Bank OZK (OZK) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Bank of the Ozarks’ Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.[Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Tim Hicks. You may begin.

Good morning. I am Tim Hicks, Chief Administrative Officer and Executive Director of Investor Relations for Bank of the Ozarks. The purpose of this call is to discuss the company’s results for the quarter just ended and our outlook for upcoming quarters. During today’s call and in other disclosures and presentations, we may make certain statements about our plans, estimates, strategies and outlook that are forward-looking statements. These statements are based on management’s current expectations concerning future events that by their nature are subject to risks and uncertainties. Actual results and future events could differ possibly materially from those anticipated in our statements and from historical performance due to a variety of risks and other factors. Information about such factors as well as GAAP reconciliations and other information on non-GAAP financial measures we discuss is included in today’s earnings press release and into our 10-K, 10-Qs and various other public filings and investor materials. These are all available on our corporate website, bankozarks.com, under Investor Relations. The company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Finally, the company is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third-parties. The only authorized live and archived webcast and transcripts are located on our website. Now let me turn the call over to our Chairman and CEO, George Gleason.

We are very pleased today to report our excellent third quarter results, which include our eight consecutive quarter of record net income and numerous other record results. I want to send a huge shoutout to our entire team for the excellent results they achieved in the quarter just ended. Despite the temporary distraction of a leadership transition at real estates specialties group, two major hurricanes and a significant focus on our infrastructure build out and DFAST implementation, the team stayed disciplined and focused on achieving excellence in our business of delivering great service and value to our customers. I am deeply honored to serve with so many talented hard-performing and hard-working men and women. Well done, and thank you. Let me turn the call back to Tim.

Our $20.8 billion in total assets at September 30, 2017 was a 13% increase from September 30 last year. This balance sheet growth has contributed to excellent income growth. Our net income for the quarter just ended was a record $96.0 million, and a 26% increase from the third quarter of 2016. Our diluted earnings per common share for the quarter just ended were a record $0.75 and a 14% increase compared to the third quarter of 2016. Our strong growth continues. In the quarter just ended, the funded balance of our non-purchased loans and leases grew $1.02 billion and our unfunded balance of closed loans grew another $636 million. For the first nine months of 2017 the funded balance of our non purchase loans and leases grew $2.4 billion [Technical difficulty] loans grew $2.5 billion. Our unfunded balance of closed loans was a record $12.5 billion at September 30, 2017 which will be important in achieving our loan growth goals in the remainder of 2017, 2018 and early 2019. RESG accounted for about 52% of our growth in the funded balance of non-purchased loans and leases in the quarter just ended, while our other loan and lease teams accounted for 48% of the third quarter growth. As most of you know, RESG has been our largest growth engine for earning assets for many years. We expect RESG will continue to be our largest growth engine, and that it will continue to increase its volume of originations, but we are pleased by the positive contribution of momentum from our various other loan and lease teams. For several years, we’ve been working on various initiatives to achieve greater contributions to our growth and earning assets from our other lines of business and from product types other than commercial real estate. You can see the success we are having in this regard. We expect to continue to increase our growth in these other lines of business. At September 30, 2017 the RESG portfolio accounted for 66% of the funded balance and 94% of the unfunded balance of our total non-purchase loans and leases. At quarter end, our average loan to cost for the RESG portfolio was a conservative 48.9% and our average loan to a price value was even lower at just 41.5%. The very low leverage of this portfolio exemplifies our conservative credit culture and is one of many reasons we have such confidence in the quality of our loan and lease portfolio. As we have said all year, we expect 2017’s growth and the funded balance of non-purchase loans and leases to be between $3.1 billion and $4 billion. Although as we noted in our July conference call, we’ve revised that expectation for growth to be in the lower half of that range. Longer term prospects for growth in the funded balance of non-purchase loans and leases continue to appear good based on the growth in our customer base, our robust pipeline of transactions currently in underwriting and closing and our largest ever unfunded balance of closed loans. Accordingly, we expect our dollar volume of growth in non-purchase loans and leases in 2018 to exceed our 2017 growth. While it is early to make comments about 2019, based on our business plans and the positive momentum we have in RESG and a number of other loan categories, we expect our dollar volume of growth in non-purchase loans and leases in 2019 to exceed 2018s growth. Organic growth of loans, leases and deposits continues to be our top growth priority. And we have demonstrated our ability to achieve substantial growth apart from acquisitions. With that said, we believe acquisitions will provide opportunities to augment our robust organic growth. Our 15 acquisitions since 2010 have been triple accretive, and accretive to book value per share and tangible book value for share closing and accretive to earnings per share in the first 12 months following closing. We expect to continue to be disciplined in our acquisition strategy and to apply this triple accretive standard to future opportunities. We continue to identify and analyze M&A opportunities and we believe our disciplined approach will help us create significant additional shareholder value overtime. Now let’s turn to capital. As most of you know, we expect to file our first Dodd-Frank Act Stress Test, or DFAST submission in July 2018 based on our year-end 2017 financials. As you may recall, during the second quarter we completed the issuance and sale of common stock for net proceeds of approximately $300 million to support our expected growth over the nine quarters covered by our initial DFAST test period. We will continue to monitor our capital position considering our expected growth, expected performance under our initial subsequent DFAST submissions and other relevant factors. If we determine we need additional capital whether for our initial or subsequent DFAST submissions or otherwise, we think the most likely avenue for our next capital formation would be issuance of subordinated debt. At the current time, we consider it likely that we will issue some level of subordinated debt by year end 2018. During the quarter just ended, because of hurricanes Harvey and Irma, we had approximately 122 offices in six states which were either or had reduced hours or closed from one to seven days. While we cannot quantify the lost revenue or lost reduction from these temporary closures, the hurricanes did have an impact on our employees and our operations in those offices. During the hurricanes, the well being of our employees was our top concern. We provided financial assistance totaling approximately $113,000 to 234 employees in Texas, Florida and Georgia impacted by the hurricanes. In addition, we waived late fees, overdraft fees and ATM fees and granted short term payment deferrals for certain customers meeting certain criteria. We have conducted a review of the majority of our loans with collateral and the impacted areas. While we are aware of damage to some of our collateral, in most cases, such damage was minor, and we expect most customers to be able to repair the damage with their own funds or with funds received from insurance. Based on this review, we determine that we should not make any additional provision for loan and lease losses during the third quarter because of the hurricanes. Let me turn the call over to our Chief Financial Officer and Chief Accounting Officer, Greg McKinney.

