Live Oak Bancshares Inc (LOB) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Live Oak Bank fourth-quarter 2015 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Greg Seward, General Counsel. Please go ahead.

Thanks and good morning, everyone. Welcome to our fourth-quarter 2015 earnings conference call. We are live webcasting this over the Internet. To access the call over the Internet with the live webcast, please visit our website at investor. LiveOakBank.com, and follow the links from there. Our fourth-quarter 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. 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, can also be found in our SEC filings. I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.

Greg, thank you very much, and welcome to all those on the call. In my very brief comments this morning, I'm going to focus on three things with you. First of all, I'm going to attempt to convince you to look at us differently, look at us annually, focus on originations, and remember we are in the construction business.

Secondly, I'm going to talk a little bit about safety and soundness; and lastly and most importantly, we're going to talk about the customer. So I am on the slide now just for grins a two-year look-back. And as we prepared for this call and I read Brett's comments about quarter over quarter and how did we do versus Q3, and how did we do versus Q4 2014.

And if I think back where we were just 24 short months ago, we were running a $59 million revenue business and in 2015, we did almost $110 million in revenue. Pretax earnings have doubled. Capital has grown from about $50 million to about $200 million. Two short years ago, we had 141 folks and today we have about 337 folks. Originations grew from about $500 million, and we concluded last year at $1.158 billion. We told you on the roadshow in the summer that we would do $1.1 billion, so we did a bit better than that.

So as I think about monetization of what we do, it's unpredictable, folks. We sold $137 million of guaranteed paper in Q1, $137 million in Q2, $147 million in Q3 and $219 million in Q4. A lot of chicken paper that Brett is going to talk about.

Moving on to the next slide on continued growth, I just want to highlight a couple of things for you here. Back to the two-year look-back, 2013 we did about $500 million worth of originations. 93% of that was in the vet space, healthcare, farm, and death care. In 2014, we grew originations to $848 million, picked up a couple more verticals in investment advisors and chickens. 99% of the $848 million were in those six verticals. Those six verticals did 96% of the $1.158 billion in 2015.

We are in six other verticals if you look in the middle of the slide. Family entertainment, hotels, wine and craft beverages, self storage, independent insurance agents, and we now consider e-lending as a vertical. That group -- and we are very, very anal about pipelines -- and let me define pipeline for you. So our pipeline begins with a proposal, then moves to underwriting, then moves to credit approval, then moves to acceptance by the customer, and then on to closing.

Once we get to the credit piece, 90% closes, 98% in acceptance, and 99% when it gets to the closing stage. Those six verticals that I mentioned a minute ago have a pipeline today of $287 million, which leads me to the following conclusion: that we are forecasting 15% to 20% growth in originations or about $1.350 billion to $1.4 billion, and about 40% of the 45% of those will be full funders at closing.

Moving on to the safety and soundness slide, most every banker that I know believes in soundness, profitability, and growth -- good banker -- in that order. These are normal and customary slides, but I want to add a few more for you here today that are not published.

Our average loan per customer grew last year from about $120,000 to about $140,000. Some of our customers have more than one loan, but customer exposure is well under $200,000 per customer; minuscule compared to the capital account at the bank, minuscule compared to the capital account at the bank and the holding company.

Unguaranteed non-accruals as a percent of unguaranteed exposure dropped from about 96 bps to about 41 bps over the course of the year. Non-performers as a percent of reserves dropped from 71% of reserves to about 27% of reserves at the end of the year. Our 90 day past-due loans dropped from about $1.6 million to $863,000. 90 day past-due loans as a percent of unguaranteed exposure is only 17 bps.

And here to me is the important thing. So we have roughly $200 million worth of capital in this Company, including the $75 million of cash at the holding company. And our total unguaranteed portfolio is about $500 million.

Moving on to my last slide of how do we treat our customers. We say here every day that we treat every customer like they are the only customer in the bank. And when Neil and I had our software company, I guess maybe we had about 3,000 customers, and I think our average customer sat survey was about 7.5, which for a software company was pretty good. You can see here in the 9s, we are pleased with that.

But what I want you to understand is what we are building, and there's really three phases to what we are building. Yes, an SBA loan is a tough loan to close. Yes, it has 148 documents. And if you are going to treat every customer like they are the only customer in the bank, you must perfect the handoff between the lender, the underwriter, the closer, and what we affectionately call the [bagger]. That's our business advisory group or the folks that service the loans and collect financial statements and payments.

