Operator: Hello, everyone. Thank you for joining us and welcome to the Second Quarter 20 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 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Gregory W. Seward, general counsel. Gregory? Please go ahead.
Gregory W. Seward: Thank you, good morning, everyone. Welcome to Live Oak's Second Quarter 26 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 material that we will reference on the call, please visit our website at investor.liveoakbank.com 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. 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 in the presentation materials. Now turn the call over to our President, William C. Losch.
William C. Losch: Thanks, Gregory. Good morning, everybody. Thanks for joining us. Let's get started on slide 4. Our strategy to create more sustainable earnings momentum here at Live Oak continues to work you see it across all 5 themes on this slide. Reported EPS of $0.74 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 would expect from Live Oak, our urgency on AI activation can continues to accelerate. Turning to slide 5. 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 5 that those results are simply outstanding. With adjusted PPNR of 23% over Q2 25 and adjusted EPS of 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 8 points. From 61% last year to 53% on an adjusted basis. Over the last several quarters, turning to slide 6, we have been sharing with you progress on 2 key initiatives. Live Oak Express, our small dollar $7.08 program, and business checking. Both of these efforts launched in early 24 and in just over 2 years, our teams have made significant gains. On slide 6, 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 have generated $19 million of gain on sale over the last 6 quarters, about point $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 7. 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. We are now at roughly 5% of checking and other DDA balances to total deposits, up from about 4% last quarter and from virtually zero 2.5 years ago. What makes this even more impressive is that the deposit base has been growing 10 to 15% a year over that time frame as well. And now over 1/3 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 4 years ago, that was only 3%. This is absolutely phenomenal work by our lenders, and our treasury management teams and there is a lot more to come. And, if you do the math, we have got 744 million of balances in just over 2.5 years that are 325 basis points or more better than the rest of our portfolio. This has improved our NII and pretax earnings by $25 million or 40¢ of EPS annualized and growing. The industry average has about a 25% DDA to total deposit mix. Our goal is just a minimum of 10%. On a current $14.5 billion deposit base that is growing 10% to 15% a year, that is massive upside to come as we become the primary bank for our and significantly improve our funding profile. On slide 8, 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 2 years, Live Oak's performance continues to significantly outperform with a 10-year net charge off ratio of 40 basis points compared to over a 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 or roughly $12 million is from new loans that we have not had an opportunity to earn a penny on yet. CECL is not kind to growing companies like ours. I would 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 deposit credit trends. Aside from our exited distillery portfolio, which is only about 1 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 am very proud of our lending and credit teams for what they are delivering. Turning to slide 9, As you might expect, Live Oak is incredibly forward leaning on the to harness the power of AI. Our AI activation and embrace of the technology is high. A 100% of our employees now have access to AI native tools. We have a 150 cloud super users, or roughly 15% of the company actively experimenting with cloud for enterprise and 90% of the group's 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, mentoring provide unique competitive advantages and knowledge building, And third, active use of frontier technology by AI leaders. At Live Oak, this is executive led, not delegated. it is offensive, not defensive. And it is 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 am 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 Live Oak over the past 3 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 are ready to go. Thank you to all Live Oakers. I could not 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?
