Earnings Call Transcript - LOB Q4 2025

Operator, Operator

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. I would like to turn the conference call over to Gregory Seward, Live Oak's General Counsel. Please go ahead.

Gregory Seward, General Counsel

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 investorliveoakbank. You can 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 in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials. I will now turn the call over to our President, Vijay Moesch.

Vijay Moesch, President

Great. Thanks, Greg. Good morning, everybody. Thanks for joining us. Let's get started on slide four. 2025 was quite an interesting year. Here at Live Oak, I'm 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 outside venture gains from our ventures portfolio. 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 PPNR growth, 17% revenue growth, and 13% tangible book value growth, in addition to accelerating our momentum in our key growth initiatives of Live Oak Express and checking. I'm particularly proud of this 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. As proud as I am of those production results, what matters most is how you translate that into profitable operating leverage. You can see on slide seven that those results are simply outstanding. With adjusted PPNR 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 ten years relative to all other SBA lenders. While default rates had moved higher over the last two years, as PPP and stimulus tailwinds have burned off, and rates rose rapidly, Live Oak's performance has consistently been well ahead of peers. Thankfully, we know small businesses and are great credit managers. 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. In just 24 months, our teams have made significant gains in winning customer checking relationships and serving more small business borrowers. At the end of 2024, only roughly 6% of our customers had both a loan and deposit relationship with us. Today, that percentage is 22%. And we've got a lot more runway to travel. On the small dollar 7(a) front, what we call Live Oak Express, production is ramping up meaningfully and will continue to do so. These loans are also very desirable on the secondary market, 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?

Walt Phifer, CFO

Thanks, Vijay. Good morning, everyone. As outlined on Page 11, we had an outstanding end to our 2025 campaign. Q4 produced $44 million of net income and $0.95 of earnings per share, both of which were approximately three times 2024. Our strong performance was aided by excellent growth in core profitability trends, as seen in both our reported and adjusted PPNR improvement year over year. Generally improving credit trends and our fourth consecutive quarter of lower to stable provision expense and $28 million of net gains in our ventures investment portfolio, primarily driven by the $24 million gain from the Aperture 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 initiatives of growing business checking and originating Live Oak Express loans. Business checking balances of $377 million doubled year over year, materially benefiting our interest expense line, while Live Oak Express contributed $12 million towards our gain on sale totals in 2025. 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. We continue to be very excited about our operating leverage trends highlighted on slide 13 as was BJ's. Q4's adjusted PPNR of $64 million as detailed in Slide 28 is 21% higher than 2024, while our adjusted EPS has doubled over the same time period. That doesn't tell the full story. 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 billion 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. Both small business and commercial lending teams delivered double-digit year over year balance sheet growth rates. Slide 15 illustrates our loan and deposit balance growth, highlighting the strong, consistent trends on both fronts. Our total loan portfolio grew approximately 4% linked quarter with year over year loan balances increasing approximately 17%. That's just outstanding durable growth. Q4 customer deposit growth was slightly down linked quarter, as was expected due to typical Q4 seasonality. Yet our year over year customer deposit growth rate was 18%, which is fantastic growth in a very competitive market. As I mentioned earlier, we continue to be very excited about the momentum we are seeing in business checking, as highlighted on page 16. We saw our fourth consecutive quarter of growth with checking balances increasing 4% linked quarter to $377 million and are highly encouraged by our progress in deepening customer relationships. As BJ noted, 22% of our customers now have both a loan and a deposit account with us. Our total low-cost deposits and 37% of new loan customers also opened a checking account in Q4, including non-interest-bearing checking balances, low-cost collateral construction, and loan reserve accounts, now totals approximately 4% of our total deposit base, a twofold increase year over year, and tremendously accretive to our earnings profile. Our net interest income and margin trends are detailed on slide 17. In 2025, we saw our quarterly net interest income increase by $8 million or 7% linked quarter. And $26 million or 26% compared to 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. As in the past, when we have seen large Fed moves downward of 50 basis points in the quarter, we will see near-term compression as our deposit pricing and strong volume catch up. 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 2026. Any fewer cuts or later cuts in the year will provide an earnings opportunity for the bank. Moving to guaranteed loan sale trends on Slide 18, the gain on sale was intentionally down this quarter as our large investment gains provided loan sale flexibility. Essentially allowing us to delay sales into a future quarter while increasing our loans held for sale by approximately $60 million quarter over quarter to maximize net interest income for a few additional months. This is a similar tactic that we have deployed in the past when we have large investment gains. Looking back to 2025, we are more than pleased with the momentum that we are seeing in our Live Oak Express product and the immediate impact it has had on our providing for a meaningful 20% of our gain on sale for $12 million, a twofold increase compared to 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 employee experiences, 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 thirty days past due remained low for the fifth consecutive quarter with $10 million or nine basis points of our held for investment loan portfolio past due as of December 31. 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 linked quarter increase here was primarily driven by SBA credit, and it's consistent with the broader SBA industry trends, which LIBOR continues to outperform. Our reserve levels declined modestly in line with the improving trends in past dues, classified assets, and net charge offs. Altogether, improvements across these metrics show that the uptick in 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 linked quarter. A few thoughts on the forward outlook. We are very optimistic about the opportunity in front of us in 2026 and beyond. On the revenue front, we generally see a stable or low rate environment coupled with continued strong loan growth as a favorable backdrop for our bank's growth, margin, and credit outlook. Our two strategic initiatives in business checking and Live Oak Express align nicely with plenty of runway to continue to drive deeper relationships, increased fee revenue, and lower funding cost. 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 provide across the bank are enticing and will enhance our customer service and efficiency with active efforts ongoing. Above all else, we have an amazing culture, team, and brand here at Live Oak Bank that is irrevocable. With that being said, thank you again for joining this morning. Vijay, back to you for closing comments before we hit the queue for Q&A.

