Live Oak Bancshares, Inc. (LOB) Earnings

Management highlights

### Overall Financial & Strategic Performance - Core revenue grew 11% YoY, while total non-interest expense declined 1% YoY to $85 million, driving strong operating leverage. Adjusted pre-provision net revenue (PPNR) grew 23% YoY to $76 million, and adjusted EPS grew 20% YoY to 77 cents. Reported EPS was 74 cents, up 45% YoY. The adjusted efficiency ratio improved 8 percentage points YoY to 53%, and the reported efficiency ratio improved 7 points YoY to 54%. - Return on average common equity expanded 251 basis points YoY; the long-term target is sustainable 15% ROE and 15%+ annual EPS growth, which management expects to achieve in the next several quarters. - Total deposit portfolio grew 16% YoY, funding strong loan growth in a competitive market. ### Credit Quality Highlights - 10-year net charge-off ratio is 40 basis points, far outperforming the industry average of over 120 basis points. - 87% of the loan portfolio was originated at current or higher interest rates, supporting credit durability. Overall credit trends are stable to improving, with criticized and classified loans improving substantially QoQ. - Q2 2026 provision expense totaled $26 million: 45% driven by strong loan growth, 40% driven by the exited distillery portfolio, and 15% from macro and other factors. Excluding the distillery portfolio (which represents 0.5% of total loans), unguaranteed ACL coverage improved to 2.01%, down 13 basis points QoQ. Over 30-day past due balances remain very low, and non-accruals were flat QoQ. Net charge-offs increased only due to the distillery portfolio. ### AI & Innovation Strategy - 100% of employees now have access to AI-native tools, with 150 AI superusers (15% of staff) and 90% of company groups participating in enterprise AI pilots. Over 640 custom AI agents/skills have been built in-house across all platforms. - AI is structured as an accelerant to the existing strategy (not the strategy itself), with three core focus areas: building in-house proprietary expertise via direct partnership with AI providers, select co-design engagements for competitive advantage, and active adoption of frontier technology from industry leaders. - Management prioritizes offensive AI use for new products, customer acquisition, and distribution, rather than just cost cutting. The AI-powered CASCA loan origination platform is in pilot for Live Oak Express, with closed loans completed, and full rollout to Express planned for the end of 2026, before expanding to other segments. The target is to reduce SBA loan closing time from 2 months to 2 weeks.

Guidance

- **NIM Outlook**: Management expects NIM to remain generally stable in the low to mid 330 basis point range (consistent with the past 2-3 year average) for the back half of 2026, as the positive impact of strong loan growth offsets margin compression from intense deposit competition. - **Loan Growth**: Management reaffirms 10-15% annual loan growth, and notes pipeline momentum leaves open the possibility of upside to this target. Pricing discipline on new originations remains strong, with no increase in risk or portfolio remixing. - **Expense Outlook**: Low to mid-single digit annual expense growth remains the appropriate outlook. Management expects average quarterly non-interest expense to hold near $85 million (the Q1 and Q2 2026 level), as capacity freed from operational efficiencies is reinvested in strategic priorities (AI, Live Oak Express, business checking). - **Credit Provision**: Provision expense is expected to normalize in the $20 to $25 million quarterly range, which management views as healthy and manageable given the compounding earnings power from loan growth. - **Live Oak Express Cruise Altitude**: The $750 million annual production target is a multi-year trajectory. Management expects 2026 full-year production of ~$300 million, with step change growth expected in 2027 after the full rollout of the new AI-powered origination platform. Average gain-on-sale premiums are expected to remain in the 109 to 113 range long-term. - **Business Checking Target**: Management remains confident in reaching the 10% minimum share of total deposits target, with merchant services rollout expected to accelerate small business adoption.

