Live Oak Bancshares, Inc. (LOB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Live Oak Bancshares Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference call over to Greg Seward, Live Oak General Counsel. Please go ahead.

Thank you, and good morning, everyone. Welcome to Live Oak's Fourth Quarter 2025 Earnings Conference Call. We are webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank and go to the Events and Presentations tab for supporting materials. Our earnings release is also available on our website. Before we get started, I'd like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation trials. I will now turn the call over to our President, BJ Losch.

Great. Thanks, Greg. Good morning, everybody. Thanks for joining us. Let's get started on Slide 4. 2025 was quite an interesting year. And here at Live Oak, I'm really, really proud of the way we navigated through those interesting times. Macro uncertainty persisted throughout the year, whether it was DOGE or tariffs or the uncertain economy and ultimately, 3 rate decreases from the Fed late in the year. We continue to navigate through a small business credit cycle, and our loan portfolio showed continued credit stabilization over the course of the year. We significantly improved our operating processes and controls. We successfully executed on our first preferred offering, and we finished the year nicely with some outsized venture gains from our ventures portfolio. And yet even with that busy and potentially distracting backdrop, we produced some excellent results, as you can see on Slide 5. 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 2-year view of our production on Slide 6, 57% growth in loan production across both our small business and commercial groups and importantly, strong pipelines heading into 2026. And as proud as I am of those production results, what matters most is how you translate that into profitable operating leverage. And you can see on Slide 7 that those results are simply outstanding with adjusted PPNR up 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. And on Slide 8, 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 2 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, and we're hopeful that these trends start to moderate back towards the long-term trend lines sooner rather than later. Finally, we continue extending our customer product offerings with checking and small dollar SBA loan capabilities. Both of these efforts launched in early 2024. And in just 24 months, our teams have made significant gains in winning customer checking relationships and serving more small business borrowers. At the beginning of 2024, only roughly 6% of our customers had both the 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 that are leading to nice gain on sale increases. There's a lot more upside to this business as well. We're just starting. I couldn't be prouder of how our people are taking care of customers, making our operations better and profitably growing our company. Thank you to all Live Oakers for the momentum that they have built heading into 2026. And with that, Walt, how about running through some of the financial highlights for the quarter.

