Ameris Bancorp (ABCB) Q2 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Ameris Bancorp Second Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode [Operator Instructions]. Please note today’s event is being recorded. And with that, I’d now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead, ma’am.

Thank you, Brian. And thank you to all who have joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the Investor Relations section of our website at amerisbank.com. I am joined today by Ed Hortman, Executive Chairman; and Dennis Zember, President and CEO of Ameris Bancorp. Ed will make some opening general comments, Dennis will talk about the quarter and our completed acquisitions and the outlook for the third quarter. And I’ll spend some time going over the details for the financial results. With that, I turn it back over to Dennis for closing remarks. Before we begin, I’ll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list some of these factors that might cause results to differ in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the Company’s performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I’ll turn it over to Ed Hortman for opening comments.

Nicole, thank you, and good morning everyone. I appreciate to taking the time this morning to join our second quarter 2018 earnings call. The second quarter was very busy and a somewhat noisy quarter for us. Dennis and Nicole will go into those details and explain the noise, but I want to make a few short comments before they do that. The core trends of Ameris are as good as we’ve seen in decades. We have strong asset growth, a stable margin, improving operating results and financial ratios across the board. The momentum and energy within the company is extremely positive as we look to the third quarter. I’m very proud of our team and what we’ve built to keep this company moving forward and provide top quartile results. As we previously announced, I retired as CEO on July 5 and would retire as Executive Chairman on September 5, so today will be my last quarterly earnings call. I greatly appreciate the relationships I’ve built with each of you on the call and I’m exceedingly proud and confident in our team and our board. It is this level of confidence that has allowed me to retire. I have every confidence and expectation that Dennis and the leadership team will take the company to even greater successes. It goes without saying I’ll still be a customer, a shareholder and a cheerleader and I’ll be celebrating successes, albeit from the sideline. So Dennis, with that, again, congratulations as new President and CEO of Ameris Bancorp. I’ll stop here and turn the call back over to you.