We have long focused on three disciplines; margin, efficiency and asset quality. I want to spend my time today providing some details on our net interest margin and related matters. In the quarter just ended, our net interest income was a record $209.7 million but our net interest margin decreased to 4.84%, down 15 basis points from this year’s second quarter. In recent calls, we have mentioned that we are most focused recently on our core spread than our net interest margin. Cost spread is the term we use to describe the difference between our yield on non-purchased loans and leases, which is our largest category of earning assets and our cost of interest bearing deposits. In the quarter just ended, our yield on non-purchase loans and leases increased 21 basis points to 5.63% while our cost of interest bearing deposits increased 12 basis points to 0.79% resulting in a 9 basis point increase in our core spread. Our core spread has increased 29 basis points over the last five quarters. Increases in LIBOR rates and the Federal Reserve’s fed funds target rate have contributed among other factors to this improvement. The improvement in our core spread in the quarter just ended largely reflected the full core benefit from the last increase in the fed funds target rate in mid June. There are many factors, which affect our core spread, but we expect the most meaningful factor in coming quarters will be the Federal Reserve’s action related to the fed funds target rate. If the Federal Reserve continues to increase the fed funds target rate, this should typically help us continue to increase our core spread, because 8% of our non-purchased loans and leases at September 30, 2017 at variable rates. The benefit from the increases and yield on these variable rate loan and trend increase in the fed funds target rate should more than offset the increased cost of interest bearing deposits resulting from our deposit gathering initiatives such as our spin-up [ph] offices. Conversely, if Federal Reserve were to discontinue increases in the debt funds target rate, this would likely put some downward pressure on our core spreads. As a result of our robust level of loan originations in the quarter, we had $47.6 million in net deferred credits at September 30, 2017, meaning we had $47.6 million more in unamortized deferred loan origination fees than unamortized deferred loan origination cost. These net deferred credits will contribute to net interest income as they are recognized in future periods. Our second largest component of earning assets is purchase loans, which are the remaining loans we have acquired in our 15 acquisitions since 2010. Our purchase loans have a higher yield than our non-purchase loans and leases. Our portfolio of purchase loans is of course paying down every the quarter, so this constant reduction in this higher yield of portfolio puts downward pressure on our net interest margin. As of September 30 2017, we have $105.3 million in valuation discount remaining on our purchase loans. Our third largest component of earning assets is our investment security portfolio. We have made a number of adjustments to that portfolio in recent quarters. Our yield on investment securities was 3.05% in the quarter just ended which represents a 56 basis point decrease from 3.61% in this year’s second quarter. As we discussed in our July conference call, during the second quarter, we increased our investment portfolio by net $631 million, which resulted from purchasing approximately $728 million of highly [ph] liquid short duration government agency mortgage-backed securities in mid June. Because of the high quality and short duration of these securities, they yield only about 2%. Despite the relatively low yields, we add these securities to provide another tool for managing our balance sheet liquidities or trying to avoid significant interest rate and market risks. Our results for the quarter just ended included in our third quarter net interest margins reflect the full quarters impact of the addition of these lower yield and securities in mid June. We continue to make adjustments in our investment securities portfolio in the quarter just ended, as market conditions provided an excellent opportunity to reduce portfolios market and interest rate risk. As you probably know the yield on 10-year U.S. Treasury bond dropped sharply during the middle of the quarter. Considering this, along with possible additional fed fund rate increases uncertainty surrounding the Federal Reserve unwinding its balance sheet and uncertainty regarding the impact of possible changes in tax rates on the value of tax exempt bonds we elected to shorten the duration of our investment portfolio and reduce our exposure in longer term tax exempt bonds. Specifically during the third quarter we sold $149.6 million of mostly longer duration tax-exempt municipal bonds. We recognized both gains and losses in the process with net gains of $2.43 million. While these sales reduced our investment portfolio exposure to the risk of rising rates and the risk of reduction in effective tax rates, it might affect valuations on our tax-exempt municipal bonds; the sales will also reduce our investment security portfolio yield. For the fourth quarter, we expect the fully tax equivalent yield on our total securities portfolio to be between 2.80% and 3.0%, obviously this could fluctuate by some purchases, sales cost prepayment and other factors during the quarter. Let me turn the call over to our Chief Operating Officer and Chief Banking Officer, Tyler Vance.

