Q3 2019 Earnings Call
Good morning, welcome to the SB financial corporations course, your 2019 earnings conference calls hosting the call today from SB financial Chris homes, President and Chief Executive Officer. He is joined by James Gordon Chief Financial Officer.
President ventures will be available during the question answer session.
No be financials earnings release supplemental financial information and this mornings presentation.
On the Investor Relations page of the company's website.
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John Firstbank online Dot com.
On the Securities and exchange Commission's website.
When you talk to you talking to you.
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SB financial earnings release supplementary financial information on this mornings presentation, which are available on the Investor Relations page well the company's website at Www Dot Firstbank online dot com and on the Securities and Exchange Commission website.
I see see talk goes I.
I would now like to turn the presentation over to Chris homes, SB financial President and CEO .
Alright, thank you.
Thank you for joining us on this call to reroute result for the third quarter 2019 I. Appreciate your continued interest in the financial.
This call I'll review the highlights of our third quarter, and then I'll turn the call to James Gordon, Our Chief Financial Officer.
Provide additional analysis on our financial results followed by your question.
This quarter our team produced stellar results are with adjusted EPS of 77 cents.
Adjusted return on average assets of 1.61% and adjusted return on average tangible common equity of 17.7% all the Lakeside, we balanced growth and profitability during the quarter that included two fed rate gosh, it our newly restructured mortgage area that team capitalized on a lower rate environment.
By delivering.
Strong interest rate lock volumes in profitability.
For our two remaining origination channels retail and consumer direct.
Oh, let's call. It think it's important to walk through three topics first load our strong third quarter.
And are solid fundamental growth.
Our thoughts on or near term external factors that are most recent activities M&A activities and opportunities.
Burst older School third quarter at our our fundamentals, which we think are really really solid we're very pleased with Harris, our how our team born in the third quarter.
We deliver annualized loan growth of 5.2% for the quarter, Yeah and.
Indirect 12% organic growth year over year that we said before we think of our business in terms of years net orders. So we don't get too excited to blow grows is 15.
For sit in one quarter, which it was in one recent four or 5% in another.
Our goal is long term consistent profitable in sale growth they were committed to staying disciplined, especially what we believe is becoming increasingly increasingly irrational credit market well, let a little later, we grew our customer deposits by 6.9% annualized for the quarter they weren't but.
Kicked to the proud of our growth in non interest bearing deposits up 36.6% annualized excluding mortgage related deposits non interest bearing grew 19.6% annualized for the quarter.
The new Treasury management platform implemented earlier this year continues to eight our relationship managers and delivering strong customer deposit growth and we're very pleased with the results over the past couple of quarters.
The net interest margin, excluding the impact of accretion to nonaccrual recoveries came in at 4.12% this quarter.
As we said last quarter, we anticipate compression of five to 10 basis points for each 25 basis point gotten a bit bunch target right.
Two rate cuts in the third quarter, I wasn't getting a quarter and would it be yeah. It our margin excluding accretion in nonaccrual recoveries were down 10 basis points from the second quarter.
Additional rate cuts in the fourth quarter or we'd expect some additional compression.
We also so our deposit costs move lower each month during the quarter and we expect that to continue.
Oh mortgage was key driver of our earnings growth from the second.
The third quarter, well as total adjusted free cash contribution increased from 2.6 million to 5.4 million.
With Treasury yields down there was significant increase in demand both in purchase and refinance volumes.
We had a record month of pretax contribution from our mortgage team in August at 3.7 million, which is especially significant given that we completed the sale of our to wholesale origination channels in June and July so the record month and profitability was on lower origination volumes and they left less complex business.
At least preliminarily validating our strategy.
There's still some efficiency improvements that we're making but all the whole we like.
We have our mortgage operation structured currently.
We have to stroll customer focused retail platforms now in store and old one that are able to take advantage of lower rate environments. Like we saw the third quarter, but will provide us more predictability at rising rate environment like we had in 28 thing.
Well the people side, we met if you keep back off the tires that we'll continue to allow us to grow organically and through acquisition, we closer to 10 billion would continue to invest our platform both on the technology and the people brought.
So that we can handle the scale that we anticipate over the years.
To summarize this quarter's results.
Proud to strong profitability and prudent growth that our team deliver and we're pleased with the way our platform is continuing to develop a little more long term growth and value creation.
Next on some near term or external factors.
Our team is performing very well executing our plan and delivering outstanding results. There can your term uncontrollable other Lewis.
We're managing.
Being being primarily some likely rate that's in the fourth quarter.
Potentially slower economic growth and some irrational late cycle behavior that we're seeing it in the market.
So on the likely right because you know the whipsawing rate increases and cuts that we've seen over the past thinking much has created a difficult ward you that outlook for community banks in 2020.
Herbalife rate loans have and will continue experienced immediate decreases in rates assuming that bid has additional rate cuts.
It will take longer to incrementally dropped deposit rates to recruit the margin compression called by the variable rate loans decreased just similar to the positive lag that we saw at rates were increasing but in reverse.
