Ameris Bancorp's (ABCB) CEO Ed Hortman on Q3 2016 Results - Earnings Call Transcript

| About: Ameris Bancorp (ABCB)

Ameris Bancorp (NASDAQ:ABCB)

Q3 2016 Earnings Conference Call

October 17, 2016, 11:00 ET

Executives

Ed Hortman - President & CEO

Dennis Zember - CFO & COO

Analysts

Tyler Stafford - Stephens Inc.

Peyton Green - Piper Jaffray

Nancy Bush - NAB Research

Jennifer Demba - SunTrust Robinson Humphrey

Brady Gailey - KBW

Casey Whitman - Sandler O'Neill & Partners

Christopher Marinac - FIG Partners

Operator

Welcome to the Ameris Bancorp Third Quarter 2016 Financial Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Dennis Zember, Chief Financial Officer and Chief Operating Officer. Please go ahead.

Dennis Zember

Thank you, Nicole and thanks to all of you for joining us today on the call. During this call, we'll be referencing the press release and the financial highlights that are available within the Investor Relations section of our website, at AmerisBank.com. Ed Hortman, President and CEO and myself, will be the presenters and after our prepared remarks, we'll be available to answer any specific questions you might have.

Before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainty. The actual results could vary materially.

In our SEC filings that can be found in the Investor Relations section of our website or on the SEC's website, we provide a pretty lengthy list of certain risk factors that could cause the results to differ in a material fashion from any forward-looking statement. We do not assume any obligation to update the forward-looking statements as a result of new information, early developments or otherwise, except as may be 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 a reconciliation of these measures and our GAAP financial measures in the appendix to our presentation. With that, I'll turn the call over to Ed Hortman.

Ed Hortman

Thank you, Dennis and good morning to everyone and thank you for taking the time to join our third quarter earnings call this morning. We had another record quarter, with continued improvement in virtually every area. The growth in our core business and its profitability is really satisfying. It's also rewarding to me, because the results are coming from initiatives we started some number of months ago and our bankers have been on a mission, hard at work and making a difference.

The first initiative was to change the reliability of our organic growth and was necessary to put our excess liquidity to work which challenged our lenders to begin looking at larger, more established companies for lending opportunities and we expanded the reach of several of our lending lines of business. We've seen very positive results and our year-to-date growth rate in organic loans is 19.4%. The fourth quarter is always seasonally lower, but I expect our growth momentum will produce a better than average fourth quarter and we should finish the year with one of the best growth stories ever in our Company. The second initiative is our Company's efforts on expense control and efficiency. This has been a real challenge, primarily due to the rapid pace of M&A that we've undertaken in the past several years.

We've made up a lot of ground this year by focusing on our existing resources and have been very careful with any new spending. We freed up some resources to be reallocated to revenue and administrative functions, through rationalizing our branch footprint, renegotiating terms with some of our larger vendors and in a lot of cases, just becoming more sensitive about where we're spending money. Taken together, we've been able to reduce the growth in operating expenses to be only about half of the growth rate of revenue and this formula has moved up materially closer to our goals in the past year. I would like to say again that our bankers have done an outstanding job on both these initiatives and I'm very proud of their results.

I'm also especially proud that we've been able to adjust our model to deliver these financial results in a long term low interest rate environment, while at the same time reducing the risk profile of our earning assets. Similar to our second quarter results, we have no noise in our third quarter numbers, meaning there are no adjustments made between operating and reported earnings. Our earnings for the quarter were $21.6 million or $0.61 per share which compares to our operating earnings in the same quarter last year of $15.9 million or $0.49 per share.

Our return on assets during the quarter increased to a very strong 1.35% compared to 1.21% in the same quarter of 2015. Return on tangible common equity increased similarly, moving to 17.18% in the current quarter, against 16.23% a year ago. The only difference between actual and operating earnings in the year-ago period was about $300,000 after-tax merger costs and securities gains.

On page 4 of the earnings presentation, we list our operating highlights. In the quarter, we had $223 million of organic loan growth which excludes any activity in purchased or covered loans. That's about 23% on an annualized basis which compares to about 25% in the second quarter. This is a little over 2 times our organic growth in the same quarter of 2015 which was about 10.5%. Our operating efficiency ratio moved down to 60.1% in the quarter, but we still have more work to do.

