Live Oak Bancshares, Inc. (LOB) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2017 Live Oak Bancshares 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 of Live Oak Bancshares. Sir, you may begin.

Thank you, and good morning, everyone. Welcome to Live Oak's third quarter 2017 earnings conference call. We're webcasting live over the Internet, and this call is being recorded. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank.com, and follow the links from there. Our third 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.

Thanks, Greg, and good morning. I have never been more excited about our business at Live Oak Bancshares and Live Oak Bank in our history. And reflecting that this is our 10th anniversary between Live Oak Lending and Live Oak Bancshares, I couldn't help but think about fundamentals. As I look around our bank and see an average age of 32 years and the fact that many of these folks have never been through a credit cycle and remembering last week when I landed in Dallas and went to Arlington and saw 42 brains. I'm going to make a comment or 2 about our precious capital and the preservation of that capital and unpacking that, the object of the exercise is we see no dilution to your share count in the foreseeable future. Secondly, as always, we shall touch on technology, Neil will do that, and how our joint venture with First Data will give us a platform to change that which is broken in our industry. Scott Custer will review our core business, its divers and unique operating leverage, and Brett will bring home with just the financial facts. So, moving on to the next slide for those new to our story. We are the second largest SBA lender in the United States. It's taken us 10 years to build a platform to treat every customer like the only customer in the bank. You must perfect a handoff between the lending officer, the underwriter, the closer and the servicers, and when you do that, the results on the right-hand side of this slide are obvious. We have originated $6.8 billion since inception, this year we've grown almost 40% year-over-year. Charge-offs are de minimus and we're almost a 2% ROA earner. Moving on to the next slide. Yes, we raised $113 million in August, issued 5.2 million shares almost. So, what are we're going to do with the money? First of all, we're going to portfolio more guaranteed paper. That allows us to march toward cash flow breakeven, recurring revenue, equally recurring expenses. Scott, if he has time, will talk about asset diversification. We are in 16 verticals and domain experts have deep knowledge in those industries that we may dig a bit deeper there and make non-SBA loans. Neil will talk about our strategic investments, all of which lead to allowing us to attract and retain customers across the country. So, let's examine, on the next slide, our balance sheet and certainly our capital ratios are high. Tier 1 leverage is at 14. Total capital is at almost 18. We have $365 million of capital at the holding company and a very robust loan loss reserve of $21 million. But we look at this a little bit differently at Live Oak Banks. We have $1.9 billion of total loans, but only $1.1 billion of un-guaranteed paper. So, if you add the $365 million and the $21 million, you come up with an effective capital ratio of over 30%. And it's almost amazing to me that after all these years, and all these originations, we today only have $3.3 million of nonperforming loans. So how do we protect this capital account from future losses? So, let's - if the past is a reflection of the future, let me just turn to the next slide and highlight a couple of our guiding principles of underwriting. We do not believe in contracts at Live Oak Bank, nor incentive compensation, no lending officers have authority, that resides in the loan administration department. Every lending officer owns stock in our company. And we are relentless about site visits. We make about 200 loans a month, so that's 200 site visits. And if you drop down to the next slide, Michael, let's talk a little bit about monitoring of this portfolio. We are maniacal about this. We have 35 folks just out of college managing 3,500 relationships, so about 100 relationships per relationship manager. And at the bottom right of that slide, you'll see that we have current and satisfactory financial information on 87% of our customers within the last 6 months. There is a 100% chance, if you do not send us a financial statement at the end of the quarter, you will get a call. And it is highly likely that you will get a visit. So, while I go through this, we have plenty of capital, and we see no share dilution for the foreseeable future. Moving on, Mica, to the treasure chest slide. Our tax credit leasing business allows us the flexibility to portfolio a significant amount of guaranteed paper that we essentially call the treasure chest. So, I kind of look at it three ways. As the federal regulators focus more and more on liquidity, the treasure chest helps us, first, $270 million of liquidity. If we sold that paper, we generate a $30 million gain. That gain would be pre-taxed and after-taxed because of our tax credit leasing business. Secondly, it gives us earning consistency and reduce our lines on gain-on-sale dollars. And lastly, we add to a very robust capital account with $30 million worth of Tier 1 capital. Moving on to the renewable energy business, both our renewable energy lending business and our leasing business is robust. And just a word on the tax credit leasing business. This is not a gimmick. We have closed $68 million in loans year-to-date and funded $50 million. The pipe is 180 and Brett, if he has time, will discuss the DTAs in the Q&A. So, who knows what's going to happen in Washington, relative to tax reform. The facts today are that tax credit rate in 2018 is 30%, the same in 2019, dropping to 26% in 2020, 22% in 2021, and 10% in 2022 thereafter. If there are changes, we'll react to that accordingly. So excitedly, moving on to the financial technology investment slide. We have invested about $6 million of the $10 million set aside for Live Oak ventures. The core technologies on which banks operate are ancient. Great software is typically built by a small group of folks. For instance, Oracle's database software was written years ago by 7 people. We are putting common equity into the hands of folks that have built core banking functionality before. We will work with key financial institutions that follow us to test the software and provide additional capital when needed. The end result will be a platform wide, elegant, fully digital experience, which Neil will elaborate on.