But to combat these margin pressure on the asset war try out of that that's Oh, we try to include boards in every new and renewing variable rate low.
We continued sports and hedging options, but so far that does have an outweigh the costs.
On the liability side, we continue to push non interest bearing road and have seen some success. We also have over 400 million an index deposits. It will try to retain do the falling rate environment.
Use.
Use excess liquidity that within keeping on the balance sheet did have been pricing. It was so right secret wall as always we'll continue to weigh road versus a margin that gives us an appropriate return on capital.
Oh, the contrary, that's going on right and environment has had a positive impact or mortgage operations are yielding great financial results this quarter and acting as as a counter cyclical offset dropping rates that we plan.
Assuming a rate continues ball, we expect additional good results. However, a seasonally the fourth and first quarter or generally low points for mortgage as we've said previously we expect mortgage to be just a bit over breakeven in the next couple of quarters.
Ah Onez, just kind of slowing economic growth.
One thing I'd like to mention is our organic loan and deposit growth.
We're in old staying disciplined in our credit process.
Want to defend our capital and earning stream winning credit terms become irrational the best way for us to do that it's not sacrifice credit structure or pricing for the sake of short term growth.
We have our relationship managers out there pounding the pavement looking for new business and seeking to expand.
Existing relationships.
However, we architected to walk away from some credits because competitors in the markets are willing to upset risk that we consider foolish.
We saw several instances over the past couple of quarters of banks in the market, taking structural right into her with other we're just not willing to accept some examples of those structures and rage work.
Guarantees or marginal credits fully releasing after 12 months.
100% financing with no guarantees.
Lower equity investments by borrowers with lender focus on LTV and ignoring the loan to project costs and sub 4% range or 10 to 20 year fixed rate loans in higher risk product categories.
And that was just don't that competition from banks, we're also seeing institutional market or the institutional market competing guest as more and more.
And we're also seeing some larger credit unions going aggressively after seeing on CR eat deals with both terms and rate that we just are not one of the match.
We've offered some one off pricing good customers that we know we're comfortable or a with and that work of where the order could have been dot relationships, but long term cheap fixed rate loans to put a proven borrowers have a tendency to become credit issues. When the cycle turns when you start to see some weakness in a credit.
What strategies, let that low rig by weight to another institution, that's hard to do with alone has a leadership fixed rate.
Well, we've grown our loan portfolio organically at 11% for three quarters.
Our long term growth targets have been 10% to 12% for the last few quarters last few years actually a this quarter's organic growth was just over 5%. It's a competitive bar with the shift in the face of a slowing economy will likely be satisfied with growth in the 5% to 10% range over the next few quarters our plan.
It is to grow our core deposit based upon that growth targeting our old deposit ratio in the 90% range.
Our provision expense continues to be very low by historical comparisons and our loan portfolio continues to exhibit excellent credit metrics.
Five basis points of net charge offs, so far this year.
And with each day closer to the end of the credit cycle. This benign credit environment would change at some point.
Ah we hope that is in the very distant future, but we're prepared if it sooner.
Today, the loan metrics older portfolio continued to be very good.
Regardless of credit quality, we believe that the provision expense under Seesawing 2020 will likely increase of what we've exhibited in 29 thing.
So on M&A Ah, we believed that there continues to be M&A opportunities that will be available over the near term we announced next an acquisition.
That we really like in September for pressure on that pending acquisition with farmers National Bank of Scottsville or the bank is almost 100 years old it's in the attractive bowling Green emitter say, which is adjacent to the national Interstate.
It has 28% noninterest bearing deposits.
And it's the same core processing system that are back is old would should diminish our execution risk.
We also continue to look for similar transactions, we continue to have numerous discussions and meetings with other management teams.
We're hopeful to continue to execute on M&A that strategically expands and deepens our presence in and around our footprint.
We'll stay disciplined on that as well, but with.
Everything that we've been hearing about that's coming available we'd be disappointed if were able to execute on at least a transaction or two in 2020.
So to summarize we delivered a fundamentally sound quarter that resulted in strong profitability. We're excited about the acquisition that we've announced recently and we feel we positioned ourselves well for future growth and value creation.
With that overview I will turn the call over to James to review, our financial results in more detail.
Thanks, Chris and good morning, everyone. Our adjusted diluted earnings per share were 77 cents for the third quarter 2019, with an adjusted return on average assets of 1.61 person.
Just a return on average tangible common equity of 17.7%.
Growth and improved mortgage results drove an increase over our adjusted he'd be up to 70 cents last quarter and provided a 13.2% year over year than the because.
Slide four illustrates the underlying fundamental trends of the company's profitability and demonstrates our consistent performance or increase in adjusted.
Return on average assets over the years as well as our performance. This quarter served to demonstrate the string durability and earnings power of our core franchise. This sustained level of profitability has been driven by balanced loan and deposit growth and margin that remains one of the highest among our peers expense control and fundamentally sound credit quality.