Walter J. Phifer: 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 is a continuation of a deliberate multi-quarter trend. The same drivers we have 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. And to us, that is what real momentum looks like. Sustained and building across the business. Now let's dive into slide 12 and this breaks down the quarter across the 6 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 74¢. Up 23% linked quarter and 45% year over year. And 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. And 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 the 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 7 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 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. And to fund that growth, we have also grown our deposit portfolio 16% year over year. We are very proud of these growth levels in a highly competitive markets on both fronts. We are 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 the next several quarters. Focusing on the right hand side of the page, we are highly encouraged by the early success of our 2 key strategic initiatives. Live Oak Express and checking. As BJ mentioned, both of these initiatives continue to ramp nicely. Live Oak Express had its best quarter ever in Q2. With $82 million of loan originations and $5 million of gain on sale contribution. And checking balances increased 15% linked quarter and 63% compared to this time last year. Our Q2 provision expense of $26 million was driven by both our strong quarterly loan growth that was approximately 3x the balance growth we generated in Q1, and our exited distillery portfolio. Excluding this distillery portfolio, our broader portfolio of 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 1 quick call out on the unique items front as noted on slide 11. Our effective tax rate was 19.9% this quarter. Which included $2.7 million benefit from purchase tax credits and other onetime tax adjustments. Our adjusted EPS of 77¢ normalizes for that at a 24% tax rate. So 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. And 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 impact. 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. We believe that is a favorable backdrop for the bank's net interest income and NIM profile. And 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 guarantee 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. SBA premiums remained steady, and 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 grow, providing both efficient fee income as well as optionality in our loan sales strategy. that is a great place to be. I am proud of the expense and efficiency trends detailed on slide 17. Total noninterest 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. And it is how we have improved our efficiency ratio to 54% in Q2. 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. But 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 18. The primary metric and trends to focus on this page is the unguaranteed ACL coverage ratio shown in the top left graph. As this is the most holistic metric how we think directionally about the total loan portfolio's credit health. The declining trend represents improving broader portfolio trend, strong high quality growth, and our focus on proactively identifying and then exiting troubled credit. 3 other notable items on this page include the Q2 provision attribution summarized on the top right. As BJ mentioned, Q2's provision expense was largely driven by 2 factors. Strong loan growth, which we refer to as good provision, which was almost half of the provision for the quarter, as well as specific impairments related to and our exited distillery portfolio. As you can see in the table on the bottom of the page, over 30 days past due remain very low, and non accruals remain 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. And lastly, given the possibility of additional rate hikes, we do find comfort in the fact that approximately 87% of our loan portfolio has been originated at current or higher rates. To wrap up, our earnings momentum is sustainable in building. Operating leverage is increasingly working in our favor, Our growth engine and strategic initiatives are gaining traction. And our credit profile remains sound. Thank you to the Live Oak team for another strong quarter. And with that, back to BJ for his closing remarks before Q&A.
William C. Losch: Thanks, Walt. 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. To withdraw your question, press star 1 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 Q&A roster. Your first question comes from the line of Janet Lee with TD Securities. Your line is open. Please go ahead.
Bill Young: Hey. Good morning, guys. This is actually Billy Young stepping in for Janet. How are you?
William C. Losch: Billy, how are you doing?
James S. Mahan: How's it going, Billy?
Bill Young: Doing well. Just to elaborate on your relatively stable NIM outlook in the near term, how I think you previously had, I think, a range. So should we expect it to just generally remain in that range over the back half of the year? Hey, Billy.
Walter J. Phifer: This is Walter. Sorry about that. I think you cut out on that question Could you do us a favor and repeat? I apologize about that. Can you hear me now? Yes. Thanks, Billy.
Bill Young: 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-3.30s. It seems you expect it generally to kind of remain in this range over the back half this year.
Walter J. Phifer: Yeah. Again, thanks, Billy, for repeating that. This is Walt. Yeah. I think that is right. I think there is 2 primary factors influencing the margin here in the near term. You have the heavy growth, which is great, and that tends to help with an expansion. And then the on the deposit front, the, you know, the competition there is been pretty intense. We have seen multiple ways different competitors are attacking that, whether it is cash promotion etcetera based pricing, and so forth. So growth will help expand them, Deposit competition helps compress NIM. I think largely, you know, given where we have been and given where we have been over the last say, 2 to 3 years with an average NIM of, call it, 3.33% to 3.35%. Yeah. That feels that feels appropriate given where we are at today.
Bill Young: Got it. Thank you for that. And then just secondly, your net charge off trends are very encouraging. Though, you know, we have seen some continued upward pressure on non NPLs. So can you maybe just comment on your line of sight on just negative risk migration in your book at this point? And then, you know, any updated thoughts about where we sit with respect to the small business credit cycle?
William C. Losch: Okay.
Walter J. Phifer: Yeah.
Michael Cairns: This is Michael Cairns. Happy to take that question. So when I look back, I mean, there is a lot of discussion on the call already about the distillery portfolio, which is a really small component of our loan assets. And so I take a broader view and take a step back and look at how the portfolio as a whole, where we are actively lending is performing. We have got $13 billion worth of loans. We are very active in SBA and commercial. And when I look 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. But 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. And our past dues remain very low. So all of that is a good signal to us that we think that our bank is past the credit cycle that we have been discussing in prior quarters and we are in a good position to move forward.
Bill Young: that is great to hear. And maybe just 1 quick follow-up on that. Do you see any other near term opportunities to perhaps exit any other portfolio similar to the distillery exit?
