Q3 2019 Earnings Call
Ladies and gentlemen, please stand by your Centerstate Bank third quarter 2019 earnings release Conference call, we began momentarily.
Again, please stand by your conference will be getting one minute. Thank you.
At this time, all participants are in listen only mode.
Later, we'll conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I would now like to turn the conference call, but to your host Mr. will Matthijs Chief Financial Officer. Please go ahead.
Thank you good morning, everyone. We appreciate you joining airpatrol to discuss our third quarter financial results.
Joining me in our presentation today, our Ernie Pinner, our executive Chairman, John Corbett, our CEO , Steve Young or C O and Richard Murray CEO Centerstate Bank.
Before we begin our remarks I want to remind you that our comments may include forward looking statements within the meaning of the private Securities litigation.
Litigation Reform Act of 1995.
Any such forward looking statements, we may make are subject to the safe Harbor rules.
Please review the forward looking disclaimer and Safe Harbor language on page 12 of our earnings release.
I'll also remind you that you can find our earnings release and other financial information and Investor Relations section of our website I.
I'll now turn the call over the Ernie.
Well good morning, I want to think Olivia it's always recalled it now and for has an interesting intrusion confidence in our company.
Third quarter is been a great quarter buzzard balance sheet growth and income statement.
In fact, but my point of view like has had a great growth an excellent returns.
Our share hurdle shareholders over the last 20 years.
When you are aware this is probably my last earnings call.
And I want to say, what a great experience. She there's been being involved in a great company. It is not be on a job so to speak but rather a source of proud and memorable experiences.
Many of you had been a dependable source of advice and counsel that has helped ensure interstate success as well just don't keep me on track.
As a stepped down from the role of exactly Germany gladly accept the role of board Chairman and not officers director.
I will miss being your work you banker for these past 55 years.
And especially the last 20 years and Centerstate banker.
John Corbett, a gentleman, who is my friend and partner is an excellent CEO .
Do you not had worked closely for 30 years.
I have always recognized John's leadership in focus within power him to charge the future first Interstate and he has done so we'll continue.
John It's your requested in my new role is more chairman I spent some time this being ranchers an option on recycling our bankers for their hard work dedication.
I look forward to doing so.
I will miss the relationships with many of you, but I continue to which the best restrict you in coming years.
Now, let me return to meeting over to John pre installed on this quarter Dawn.
Alright, Thank you are already.
Yeah. The older you get the more you appreciate your true friends when you look back.
It gets easier to see how they influence your life when I was in high school.
Already and I attended the same church and then after I got out of college.
He sent me to the Bank management training program in Charlotte North Carolina.
And then a 1999 he taught me into this crazy idea a joining with them to write some capital and started de Novo bank that we named Centerstate.
Blown away he successfully attracted a team of bankers.
Lets centerstate three the great recession.
And he's greed of significant well for our shareholders since the day of our IPO.
I want to reiterate a that already is not going anywhere while they won't have the word executive in his title effective January one.
He will continue to lead Centerstate as our board chairman.
And continue to be the true north of our company's culture.
Switching gears to other company's third quarter results.
Centerstate team continue to advance the ball domicile.
If you adjust for merger cost the company produced earnings of 53 cents a share.
Hey return on assets of approximately 1.6%.
And a return on tangible equity of approximately 18%, which is pretty consistent with the last two quarters.
The highlights for the quarter with strong organic revenue growth.
This was the first quarter that we experienced the headwinds of the Durbin Amendment, which resulted in $3 million of lost revenue.
But even including the loss of $3 million of interchange fees and including NIM compression. The Companys total revenue still increased by nearly $7 million during the quarter.
This is a clear illustration of the benefits of the diversified business model that we've built the model works.
Back in the summer of 2016.
The 10 year Treasury fell below 1.4%.
And Steve and I were worried about a prolonged low and flat yield curve environment.
So that fear motivated us to increase our investment in counter cyclical fee income businesses.
The primary two investments were one to ramp up a residential mortgage department.
And to build the team at our correspondent division to provide interest rate swaps to our correspondent bank clients.
These two investments began paying off this year and kicked into hyperdrive in the third quarter and Steve will walk you through the numbers.
Not only did we see solid organic revenue growth, but we also experienced a healthy level of balance sheet growth as well.
After a little slower start to the year than we would've liked loans grew in the third quarter at an annualized rate of 7%.
And deposits grew at 6%, which is consistent with.
With the mid single digit guidance that Richard gave last quarter.
Yeah.
Finally, I'm happy to report that we had a very successful systems conversion of National Bank of Commerce in September .
When I think about the culture of our company.
It is on full display when we're under stress and have to pull together.