So after six years of effort of building this on the Force.com platform and our sister company, nCino, which has over 100 customers today, it did occur to us that there is a phase 2 here, and that phase 2 is expose that technology to the customer. Well, and that is really what e-lending is all about, and Greg and Neil are going to tell you that.

But then can you become a real bank? If you have that platform and you have elegant interfaces into multiple backend systems, can you not combine that and get to the liability side of the balance sheet, have a small business customer in America tightly integrate remote deposit capture, bill pay, financial planning, and all these things that Neil are going to show you.

We wanted to show you this today. We couldn't get NASDAQ to go along with it, but in the future we are going to show you what we have built; maybe not every quarter but certainly every six months or so. Because the conclusion is simple. We believe that in the next, when Neil finally gets this thing done in the next 90 to 120 days, we will have built a fully digital bank for small business America.

It has occurred to us that there are 28 million small businesses in this country and they create 66% of the new jobs. So can we when finished become an eclectic home, not only for SBA loans -- yes, we are in 11 industries, 12 if you include e-lending. There are 1,100 out there; you heard that on the roadshow. But there are many specialty finance companies out there that could use our technology and become part of what we do if -- well, that's what we think we're going to do.

So, Brett, now you can talk about all the quarters and the numbers.

Thank you, Chip. Good morning, everyone. You will see on the slide we are showing some year-over-year highlights. As Chip mentioned, we view ourselves very much as a year-over-year company. A lot of what I'm getting ready to talk about is quarterly comparison, a comparison of Q4 to Q3, but we don't want to take away from anything shown on the slide on our improvements from 2014 to 2015.

Our after-tax earnings for the fourth quarter rose sharply to $5.7 million from $2.9 million in the third quarter, and the diluted earnings per share rose to $0.16 from $0.09 in the respective periods. The return on assets in Q4 was 2.2%. We had robust loan origination activity of $331 million in the fourth quarter. Origination volumes increased each quarter throughout the year, ending the year at $1.16 billion, in excess of 35% growth over 2014 annual production.

Total loans outstanding grew by about 8% over prior-quarter levels to $761 million. At quarter end, the on-book amount of held-for-sale loans totaled $481 million. The rate of growth in the held-for-sale portfolio was less than in prior quarters of the year, due to the liquidation of a large portion of our construction portfolio, which became fully funded and was sold in the secondary market.

The face amount of guaranteed loans held for sale held steady at just about $500 million, which represents approximately $45 million to $50 million of tenant revenue at current market prices. The volume of guaranteed loans sold in the secondary market in the fourth quarter also increased significantly to $219 million, up from $126 million of a year ago and $147 million last quarter.

Net gains on these loan sales likewise grew to $20.8 million, a notable increase from the $15 million mark we had experienced for the prior four quarters. The increase illustrates the recognition of revenue associated with loans originated in prior quarters or last year, as we have alluded to in prior communications.

Our net revenue per million decreased in Q4 compared to Q3. This is a result of the mix of loans sold rather than market conditions, which generally improved throughout the quarter after reaching 12-month lows in September. We continue to expect variability in quarterly revenues due to the timing of loan sales, but with our strong growth in originations and other franchise growth, we are confident that we are creating long-term value.

Our net interest income grew $1.9 million or 28% to $8.5 million from the third quarter of 2015, and was double that of fourth-quarter 2014. The increase was driven by both ongoing growth in the loan portfolio and a steadily rising net interest margin. The latter grew by 55 basis points over the prior quarter to 3.66%.

The servicing revenue from our sold loan portfolio increased to $4.4 million for the fourth quarter compared to $4.2 million for the third quarter of 2015. The combination of these two recurring revenue streams rose to $12.9 million in the fourth quarter from $10.8 million for the third quarter of 2015.

Compared to the same period of 2014, these revenues grew $5.2 million or 67%. At December 31, 2015, our servicing asset was valued at $44.2 million for the $1.8 billion in guaranteed loans outstanding in the secondary markets. As a reminder, that servicing asset represents the present value of the anticipated revenue from the ongoing servicing of the sold loans.