All right. Thank you, very much, Ed. And before I get going, I’d like to – I go back 13, well, 14 years or so when Ed called me and convinced me to move from Atlanta to Moultrie and took a chance on me 14 years ago. I was 35 years old. And I’ve learned a lot and I will tell you that it’s been a lot of fun. The value that we’ve created and the relationships that we’ve had beyond what we’ve done professionally at Ameris, building the kind of company that we have, taking it from about $100 million of market value to about $2.5 billion, it’s been great. The friendship with Ed, Mara, Rachel [ph] and I have really enjoyed that over the years and look forward to that going forward. So Ed, I appreciate that and congratulations on the retirement. We’ll do our best to make you proud going forward. Let’s talk about our second quarter results. For the quarter, we’re reporting operating earnings of $29.2 million or $0.74 per share, which is about 18% higher on a per share basis from 2017. The quarter’s operating results do include the impact of some credit comps that we do not believe are recurring. And I’ll just get to those in a minute. Our operating ratios were strong even with the credit noise, our ROA coming in at 1.38% and our operating efficiency ratio dipping to 57.5%. During the quarter, we had a few loan relationships in the U.S. Premium Finance division that defaulted and negatively impacted our earnings by $3.7 million after tax or about $0.09 per share. As we stated in the press release, these loans were included in our original purchase of the business and our general operating lines to insurance agencies. These are not the traditional Premium Finance loans and not part of the business that we’ve been focusing on for growth and profitability. At the end of the quarter, there is only $18 million of these operating lines on the balance sheet, which is about 0.2% of our total loan portfolio. We didn’t exclude these costs from our operating results, but the circumstances that led to these agencies defaulting are not typical in the insurance agency industry. And because of that, we believe that this is an isolated issue and it’s not indicative of the credit quality in this division. This credit issue is unfortunate because it very temporarily overshadows our leading levels of profitability and the kind of credit quality that we are carrying on our balance sheet. I think on what Nicole is going to discuss on profitability levels. So, let me just make a comment or two about the credit side. Today, approximately 27% of our legacy portfolio is either cash-secured backed by municipalities or included in the mortgage loan pool that have no losses since purchase. The investor CRE portfolio – the investor CRE part of our portfolio, which is always considered more risky than the owner-occupied side, has six basis points of past dues and only 10 basis points of non-performers. We’ve been able to be picky in this part of the portfolio. We still demand guarantees in almost all of our negotiations with customers. It has us well-positioned on the CRE portfolio. On the construction side, our legacy NPAs are only seven basis points. Past dues in this category, commercial and residential, were only 16 basis points at the end of the quarter. And I mean, I’ve heard some of the other calls and I understand that the perception out there is that we’re nearing the end of a really good cycle on credit. But for now, we don’t see anything in our markets, generally speaking or in our overall portfolio, that concerns us. Let me talk a little bit about the deals that we closed this quarter. Atlantic and Hamilton both closed in last part of the quarter. Hamilton closed on both – next to last day – well, yes, the next to last day. Both acquisitions together, along with our organic growth, pushed us to total assets of just over $11 billion. On the Atlantic deal, we have finished the integration along with all the branch and backroom consolidations and believe that the third quarter will be mostly claimed from an expense standpoint with respect to Atlantic. The Hamilton deal closed at the very end of the quarter. so, really, there’s no impact in our second quarter from Hamilton from spread income revenues or operating expense. These deals are important in a couple of ways. First, they’re both going to provide meaningful financial results for our shareholders. Nicole has got some slides out there about the cost saves and our confidence level there. We believe that once all these are – these deals are integrated, they will be the catalysts we need to reset our efficiency ratio, again, lower by several hundred basis points. It took us years to get just to 60 base – excuse me, 60%, doing that by getting some leverage through M&A and building very efficient lines of business from scratch. These deals and our determination to succeed on this initiative are going to move us into the lower 50s once Hamilton is converted and fully integrated. Our recurring ROA is already in the top quartile in the mid to low – in the low to mid 1.50% range and these deals are accretive to that ratio as well. You wouldn’t expect these deals to have the strategic opportunity they have being this meaningful financially, but we believe they are. Hamilton puts us in Atlanta, which we believe is going to anchor our growth rate for several years, and Atlantic Coast is significant in Jacksonville as the leading community bank and gives us a presence in Orlando and Tampa. The employees in both deals that we have retained are among some of the most enthusiastic folks we have found in M&A deals, which bolsters my confidence that the strategic value of both acquisitions can be realized. Our core growth story. We delivered again on that story with one growth coming in at approximately 18% annualized. Our growth is still coming from multiple markets and really across the spectrum on the product type. I’m especially happy that we are able to get the growth even while moving higher on production yields, which increased to 5.46% in the core bank. Nicole is going to talk a little more about production yields and funding rates and all that, but what I’ll say is that the market is tough and competition is about as fierce as we’ve seen it in the past few years with people clamoring for some growth. So I really commend our bankers for another great quarter on the kind of profitable loan growth they’ve put up. For the last half of the year, we are focused almost exclusively on integrating these two deals and beating the economics that we promised, getting the bankers in these new markets up to speed on the Ameris way quickly so that we can see the incremental growth that we expect. Earlier in the year, we saw 2019 estimates and knew we had a challenge in front of us, but our core run rate ROA against our new level of total assets makes that pathway much clearer. Nicole has several slides in the first part of the presentation that drive home the opportunity we believe we have with earnings per share and operating ratios. And we have a few strategies that are not included or are ready to be discussed on both spread and efficiency that give us more confidence that we’ll be able to deliver the results in the rest of 2018 and 2019. Last comment, real quick. We still get asked a good bit about M&A. And while we are integrating and converting these existing deals, we are still having conversations. The only deal that we’d be interested in is one with a solid deposit franchise and in good markets. We don’t believe we have to go to a new market or a stretch to make a deal. Nicole is going to discuss the incremental profitability we found with our organic growth over the past year and I will not steal her thunder, but suffice it to say, we’re in a great position with organic growth. The drive – the EPS drivers that organic growth has given us is more than enough to offset any opportunity that we will pick up with an M&A deal. We still love M&A as much as anybody and think that we are outstanding at negotiating the deals and getting the results and integrating the team and we are hunting hard, but it has to hit the metrics that we want or we’ll just rely on our organic machine for earnings per share growth. Okay. Nicole, with that, I will hand it over to you for some details on the numbers.