Thanks, BJ. Good morning, everyone. As outlined on Page 11, we had an outstanding end to our 2025 campaign with Q4 producing $44 million of net income and $0.95 of earnings per share, both of which were approximately 3x Q4 of 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 Apiture sale. Growth remains excellent as Q4's loan production of $1.6 billion capped off our highest year of loan production in company history with $6.2 billion, driving the 17% annual loan balance growth, outstanding loan origination that you just won't see replicated broadly across the industry. And we love to see the progress across our 2 focused 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. Now let's get into the details on the following pages. Page 12 provides a financial snapshot of our Q4 earnings results with quarter-over-quarter demonstrated improvement across all major profitability and growth metrics. On the bottom right of the page, you will see several notable items included within our reported results, headlined by the $28 million net investment gains from our Live Oak Ventures investment portfolio. In addition, we had approximately $11 million of offsets from warrant losses, capitalized software accelerated depreciation, severance and allocation of funding to our donor-advised fund. I continue to be very excited about our operating leverage trends highlighted on Slide 13, as was BJ. Q4's adjusted PPNR of $64 million as detailed in Slide 28, is 21% higher than Q4 of 2024, while our adjusted EPS has doubled over the same time period. And that doesn't tell the full story as it includes approximately $5 million of accelerated depreciation of capitalized software and severance expenses as well as an intentional decision to delay some loan sales until 2026, which we'll touch on more shortly due to the large aforementioned investment gains. Slide 14 breaks down the $1.6 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 and both small business and commercial lending teams delivered double-digit year-over-year balance sheet growth rates. Slide 15 illustrates our loan and deposit balance growth, highlighting the strong consistent trends on both fronts. Our total loan portfolio grew approximately 4% linked quarter with year-over-year loan balances increasing approximately 17%. That's just outstanding durable growth. Q4's customer deposit growth was slightly down linked quarter as was expected due to typical Q4 seasonality, yet our year-over-year customer deposit growth rate was 18%, which is fantastic growth in a very, very competitive market. As I mentioned earlier, we continue to be very excited about the momentum we are seeing in business checking as highlighted on Page 16. We saw our fourth consecutive quarter of growth with checking balances increasing 4% linked quarter to $377 million and are highly encouraged by our progress in deepening customer relationships. As BJ noted, 22% of our customers now have both a loan and a deposit account with us and 37% of new loan customers also opened a checking account in Q4. Our total low-cost deposits, including noninterest-bearing checking balances, low-cost collateral construction and loan reserve accounts now totals approximately 4% of our total deposit base, a 2x increase year-over-year and tremendously accretive to our earnings profile. Our net interest income and margin trends are detailed on Slide 17. In Q4 of 2025, we saw our quarterly net interest income increased $8 million or 7% linked quarter and $26 million -- or 26% compared to Q4 of 2024. Driving the Q4 increase in net interest income were both our continued outstanding growth as well as our net interest margin expansion of 5 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 1. As in the past, when we have seen large Fed moves downward of 50 basis points in the quarter, you will see near-term compression as our deposit pricing and strong volume catch up, and we continue our upward trajectory on net interest income. Historically, our model operates well in a lower interest rate environment. Once we navigate the journey down on as our deposit pricing adjusts. Currently, our base outlook for the Fed consists of 3 Fed cuts in March, June and September of 2026. Any less cuts or cuts later in the year will provide an earnings opportunity for the bank. Moving to guaranteed loan sale trends on Slide 18. Gain on sale was intentionally down this quarter as our large investment gains provided loan sale flexibility, essentially allowing us to delay sales 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 in 2025, we are more than pleased with the momentum that we are seeing in our Live Oak Express product and the immediate impact it has had on our earnings, providing for a meaningful 20% of our gain on sale of $12 million, a 2x what it contributed in 2024. We remain very focused on ramping our Live Oak Express originations as that will continue to be the primary driver of our gain on sale growth going forward. Expense and efficiency trends are detailed on Slide 19. Q3 reported noninterest expense of $89 million included approximately $6.6 million of onetime expenses detailed within a notable items section back on Slide 12. We remain heavily focused on improving both our customer and our employee experiences and implementing technology and operational improvements across our entire business, all with the goal of creating raving fans, moderating expense growth and thus improving efficiency and providing a solid mature foundation to support our growth. Taking a look at credit on Slide 20. Over 30 days past due remained low for the fifth consecutive quarter with $10 million or 9 basis points of our held-for-investment loan portfolio past due as of December 31. The amount of nonaccrual loans increased to $110 million or 91 basis points of our unguaranteed held-for-investment loan portfolio in Q4. The linked quarter increase in here was primarily driven by SBA credits and is consistent with the broader SBA industry trends, which Live Oak continues to outperform. Our reserve levels 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 nonaccruals 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 2 strategic initiatives in business checking and Live Oak Express are ramping nicely with plenty of runway to continue to drive deeper relationships, increased fee revenue and lower funding costs. We have refocused our expense base and investments on the best opportunities, which will moderate the growth rate while better supporting strong revenue growth. The possibilities that AI and tech innovation provides across the bank are enticing and will enhance our customer service and efficiency with active efforts ongoing. And above all else, we have an amazing culture, team and brand here at Live Oak Bank that is irreplicable. With that being said, thank you again for joining this morning. BJ, back to you for closing comments before we head to Q&A.

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

[Operator Instructions]. Your first question is from Crispin Love from Piper Sandler.

Just first, NII and the NIM, very strong in the quarter, a nice expansion there. But can you just talk about some of the dynamics into the first quarter, the impact of the last 2 cuts, the impact of loan yields as there's likely some lag also deposit costs and then just consequently NII and the NIM in the first quarter relative to fourth? Well, I believe you mentioned some compression in the NIM, but higher NI, but if you just flesh that a little bit, that would be great.