Vijay Moesch, President

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

Operator, Operator

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any key. 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.

Crispin Love, Analyst

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 that there's likely some lag, also deposit costs, 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 NI, but if you just flesh that out a little bit, that'd be great.

Walt Phifer, CFO

Yeah. Hey, Chris. Thanks for the question. I think you hit the nail on the head with 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 adjust 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 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 the upward movement on that interest income. Largely, the speed of that flow on the upward movement will depend on your outlook for fed cuts or the forward curve you're looking at. A good proxy for what Q1 could look like in terms of NIM is back in '24, when we had 50 basis points of Fed compression right at the end of September and you can see kind of the quarter over quarter change, which was impacted.

Crispin Love, Analyst

Okay. Great. Helpful color there. And then just on gain on sale income, down materially in the fourth, not a major surprise at least directionally due to the shutdown. You mentioned the aperture gain drove some of that decision to hold more loans. I think you typically sell more in the back half of quarters. Is that changing in the first quarter because of the shutdown? Have you been active selling in early twenty twenty six? 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 2025? I would expect that it would be kind of higher than that just when you look at the fourth, but I just want to check to see what you're thinking there.

Walt Phifer, CFO

Yeah. Thanks, Chris. It's Walt again. The government shutdown really did not impact us much in Q4. I think we saw a little bit of a timing delay in certain loans, but you saw that strong SBA production in the quarter. We were able to get, you know, all our loans that we talked about in the last earnings call 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 in January versus February or March. I think it'll still be more typical toward the mid to back end of the quarter. Historically, Q1 is typically our lowest quarter of the year. I know 2025 was a little different due to fintech gains, but I would expect our Q1 to be more in line with what was seen in 2025. That's when we start our upward trend in gain on sale.

Crispin Love, Analyst

Alright. So if I'm looking at Q1 twenty-five, even if there was a little bit of lag there, it could be below that Q3 level.

Walt Phifer, CFO

I think it'll be closer to what you're seeing in 2025. Yeah. So our 2026 will align more with what you see in Q1 twenty twenty-five.

David Feaster, Analyst

Good morning, everybody.

Walt Phifer, CFO

Hey, David.

David Feaster, Analyst

I wanted to not to beat a dead horse on the margin outlook, but I just wanted to maybe get some thoughts on the trajectory. I appreciate the commentary on the first quarter. You've got three cuts embedded in your guidance. Obviously, there's just going to be a lot of moving parts. You got the tailwinds from deposit repricing in the prior cuts, the headwinds on the assets repricing lower on the rate-sensitive stuff. I 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 with the tailwind from the prior cuts, we can actually see some expansion, and can you just think through that trajectory over the course of the year?

Walt Phifer, CFO

I think, you know, David, this is Walt again. What we think about is not only what the Fed cuts are going to do, it's also the timing and severity of those cuts. Stable environments work really well for us. In 2024, we saw compression to begin with, then with a stable environment, we experienced nice NIM expansion throughout the year. Assuming we see 25 basis points of Fed cuts this year, that should allow our deposit pricing to catch up relatively quickly. We expect a step down here in Q1, and after that, we can start seeing the upward trajectory or NIM expansion as we move through the year. It’s going to be driven by continued growth.