Our efficiency ratio has been among the top decile of the industry every year for 15 consecutive years. In the quarter just ended, our efficiency ratio was an excellent 34.4% and for the first nine months of 2017 was 34.9%. While our efficiency ratio has been excellent, we have a longer term goal of improving that ratio even further. However, we don’t expect much of any improvement over the next few quarters, infact our efficiency ratio might increase slightly for one or more quarters in the near term. As we have discussed for many quarters now, we have been focused on developing our products and infrastructure to allow us to continue to achieve high performance even as we become a much larger bank. We have previously discussed our increased focus on developing technology based products and solutions through our Ozark Labs, which we think will be critical to our success in the rapidly evolving retail banking environment. We have also talked about our focus on expanding and enhancing our infrastructure for information technology, information systems, cyber security, business resilience, enterprise risk management, internal audit compliance, BSA/AML monitoring training, and other important areas as well as expanding our human and physical infrastructure to serve low-to-moderate income and majority minority markets and customer segments. All these initiatives are important elements in our preparation for significant future growth and we have already made significant progress. These initiatives have been and will continue to be an important emphasis for us during the fourth quarter of this year and into 2018 as we complete most of this infrastructure build that has been underway through 2016 and 2017. We expect our total non-interest expense to increase during the fourth quarter by approximately $3 million to $5 million compared to the level of non-interest expense in the third quarter. We also believe that we will continue to have further increases in our level of non-interest expense during the first half of 2018. We anticipate that we will see that rate of increase subside in the second half of 2018 after most of our infrastructure build is complete and our expenditures for consulting fees subside from the current level. Accordingly, after mid 2018 we expect to see a generally improving long term trend in our efficiency ratio. There are several key factors among others needed to accomplish our long term efficiency goals. First, we expect to ultimately utilize a large amount of the excess capacity of our extensive branch network tapping many billions of dollars of additional deposits through existing offices. That potential is very evident in the recently released FDIC’s bank deposit market share data as of June 30, 2017. For the 156 cities and towns, excluding New York City in which we had deposit gathering offices, we had 4.13% of the branches but only 1.40% of the deposits. We believe we can grow two or near market share period. Our ability to achieve substantial deposit growth in many of these cities and towns while adding minimal amount of overhead should have favorable implications for our efficiency ratio. Second, we expect to achieve further efficiencies overtime from our ongoing deployment of technology applications from Ozark Labs. We believe these factors among others will allow us to achieve an improving efficiency ratio long term. Of course, our guidance regarding an improving efficiency ratio does not consider the potential impact of any future acquisitions. Let me change subjects and discuss liquidity. We have long expected that we could accelerate deposit growth as needed to fund our loan and lease growth. Our experience in recent years has validated that expectation. Atleast monthly and more often as needed, we have had a comprehensive 36-month projection of our expected loan fundings of loan pay downs and other sources and uses of funds. These detailed monthly projections of needed deposit growth provides a goal through our deposit growth strategies. This has proven to be a very effective process. Currently, we have 47 offices in 34 cities in spin-up mode, offering various deposit specials along with an enhanced level of marketing activity. Our branch network of approximately 243 deposit offices continues to have substantial untapped capacity as I just mentioned, and we believe that capacity is sufficient to fund our expected loan and lease growth over the next several years. At the same time, we plan to add de novo branches in new markets, which is to provide the additional deposit capacity to support future growth. At September 30, 2017, our total deposits were $16.8 billion, which was a $582 million increase in total deposits from the previous quarter end. Our organic deposits, which exclude broker deposits, grew a very healthy $934 million in the quarter just ended. Because of this significant growth in organic deposits in the quarter just ended, we decreased our volume of broker deposits by $352 million from $1.57 billion or 9.7% of total deposits at June 30, 2017 to $1.22 billion or 7.2% of total deposits at September 30, 2017. For the first nine months of 2017, we have decreased broker deposits by $771 million. Of course we are not subject to any regulatory limitations on our volume broker deposits and our internal policy calls for a 50% limit, which we are well below; but we are nonetheless pleased to see our percentage of broker deposits continue the downward trend over the past six quarters. We consider net growth in core checking accounts as one of our most important deposit metrics. We achieved excellent organic growth in our number of net new core checking accounts with 6,173 net accounts added during the quarter just ended, bringing our total net new core checking accounts to a record 17,000 plus for the first nine months of this year. As we’ve discussed in previous conference calls, the Durbin Amendment started impacting our service charge income as of July 1. During the third quarter of 2017 our service charge income was $9.7 million which was a decrease of $2.0 million from this year second quarter. This was consistent with our estimate given in the July conference call that the Durbin Amendment would result in a pre-tax reduction and service charge income of about $1.95 million per quarter. In the quarter just ended, our cost of interest-bearing deposits increased 12 basis points compared to the second quarter of 2017, as we increased rates on competitively bid deposits and rates at certain offices and spin-up mode in order to grow deposits to fund growth. Given our expectation for strong growth in non-purchased loans and leases in the fourth quarter, we expect to continue to grow deposits significantly. Based on this combined with possible further increases in the fed funds target rate, we expect additional increases in our cost of interest-bearing deposits. Our goal is to hold the rate of increase in our cost of interest-bearing deposits below and hopefully well below the rate of increase in our yield on non-purchased loans and leases. As Greg noted, if the Federal Reserve continues the recent pattern of Fed funds rate increases, that goal should be achievable, as it has been over the last five quarters. Now, let me turn the call back to George.

Our asset quality metrics during the quarter were excellent. These ratios reflect our long-standing commitment to conservative underwriting standards and excellent asset quality, which is resulted in our having asset quality consistently better than the industry as a whole. Our annualized net charge-off ratios during the quarter just ended were eight basis points for non-purchased loans and leases and nine basis points for total loans and leases. In our 20 years as a public company our net charge-off ratio is averaged about 34% of the industry’s net charge-off ratio and we’ve beaten the industry’s net charge-off ratio in every year. Our out performance has been even better recently as evidenced by the fact that our net charge-off ratio was just 13% of the industry's net charge-off ratio last year, and just 12% of the industry's net charge-off ratio for the first six months of this year. At quarter end excluding purchase loans are nonperforming loans and leases as a percent of total loans and leases were just 11 basis points, our nonperforming assets as a percent of total assets were just 20 basis points, and our loans and leases past-through 30 days or more including past-through non-accrual loans and leases to total loans and leases were a record low 12 basis points. This was our seventh consecutive quarter of reporting a record low past-through ratio reflecting the outstanding work of our loan and lease teams. That concludes our prepared remarks. At this time we will entertain questions. Let me ask our operator Latoya to once again remind our listeners how queue in for questions. Latoya to cure for questions Latoya?

