Live Oak Bancshares, Inc.

Hello, everyone. Thank you for joining us and welcome to the second quarter 2026 Live Oak Bancshares, Inc. 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.

Thank you and good morning, everyone. Welcome to Live Oak's second quarter of 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 material 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 calls that are subject to risks and uncertainties. Factors that may cause the 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. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, and also be found in our SEC filings in the presentation materials. I would now turn the call over to our president, D.J. Losch.

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 LIVO continues to work, and you see it across all five themes on this slide. Reported EPS of 74 cents for the quarter, even 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. And 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. And 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. And you can see on slide five that those results are simply outstanding with adjusted PPNR of 23% over Q2 2025 and adjusted EPS of 77 cents of 20% from this time last year. The core revenue grew 11% year-over-year, while expenses grew just three, 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 7A program, and business checking. Both of these efforts launched in early 2024 and in just over two years, our teams have made significant gains. 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 30 cents 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 $450 million. and other DBA 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 to 15% a year over that timeframe as well. And 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 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. And again, if you do the math, we've got $744 million in balances in just over two and a half years, that are 325 basis points or more better than the rest of our portfolio. This has improved our NII and pre-tax earnings by $25 million or 40 cents of EPS annualized and growing. The industry average has about a 25% deviated total deposits mix. Our goal is just a minimum of 10%. On a current $14.5 billion deposit base that's growing 10% to 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. 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 for roughly $12 million is from new loans that we haven't had an opportunity to earn a penny 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. 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 cloud super users were roughly 15% of the company actively experimenting with Cloud for Enterprise and 90% of the groups across the company represented in that pilot. Our teams have now built more than 640 agents and skills across all our AI platforms. And 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. And third, active use of frontier technology by AI industry leaders. At LIVO, 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. And 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. While we will generate plenty of productivity and efficiency gains from AI, so will everyone else eventually. and 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 Loud Oak over the past three years and 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. So therefore, AI is an accelerant to our strategy, not the strategy itself. And this is going to allow us to play much more offense with AI, with new capabilities, new products, new customer acquisition, and new distribution. As Chip says, second pitch, first inning, and we're ready to go. Thank you to all of our vocers. 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?