Live Oak Bancshares Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2026

Key Takeaways

  • Positive Sentiment: Live Oak reported Q2 EPS of $0.74 and adjusted EPS of $0.77, with core revenue up 11%-12% year over year and expenses up only 3% or down 1% depending on the measure, driving strong operating leverage and an improved efficiency ratio near the low-50% range.
  • Positive Sentiment: Loan growth and production remained strong, with $1.5 billion of originations across 33 industries and the loan portfolio up 16% year over year to about $13 billion. Management also highlighted a record $4.6 billion pipeline, supporting continued growth expectations.
  • Positive Sentiment: Live Oak Express and business checking are scaling quickly. Express originations hit a record $82 million in the quarter, while checking balances rose 63% year over year to $469 million and now represent about 5% of deposits, with management seeing further upside.
  • Neutral Sentiment: Credit trends were described as stable to improving, though Q2 provision expense was elevated by growth-related CECL reserves and an exited distillery portfolio. Management said broader portfolio metrics remain solid, past dues are low, and the bank believes it is past the most recent credit cycle.
  • Positive Sentiment: Management struck an optimistic tone on AI and automation, saying all employees now have access to AI-native tools and the company has built 640+ agents and skills. The Casca pilot for Live Oak Express is expected to roll out more broadly by year-end, with the goal of materially shortening SBA loan processing times.
AI Generated. May Contain Errors.
Earnings Conference Call
Live Oak Bancshares Q2 2026
00:00 / 00:00

There are 11 speakers on the call.

Operator

Hello, everyone. Thank you for joining us, and welcome to the second quarter 2026 Live Oak Bancshares Incorporated earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Greg Seward, General Counsel. Greg, please go ahead.

Speaker 1

Thank you. Good morning, everyone. Welcome to Live Oak's second 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.liveoak.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 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.

Speaker 1

Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings in the presentation materials. I would now turn the call over to our president, BJ Losch.

Speaker 2

Thanks, Greg. Good morning, everybody. Thanks for joining us. Let's get started on slide four. Our strategy to create more sustainable earnings momentum here at Live Oak continues to work, and you see it across all five themes on this slide. Reported EPS of $0.74 for the quarter, with even stronger performance from the core operations. Our lending businesses continue to put up strong, diversified numbers. $1.5 billion of loan originations across 33 industries this quarter. Our broader credit trends are stable to improving. Live Oak Express and business checking are both ramping and having a very meaningful impact on our results, with far more to come. As you'd expect from Live Oak, our urgency on AI activation continues to accelerate. Turning to slide five, you see the earnings momentum continues.

Speaker 2

As proud as I am of our loan production results, what matters most is how you translate that into profitable operating leverage and credit quality. You can see on slide five that those results are simply outstanding, with adjusted PPNR of 23% over Q2 2025, and adjusted EPS of $0.77, up 20% from this time last year. Core revenue grew 11% year-over-year, while expenses grew just 3%, and our efficiency ratio improved eight points from 61% last year to 53% on an adjusted basis. Over the last several quarters, turning to slide six, we've been sharing with you progress on two key initiatives, Live Oak Express, our small dollar SBA 7(a) program, and business checking. Both of these efforts launched in early 2024, and in just over two years, our teams have made significant gains.

Speaker 2

On slide six, Live Oak Express posted a record quarter of $82 million in originations, up 63% from a year ago. These smaller loans are highly desirable on the secondary market, and we've generated $19 million of gain on sale over the last six quarters, about $0.30 of earnings accretion and growing. Our goal at Cruise Altitude is to produce at least $750 million annually, supported by an AI-native loan origination platform. If you do the math on that kind of volume with those kind of premiums, the future earnings impact on the way is substantial. Turning to slide seven, business checking continues to build deeper, more profitable customer relationships. Checking balances are up 63% year-over-year to $469 million, and total checking and other DDA balances are now at $744 million.

Speaker 2

We're now at roughly 5% of checking and other DDA balances to total deposits, up from about 4% last quarter and from virtually zero two and a half years ago. What makes this even more impressive is that the deposit base has been growing 10%-15% a year over that timeframe as well. Now, over one-third of our new loan customers each quarter open a checking account with us, and 25% of our customers have both a loan and a deposit account. Just four years ago, that was only 3%. This is absolutely phenomenal work by our lenders and our treasury management teams, and there's a lot more to come. Again, if you do the math, we've got $744 million of balances in just over two and a half years that are 325 basis points or more better than the rest of our portfolio.

