than a year ago as a high growth and innovative bank we remain committed to investing in key areas such as lending and live 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 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 credit. Three 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 two factors, strong loan growth what we 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 remain largely flat quarter per 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 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. 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. Thanks, Bob. Great summary.

Let's go to questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. 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 Please stand by while we compile the Q&A roster. Your first question comes from the line of Janet Leigh with TD Securities. Your line is open. Please go ahead.

Hey, good morning, guys. This is actually Bill Young stepping in for Janet.

Bill Young, how are you doing? How's it going, Bill?

Doing well. Just to elaborate on your relatively stable NIMM outlook in the near term, I think you You previously had a range, so should we expect it to just generally remain in that range over the back half of the year?

Hey, Billy. 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?

Thanks, Billy.

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 expected generally to kind of remain in this range over the back half this year.

Yeah, thanks again, Bill, for repeating that just as well. Yeah, I think that's right. I think there's two primary factors influencing the margin here in the near term. So you have the heavy growth, which is great, and that, you know, tends to help with an expansion. And then on the deposit front, you know, the competition there has been you know pretty intense um we've seen in multiple ways uh different competitors are attacking that um whether it's cash promotions exception-based pricing and so forth so growth will help expand in deposit competition helps compress them i think largely you know 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.

Got it. Thank you for that. And then just secondly, your net charge off trends are very encouraging, though we have seen some continued upward pressure on non-guaranteed 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?

Yeah, this is Michael Carnes, happy to take that question. So when I look back, I mean, there's 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're actively lending is performing so we've got 13 billion dollars worth of loans we're very active in sba and commercial and when 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 outperformed the industry as well on default trends. We saw positive risk-grade 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've been discussing in prior quarters, and we're in a good position to move forward.

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?

No. 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. We build in assumptions that are underwriting to anticipate rising rates. Where tariffs are back in the news, we're looking at fuel cost 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. But our portfolio has held up really well, and I haven't seen any particular segment that has shown outside the interior.

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

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

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

Hey, this is BJ. I feel great about it. And I'm continuing to be pleasantly surprised and impressed with our lenders and our people. They constantly find ways to find new, you know, referral sources, 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, two years ago where pipelines were half of where they are today, half. and to continue to build that pipeline and keep it strong is is fantastic so you know looking forward we see continued uh momentum uh 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 really good about uh that so we expect that to continue one thing i'll add uh when walt was talking about margins I'm 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'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 to pay for our services. So I'm very pleased with the discipline that the lenders have and the pipelines that they're building.

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

Yeah, I'll start with that, Eric. Thanks for the question. Look, I think our deposit team is doing a fantastic job in this environment. There's multiple ways to continue to grow our deposits. obviously got to be competitive in pricing and 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. So we do what we can to combat that when we need to, but broadly, we think our depository is working. It's not a silver bullet. There's not one channel. There's not one product. It's pretty diversified with what we have. And then, And, you know, as we mentioned earlier in the call, and BJ really hit on in his section, you know, the check-in 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. So we're really confident we can continue to fund our growth here going forward. And, you know, thanks to the deposit team for what they're doing. Great.

And then last one 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'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? yeah i'll start again thanks eric um yeah so for you know the expense outlook i still think the low single digits low to mid single digits uh outlook um is is still appropriate um it's a really fine line in terms of how we're balancing it but we're really focusing on um 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 two strategic initiatives that we have with LiveXpress and checking. So, I see, you know, 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.

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

Thank you. your next question comes from the line of david feaster with raymond james your line is open please go ahead hey good morning everybody um i wanted to circle back to the credit front for a minute you know it 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? yeah michael here yeah that's a great question so for sure when i was referencing the sba credit cycle our commercial portfolio has held up very well um outside of this distillery segment and so um you know 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 it you know a 12 million dollar net charge off quarter and provision that's up well below 20 million um and so feel really good uh about where our portfolio is landing on both the commercial and the sba side um and from

my view the bottom line is just a strong credit quarter for us um 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's still more investments that are coming there um you know 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?

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. And I think, you know, 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, you know, quite candidly, you know, allow our lenders to understand how to sell checking. We've done all that. We're introducing merchant services as we speak, which obviously is very important to a large swap 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. 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 two years ago that we'd be at 5% of our deposit base in checking. You know, as impressive as our teams are, I would have probably taken the under. So, I'm incredibly pleased with where we are, and I expect that to continue.

Okay, that's great. And then going back to the expense side, I mean, 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. Like, 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? And then, again, maybe just talk a bit about some of the investments. I mean, obviously, the SBA Express, you know, or excuse me, Live Oak Express. But, you know, 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. I know you've got a lot of things cooking, as always, but just kind of curious, what else you guys are investing in at this point?