Segment performance

Live Oak Bancshares operates two core strategic segments plus the overall lending business: 1) Overall Lending: Total Q2 2026 loan originations hit $1.5 billion across 33 industries, with total loan balance growing 4% quarter-over-quarter (QoQ) and 16% year-over-year (YoY) to $13 billion. The loan pipeline reached a record $4.6 billion. Net interest income (NII) was $125 million, up 5% QoQ and 15% YoY, with a net interest margin (NIM) of 3.33%, expanding 6 basis points QoQ. Gain on sale from guaranteed loans was $17 million, up 13% QoQ and flat YoY, with SBA premiums remaining steady. 2) Live Oak Express (small-dollar 7A program): Q2 2026 originations hit a record $82 million, up 63% YoY, contributing $5 million in gain-on-sale revenue (29.4% of total quarterly gain-on-sale). Cumulative gain on sale over six quarters totals $19 million. Long-term annual production target is $750 million at cruise altitude. 3) Business Checking: Checking balances grew 15% QoQ and 63% YoY to $450 million, with total DBA deposit balances reaching $744 million, representing ~5% of the firm's $14.5 billion total deposit base, up from virtually zero 2.5 years ago. Currently, over one-third of new loan customers open a checking account, and 25% of total customers have both a loan and deposit account (up from 3% four years ago). Checking deposits yield 325+ basis points lower funding cost than the rest of the deposit portfolio, adding $25 million annualized pre-tax earnings improvement. Long-term target is a minimum 10% of total deposits in checking.

Risks & headwinds

- Intense competition for deposits, including exception-based pricing and cash promotions from competitors, creates ongoing pressure to lower deposit costs and maintain margin stability. - Macroeconomic risks include potential additional interest rate hikes, renewed tariffs, rising fuel costs, and persistent inflation, which impact small business operating performance and credit quality. - Consumer discretionary spending segments are monitored closely for potential credit deterioration, though no outsized weakness has been observed to date outside of the already exited small distillery portfolio. - Credit provision increases are magnified for growing firms under the CECL accounting standard, as provision must be taken for new loans before any revenue is earned from them.

Analyst Q&A

• Q: NIM is currently in the prior low-to-mid 330 basis point guidance range; should investors expect it to stay in that range through the back half of 2026? /

  A: Management confirmed NIM will remain in that range. Strong loan growth creates upward pressure on margin, while intense deposit competition creates downward pressure. These factors offset each other, keeping NIM stable consistent with the 2-3 year average NIM of 330 to 335 basis points. There is no expected material deviation from the prior range. /n/n

• Q: Excluding the exited distillery portfolio, is the small business credit cycle past its peak stress, and does this apply to both SBA and commercial portfolios? /

  A: The commentary that the bank is past the credit cycle applies broadly to both SBA and commercial portfolios. Outside of the small distillery segment, both portfolios have performed very well, with substantial QoQ improvement in criticized and classified loans, particularly in commercial. Excluding distilleries, net charge-offs and provision would both be far lower, resulting in a very strong credit quarter for the entire portfolio. /n/n

• Q: Where are expense savings coming from, and what new strategic initiatives is the bank investing in beyond Live Oak Express and checking? /

  A: Savings come from intentional, company-wide efficiency efforts including organizational streamlining, vendor consolidation, and granular KPI tracking across all departments. This creates capacity to reinvest in high-growth priorities: Live Oak Express, the business checking and treasury management platform, risk management scaling, and the AI-native CASCA loan origination platform. Millions are invested in these initiatives, balanced against cost cutting elsewhere, leading to 15% YoY revenue growth against just 2% YoY expense growth in H1 2026, with no sacrifice to customer experience or growth. /n/n

• Q: What is the timeline to reach Live Oak Express's $750 million annual production target, and what is the outlook for gain-on-sale premiums? /

  A: The target is a multi-year trajectory, with full-year 2026 production expected to hit ~$300 million. Full rollout of the AI-powered origination platform and optimized top-of-funnel marketing by end of 2026 will drive step change growth in 2027, with cruise altitude of $750 million expected a few years out, with potential to grow beyond that. Gain-on-sale premiums have been steady between 109 and 111, and are expected to stay in a 109 to 113 range long-term, consistent with historical secondary market pricing for small SBA loans.