Speaker 2

This has improved our NII and pre-tax earnings by $25 million, or $0.40 of EPS annualized and growing. The industry average has about a 25% DDA to total deposits mix. Our goal is just a minimum of 10%. On a current $14.5 billion deposit base that's growing 10%-15% a year, that's massive upside to come as we become the primary bank for our customers and significantly improve our funding profile. On slide eight, you can see our credit trends over 10 years relative to all other SBA lenders. While default rates have moved higher across the industry over the last two years, Live Oak's performance continues to significantly outperform with a 10-year net charge-off ratio of 40 basis points compared to over 120 basis points for the industry as a whole.

Speaker 2

As Walt will discuss, our provision expense this quarter was driven roughly 45% by growth, 40% by an exited distillery portfolio, and 15% by macro and other factors. Let's pause on that for a second. 45% of our provision this quarter, or roughly $12 million, is from new loans that we haven't had an opportunity to earn $0.01 on yet. CECL is not kind to growing companies like ours. I'd much rather have our growth, which adds future revenue, driving higher provision than low growth and lower provision all day, every day. Yet despite the CECL growth penalty, our production and revenue engine is more than powering through it, generating significant and sustainable earnings growth. I feel very good about our broader credit trends.

Speaker 2

Aside from our exited distillery portfolio, which is only about one half of 1% of our total portfolio, trends are positive as evidenced by our metrics, particularly our total reserve coverage. Sitting here today with 87% of our loan portfolio originated at current or higher interest rates, we expect continued durability of these trends. I'm very proud of our lending and credit teams for what they are delivering. Turning to slide nine. As you might expect, Live Oak is incredibly forward-leaning on the opportunities to harness the power of AI. Our AI activation and embrace of the technology is high. 100% of our employees now have access to AI-native tools. We have 150 Claude super users, or roughly 15% of the company actively experimenting with Claude Enterprise, and 90% of the groups across the company represented in that pilot.

Speaker 2

Our teams have now built more than 640 agents and skills across all our AI platforms. Our approach is multidimensional by design. First, to gain expertise and proprietary advantage through in-house efforts directly with AI providers. Second, through select co-design engagements meant to provide unique competitive advantages and knowledge building. Third, active use of frontier technology by AI industry leaders. At Live Oak, this is executive-led, not delegated. It's offensive, not defensive, and it's being executed like a massive merger integration and transformation to unlock the most long-term value by creating AI nativity across the organization. As excited as I am about our plans to create AI nativity across Live Oak, I'm even more jazzed about our starting position as we head into what is the most transformational technological change in my career, certainly.

Speaker 2

While we will generate plenty of productivity and efficiency gains from AI, so will everyone else eventually. Many will have efficiency and cost reduction as their primary focus. That will not be a competitive differentiator, nor will it grow any business sustainably. Through incredibly hard work and dedication from our people, we have fundamentally changed the business model at Live Oak over the past three years. Have created a much more consistent and sustainable business model, customer experience, earnings trajectory, and return profile with a long runway to go. In other words, our current strategy is working without AI. Therefore, AI is an accelerant to our strategy, not the strategy itself. This is going to allow us to play much more offense with AI, with new capabilities, new products, new customer acquisition, and new distribution.

Speaker 2

As Chip says, "Second pitch, first inning," we're ready to go. Thank you to all Live Oakers. I couldn't be more proud of how our people are taking care of customers, making our operations better, and profitably growing our company. With that, Walt, how about running through some of the financial highlights?

Speaker 3

Thanks, BJ. Good morning, everyone. Before I get into the numbers, let me frame the quarter this way. What you see in our Q2 results is not a single strong quarter. It's a continuation of a deliberate multi-quarter trend. The same drivers we've talked about for several quarters now, things like growing revenue faster than expenses, compounding our earnings power, and scaling our strategic initiatives, showed up again this quarter, and in some places accelerated. To us, that is what real momentum looks like, sustained and building across the business. Let's dive into slide 12, as this breaks down the quarter across the six headlines we think matter most. Starting on the left-hand side of the page with our compounding earnings power and operating leverage. Reported EPS in Q2 was $0.74, up 23% linked quarter and 45% year-over-year.