Michael Cairns: No. Know, obviously, I have spent a lot of time a lot of my time in the credit team thinking about all of those macroeconomic risks that exist out there. We are watching interest rates and thinking about that, we build in assumptions in our underwriting to anticipate rising rates. Tariffs are back in the news, we are looking at fuel costs and inflation and how that impacts our customers potential customers. If there is any area that I watch more specifically, it is anything that is related to consumer discretionary spending. So but our portfolio has held up really well. And I have not seen any particular segment that has shown outsized deterioration so far.
Bill Young: Great. Thank you very much. I will step back.
Operator: Your next question comes from the line of Eric Spector with Cantor Fitzgerald. Your line is open. Please go ahead.
Eric Spector: 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. Curious how you think about that, you know, 10 to 15% growth, you know, 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, you know, that 10 to 15% growth level?
William C. Losch: Yeah. Hey. Yeah. Hey, this is BJ. I feel great about it. And I am continuing to be pleasantly surprised and impressed with our lenders and our people. They constantly find ways to find new, you know, referral source to network across existing customers to get more production. To build partnerships. And so activity remains very, very high. Chip and I were talking about it the other day. I think it was not, you know, 2 quarters-- excuse me, 2 years ago. Pipelines were half of where they are today. Half. And to continue to build that pipeline and keep it strong is fantastic. So know, looking forward, we see continued momentum. We can see 3 to 6 months out in our pipeline in terms of what is going to ultimately turn into production. And we feel really, really good about that. So we expect that to continue. 1 thing I will add when Walter was talking about margins, I am also very impressed with what our lenders are doing with pricing and pricing discipline. We have seen an increase in new origination pricing even as production has continued to rise, particularly on the small business side. And so that is not taking more risk. that is 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. So I am very pleased with the discipline that the lenders have. And the pipelines that they are building.
Eric Spector: that is helpful color. And then 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.
Walter J. Phifer: Yeah. I will start with that, Eric. Thanks for the question. I think our deposit team is doing a fantastic job in this environment. there is multiple ways to, you know, to continue to grow our deposits Obviously, you gotta be competitive in pricing, and I think they do a really good job understanding the market in both on our consumer and business savings side. As well as our customer CDs. They are also really creative in how they think about marketing strategies, especially in a in an AI age of you combating Google Gemini and chat and all those things. You know, where we see the most pressure is actually things that not in stated rates. it is more in exception based pricing, from our competitors. So we do what we can to combat that when we need to, but broadly, you know, we think our deposit strategy is working. it is not a silver bullet. there is not 1 channel. there is not 1 product. it is pretty diversified with what we have. And then you know, as we mentioned on earlier in the call, and Vijay really hit on in his section, you know, the checking story for us is just substantial upside. And that is where we continue to lead in building that product out adding merchant services, and things like that. So we are really confident we can continue to fund our growth. Here going forward, and, you know, thanks to the deposit team for what they are doing.
Eric Spector: Great. And then last 1 for me. Just on expenses, we talked about kind of mid single digit expense growth in the past. Expenses were down this quarter, but I know you are continuing to invest in, you know, innovation and new initiatives in AI. Can you talk about how you think about the expense outlook here going forward?
Walter J. Phifer: Yeah. I will start again. Thanks, Eric. Yeah. So for, you know, the expense outlook, I still think the low-single digits, low- to mid-single digits outlook is still appropriate. it is a really fine line terms of how we are balancing it, but we are 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. And, you know, and the 2 strategic initiatives that we have with Live Oak Express and checking. So I see, you know, what we have seen over the last, call it, 6 quarters or so is an average quarterly expense of about $85 million. that is where we were here in Q1 and again in Q2, and I think that is appropriate right now looking forward.
Eric Spector: Great. Thank you for taking the questions, and congrats on a great quarter.
Walter J. Phifer: Thank you.
Operator: Your next question comes from the line of David Feaster with Raymond James. Your line is open. Please go ahead.
David Feaster: Hey, good morning, everybody.
William C. Losch: Hey, David.
David Feaster: I wanted to circle back to the credit front for a minute. You know, 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? And maybe just what are you seeing maybe more on that more traditional commercial portfolio and underlying credit trends in that book?