David Feaster, Analyst

Terrific. That's helpful. Also, on the expense side, you alluded to some of the things. Just hopeful you could provide some puts and takes on expenses. You have 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 as you know you've really been focused on expense management.

Walt Phifer, CFO

David, this is Walter again. Thanks. Great question. We're really trying to ensure we balance both revenue and expense growth. As BJ mentioned and I mentioned, we’ve done a really good job of that, especially over the last few years. In terms of where we're investing, our two strategic priorities are both business checking and Live Oak Express, which are heavy focal points. The areas with AI and application across our operational areas of the bank, and our loan origination platform are truly exciting. Typically, we expect moderate growth rates for expenses, likely in the single digits year over year, as we think through making sure that we're channeling our money strategically into the right places.

David Feaster, Analyst

Okay. That's helpful. And then just quickly touching on credit. There are mixed trends there. Just wanted to get your color on what you are 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 have more pressure? What drove the increase in nonaccruals? And how do you think about credit trends in the near term? Any color on the classified assets trends specifically would be helpful as well.

Michael Cairns, CRO

Good morning. Michael Cairns here. I'm happy to talk about credit a little bit here. From my perspective, this quarter was relatively uneventful and stable compared to last quarter. The past dues are low, and to your point about classified loans, they're flat to slightly improving over the quarter. Nonaccrual loans exist within our classified loan portfolio, and when we identify them as potential problem loans, we assess reserve levels. We're seeing that in the nonaccrual balances, but not a spike in reserve or provision expense since we've already assessed the potential losses for those loans. In 2025, while there were higher industry defaults, Live Oak performed significantly better than the industry. We have maintained our credit culture and standards, and our lending staff has done an excellent job finding loan growth without sacrificing credit quality, which has positioned us favorably compared to the industry and will yield benefits in the future.

David Feaster, Analyst

That's great color. Thanks.

David, Analyst

Hey. Good morning, guys.

Walt Phifer, CFO

Good morning, Dave.

David, Analyst

Walt, I just want to go back to your comments on the margin. You mentioned down similar to that trend in 4Q '24, I believe. It looked like that was down about 18 basis points that quarter. So I just wanted to clarify that was sort of the magnitude you were considering. On slide 17, you guys included a newer line in that other loan income was about six basis points on the margin for the quarter. I was just wondering what that was exactly, and is that something that going to reverse as that rolls off, or does that stay in the margin? I’m trying to figure out if that's incremental to what you saw in terms of the trend in Q4 2024.

Walt Phifer, CFO

Sure. Hey, Dave. This is Walt. On the other loan income, that line was inflated more than we typically see in any given quarter. This relates to a few large solar and senior housing loans that paid off and had pretty high prepayment penalties. So we don’t expect that run rate moving forward, especially not to that degree. When you think about the trajectory back in Q4, after the 50 basis points of cuts, I think that's reasonable in the range you noted. One thing helping us this year is that we got ahead of the variable loan portfolio repricing on January 1, with some deposit rate reductions at the end of Q4. And we're also working to reduce pricing again in Q1. We're taking steps to mitigate that. The pipeline has not slowed down at all; we expect a strong Q1 for growth, which will hopefully help manage the NIM compression.

David, Analyst

Great. Appreciate that. On expenses, just to confirm, were you saying mid-single digit growth for expenses next year?

Walt Phifer, CFO

Correct. Slower than what we saw this year.

David, Analyst

Okay. Great. And then on Live Oak Express, you had good detail on the $12 million of gain on sale for 2025. Are you thinking, bigger picture, what trajectory there? Is that something that could double in '26? Could it go even higher than that? What are your thoughts?

Walt Phifer, CFO

Dave, this is Walt again. I'll start and then Vijay may have more to add. We're doing what we can to ensure we build the top of the funnel in that space. We did see a slowdown in our Live Oak Express origination back in 2024 due to the SBA SOP changes in June. We had to reset expectations to build that pipeline. Doubling is very aspirational, and it’ll be less than that. I'll let Vijay add his comments.

Vijay Moesch, President

I believe at cruise altitude, our aspirational goals are a billion dollars a year of production. That isn't next year, but over time. When we started down the road of building out a Live Oak Express product, it was by brute force. We never really focused on the small dollar loans. Our average loan size was more in the $1.2-1.3 million range. Now we are intentionally building capabilities to fill the top of the funnel. We’re developing a next-generation loan origination platform that will make it simpler and faster for our people to serve our customers and get to decisions quickly. We have engaged outside expertise in our marketing group that are experts in performance marketing to better target customers searching for loans through Live Oak Express. We’re ensuring that our lenders can find more avenues for referrals and including that in their incentives for growth.