The second and third quarters for us are seasonally our best quarters and we expect that we'd move a little higher on the efficiency ratio and the overhead ratio during the fourth quarter. Even with that, we should finish 2016 about 400 or 500 basis points better on efficiency than where we were in 2015 and we anticipate that improvement in our profitability ratios is sustainable. Credit quality continues to benefit from an improved market and the hard work of our resolution experts. We finished the quarter with only 41 basis points of legacy non-performing assets and net charge-offs on our legacy portfolio at 5 basis points. For the year, net charge-offs on legacy assets are about 8 basis points, compared to 15 basis points a year ago.

Lastly, on our highlights, I'd just make mention of our book value and capital levels. We ended the third quarter this year with tangible book value of $14.38 per share, up from $12.31 per share at the end of the third quarter in 2015. Our Jacksonville Bank transaction was neutral to book value earlier in the year, so the only growth here has been from earnings. I'm encouraged to see $15 per share in the near future and believe that once we reach that level, we'll have put the book value overhang on our stock in the rear view mirror. Our tangible capital levels dipped very slightly in the third quarter, moving from 7.96% at the end of the second quarter of 2016, to 7.9% in the current quarter. This is pretty impressive, when you consider we lost about $2.5 million of unrealized gains in our capital section and we grew tangible assets by approximately $273 million during the quarter.

Before I turn it over to Dennis, I'll reiterate some of the comments we've made at recent conferences, with respect to M&A. Obviously with the strength in our stock, we would like to have some opportunities to augment the robust organic growth we're having, with a good M&A deal. We're still having discussions with a few banks and also a non-depository enterprises, that could augment what we're already doing on the line of business side.

When I look at what our organic growth has given us, with a good risk profile and originated with our credit culture, it makes us a little more deliberate or conservative in the way we look at M&A. We continue to see a pricing gap between bid and ask, but we do remain interested in strategic partnerships that will have long term growth in market share and shareholder value. With that, I'll ask Dennis to discuss some of the details behind our quarter.

Dennis Zember

All right. Thank you, Ed. I'll start with a few more details behind our loan growth for the quarter. Ed mentioned our year-to-date loan growth rates just about 20%, a hair below that. Our third quarter came in at about 23% or $223 million. The growth was as diversified as what we've seen in the past quarters, with about 23% in CRE, about 19% in municipal, about 11% in residential mortgage and about 25% of the growth was in mortgage warehouse. The remaining 22% was a combination of general C&I, consumer and a small amount of growth in ag production lines.

Given that we're not solely focused on CRE, we're maintaining pretty favorable regulatory ratios on that asset class. At the end of the quarter, we were 244% in non-owner occupied CRE and 71% in construction. We expect both of these ratios will tick up a hair in the coming quarter, but we don't see an issue with the amount of growth we're having in this class and our capital build, we don't believe we'll have an issue with these ratios. If there's been a real challenge for us this year, outside of the efficiency initiatives, it's been adjusting our deposit growth rate to be something that more closely matches our loan growth rate. We did get more aggressive this quarter on the deposit side and had pretty solid results.

We grew deposits about $127 million or about 57% of what we had in loan growth, with the rest of the funding coming from Federal Home Loan Bank advances. Generally in the fourth quarter of the year, we experienced a pretty decent influx of deposits from our municipal accounts and from ag paydowns. So we anticipate retiring most of what's outstanding at the end of the quarter in Federal Home Loan Bank advances. Since this is the first year in a long time that we're more than fully invested, I don't expect the dilutive effect on the margin that we've seen in the past few years from this liquidity, from this new liquidity that we expect. Speaking of the margin and non-interest income, we came in with a reported margin of 3.99% which was down from the quarter before, mostly driven off of lower accretion income.

When you exclude accretion income, our margin was 3.75% in the current quarter, compared to 3.81% in the same quarter a year ago. Loan pricing on new production came in at 4.14% which compares to 4.33% in the second quarter of this year. Lower production yields this quarter were expected, given the percentage of municipal in our growth rates. The funding rates notched up a hair with deposits, moving to 23 basis points and total funding moving higher to 36 basis points, that is a 1 basis point increase in total deposits and about 4 basis points increase in total cost of funds which is about as good as we could have hoped for, over the past year. Non-interest income in the quarter came in at $29 million, up from $25 million a year ago. Deposit service charges were solid, moving higher by about $900,000 against the second quarter of this year.