I think back to the three back to back Hurricanes, we faced in 2004.
Great recession, a few years later.
And then the 27 systems conversions that we've completed together over these last 20 years through every stress the Centerstate teamwork communication Trust and professionalism continues to get stronger.
Although there's hundreds of people that had part and the success of the conversion.
Thank president Mark Thompson, and our Chief administrative officer, Jennifer Idell really deserve the credit for leading the effort.
I'll now turn it over to Steve and will and I can give you details in the quarter and future guidance for your malls.
Thank you John Good morning, everyone I.
I will report out on our third quarter revenue results in both net interest income and noninterest income as well as our updated expectations for both balance sheet and revenue for the remainder of 2019 and and into 2020.
First of all for revenue results revenue increased 6.8 million or 3.5% annualized compared to the second quarter.
Net interest income excluding accretion income declined by 1.7 million or 1.2% annualize, but was more than offset by the tenant a half million dollar increase in noninterest income.
Reported net interest margin declined 26 basis points to for 19 in quarter three from for 45 in the second quarter and was lower than our 430 to 440 guidance.
Loan accretion decreased as expected eight basis points to 36 basis points, which was in line with our 35 to 40 basis point accretion guidance.
Net interest income ex accretion fell 1.7 million from the second quarter due to an 18 basis point decline in NIM to 3.83%, which was below our guidance of 390 before.
The decline in NIM was offset somewhat by strong interest, earning asset growth at night, and a half percent annualized or about 350 million.
This 18 basis point decrease occurred as interest, earning asset yield ex accretion decreased by 13 basis points well total cost of funds increased five basis points from the prior quarter.
During a rate cutting Skype cycle, we would expect for the earning asset yield to reprice down as they did but would normally see relief on the funding side to help offset some of the earning asset pressure.
But in order to protect the core deposit franchise and because of the potential customer impact we were hesitant to cut rates on our income deposit accounts in the third quarter, even though the fed cut rates by 50 basis points.
Now that we had a successful conversion with our customers. We now have the confidence and disciplined to lower the appropriate deposit rates in order to reflect this new environment.
As an aside we did see our interest bearing deposit cost peak in the month of July 1.08% and declined to 1.04% in September .
After the rate adjustment occurred at the end of September we adjusted deposit rates down again late in the quarter, which will be reflected in the fourth quarter.
Overall, we have over the years demonstrated discipline in managing deposit costs through our strong core deposits and checking franchise and over the course of the next few quarters should be able to make good progress as rates continue to trend lower.
Secondly, as it relates to non interest income during the current quarter. We were pleased that noninterest income as it says about average assets increased 21 basis points from 91 basis points in second quarter to 112 in the third quarter and significantly better than the guidance of 80 to 90 basis points poster.
Total noninterest income increased 10, and a half million from the prior quarter, primarily due to the increase in correspondent banking at night, and a half million and mortgage banking revenue increase of 2.6 million.
Offset as expected by approximately $3 million decrease interchange income due the impact to the Durbin Amendment.
Corresponded banking revenue increased nine and a half million from the prior quarter and it was due to the continued increase in interest rate swap revenue as well increase in the fixed income revenue both the interest rate volatility in the flat and then inverted yield curve helped propel these businesses even while this was a headwind to the bank's net interest income.
Interest rate swap revenue in the pipeline is strong and should continue to be a tailwind of inverted yield curve environment, while fixed income will pick up more of the curve steepens at the fed cuts rates.
Mortgage banking noninterest income increased by 2.6 million the 9.4 million.
New mortgage loan originations for the quarter with a record 484 million versus 416 million in the second quarter.
77% of the production was in the secondary market well, 23% was booked on the portfolio.
Kundera gain on sale margins were 2.57%.
Purchases represents 65% of closings well, 35% were refinances.
Before I comment on the specific areas of guidance I would like to make a few comments on how we constructed a diversified business model how our various revenue.
Sources react to rates and the shape of the yield curve.
As you think about modeling CFL earnings I'd like to describe three different environments and how we position our balance sheet, an income statement to perform and these environments.
First of all in an inverted yield curve like the third quarter NIM decreases significantly is where they are unable to reprice deposits as fast as our loans, but we have fee income like mortgage and interest rate swaps have record quarters to more than offset revenue pressure from them.
The second environment is a low flat yield curve.
NIM continues to be challenges will be unable to reprice deposits very fast while new loan yields continue to come on lower.
Environment for NIM is less challenging done in an inverted yield curve.
The businesses like mortgage fixed income and interest rate swap businesses outperform but likely at a reduced rate as we saw the third quarter.