Thanks, Chip. At ventures, we've been busy investing in companies that help solve the problem. Now more than ever, digital bank transformation is center stage. And I would remind you that these are minor investments alongside other banks and sophisticated private equity firms. So on to Apiture. We're tremendously excited about our new joint venture with First Data. This marks another great milestone in our strategic partnership with the industry [indiscernible]. We are calling the solution generation for our G4 online banking. Digital banking solutions have been around for some time, but this rebuilds it from the ground up, taking advantage of the NexGen platforms, such as foris.com and AWS. As outlined on Slide 12, the 50/50 JV will have a one-time non-cash contribution value of $68 million. Other than this one time gain for modeling purposes, assume a neutral P&L impact through 2018. The next slide illustrates how quickly digital landscape is evolving. While investments in web and mobile continue, digital channels now include personal assistance such as SiRi, Alexa and Cortana. Chat bots and TVs are now viable channels. Lastly, other e-commerce applications, like Clover we've talked about before, need secure access to support banking functions such as new account opening and more. Through [indiscernible] API's Aperture will usher in the next generation of digital banking and Live Oak will be the first to benefit. Scott, over to you.

Thanks, Neil, and good morning. Really, as we think about the bank itself, Live Oak Bank, there are really three points that I want to bring up over the next few slides. Those three points are: number one, the Live Oak business model and loan origination machine remains alive and well. Slide 14 points that out directly, as you see going back to 2010, a 39% annual growth rate and inside this fiscal year, 42%. That's driven by, as you move to Slide 15, it's driven by our business model of continuing to diversify by adding new verticals, and as we add verticals, the new verticals driving much of that growth, especially as you see, the Live Oak 2.0 verticals that are now catching their full momentum with originations up over 400 million year-over-year. When you think about our business and you look at it quarter-to-quarter, it's often hard to draw conclusions because there are so many things that happen especially with the SBA process, certain loans may bridge from one quarter to the other. But what's not refutable is just how you can view the business in a full-year context and as we've said in previous calls, we expect 2017 originations to be right in the $2 billion range, and that will continue our approximate 39% to 40% compounded annual growth rate. Key item number 2 about the Live Oak business is our strategy of holding loans and increasing recurring revenue continues to make a difference in the consistency of our earnings profile. We're holding - Chip indicated, we're holding more guaranteed paper today, we hold about 25% of every guaranteed loan that in the past we have sold and you can see that reflected in the chart on Page 16. As you see, 57% revenue growth since Q3 2016, and 67% peer portfolio growth in that same period and even just in the last quarter, almost $200 million of pure loan growth on the balance sheet. This will give us a more stable and consistent earnings profile and will serve us well as we look to the future. The third key point that we need to make, and that really is - well, let me just speak quickly to the leverage that's in the business, that's here on Page 17, and that really is as our verticals mature, we're able to drive our cost down, revenue continues to grow and you see the Live Oak verticals 1.0, the verticals we've been in the longest, have a 15% cost to revenue ratio. Our newer verticals have a 23% cost to revenue ratio and that ratio will continue to go down. We'll continue to drive more leverage in the business as we move along. You'll continue to see a better relationship between revenue and operating expense, as we move. The final point that I wanted to make, and probably the third key issue, is our deposit initiatives continue to gain momentum and the company and our chains [ph] are a reflection of the balance sheet. In Q3, we grew our savings product. Our savings account grew deposits to almost $400 million in the quarter. We're up to $2.1 billion now in total deposits, and importantly, 77% of that $2.1 billion are core deposits. Our cost of funds on the total book is 130 basis points. We believe our deposit data is very well-positioned and consistent with similarly situated companies. And we've got several things on the move, as you can see. We're getting ready to launch our mobile banking, which will include mobile deposit capture. And we have initiatives that are in the works that will be coming online as we go through Q4 and on into next year. So again, just in summary, the Live Oak business model is clicking on all cylinders and Brett's going to show you how all that plays out in our financial results.