During the fourth quarter, there was a net downward adjustment of $2 million to the carrying value of this asset, as the ongoing amortization of the portfolio was partly mitigated by improving market conditions. Although market conditions improved in general, as previously mentioned, our net gain on sale revenue per million sold decreased from Q3 to Q4 due to our mix of loans sold, with premiums varying due to rate adjustment periods, the spread over prime for quarterly adjusting loans, and other loan terms.

On the funding side, we continue to be successful in our deposit-raising efforts. Total deposits grew by nearly 6% over the third quarter to $805 million, virtually keeping pace with loan growth. Also as previously announced, we paid down our SBLS borrowing in anticipation of higher costs.

The credit quality picture remained in good shape in the fourth quarter. At quarter end, the unguaranteed exposure of nonperforming assets was $2.4 million compared to $2.6 million at September 30, 2015. Net loan charge-offs were $205,000 or 30 basis points annualized of loans held for investment in the fourth quarter of 2015, compared to $243,000 or 40 basis points in the prior quarter. Despite lower credit losses and problem assets, the provision expense was $1.5 million in the first quarter in conjunction with the growth of our loan portfolio.

Noninterest expense for the fourth quarter of 2015 increased to $22.1 million versus $18 million for the third quarter of 2015, reflecting our growth strategy. On the other hand, the efficiency ratio improved to 67.4% from 74% in the prior quarter.

Salaries and employee benefits increased by $2.8 million in the fourth quarter primarily as a result of increased staffing to support loan demand, growth in our industry verticals, and new initiatives at the Company. Occupancy expense increased $852,000 in the quarter as we settled into the expansion of our headquarters, which supports the Company's growth as well.

The remaining expense increase was scattered across various line items and included fees paid for software application as the Company continues to invest in further development of its online lending and deposit platforms.

All in all, we believe this was a very solid quarter, though we remain focused on the long-term. We have entered 2016 with excitement and confidence about what we are building here at Live Oak. Neil is now going to touch on the progress of several recent developments.

Thanks, Brett. Good morning, everyone. First of all, Chip mentioned the term digital bank and I really kind of want to revisit that for purposes of this call as we will be using that term going forward. We have used terms like e-lending before, but as we roll out deposit products, it really kind of smacks us in the face that we are building something a little different.

Digital bank typically is applied to online banking and, if we as a sector really want to get fancy, we will throw in mobile and omni-channel in there to make it sound more robust. But here's the question: How can we be a digital bank and then, when it comes to apply for a small business loan, ask the borrower to fill out a paper-based form and then submit that through our enterprise and move at the speed of the paper file?

And that level of service was exactly the level of service that gave birth to the non-bank lenders, in our opinion. So we would submit that the digital bank is something bigger and would like to extend the definition to include services such as online lending, such as integrated merchant, advice, and put it on top of something we are calling video call center, where we can in a digital branchless environment still maintain the personal communication with the borrower.

So turning -- moving on to the next slide, we're actually showing you here a view into what we are building. These are actual real screens. On the left-hand side you will see the navigation pane that allows you to go inside our accounts as well as external accounts because our belief is a small business borrower is also going to have accounts outside of our bank.

But what is in line here that isn't typically in an online banking app is the ability to apply for a loan. And let me remind you, this is not just a loan application online, this is end-to-end, from click to close, click to adjudication of the credit to funding of a transaction.

Now I will say this, these are not auto decision loans. Let me repeat, these are not auto decision loans. These are automating the declines and teeing up the transaction for human intervention when it's most optimal.

So as you continue on, merchant, as we looked at our small business market segment, did some studies, was this opaque service that banks offer their customers where the fees are variable and the customers feel they are feed to death. We intend to make that transparent and offer through API complete transparency into all those transactions.

And lastly, on the right, a communication pane, which will allow us to interact with our customers in a way where we can maintain the borrower experience and the presence that typically will happen in a branch but do it online.

Turning the page, and drilling down on e-lending, it's important to recognize -- one, this is our answer to the non-bank lenders out -- and this sits on top of the nCino platform. What's quite interesting since we [launched] this in August -- and I'm going to ask Greg to talk about the business e-lending because it truly isn't just the technology.

