #4: It's a really small segment of our balance sheet. But it's disproportionately impacting the non-accrual percentage this quarter. And that was the big mover this quarter.

Speaker #4: That's not a vertical that we decided to exit this quarter. We exited it some time ago. When we saw the issues there that primary driver being the consumer preference change in demand for whiskey and an oversupply in that product coming out of COVID, especially.

Speaker #4: And so 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 in our servicing team.

Michael J. Cairns: 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.

Michael Cairns: 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.

Speaker #4: 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 non-accruals as a whole, when you think about that, I do I won't highlighted this a little bit.

Speaker #4: Those loans are individually assessed by our special asset team and our credit team on an ongoing basis. So once you're a classified or a non-accrual, we're pegging a potential loss there.

Speaker #4: And that's built into our reserve coverage. So 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 covers a pretty good indication of how we feel.

Michael J. Cairns: 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, and I feel good, and I feel like our portfolio is very stable at this point.

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

Speaker #4: And I feel good and I feel like our portfolio is very stable at this point.

David Feaster: 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.

Speaker #8: 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.

Speaker #8: 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?

Speaker #8: 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.

BJ Losch: Hey, David, it's B.J. 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 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.

Speaker #7: Hey, David, it's BJ. So obviously, our biggest platform is lending. And so a year and a half ago, we started on this journey to get on an AI-native platform because we saw the future coming.

Speaker #7: 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.

Speaker #7: 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.

Speaker #7: 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.

BJ Losch: 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, 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.

Speaker #7: 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.

Speaker #7: 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.

Speaker #7: Because they're curious. So, starting with a bottoms-up approach to make it accessible to people, and not just some scary thing that's out there, I think has been a big deal.

Speaker #7: 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.

Speaker #7: We are going to have that in our operations. But with that said, I think frankly, over time, everybody's going to do that. And so our end goal is not just to be AI-native.

BJ Losch: 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.

Speaker #7: 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.

Speaker #7: 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.

Speaker #7: 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.

David Feaster: 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?

Speaker #8: 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.

Speaker #8: 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.

Speaker #8: Live Oak Express does 750 million plus in production. Growth remains in that mid low to mid-teens pace. really materialize. How do you think about the profitability profile of Live Oak as this all starts to hitchdrive?

BJ Losch: 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 2 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.

Speaker #7: 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.

Speaker #7: 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.

Speaker #7: And so 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.

Speaker #7: So I'm pretty excited about our ability to do that. And hitting a 15% return is one thing. Having a 15% earnings growth in one year is one thing.

Speaker #7: 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.

BJ Losch: 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. 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. I think Live Oak is better positioned than we have been in years to generate top-tier returns.

Speaker #7: 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.

Speaker #7: 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.

David Feaster: That's pretty exciting. Thanks, everybody.

Speaker #8: That's pretty exciting. Thanks, everybody.

BJ Losch: Thanks, David.

Michael J. Cairns: Thanks, David.

Michael Cairns: Thanks, David.

Speaker #6: Thanks, David.

Speaker #7: Thanks, David.

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

Speaker #3: Next question will be from Janet Lee at TT Cowan. Please go ahead, Janet.

Janet Lee: Good morning.

Speaker #9: Good morning.

Michael J. Cairns: Morning, Janet.

Michael Cairns: Morning, Janet.

Speaker #6: Good morning, Jen.

Janet Lee: 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 because of the macro uncertainty that we're in? Are you seeing a little bit more pressure, if at all?

Speaker #9: 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?

Speaker #9: It looks like you're pointing to some improving and stable small business default trends. The non-guaranteed MPAs uptick a little bit, maybe some looks like a lot of that is driven by the verticals that you exited.

Speaker #9: So where do you think we are in the processes of getting better or because of the macro uncertainty that we're in? Are you seeing a little bit more pressure, if at all?

Michael J. Cairns: 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 in record low interest rates and then experiencing really high interest rates. 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.

Michael Cairns: 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 in record low interest rates and then experiencing really high interest rates. 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.

Speaker #6: Yeah, 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.

Speaker #6: 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.

Speaker #6: 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.

Speaker #6: 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.

Speaker #6: 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.

Michael J. Cairns: 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, and 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, 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.

Michael Cairns: 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, and 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, 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.

Speaker #6: And so we've gotten past that interest rate risk that was part of a big component of the cycle. And the economic uncertainty out there every morning you wake up and there's a different headline.

Speaker #6: And we're talking about that. And so 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.

Speaker #6: 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.

Speaker #6: But 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. So it'll be an indirect impact to all of our businesses.

Walt Phifer: 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 and credit team do. I'm watching it closely. We're talking about it a lot, but right now I feel pretty good about where we sit for this portfolio.

Michael Cairns: 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 and credit team do. I'm watching it closely. We're talking about it a lot, but right now I feel pretty good about where we sit for this portfolio.

Speaker #6: 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 and credit team do.

Speaker #6: So I'm watching it closely. We're talking about it a lot. But right now, I feel pretty good about where we sit with this portfolio.

Chip Mahan: 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.

Speaker #7: And Michael, you'll remember if you look at slide six, 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 dollars.

Speaker #7: 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.

Janet Lee: Got it. Thanks for all the color. For Q1, 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?

Speaker #3: Got it. Thanks for all the color. And for the first quarter, expenses came in, I think, much better than what the street was despite some typical seasonal headwinds.

Speaker #3: 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?

Speaker #3: How should we think about that aspect?

Walt Phifer: 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 helped bring that down here in Q1. If they average over the last, call it five quarters or so, it's been just above $85 million. That's in line with what you see here in Q1 as well. That's a good run rate moving forward for us, with maybe slight upticks here and there as we think about potential areas where we can invest. How I think about that, 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.

Speaker #6: Yeah, hi, Jen. 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 helped bring that down here in Q1.

Speaker #6: But if the average over the last, call it, five quarters or so, it's been just above 85 million dollars. That's kind of in line with what you see here in Q1 as well.

Speaker #6: 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, is there's always a balance, right?

Speaker #6: We are an innovative company that's high the 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.

Walt Phifer: Really the way we evaluate potential investment in that space is what can we do to accelerate that? Because as BJ Losch 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 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 trend down into the call it low to mid-50s.

Speaker #6: And really, when 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 two initiatives specifically can drive.

Speaker #6: So those are things that we think about when, kind of, as you invest in that space, there's always opportunities to get it more efficient in other spaces.

Speaker #6: And that's where AI comes into play. So largely through 2026, I think that balances out. I think you kind of stay where you're at now, plus or minus.

Speaker #6: On a quarterly basis, through the rest of the year, that'll help with that, coupled with revenue growth. We'll see our efficiency ratio kind of trade down into 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.

Walt Phifer: Like I mentioned in my prepared remarks, that's exactly the trend that we really have been positioning ourselves to achieve and hopefully continue that trend past 2026 and outperform as we get into 2027 and beyond.

Speaker #6: And outperform as we're getting to 2027 and beyond.

Janet Lee: Got it. Thank you.

Speaker #3: Got it. Thank you.

Walt Phifer: Thanks, Janet.

Speaker #6: Thanks, Jen.

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

Speaker #1: And 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: That's a wrap, guys. We enjoyed it. See you next quarter.

Speaker #6: 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 day.

Speaker #1: 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.

Q1 2026 Live Oak Bancshares Inc Earnings Call

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