Speaker 3

As BJ just noted, our adjusted EPS was $0.77 in Q2, up 20% from the prior year. This is excellent year-over-year growth. The key to this EPS growth is improved operating leverage. If you have tuned into our story over the past few years, you have heard that this has been an intentional focal area for us. Reported revenue grew 12% year-over-year, while expenses declined 1%. As a result, with a year-over-year lens, Q2 reported PPNR of $72 million was up 32%. Our adjusted PPNR of $76 million was up 23%, and our efficiency ratio improved by seven percentage points, down to 54%. The middle of the page highlights our broad-based organic growth and expanding returns. Our loan book grew 4% linked quarter and 16% year-over-year to approximately $13 billion.

Speaker 3

While our loan pipeline has climbed to $4.6 billion, a record high for the bank. Our lending teams continue to do a great job replenishing the pipeline to ensure future growth. To fund that growth, we've also grown our deposit portfolio 16% year-over-year. We are very proud of these growth levels in a highly competitive market on both fronts. We're even more proud of the return on average common equity expansion of 251 basis points from just a year ago. High growth is great, but high growth with improving returns is even better. Sustainable 15% ROE and 15% plus annual EPS growth is our goal. With our current trajectory, that looks to be achievable in the next several quarters. Focusing on the right-hand side of the page, we are highly encouraged by the early success of our two key strategic initiatives, Live Oak Express and Checking.

Speaker 3

As Vijay mentioned, both of these initiatives continue to ramp nicely, with Live Oak Express having their best quarter ever in Q2, with $82 million of loan originations and $5 million of gain on sale contribution. Checking balances increased 15% linked quarter and 63% compared to this time a year ago. Our Q2 provisioning expense of $26 million was driven by both our strong quarterly loan growth, that was approximately 3x of balance growth regenerated in Q1 and our exited distillery portfolio. Excluding this distillery portfolio, our broader portfolio credit trends improved, as evidenced in our unguaranteed ACL coverage of 2.01%, down 13 basis points from last quarter. Before moving on, there is one quick call-out on the unique items front, as noted on slide 11.

Speaker 3

Our effective tax rate was 19.9% this quarter, which included $2.7 million of benefit from purchase tax credits and other one-time tax adjustments. Our adjusted EPS was $0.77 normalized for that at a 24% tax rate. With that framing in mind, let's dive into some of the select key highlights on the remaining slides. Jumping down to the net interest income and margin trends on slide 15. Net interest income in Q2 was $125 million, up 5% linked quarter and an impressive 15% year-over-year. Net interest margin expanded 6 basis points linked quarter to 3.33%. As the roll forward on the right shows, the quarter-over-quarter expansion was driven primarily by loan volume and mix, more than outweighing deposit funding impacts.

Speaker 3

As I mentioned on our last earnings call, our primary focus is on controlling what we can control by aspiring to maintain spread discipline on the lending front and funding the bank's growth as efficiently as we can in a highly competitive market. From a macro perspective, we currently expect rates to remain flat in the near term, and we believe that is a favorable backdrop for the bank's net interest income and NIM profile. We expect our margin to remain generally stable as it has over the last 3 years, while volume growth continues to be healthy. A quick note on guaranteed loan sales highlighted on slide 16. Gain on sale from guaranteed loans was $17 million, up 13% linked quarter and in line with the prior year.

Speaker 3

SBA premiums remained steady. Live Oak Express was a meaningful contributor at its highest quarterly gain on sale level to date of $5 million. Live Oak Express continues to provide both efficiency income as well as optionality in our loan sale strategy. That's a great place to be. I'm proud of the expense and efficiency trends detailed on slide 17. Total non-interest expense was $85 million in Q2, down 1% compared to both linked quarter and prior year quarter. This, coupled with our 12% year-over-year revenue growth that I spoke of earlier, is operating leverage in action. It's how we have improved our efficiency ratio to 54% in Q2, to 7 points better than a year ago. As a high-growth and innovative bank, we remain committed to investing in key areas such as lending and Live Oak Express, checking, risk management, and AI and technology.

Speaker 3

Our focus is doing so in a way that drives better scale, better efficiency, and a stronger earnings profile over time. Lastly, turning to the credit trends detailed on slide eighteen. The primary metric and trend to focus on this page is the unguaranteed ACL coverage ratio shown in the top left graph, as this is the most holistic metric in how we think directionally about the total loan portfolio's credit health. The declining trend represents improving broader portfolio trends, strong high-quality growth, and our focus on proactively identifying and then exiting troubled credits. Three other notable items on this page include the Q2 provision attribution summarized on the top right. As Vijay mentioned, Q2's provision expense was largely driven by two factors.