The business of e-lending, rapidly moving these loans through the system is quite interesting. But we've been able to turn around loans from click to close in as quickly as 10 days and we have an expectation and a turnaround time of 48 hours from when we get all the information to when a credit decision is there.

So the only thing I would end on and I'll give it over to Greg here is that unlike our non-bank lender peers, we do indeed offer better rate and terms. So naturally you can see in this picture we have highlighted monthly payments as something that makes us different.

So as you guys know in a press release prior, Greg Thompson came to us to build out e-lending and build out the franchise. He has recently been promoted to the Chief Operating Officer, but I brought him into maybe touch on a few highlights, at least for this session. We are probably not going to do it every session, but at least for this session relative to what you have experienced in e-lending.

Thank you, Neil. Let me just highlight a few things that will leverage some of Chip's comments and some of Neil's comments. Chip mentioned the inherent complexity of an SBA loan. The technology that we are using on the nCino platform simply allows us to streamline that complexity and make it easier.

So what the technology does for us in the e-lending space is allows us to originate these loans faster, service them more efficiently, and -- but it's not really any different fundamentally from the successful business model that Live Oak has always enjoyed. So we are using the same credit box that Live Oak has always used. We are staying in-vertical with these smaller loans.

It is a similar process, but again it leverages the technology so that when the customer is ready to enter their information, upload their documents, sign their documents electronically, the technology is ready for that to happen. So we are currently only originating seven, eight products, but we could expand beyond that.

As Neil mentioned, we launched in August of 2015 and since then we have been in sort of a soft launch mode, which means we of been training the team, refining the process, improving the process, and preparing to launch more broadly through marketing campaigns within vertical and that kind of thing. So we are ready now to make that leap and we are about to launch and we are really excited about what we believe this additional capability will allow us to do within each vertical.

So these loans are the smaller loans. They are between $75,000 and $350,000. Each one of them we are able to do profitably. We're able to originate profitably and we've gotten great feedback so far from the customers about their experience in the process.

And the last thing I will say is, as great as the technology is, as always at Live Oak the people are the key. So the people make the decisions about each loan. The credit decision that Neil talked about is not done by a computer, it's done by a person. People usher the customers through the process all the way through. The technology just allows us to enable the process to be a bit faster. So more to come on e-lending but that's where we are right now. We think there's a lot of opportunity in 2016.

Thanks for those highlights, Greg. Going back, moving on, if you can to -- you've got a picture of Louise Northington, one of our credit analysts, and she was not terribly pleased when I asked her to do that. Anyway long story short, you've got what I call a video call center and the ability in line with the workflow to interact with a human being.

So this is not what 1-800 call somebody I don't know and wait in the queue. This is immediate response. And we're staffing, what's most important behind this, video call center sounds good on the technology front, but we're staffing to deal with primary, secondary FTE behind, so we could always have named people interacting with our small business borrowers. We believe that level of service will be a big differentiator.

Moving along, of course because we've got an API-driven model, and our view on technology is unique in terms of how we interface with the backend providers, again it's exclusively API. We own all the data. We can build any front end that we want.

So coterminous with the deposits launched this year, you will see a mobile launch and I shared with you some of the real screens that are happening that we are building right now. So just to be clear, the deposit slides that you looked at are building this year as committed to, we're piloting in June. If you want to take a look at it, last year in my mind was the year of the build for e-lending. This year is the year of the build for deposits with [in-math] launch at the end of this year.

The last slide I will share with you and I will bring it back down to I think something that is near and dear to all of our hearts and it's noninterest expense. We've gotten a couple questions around our technology spend as a function of noninterest expense.

And I want to make sure where we might be investing in engineers and developers on one side, we are mitigating that cost on the other because we are not going outside to market where oftentimes it's more expensive. And you might say it sounds more expensive to build. Well, doing it on top of the force.com platform and with the experienced guys that we do, it's not -- simply not.

What you are looking at here is an analysis that we did. Live Oak on the right, we looked at all technology spend, that is IT, that's developers, that's every aspect of technology spend, compared it against an IPBA study. Unfortunately the best we could have gotten was 2012, but they were right there for banks greater than $500 million in assets at 9%.

And who we really look at ourselves as competitors against, certainly on the asset generation side, non-bank peers were substantially higher. So we will always innovate and invest in areas where we think we will have a competitive advantage. We will always gut check ourselves to make sure we are in line with the noninterest expense spend -- investments.