Michael Cairns: Yeah. Michael here. Yeah. that is a great question. So for sure, when I was referencing the SBA credit cycle, our commercial portfolio has held up very well. Outside of this distillery segment. And so know, that is how I am looking at that. You think about if we did not have this distillery segment in our portfolio today, we would be sitting here talking about you know, a $12 million net charge off quarter and provision that is of well below $20 million. And so feel really good about where our portfolio is landing on both the commercial and the SBA side. And from my view, the bottom line is the strong credit quarter for us.
David Feaster: Okay. that is helpful. And then, you know, switching over to the to the funding side again. You again, you guys have done a great job on this business checking initiative. It sounds like there is still more investments that are coming there. You know, you talked about a third of your new clients that are opening checking accounts. What do you think will it take to get a real step change in the growth rate and balances within that business checking?
William C. Losch: Hey, David. it is BJ. I think we are seeing big step changes in growing those balances. If you think 2.5 years ago, we really did not have a checking account And today, we have 5% of our deposits in noninterest or other DDA. that is incredibly impressive. And I think you know, on our path to getting to 10 plus percent, I am 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 offering to be more attractive to small business customers fit their needs, and you know, quite candidly, you know, allow our lenders to understand how to sell checking. We have done all that. We are introducing merchant services as we speak, which obviously is very important to a large swap of our small business customers. that is kind of a lifeblood of how they do business, and therefore, what needs they have for checking accounts. So going forward, particularly with merchant services, we see that as a further tailwind to our ability to continue to grow checking balances. So I feel really, really good about the trajectory to be really candid. You know, if someone had told me 2 years ago that we would be at 5%, of our deposit base in checking. Know, as you know, as impressive as our teams are, I would have probably taken the under. So I am incredibly pleased with where we are, and I expect that to continue.
David Feaster: Okay. that is great. And then, going back to the expense side, I mean, look. I think what you have done on the expense 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. Mike, is this is this trimming some fat or just being more tactical with investing in spending or your AI initiatives that are really starting to enable you to optimize expenses, And then, again, maybe just talk a bit about some of the investments you I mean, obviously, the SBA Express, you know, or I excuse me, Live Oak Express, But, you know, what are some of the other initiatives that working on? Again, I have not heard you talk about embedded finance in a bit. I know you got a lot of things cooking as always, but just kinda curious what else you guys are investing in at this point.
Walter J. Phifer: Thanks, David. I will start on, this is Walter. On the efficiency side, kind of where we are finding capacity, I think it is pretty much looking, you know, 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 is looking at different vendors and consolidating different systems. You know, someone is being very intentional about where we decide to invest in new headcount. Rethinking, you know, marketing strategies to make sure that they are effective. We have we have been very deliberate diving into KPIs you know, across all of our different departments to make sure that we can measure where, you know historically, we are how those are trended and where those efficiencies are going. So it is just much more intentional how we think about expenses than we have probably over the history of the bank. And a lot of times focus when you focus your attention on things, it tends you tend to live around the 5 pennies here and there. On the on the investment side, I will start. I will let Vijay add on add on. Some of it is just you know, we have mentioned Live Oak Express. We will we mentioned AI data platform that we are working on there. We are also mentioning on expanding that team. On the checking side, make sure we have the right products, with the right marketing strategies in place. So that is kind of pure you know, strategic initiative investment.
William C. Losch: On the AI stuff, I would say a lot of the efficiencies we have seen over the past, call it, year and a half, had nothing to do with AI yet. it is really just driven kind of from our intentional focus on it. Where our investment in AI now or like Vijay mentioned giving a enterprise licenses to AI platforms across the company. And partnering with, you know, different AI companies to help them think about or help us think about you call process transformation. Right? How do get from step 1 to step 9? Having to go through step 2 through 8? Yeah.
Walter J. Phifer: David, I would I would also add Live Oak is not your typical bank.
James S. Mahan: You know? Yeah. Chip has created a culture here in the DNA that is so forward leaning and innovation led and you know, that is what that is what makes it special.
William C. Losch: But what Chip and the founders have also done is created a culture of care here where people love this place. 1 of the mantras that we have is how do we make it simpler easier, and faster for our people to serve our customers? And that shows up every day in how they are looking at whether or not to hire somebody. How to look at a process, where can we take cost out, how can we streamline something. And so you know, kind of creating that kind of care, takes a long time. it is not learned overnight, and we have had it for 17 years. So it sounds a little trite, but it is true. that is that is what a lot of our people are doing day to day.