Thanks, Dave. I'll start on this wall. 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. um you know some of that is looking at organizational structure that we have some of it's looking at different vendors and uh and consolidating different systems um you know some of it's being very intentional about where we decide to invest in new headcount um rethinking you know marketing strategies to make sure that they're effective um we've 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. So it's just much more intentional how we think about expenses than we have probably over the history of the bank. And a lot of times when you focus your attention on things It tends, you tend to live around to find pennies here and there. On the investment side, I'll start, I'll let BJ add on. Some of it's just, we mentioned Live Express, we mentioned the AI data 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. So that's kind of pure, you know, strategic initiative investment. On the AI stuff, I would say a lot of the efficiencies we've seen over the past year and a half has nothing to do with AI yet. It's really disturbing from our intentional focus on it. Where our investment in AI now are 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 called process transformation, right? How do you get from step one to step nine without having to go through step two through eight?

Yeah, David, I'd also add, Live Oak is not your typical bank. You know, Chip has created a culture here and the DNA that is so forward-leaning and innovation-led, and, you know, that's what makes it special. But 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? And 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 cost out, how can we streamline something. And so, you know, kind of creating that kind of care takes a long time. It's not learned overnight, and we've had it for 17 years. So it sounds a little trite, but it's true. That's what a lot of our people are doing day to day. On the flip side, you know, because we are forward-leaning and innovation-led, you know, 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. So, you know, 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. And, you know, one more thing I'll add. Yes, it's 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 2025 versus the first half of 2026, our total revenue is up 15 percent and our expenses are up too. And so 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. And so, you know, 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, very special quality of this place. That's super helpful. Thank you.

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

Hey, good morning. This is Ben Graham in 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.

I'll start. Michael can jump in. as well uh or chip but i'd say the one word i continually use and it's very apt today for our small business customers is resilient you know so we do a quarterly pulse survey ben as you you know kind of uh referenced we see portfolio trends and 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're 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're seeing is, you know, when they have, 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. 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 so i mean the only thing just 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 you know verticalized gives us insight into what's happening within all of these broader or all these individual segments and then the broader view and so we have like real conversations with our customers and understand where they're at um and you know i think there is um across the small business community as a whole there are we're experiencing inflation people are concerned about potential for interest rate increases but our to dj'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 of transactions to to make sure that our customers have 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 all our customers. Yeah, let me add to that just a little bit.

A little secret around here is that before Mike was chief credit officer, he was head of family entertainment lending at the bank two weeks ago. And this guy is all, these guys do all the work, so I get a chance to have fun every day. Yesterday, I went to see a manufacturing company not far from here. $13 million revenue business that had fallen on hard times is now not. So we financed a rather wealthy fellow.

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've touched upon it a bit, but first, congrats on the record quarter and originations. And 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. Yeah, if anything's possible.

It's BJ.

That'll be a multi-year trajectory for us.

So to go, you know, from nothing two years ago to, you know, we'll probably end the year at 300 million of production or so. That's a 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. So, you know, those two things will be in by the end of this year. And so, you know, hopefully we start to see a step change pickup going into next year. But it'll take a couple years for us to get to that cruise altitude. And that 750 is hopefully just the beginning. We think that we can go north of that over time.

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

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

This is Emily on for Tim Switzer. Thanks for taking my question.

Hey, Emily.

Yeah. So on Live Oak Express, you know, 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.

Yeah. Hi, Emily. This is Wall. I'll start on there. So our premiums have been very consistent in that kind of 109 to 111 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 anywhere from 109 up to 113 feels reasonable. So I think that's consistent going forward.

Okay, awesome. And then, you know, 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? And do you still expect those efficiencies to cut the time it takes to close an FBA loan? from its current average of two months to just two weeks?

Absolutely. We're still in pilot with Casca in our Live Oak Express area, our small dollar loan area. And so, you know, we've been doing it really componentized, if that makes any sense. You know, if you think about the life cycle of originating a loan, there's lending, underwriting, you know, closing, construction, servicing you know there's a lot of pieces to it and we want to make sure that we get all of those right so we've been uh testing those so we've we've put um uh loans through the live oak express platform already and closed uh some so we expect to do more over the next few months and then have a full full rollout in our Live Oak Express product of Casca by the end of the year 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 what we're going to deliver that's great to hear really exciting um and then just my last one back to credit uh with the provision this quarter um being primarily

driven by growth and giving your commentary on current pipelines and loan momentum uh where do you expect the provision to go moving forward um yeah so i'll start on that one um Hi, I'm Liz.

Well, you know, I think in the past we've talked about some provisions saying somewhere normalizing in the 20 to 25 million dollar range. And I think, you know, 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's that's a healthy level for us. And, you know, I love BJ's comments earlier when he said he would take that all day, every day. And so would I, you know, given the compounding earnings power that that's going to provide for us in the future.

And I think, you know, again, to reiterate, I mean, we've done a significant amount of work over the last couple of years to to build a more sustainable business model and earnings engine. And so, you know, if it's 20 to 25, it can be low as 15, one quarter as high as 25, 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.

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

Thanks, Ellen.

There are no further questions at this time.

I will now turn the call back to Live Oak Bank President BJ Loesch for closing remarks. chip any thoughts 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 encino 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 three and a half million in this country, and we've been at it 18 years, we've got about 10,000 customers. And as we sit in front of our people i say bj allows me to say two words curious and tedious and i am 1000 convinced that all 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'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. But if we can 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'll see you next quarter.

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