And the only thing I would end on would be that our noninterest expense did go up in Q4, as many have noted. But given that the technology spend has been static year-over-year, that has been substantially in new business development. And to Chip's earlier slide, FTE tied to future revenue. So I will -- I think we're done and we will open it up to questions, please.

(Operator Instructions). Aaron Deer, Sandler O'Neill.

Good morning, guys. The growth that you guys recorded this quarter was very impressive and seeing a strong volume of loans reach full funding and get to the point-of-sale was certainly a nice surprise. One of the surprises though I guess was the gain on sale margins in the quarter.

Directionally we had talked last quarter and it sounded like you were seeing a rebound, but the numbers this quarter make it appear as though those premiums were actually down in the quarter. Can you talk a little bit about what you saw through the quarter and what your expectations are for 2016?

Sure, Aaron. This is Brett. So just to go back and talk about the numbers, Q3 we had reported a net gain per million of roughly $105,000 and this quarter we were down to the $94,000 or $95,000 range. In general I think it's important to go back and look at Q3 and understand Q3.

The last half of September, as we all remember and as we talked about in October, there was a sharp decline in premiums in the last part of September. But you also have to keep in mind two thirds or a little more than two thirds of Q3 we were at nearly record high premiums. So you've got an average gain on sale for a quarter that is both reflective of premiums that are close to record highs and then a dramatic decline leading to that Fed decision.

What we have seen in the markets is steady improvement in markets since that decline at the end of September. Not improvements back up to those record highs. It's been a very steady, gradual tick up in premiums, which in many ways we think is preferable to sort of this herky-jerky roller coaster of premiums up and down and up and down. Kind of a steady increase which hopefully would mitigate the risk of an overcorrection and then ultimately another decline.

So that is sort of broad. More specific to Live Oak, you have to think about the mix of loans that we sold. As you all know, in Q2 and Q3 there were delays in many of our construction projects, delays in our construction pipeline.

Those loans coming to fully funding, so those loans reaching fully funded status in Q4 being mostly the fig five adjustables that we've talked about in the past were chicken loans, it was more heavily weighted. The loan sales were more heavily weighted to those style or those period of adjustments of loans, which commanded lower premiums. Whereas it probably would've been a little more summary or mitigated had those loan sales occurred in Q2 and Q3.

Is it possible to get the month-by-month premiums so we could have a better sense of just exactly how they were trending through the quarter? And then what you are seeing so far this year?

No, I don't think we're going to do that, Aaron. The way I think about this is, yes, what you were saying -- all of your initial comments had to do with variable rate paper on the markets coming back and the markets going down mainly, right?

Yes, mainly, [for early] adjusting.

So what we have found Q4 was a big chicken quarter. A lot of those loans that we sold were chicken loans and those are all fixed for five years. 20-year ARM fixed for five. We now have much more experience with our poultry growers and it is coming in a lot better than our expectations.

I've talked about the debt service coverage ratio. So we are contemplating changing the way we price that product from fixed for 5 to 20 year fixed rates or another couple things we're working on. And we expect the premiums to be substantially higher than they have been in the past.

Okay, presumably that would take 12, 18 months or so for that to work its way through the pipeline to see that benefit, correct?

Well, not really. We can change the rate on some of those during construction.

Okay, so it's just before they reach full funded.

Yes, that will be the entire -- we will go back to those borrowers and say whatever the current rate is, 20 year fixed at 7.25%. We feel comfortable now from a credit standpoint in doing that, whereas before we were a little bit worried.

Okay and with respect to -- as you kind of look out over the coming quarter or two, and you see what volume of loans are approaching full funding as well as what's in the pipeline that's going to be fully funded at origination, how do you see the sale volume shaping up over the next couple of quarters?

So as Chip mentioned and as shown on one of his slides, we suspect or we are anticipating that 40% to 45% of our new originations will fully fund at closing and roughly 75% of that, the guaranteed portion, will be sold in the secondary market. And then as indicated in our earnings release, and also referenced in previous comments, we have about $500 million guaranteed space amount of notes that are in that construction phase.