The last curve is a steep yield curve in this environment NIM outperforms its core deposits gain more value with more asset sensitive balance sheet fee businesses, such as mortgage interest rate swap in fixed income moderate.
So with that.
Loan and deposit guidance as expected loans are expected to increased mid single digits for the remainder of 2019 to 20, and we expect deposit growth will be aligned with loan growth for the remainder of 2019 20, So no change.
Guidance there.
Net interest income based on the new lower yield curve and current shape of the yield curve as wells are.
Expectation this quarter of two more rate cuts. This year one in October one in December we continued to face NIM headwinds and would expect five to eight basis points in NIM contraction in fourth quarter as interest, earning asset yield decreased similar to last quarter, but this quarter offset somewhat by the funding pressures declining in the previously discussed.
Income customer conversion completion.
Reported NIM continues to be a little higher than expected due to higher pay off at higher loan accretion based on our forecast, we would expect loan accretion to be approximately the same levels quarter three.
In total we would expect reported margin to be between four or five and for 15 for the remainder of 2019.
Noninterest income noninterest income the average assets was 112 for the third quarter, which was better than expected based on the environment. We expect non interest income to continued to perform at a higher level, but not to the extent of core three unless the yield curve continues to stay in burden as a result of these impacts we would expect the ratio.
Noninterest income to average assets to range between 90 basis points and 110 basis points in this environment, but recognize some uncertainty in how volatile interest rate markets will be as well the shape of the curve as discussed before.
Any changes here, both positive and negative should have a corresponding opposite effect on the bank's net interest income.
With that I will turn the call overdo, it will discuss allowance for loan loss non interest expense and capital management.
Thank you Steve.
We had net charge offs in the quarter of 2.3 million, which was eight basis points annualized.
Brings our year to date nine months net charge off to an annualized seven basis points.
Our non accrual loans in the quarter 39 million, which was 34 basis points of total loans.
While up from Q2, this 34 bips fit the fourth slowest quarter and level in our last quarter, so pretty consistent trend wise with what we've seen the last two years.
I will note at approximately 4 million as we increase.
Wasn't government guaranteed loans. So we would expect they used to having more potential a more favorable potential loss outcome. The most non performers.
Our allowance was 67 basis points originated loans at quarter end.
Also note again direct your attention to page six of the release, so as we did and the second quarter you have some breakout on our PCR loans.
You'll note that.
Our PCL loans had a legal balance of approximately 210 million.
A carrying balance of 143 million. So they discount of 67 million and that that 67 million was made up of approximately 25 million related to credit.
Remaining 42 million non credit.
If Cecil were adopted October 1st and yes, the seasonal model indicated the same required allowance for credit losses as is and the credit discount. Today. Then is 25 million of the discount will move into the allowance for credit losses under Cecil and that 42 million would remain in the discount and accrete on over the life of those loans.
With respect to Cecil we've had conversations with our auditors and we've been advised that seasonal guidance in a forum such as this would constitute a disclosure requiring model validation SAS control testing.
Policy in procedure reviews, et cetera, and we're not yet at the stage.
To give you guidance. Therefore, as we had originally planned to do and I will say, we're working with an outside advisor that's used by a significant number of FCC filers and our belief is that our final season results will not cause us to be an outlier versus our peers.
Turning to non interest expenses, our efficiency ratio in the quarter was 51.9%.
Pretty consistent.
As Steve noted our noninterest income was up 10, and a half million versus the second quarter and would've been up 13 asked me and but for the Durbin impact.
With that growth coming almost entirely in areas with commission based compensation structures correspondent mortgage SPJ those three they by about 12.3 million quarter over quarter.
And our non interest expenses grew by 3.88 million quarter over quarter.
Settled the second quarter call.
Base will fluctuate a bit, but some revenue volume and these business lines.
I'll also note we did benefit in the quarter from a reduction and the FDIC assessment expense of approximately 1.7 million due to the assessment credit so without that.
Credit our growth versus Q2 would've been approximately five and a half million versus pertaining to ask me in growth and non interest income, which again was after that $3 million Durbin hit.
Let me sort of high level reconcile our naive versus expectations.
Yes.
When we announced the income merger in November of last year.
At the time, we announced expected Q4 of 19 NIH of around $100 million after achieving all cost saves.
In the third quarter was 110 million, excluding merger expenses, but our noninterest income was up 19 million.
From Q3, Q3 c levels, if you combine the two companies together.
Last year, and that's normalizing for Durbin. So if you use an approximate marginal efficiency ratio of 50% for these businesses that will generate about 10 million more and then I from this additional fee revenue.
So the point beyond that we believe we're on target with our cost saves in the income acquisition.
Let me also just reference.