Thank you. [Operator Instructions] The first question is from Ken Zerbe of Morgan Stanley. Your line is open.

Great, thanks. How you guys doing today?

Good. Thank you, Ken.

I guess first question, now that we’ve had or you’ve had a few months of Dan Thomas being gone from the Bank. Can you just talk about what you’re seeing from a client perspective or sponsor perspective in terms of their demand for growth? I mean, has this changed in any way the longer term outlook for RESG?

Thank you, Ken. I do not believe that Dan’s departure despite his significantly positive to RESG for many in anyway affects our growth trajectory. Dan was one member of a very effective team that he helped assemble. And that team has tremendous capabilities and we have not seen any loss of business or loss of momentum as a result of that and that was clearly evident in our closings. During the quarter it’s clearly evident in application volume going forward. For example, I’ll give you just indicative stat. When I look at the closing forecast for RESG at the beginning of the quarter we had about $2 billion in loans already approved and in closing for Q4 as of the beginning of the quarter. Now we’ll close more loans and that in an average quarter, but that’s a very healthy starting point as of the beginning of the quarter. So, we’ve not seen any loss – customers loss of opportunity or slowdown in our production and the various loan origination teams, Tucker Hughes’s team in Dallas Rich Smith's team, in New York, Greg Newman's team in the South East, Jason Choulochas' team in Los Angeles, Mason Ross's team in L.A. Those guys – I’m sorry San Francisco, those guys are doing an excellent job and it truly is business as usual in every respect.

Okay. And question on the unfunded lines, obviously -- so I think it was about 640 million in total growth there, little bit slower than it has been in some of the more quarters. Just so I know, is there any seasonality in that number? Is there any reason to assume that that’s an indication of sort of future growth from here? Or is it just a volatile number? Thanks.

Ken, I don’t think there is any seasonality that we’ve detected in that number in the past. I’m not surprise at that number nor concerned about that number. You know, our unfunded balance grew very significantly over the last couple of years as we were doing more larger loans, it takes longer to fund on a larger loan because it takes longer to build a larger more complex construction project. The types and nature in the funding schedule on loans that we’ve originated this year are consistent with those we’ve originated last year and the year before. So we’re sort of growing into that bigger project, longer funding schedule that tended to swell that volume of unfunded balances in prior years. So we had a couple of years where our unfunded balances were growing at 10%, 20% or 30% higher growth rate than our funded balances. We would expect going forward those funded and unfunded balances to grow more in tandem as the funded – unfunded loans that swell that balance a year and two years ago fund the newly created unfunded balances will tend to offset those with a more normalize growth rate. So, I don’t think that has any adverse implications whatsoever for future growth in our funded balance. Does that make sense?

It completely makes sense. And then just I guess one quick final question. Just want to make sure you’re reaffirming the lower half of 3140 loan growth guidance this year? And that the year 2018, 2019 comments, we’re on, that you see growth over the 2017. but that’s growth over the lower half. Is that all correct?

Well, growth over whatever, our actually number ends up being and yes, we have reaffirm lower half of 3.1 to 4 billion ranges for this year for non-purchase loans and leases. And I think Tim’s remarks were we expected growth in 2018 to exceed our 2017 growth whatever that number ends up being. And we expect growth in 2019 to in dollar terms exceed 2018’s growth.

Perfect. Thank you very much.

All right. Thank you.

Thank you. The next question is from Jennifer Demba of SunTrust. Your line is open.

Hello, Jennifer.

Hi. How are you?

I’m fine. Thank you.

Good. I just wonder if you could give some more color on the expected expense growth in the fourth quarter and first half of next year. You said cyber security compliance, CRA, things like that, and if there’s any one thing that is a big percentage of it or is it just a lot of little thing there?

It is a lot of little things. If you look at our FTE headcount at September 30, we had 2,400 and ten and a half FTE we’ve got to get of this half FTE issue. 2,410 FTEs compared to 2,315 at the beginning of the year, so we’ve added what is that 95 full time equivalent employees. So far this year a large number of those have been people added in this very broad-based enterprise risk management and ITIAS [ph], cyber security loan review internal audit compliance, BSA/AML. As Greg has articulated and enumerated those things, and Tyler in previous calls and conferences we are trying to basically build the risk management and operational ITIAS [ph] infrastructure for a $40 billion to $50 billion bank and you know we are going to building a lot of that anyway to move from a $20 billion to $30 billion bank over the next couple of years, and as we’ve built it we concluded that it probably would be costly to do so that we would be greatly advantaged in our flexibility and ability to grow in the future if we went ahead and built a much broader based infrastructure. So, we are heavily into that, that’s been a more involved process that I’ve probably personally envisioned when we started it and we are adding more people and we have engaged a number of consulting firms to work on parts of that including our DFAST build, but also on a number of other parts of that and we expect to see a significant increasing cost and personnel related to that infrastructure build this quarter and Q1 that we hopefully will complete that process towards the end of Q2 of next year and then we’ll see elimination of a lot of those consulting fee cost and a significant cessation in the rate of that increase and overhead cost. I’m hopeful that our efficiency ratio over the next three quarters -- we’ll be able to maintain it through strong revenue growth that are about the same level or near the same levels we’ve been in the last several quarters, and that then once we get that infrastructure build complete midyear of next year, we will see a gradual but steady downtrend in the efficiency ratio for years to come.