The third quarter is generally our strongest quarter on service charges, so some move higher this quarter was expected. The increase was all in the service charge component, with NSF and debit interchange income, coming in mostly flat during the quarter. Mortgage revenues were strong during the quarter at $14.1 million which is up about 40%, when compared to the same quarter a year ago. We had total retail production of about $410 million which was $35 million more than in the second quarter and about $100 million higher than a year ago. Our gain on sale margins for the quarter were 369 basis points which was down from 390 basis points that we reported in the second quarter, that was driven mostly by the fallout on the Brexit news.

Comparing to the third quarter of 2015 is more relative here, where we reported 352 basis points of gain on sale. The splits on government lending and purchased business are all very similar to what we reported in the past, with respect to mortgage.

Lastly, before I turn it back for questions, I'll comment about our operating expenses. Slide 9 shows the progress we've made over the past year, moving our year-to-date efficiency from 71.6% to 61.4%. Some of this move relate -- inefficiency relates to us putting the credit noise behind us last year which is obviously a permanent move, but the other 500 basis points or so of the improvement is what we've done this year.

We list a few of the more influential items here and I won't read them all, except to emphasize the effect of gaining leverage on our existing commercial bankers, who succeeded in booking larger deals for us with better risk profiles and in a manner that has not hammered the margin, like what we would have expected. Augmenting that with some of the lending lines of business we do, like muni and mortgage warehouse that are very efficient and has increased the net overhead effect in 2016 and really propelled us on this initiative. With that, I will turn it back to Nicole for any questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Tyler Stafford of Stephens. Please go ahead.

Tyler Stafford

Dennis, first, to start on the loan growth and just a clarity question, so obviously nice growth this quarter and so far this year and the release had some positive commentary about that pace of growth in 2016 being sustainable and potentially increasing next year. Just to be clear, are you referring to the originated plus the purchased non-covered bucket in that outlook which was 23% growth year-to-date?

Dennis Zember

Yes. When we're talking about 23% growth, when we're talking about all our growth on loans, we're talking about loans net of unearned income and purchased non-covered loans. So at the end of the quarter, we had about, what, $4.15 billion of those loans. So I'm excluding covered loans and the purchased mortgage pool.

Tyler Stafford

Okay. So those two buckets should be sustainable, at that pace of growth you've seen this year should be sustainable for next year?

Dennis Zember

Yes, correct.

Tyler Stafford

And then Ed, maybe could you share any more specifics with us on the new lines of businesses that you alluded to in your prepared remarks and what that might look like for you? And then I guess any new hiring updates either on the loan side or the fee income side?

Ed Hortman

Tyler, it's not anything much different than what you've heard from us before. Municipal has been really strong for us and the warehouse and retail mortgage operations have been really strong. And those are really the three that have the most strength and meaningful impact. And as far as new hires, we're constantly reassessing and trying to hire high-quality top producers and upgrading talent and that's going to continue on a regular basis.

Tyler Stafford

And then maybe Ed, just last from me, just a question I guess around Hurricane Matthew and any potential impacts you've seen or expect to see from the storms in your markets?

Ed Hortman

We've had a couple of questions in the last few weeks about agriculture in general and historically, it's been about 8% to 10% of our portfolio, it's down to about half that now, around 5%. We didn't have a lot of impact. We had a small amount of impact on the very Eastern side in the Vidalia area which I'm sure everybody knows Vidalia onions, that territory, but not a meaningful impact anywhere. Tyler, the sad part is we lost an employee and when they evacuated Savannah and went to the Western part of South Carolina with her family, she had an accident. She was on our leadership team. It was really, really emotional for our people.

So while we don't expect any financial impact from the storm and didn't have any, from a human relations and personnel standpoint, it was pretty difficult to handle. We didn't have any significant branch impact. We had three branches that did not open on Tuesday, two of those did open during the day and the third one opened on Wednesday. So from the perspective of the location of our facilities and what the impact could have been, it was really positive and we had trees down, we had some of those things, but really no substantial impact to our facilities.

Operator

Our next question comes from Brady Gailey of KBW. Please go ahead.

Brady Gailey

Man, I didn't know you all lost an employee. I hate to hear that. I'll definitely be thinking about you all. So my first question is on loan growth. You talk about doing some larger in size loans. Can you just help frame that out, how the average loan size, you think it will move up meaningfully over the next couple of years as you all focus on this larger loan size market? And how large of loans are we talking about you all booking now?