We did exercise the option on 30%.
Minority interest in the factoring subsidiary in the quarter at the state in the release that the window for the call option open during the third quarter and we exercised on September Thirtyth at a price of 11.4 million. It was us no impacts the income statement from this minority interest repurchase.
Given that we bought in the last day of the quarter, but future periods will reflect a 100% ownership of that income stream.
I also like to pause and know how much we appreciate our relationship with our former partners in that business.
Let me turn to capital formation and buybacks.
We continue to have strong capital generation within a return on tangible common equity of almost 18% for the quarter and the nine months here today, excluding merger related expenses and over 15% year to date, including merger related expenses.
With a very active quarter for repurchases 3.1 million shares.
Our 7% annualized loan growth and our dividend payout of 11 cents per share, we still maintain healthy capital ratios with TCV at 9.6% at the end the quarter, which is down slightly from 10%.
Q2.
As noted in the release, we've continue repurchasing shares under an ongoing Tenbfive plan after quarter end and we've repurchased approximately 1 million shares thus far and Q4. This brings our total share repurchases year to date to 5.7 million shares representing approximately 4.4% for the shareholders.
I think that's the time of our May 2019 increased repurchase authorization.
It's also leaves us with just under 800000 shares remaining in that authorization.
We recognize that repurchases are an important component of our capital management and capital return toolbox, along with dividends growth growth in capital retention and we'll be discussing the company's repurchase authorization and dividend levels with our board and the context of our 2020 planning.
Let me state on last quarter's call as investors and capital managers will continue to assess the environment and make the capital decisions. We believed to be best for the company and its shareowners, if we face a challenging environment for growth of an acceptable quality and an environment, where bank stocks are out of favor. We would expect to continue to return capital via share repurchase.
It is while also maintaining a very helpful. Okay very healthy capital ratios.
So as to allow us to operate from a position of strength should we head into an economic downturn.
As we also said repurchase activity will likely be lumpy from quarter to quarter.
Finally, our effective tax rate in the quarter was 23.6% similar to the rate last quarter. Looking ahead, we expect the effective tax rate dropped by approximately 50 basis points due to production in the Florida state income tax rate.
Any noise from excess tax deductions on equity compensation, which is of course lumpy.
Thank you, we'll now take questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchtone telephone.
Your question has been answered you wish to remove yourself from the Q. Please press the pound.
Your first response is from Michael Young of Suntrust. Please go ahead.
Hey, good morning, everyone.
Right.
Oh I wanted to start on the NIM commentary, Steve maybe just going a little further obviously.
Kind of mentioned that there is some additional opportunity to reprice deposits downward.
Maybe you didn't take as much of advantage of this past quarter and I understand that guidance for the fourth quarter, but will that continue to be sort of a an offset or benefit as we move into early next year and what are your kind of general thoughts given the shape of the the curve and kind of Fourk fed funds expectation.
As we move into next year.
Yes, Michael Good question, let me kind of the phrase that in a couple of ways.
And our deposit the half of it isn't checking accounts, which really doesn't have much of a chance to reprice because it's virtually zero. That's a part portions that are sensitive are in the money market rates, we have about $2.6 billion, a special priced money, there and our CD book, which was about 2.4 billion. So.
It's about 5 billion dollars' worth of.
The other things that reprice, our CD book is short I think we've got about 750 million of that Reprices in the fourth quarter. Another 500 million reprices in the first quarter. So about half of the book crude prices in the next six months and about 83% of that Reprices in the next fourth quarters.
So we kept the liability side pretty short.
Not knowing which way rates rates would head. So I think what we're going to see in the short run as I mentioned, our deposit cost peaked in July we started on the on downward trend in September once we got the income conversion.
Than we were able to move rates again, and I think what you'll see over the next few base few quarters, depending on what rates do is built a lag effect meeting work will catch up to the rate that probably everybody else will that that probably when rates start stop cutting we'll probably catch up.
Little bit more at the end, that's how I would characterize it saw would would tend to think that the margin pressure.
That we saw in this quarter will be will catch up on that could be as of the rate cutting cycle.
That makes sense.
That's helpful. Thanks, and then maybe just kind of a bigger picture question on overall profitability I don't know the efficiency ratio is kind of the correct way to talk about it or just bottom line profitability, but as we move into next year with some.
The pressures on.
I still lingering, but you know fee income obviously picking up some of that that lost revenues do you think we can sort of tread water here.
The good profitability levels or is there some incremental pressure that you expect as we move through 2020.
Hey, Michael This is Steve just to comment you may be a way to think about it is our efficiency ratio. So if you think about the puts and minuses of what's having what will describe coming into the fourth quarter and as we think about next year.