Thank you.

Thank you.

Thank you. The next question is from Michael Rose of Raymond James. Your line is open.

Hey good morning guys. Just wanted to follow up again on the expenses, you know $3 million to $5 million up in the fourth quarter and a little bit more, you said in the first half of next year. How much of that increase you kind of consider to be one time in nature especially and some of it is going to be part of the run rate as we move forward. Can you guys quantify that at all?

Michael, I think it’s pretty much permanent addition to the run rate, because other than consulting expenses which we hope will be a temporary phenomena as I said and begin to abate considerably middle of next year. Other than those, the people were adding their permanent additions to staff, as this is a permanent infrastructure build, so I think we’ve got to include that in our run rate going forward.

All right. That’s helpful. And then just a follow up on that the salaries cost were down pretty markedly quarter to quarter, was there – I mean was that the impact again going away, was that – you guys just give the color on what drove the sequential decline?

Dan’s departure did have an impact on certain [ph] of our benefit accruals and you know when Dan left there were recorded calls for options and grants that -- think stock grants have been granted in previous periods which because those were not being realized were [indiscernible] and so forth. So there was a couple of million dollars or more of impact in those numbers because of that, and that is embedded in the guidance we’ve given for overhead expense in Q4.

Understood. And just another quick one, the other fee income line item was up about $2.5 million this quarter. Can you guys reconcile if there was any one time gains in there anything like that?

Not particularly onetime gains, but you know we’ve talked for the last six quarters or so that with the accelerated repayments and our RESG loan book particularly that we were trying to protect our return on equity on those loans back including unused commitment fees and certain loans and underwriting fees and asset management fees as well as minimum interest and exit fees when we could, and that increase in that line item to a large extent reflects the fact that we are getting more of those asset management fees as those loans originated with those monthly asset management fees begin to become a bigger and bigger part of the RESG portfolio, those fees are growing and the unused commitment fees are even larger and a more significant part of that and as those unused commitment fees are being built into more of the loans that are getting closed and on REGS’s book that number is getting bigger, so you can definitely see that in that number and you know while no one can absolutely predict the future our expectation would be that, that line item fee income will continue to grow as those fees become a more normal part of the business model.

That’s very helpful, George and maybe just one more quick one. I think you mentioned this quarter’s growth 48% of it was not RESG. I know you guys have continued to build out some business lines, it seems like you are having some success obviously some paydowns and RESG impacting that number, but can you kind of talk about the areas outside of RESG where you are seeing momentum of growth you know we don’t have the average those appeared in balances for a lot of those categories before the [indiscernible] comes out.

Yes, we our indirect Marine and RV business was up about $174 million during the quarter and if I’m following this correctly, $173 million you’ve actually got it written down for me, Tim thank you. $173 million there or we had $113 million; $114 million of growth in our corporate loans specialties group leasing was negligible. The largest non-RESG component was community banking which was about $201 million in growth. So it was broad based and we are very pleased with the progress that we are making in getting more growth of the quality and pricing that we want from our other lines of business we expect to continue to emphasize that and that is the positive momentum we have there was sort of generally eluded to I think about Tim when he commented about our expectations for stronger growth in dollar terms in 2018 and 2019 we expect those units to contribute more growth in future years than they have this year. They certainly contributed more this year than last year and we expect that trend to continue although we do expect RESG will continue to be the dominant growth engine.

Great. Thanks for taking my question guys.

Thank you.

Thank you. The next question is from Timur Braziler of Wells Fargo Securities. Your line is open.

Hey good morning.

Good morning. I guess first question, maybe talk about the overall health of the construction industry and more specifically what paydown and payoff activity look like this quarter compared to some of the last two quarters we had?

Paydown and payoff activity continued to be extremely robust in the quarter, just ended as it was in the second quarter and in the first quarter and you know we are not seeing any change in that velocity of the pre payments that’s material either way. In my view we are getting a lot of payoffs and they are coming very quickly. So that just continues to be a reality of the market with which we’ve been dealing for a couple of years now and expect to continue to deal with certainly in 2018 and the fourth quarter of this year. You know our view on the construction and development industry at large is that there has been a significant degree of discipline shown by our customers and the product that we are financing seems to be very much justified by the supply, demand, metrics that we are seeing and the supply demand analysis that we are doing and the supply demand analysis that our customers are on each project. So we continue to be fairly constructive about conservatively underwritten transactions done with a thorough analytical review of the market conditions surrounding those, and because of that we are finding a lot of opportunities that may sound economic sense to us and that fit the conservative risk profile of our underwriting.

Okay. That’s helpful. And then maybe just one more for Tyler, what’s the difference in deposit costs at the spin-up branches versus the legacy branches?

It’s really depends on the market. The current CD specials that we have are anywhere from a 10-month term to a 17 months term and depending on the market in those 47 offices we have spin-up in, those could be as low as 1.10 APY or as high as 1.61% APY and a lot of the non-spin-up offices were still at 50 basis points or 25 basis points on a one year CD.

Okay. And then how much of the new deposit growth is coming out of the spin-up offices versus the existing ones?

I actually don’t have that breakdown with me. We tended to outrun recently our need for funding is evidenced by the $771 million of broker deposits we paid down. So we tended to throttle the spin-up market, a little more recently, but I actually don’t have exact breakdown of that for you today. One of the things I would add and Tyler you might want to comment on this, is we don’t actually consider our deposit office at 1 Rockefeller Center as a spin-up office, but we've added deposit gatherings staff there over the last 12 months and really focused on high net worth and corporate business, customers of various types and have had Tyler, a $1 billion.