Walter J. Phifer: On the flip side, you know, because we are forward leaning and innovation led, know, we are spending millions and millions and millions of dollars on forward leaning stuff.
William C. Losch: Live Oak Express, we have 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 have spent several million dollars. AI native our new loan origination platform with Canapi, several million dollars. So you know, we have done all this because our people are taking care of our company and taking care of our customers and recycling it into what is gonna make us successful in the future.
James S. Mahan: And 1 more thing I will add.
William C. Losch: Yes. it is very impressive what this team and this company has done on expenses. But if you look and do the math on the first half of 25, versus the first half of 26 our total revenue is up 15%. And our expenses are up 2%. And so we are not sacrificing customer experience. We are not sacrificing loan pipelines and production. We are not sacrificing the ability to grow revenue. In anything that we are doing. And so, you know, that type of ability to understand what bad costs might be that are not driving revenue or customers experience and putting money into good costs, I think, is a very, very special quality of this place.
David Feaster: that is super helpful. Thank you.
Operator: Your next question comes from the line of Crispin Love with Peter Sandler. Your line is open. Please go ahead.
Ben Graham: Hey. Good morning. This is Ben Graham in for Crispin Love. Thanks so much for taking the question. You are you are obviously very close to small businesses, and I am just wondering if you could discuss what you are seeing now related to the health of the small business owner today. Given the monthly and quarterly financials you get, survey work you do, etcetera. And just the conversations you have. I am I am wondering if it is improving stable. I am just curious on what you are seeing there. Thanks.
Walter J. Phifer: I will I will start.
Michael Cairns: Michael can jump in as well.
William C. Losch: Or Chip, but I would say the 1 word I continually use, and it is very apt today for our small business customers, is resilient. You know? So we do a quarterly poll survey, Ben, if you know, kinda referenced, we see portfolio trends quarterly financials all the time. And our small business customer, this is their lifeblood. This is what they do. This is what they care about. And so they are going to do whatever they can to make that business as, you know, profitable and as prosperous as possible. And so, you know, what we are seeing is you know, when they have when a certain industry or a certain customer will have struggles with sales. They are going to optimize their cost structures or they are going to deplete their cash reserves temporarily or delay capital investment But then other times, they are going to use that to their advantage. So you know, we just feel really good about our customers and our people's ability to service those customers. Which I think is really, really important.
Michael Cairns: So mean, the only thing this is Michael here. The only thing I would add is that is a big part of what our servicing team does. And the fact that we are so you know, verticalized gives us insight into what is happening within all of these broader all these individual segments and then the broader view. And so we have, like, real conversations with our customers and understand where they are at. And, you know, I think there is across the small business community as a whole, There are we are we are experiencing inflation People are concerned about potential for interest rate increases, but our to Vijay's point, that is what I always take away from all these conversations as well. Is that our small business borrowers are very resilient, and that is a trait The character component behind all of these deals is a trait that we look for on the front end of transactions to make sure that our customers have that ability to weather some storms. So from my seat, the risk grade migration, the positive improvement in the portfolio is a good representation of how our customers are. Are feeling.
James S. Mahan: Yeah. 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. 2 weeks ago, I had a chance to go out to Ames, Iowa and Cedar Rapids, Iowa to see a entertainment center, and this guy is all a head full. These guys do all the work, so I get a chance to have fun every day. And yesterday, I went to see a manufacturing company not far from here. $13 million revenue business that had fallen on hard times is now knocking it out of the park. So we financed a rather wealthy fellow to buy the business and a very interesting young couple had turned the business around. And now they are very interested in buying the business from him. So we live the American dream every day.
Ben Graham: Awesome. Thank you so much for all of the color there. And if I could follow-up just on Live Oak Express. I know you have touched upon it a bit, but first, congrats on the record quarter in originations. And I am just curious on the $750 million targeted future annual production. I am just wondering if you could give a little more color on the timeline there. Yeah. If any if anything's possible. Thank you.