We do have some cost saves still left.
In the Q4.
The income mergers auditing its fourth quarter, which was of course help that efficiency ratio, but the minus is are there is continued NIM compression NIM NIM pressure and probably will the.
Yes, as we guided towards that noninterest income would be surprising if it were as good as last quarter, So theres going to be some revenue headwinds there, but we're going to offset some of that through expense saves in the fourth quarter and as you look ahead I would think that as we look at it today that our efficiency ratio would would remain.
I mean reasonably steady and that with all the puts and takes there.
Maybe would be maybe an increase as a percent or so but it would be in the general range and then it will be our job.
To manage.
Fixed cost of that but hopefully that's helpful. As you think about.
Landing.
That is helpful. Thanks, I'll step back for now, but I did want to wish Ernie divested will Miss your wisdom on this call.
Thank you very much.
Thank you your next responses from Brady Gailey of KBW.
Hey, good morning, guys.
Okay great.
Yes, I wish the same to you as well earn it will be different not hearing your voice opening up the call.
Hi, Thank you start with.
Our I want to start with the.
Opportunity from truest.
Just give an update on how do I know youre spending a lot of time here in Atlanta, just how the conversations or go on with.
Your potential new lenders.
Or on the customer side. It seems like there's just a lot of banks looking to capitalize on the opportunity here in Atlanta like Bank, United Just announced an hour ago that they've hired a CNR team in Atlanta.
And that they're going to expand into the market. So seems like competitions going to be grade and a lot of people are going to look into it.
You have to take the opportunity just an update on truest and how you're thinking about that opportunity.
Sure Hey, Brady this is Richard.
As we said last quarter recruiting remains a priority really in all of our markets mostly to customer facing folks are ends the business bankers the branch managers.
While the Suntrust BBT event is a very unique events.
We're taking very proactive steps to take advantage of the opportunity to got up sort of a long term plan.
Working that plan.
Got it and feel like it's going to be a long term events.
One of the good folks were talking to you are being taken care of they're waiting to see kind of how things shake out in terms of supervisors and market leaders and whatnot, but.
We have had some success to date in terms of hiring folks from Suntrust and from BT and Telus.
But we're also mindful that they don't have a according to market and all the good bankers. So we're focusing on who we think are the best bankers in the market and we think can thrive in our environments and we're also very mindful of our own shop, and the disruption that our M&A activity.
Has that went on especially in Atlanta, having to conversion a couple of weeks ago.
It's definitely something that we're focused on making sure we're keeping our back door covered as well but.
We definitely have a plan will work in that plan, we feel like we have some opportunities there we've had some successes with those folks.
But we do feel like it's probably 12 18 months event and one bit.
Hopefully have some further success is down the road.
Okay, and then next I wanted to ask about M&A that I know, you're just converted and common it's still a fresh steel but on your stock is up over 15% year to date you now trade at two times tangible that gives you a little more power.
To to announce a good deal how are you thinking about M&A as we look into 2020.
Great Brady its John .
Getting the National Commerce.
Integration complete getting the conversion behind us those have been our priority. That's what we said a year ago, but now we can we can check that box and things are going incredibly well with the national Congress team. There now the centerstate team so that gives us some freedom to be.
Engaging in some conversations that we've had for quite some time I mean, we just we just a firm believers.
This industry will continue to consolidate and we think we're uniquely positioned to create value through that consolidation and the priorities for us have not changed as we think about the landscape. We think about the three ends we want to focus number one on the map number two on the management.
Team that we're building and then ultimately the math that we create for shareholder return.
And when you think about the math, just just pull up SNL and looked at the markets that have the highest.
Population in migration, that's where we're focused.
If you if you go back to the Ernie Pinner wisdom here shoot where the ducks are flying and their fly on where the populations are moving and when we're in great markets right now.
I would love to continue to dial down where you where we are but if we if we look outside of the markets. It will be in markets, where there's a lot of population in migration.
All right and then last for me the 1.7 million dollar benefit from the credit for the FDIC assessment is that is that pretty much all of it or do you all have anymore that could be a benefit in future quarters.
Hey, readiness will we expect a similar amount in Q4, and then just a sliver and significant amount in Q1 of 2020.
Okay, Alright, great. Thanks, guys.
Thank you.
Thank you your next responses from Michael Rose of Raymond James.
Hey, good morning, guys.
Well just wanted to follow up on the on the accretion comments understanding the fourth quarter expected to be kind of similar to the third quarter.
As we think about 2020 with Cecil, though should we think about.
You know the PC I.
Loan accretion essentially going away or you have any sort of initial estimate for what the accretion could look like next year. Thanks.