Thank you, Dennis. Before I go into the details of the quarter, I would also like to take a minute to thank Ed. Well, almost everyone listening on the call today knows Ed as the former CEO of this successful publicly traded company. I know Ed as a leader and a teacher and a mentor. His wisdom and support has never wavered. And for that, I’m grateful. Ed, I want you to know that I’m going to personally miss you and I hope to hear many happy stories of the quality time you’re spending with your grandson and family and in retirement. So on to the financials. Today, we’re reporting operating earnings of $29.2 million or $0.70 – $0.74 per share for the second quarter, which is approximately 18% improvement over the same quarter last year. These operating results primarily exclude $18.4 million of merger charges and $5.5 million of early retirement benefits. Including all of the charges, we are recording total earnings of $9.4 million or $0.24 per share. Dennis discussed the impact of the credit issue earlier, so I’ll not spend any time repeating that and just go into some of the details – the other details of the quarter. Our operating return on assets in the second quarter was 1.38%, which was an increase from the 1.32% we reported in the same quarter of 2017. Although we aren’t excluding it from our operating results, if I adjust to them the credit costs in the Premium Finance division that Dennis discussed, our ROA was actually at 1.55%. I mentioned that adjusted run rate ROA only from the standpoint of our core profitability and the trends we’re experiencing. A year ago in the second quarter, we reported an operating ROA of 1.31%. When we adjust that for the new tax rate, that equates to a 1.49%. So essentially, as of last year, we have grown our bank organically by almost $1.4 billion, an increase to our core profitability by six basis points. We did this by focusing on several key areas. First, we paid attention to the margin. This yield curve certainly didn’t make it easy, but it isn’t impossible. We have managed a remarkable deposit beta throughout the period of increasing rates and our diversified market, credit offerings and lines of business keep us from having to chase the cheapest credit just for the sake of growth. Secondly and most importantly, we’re mindful of operating expenses. We have used this period of organic growth and M&A to reengineer everything. Our administrative group, especially our returning points of leverage and increased profitability as we trust our leaders to take on more. At the bank level, we have invested in support around our best lenders and allowed them to achieve portfolio levels that two to three years ago we wouldn't have thought possible. Again, I'm not trying to belabor this, but the market seems very nervous about the potential, the possibility to sag from a host of risks, but we've been able to get the growth we forecasted and still improve our already strong ratios. We had a great quarter with our net interest margin exclusive of accretion, exclusive also of the Atlantic Coast impact, which lowered our margin by about two basis points. We really only have a one basis point decline, which is higher by six basis points against the same quarter last year. Our interest-bearing deposit beta of 28% and strong growth in non-interest-bearing demand really gives us an advantage on holding the margin and something we believe is sustainable as we move to the second half of the year. Concerning the acquisitions, we expect Atlantic Coast will reduce our margin by an additional four basis points, but Hamilton should neutralize that. So we expect that the margin reset for the acquisitions we closed this quarter will continue to hold in the low 3.80% range. Our yield on earning assets increased by 14 basis points and those are broad portfolio in all categories of our core loan portfolio. The prepayment fee on our purchased loan pools accelerated somewhat, which caused the yield to come in a little bit. Dennis briefly mentioned the loan production yields in his earlier comments, but to restate, our core bank production yields were 5.46% for the quarter against the 4.57% in the same quarter a year ago. Two important things to note here. First, nobody really talks about loan yield beta, but we're higher against last year by almost 90 basis points, which means we have been able to get almost all of the short-term rate increases to flow into our loan production. Secondly, our incremental funding rate for the second quarter in the core bank was about 161 basis points considering growth in non-interest-bearing deposits mixed in with DTA, CD and lending market growth and repricing. For the