Live Oak Bancshares, Inc. Q4 FY2025 earnings call

• Navigated macro uncertainty throughout 2025, including Fed rate decreases. Loan portfolio showed credit stabilization. - Achieved record loan production, 17% loan growth, 27% core PPNR growth, 17% revenue growth, and 13% tangible book value growth. - Accelerated momentum in key growth initiatives like Live Oak Express and checking. - Credit trends relative to SBA lenders showed Live Oak's performance well ahead of peers despite recent default rate increases. - Extended customer product offerings with checking and small dollar SBA loan capabilities, with 22% of customers having both loan and deposit relationships now compared to 6% a year ago. - Q4 net income was $44 million, EPS was $0.95, both approximately three times 2024. Adjusted PPNR was $64 million, 21% higher than 2024, and adjusted EPS doubled over the same period.

In the fourth quarter, Live Oak had $44 million of net income and $0.95 of earnings per share. Loan production was strong with $1.6 billion in Q4, capping off a $6.2 billion year, representing 17% annual loan balance growth. Business checking balances were $377 million, doubling year over year. Live Oak Express contributed $12 million to gain on sale totals in 2025, accounting for 20% of gain on sale. Loan production showed 17% growth, core PPNR grew 27%, revenue was up 17%, and tangible book value grew 13%. Business checking balances contributed to benefiting the interest expense line, and Live Oak Express drove gain on sale growth.

• Expect three Fed cuts in March, June, and September 2026; less cuts or later cuts provide earnings opportunity. - Strategic initiatives of business checking and Live Oak Express have plenty of runway to drive deeper relationships, increased fee revenue, and lower funding cost. - Expense base refocused with investments on best opportunities to moderate growth rate while supporting strong revenue growth. - AI and tech innovation opportunities to enhance customer service and efficiency are being actively pursued.

• Macro uncertainty persisted throughout 2025, including factors like Doge, tariffs, and uncertain economy. - Credit trends had moved higher over the last two years as PPP and stimulus tailwinds burned off and rates rose, though Live Oak's performance remained ahead of peers. - Potential impact of Fed rate changes on net interest income and margin, including near-term compression as deposit pricing adjusts.

Q: Talk about NII and NIM dynamics into the first quarter, impact of last two cuts, loan yields lag, deposit costs, and NII/NIM in first quarter relative to fourth.

A: Anytime there's 50 basis points of Fed cuts in the quarter or following, variable quarterly adjust loan portfolio reprices on first business day, driving NIM and net interest income compression in near term. Deposit pricing adjustment and growth will push back to upward trajectory. Back in 2024, 50 basis points of Fed cuts in September showed quarter over quarter change.

Q: On gain on sale income, down materially in fourth due to shutdown, and activity in early 2026. How would gain on sale income trend in first quarter?

A: Government shutdown impacted slightly in Q4, but typical gain on sale sales occur in mid to back end of quarters. Q1 historically is lowest quarter, expected to be more in line with 2025, then start up into right stair step momentum on gain on sale line.

Q: Thoughts on margin trajectory with three cuts embedded, tailwinds from prior deposit repricing, headwinds on rate sensitive assets. How about margin trajectory over course of year?

A: Stable environments work well. Expect step down in Q1, then start seeing upward and right trajectory of NIM expansion through year, driven by growth. Focus on net interest income with double digit growth year over year possible despite margin variations.

Q: Expense management, core expense run rate, investments in Live Oak Express, embedded finance. Thoughts on expense growth?

A: Balancing revenue and expense growth, focusing on strategic priorities like business checking and Live Oak Express. Expense growth rate expected to moderate to mid single digits year over year, investing strategically in areas like AI and operational improvements.

Q: Credit trends, pressure points, increase in nonaccruals, classified assets trends. Color on near term credit trends.

A: Past dues remained low for fifth consecutive quarter. Nonaccrual loans increased due to SBA credit, consistent with industry trends. Classified loans flat to slightly improving. Reserve levels declined with improving past dues, classified assets, and net charge offs. Live Oak's credit culture and underwriting standards have set it up favorably to industry, with relief expected for borrowers as interest rate cuts happen in 2026.

Q: Follow-up on Live Oak Express, impact on competitors, pricing, yields, and internal AI development.

A: Competitors saw pressure on smaller dollar loans, Live Oak hasn't seen pricing/yield impact yet. Some competitors backed away, Live Oak is thoughtfully building the business. On AI, developers use cursor, introducing people to AI tools, modernizing departments with AI, and creating a team for AI native bank development.

Q: Update on provision expense if credit continues to improve. Should provision be stable or moderate further?

A: Stabilizing credit trends, growth and CECL need to be balanced. With stabilizing portfolio and credit trends, provision expense should stabilize around current levels assuming same growth rate.

Q: Business checking initiatives, funding mix outlook. Thoughts on funding mix over next year or two.

A: Noninterest bearing deposits grew to 4% of deposit base, with aspirational goal to reach 15% over time. Trajectory makes sense with current growth rate, aiming for increased noninterest bearing deposits to benefit funding mix.

Q: Benefit to margin/NII from holding more gain on sale loans, and portfolioing in 4Q.

A: Benefit to NII from $60 million of held for sale loans is in the 1.8 to $2.5 million range annually. Likely to monetize the additional $60 million in Q1 to provide flexibility for Q2 originations.