Sure Michael we did not happen to answer the second question, we do not have an estimate yes that we are ready to disclose.
I was trying to give some sort of a hypothetical look.
With that disclosure on page six of our lease in my comments around that but we.
We have a fairly significant discount for our PCR loans today.
That has.
Number of acquisitions over the years and where many of those loans have had better performance than was anticipated. The time of acquisition part thats to the economy being better and price just better performance in general.
But there's 100 $843 million book balance on that 200, Tim and our legal balanced portfolio and have that $67 million discount 25. This credit so.
Again.
Recently.
October one and we don't know for certain if that amount is the exact same there will be required under ceases allowance methodology, but if those two things were true that 25 million will drop down below as an allowance that that 42 million noncredit discount.
As a non 30 would remain above and accretion over the life with those loans. So.
I don't necessarily goes away.
On the PCL Pcr loans.
Yes in the Gulf pool basis to loan by loan basis on those but.
I don't have a good guidance, but I'll give you sort of a flavor of the bucket so to speak.
So just to be clear.
And again I think obviously is everyone's understanding Cecil is kind of all over the board, but are you, saying that 25 million.
He will be substantially less.
Under Cecil.
I guess has no I'm.
Im sorry, so that's what I'm, saying is a discount.
Okay.
A larger portion of which is not credit related. So 67 total discount on that book to 10 25 large credit related the rest is non credit related the non credit related will not go into the allowance for credit losses under Cecil.
A allowance will have to go on for Cecil for those loans and if you. If the same seasonal determined that the preseason methodology determined that theyll appropriate allowance for that book of PCR to become BCD loans was 25 million and that would drop in the allowance and the other 42 would stay up.
As a rate discount that would come in over over the life.
You can think about it Michael just maybe summarize it is.
We have around roughly at $67 million discount in the non piece, which nothing changes. It continues to do what it does and last quarter was $8 million for settled decline over time, but.
At that the the other there's not the PCI discount will move if she told US today and we did that would be 42 million versus 67. So it's what two thirds of that number. So in theory, what would happen is that would that accretion so to be at eight would be five and of course decata in there. So I think.
Okay General.
Well, it's a hard to model because there's a part of the different assumptions that I think thats, probably the way to think yes, the weighted average leverage those loans.
It'll impact of course.
Okay now I get it very very helpful. Thanks for thanks, requiring that clarifying that for me.
Hey last quarter, you guys talked about.
You know mid single digit annualized growth in the back half of the year.
Obviously, you're kind of already there after this quarter any sort of update just given what appears to be pretty strong production and pipelines as we as we go into the fourth quarter and any kind of initial stab at 2020. Thanks.
Sure. This is Richard.
We did have a nice rebound in the organic loan growth roughly 7% nice production increase about $100 million or 11% that resulted in the loan growth of roughly 200 million our loan payoffs and paydowns were flat to the second quarter.
So that always plays a role.
So it's hard to tell exactly where that will be for the fourth quarter.
But we're looking back at the production we had good production really spread out over most all regions Atlanta, and Alabama stood out we had really nice production in both of those markets, which was encouraging given the amount of conversion activity going on.
Third quarter in those two markets South Florida in West, Florida also had good good production months.
Quarter excuse me, but the pipelines are still really strong there on paper, maybe down slightly but I think thats probably conversion related work.
Merging our encino pipeline into the.
Interstate pipeline and I think roughly it's flat when you all that done so we feel very good about economic activity in the pipelines and given the strong production. We had last quarter. So I think looking ahead to the fourth quarter that mid single digit growth rate.
Seems like something that we should expecting that I think our thoughts about 2020 or the same.
Theres a lot lot of good economic activity, but there's still a fair amount of caution as we've talked about in previous quarters.
Out there with the customer base in the prospect base. So.
We think that mid single digit growth rate would work for the fourth quarter and for 2020.
Yeah, obviously, you guys want to be cautious of or at least cognizant of pricing and structure, which is seemingly under.
Some pressure here and then just just finally just wanted to clarify.
Some of the guidance. So I think what she said was you know total noninterest expenses may be up roughly $10 million, but a lot of that's going to be related.
In the fourth quarter two higher level.
Of incentive comp related to the season I think you said you're 90 to.
Hundred 10 basis points fees to average assets that I get that right.
You did and just to clarify on the NIH.
We would love for you in Q4 to be well north of that $100 million bogey because that was set at a level of non interest income significantly below where it is where it wasnt third COVID-19 million below.
Looking back Q3 of 18, so because if we have not or Tim in our increase non interest expenses from that then we'll have.