William C. Losch: Hey. it is it is BJ. That will be a multiyear trajectory. For us. So to go, you know, from nothing 2 years ago to, you know, we will probably end the year at 300 million of production or so. that is that is pretty good start over 2 years. We do think our new loan origination platform is going to help us. We are 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 is gonna be helpful. So you know, those 2 things will be in by the end of this year. And so know, hopefully, we start to see a step change pick up going into next year. It will take a couple of years for us to get that at to that cruise altitude. And that 750, is hopefully just the beginning. We think that we can go north of that over time.
Ben Graham: Awesome. that is it for me. Thanks so much for taking my questions.
William C. Losch: Thanks, Ben.
Operator: Your next question comes from the line of Emily Lee with KBW. Your line is open. Please go ahead.
Emily: Hey, everyone. This is Emily on for Tim Switzer. Thanks for taking my question.
William C. Losch: Hey, Emily.
Walter J. Phifer: Yeah.
James S. Mahan: Hi.
Emily: So on Live Oak Express, you know, you continue to target that 57 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 the higher premium business?
Walter J. Phifer: Yeah. Hi, Emily. it is Walter. I will start on there. So our premium has been very consistent. In that kind of 1.09 to 1.11 range. I think with our pricing power and our focus there, and if you look historically at the secondary market, it sells for the small loans. You know, where our spreads are, I think you know, anywhere from 1.09 up to 1.13 feels reasonable. So I think I think that is con consistent going forward.
Emily: Okay. Awesome. Thank you. And then know, you talked a ton about your approach as it relates to technology and AI innovation. But could you maybe speak more on yyour partnership with Canapi AI and any progress there? And do you still expect those efficiencies to cut the time it takes to close an SBA loan from its current average of 2 months to just 2 weeks?
William C. Losch: Absolutely. We are still in pilot, with Canapi. In our Live Oak Express area, our small dollar loan area. And so you know, we have been doing it in a really componentized way, if that makes any sense. You know, if you think about life cycle of originating a loan, there is lending, underwriting, you know, closing, construction, servicing. You know, there is a lot of pieces to it. And we wanna make sure that we get all of those right. So we have been testing those. So we have we have put loans through the Live Oak Express platform already and closed some. So we expect to do more over the next few months and then have a full rollout in our Live Oak Express product of Canapi by the end of the year. We will then transition to, you know, building that out for the rest of our small business verticals and beyond. But 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. So more to come on that, but we feel really good about where we are and we are going to deliver.
Emily: that is great to hear. Really exciting. Then just my last 1, 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 provisioning to go moving forward?
Walter J. Phifer: Yeah. So I will start on that 1. Hi, Emily. it is Walter. Yeah. I think in the past, we have talked about provisioning saying somewhere normalizing in the 20 to $25 million range. And I think to BJ's point with our growth being the way it is and the pipeline being the way it is, you know, that feels appropriate to me. Right? And I think that is that is a healthy level for us. And you know, I love BJ's comments earlier where he said he would take that all day every day and so would I. You know, given the compounding earnings power that is going to, you know, provide for us in the future.
William C. Losch: And I think, you know, again, to reiterate, I mean, we have done a significant amount of work over the last couple years to build a more sustainable business model And earnings engine. And so you know, if it is 20 to 25, it can be low as 15 1 quarter, as high as 25 another. It does not really matter. Because what we are doing on the front end to drive revenue and new acquisition, how our teams are being disciplined about good cost versus not. About what they are seeing on the front end and how they are 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.
Emily: Great to hear. Thank you guys for taking my questions, and congrats on the quarter.
William C. Losch: Thanks, Emily.
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.
William C. Losch: Chip, any thoughts?
James S. Mahan: Yeah. To our investors, I would close with 2 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, and then they were to treat every customer like the only customer we created. Basically, what is Encino today, cloud native API first. This 1's gonna 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 thousand revenue businesses $5 million revenue business, of which they are 3.5 million in this country, and we have been at it 18 years. We have got about 10 thousand customers. And as we sit in front of our people, I say, Vijay, it allows me to say 2 words. Curious, and tedious. And I am 1 thousand% convinced that all 1 thousand of our people have been very curious relative to artificial intelligence. And I think we could take with this new technology tedious out of this business, which means we are gonna 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 5 hours. Well, 3 of us got together, and we saved 10 hours. I do not think our focus would ever be to eliminate staff in this area. But if we could eliminate and have more fun and have more time, then we can get more customers. So I think that is where you see this business today, fun, and faster. And we thank you for joining us, and we will see you next quarter.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