Yes, sir. $1 billion of growth, George…

Of growth in the last year and that are really three quarters I guess mostly in that New York office. So that has reduced to some extent. They need to be more aggressive with putting more offices and spin-up mode in our community banking footprint and the other seven states where we take deposits.

Yes. That will be true.

New York has been a big help to us on the deposit side the last three, four quarters.

Okay. And then, I guess, the comment that you had made about entering new markets through de novo. Can you give us some examples of the markets that you’d be looking to enter? And does this complement or does this replace some of the existing M&A strategy that’s been talked about in the past?

It has nothing to do with the M&A strategy we’ve talked about in the past. We’ve always said, we got capacity to grow our company organically and M&A is icing on the cake, so it really has nothing to do with M&A at all. We have a version of a branch called de novo two branches that we’ve yet to open. We expect to open de novo two branches in Orlando, Florida, Nashville, Tennessee and Atlanta, Buckhead area, Atlanta over the next six quarters, and those will be our first de novo two branches that we’ll open. These are very different than our traditional branches we've opened in the past. They are very technology driven. They are very sales oriented -- salesforce oriented branches. They’ll be larger. They’ll be in very highly visible locations and they will focus longer-term on Top 100 MSAs in the U.S. that have really strong growth rates and so forth. We would expect these de novo two branches to be much more potent as far as the volume of deposits that they'll handle, because they’re going to be in very large markets and we think we got a tremendous business model for them. So, to give you an idea of how we think this, we’ll rollout over time, if you look at our longer-term strategic plan and look at our organic growth from where we are today to about almost 50 billion in assets organically. We would anticipate that over that period of time our number of offices would grow from a current 252 offices to somewhere in the 290 office range and that would include de novo two branches and the companion branches that go with them. Typically the de novo two branches will be in very high demographic areas, but we also have a need to serve low to moderate majority/minority customer segments and the markets where we’ll be locating the de novo two branches. So we are anticipating one or more companion branches with them, a small number one or two in most cases. Companion branches to meet our CRA obligations or otherwise provide a little bit of additional infrastructure. So, if you can imagine that we’re talking about one to three offices and a million person are larger MSA and we expect these branches to be hundreds of thousands and perhaps like our one Rockefeller Center office, $1 billion millions, hundreds of million or billion dollars and…

Ladies and gentlemen please standby. Your call will resume momentarily. Thank you for your patience and please standby. Okay. Yes, sure, reconnected sir. And we’ll go to the next question from Will Curtiss of Piper Jaffray. Your line is open.

Let me go and finishing answering to Timur’s question. I apologize that somehow our phone systems went bad or we were otherwise disconnected. I'm not sure. But I apologize for that. But – so the expectations Timur is that we will add about 60 offices gross over that period of time. We will close about 20 of our existing offices as those offices become less valuable or unprofitable in the evolving landscape that we see for consumer banking. So we’ll be net up about 40 offices and we’ll achieve which is about a 16% increase in office count. At the same time that we’re achieving about a 150% growth in our total asset, or little less than that, but close to 150%. So, you can see as we model that projection out and allocate staff and so forth to that while we are optimistic that we’ve got a business strategy that will ultimately help us achieve a much lower efficiency ratio. Did that answer your question? All right. Operator, let’s go to the next question.

Okay. Yes, sir. The next question will come from Will Curtiss of Piper Jaffray. Your line is open.

Thank you. Good morning, guys.

Hi, Good morning, Will.

Maybe just go back to get some comments about the community bank and kind of your -- positive momentum and you’re seeing there on expectation. So, I’m just curious if there any opportunities to leverage RESG as it relates to the bank? And kind of how you’re thinking about that relationship between the two going forward?

Actually I do think that there are opportunities to leverage that. In the past we've really kept a buffer between RESG and the commercial real estate business of our community banks, and that has kept our community bankers away from serving some opportunities that they would've probably served, but we’re really too small of an opportunity to utilize RESG resources for. So, we've had considerable success recently in Florida getting a better integration between community banking and RESG. We’re now working on that in the Carolinas. I think you’ll see us roll that into other areas. I think that will help us serve more customers, get more deposits, miss less CRE opportunities and provide a more seamless solution in the markets where we have both RESG presence and community banking presence going forward. So that’s clearly an area of improvement and capturing opportunities on which we’re focused.

Okay. Thank you. All my other questions have been addressed.

Thank you.

Thank you. [Operator Instructions]. The next question is from Brian Martin of FIG Partners. Your line is open.

Hi, guys.

Hi. Good morning, Brian.

Hey, George, can you just comment a little bit on the, I guess, maybe just the uncertainty, but on the purchase loan runoff, maybe it still seems that its at an elevated level, but I guess, should we just assume that from this point that it just going to be a little bit than was initially anticipated or just there was initially anticipated type of level, but maybe just give a little thought on that?

Brian, I wish I knew the answer to that. We have expected every quarter that rate of purchase loan run-off to subside and slow a bit and it has not slowed very much. Honestly I don't know what to expect on. It's running out little faster than then we modeled.

Okay. And then maybe just back to two things. On the expense number just so I guess I’m clear, the growth rate that you’ve talked about of the next quarter and then into early 2018. When you get to the second half of 2019 it sounds as though the expenses will continue to grow, just the rate of growth will slow. Is that how to think about that? And then as you get into 2019 it's more of a normalized level after the build up continues that you’ve outlined?