Thanks, Scott. We're very excited about our third quarter earnings of $0.33 per share. Our after-tax ROA increased once again this quarter to 2.18%. With Q3 origination of $396 million, the year-to-date total of $1.45 billion, represents more than a 40% increase over the prior year as we continue to benefit from robust activity and mature annual verticals. As we indicated in last quarter's call, third quarter origination volume is heavily impacted by the seasonality of renewable energy lending, and originations will bounce back in Q4. We're confident that we will exceed the upper end of our 2017 target range with approximately $2 billion in originations likely for the year. Our total loan portfolio grew 67% over the past four quarters, providing steady, recurring interest revenues. This is a product of our strategy to build longer-term revenue streams and reduce quarterly earnings volatility by retaining low risk guaranteed loans. Based on the net amount, guaranteed loans held for sale grew to $1.1 billion in Q3, compared to $692 million one year ago. And includes the guaranteed portions of loans that are part of our hold strategy, as well as our construction loans, which cannot be filled until disbursements are complete. Our combined recurring revenue sources of net interest income and servicing revenues increased 57% over Q3 2016, and a healthy 12% above last quarter, demonstrating the success of the previously mentioned strategy to build the loan portfolio. This increase brings us closer to the bank's goal of recurring revenue covering noninterest expense. The net interest income component grew 81% over the same quarter a year ago to $21 million, driven by the strong growth in the loan portfolio combined with an improving net interest margin. Compared to the prior quarter, our margin was fairly stable at 3.91%, but is driven by 59 basis points over the past year given the favorable repricing characteristics of our loan portfolio. Our outstanding servicing portfolio of SBA and USDA guaranteed loans sold in the secondary market totaled $2.58 billion and yielded $6.5 million servicing revenue, an increase of nearly 11% from Q3 2016. The bulk of the revaluation loss of $3.7 million on the service portfolio related more to loan balance reductions through amortization and prepayment than from changing market conditions. The impact of the revaluation can vary widely from quarter-to-quarter, but we do not necessarily see it going down in the coming quarters. Our deposit base continued its growth in Q3 to just over $2 billion, an increase of $141 million over the prior quarter, and $610 million above a year ago. with the comparative reduction in the percentage of guaranteed loans liquidated compared to new originations in each quarter, our ability to attract new deposit volumes and customers has been critical to our hold strategy. Guaranteed loan sales declined to $164 million in the third quarter, due to the absence of the fully funding renewable energy loans caused by the seasonality, as mentioned earlier. The net gain on sale of guaranteed loans was $18.1 million or approximately $111,000 of revenue for each million sold, which was well above last quarter's average premium. The increase was primarily the result of the mix of loans that were sold, as renewable energy loans which carried lower sale premiums comprised a negligible portion of the sold amount. Guaranteed loan sales in the fourth quarter is expected to increase with renewable energy loan production ramping up again. In general, we've historically experienced lower relative premiums as the year-end approaches. I encourage you to look at our prior quarterly reporting to assess potential premiums in the fourth quarter. Turning to credit quality, our overall credit performance remains very strong. Net charge off in Q3 were $959,000 compared to $191,000 in the second quarter, and $1.5 million in the first quarter. The resulting annualized loss rate on average loans held for investment is 34 basis points, in-line with historical averages. As a percent of total assets, un-guaranteed, nonperforming loans and foreclosures declined to 15 basis points. Provision expense of $2.4 million exceeded net charge-offs as we continue to add to loan reserves to accommodate strong loan growth. Noninterest expense was just under $36 million in the third quarter, and is reflective of the significant expansion of our operations over the past year. We will continue to invest in initiatives that position us for superior long-term performance, while meeting demands of our growing loan origination platform and portfolio. Much of the yearly growth in noninterest expense can be attributed to the depreciation expense of additional aircraft and solar panels for renewable energy leasing activity, infrastructure to support and promote the strong growth in our core business and the addition of Reltco's operations. As we have said, Reltco's primary purpose is to position us for operational efficiency in the loan closing process and to heighten the customer experience. That said, Reltco's not currently performing to our original expectations, and we will continue to monitor its financial performance. Our renewable energy leasing business has greatly exceeded our expectations, due to the sizable investment type credits it is generating. These credits rose to just under $8 million, thus providing a nice net tax benefit of $5.1 million in Q3. For the full year, however, we do not expect our effective tax rate to remain negative given the fourth quarter gain resulting from our joint venture with First Data. As a reminder, expected tax credits are spread over the year in which they are earned when the underlying solar equipment becomes operative. Therefore, there's a cumulative effect during the calendar year that kicks in each quarter as the tax credits are recognized. The 30% tax credit is scheduled to progressively decline in the coming years. However, we see this as a very attractive endeavor until at least the year 2021, under the current legislation. We would once again reiterate that solar leasing is not a one-off exercise on our part. Our solar leasing business is closely linked with our renewable energy lending activity and affords us attractive returns and an added source of capital that we will use for a variety of initiatives within the company. Regarding capital, I would like to echo Chip's comments on the success of the capital raise we completed in August that further fortify our capital levels. It also gives us ample flexibility to pursue our growth mission. Additionally, the formation of Apiture is expected to add approximately $40 million in capital. While Live Oak does not expect to report any earnings from the joint venture during 2018 due to the earnings preference, we're very excited about the access it provides us to a much larger playing field. As you can see, we're well-positioned for a strong Q4 and 2018 as our loan platform continues to grow and diversify, while our efforts and financial technology promote meaningful change within the industry. This concludes my comments. Thank you for dialing in this morning, and we will now open the call for questions.