Revenue increase of roughly double if you assume approximately 50% efficiency ratio for those businesses, so yet, but it's hard to predict because those businesses.
But it's still a pretty good environment for all for those businesses.
And as I back then to kind of the comments around efficiency at least for kind of next year.
Would you it seems like you still expect a seat average asset ratio in excess of 90 Bips is that the right way to think about it.
You know is that.
Michael.
As we as you know from a total perspective, I think pre durbin or excuse me post Durbin just to kind of frame. It up the Durbin we were about 80 basis points you take the second quarter adjusted for the 3 million a quarter. That's about 80 basis points. This quarter, we did 112 and what we're saying.
Saying as its probably elevated for quarter two here I don't know how much but I would think you would settle back down in that range, even though in an environment, where you think that the the curve is low and flat that will be better for those businesses, but probably not to the extent of a 112. So I think you're thinking about it about right.
Okay perfect. Thanks for all the color appreciate it.
Thank you.
Thank you your next responses from staff Tyler Stafford.
Stephens. Please go ahead.
Hey, good morning, guys.
Hi, Good morning, Hey, well just one more for me on the seasonal discussion do you have what the weighted average life of the PCI portfolio is.
I do not and its and contractual whatever's life on those portfolios is probably less.
Less instructive than it would be for a normal past portfolio, but I don't talent to answer your question directly okay.
On the buyback topic I appreciate you guys are.
Well the having those conversations with the board over are coming weeks or months can you just remind us.
Capital ratios that you kind of feel are your bogey that you're targeting and in terms, how much excess or deployable capital you do have though.
Our view depend somewhat upon the economic environment, we're facing and our thought is that if we are heading into.
And eventual downturn, we would rather into that in a position of strength. So we can take advantage of opportunities that might arise. So we would hold heavier capital and that environment than we might hold say in the middle of a of an emerging economy.
No.
Specific level and I don't know that we have a specific time, we communicate but we certainly comfortable below the 99.6% we are today.
And so if you drove down 9%, we still feel like we're pretty pretty healthily capitalize.
Our formation rate does give us the luxury of some extent, having our K Canadian too and that we can be active with repurchases. This this quarter is probably a bit in the not an anomaly in that we bought back 3.1 million shares in one quarter.
But we have said it be lumpy, but.
We think we can still foreign capital.
Buyback shares pay healthy dividend and hold really strong capital ratios. All the same time, John or fewer Steve richer have different comments I think thats it.
Tyler Charlie this is John .
Tom and thinking about the buyback and just.
How nice it is to have isn't as an option I mean don't forget a 2020, we're going to head into this political cycle and you just have to believe the volatility of bank stocks would that political cycle, you're going to want the flexibility in the optionality to use buyback if it's if it's attractive.
Yes understood Okay. Thanks, John .
So to the income conversion was in September I can give us an approximation of how much expense saves that should fall out of the Threeq you run rate and Fourq you from that conversion.
Yes.
Approximately 2 million.
Left to achieve in Q4.
From that.
That conversion.
And then that will be.
The complete coffees realization at that point will.
No there will be.
Substantively, yes, there would be still some some dribbles that will some events pickup MCU and Q1.
In Q1, you always have your higher.
FICA match, and all that stuff that kind of creates noise in Q1 for the whole bank, regardless of any cost saves so so effectively.
Fourth quarter be playing okay.
Perfect for that and then just lastly on on the credit side Nonaccruals Inc. increased 13 million or so still still obviously manageable and low just.
Chris If you guys thriving comment on what drove that any any particular chunkiness that's in the portfolio and I'll hop out. Thanks.
Hey tolerance John .
There were the larger credit inflow in that increase was a $4 million government guaranteed loan. So the nice thing is that that loan there won't be any loss on and then the other inflows were small owner occupied see an I kind of type credits nothing nothing Nate.
Sure.
Okay perfect. Thanks, John .
Thank you. Your next response from the line Stephen Scouten of Sandler O'neil. Please go ahead.
Hey, Ryan good morning.
Good morning.
And that curious maybe Richard a follow up on your commentary about loan demand in kind of.
How are your customers you're thinking about the economy I think you mentioned still some skittishness as you guys talked about last quarter, but.
Last quarter I think you gave some numbers about maybe 700 million of opportunities that you had kind of passed on or 45 or 50% or total looks can you can you give us some idea on that this quarter and how much of your.
Potential deals, maybe you passed on because of structure or pricing or.
Overall just cautiousness.
Yes sure.
We did last quarter, we looked at about 1 billion five we passed on about 43% of that.
Had good production, but passed on about $650 million.
And that was the first quarter that we've collected this data collected it again in the third quarter.
We looked at about a big in seven.