Speaker 3

Strong loan growth, what we refer to as good provision, which was almost half of the provision for the quarter, as well as specific impairments related to our exited distillery portfolio. As you can see in the table on the bottom of the page, over 30 days past due remained very low and non-approvals remained largely flat quarter-over-quarter. The net charge-off increase was driven by the exited distillery portfolio, which accounted for approximately 50% of the loans charged off in the quarter. The net charge-off trends otherwise were very encouraging. Lastly, given the possibility of additional rate hikes, we do find comfort in that approximately 87% of our loan portfolio has been originated at current or higher rates. To wrap up, our earnings momentum is sustainable and building. Operating leverage is increasingly working in our favor.

Speaker 3

Our growth engine and strategic initiatives are gaining traction, our credit profile remains sound. Thank you to the Live Oak team for another strong quarter. With that, back to Vijay for his closing remarks before Q&A.

Speaker 2

Thanks, Bob. Great summary. Let's go to questions.

Operator

We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. Withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the roster. Your first question comes from the line of Janet Lee with TD Securities. Your line is open. Please go ahead.

Speaker 4

Hey, good morning, guys. This is actually Bill Young stepping in for Janet. How are you?

Speaker 5

Billy, how you doing?

Speaker 3

How's it going, Billy?

Speaker 4

Doing well. Just to elaborate on your relatively stable NIM outlook in the near term.

Speaker 4

I think you previously had a range. Should we expect it to just generally remain in that range over the back half of the year?

Speaker 3

Hey, Bill, this is Walt. Sorry about that. I think you cut out on that question. Could you do us a favor and repeat?

Speaker 4

I apologize about that. Can you hear me now?

Speaker 3

Yes. Yeah. Thanks, Billy.

Speaker 4

I just wanted you to articulate just the comment on the relatively stable NIM outlook relative to your prior expectation of just low to mid 330s. It seems you expect it generally to kind of remain in this range over the back half of this year.

Speaker 3

Yeah. Thanks again, Billy, for repeating that. This is Walt. Yeah, I think that's right. I think there's two primary factors influencing the margin here in the near term. You have the heavy growth, which is great, and that tends to help with NIM expansion. On the deposit front, the competition there has been pretty intense. We've seen in multiple ways different competitors are attacking that, whether it's cash promotions, exception-based pricing, and so forth. Growth will help expand NIM. Deposit competition helps compress NIM. I think largely, given where we've been and given where we've been over the last, say, two to three years with an average NIM, let's call it 330 to 335, that feels appropriate given where we're at today.

Speaker 4

Got it. Thank you for that. Just secondly, your net charge-off trends are very encouraging. Though we have seen some continued upward pressure on non-guaranteed NPLs. Can you maybe just comment on your line of sight on just negative risk migration in your book at this point? Any updated thoughts about where we sit with respect to the small business credit cycle?

Speaker 5

This is Michael Karnes. Happy to take that question. When I look back, there's a lot of discussion on the call already about the distillery portfolio, which is a really small component of our loan assets. I take a broader view and take a step back and look at how the portfolio as a whole, where we're actively lending, is performing. We've got $13 billion worth of loans. We're very active in SBA and commercial. Looking across the quarter, our credit metrics are very stable, even including those distillery loans. We saw a substantial improvement over the quarter in our criticized and classified loans, particularly in our commercial portfolio. Our SBA portfolio continues to outperform the industry as well on default trends. We saw positive risk rate migration kind of across the board, to answer your question specifically.

Speaker 5

Our past dues remain very low. All of that is a good signal to us that we think that our bank is past the credit cycle that we've been discussing in prior quarters, and we're in a good position to move forward.

Speaker 4

That's great to hear. Maybe just one quick follow-up on that. Do you see any other near-term opportunities to perhaps exit any other portfolios similar to the distillery exit?

Speaker 5

Obviously, I've spent a lot of my time in the credit team thinking about all of those macroeconomic risks that exist out there. We're watching interest rates and thinking about that, and we build in assumptions in our underwriting to anticipate rising rates. Tariffs are back in the news. We're looking at fuel costs and inflation and how that impacts our customers and potential customers. If there's any area that I watch more specifically, it's anything that's related to consumer discretionary spending. Our portfolio's held up really well, and I haven't seen any particular segment that has shown outsized deterioration so far.

Speaker 4

Great. Thank you very much. I'll step back.

Operator

Your next question comes from the line of Eric Spector with Cantor Fitzgerald. Your line is open. Please go ahead.