Dennis Zember

Brady, we changed tacks a little after we did the Bank of America merchants deal last year and had all the liquidity. And everybody on the call knows, historically, our average loan size has been right at $100,000, so we've been pretty small. Really what we're looking at now are loans probably closer to $5 million to $10 million.

We do have some slides in our past investor presentations that show still a good bit of diversification at the top, where the biggest deals really don't make up that much of the portfolio. Our largest deal is right at $40 million and it's a municipal account. In fact, a GO, in fact, a third of our largest 50 deals are municipal accounts. So really, we have moved our sweet spot on what we're chasing, Brady, from $2 million or $3 million to probably $5 million to $10 million.

Ed Hortman

Brady, we've not changed our internal lending limits and they're less than one-fourth of our legal lending limit. I think it's just a focus, like Dennis says, on the sweet spot moving up a little.

Brady Gailey

Okay. And then on the deposit side, you all mentioned being a little more aggressive, to try to match loan growth and deposit growth one for one. When you say more aggressive, is that just offering some higher rates or are you doing other stuff, like, how you incentivize your employees related to deposit growth?

Dennis Zember

That's a loaded question about incenting employees on deposit growth, but I mean, some of it is that. The incentive plans for commercial bankers this year didn't have a lot of that. Again, we came into the year with a lot of liquidity and that's really where we've been for the last few years. So we focused more of that on the asset side. But it's tweaking that. It's tweaking some of what we'll pay on the incremental deposit side, where we're willing to be a little more aggressive for new business.

Brady, it's also, we've achieved a pretty good growth story on the asset side, by really good work from our bankers, but we've also diversified with some lines of business, that make us not be a one-trick pony with CRE. And some of it is us doing the same thing on the deposit side, developing some niches and some unique products that can help marry up what we're doing on the deposit side, at least from the growth rate, to what we're doing on the asset side and doing it at a pretty competitive rate or a pretty profitable rate. So really when we say get aggressive, we mean four or five different strategies.

Brady Gailey

Okay. And then lastly from me, Ed, you mentioned M&A and looking at some non-depository deals. I'm guessing you're referring to maybe mortgage companies or SBA companies. Can you just expand on what you mean by non-depository M&A?

Dennis Zember

Brady, let me jump in. We're probably not looking to buy anything mortgage or SBA related, just because we like what we have there so much. We started both of those from scratch. So we're probably looking more for something that would augment what we -- probably more lending line of business, that we would be confident we could operate, with an incremental ROA that would stay in the 1.5% to 2% range, not something that would dilute our operating ratios, whether it's efficiency, something that would be accretive to credit risk.

We've looked at several different things. Everybody knows, last year, we're looking at, not on the lending side, but we looked at wealth management and we couldn't get there on the profitability side. So us looking at this is not anything new. I think it's just, with what Ed said about the bid/ask difference on depository M&A, we started looking elsewhere.

Operator

Our next question comes from Jennifer Demba of SunTrust. Please go ahead.

Jennifer Demba

Question on your mortgage pipeline and how that's changed, maybe in the last month, if at all?

Dennis Zember

Okay. I'm flipping to it. We came into the quarter with -- it starts tailing down right at the end of the third quarter, usually. We came into the quarter with about $162 million in locked loans. We ended the quarter with about $145 million in locked loans. Last year the pipeline from the third to fourth quarter and I know that's some of what we're thinking here, the pipeline from the end of the third quarter of 2015 to the end of the fourth quarter was down about 10%. So if that holds and generally our quarterly trends on -- historical quarterly trends on mortgage are pretty consistent. If that was the case, we probably would end the year somewhere, call it $130 million to $135 million.

Jennifer Demba

Okay and question on your provisioning outlook, Dennis. Your credit's been great, but I'm guessing provisioning is going to have to go up at some point, particularly if you're doing larger loans.

Dennis Zember

Yes, that's one of the first questions he asks me is, where did we end up on the provision and where did we end up on the reserve. Really we're at the low water mark on the reserve. When you back out the municipal out of the portfolio, the tax, they all have taxing authority behind them. When you back those out and some of the other 10, 15 grade, the reserve looks a little more normal, but that being said, we think that the idea, Jennifer, is that some of the operating expense, the credit quality expenses OREO [ph] and problem loan expense, would trend down over the next few quarters and that provision would trend up.

