Live Oak Bancshares NYSE: LOB reported third-quarter 2026 earnings per share of $0.52, as the bank recorded a $17 million provision tied to its exited distillery lending portfolio. President BJ Losch said the charge reduced earnings by about $0.27 per share, while management emphasized record loan production, improving operating leverage and growth in its Express lending and business checking initiatives.
“We reported EPS at $0.52, as obviously not the number we wanted to print and not the number you expected from us,” Losch said. He characterized the quarter’s underlying operating results as among the strongest in the company’s history.
Distillery portfolio drives elevated provision
Total provision expense was $55 million during the quarter. The distillery portfolio accounted for $17 million, or 31%, of the total. Live Oak exited the distillery lending vertical in 2024 and is now managing the remaining loans through workout efforts.
The bank said declining U.S. spirits demand and excess barrel inventory have pressured collateral values across the industry. Live Oak has recognized $29 million of provisions year to date through specific reserves and net charge-offs on the portfolio, which represents roughly one-half of 1% of its total loan book.
Losch said 98% of the remaining distillery portfolio is classified, with all remaining credits under enhanced monitoring. Eight of the 13 loans were still accruing at quarter-end. The company has dedicated workout resources to the portfolio and said it will monitor collateral realization, borrower performance and borrower cooperation.
Chief Credit Officer Michael Cairns said the company had about $60 million of unreserved exposure remaining in the portfolio, backed by what he described as conservative collateral estimates. He said Live Oak intends to exit the remaining credits as safely and quickly as possible, though some borrowers continue to make payments.
Outside of distillery lending, management said small-business banking credit trends remained stable. Small-business past dues were 9 basis points, nonaccrual loans were 1.10%, and net charge-offs were 1.07%, consistent with recent quarters. Commercial banking past dues were essentially zero, while nonaccruals were 1.17% and net charge-offs were 86 basis points, reflecting distillery actions and several larger commercial credit impairments.
Cairns said Live Oak was not seeing broad-based credit deterioration across its SBA and commercial books. He noted that commercial credit results can be more volatile because of the larger size of those loans and the timing of impairments, recoveries and charge-offs.
Loan production and operating leverage reach records
Third-quarter originations totaled a record $2.1 billion across 34 industries, up 38% from the prior quarter and 29% from a year earlier. Period-end loans reached $13.9 billion, increasing 6% sequentially and 16% year over year.
Losch said $16 million of the quarter’s provision was associated with loan growth, as the bank added more than $700 million in loan balances. Under the current expected credit loss, or CECL, accounting framework, Live Oak reserves for loans when they are originated, before earning interest income on them.
Adjusted revenue increased 15% year over year to $172 million, while adjusted expenses increased 1%, according to management. Adjusted pre-provision net revenue, or PPNR, reached a record $88 million, up 33% from a year earlier and 16% from the prior quarter. The adjusted efficiency ratio improved to 49% from 56% a year ago.
On a reported basis, Chief Financial Officer Walt Phifer said revenue rose 23% year over year while expenses grew 3%, producing a reported efficiency ratio of 49%.
Net interest income was $133 million, up 6% sequentially and 15% from a year earlier. Net interest margin held at 3.30%, in line with the preceding five quarters. Phifer said loan volume and mix added about 14 basis points to the margin, offset by higher funding costs amid strong loan growth and a competitive deposit market.
Management expects a relatively stable margin in the near term, with balance-sheet growth serving as the primary driver of net interest income. Phifer said a 25-basis-point rate increase could contribute roughly $5 million to $10 million of annual net interest income, though the ultimate effect depends on growth and deposit competition.
Express lending and checking expansion continue
Live Oak Express, the company’s small-dollar SBA 7(a) lending operation, originated a record $107 million during the quarter, up 173% from a year earlier and from $82 million in the prior quarter. The business generated $7 million in gain-on-sale revenue, up 250% year over year.
Live Oak generally sells more than 75% of the guaranteed portion of Express loans, while retaining the unguaranteed portion on its balance sheet. The company said Express has generated $18 million of gain-on-sale revenue over the last five quarters and continues to target more than $750 million in annual originations at “cruise altitude.”
Total gain on sale of guaranteed loans was $19 million in the quarter, up 12% both sequentially and year over year. Live Oak Express represented nearly 40% of that total.
The company also continued to expand its business checking platform. Checking balances surpassed $500 million, up 39% from a year earlier, while total relationship deposits reached $1.3 billion. Relationship deposits carried an average cost of 1.84%, compared with the company’s overall deposit cost of 3.47%.
About 25% of Live Oak customers now have both a loan and deposit account, up from 20% a year ago and 3% four years ago. Losch said the company plans to introduce merchant services as a way to further deepen small-business customer relationships and increase sticky operating-account balances.
Capital and technology investments
Live Oak funded loan growth with approximately $920 million in new deposits during the quarter, with customer deposit channels accounting for about 75% of that growth. Management described the funding market as highly competitive, citing stated rates, promotional offers, exception pricing and relationship-based pricing as factors affecting deposit costs.
The company said roughly 37% of assets were cash or government-guaranteed at quarter-end. Its Mahan ratio, which measures Tier 1 capital, reserves and fair-value marks against unguaranteed loans, was 15.4%. The tangible common equity version of that measure was 14%.
Live Oak also said it is expanding its use of artificial intelligence. All employees have access to AI-native tools, and the company has 200 Claude “super users.” A bank-wide Claude for Enterprise rollout was scheduled to begin in the fall, with management highlighting potential uses in portfolio management, credit data aggregation and faster credit work.
About Live Oak Bancshares (NYSE:LOB)
Live Oak Bancshares, Inc is the parent company of Live Oak Bank, a digital-focused financial institution headquartered in Wilmington, North Carolina. Founded in 2008, the company specializes in providing banking services to small and mid-sized businesses, with a particular emphasis on loans to owners of professional and industry-specific businesses.
Through Live Oak Bank, the company offers commercial lending, Small Business Administration (SBA) loans, business deposits, treasury management and other financial services.
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