Speaker 6

Hey, good morning. Thanks for taking the questions. Maybe just starting off on loan growth. Production was impressive this quarter. Appreciate the color on the record pipelines. Just curious how you think about that 10%-15% growth in a flat to slightly higher rate environment, and how we should think about the cadence of growth through the back half of the year, and could we potentially see upside to that 10%-15% growth level?

Speaker 2

Yeah. Hey, this is BJ. I feel great about it. I continue to be pleasantly surprised and impressed with our lenders and our people. They constantly find ways to

Speaker 2

find new referral sources to network across existing customers, to get more production, to build partnerships. Activity remains very high. Chip and I were talking about it the other day. I think it was not two years ago where pipelines were half of where they are today. Half. To continue to build that pipeline and keep it strong is fantastic. Looking forward, we see continued momentum. We can see three to six months out in our pipeline in terms of what's going to ultimately turn into production, and we feel really good about that. We expect that to continue. One thing I'll add, when Walt was talking about margins. I'm also very impressed with what our lenders are doing with pricing and pricing discipline.

Speaker 2

We have seen an increase in new origination pricing, even as production has continued to rise, particularly on the small business side. That's not taking more risk. That's not remixing our portfolio. That is simply our lenders understanding the marketplace, understanding the value of what we provide to customers, and customers recognizing that and being willing to pay for our services. I'm very pleased with the discipline that the lenders have and the pipelines that they're building.

Speaker 6

That's helpful color. Maybe the funding story was a real standout this quarter with impressive NII growth and lower deposit costs. Just how much room do you see to bring deposit costs down further in a stable rate environment? Maybe just some color on the competitive environment for new deposits.

Speaker 3

Yeah. I'll start with that, Eric. Thanks for the question. Look, I think our deposit team's doing a fantastic job in this environment. There's multiple ways to continue to grow our deposits. Obviously, you got to be competitive in pricing. I think they do a really good job understanding the market and both on our consumer and business savings side as well as our customer CDs. They're also really creative in how they think about marketing strategies, especially in an AI age of you combating Google Gemini and Chat and all those things. Where we see the most pressure is actually things that aren't in stated rates. It's more in exception-based pricing from our competitors. We do what we can to combat that when we need to. Broadly, we think our deposit strategy's working. It's not a silver bullet. There's not one channel. There's not one product.

Speaker 3

It's pretty diversified with what we have. As we mentioned earlier in the call and BJ really hit on in his section, the checking story for us is just substantial upside, and that's where we continue to lead in building that product out, adding merchant services and things like that. We're really confident we can continue to fund our growth here going forward. Thanks to the deposit team for what they're doing.

Speaker 6

Great. Last one from me, just on expenses. We talked about mid-single digit expense growth in the past. Expenses were down this quarter, but I know you're continuing to invest in innovation and new initiatives and AI. Can you talk about how you think about the expense outlook here going forward?

Speaker 3

Yeah, I'll start again. Thanks, Eric. For the expense outlook, I still think the low single digits, low to mid-single digits outlook is still appropriate. It's a really fine line in terms of how we're balancing it, but we're really focusing on creating capacity through finding efficiencies elsewhere in the bank and then taking that capacity and reinvesting it in, especially on the AI side. The two strategic initiatives that we have with Live Oak Express and checking. I see what we've seen over the last six quarters or so is an average quarterly expense of about $85 million. That's where we were here in Q1 and again in Q2, and I think that's appropriate right now looking forward.

Speaker 6

Great. Thank you for taking the questions, and congrats on a great quarter.

Speaker 3

Thank you.

Operator

Your next question comes from the line of David Feaster with Raymond James. Your line is open. Please go ahead.

Speaker 7

Hey, good morning, everybody.

Speaker 3

Hey, David.

Speaker 2

Morning.

Speaker 7

I wanted to circle back to the credit front for a minute. It really does feel like things are stabilizing, looking at your numbers, especially just given the distillery book runoff. You mentioned being past the credit cycle. Is that commentary specific to the SBA credit cycle, or is that broad? Maybe just what are you seeing maybe more on that more traditional commercial portfolio and underlying credit trends in that book?

Speaker 3

Michael here. Yeah, that's a great question. For sure, when I was referencing the SBA credit cycle, our commercial portfolio has held up very well outside of this distillery segment. That's how I'm looking at that. You think about if we didn't have this distillery segment in our portfolio today, we'd be sitting here talking about a $12 million net charge off quarter and provision. That's well below $20 million. Feel really good about where our portfolio is landing on both the commercial and the SBA side. From my view, the bottom line is it's just a strong credit quarter for us.