We're targeting $2.5 million a quarter of total credit expenses. That probably will trend a hair higher, but not $4 million, maybe somewhere between $2.5 million and $3 million next year. But with a lot of that trending more towards the provision line versus problem loan expense.

Jennifer Demba

One more question. Can you give us some detail on the SBA results during the third quarter?

Dennis Zember

Yes. SBA's showing lower net income and lower revenues. Let me go to my page. What we have in SBA is a good bit of construction activity. We've probably got either the fourth quarter or the first quarter are going to be pretty solid with SBA income, just given what we're managing there. On the SBA side, this quarter we closed almost $25 million of SBA loans compared to $17 million in the second quarter and only $10 million in the first quarter.

So we had one of the best quarters we've ever had. In fact, this was the best quarter we ever had in closed production. But as far as sold, we only sold $11 million. So you have got to go back to this quarter a year ago, where we sold $9 million.

Ed Hortman

That's because they haven't funded yet.

Dennis Zember

They're just not fully funded and fully ready to sell. But again, we think we're 90 to 120 days from a good bit of this closed production being sold.

Jennifer Demba

Okay. Can I ask one more question? Can you just talk about your loan growth, very strong, can you talk about market wise, where it was strongest versus weakest?

Dennis Zember

Jacksonville is really where we've said in the past, Jacksonville, Atlanta, we're strong, all of our South Carolina markets were really strong. Each of them had -- when I say South Carolina, I mean Charleston, Greenville, Columbia, of them had a strong quarter. In fact, Jennifer, one thing we've been saying when we've gone out, that we've always relied recently on those five big markets, but when you look at -- I left out Savannah. But when you look at what we've done this year, you got to throw other markets in there like Panama City, St. Augustine, we've had fantastic growth in St. Augustine, Tallahassee's up almost $30 million this year for us. So really, we've taken Gainesville, Florida. You take what used to only be four, five or six larger metro markets that were providing most of the growth, we've probably moved that to nine or maybe even 10 good size markets that are contributing.

Operator

Our next question comes from Casey Whitman of Sandler O'Neill. Please go ahead.

Casey Whitman

So sorry to hear about the loss of your employee, most of my questions were answered, but just a few. I noticed you incurred some consulting costs related to crossing the $10 billion in asset threshold during this quarter. Do you have a sense yet for how much total investment you're going to need to make over the next several years? And maybe talk about what other levers you might have to offset that, like additional branch closures?

Ed Hortman

I'll let Dennis answer that. But I would just tell you that we do have a committee that is formed to look at what processes, what infrastructure, what obstacles or issues we need to consider and prepare for. It may be some time before we get there, but as you point out, we're in the process of preparing now, so we don't have an opportunity that we have to pass on if there were to be one.

Dennis Zember

And I would just be clear, we don't think $10 billion is -- by June of next year, that's not what we tried to imply. It's really, I think some of what we're doing there, Casey, is the same reengineering that we did in credit support. We've done the same in human resources. So it's something that we've done across the Company a lot of times, but focusing just more on the enterprise risk management area and a little bit more in credit as well, just to support where we're now and what we think we're going to do next year. Credit support, we need to restructure and reengineer a few things there, given a few vacancies, but also given some of what we were talking about earlier, larger, more complex deals, potentially new lending lines of business.

So we wanted to get prepared for that as well. It's not all necessarily $10 billion but it will definitely feed into that. As far as how much more investment we need to make, I mean it's probably $1 million, maybe a touch more than that, of compensation that we would need, permanent compensation, whereas this is just consulting and getting some experts to work with us a little. I think the permanent side is probably $1 million to $1.5 million of compensation that would be in credit analysts and risk management positions and then probably about half of that more in IT and support systems.

So from here to there, we may be $2 million, $2.5 million a year of expenses away. As far as what levers we can pull, a lot of that I think we could -- probably at least half of that, I think we can pay for with renegotiating some contracts that we have with some of our larger core vendors. We're doing some of that now. Some of that, we may see some savings as we roll into next year. We may be able to pay for some of that before we actually start incurring it.

Casey Whitman

And then, wondering what is your outlook for the size of that mortgage pool book? Are you still making selective purchases there or would you expect that to start to run down? Just trying to get a sense for your thoughts on the size of the overall balance sheet, a year or so out.

Dennis Zember

Well, we're getting about $20 million of payoffs a month. I wish we weren't getting many payoffs, because that book has performed exceptionally well, especially from a credit standpoint. I don't think you'll see us making any more purchases on those. We're not looking at any right now and it takes us about 60 days to do underwriting and due diligence.

