Live Oak Bancshares (NYSE:LOB) held its first-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

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The full earnings call is available at https://events.q4inc.com/attendee/379074534

Summary

Live Oak Bancshares reported a strong Q1 2026 with an EPS of $0.60, a significant improvement over the prior year, driven by an 18% increase in revenue and controlled expenses.

The company emphasized strategic initiatives such as ramping up small dollar SBA lending and checking accounts, both of which are seen as highly accretive to earnings and crucial for their goal to be 'America's Small Business bank.'

Loan production was robust, with $1.4 billion originated across 35 industries, and the pipeline is at an all-time high, supporting confidence in future growth.

Credit trends were stable, with a slight improvement in provision expenses, and a focus on maintaining strong credit quality.

The company is leveraging technology and AI to enhance operations and customer experience, aiming to be an AI-native bank to improve efficiency and service.

Management remains optimistic about achieving long-term profitability targets of 15% ROE and 15% EPS growth, citing strong momentum in key growth areas and disciplined expense management.

Full Transcript

Sam

Good morning. Good morning, ladies and gentlemen, 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 and if at any time during this call you require immediate assistance, please press star zero for the operator. Also note that this call is being recorded on Thursday, April 23, 2026 and I would like to turn the conference over to General Counsel, Greg Se. Please go ahead, sir.

Greg Se (General Counsel)

Thank you and good morning everyone. Welcome to Live Oak's first quarter 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 Live Oak Bank and go to the Events and Presentations tab for supporting materials. Our earnings release is also available on our website. Before we get started, I 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. Good morning everyone. Team Live Oak is excited to tell you about our performance for the first quarter. Things are a little bit different today. Our President, BJ Loesch is a bit under the weather and predictably he's dialing in remote. He'll start us off with a few overarching comments and we'll hand it over to Walt Pfeiffer, our CFO for some numbers and all of us, including Michael Carnes, our Chief Credit Officer, will be available for questions at the end. BJ, over to you.

BJ Loesch (President)

Great. Thanks Chip. Good morning everybody. Thanks for joining us. Let's get started on slide 4. Our plan to create more sustainable earnings momentum is really working as you can see in our earnings Trends. With reported EPS of $0.60 for the quarter and even stronger performance from the core operations, our lending businesses continue to put up strong numbers. Our credit trends are stable to improving. We're continuing to ramp up small dollar SBA lending and Checking which are having a meaningful impact on our results. With far more to come, 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 5, you see the earnings momentum continues. 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. And as you can see on slide 5, those results are simply outstanding with adjusted CP&R of 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. 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. 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 $7 a program. Both of these efforts launched in early 2024 and in just 24 months our teams have made significant gains in winning customer checking relationships and serving more small business borrowers. That sounds great and it is. But why is 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. 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. 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. 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. 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. And as you can see on slide 8, we sold 140 million of these so far. Our goal at cruising 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 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. And with that, Walt, how about running through some of the financial highlights?

Walt Pfeiffer (Chief Financial Officer)