[Operator Instructions] And our first question comes from Nick Grant from KBW. Your line is now open.

Hi, good morning guys.

Good morning, Nick.

How big do you think the renewable energy leasing business can become over time? And what growth rate do you anticipate on leasing relative to your other verticals at this point?

That's a really good question. I mentioned in my comments that the pipe is about $180 million. I think all of that, really, is, Brett, reflective of DDAs, you may want to comment on that.

Yes. So, I guess as far as what is available out there, I think, we perceive this is very attractive endeavor for Live Oak. We will continue to use it to the extent that it makes sense. We will be, I think, very purposeful and considerate of the exposure that we would take to any DDA or what level of risk we're willing to take there. But as long as legislation is in place, such that it makes sense as a business for Live Oak to help us build capital, we will continue to capitalize on it.

And I think, Nick, this - the way we view this is almost an extension of the bond portfolio, these are all fundamentally rated municipalities. So, we got into the tax credit lending business - I mean, the renewable energy lending business for tax equity plays on larger deals through the REAP program. And so, we operate at kind of a lower level $2 million to $5 million, Scott, which - and it seems to be very, very little competition in that space. You may want to comment on that.

That's correct. I would say that we have a good line of sight on how much of this business we want to do, can do. We're not going to go blow up a big DTA here and have an outside DTA versus the size of our balance sheet. We have a stable pipeline of business opportunity that's out there in front of us. Chip said we're playing in a level where some of the larger companies don't play. So, we've got a little unique niche that we've carved out. And it’s a way - I mean, we're growing tangible book value as a result of this business and I think sometimes that doesn't get enough like the TBB [ph] of Live Oak is enhanced significantly by this business. And I believe if we continue to do it the right way, as Brett said, it's good business as long as the tax credit situation is as it is.

Okay, great. And then one quick follow up on that. I know there's going to be some choppiness quarter-to-quarter with - when the tax rates hit. But is there a way we should be thinking about your tax rates in over the next couple of years in the fourth quarter? And is there some level of, I don't know, like a 10% tax rate or something that you're managing to at this point?