Yes. Chris, it's Walt. Thanks for the question. Yes, I think you hit the nail on the head and kind of go back to some of the comments I made in the prepared remarks. Typically, any time you see 50 basis points of Fed cuts in the quarter or the following quarter, as you know, we have a large variable quarterly adjusted loan portfolio that reprices on the first business day -- so that will drive both NIM and net interest income compression in the near term. The good news, which is essentially the beauty of Live Oak and our growth engine is that as the deposit pricing continues to adjust, growth really pushes us back to that up and to the right migration in both net interest income and NIM fairly quickly. Really -- and the steepness of that slope on that up and to the right migration is largely going to depend on whatever Fed outlook or forward curve you're taking or taking a look at. But I think a good proxy if you kind of looking for a guide for what Q1 could look like in terms of NIM back in Q3 of '24, we had 50 basis points of Fed compression or Fed rate cuts right at the right at the end of September. And you can see kind of the quarter-over-quarter change in Q4 2024 as a result of that.

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 because of the shutdown. And then you also mentioned the aperture gain drove some of that decision to hold more. I think you typically sell more in the back half of quarters. But is that changing in the first quarter because of the shutdown? Have you been active selling in early '26? And then just when you look at the first quarter, how would you think gain on sale income could trend just as you look at more normalized quarters like the first 3 of 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 kind of check, see what you're thinking there.

Yes. Thanks, Cris. It's Walt again. I think the government shutdown really didn't impact us much in Q4. I think we saw a little bit of a timing delay in certain loans. But I think you saw the strong SBA production in the quarter. So we're able to get kind of all our loans, as we talked about in the last earnings call, kind of positioned to close once the government opened up, and that's exactly what we did. As you think about gain on sale trajectories, I don't think anything will change between when we sell loans versus January versus February or March. I think it will still be much more to the mid to the back end of the quarter. That's our typical approach. I think Q1, historically for us is our lowest quarter of the year. I know Q4 of 2025 was a little bit different because of the fintech gains. But I would expect our Q1 to be much more in line with the Q1 of -- and then that's typically when we start our up and to the right stairstep momentum within the gain on sale line.

All right. So if I'm looking at 1Q '25, so even though that there was a little bit of a lag there, it could be below that kind of 2Q, 3Q level?

I think it will be closer to what you're seeing in Q1. Yes. So our Q1 2026 will be closer to what you see Q1 2025, so it will be a step up versus what you saw on Q4 and then that gets us back into -- I think Q1 of 2025 was in the $15 million rate total gain on sale that feels, that feels appropriate.

Your next question is from David Feaster from Raymond James.

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 3 cuts embedded in your guidance. Obviously, there's some -- there's just going to be a lot of moving parts, right? You've got the tailwinds from the deposit repricing in the prior cuts, the headwinds on the assets repricing lower on the rate-sensitive stuff. I just was curious if you could help us think through with the 3 cuts that you've got embedded, how do you think about the margin trajectory over the course of the year? Do you think we can -- given the tailwind from the prior cuts, we can actually see some expansion? And kind of just help us think through that trajectory over the course of the year.

Yes. I think, David, this is Walt again. Really the thing that we think about is not only what the Fed cut is going to do, it's the timing and the severity of those cuts. Stable environments work really well for us. So if you saw Q4 of 2024, we saw a compression. And then with a stable environment, we saw nice NIM expansion throughout the year. With 25 basis points of Fed cut assumptions, that allows our deposit pricing to catch up relatively quickly. Ultimately, we'll expect that step down here in Q1. And then our expectation is to go back on that, start seeing the up and right trajectory or NIM expansion as we move through the year. Largely, it's going to be driven by growth. Now obviously, the deposit market is very competitive, and we're going to -- we have to do what we need to do to continue to fund our outstanding growth. And David, like we talked about in the past, we at Live Oak, I mean, even with a -- you call it anywhere from a 3.15% to 3.50% NIM, we think that's really attractive. We focus a lot on net interest income. And that's the beauty of kind of the Live Oak model, right, where you can have a double-digit net interest income growth year-over-year even with some variations from your margin trajectory.

Terrific. That's helpful. And then obviously, there was a lot of noise on the expense side this quarter. You alluded to some of the things. Just was hoping you could give us some puts and takes on expenses. You've got a lot of investments on the horizon. We talked about the Live Oak Express ramping up. We talked about embedded finance. Could you just help us think through a good core expense run rate from here? What you're investing in? And how you think about funding those investments, just as I know you've really been focused on expense management.