quarter in the core bank, our growth in repricing activity is coming in at levels that are very close to our existing margins, which we're delighted with given the yield curve pressure and the intense level of competition. Non-interest expense – I'm sorry, non-interest income increased $4.8 million during the quarter to $31.3 million. About $2 million of this relates to a reversal of a liability and the remaining increase was almost all related to the increase in the Mortgage division, which had a really strong quarter. When compared to the second quarter of last year, retail mortgage production increased over 30%. We're having some real success hiring producers that have steady sources of referrals or construction connections. And during the quarter, we were able to grow our number of mortgage bankers by 16%. Our markets are still strong with respect to new homebuilding and the pace of home sales and we believe that continuing to focus on builders and realtors as our primary customer will continue to drive above-average growth and profitability in our Mortgage group. For the quarter, our operating efficiency ratio improved to 57.53% in the second quarter from the 59.95% reported in the first quarter and 59.37% reported in second quarter last year. The efficiencies that we expect to gain from the Atlantic and Hamilton acquisitions, along with our style of organic growth, is expected to drive additional leverage and, like Dennis said earlier, reset our efficiency ratio to something in the lower 50% range by the end of this year. We continue to see positive effects of the Tax Cuts and Jobs Act that was passed in the fourth quarter as our effective income tax rate was 20.5% in the second quarter, compared to 22.4% in the first quarter and then 13.9% in the same period last year. We believe our effective tax rate will be between 22.5% and 23.5% going forward. On the balance sheet side, total assets increased over $3.1 billion and earning assets increased over 2.7%. The Atlantic acquisition added approximately $966 million in assets and the Hamilton acquisition added about $2 billion in assets. Exclusive of these acquisitions, organic loan growth totaled $ 268 million or 18.35% organic loan growth for the quarter. This compares to $153.8 million or 10.8% in the first quarter of this year and just slightly ahead of our forecasted year gain in the 15% range. On the deposit side, the Atlantic acquisition added over $584 million in deposits and the Hamilton acquisition added about $1.4 billion in total deposits. Exclusive of these acquisitions, deposit growth totaled $131 million for the quarter, which was a little lower than we hoped. In the last month of the quarter, we materially increased our incentive for new deposits and, by the end of the first month, we were seeing more of the kind of movement that we were targeting. I'm confident that we can see better deposit growth rates in the coming quarter, if for no other reason, the opportunity that we now have in Atlanta, Orlando and Tampa. We continue to see really encouraging growth in our lines of business and believe this is important when considering the second half of 2018. Production in our retail mortgage group increased by over 30% when compared to the same quarter last year. Production in our warehouse lending division increased over 26% when compared to the same quarter last year. Loan production in the Premium Finance division remained strong as total production was 18% higher this quarter than the second quarter of last year. We believe we can sustain double-digit annualized growth rate in these divisions for the next few years. We touched earlier on the elevated provision expense in the Premium Finance division, which we do not anticipate going forward. Outside of that, our asset quality remains strong. Outside of the acquisitions and the Premium Finance issue, our non-performing assets as a percent of assets and our annualized net charge-off ratios were flat. The diversification of our loan portfolio continues to strengthen both among type of loan and geography. We have not seen deterioration in our portfolio to include our commercial real estate and construction loans that continue to perform well. In conclusion, we are really excited about the third quarter. The three recent acquisitions have positioned us well going into the third quarter. And when, not if, but when we execute our strategy for the cost savings and operational efficiency from these acquisitions, combined with our organic growth in lines of business, we believe we will continue to see top quartile financial results. With that, I will turn it back over to Dennis for closing comments.