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 to 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 2025 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. Customer deposits grew 3% last 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 increasing 9% last 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 the core earnings for 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. Our pipeline is 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% last 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. And as a reminder 30% of our loan book is government guarantees, a key differentiator of our balance sheet versus the industry. Customer deposits ended at approximately $9.9 billion and grew 3% last quarter, roughly in line with our loan growth. The reported loan growth rate was a little more muted than the underlying production would suggest. That was primarily a timing function of elevated payoff activity during the quarter related to some larger loans across three verticals and were largely anticipated. We view this level of pay downs as an outlier and not as something that should persist in the same 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 in margin to step down following the 50 basis points of prime based loans repricing on January 1, 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 7 basis points, illustrating strong recurring revenue growth and improved pricing discipline. 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 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 the compression would have been muted. Ultimately I think our net interest income profile remains very healthy and year over year growth is strong if the forward curve holds true. A flat interest rate environment should be a good backdrop for our net interest income and NIM profile in 2026. Moving over to guaranteed loan sale trends on page 15, from an absolute performance standpoint this was a good quarter. Gain on sale was up 25% last quarter and in line with Q1 of 2025 as we guided in Q and A during our last earnings call. SBA premiums remain steady and Live Oak Express continue 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 upward trajectory throughout the year, we expect 2026 to be no different. The bottom line gain on sale was up link quarter in line with Q1 of last year as we guided. 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. 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. 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 a reserve position remains healthy. As you see highlighted at the top of the page are unguaranteed allowance for credit losses to unguaranteed loans and leases held for investment ratio of 2.14%. 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 trans perspective, the over 30 day past due ratio improved to 4 basis points which is an excellent result and below our typical assume 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 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. However, all 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. We are of course monitoring macro developments closely, but sitting here today we feel good about the health of our portfolio, the low level of delinquencies and the reserve position we have built. Capital levels remain healthy and robust as shown on page 18 with quarter over quarter risk based capital ratios improving approximately 10 basis points while our Tier 1 leverage ratio remains stable as highlighted on the left side of this page. We also continue to think the main ratio is a very helpful way to frame the strength of our differentiated balance sheet as approximately 40% of our assets are in cash, government guaranteed investments or government guaranteed loans in Q1. Our tier 1 capital plus allowance for credit losses and fair value marks. Our main ratio totaled 16.7% of unguarantined loans, 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 per 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 and with that I'll turn it back over to bj.

Operator

Great. Thanks Walt. Let's go to the questions. Thank you sir. Ladies and gentlemen, if you do have any questions at this time, please press STAR followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised and should you wish to decline from the polling process. Please press Star followed by two 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 one now if you have any questions. Thank you. First will be Eric Spector at Cantor Fitzgerald. Please go ahead Eric.

Walt Pfeiffer (Chief Financial Officer)

Hey, good morning, this is Eric dialing in for Dave. Thank you for taking the questions. Maybe just starting off hey, good morning. Maybe just starting off on the Net Interest Margin (NIM) with the Fed on hold, could you walk us through the key drivers of what would allow Net Interest Margin (NIM) to kind of stabilize near term and then improve later in the year? And then just talk us through the dynamics of specifically how much is coming from growth, wider loan spreads or funding mix improvement? Yeah, great question here. This Walt. So 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. So put that in context of 2026. Keeping consistent with commentary from our last call. Assuming those flat rates, we'd expect that margin stabilize here in the near term and then allowing growth levels to influence the level of expansion as the year progresses. If you think through the different factors, I think with a flat interest rate environment, loan yields can stabilize because you're not getting that downward repricing pressure that we saw in Q1. And then at the end of last year, deposit market is competitive. That's an area that we spend quite a time monitoring and making sure that our flows make sense and are supporting our growth. But we feel really good about Our positioning in that space as well. And then from a growth perspective, I think that the vast majority of any expansion can move forward will be highly growth driven. And if you've kind of followed our story, which I know you've had over your career, growth for us is pretty impactful from a market standpoint. So you know, 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. 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 and diversified. Can you help us think through how much of the pipeline strength is translating into near term production and do you

Eric Spector (Analyst at Cantor Fitzgerald)

see enough visibility to support low to mid teens growth in a stable rate environment and then maybe help us think through the cadence of growth throughout the year? Yeah. So I'll start again. Eric, this is Walt. So from a pipeline standpoint, our pipeline today is about $4.5 billion. Typically with that equation, from a production standpoint, you know, they gotta move through and they have their expected closings. I would think our production will be very in line or better than Q2 of last year could have been here. In the near term, some things will push to the right, some things will come 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. 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. 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. 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. I'm good. B.J. you got a new start.

BJ Loesch (President)

Yeah, I'll take that one. I'm, I'm excited about this one. I mean we're, we're building a lot of customer relationships. When, 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%. 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. 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 years is just, you know, getting our lenders more comfortable with the notion of selling deposits because we hadn't done that for the first 15 years of our, of our existence. Our lenders are doing an excellent job doing that and our treasury management team and our deposits team are doing a fantastic job taking those leads and moving those into actual active accounts. So, you know, over the next three years, I would expect us to be in the 10 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, 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. So a 10% target is not really heroic. If you look at the industry, the industry's at 20 to 25%. 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.

Eric Spector (Analyst at Cantor Fitzgerald)

Great, that's, that's helpful. Color. I'll step back. Thanks for taking the questions and congrats on a good quarter. Thanks, Eric.