David, it's Walt again. Thanks. Great question. We're really trying to do our best to make sure that we're balancing both revenue and expense growth. As BJ mentioned and I mentioned kind of looking at the operating leverage slides, we've done a really good job of that, especially over the last few years. But even if you extend it past 5 years with our PPNR trajectory. I think from where we're investing, the 2 strategic priorities for us of both business checking and Live Oak Express are heavy focal points. The areas with AI and application and kind of across our operational areas of the bank, it's -- and our loan origination platform is really exciting. I think from an expense growth rate, we typically -- we mentioned in our prepared remarks, we expect that to moderate quite a bit. That's something probably likely in the single digits year-over-year as we think through just making sure that we're putting our money strategically in the right places.

Okay. That's helpful. And then just quickly touching on credit. There's some mixed trends there. I just wanted to get your color on what are you hearing from your clients? Where are some of the pressure points that you're seeing as you look into the portfolio? Are there any segments that there's more pressure? And what drove that increase in nonaccruals? And just how do you think about credit -- how do you think credit trends near term? And any color on the classified asset trends specifically would be helpful as well.

Yes. Michael Cairns here. I'm happy to talk about credit a little bit here. And my view on this quarter was it was a fairly uneventful and stable quarter when you compare it to where we were last quarter. The past dues are low. And to your point or your question, classified loans are flat to slightly improving over the quarter. And when you think about nonaccrual loans, those live within our classified loan portfolio. And so when we determine that they're a classified loan, at that point, we're assessing the reserve of potential losses against that -- those loans and natural progression of a classified loan or the reason we identified as a potential problem loan is because payment defaults could happen. So you're seeing that in the nonaccrual balances, but you're not seeing a spike in reserve or provision expense because we've already assessed the potential losses within that pool. And then when you look at -- and I know Walt touched on this already, but when you look at the SBA data, 2025, we still saw higher industry defaults. Live Oak wasn't immune to that, but we also fared significantly better than the industry. And when I think about that, I think about the fact that we have always maintained our credit culture. We don't stretch on underwriting standards and a lot of credit really to our lending staff who are out there historically and today, finding loan growth without sacrificing credit quality. And I think that's what has set us up to be in a favorable position to the industry and also what will pay dividends for us in the future. And then when you also think about the interest rate cuts that happened in the back half of 2025, our borrowers haven't felt the benefit of that quite yet, but they should in 2026. So I expect some relief there, especially if we see some additional cuts. And again, I don't know if I touched on this or not, but the SBA portfolios that makes up the chunk of the nonaccrual balances in the classifieds. So with all that, I felt like it was a pretty stable quarter. I

Your next question is from David Rochester from Cantor.

Walter, I just want to go back to your comments on the margin. You mentioned down similar to that trend in 4Q '24, I believe. And so it looked like that was down about 18 basis points that quarter. So I just want to make sure that, that was sort of the magnitude that you were thinking about. And then on Slide 17, you guys included a newer line in that, some income from -- it was other loan income that was about 6 basis points on the margin for the quarter. I was just wondering what that was exactly? And is that something that's going to reverse as that rolls off of 1Q? Or does that stay in the margin? Just trying to figure out if that's incremental to what you guys saw in terms of the trend in 4Q '24.

Sure. Dave, this is Walt. Thanks for the question. On the other loan income, I'll start there. So that line was inflated more than we typically see in any given quarter. This really relates to a few large solar and senior housing loans that paid off that had pretty high prepayment penalties. So that's something that we don't expect to see in a run rate moving forward, especially not to that degree. And then as you think about the trajectory back in Q4 after the 50 basis points of cuts, yes, I think that's in a reasonable range. I think the one thing that's helping us this year is that we were able to get out in front of the variable loan portfolio repricing on January 1. with some deposit rate reductions there at the end of Q4. And also, we're able to already start to reduce some pricing again here in Q1. So we're doing what we can to mitigate it. But I think the other factor there is our pipeline hasn't really slowed down at all. So we're expecting a pretty strong Q1 in terms of growth that's going to hopefully help manage that NIM compression that they're taking a look at.

Okay. Great. Appreciate that. And then just on expenses, I just want to make sure I heard you right. Were you saying mid-single-digit growth for expenses next year slower than what we saw this year?

Yes.

Great. And then just on Live Oak Express, it was good detail you had in here of the $12 million of gain on sale for '25. Are you thinking I guess, bigger picture, what are you thinking for the trajectory there? Is that something that I could double in '26? Could it go even higher than that? What are your thoughts there?