No closing comments. Yes, let's just go for questions.

Okay. It is now time for the Q&A.

[Operator Instructions]. And today’s first question will come from Brady Gailey with KBW. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning.

Good morning.

I just want to start by telling Ed, congrats on the successful career and good luck in retirement, and Dennis, congrats on the promotion.

Thanks, Brady.

So maybe we'll start, I guess, the core NIM guidance, kind of in that low 3.80% range, which is kind of where you're at already. Maybe talk about what your expectations are on the accretable yield side just with ACFC and Hamilton now kind of in the run rate starting in 3Q.

Yes. So our – if you – we have our accretion in our financial highlights. So the first quarter of this year is about $1.4 million. That increased in the second quarter to $2.7 million. Part of that was an accretion payoff on one loan and part of that was the first impact of Atlantic Coast. So what we anticipate in the future is that $2.7 million increasing to the low $3 million range based on what's coming on from Hamilton and Atlantic Coast, offset by what's running off from some of the previous acquisitions.

All right. And then just on what happened in Premium Finance. So what caused the two insurance agencies to default? I don't want to pressure. I think you all mentioned like some unusual circumstances, but what actually caused them to default?

Brady, I really don’t want to talk about the customer issue, publicly, but I will tell you it's not – it wasn't just operating results. It wasn't – it did not have anything to do with bad operating results, bad operating decisions by the principals or the agencies or bad offerings, things that you would expect insurance agencies to weaken by. It was something that – I just – we don't want to – I don't want to go into the customer issue. It was an unusual circumstance that's not a recurring issue and it's not something that we face really across the board in any of our credit offerings, but especially in the insurance agency side. I will say that the – we'll take this opportunity to say that in the Premium Finance business that we bought in U.S. Premium Finance, before they came to Ameris, they used credit offerings – generally smaller credit offerings to agencies as a means to kind of induce – offering them some credit terms as a means to kind of get in and get the agency to use U.S. Premium Finance. Since they've come to Ameris, that's not really what we've been focusing on. I mean, we have a much lower cost of funds than what they experienced in the past and so we're able to compete, honestly, a lot more on pricing. There's not a lot of difference pricing-wise or no difference really between us now and what the bigger companies – what BB&T's offering is, what the insurance offerings are, the first insurance funding that we’ve owned. So we can compete solely on price and be successful and we really don't have to do the credit offerings. And that's why this portfolio is down from $24 million to $18 million. And by the end of the year, I can see it – most of these are on very short amortizations. And so I think in the next 18 months to two years, we were pretty much be out of this.

All right. And the last for me. I heard Nicole talk about a $2 million reversal of a liability. So I think it was captured – it looks like it was captured in other fee income. Just give us a little more detail as far as what that was and just confirm that, that was in other fee income.

That’s right. It is a $2 million reversal of a liability and it's showing that in our non-interest income section of the income statement. And that is related to the Premium Finance, so some accruals and liabilities that we had that we no longer have to pay. So we were able to reverse $2 million out of that. And if you'll notice in the press release, we stated it's $6.7 million of provision expense with a net impact to the company of $3.7 million. And I'll take the opportunity to give the math on that. You have the $6.7 million provision expense less this $2 million reversal gives you $4.7 million impact. Your tax-effect that at 21% and that's where we get to the $3.7 million net impact to the company of this Premium Finance situation.

Got you. Okay. That’s helpful. Thanks guys.

Excellent.

The next question comes from Tyler Stafford with Stephens Incorporated. Please go ahead.

Hey, good morning, everyone.

Good morning.

Good morning.

Hey, Nicole, I wanted to start on Slide 5, just a clarification question on the expenses. So you got the three columns there on the non-interest expense, the $66.9 million, the $9.7 million in the middle and then the negative $2.3 million. So is the way that we should be thinking or interpreting this slide is the first column, $66.9 million plus the $9.7 million less the $2.3 million is – so roughly $74.5 million, is that the 4Q non-interest expense run rate that you guys are pointing to here?

Yeah. You got it exactly.

Okay. All right. Perfect. So, then beyond that I guess, the full Hamilton cost savings will be realized by 12/31. And so 1Q will be a – the first kind of clean full quarter?

That’s right. Actually, that third column on Slide 5, that negative $2.3 million, that is the remaining cost savings at Hamilton. So we closed in on June 29 and we have the data system conversion scheduled for October. And so there will be some – obviously they – all of those cost savings are not immediately after October, but that $0.3 million is the cost savings that we'll have in the fourth quarter.

In the first quarter.

In the fourth, yeah.

In the fourth quarter, okay.

Because we have Hamilton coming out there.

Yeah. Okay. All right. Got it. And then Dennis, maybe, can you talk about the profitability of the Mortgage division? What – I guess, what opportunities there are to improve that? Obviously, the revenue is up nicely, but the expenses, I guess, just from all the hiring this quarter, kind of impacted that negatively for the net bottom-line kind of quarter-over-quarter. Where do you see the profitability of that business kind of going from here?

Nicole, if you can…

Okay. I’m going to answer it a little bit and Dennis can certainly accurate. So, if you look at the Mortgage division, it does look a little bit because they increased their production by 30%, but then if you look at their salary and benefits line, there's an increase they are. And that is – there are several things going on. One, we portfolio-ed a small portion this quarter. So we paid commissions on those where we didn't necessarily have the gain on sale. And then, we also have an 18% increase in net producers of new hires. So we – they are still getting onboard. So we have that first couple months of draw until they get their portfolio built back up. So we felt that lag this quarter and that's really the difference. So once we get that all back up to speed, I think our profitability will go back to where we were in prior quarters.