Operator

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. Please go ahead, Tim.

Tim Switzer (Analyst at KBW)

Hey, good morning. Thanks for taking my questions. Morning, Tim. 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, in your opening comments, but you know, is, was there any hold back at all this quarter? It was 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. Sure, great question. Hey, Tim, this wall. 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 and two weeks of the quarter. So typically anything that comes through at that point in time, you can't sell and settle within the current quarter. So it gives you a nice head start going to the next quarter. 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 you know, we've shown this kind of over the years where Q1's our lowest and then we have a slight stair step kind of Q2 and Q3 and Q4 and so forth. But then you kind of, you normalize 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 now give you kind of a sense of, you know, what that stair step could look like. Okay, interesting. And any, any color you can provide on what drove the 1% increase in the gain on sale premium. Yeah, this is Walt again. It's really just a function of mix. We did see a little bit higher Live Book express origination in Q1, as you saw on the deck. So as BJ mentioned, Live Book Express gets 9 to 13% premiums. That helps USDA loans at 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 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. But broadly, I think that 106 to 107% range from a premium standpoint as we've averaged over the last five quarters. I would maintain that going forward. Okay, got it. And then the last one for me real quick on, I mean, I guess basically just how is Live Book Express been trending towards your expectations? You guys talked about the $750 million annual target. I think previously you guys have mentioned a billion dollars is kind of an aspirational goal. Has that changed or is it more just like a timeline on when you'll achieve these.

BJ Loesch (President)

I think we're just being conservative, Tim. I, I do expect to go past the $750 million production in annual. You guys are kind of seeing the demand that you are expecting so far? 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, it essentially went back to what they owe that the rules had been before. 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, you know, our ability to, to generate those loans efficiently. But as you can see, we're on the rise again. So, you know, I feel highly, highly confident in our ability to generate that kind of volume. And as you'll see on this 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. And so with all the changes in the SOP and you know, 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. And so I think that that number is going to re, accelerate sooner rather than later.

Tim Switzer (Analyst at KBW)

Great, that's, that's good to hear. Thanks for all the color.

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.

Michael Carnes (Chief Credit Officer)

Hey, good morning everybody. You know, I wanted to start, go back to the, the credit side for just a second. You know, you talked about how over a quarter of the non accruals are in verticals that you've exited. Could you, what verticals are those? How much in remaining balances do you have in those verticals? And, and kind of what led you to exit those? Is it, 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, could touch on that. Yeah, good morning, Michael Carnes 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. 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. And so that's an ongoing process for us. And over the years we've made the decision to exit, you know, several verticals, we've adjusted verticals, we've added new verticals and like that's an ongoing process for us. The, the vertical that or a segment of a vertical that we're really highlighting. The, you know, the increased small uptick and 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. 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. That's not a vertical that we decided to exit this quarter. We exited 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. 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. 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. And Walt highlighted this a little bit. You know, those loans are individually assessed by our special asset team and our credit team on an ongoing basis. So once you're classified or non accrual, we're pegging a potential loss there and that's built into our reserve coverage. So you can look at these, these components like non accruals and past dues. But when you look at the, you know, 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, of how we feel and good. And I feel like our portfolio is very stable at this point. Okay, that's helpful. And you talked about an AI origination platform. I know you guys have a lot of investments ongoing, you know, through Canopy, through stuff that you guys are developing. You're, 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 some of the, you know, the, maybe some of the exciting things on the horizon that you're looking at in both of those areas.

BJ Loesch (President)

Hey, David, it's B.J. so obviously our, 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. 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. 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. 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 a thousand 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, start doing it in your individual work and in your teams to make it better. 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 because they're curious. So, you know, 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. But ultimately we are going to be an AI native bank. We are going to have everything that we can possibly. But on an AI platform, 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. 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. 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. 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 (Analyst at Raymond James)

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, I guess. How do you think about a longer term profitability target for the bank? Assuming that we do get, we get a larger NIB contribution and more checking account growth. You know, Live Oak Express, you know, does $750 million plus in production. You know, growth remains, you know, in that mid, you know, low to mid teens pace, rates stabilize, AI starts to really materialize. How do you think about the profitability profile of Live Oak as. As this all starts to hit stride?