So there's not going to be any purchases this quarter and I think as far as next year, we'd probably let the majority of that roll off, especially given that we think we can sustain the loan growth that we put up this quarter. So I think we'll probably just remix some of those assets.

I think it will be positive from a margin standpoint, probably could pick up 125 basis points or rolling that into just traditional commercial assets and there's no need to put more pressure and strain on the deposit side, to simply fund more investment in these mortgage pools. Does that help?

Operator

Our next question comes from Christopher Marinac of FIG Partners. Please go ahead.

Christopher Marinac

Ed and Dennis, I wanted to go back to the drop in loan yield. I think you alluded to this at the very beginning of the call, but was it all related to the new larger loan emphasis or was some of that also just normal decline that would have happened anyway with runoff and/or the small change in accretion?

Dennis Zember

The majority of it is the accretion side, is accretion. I will tell you, I mentioned the production yields this quarter were 4.14% compared to 4.33% a year ago. We're definitely seeing some lower yields on the asset side.

The incremental assets are short, so we're not doing -- the longest deals we do are municipal deals. If you exclude that from our production, most of our assets are still three-year assets, on average. Really we're at a low watermark on incremental loan yields, I can tell you that.

When I look at the -- where we expect growth to come in next year and we're going through budgeting season right now, we're probably 20 basis points higher than where this quarter came in and a lot of that has to do with more emphasis on mortgage warehouse and we don't expect that muni is going to grow as much next year as it did this year, relative to the asset base. When you look at incremental loan yields, they're not much off from where we're right now.

Christopher Marinac

And then I had a follow-up, just as it relates to expenses, just summarizing your prior answers. So would the efficiency ratio be able to dip down lower than it is now, just without acquisitions, without anything in terms of major initiatives, just the ongoing blocking and tackling that you're doing, that is a fair expectation for us to have?

Dennis Zember

When I walked into Ed's office, excited that he we had an operating efficiency ratio it was actually 60.08%, released it as 60.1%, Ed told me I had a little more work to do, so apparently we're going to have to go a little lower.

Seriously, what Ed mentioned at the outset of his comments were how much work our folks had done this year. And our incremental efficiency ratio this year has been probably 35% or 40% and that's put quite a strain on our people and I think probably for next year, we would probably do more incremental efficiency probably in the 55% range, not that there's deferred maintenance or anything like that, but as far as one of the calls earlier was about hiring, I think Tyler asked about new teams and stuff like that.

We've really avoided doing that, because we have wanted to hit this efficiency target and then start investing. I think you'll probably you'll see us do more of that, more of that, Chris. I think it could go lower, but I think for now, we're probably just going to try to stay right at 60% and invest in the business.

Christopher Marinac

Last question just has to do with SBA. Are you doing anything growing SBA outside of the footprint that you currently have here, across the many states?

Dennis Zember

Our footprint really goes to just down south to Ocala, but we've hired some producers in Tampa. We're doing something in Charlotte. We would look close -- let me say, close to the footprint. I don't think you'll see us in Boston or out west in Dallas or San Francisco, but close to our footprint in Southern states, I believe we would be willing to do that. We finished with 10 SBA bankers and we're looking to get that to 15 and so the idea that we might have to go a little further out of our footprint, like I was saying, I think we're okay with doing that.

Operator

Our next question comes from Nancy Bush of NAB Research. Please go ahead.

Nancy Bush

The OCC issued their guidance about commercial real estate exposure, I think in the first quarter. Could you just comment on how commercial real estate quality, asset quality, has proceeded for you since then and do you -- if you could just give us some color on markets that you might see as problematic for CRE exposure?

Ed Hortman

I would point out that we're still well within the guideline number and I think, Dennis, it was 207% at the end of the quarter CRE. So from the standpoint of concentrations, we've managed to well within the guidance. So overall, the risk profile is not what it was in our bank in the last downturn. And C&D was less than two-thirds of the guidance. So from a macro level, we're in a really good place, if we wanted to get more aggressive in a particular market or with an M&A target that was concentrated, we have the flexibility and the leeway to do that.

I don't know that we've seen any signs of a particular market we're in, that alarms us. Clearly, there's segments within the market that we see overheated and that we've avoided and that would vary by market, but we've also seen and multi-housing is one of them. But we've also seen a couple of those deals that -- and markets that made us pretty excited. So overall, we're in a really good place. We don't see any market that's a big concern at this point, with our portfolio.