Okay, got it. Maybe, just one more on the expense side, Beyond the Hamilton and, now, ACFC cost savings that we realized, so once we get kind of the starting point for 2019, how should we think about just the normal expense growth from there? Are there any more major investments or cumulative downs or anything planned or – that you feel like you need? And then – and just kind of trying to get a framework for expense growth next year.

Yeah. I will say we are recruiting hard, especially in Atlanta and Orlando and Tampa. We're really excited about the opportunity to be there and feel like the growth – we're going to need – we love what the producers we have and we like the levels, but we want more. So we are there. As far as like a whole team lift out, I don't know if that would happen, but I will tell you that the expense growth is going to be muted. We are going to – looking out, various – slight yield curve does give you margin pressure. We have managed it, I think, exceptionally well, but it just gets flatter and flatter and you just keep seeing more and more reports. So, there's a margin and a revenue risk there and we're going to insulate ourselves with operating efficiency. And we do have a few things, I think, we'll probably be ready to talk about in the next couple of months that will help us outside of just having more muted growth than what we've been known for in the past that may actually help us be even a little flat. I think the – as far as investments go, most of what Nicole has found on extra cost saves – or everything that Nicole has found an extra cost saves has really been driven to pay for the extra investments that we have to make or that we have been making right now. A lot of those investments – I know that going over $10 billion is different than what it was a few months ago or a year ago with some of the law changes, but investing a little more in risk management and a little bit in IT and background is what we've been doing and Nicole has pretty much paid for that with the extra cost savings that she's found.

Okay, great. That’s helpful. Ed, it's been truly a pleasure. I hope you guys enjoy your retirement, a well-reserved – well-deserved retirement. Congrats again.

Thanks, Tyler.

The next question comes from Will Curtiss with Piper Jaffray. Please go ahead.

Hey, good morning, everyone.

Good morning.

Good morning.

Ed, great run and congratulations on the retirement. And Dennis, keep it up. The – let's see, this first question I had was on the – I just want to get some color on the CRE balances. I think they are flat in the legacy book this quarter. And maybe just your thoughts in general on the CRE environment with regards to competition, given kind of what we've heard from other banks recently?

It is intense. I mean, really intense. Really glad that's not been our only offering because that really is the go to, I guess, for kind of banks our size and smaller. And so we'd love – the intense competition there is notable. You can really see it in the yield offerings or the yields that you can book on that. Structure-wise – I will tell you the outset of this comment that structure, we don't really see any bad actors out there on the structure side. Really, we don't. It's not what it was years and years ago ahead of the last recession. Investor CRE. I think a lot of investors are – have things – have projects that have become fully stabilized that have had a couple of years of RIN increases that are getting – are seeing the opportunity to cash out and kind of get do what investors do. And so we are seeing sort of above average payoffs, especially on the investor CRE side. If Lawton's here, he could give you a little more feedback on that, but that kind of – we actually expected in second quarter to come in a little better than what we did on the loan growth side, which we're pleased with at 18%, but we thought that second and third quarter were going to be bigger quarters for us. I think the third quarter's, I think – looking at the pipeline and what's scheduled to close, I think third quarter is going to be as strong, maybe a little stronger than the second quarter, but the headwinds from investor CRE payoffs are all real. Beyond that, we are – I guess, the comment that I made about the perception that we're nearing the end of a really great credit cycle, that's probably affecting us too. I mean, the idea that you get into a commercial construction deal now that's three years before it's fully stabilized, looking at a new apartment, a new multifamily project or a new warehouse or anything like that, I mean, it got us a little more cautious on that. And so maybe some of the growth that we had over the last year – Nicole had – initially had in her comments kind of comparing 18% to what it was a year ago. I mean, a year ago, we – a year ago, I think we would have done a multifamily deal or a warehouse deal. And today, we're a little more cautious because you just don't know if you want to be holding a three-year project right now. So I think that is probably a little more pervasive across the industry. I've heard some comments, too, and maybe they have not been that specific, but that's sort of what is top of mind for us. Did that help, Will?