Speaker 7

Okay. That's helpful. Switching over to the funding side again. You guys have done a great job on these business checking initiatives. It sounds like there's still more investments that are coming there. You talked about a third of your new clients that are opening checking accounts. What do you think it's going to take to get a real step change in the growth rate and balances within that business checking?

Speaker 2

Hey, David, it's BJ. I think we're seeing big step changes in growing those balances. If you think two and a half years ago, we really didn't have a checking account, and today we have 5% of our deposits in non-interest or other DDA. That's incredibly impressive. I think, on our path to getting to 10-plus percent, I'm feeling increasingly confident that we can do that. A lot of our initial growth, let's say the first 18 months, was really driven more on the commercial side and some of the larger balances as we were trying to mature our treasury management offering to be more attractive to small business customers, fit their needs, and quite candidly allow our lenders to understand how to sell checking. We've done all that.

Speaker 2

We're introducing merchant services as we speak, which obviously is very important to a large swath of our small business customers. That's kind of a lifeblood of how they do business and therefore what needs they have for checking accounts. Going forward, particularly with merchant services, we see that as a further tailwind to our ability to continue to grow checking balances. I feel really, really good about the trajectory to be really candid. If someone had told me two years ago that we'd be at 5% of our deposit base in checking, as impressive as our teams are, I would have probably taken the under. I'm incredibly pleased with where we are, and I expect that to continue.

Speaker 7

Okay. That's great. Going back to the expense side, look, I think what you've done on the expense control front and driving positive operating leverage is, I think, extremely underappreciated by the market. I was hoping you could maybe talk a bit about where these savings are coming from. Is this trimming some fat or just being more tactical with investing and spending or your AI initiatives that are really starting to enable you to optimize expenses? Again, maybe just talk a bit about some of the investments. Obviously the SBA Express or excuse me, Live Oak Express. What are some of the other initiatives that you're working on? Again, I haven't heard you talk about embedded finance in a bit.

Speaker 7

I know you got a lot of things cooking as always, just kind of curious what else you guys are investing in at this point.

Speaker 3

Thanks, David. I'll start on this. On the efficiency side, kind of where we're finding capacity, I think it's pretty much looking across the bank in pretty much every direction that we can. Some of that is looking at organizational structure that we have. Some of it's looking at different vendors and consolidating different systems. Some of it's being very intentional about where we decide to invest in new headcount. Rethinking marketing strategies to make sure that they're effective. We've been very deliberate diving into KPIs across all of our different departments to make sure that we can measure historically how those have trended and where those efficiencies are going. It's just much more intentional how we think about expenses than we have probably over the history of the bank.

Speaker 3

A lot of times when you focus your attention on things, you tend to look around to find pennies here or there. On the investment side, I'll start, I'll let BJ add on. Some of it's just we mentioned Live Oak Express, we mentioned the AI-native platform that we're working on there. We're also mentioning on expanding that team. On the checking side, make sure we have the right products, we have the right marketing strategies in place. That's kind of pure strategic initiative investment. On the AI stuff, I would say a lot of the efficiencies we've seen over the past call it a year and a half, has nothing to do with AI yet. It's really just driven from our intentional focus on it.

Speaker 3

Where our investment in AI now or things like BJ mentioned, giving enterprise licenses to AI platforms across the company, and partnering with different AI companies to help them think about or help us think about call it process transformation, right? How do you get from step 1 to step 9 without having to go through step 2 through 8?

Speaker 2

David, I'd also add Live Oak is not your typical bank. Chip has created a culture here and a DNA that is so forward-leaning and innovation-led, and that's what makes it special. What Chip and the founders have also done is created a culture of care here where people love this place. One of the mantras that we have is: how do we make it simpler, easier, and faster for our people to serve our customers? That shows up every day in how they're looking at whether or not to hire somebody, how to look at a process, where can we take costs out, how can we streamline something. Creating that kind of care takes a long time. It's not learned overnight, and we've had it for 17 years. It sounds a little trite, but it's true.

Speaker 2

That's what a lot of our people are doing day to day. On the flip side, because we are forward-leaning and innovation-led, we're spending millions and millions and millions of dollars on forward-leaning stuff. Live Oak Express, we've spent several million dollars standing that up. Checking, as you might imagine, to stand up an entire treasury management platform and team, several million dollars. Risk management and our ability to scale, we've spent several million dollars. AI-native platform, our new loan origination platform with Casca, several million dollars. We've done all this because our people are taking care of our company and taking care of our customers and recycling it into what's going to make us successful in the future. One more thing I'll add. Yes, it's very impressive what this team and this company has done on expenses.