There isn't necessarily a tax rate that we're managing to. I guess more so than that, similar to what Scott said, we're more thinking of it as what exposure level of leases and DTA if any, we're looking to take. So, I would say, as you're thinking about Q4, I would say think about it similar to what Q3 looks like. And then, I think 2018 is a bit of a future discussion depending on any macro changes.

Okay, great. Thanks for the color. Then on the margin, what's the competition like in the online deposit market right now? And do you feel you have any flexibility on rates coming through the next couple of rate hikes?

Yes. So, we've been tracking - this is Neil here, Nick - deposit betas pretty closely, actually on a product by product basis, and what we're seeing right now is a deposit beta of less than 50% for many of our products. And we also are looking at new products and we'll probably be announcing those low deposit beta products coming out here. We have still a lot of time with Clover, when Erin here talked about Clover, and what that can be and that's going to be great, but as we look at holding on - leveraging that precious capital to holding onto good loans, solving for the low deposit beta side of the balance sheet is kind of become a massive priority. So, excited because we had - but to answer your question directly, you know, it's safe to assume - we're analyzing it maniacally on a product-by-product basis and right now it's less than 30%.

And the only thing I'd add to that, I mean, you get worked up - work - I mean, certainly with rates going up, you get focused on the deposit side. I would say that our balance sheet overall is exceptionally asset sensitive. 70% of our loans are floating rate loans. So, we feel good as - I mean, if you believe the forward fed rate forecast, just thinking about the balance sheet overall, it's well constructed for a rising rate environment. And we will be the beneficiary of that as we go along and believe that we'll be able to hold deposit costs in a reasonable manner as we move along.

Okay. Thanks for the color. I will hop back in the queue.

Thank you. And our next question comes from Aaron Deer from Sandler O'Neill. Your line is now open.

Hi, good morning guys.

Good morning, Aaron.

Brett, I'm not going to let you off the hook too easily on this tax question because it's a little bit of a tail wagging the dog situation here. And I want to make sure that you understand this right because it seems from what you're saying, we can have another negative tax rate or tax benefit here in the fourth quarter. And given the growing pipeline that you have, it would seem that, that ought to continue into next year. And so, I'm just trying to understand what that means? How we should - if that's reasonable. And then I would also like to get some of your thoughts on what that means for the correlated equipment expense that goes along with the depreciation of those panels.

Yes, I guess I'll go back to my prepared comments, where in Q4 - from the reporting standpoint, Q4 will not be in a negative tax rate position given the gain that we're going to book as a result of the joint venture. I would say that a volume of tax credits for Q4 is likely going to be similar to the volume of tax credits we booked in Q3. So, from a volume standpoint, I can see that it as being similar. From a tax rate standpoint, I don't think Q4 will be in negative territory. Going forward for 2018, I don't think that we're ready to commit to what an effective tax rate will be for 2018. Assuming no changes to the tax code - or no changes to investment tax credits or solar panel taxes, I could see it being much lower than what we have historically experienced. I'm not certain that I would go as far as saying single-digits, but certainly much more favorable than taxes that we've experienced - tax rates we've experienced in the past.

Well, I think you have the whole Washington thing. I think most folks think that we'll have tax reform in Q4, we have to react to that. The other thing we can do is feather the pipeline, right? So, if we want to bring that down, then we increase credit quality.

And it's hard to improve credit quality on a portfolio that's already investment grade and as good as you want to have. So, I think it's a business that it's good today and we just have to - we don't know there are so many factors out there that are really beyond our control that will affect what next year looks like. It's hard to make a prediction about that.

Okay. Some of you guys do have control over it and that's operating expenses. Obviously, you're investing very heavily in the business and I understand that. But you're on track at this point for expense growth to be up maybe 50% over where we were last year. I'm just to get a sense of what kind of growth we anticipate going forward as you look out? And anticipated new verticals, just trying to bring forward another infrastructure build out. How should we be thinking about the growth in operating expenses over the next 12 months?