Yeah, very helpful. I appreciate that. And then, just the last one for me. Do you have any updates on the expected impact from Durbin?

We do, it’s still the same kind of impact that we've said before, about $4 million. So, starting next year, we have to add about $2 million.

Okay. All right. And that $4 million, is that pretax or after?

Pre.

Okay. Thank you.

Next question comes from Jennifer Demba with SunTrust. Please go ahead.

Thank you. Good morning. Ed, congratulations on your pending in retirement are really going to this year.

Thank you, ma’am.

Dennis, congratulations

Thank you.

So, can you give us a little more detail if you can on how you hope to keep expenses – expense growth muted next year? And what efficiencies you can find on top of the merger-related ones that maybe haven't been accomplished yet or you're looking for?

I will, broadly speaking, without giving any numbers about it, I will tell you that we're 18 months from the maturity of our core processing contract. And the last time we – which we're happy – we're really happy with our core service provider, but the last time we negotiated that, we were probably, I'm thinking, we're easily – we're probably less than half of the size we are now. We're – and so I believe there's going to be some opportunities there. And the secondly as we’ve really not done, given the expansion that we’ve had and given the growth, we’ve really been able to pick up most of – we've been able to move from probably a perennial 67% to 70% operating efficiency ratio, that was kind of what we were known for, we've been able to move to 60%, really doing that with just M&A deals, getting leverage from M&A and building efficient lines of business. What we've not done is look at our branch system. And I'm not going to say that we're going to have. We're not about to close half of our branches, but it's been in the coming years, probably three years, several years since we really did anything on the branch side and we are looking at that now too. So I think when you combine both of those strategies plus the fact that we’ve taken the opportunity with this M&A – the M&A – pending M&A this year to already do some of the administrative investing, I just don’t see the need for a lot more expense load going into next year. Now, we will – on the production side, the revenue side, I think we are – if somebody – if we find somebody that we are confident can play our offense, we – we’re going to move with speed, hiring them, getting them home, getting them up to speed, giving them the resources they need and let them do what our top producers do. We’re not afraid of that at all and we’re very interested in that. But I think from a revenue standpoint, that’s not what’s caused us to have revenue – excuse me, earnings misses in the past – what’s caused us to have earnings misses in the past. It’s really more less investment at the bank and in the production side, more investment on the administrative side. And when I look today, I feel like we – when Nicole mentioned the reengineering efforts, we believe are going to help us solve that riddle.

It’s very helpful. Thank you.

Next question comes from Casey Whitman with Sandler O’Neill. Please go ahead.

Good morning.

Good morning.

Good morning, Casey.

Just to go back to I believe it was Tyler’s question on Slide 5. I’m just trying to understand at least like a starting – how you got that normalized run rate of – I think it was like $67 million in expenses in the second quarter. Does that include like a normalized provision expense in there? Or is it assuming a full quarter of ACFC? Or what’s the difference there between the $67 million and I think it was like $62 million that you actually reported in the second quarter?

Yes. There are some things included in the expense for some new hires that we add in the end of the second quarter that we didn’t have at full quarter. There’s also some other expenses that we know that we are incurring that we maybe only incurred as a part of the quarter. So we had added those in to get what will be a normalized run rate for everything that we know that came in at the end of the quarter.

Okay. And then I guess, my other question on expenses then would be, just as I look at the Premium Finance group – and I appreciate all your commentary around the credits, but what was driving, I guess, those expenses to come up again this quarter versus last quarter? Is there anything kind of coming out in the future?

Yes. So in the non-interest expense section of the premium – you’re looking at the segment reporting of the Premium Finance?

Yes.

That $1.7 million compared to $500,000?

Yes.

From first quarter.

Exactly.

Okay. That’s basically an amortization of the intangibles from the acquisition. And if you look on the main income statement, you’ll see how that – the amortization increase. And most of that, there’s a small portion of it from Atlantic that we only had one month and then – but the rest of it is here in the Premium Finance.

Okay. So that will stay?

And as well, we – if I can add just a little bit of color there. The amortization in the second quarter.

With the catch-up.