BJ Loesch (President)

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, you know, 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 and so, you know, I, I just feel like we're, we're about to hit our stride and, and our plans that we put in place over two years ago to make that happen are starting to happen. So I'm pretty excited about our ability to do that. And you know, not, you know, hitting a 15% return is one thing, having a 15% earnings growth in one year is, is one thing, 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 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. We're still working on embedded banking, which we're very excited about and we've got endless possibilities with AI. So I think, I think live oak is better positioned than we have been in years to generate top tier returns. That's pretty exciting. Thanks everybody. Thank you. Thanks Dave.

Janet Lee (Analyst at TD Cowan)

Next question will be from Janet Lee at TT Cowan. Please. Go ahead, Janet. Good morning Janet. Could you talk to us a little bit more about where you think we are and the small business 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 some of looks like a lot of that is driven by the verticals that you exited. So where do you think we are in the process? Is it getting better or because of the macro uncertainty that we're in? Are they, are you seeing a little bit more pressure, if at all?

Michael Carnes (Chief Credit Officer)

Yeah, Michael, again here to take that question. So I'll go back to that slide that BJ walked us through where you can see the industry trends and you see that the industry is still, you know, grappling with some, some headwinds here. Whereas we have been flat for some time. And I credit that for a couple, you know, to a couple things. One, being pretty proactive in addressing and recognizing the environment we were in. And the environment was, and the driver of, of that credit cycle was really about rapidly rising interest rates on our customer base. So we were underwriting loans, you know, and record low interest rates and then experiencing really high interest rates that for us at least I Can't speak to the rest of the industry. But for live oak, that component of this cycle is, 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. And so, you know, we, we've gotten past that interest rate risk. That was part of a big component of the cycle. And, you know, the economic uncertainty out there, every morning you wake up and there's a different headline. And we're talking about that. And so we're having conversations with our, with our customers on the front end in our portfolio, just talking about fuel costs, how that could impact their business. It certainly, if this is prolonged, could impact. It will impact the business community, the small business community, and all of us, you know, across operating expenses. But we don't have verticals that are focused in industries that are heavily dependent on fuel costs, a big component of their operating expenses. So it'll be an indirect impact to all of our businesses. But that's why we underwrite to hire 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 credit team do. So I, you know, I'm watching it closely. We're talking about a lot, but right now, I feel pretty good about where we sit. And Michael, you'll remember if you look at Slide 6, 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. 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 (Analyst at TD Cowan)

Got it. Thanks for all the color. And for the first quarter, expenses came in much better than where the street was, despite some typical seasonal headwinds there. Obviously, you're also investing into your franchise, and you talked about the AI initiatives. Can you speak to any updated thoughts on your expenses, how the expense trajectory should look like for the rest of 2026, or whether there's, like, an efficiency ratio target. How should we think about that aspect?

Walt Pfeiffer (Chief Financial Officer)

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. But if the average over the last call, five quarters or so, it's been just above $85 million. That's kind of in line with what you see here in Q1 as well. That's a good run rate kind of moving forward for us with maybe slight upticks here and there as we think about potential areas where we can and kind of how I think about that. There's always a balance. We are an innovative company that's high, the high growth, and 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. And really, the way we evaluate potential investment in that space is what can we do to accelerate that? Because as BJ mentioned, there's quite a bit of earnings accretion that those two initiatives specifically can drive. So 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. So largely through 2026, I think that balances out. I think you kind of stay where you're at now, plus or minus on a quarterly basis through the rest of the year. That'll help with that. Coupled with our revenue growth, we'll see our efficiency ratio kind of tread down to the call it low to mid-50s. And like I mentioned in my prepared remarks, that's exactly the trend that, you know, we've really been positioning ourselves to achieve and hopefully continue that trend, you know, past 2026 and outperform as we get into 2027 and beyond.

Janet Lee (Analyst at TD Cowan)

Got it. Thank you.

Operator

Thanks, Janet. And at this time, we have no other questions registered. I would like to turn the call over to Chairman and CEO Chip Mahan. That's a wrap, guys. We enjoyed it. See you next quarter. Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.

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