Tim, Analyst

Hey. Good morning. Thanks for taking my questions. My first one is kind of a follow-up on this discussion on Live Oak Express. We're more than six months now into these SOP changes regarding the smaller dollar loans. Can you characterize the impact that has had on your competitors? Has that made it a little easier for you to win some market share in the smaller dollar space? Has that impacted pricing, yields? Anything like that?

Vijay Moesch, President

On that, I don't think we've seen any impact on pricing or yields yet. As for other lenders, we've noticed some back away, particularly non-bank lenders facing significant credit pressures. We’re starting to see bank lenders being more selective, which is sensible. A healthy SBA 7(a) industry is crucial. We've always been intentional with our small dollar lending products and do not chase high-end pricing; we want businesses to succeed. So, yes, our total addressable market on the smaller side may reduce as we are more selective. However, we are making it easy for customers to engage with us, targeting those who want to do business with us, using the full power of our brand and our team.

Tim, Analyst

That was great color. Thank you. I was also wondering, on the flip side, since everyone is not required to do essentially full underwriting, are you seeing some competitors move back to Live Oak's more traditional loan size?

Vijay Moesch, President

Not necessarily. We haven’t detected much movement from that perspective.

Tim, Analyst

Okay. And I was looking for an update on the opportunities and internal development regarding AI that you mentioned in previous calls. What are the tangible use cases you're exploring? What benefits can you provide, whether that’s internal efficiency or creating a better customer experience?

Vijay Moesch, President

Sure. I'll give a brief update. Starting with our technology and operations teams, all our developers are using cursor next-generation AI-based software. This pivot was made quickly, which is beneficial. We’re introducing AI through tools like Copilot, and we’re putting our information into proprietary large language models that can be queried for insights related to our customer base and business. We're taking a multifaceted approach on how we modernize operations. We’re going to major departments to understand pain points and improve efficiencies, some with better processes, others by eliminating manual processes and leveraging AI. We plan to have a dedicated team focused on how we create an AI-native bank over the next three to five years. You will see more use cases from us as we build out what being an AI-native bank means.

Tim, Analyst

That was great. If I get one more question, it's kind of a follow-up on the credit discussion. I think Michael mentioned we are not seeing spikes in provision expense. What should we expect for provision going forward if credit continues to gradually improve over the course of the year? Should it normalize, moderate further, or is this where it's going to stay?

Walt Phifer, CFO

I'll start. Hey, Tim. It's Walt. I'll jump in, and then Michael can add on. It's essential to recognize, being a high-growth bank, growth impacts CECL, so that will drive our provision expense along with portfolio trends. However, what you've seen in the last three quarters indicates stabilizing trends, and that should provide guidance on what to expect going forward, assuming similar growth levels.

Billy Young, Analyst

Good morning, guys. How are you?

Walt Phifer, CFO

Morning, Billy.

Billy Young, Analyst

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

Walt Phifer, CFO

Yes, I'll start there, Billy. We have reached about 4% of our non-interest-bearing deposits as I mentioned earlier. Our aspirational goal is to get toward 15% of our deposit base over time. That's not going to happen next year, but I think we have seen a growth trajectory from 2% a year ago to 4% this year. This trajectory makes sense as we move into 2026.

Billy Young, Analyst

Got it. Thank you. That's helpful. A couple of housekeeping items on your decision to hold on to more of your gain on sale loans. Did you size up how much the benefit was to the margin from holding onto the higher-held-for-sale loans this quarter? And then, did you use this opportunity to portfolio more production in Q4?

Walt Phifer, CFO

Yeah, Billy. The benefit for NII of about $60 million of HFS, given our spreads and margins, is likely in the range of about $1.8 to $2.5 million per quarter. So, not overly material for Q4 itself. As for portfoling, I don’t think that's what we will likely do. I aspire to see us build any kind of treasure chest, but essentially a portfolio of loans held for sale that we can monetize. This gives us momentum into Q1, so we’ll likely monetize the additional $60 million here in Q1, which provides flexibility for reloads we originate in Q1.

Operator, Operator

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 closing remarks.

Chip Mahan, Chairman and CEO

See you next quarter. Thanks.

Operator, Operator

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