Yes. In the second half of 2018 and 2019, we expect the company will continue to grow and grow at a very healthy rate and that will obviously require increases in overhead expense. But our thinking is that the rate of increase and overhead expense will subside significantly in starting in mid-2018 and that that will allow us to begin to notch a fairly steady improving trend in our efficiency ratio from mid-2018 on out.

Okay, perfect. And just the last two things from me, maybe just more to Tyler, Tyler it sounds as though the pay-offs in the brokered CDs you have guys have gotten down here the last couple of quarters. I mean, what’s really driving the kind of the core organic growth on the deposit side. And then, I think you mentioned, I guess, I’d missed your comment on capital, if you could just go back to kind of what your outlook was on capital going forward? That’s all I had.

On the deposit side, Brian, it was really those two factors. Its still good success in our spin-up campaigns that we’re utilizing, but then certainly as George mentioned the New York office has performed exceptionally well. We did add a team now with three individuals in that office that are gathering deposits. So the combined efforts of growth in New York and then the CD campaigns and then just our normal good everyday organic growth, every office, every day adding customers, the net checking numbers certainly outstanding. So, those combined factors have given us the opportunity to pay down that brokered number. Nonetheless, Tim will answer your question on Capital.

Okay.

Hey, Brian, it’s Tim. On my prepared remarks on capital obviously we’ll be going through our first DFAST submission at the end of this year that will submit in July of next year. Again reference, the $300 million that we raised in the second quarter obviously anticipating really strong growth during that nine quarter DFAST period, and if you remind back on our comments from our second quarter, its really are best case is requiring the capital. So more normal economic scenario that we feel like our business plan is going to be very strong and that capital was needed in our projections. If we decide we’re constantly monitoring projections for this DFAST submission and certainly for future DFAST submissions. If we decide we need augment our capital position again. We would expect that to be in subordinated debt. And based on our current thoughts and around that we think sometime by the end of 2018 we’ll need to augment our capital position with subordinated debt. The timing and amount of that is still to be determined.

Sure. Okay. That’s all I have.

I would add the comment to that is as shareholders you ought to hope that the amount of that is more and than less because more than less means we’re expecting more loan than less.

Got you. I appreciate it. And maybe just one last thing, I forgot was just the securities portfolio you talked about the increase you guys did last quarter and some the changes you’ve made. I mean, going forward may I guess the level that’s at, I guess, given where rates are in your outlook you anticipate kind of keeping that where it at? Or does that number grow going forward?

That number will probably grow, even though it shrunk in the quarter just ended longer term that securities portfolio will probably grow, because we have identify that as a tool that we want to use and the effective management of our liquidity position on our balance sheet. So we’re probably be adding more to that and as long as we’re in an environment like we are today where the uncertainties would dictate one's staying shorter we think on the yield curve and taking less interest rate risk we’ll probably load short securities which will be low yielding to that portfolio. We get an environment in the future where we think rates are more likely to go down then up. We would probably reverse our strategy intend to go more medium or longer-term than short-term with that portfolio which would be more profitable for us, But right now we’re more concerned about defensively positioning that portfolio than trying to maximize yield on it.

Got you. Okay. I appreciate the color. Nice quarter guys.

Thank you.

Thank you. The next question is from Matt Olney of Stephens Inc. Your line is open.

Hey, great. Thanks for taking my question. I apologize that my phone line drop for a few minutes, so you may have addressed this, but on the margin looking toward the fourth quarter can you give us some direction and some color on the margin. I appreciate the commentary and the margin being somewhat dependent upon the Fed. I'm just trying understand if the Fed does move in December would that be impactful enough to move the margin higher in the fourth quarter?

Greg, provided you such good commentary on that interest margin in his remarks, I really tried to add any additional color to that, you know, I think the most important thing from my perspective the CEO, is what Greg said about our core spread which is where our focus really is and if the Fed continues to raise interest rates then we ought to be able to continue to improve that core spread because of the significant percentage of our loans about 80% that are verbal. If Fed were to take a break and not raise Fed funds target right for a period of time than that would tend to flatten out or slightly decreased that core spread. So, I don't know that we can add any color really beyond what Greg already said so I would encourage listener to just really Greg’s remarks again and look at all the different the comments he made about that core spread which really is driven by our yield on non-purchased loan or -- and look at what he said about the purchase loan portfolio running off which it will over time and look at what he said about the investment securities portfolio. There is not anything else I can add.

Okay. And then lastly, given the commentary on the infrastructure build, I’m curious how you’re thinking about the long-term goal of achieving the efficiency ratio below 30%? Is that still realistic? And is their timeframe around that you could help us out with?

Yes. As I responded, I think it was to Timur’s call question. We do think that we can achieve a steadily improving efficiency ratio after we complete this infrastructure build midyear next year for all the reasons I've already articulated. So, we are optimistic that we can ultimately achieve that goal.

Thank you.

Thank you.

Thank you. The next question is from Peter [Indiscernible] of Sandler O’Neill. Your line is open.

Hello, Peter.

Peter, please check if you’re in mute.

Hey, guys. This is Steven [ph]. Can you hear me?

Yes.

So, I had a follow-up question here just in regards to the M&A conversations. It sounds like obviously those continue to be ongoing, but can you give any further color about maybe the veracity if some of those conversations? And what might be the impediment to additional build today? Is it just kind of the spread between where the old multiple is today and what sellers are wanting? And is there maybe a threshold of where you'd like to see your valuation to wear that that math would be more justifiable in your mind?