Yes, I would say, probably continue - what will continue to be the most appropriate measure of our noninterest expense will be our loan and lease origination volume. So, we've often talked about that metric in the past, looking at what it takes to produce $1 million of loans. And I think that is in the process of evolving as time goes on. But I think trending that - the historical trends on that should be a decent proxy for the future. And the evolution of that through depreciation of solar panels, as an example of one of the items you pointed out, I think the evolution of that will be small enough from quarter-to-quarter that you can use that as a meaningful trend to gauge our noninterest expense.

Erin, this is Chip, it's a problem, buddy. So, we have bifurcated what you known to be seal team 6 and seal team 7. Jason Lunkin [ph] is trying to add 2 to 4 verticals a year. if he can find the right domain experts, we will do that. 3, 4, could be 5. Whereas, on the other hand, K. Anderson is focused on individual SBA lenders. We are now a platform. It is not lost on us. There are 4,800 SBA lenders in this country. You saw that basically in our horizontal M&A business that occurred last quarter in California with Heather and Lisa out on the West Coast. So, I don't know how - if we can find really great folks to add to this platform or really great verticals, we're going to make that investment.

And, Aaron, this is Scott. We don't have enough answer to that question already, is that - what I would do if I were you, expenses are one thing we certainly are mindful of those. But I would start watching and looking. We talk about operating leverage inside our various verticals and how, as they mature, the operating leverage grows. But I can get you to begin to pay attention to operating leverage at the company level and as our - we made the decision to hold more. We could make that - if we'd sold all of our loans, we'd have a lot more revenue this quarter. But as that recurring revenue - go back to the slide on the recurring revenue slide, and you look at that growth. As that growth continues quarter-over-quarter, the overall revenue growth in the company is going to move up as well. And I think you'll see the operating leverage in the business improve and that's really, to me, what we need to focus on. So that there's the right correlation between expense growth and revenue growth and I think you'll be pleased as you see that going into Q4, but more importantly into 2018.

Okay, that's fair. No, that's exactly what I was looking for because that's - we didn't see that in the third quarter and obviously the loan sales and some of the other factors weighed on that, but I just - anyway...

Loan sales, a little heavier depreciation in that quarter too. So, I think you'll see that dynamic begin to turn and the recurring revenue will begin to carry the day.

Got it. Okay. I don’t want to dominate the call, but I do want to get one more and then I will get back in the queue. With respect to the gain expected on the First Data JV. I think when you guys announced the deal, you talked about a $38 million equity bump. What is that? Is that still what's anticipated and what does that mean for - what's it going to be in terms of what's actually recognized higher up in the income statement?

Yes, that's still roughly where we landed. The final valuation is still being reviewed externally. But preliminarily, we think that gain is closer to $40 million that would flow to the income statement. And to the second part of your question, it is a P&L event of net $40 million in Q4 and then, as I said in our comments, after that one-time bump, it will be quite a few quarters before we - there's another P&L impact related to the activities of Apiture.

Okay, good stuff. Thanks for taking my questions guys.

And your next question comes from Jennifer Demba from SunTrust. Your line is now open.

Thank you, good morning. You mentioned at the top of the call, you may start making some non-SBA loans. Could you elaborate on that comment?

Sure. Number one, when you're the second largest SBA lender in the country, you know there is a maximum level at some point where you reach in terms of total concentration. And good business sense will tell you, you want your portfolio to diversify over time and to that end, we are doing it. We're - our renewable energy business is much more of a USDA business, still government guaranteed, but a different type of paper and a different type of a guarantee there. We're also beginning with our government contracting business, we have developed, what I believe, and try to do this a lot in prior plays in my career. I believe we've got a really first-class, world-class ABL platform, asset based lending platform today that would stand up with anybody. And so, we believe that our asset based lending capability can be leveraged. It's already being used in our government contracting business and that's one of our verticals that's got just enormous potential. But we can take that across other businesses. It's a needed product in small businesses across the country. And so, we believe there's a great potential there. And as we find conventional lending opportunities as we're growing these new verticals, we're very comfortable with our credit expertise, our ability to underwrite. And the good news is, as Chip always says, our guiding principle's around how we deliver credit, don't change, whether it's a guarantee product or non-guarantee product. So, I think you'll begin to see more and more of those conventional type loans take some space on the balance sheet.