Nancy Bush

Okay. And if I could also ask, Dennis, you made a comment about 3Q being the highest in service charges, can you just tell what accounts for that?

Dennis Zember

Generally, I don't know, it's just trends in NSFs and debit interchange. A lot of times we actually even see third quarter debit interchange higher than the fourth quarter, when you think there would be more transactions. But for us, generally, the third quarter's been our highest quarter. This quarter, we did change and we mentioned it in the press release, we tweaked a few service charge routines and that's what drove service charges a little higher.

We made a comment before about what that was and that was, we initiated a small service charge for paper statements. And so I think over the next couple quarters, that might trend a little lower, as those customers select online banking and don't select the paper charge. But for now, that's what drove that a little. That's what drove that in the third quarter.

Operator

Our next question comes from Peyton Green of Piper Jaffray. Please go ahead.

Peyton Green

Dennis, I was wondering if you could comment -- I guess over the past year, average earning assets have grown by about $1.1 billion and there's been some of a decrease in securities and liquidity, about 10% year-over-year. How should we think about that, as we move into 2017? Have you taken all the liquidity out that you can and should we just think of loan growth minus purchased loan pool cash flow, as really the driver for earning asset growth?

Dennis Zember

Yes. I think the driver for earning asset growth this year is -- coming years, absolutely going to be loans. I had hopes and dreams that we would see higher rates, Peyton and that a lot of what we have in the purchased mortgage pools could move into the investment -- into a permanent investment securities and that's not really suffered that much on the yield side, the yield deterioration, but I don't think that's going to happen. Long term, we don't want to go back to where we were, where securities were only 13% or 14% of our earning assets.

We got into that situation, because we didn't focus hard enough on the deposit side and we were always doing just-in-time funding. And we're not going to go there. We've got a deposit growth machine that's as robust as the loan side. We've just -- and we'll show that by this time next year and that's what will keep securities -- a long way to say, I think securities should be probably trending towards 20% of earning assets is what I would like.

Peyton Green

Okay. But I mean in the short run, if rates don't materially move higher, we should think of the absolute dollar level staying flat, is that fair?

Dennis Zember

The dollar level should stay flat, maybe move up a hair, but not enough to drive anything. In that the source of liquidity would be the mortgage pool, versus securities.

Peyton Green

And I guess thinking about cash flow from that, about $200 million to $240 million a year, is that fair?

Dennis Zember

Probably $200 million a year is a good assumption.

Peyton Green

Okay. And so I just want to make sure I got the SBA comment right, because I think, coming out of last quarter, the pipeline was up significantly, I think about 32%. And what you're saying is that the pipeline's still there, just hasn't funded, so you can't book the gain on sale until it funds.

Dennis Zember

That's correct.

Peyton Green

Since there's a decent mix of construction exposure in there, it's just a matter of it funding and once it funds, then you can collect the gain on sale; is that correct?

Dennis Zember

Yes. We finished the quarter with about $59 million in the pipeline, compared to $65 million in the previous quarter. I'm looking back. The loans that we closed, when we sell those, that should generate probably close to $2.3 million of gains.

Peyton Green

Okay.

Dennis Zember

Of what's closed but not sold.

Peyton Green

Okay. And then last question. So in thinking about the debit card income, once you do get above $10 billion and you're subject to the Durbin slice, should we think of that -- half of that $3.8 billion per quarter going away, is that fair?

Dennis Zember

I don't think -- it's not half. I've been -- for Ed, I mean, my reports to Ed on that have shown us about 40% of that going away.

Peyton Green

Okay. All right. And you mentioned--

Dennis Zember

Of course we think -- and obviously, Peyton, we obviously think we can grow that between here and $10 billion, so the effect is probably -- dollar-wise will be more, but just looking at today's dollars, it should be about 40%.

Peyton Green

Okay. And then you mentioned the expense piece was somewhere in the $1.5 million to $2.5 million range; is that right?

Dennis Zember

Yes.

Operator

We have no other questions at this time. I would like to turn the conference back over to Dennis Zember for any closing remarks.

Dennis Zember

All right. Thanks again for everyone that has joined. If you have any questions or comments, Ed and I both are available, e-mail or telephone. Thanks and have a great week.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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