Yes, Dave, this is Walter again. I'll start and then BJ, you want to add in to from the Live Oak Express efforts. I think we're doing what we can to really make sure that we're building top of the funnel in that space. We saw -- we did see a slowdown in our Live Oak Express origination in the back half of 2024 after the SBA SOP changes in June that we had essentially reset kind of our expectations to make sure that we rebuild that pipeline with the borrowers or rebuild the pipeline with borrowers after just essentially updating them, educating them on what those SOP changes were. Look, I think doubling is very aspirational. I think it will be something less than that. I'll let BJ talk and add in if you have any comments.

Yes. I think at cruise altitude, I think we're -- our aspirational goals are $1 billion a year of production at Cruise altitude. That's not next year. That's over time. When we started down the road of building out a Live Oak Express product, it was really by brute force. I think we've talked about it before that we just never really focused on the small dollar loans that we -- our average loan size was more in the $1.2 million or $1.3 million average loan size range. And so we started just kind of trying to see how we could do it. What we're doing now is intentionally building capabilities so that we can fill the top of funnel, so to speak, and get a lot more leads that we can then work in a much more efficient manner. So for instance, we are building and co-developing a next-generation loan origination platform, which will make it simpler, easier, faster and more efficient for our people to serve our customers much more quickly and get to decisions and funding a lot faster. We have engaged outside expertise in our marketing group that are expert in performance marketing to find ways to better target customers that are out there searching for loans that we can do through our Live Oak Express product. And we are making sure that our lenders, which have been carrying the bulk of the water up to now in terms of referrals can even find more avenues for those referrals, and we're encouraging them to do that, both through how we provide them resources, but then also making it part of the incentive plans that we have for them to grow the business. So we've kind of got a multifaceted way of going after this intentionally. So we think that we'll continue to see growth over the next several years towards that aspirational target of $1 billion a year.

Your next question is from Tim Switzer from KBW.

My first one is kind of a follow-up on this discussion around Live Oak Express. And we're more than 6 months now into these SOP changes regarding the smaller dollar loans, which I think we're now starting to see how that has pressured volume on maybe some of your competitors. So is there any way you're able to maybe not quantify, but characterize the impact that has had on your competitors? And has that made it a little bit easier for you to win some market share in the smaller dollar space? And also, like has that impacted pricing yields, anything like that?

On the latter, I don't think that we've seen an impact on pricing or yields quite yet. On the former, I think we've started to see that. We've started to see some lenders back away. First, the nonbank lenders because they were seeing a lot of the biggest credit pressures. And we're starting to see bank lenders be a little more choosy on what they do, which makes a lot of sense. We want a healthy SBA 7(a) industry. And we have always been very intentional from the outset on our small dollar lending products. We don't play at the highest, highest end of the pricing game. We don't chase spotty credit. We want businesses -- small businesses to succeed. And so our total addressable market, so to speak, on the smaller side is going to be reduced somewhat because we're going to be choosier about who we do business with. But on the flip side, we're going to make it so easy for customers to do business with us, and we're going to target people that have a propensity to do business with us like they want to, and they are going to get the full power of our brand and our people and our technology over time such that we think that, that's going to be a huge differentiator between what they currently get today, particularly on the small dollar side and what Live Oak is going to deliver. So I'm really excited about how we're actually thoughtfully building out this business, and I think it will be quite substantial and a huge part of what we do on the SBA side for years to come.

Interesting. That was great color. I was also wondering like on the flip side of this, since everyone has not required you basically full underwriting and the upfront guarantee fees and everything is essentially equal for the larger loans. Are you seeing some of your competitors now kind of move back to Live Oak's more traditional loan side at all?

Not necessarily, not that we can discern. We haven't seen much change from that perspective, Tim.

Okay. And then I was also looking for maybe an update on the opportunities and internal development you guys are doing with regards to AI. Chip has brought this up a few times on conference calls. I was looking for an update there. What are kind of the tangible use cases you're exploring? And what are the benefits it can provide you, whether that's internal efficiency efforts or creating a better experience for customers?