Those obviously will roll out of construction, reach a fully funded status and be sold in the secondary market as well. That $500 million rolling out, as you indicated just a few minutes ago or a few seconds ago, Aaron, over the next 12 to 18 months.

okay. Thank you, I'll step back.

Doug Mewhirter, SunTrust.

I appreciate all the detail on the previous questions about your business mix. Do you have ?- the loans you originated this quarter, what percentage were construction loans in terms of the face amount?

This quarter? Let's see, in Q4 -- I'm going a little bit from memory here, but we think it's -- we think it will be indicative of 2016 as well, that roughly 55% to 65%, somewhere in that ballpark, will be construction loans.

I'm sorry, I meant in Q4, what was -- what percentage of construction loans were originated in the 4th quarter, I'm sorry?

It was in that range.

Oh, it was in that range? 55% to 65%? Okay. That's helpful. And just to shift focus a little bit. In your digital bank or e-lending, your initiative, you talk about right now you are sort of staying in vertical, although maybe downsizing the loan size which is why you're doing a lot of the automation. Are you also staying within products? Are you staying within the 7A slot or are you considering other SBA products or non-SBA products right now?

We have a mild initiative in the 504 space. 504 chews up capital whereas the asset class is different. In 7A you're looking at a 50% loan to value situation. We will do some of that, we'll do some of that in the hotel space, but it will not be a -- I would not say it will be a major focus of this institution.

Yes, and Doug, this is Greg Thompson here, just to add on to what Chip said. In the small loan space, this e-lending space, we are currently sticking to the 7A small loan advantage product exclusively.

Okay, thanks for that. And my last question before I jump back in queue. It looks like you had a nice bump in the net interest margin. A lot of this is probably based on the increase in the prime rate. Will you get any follow through into the first quarter in your NIM from basically fully adjusting the rest of your portfolio? Or is that bump already sort of carried through into your portfolio?

Yes, I would say -- so it probably alludes back to the comments Chip made about the changes in pricing structure on chicken loans. That NIM is in a lot of ways a function of our growing chicken portfolio which carries a five-year fixed, which is priced at the max allowable by the FDA for an adjustable-rate product.

So that is primarily the result of the bump up. That does increase our interest rate risk exposure a little bit, which is one of the reasons why we're looking at these alternative rate structuring products for the risk piece as well as the potential increases in the gain for (inaudible).

Actually just a quick follow up on that. So what percentage in round numbers is your portfolio in terms of fixed versus floating in terms of what is actually there now before any readjustments?

What we expect to ultimately be the owned book portion of our portfolio is about one-third fixed -- a combination of fixed and fixed for five years. That's about a third of the portfolio. Where we are now in our open pipeline loans that have not closed yet is running about that same mix, maybe a little less, roughly 35% fixed or fixed five.

Okay, thanks. That's all my questions for now.

Jefferson Harralson, KBW.

I wanted to first ask about the 40% to 45%, just to make sure I have this concept correct. So if you originate $1.35 billion next year and 40% to 45% of that would be full funders. And then so call that maybe $550 million. But then some percentage of this $500 million in construction loans that's funding up will close too, so maybe -- I don't know, maybe half of that. So that would get you to maybe, I don't know, $800 million of loans sold next year. Is at least the concept correct? That will be roughly 60% of what you originate would be sold? Is that concept correct or am I missing something?

Yeah, hopefully that slide wasn't -- hopefully we communicated that correctly, that 40% to 45% of our portfolio would fully fund. And then roughly 75% of that, the guaranteed dollars, would be sold. In addition to that, you're correct, that $500 million will be rolling out over the next 12 to 18 months, as indicated in our press release, and will be sold. So your general thinking is correct in arriving at what you're estimating our guaranteed sold to be.

Okay, okay. Thank you very much. And then can you talk about the capital? There's a lot of capital there. You're obviously transforming into a digital bank with lots of products probably other than 7A I guess for clients in deposits and other things. So how should we think about the capital and the opportunity to invest in the space as a way to jumpstart these initiatives?

Yes, that's a good question, Jefferson. I think today we have about $75 million of excess cash at the holding company, right. And you investment bankers are pretty good at showing us opportunities in the specialty lending area. And we are going to be very circumspect on how we approach that.

We said on the roadshow that buying businesses is very difficult, merging cultures is very, very difficult. But we will probably kiss a lot of frogs here, but are actively looking at some really interesting companies.