Was a catch-up. There’s about $500,000 catch-up, so we bought them in January. We didn’t finalize all of our third-party evaluations and identifications of those identified intangibles until the second quarter. So we had to book basically five months of expense. So two months of that expense, it’s about $250,000 a month, $500,000 for the quarter is non-recurring. Does that gives you a better run rate?

It does. All right. Thank you for taking my questions, an Ed wishing you great retirement it’s been a pleasure.

Thank you.

[Operator Instructions] Our next question today comes from Christopher Marinac with FIG Partners. Please go ahead.

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I would tell you that we are just now, probably two weeks ago, have a – ended up with a full complement of deposit salespeople focused on our lines of business. And I know you wouldn’t – you might not think that the insurance agencies or some of our mortgage warehouse or equipment finance, you might not think those have meaningful deposit opportunities, but they do. And really, the folks that are selling in those divisions for us have much more of a – the full complement in a relationship than you think they do. It’s not just the credit offering and they walk out. Our Mortgage folks and our Premium Finance folks especially are outstanding salespeople. And every time we’ve gotten in front of a customer, we’ve walked out with a checking account. Sometimes, we walk out with more than a checking account, but getting checking accounts in that – in those divisions have been reliable. I’ll tell you also the – we’re still hiring and going back to talking about people that can play our offense and we’re still recruiting hard. So I think you can go back – and I don’t know what the number is today, but I think we’re – we have – we definitely have our sights on doubling the amount of deposit salespeople that are in our markets who focus solely on deposit gathering. And we’re not late to the game there. We’ve been hiring and been recruiting. We’ve been moving commercial people into that role. We’ve been moving our best – some of our best branch managers and sales officers into that role. We’ve hired top of the class, the head of our treasury side. And so, again, if you look at the growth Nicole mentioned, the growth in checking accounts year-over-year, it’s about 14%, which sort of speaks to some of the energy and the movement we’ve been getting there. I’ll tell you that it’s just as fierce there, Chris, as – maybe more so honestly because people are so laser-focused on deposit betas. And deposit betas are the same that they kind of creep up and money market rates and CD rates are kind of getting closer to Fed funds. And really, the only way to offset that now is the checking accounts. So people are seriously fighting for every one of those as they can.

It’s very helpful color, Dennis. I appreciate that. So are the incentives now in place with the products? And are any of those sort of new in these last couple of months that, therefore, we could see the benefit in future quarters?

Yes. We – end of May, I don’t know the exact start date, but at the very end of May, we came out with an incentive plan that basically incents our – anybody in the bank outside Nicole and I. We’re still expected to sell, but we’re not getting incentive for it, but I’m just kidding. Basically, it incents anybody in the bank for – in a pretty material way for any new deposit. Now, I mean, it is relative. If your checking account pays a substantial amount, money market accounts and CDs don’t pay quite as much especially based on where the rate is or what rate you sell.

Can I just add? And when Dennis said to anybody in the bank, I think in the past we’ve had, both on the banking – on the lending side and on the retail side, but this really has opened it up to all of the administrative functions as well, people that in the past did not have any kind of deposit gathering incentive. We’ve now opened that up to all of those functions. That’s kind of the difference when you think of everybody who wasn’t included before.

Yes. And really, in just a span of – obviously, the enthusiasm with that built. Our commercial officers this year have about 25% of their incentive on average – it varies, but on average, it’s about 25% of their incentive is deposit-orientated, and that’s going to stay in place. But on top of that, they can participate in this plan which is a little more aggressive just on the deposit side. It is going to have an impact, I can assure you. I mean, it’s – in what it did in just one month, if nothing else from the enthusiasm and the awareness, was pretty good. And I think as we go through third quarter, we introduce that in Atlanta and Tampa and Orlando. That opportunity, I think, you’re going to see – we’re pretty confident we’re going to see some results there, Chris.

Great guys. Thank you for all the back an that’s really, really help. And Ed, best wishes to you as well.

Thanks, Chris.

At this time this will conclude today’s our question-and-answer session. I’d like to turn the conference back over to Dennis Zember for any closing remarks.

All right. I appreciate your participation on call today. If you have any questions or comments Nicole and I will be around and happy to get on the phone with your or answer e-mail. All right. Thank you and have a great weekend.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.