Speaker 2

If you look and do the math on the first half of 2025 versus the first half of 2026, our total revenue is up 15%, and our expenses are up too. We're not sacrificing customer experience, we're not sacrificing loan pipelines and production, we're not sacrificing the ability to grow revenue in anything that we're doing. That type of ability to understand what bad costs might be that aren't driving revenue or customer experience and putting money into good costs, I think is a very special quality of this place.

Speaker 7

That's super helpful. Thank you.

Operator

Your next question comes from the line of Crispin Love with Piper Sandler. Your line is open. Please go ahead.

Speaker 8

Hey, good morning. This is Ben Gramen for Crispin Love. Thanks so much for taking the question. You're obviously very close to small businesses, and I'm just wondering if you could discuss what you're seeing now related to the health of the small business owner today, given the monthly and quarterly financials you get, survey work you do, et cetera, and just the conversations you have. I'm wondering if it's improving, stable, and just curious on what you're seeing there. Thanks.

Speaker 2

I'll start. Michael can jump in as well, or Chip. I'd say the one word I continually use, and it's very apt today for our small business customers, is resilient. We do a quarterly pulse survey. Ben, as you kind of referenced, we see portfolio trends and quarterly financials all the time. Our small business customer, this is their lifeblood. This is what they do. This is what they care about. They're going to do whatever they can to make that business as profitable and as prosperous as possible. What we're seeing is when a certain industry or a certain customer will have struggles with sales, they're going to optimize their cost structures, or they are going to deplete their cash reserves temporarily, or delay capital investment. Other times, they are going to use that to their advantage.

Speaker 2

We just feel really good about our customers and our people's ability to service those customers, which I think is really important.

Speaker 5

This is Michael here. The only thing I would add is that's a big part of what our servicing team does, and the fact that we are so verticalized gives us insight into what's happening within all these individual segments and then the broader view. We have real conversations with our customers and understand where they're at. I think there is, across the small business community as a whole, we're experiencing inflation. People are concerned about potential for interest rate increases. To BJ's point, that's what I always take away from all these conversations as well, is that our small business borrowers are very resilient, and that's a trait. The character component behind all of these deals is a trait that we actually look for on the front end of transactions to make sure that our customers have that ability to weather some storms.

Speaker 5

From my seat, the risk grade migration, the positive improvement in the portfolio is a good representation of how our customers are feeling.

Speaker 2

Let me add to that just a little bit. The little secret around here is that before Mike was Chief Credit Officer, he was head of family entertainment lending at the bank.

Speaker 9

Two weeks ago, I had a chance to go out to Ames, Iowa, and Cedar Rapids, Iowa, to see a family entertainment center. This guy is all I had full. These guys do all the work, I get a chance to have fun every day. Yesterday, I went to see a manufacturing company not far from here, a $13 million revenue business that had fallen on hard times, is now knocking it out of the park. We financed a rather wealthy fellow to buy the business, and a very interesting young couple has turned the business around, and now they're very interested in buying the business from him. We live the American dream every day.

Speaker 8

Awesome. Thank you so much for all of the color there. If I could follow up just on Live Oak Express. I know you've touched upon it a bit, but first congrats on the record quarter in originations. I'm just curious on the $750 million targeted future annual production. I'm just wondering if you could give a little more color on the timeline there. If anything's possible. Thank you.

Speaker 2

Hey, it's BJ. That'll be a multi-year trajectory for us. To go from nothing two years ago to we'll probably end the year at $300 million of production or so. That's pretty good start over two years. We do think our new loan origination platform is going to help us. We're doing a lot on what we call top-of-funnel efforts to optimize our marketing and our ability to get referrals from referral sources or the web that are efficient for us to run down. That's going to be helpful. Those two things will be in by the end of this year. Hopefully we start to see a step change pickup going into next year, but it'll take a couple of years for us to get to that cruise altitude. That $750 is hopefully just the beginning.

Speaker 2

We think that we can go north of that over time.

Speaker 8

Awesome. That's it for me. Thanks so much for taking my questions.

Speaker 2

Thanks, Brett.

Operator

Your next question comes from the line of Emily Lee with KBW. Your line is open. Please go ahead.