Past, one about 735 million, so pretty similar percentage pass rate.
The sort of the reasons behind the primary issues, we were dealing with were really the same as what we experienced in the second quarter credit structure sort of the type of projects that we might be bearish on or in a particular market or overall.
In the salary world and we're very focused on.
Cap rates I think the cap rates that we issued.
Or excuse me that.
Utilizing credit that we closed in the third quarter was pretty similar to that cap rate in the second quarter. So.
What we did do is pretty consistent cap rate wise and we're focused on the late cycle position that we're all in as well as looking at cash out revise and making sure that we're using common sense when it whenever there's a cash out.
Some of the takeaways are really nothing crazy going on in terms of what we saw a reasons we lost a particular.
Minutes to bank competitors, if you're talking about a non bank competitors. Some of their models are different and so they might it might make more sense for them to do something we wouldn't do.
But just like last quarter. Most issues are most credits had more than one issue, we could solve the long, but probably not solve for both.
So we ended up passing on that on that.
Transaction.
Wasn't really much consistency and market or competitor or excuse me, yes, no consistency there market were competitive it was really across the board no no no nobody standing out.
Just really cases were just a little bit more of a stretch than than what we will do are willing to do.
But some of the main takeaways, there's still a fair amount of economic activity out there and we mentioned our pipelines are still pretty good but there has been caution there still remains caution out there but late cycle.
Discussion that we're constantly having.
Were the China trade talked a political instability all those things are creating a fair amount of apprehension and caution. So people are just trying to be smart about what they what they are doing and thats appropriate there should be at this point in time and.
So I think we're seeing some discipline out there we're trying to exercise discipline ourselves.
But we still feel like we should be able to achieve that mid single.
Is your growth rate in volume going forward.
Okay very helpful. In in terms of that pricing competition I know your average yields were I guess five or not in the quarter what was the new production coming on at this quarter maybe versus last.
Yes, it's Steven this is Steve in the in the the funded production in third quarter was for 75, I believe last quarter Spavo nine.
So we what we tried to do around here in spreads can't manage the interest rate environment, obviously yields fell but.
If you think about the average.
Part of the curve that we deal and probably in the five year part of the curve probably averaged 50 to 75 range. So.
It's a pretty healthy spread.
But we are seeing we are seeing competition pricing there for sure.
Okay helpful and then with the correspondent banking and I know, you've kind of given a range on feed to average assets, but.
With these remaining elevating when you say could remain elevated is that like still a 20 million dollar number is that going back to a 12 or 13 million dollar number is there any way to narrow that range between kind of 11 million last quarter in a 21 million this quarter.
Yes, as you mentioned is probably depends upon the volatility and other things, but I would assume that last quarter's a bit of anomaly. There was theres multiple things that kind of came together at the same time.
Particularly on our interest rate swap business, you know normally when rates fall like that the economy is not doing all that well, but what we found was rates fell and and our correspondent banks and their customers, we're borrowing money and they're very healthy so.
We saw sort of a convergence of multiple thing.
What will happen. This quarter is you see livewatch is starting to move towards.
Towards the same port part of the curve at the 10 year last less.
We started last quarter it.
I want to say to 25 alive or in a 170 510 year well now that is starting to converge together and so we're seeing us we're seeing a strong October we would expect that November December it as the fed cuts rate that out that will moderate a little bit.
Now to predict that I think that range is the right way to think about it I would say that it was probably down a few million dollars this quarter.
Then probably moderates a little bit more but probably stays elevated.
To the extent we have.
Flat yield curve and low yield curve.
Perfect make makes a lot of thanks, and then just last thing for me on the factoring business.
With that still about a 600000 dollar impact and I guess.
Well that 600000, a quarter impact and where would that flow through specifically.
Yes, Steve if you look at the bottom of the income staying on page two you see that earnings attributable to non controlling interest of 603000 yep.
Yes, so that going forward will be above the line okay perfect. Greg. Thanks for all the color appreciate help.
Youre welcome. Thank you.
Do you have a follow up from Tyler Stafford Steven.
Hi, Thanks, a follow up just one clarification question. The 2 million, we'll let you mentioned earlier that will fall out of the only expense run rate from the.
September income conversion is at an annualized expensive number.
No thats the quarter quarterly okay perfect. Thanks.
Thank you.
They are there for the responses at this time.
What I would like to turn the conference back over to John Corbett.
Alright, Thank you for joining us on the call and thank you for your continued interest in Centerstate.
We're planning on attending the Sandler conference this quarter as well as the hub the conference. So hope to see many of you there in the meantime, if we can be of any help feel free to reach out to any of us and have a great day.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may now disconnect.