Well, as we've talked about previously for many years our stock traded with an extremely high correlation between our stock price and our tangible book value per share and our stock price and our earnings per share and as we you know had those short seller issues emerge early last year and as conversation about CRE got accelerated to levels but really in many cases based on really poor information or lack of understanding of our business model. We’ve had a situation where our stock price multiple has gone from one to two premiums to peer based on our excellent financial performance and above peer growth rate to the situation where our stock multiple is a couple of three multiples or turns below peer. And that clearly as we – we can call do the math that clearly affects our ability to do M&A transactions in our very disciplined M&A world of seeking to do transactions that are triple accretive. It doesn’t knock us out of the game, but it makes the math much less compelling. So I think the only thing I can say really in response to your question is that and add one comment that we continue to be active and considering opportunities and we think that we will get that multiple back in due time. And that will make M&A more attractive opportunity for us than it is today, not that we would rule it out today, but the math is what the math is.

That makes sense. Thanks for the color there. And then maybe thinking about growth just for one more second, the growth in the quarter there was obviously a pretty decent gap between end of period non-purchased and the average non-purchase, was there anything unusual in terms of the that timing of loan closings in the quarter that’s leading to that spread there or can you give any color about maybe the timing of loan closures and how that might impact fourth quarter numbers on an average basis?

You know in the second quarter we closed roughly 5/8ths of our loans in the last month of Q2 and we were slightly more skewed that way, it was almost 80 something percent of our loans closed in September of Q3. So we’ve had a long history and even if you go back to Q1 March was our most heavy quarter of loan growth. So we’ve had a long history of closing a large percentage and often a majority or a very high majority, super majority of our loans in the last month of the quarter, I’m encouraged from the funding forecast that we have for Q4 that we might get fortunate enough, I hope you know we’ve got to get them close but we’ve got a lot of closing scheduled earlier this quarter than we did at this point last quarter, so we are very helpful that we’ll get away from that situation where the vast majority of our loans closed like in the quarter, but it is a phenomena, it’s been a long term phenomena, we’ve commented on it intermittently on calls for several years that we just seem to have a lot of loans get closed in the closing weeks or week of a quarter.

Sure, sure okay that’s great. And then one last one from me, I think for me one of the most exciting things I’ve heard you George talk about lately is the potential for growth that you could have from trying to leverage your influence maybe your relationship with your RESG clients into their other lines of businesses, any progress on that front or anything you can speak to on what you, you know how long that might take to achieve and what you think that could look like for the company longer term?

I think there is considerable opportunity there. And that’s not been a pre-eminent focus for the last couple of months because we’ve been just focused on making sure that we have a totally effective transition of leadership and handle our customers in the manner they been accustomed being handled while delivering our customers the level of expertise and execution that they’ve been accustomed to. But we have started in a couple of customer meetings I have had started having discussions about other business opportunities and that are non real estate related, a lot of our RESG customers have multiple other verticals in which they do business and I do believe overtime we will harvest significant additional business opportunities from that effort.

Okay, great. Well thanks for the color and congrats on another great quarter, appreciate it.

Thank you.

Thank you. The next question is from Catherine Mealor of KBW. Your line is open.

Thanks, good afternoon.

Thank you, Catherine. How are you doing?

I’m good. Just a couple of last questions. One is on the margin and looking more on the asset side can you quantify how much of a June hike impacted the 21 basis increase in non-purchase loans versus the better pricing that you’ve been talking about that you have been getting on recent productions. I mean, just trying to think about how we can think about that going into a fourth quarter where we won’t get the benefit of you know so called a recent rate hike?

I would, we can’t specifically quantify but I would tell you it was a very important factor. I mean obviously 80% of our loans are variable rate and most of those or not had a flow or so, I don’t know what the exact number was, but say it was 70% of our loans repriced at quarter as a result of that you can do the math and if it was 60% you can do the math, that was a big part of the increase it was a result of the fed funds increase. The other element was better pricing as you allude to. So, as we are looking at Q4, we again if the fed seems ongoing December that would be helpful because we would get a partial month of that of course most of our loans were tied o LIBOR and most of them are tied to 30-day LIBOR so that would begin to price into a less extent over the 30-day period before an actual increase in fed funds target rate. So we would get some benefit from a December increase obviously it wouldn’t be as big a benefit as it was this quarter where we got the full impact for the whole quarter of the June increase.

Got it. So is it maybe fair to say or is it a fair assumption that the core spreads while it still remains positive could narrow a little bit next quarter and then in quarters where we see a full impact of the rate hike that’s when it kind of widens to this 9 bp range that we saw this past quarter?

I think, I had some very accurate prognostication.

Okay. And then one last kind of big picture regulatory question, as we do see the 10 billion threshold of new hire, would that change your outlook on the amount of expenses that you are spending on your enterprise risk management build out now?

No. Because I think, we are committed to do that here regardless of what happens with the 10 billion threshold. And I think the interesting thing to us is the 50 billion threshold at this point as we think forward. You know we felt the infrastructure and designed it and we're flashing all that out now and building all the teams I don’t see us going back at this point.

Thank you so much.

Thank you.

Thank you. The next question is from Blair Brantley of Brean Capital. Your line is open.

Hey good afternoon, George. Hey thanks for all the color, most of my questions have been answered. I just have one question on RESG, has there been any change in kind of the pull-through rates and what you guys have been seeing?

Blair, not that I’m aware of, I’ve actually not looked at that data but I don’t think there has been we’ve not moved our credit strike zone at all. We are not one micron more conservative or more one micron more aggressive than we were three months ago or six months ago or nine months ago. So our credit parameters haven’t changed, our volume of deals coming in. I have not discerned any noticeable change in that but I’ve not really looked at the data.

Okay, thank you.

Thank you.

Thank you. There are no further questions at this time.

All right. Thank you guys for joining our call today. I apologize for the telephone problems; I’m not sure where those were. We appreciate you joining the call. We’ll look forward to talking with you again in about 90 days. Have a good day.

Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day everyone.