So, Chip help me out. 3 to 5 years from now, what does this company look like? In term of a loan portfolio and a business mix. I mean, do you - I mean, how much of the company in the future will be government guaranteed? And SBA loans versus your conventional commercial loan?

Thanks for that curb ball, Jennifer. So, I think it's almost a game-time audible bi-vertical, right? As Scott mentioned, as we look at the gov con area, massive, massive potential. We have soon to be a staff in Washington D.C. of 15 to 20 folks that have been on the other side of that trade, folks that came from the SBA. So, the United States government lets out about $1 trillion a year of work, about half of that goes to Department of Defense, of the other $500 billion, about $100 billion go to small businesses, that being defined as businesses under $27 million of revenue. And then there are these different set-asides. And I won't get into all of them. But our folks don't understand that business, so could we see that growing substantially over time? I think the answer to that is yes. I guess I'd go back to compounding is a wonderful thing. So, we're about a $2.5 billion bank. We said since taking this company public, we're highly confident growing the business 15% year-over-year. So, do I think in 5 years this could be a $5 billion bank? I think probably larger, right? And some of that is based on Neil's success in generating core deposits in a unique fashion that he's touched on in many calls before. So, I'll just leave it at that, but as I said at the top of the hour, I have never been more excited about where this business is, and the flexibility that we have. We often talk about raising capital when you don't need it, we have a massive capital account, we have massive flexibility from portfolio-ing these government guaranteed loans. And I really don't see an end to that as we continue to attract and retain the young talent that we've been able to attract and retain over the years.

Okay. Thank you.

Thank you. And we have a follow-up question from Aaron Deer from Sandler O'Neill.

Hi guys. I am going to give you a hard time today. Just two quick follow-ups. One is, just wanted to get your thoughts. Obviously, as Chip has mentioned, you guys have got a - just raised a ton of capital and are very well situated on that front. But I'm just curious what your - to the extent you guys have done some analysis on the new regulatory look at HVCRE versus the new HVADC. What impact that has on your concentration ratios and if that changes your thinking at all, in terms of the mix of product that you will be doing going forward?

You're talking about the high velocity CRE, high velocity construction, those type large real estate assets that churn on the books. Is that what you're...

Just under the new guidance that they've put out with ADC versus CRE, if that's had any impact on how you guys think about the construction credits and the volume that you're doing.

Number one, we don't do a lot of typical HVCRE lending anyway, that's point 1. Point 2, the construction lending we do is: number one, largely guaranteed; number two, owner occupied. So, we - while it looks like we have a big construction budget when you peel away the layers, we don't. And the regulators get that for the most part. Steve Smits, our Chief Credit Officer, can certainly correct what I just said or put a little more color to it.

Scott, you're exactly right. And the - where it does impact us in a few verticals, that would be classified that we're construction, we're sticking with SBA guarantees, so it gives the net exposure quite a bit of runway, especially as we continue to grow our risk based capital with all the activities that Brett and team had discussed today. So, we're in very good position and the opportunities, as we look forward, are well beyond what you would call commercial real estate, transactions would fall into these buckets. Where Chip had talked about government contract lending and others are a lot of non-real estate opportunities as we look forward.

That’s great, okay. And then, Neil, it sounds like you're making good progress from Smooz deposit initiative. Just wondered what - is there a metric that we can hold you to where we should be thinking about in terms of when we might see some of the benefit of this be reflected on the balance sheet or income statement?

You asked me that, I think, last time. I hedged and said, "Hey, I don't think until early next year," and I'll probably keep that. What's interesting about these opportunities, they take time to implement. Because if you think about what Apiture is, they're selling the bank services through a channel and that channel, like a First Data, is a sophisticated company that's got a lot of moving parts and each of these types of channels that we've been pursuing, it just take a little time. The only benefit is once you turn one on, that channel can bring hundreds of thousands, if not millions of accounts, and so where I would still, to answer your question directly, look at that for early next year to - if things really slow down in Q2, and you should start seeing some - hopefully, there will be some announcements at that point.

Okay. Good stuff. Thanks again guys.

Thanks, Aaron.

Thank you. I'm not showing any further questions at this moment. I would now like to turn the call back to Chip Mahan, CEO, for further remarks.

Thank you very much. No further remarks. Thanks for everyone joining the call today and we'll see you at year-end.