Sure. I'll just give a quick update on that. I think starting with our technology and our labs teams, all of our developers are using cursor next-generation AI-based developing software. And I'm not sure that, that's going on across the rest of the industry, but having all of our people well versed in that, we made that pivot very quickly. So that's number one, and that's helpful. We are intentionally educating and introducing our people to AI first with things like Copilot, but then also things like putting our information into proprietary large language models that they can then query and use for analytics specifically related to our customer information, our portfolios and our business. So that's kind of fundamental and maybe a lot of people are doing that. But then what we're looking at is a multipronged approach on how we go after this. I think if you just look at modernizing what you do in technology or in operations or revenue-generating parts of an organization and just simply say, we want to put in AI. AI is going to solve everything. It's not. What we're looking at is a way to say, how do we go to major parts of the organization, understand what the pain points are that don't make it easy or simple or fast or efficient for our people and our customers and to fix those sometimes with just better process, sometimes with eliminating manual process and then more and more with AI. And it's a combination of being intelligent around that. So we're going to major departments and groups like loan operations and secondary markets and deposit operations and those areas to modernize those using AI and other tactics. We're also asking everybody in our organization to be knowledgeable about just doing things better and more efficient, whether it's using AI or not using AI. And then thirdly, we're going to create a dedicated team that is thinking about how over the next 3 to 5 years, we create an AI-native bank. What does that mean? What does that look like? We have the innovative history here and technology that was born out of our founders. And we're constantly thinking about how to do that better. And so you'll see more and more use cases, tangible use cases from us over time as we start to build out what that means to be an AI-native bank.

Got it. That was great. If I get one more question, kind of a follow-up on the credit discussion. I think Michael mentioned we're not seeing any kind of spike in the provision expense. Is that -- what should we expect going forward in terms of provision? If credit continues to gradually improve over the course of the year like it has over the last few months, should provision be stable? Can it moderate a little bit further? Or is this kind of where it's going to stay?

I'll start. Sorry, Tim, it's Walt, I'll jump in too, and then Michael can add on. I think if you think about stabilizing credit trends, I think one thing you have to remember for us with being a high-growth bank that growth and CECL typically don't get along real well. So growth will continue to drive our provision expense along with our portfolio trends as well. But I think kind of what you've seen over the last 3 quarters is a really good view of kind of a stabilizing or kind of stabilizing portfolio with stabilizing credit trends and that should give you kind of a broad view of what you could expect kind of going forward, assuming the same level of growth.

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

Yes, that's about right.

Your next question is from Bill Young from TD Cowen.

Just a question on your business checking initiatives. Given the strong momentum in your comments and the strong performance you had over the past year, do you have any updated thoughts about how we should think about the funding mix looking out over the next year or 2, given the increased growth in NIB?

Yes. So I'll start there, Bill. I think the -- we've been able to get about 4% of our noninterest-bearing deposits, as I mentioned earlier. Ultimately, our aspirational goal over just like kind of BJ mentioned with Live Oak Express is, over time, to get up towards in that 15% of our deposit base. But again, that's not going to happen next year. I think we saw 2% of noninterest bearing a year ago, 4% this year. I think that trajectory makes sense as we kind of move into 2026, if you just think about leveraging that growth rate.

That's helpful. And then just a couple of housekeeping items on the decision to hold on to more of your gain on sale loans. Just did you size up how much the benefit was to the margin or NII from holding on to the higher held-for-sale loans this quarter? And then also did you use this opportunity to maybe portfolio some more production in 4Q?

Yes, I'll jump in on that, Billy. The benefit for NII of about $60 million of HFS given our spreads and our margins is likely in the, call it, $1.8 million to $2.5 million range. A year, sorry, yes, that's correct. So divide that by 4, that kind of gives you. So it's not overly material for Q4 itself. As far as portfolio, I don't think that's what we'll likely do. I mean, I've always kind of aspired to get to the point where we're building a kind of what we used to call a treasury trash, but essentially, it's a portfolio of held-for-sale guaranteed loans that we can sell at any given point, gives us some good momentum going into Q1. So we'll likely monetize that additional $60 million here in Q1. And then that gives us some flexibility for loans that we originated in Q1 to then kind of give us a head start into Q2 and so forth.

There are no further questions at this time. I will now hand the call back over to Chip Mahan, Chairman and CEO, for the closing remarks.

See you next quarter. Thanks.

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