Speaker 10

Hey, everyone, this is Emily on for Tim Switzer. Thanks for taking my question.

Speaker 2

Hey, Emily.

Speaker 10

Hi. On Live Oak Express, you continue to target that $750 million of annual production, as you mentioned, over the next few years. Just curious where you expect average gain on sale premiums to settle over time with the growth of Express, given that's a higher premium business.

Speaker 3

Hi, Emily, this is Walt. I'll start on there. Our premium's been very consistent in that kind of 109-111 range. I think with our pricing power and our focus there, if you look historically at the secondary market, it sells for the small loans. Where our spreads are, I think anywhere from 109-113 feels reasonable. I think that's consistent going forward.

Speaker 10

Okay, awesome. Thank you. You talked a ton about your approach as it relates to technology and AI innovation, but could you maybe speak more on your partnership with Cascading AI and any progress there? Do you still expect those efficiencies to cut the time it takes to close an SBA loan from its current average of two months to just two weeks?

Speaker 2

Absolutely. We are still in pilot with Casca in our Live Oak Express area, our small dollar loan area. We've been doing it really componentized, if that makes any sense. If you think about the life cycle of originating a loan, there's lending, underwriting, closing, construction, servicing. There's a lot of pieces to it, and we want to make sure that we get all of those right. We've been testing those. We've put loans through the Live Oak Express platform already and closed some. We expect to do more over the next few months and then have a full rollout in our Live Oak Express product of Casca by the end of the year. We'll transition to building that out for the rest of our small business verticals and beyond.

Speaker 2

Our teams that are working on this are incredibly excited and impressed with the ease with which they can do their jobs, but then also most importantly, what the customer experience will be on the front end as well. More to come on that, but we feel really good about where we are and what we're going to deliver.

Speaker 10

That's great to hear. Really exciting. Just my last one, back to credit. With the provision this quarter being primarily driven by growth and given your commentary on current pipelines and loan momentum, where do you expect the provision to go moving forward?

Speaker 3

Yeah. I'll start on that one. Hi, Emily Lee, this is Walt Phifer. I think in the past we've talked about some provisions staying somewhere normalizing in the $20 million to $25 million range. I think

Speaker 3

To BJ's point, with our growth being the way it is and the pipeline being the way it is, that feels appropriate to me, right? I think that's a healthy level for us, and I love BJ's comments earlier when he said he would take that all day, every day, and so would I. Given the compounding earnings power that's going to provide for us in the future.

Speaker 2

I think, again, to reiterate, we've done a significant amount of work over the last couple of years to build a more sustainable business model and earnings engine. If it's $20 million to $25 million, it can be as low as $15 million one quarter, as high as $25 million another. It doesn't really matter because what we're doing on the front end to drive revenue and new customer acquisition, how our teams are being disciplined about good costs versus not, about what they're seeing on the front end, and how they're focused on credit quality. I feel incredibly encouraged by our ability to earn through, if you will, any fluctuations in quarterly provisions based on growth or anything else.

Speaker 10

Great to hear. Thank you guys for taking my questions, and congrats on the quarter.

Speaker 2

Thanks, Helen.

Operator

There are no further questions at this time. I will now turn the call back to Live Oak Bank President, BJ Losch, for closing remarks.

Speaker 2

Chip, any thoughts?

Speaker 9

Yeah, to our investors, I would close with two words, fun and faster. I was reflecting on this call this morning about how blessed I have been to be 31 years ago, putting the first bank on the internet 15 years ago in an effort to treat every customer like the only customer. We created basically what is nCino today, cloud native API first. This one's going to be different, folks. These large language models are progressing beyond our wildest imagination. When I sit here and think that we have a focus of $500,000 revenue businesses to $5 million revenue business, of which there are 3.5 million in this country, we've been at it 18 years, we've got about 10,000 customers. As we sit in front of our people, I say, BJ allows me to say two words, curious and tedious.

Speaker 9

I am 1,000% convinced that all 1,000 of our people have been very curious relative to artificial intelligence. I think we could take with this new technology, tedious out of this business, which means we're going to have more fun. Every day I see emails from everybody in this company. "Well, I used it and I saved an hour." "Well, I used it and I saved five hours." "Well, three of us got together and we saved 10 hours." I don't think our focus would ever be to eliminate staff in this area, if we can eliminate and have more fun and have more time, then we can get more customers. I think that is where you see this business today, fun and faster. We thank you for joining us, and we'll see you next quarter.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

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