We do not intend to compete in any way whatsoever in conventional lending with a Bank of America or a Wells Fargo or folks like that. But with the platform that we have built and with the domain expertise that exists in the country in specialty lending business we could easily see ourselves deploying a good piece of that capital to -- in a very accretive fashion.

Okay, would it be within this kind of small business initiative you have going on? Or it could be -- you're also looking outside that of what we talked about today?

No, this will be all small business -- all small business lending, non-SBA small business lending. We got a call on the -- a question on the roadshow, some guys said I completely understand what you're doing. I get the whole -- you've done 11 and there are 1,100. And I get the fact that the SBA has a 7A maximum next year of $26 billion and you're going to do about $1.3 billion or $1.4 billion. What happens when you get to $5 billion?

Well, that's an interesting question. Can we get there over a period of time? I think we probably can. Is there political risk? Absolutely political risk. So, we're going to look for really interesting and special opportunities where we can find like-minded people that want to own stock in this bank and really build out the whole full digital experience and have a digital relationship with small business America.

All right, thanks guys.

Aaron Deer, Sandler O'Neill.

I just wanted to follow up -- Chip, in some of your opening comments you touched on the importance of how seriously you guys take safety and soundness and risk mitigation, but also being a construction bank. And given the growth that you're putting on and notwithstanding the enormous amount of capital you guys have on the balance sheet, I'm just wondering how you guys are thinking about the recently reiterated regulatory guidance on CRE concentrations and kind of where you stand on that currently and how the fact that you guys are doing SBA loans impacts those ratios.

Yes, I wish I had the Chief Credit Officer here and Caines can probably bail me out. But owner occupied SBA 7A construction loans don't go into that bucket. The only vertical that we have today that would be affected by that, and we are rifle focused because it is a different business, is the hotel business.

A 4000 square foot vet clinic or dental clinic or a $2 million chicken house is one thing. But a $10 million Hampton Inn requires real expertise. And we've entered into a relationship with a publicly traded engineering firm called Tetra Tech to help us make sure that we handle our construction paper with the elegance that we've handled it in the last eight years for these small business owners. That would be the only one thing that would affect that ratio, I think. But we could certainly get back to you on that. I kind of -- go ahead.

I would say, Aaron, the only thing (inaudible) that -- typically our discussions with regulators when we talk about CRE concentrations, once we call through the style of loans we have, as Chip mentioned, owner-occupied, they tend to be very comfortable with it. Obviously chickens and then Chip did mention self storage, there will be some growth in self storage there that is not owner occupied.

Okay and then if I may follow up on the margin discussion. The 55 basis point expansion was a real surprise to me. And it sounds as though some of that might stem from the prime increase and from the shift in the type of loans that you're underwriting. Is that to say that this is -- that there is no other noise in there? That this margin is something to build off of going forward?

Ladies and gentlemen, please stand by, your conference call will resume momentarily. Thank you for your patience and please stand by. And pardon me, our call is about to resume.

We're connected I believe, right? Aaron?

Your line is open.

Okay, we're back on? I'm not sure where I got cut off, but I was asking about the margin. And I was surprised to see the considerable expansion this quarter and just wondering if that is related to the different types of loans that you're now originating and of course the uptick that we had in prime. Is this margin something we should be thinking about as being steady or something to build off of going forward? Or could it bounce back down to its prior level?

Was your question around net interest margin, Aaron?

Yes, yes.

Yes, I don't think there's going to be a sea change in that either way going forward. Likely it's really a function of what we end up doing with these chicken loans that are in pipeline. Well, I shouldn't just say chicken -- with loans that are in our pipeline that we have currently assigned a fixed rate to or a fixed for five-year period. If we find additional product offerings for those there could be a change.

The great thing about the fixed five and the fixed rate in the current interest expense environment are those build up NIM in the short-term. However, going out for the long term you could see an ultimate decline in those. But I don't see very much variability in the near-term on what NIM will be. I'd say the short answer to the question is steady. However, depending on what other products we see and offer to our borrowers there could ultimately be a change there. Hopefully that made sense.

Yes. No, that's great. Thank you for taking my questions, I appreciate it.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to management for closing remarks.

Well, we thank everybody for attending today and we look forward to the next quarterly review.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.