Next on slide five which presents the fundamental elements of our net interest margin specifically loan yields enthused as well as deposit cost for our prior guidance range and then for 15 to 430, excluding accretion in nonaccrual interest with the decline of five to 10 basis points for 25 basis point.
In the near term was the July and September rig to that leaves us with the current range.
395% to 424.12% this quarter ball squarely in that range.
Average contractual loan yield for the quarter declined by seven basis points as compare to the second quarter. We faced additional margin pressures are largely fixed rate securities portfolio experienced significant.
Payoffs earlier in the quarter, given the declining mortgage rates and a lower reinvestment rate lower rates that drove significant mortgage volumes for the quarter impacted our yield on the loans held for sale portfolio with those rigs down 69 basis points from the second through the third quarter.
That's really the mix of earning assets changed as we carried excess liquidity on the balance sheet in the form of fed funds old and interest bearing deposits with other banks.
The 107 million dollar increase in average balances quarter over quarter contributed approximately half of the 10 basis point decline in core margin this quarter due to lower spreads on those balances.
On the liability side, we were able to control deposit calls with a large increase in our noninterest bearing deposit balances and three point.
Declined and the cost of our money market account the average cost of our customer deposits remain flat quarter to quarter. Despite the repricing of 87 million over a few days from last year's campaign at an average rate.
3.1% to 2.3%, we continually brought that read down over the course of the quarter.
In the cost of customer to calm deposits has decreased <unk> decreased to 2.1% at the end of September we expect to see that cost declined in the fourth quarter was an average of 2.13% of the third quarter as we continue to reprice. This campaign deposits down more vertical quarter back to the repricing.
The occurred over the course of the third quarter.
For the fourth quarter, we have an additional 64 million of deposits from last years.
Deposit campaign maturing with an average cost of 2.4% than our current rate on that product is now at 1.5%.
For additional current data as we look into the fourth quarter and beyond where the NIM, excluding accretion of nonaccrual recoveries or 4.04% for the month of September with a 5.42% contractual yield on loans in a 1.28% cost of total deposits.
Posed a 5.5% and 1.11 person respectively for the whole at the third quarter.
The spot rate on our variable rate loans portfolio and as of September Thirtyth was 5.3 person a 5.37% source, which was down 36 basis points when the spot rate at June 30 of the spot rate on our fixed rate portfolio remained roughly flat at around 5.4%. We currently have around 200.
30 million a floating rate loans have been floors with another 50 basis points of cuts would have an additional 55 million.
Floors with 75 basis with cuts we would have an additional hundred 75 million at the floors or roughly 400 million total.
We do not see many tailwinds as one of the margin would creep higher than the 4.04% in the fourth the move from scores instead, we expect that to continue to decline over the near term given forecast a rig does before we are able to more fully reprice, our funding cost down it's starting to gain back run on hopefully in the second half of next year.
To summarize we will face near term headwinds with Burger rate cuts are confident in the long term stream of our customer focused balance sheet as we get it falls in the rate cuts, we have to be able to drive down our deposit calls to regain some of what we're losing that are earning asset yields.
On slide six now isn't as Chris We previously mentioned, we produce lower loan growth this quarter than we've seen recently, but year over year remained solid at 12% organic loan growth. Our objective remains consistent profitable and <unk> relationship driven growth not really focusing on his isn't a quarterly target, especially given some of the credit terms arrays.
That we're competing against right now.
Well for the state comfortably within a regulatory thresholds on the construction and development and CRT concentration ratios, which came down in Q3 as compared to Q2.
Now moving to slide seven our customer deposits were up 6.9% and realized from the third quarter. We've kept our loan to deposit ratio roughly gladly, 88% range for the past three quarters and I'm not afraid to let the pick up a bit in the near term as we keep managing the barge and moving deposit costs down with the right because.
We are particularly happy with the growth of the noninterest bearing deposit category that we've achieved over the last couple of quarters. Some of that will go away as our mortgage escrow deposits come back to more normal levels in the fourth quarter of 2019, the first quarter.
2020, but on an annualized basis, we grew nine is for.
Noninterest bearing deposits by 13.7% or the second quarter, and 19.6% or the third quarter. It continues to assist us in our Treasury management sales offers.
Looking at mortgage on slide eight in the third quarter, our total mortgage operations on an adjusted pretax contribution of 5.4 million when our retail footprint is included our interest rate lock volume for the quarter was 1.6 billion. There was a flood of refinance demand with the lower rates in August was a record breaking <unk>.
For a total mortgage operations with an adjusted pretax contribution of 3.7 million.
They also in our MSR portfolios will also significantly in Greece, resulting in a 1.7 million increase in the write off of MSR. This quarter over the already high levels in the second quarter of 2019.
With lower seasonal volumes anticipated for the next two quarters, we expect to operate slightly better than breakeven as mortgage.
Looking at our operating leverage and efficiency ratios when you exclude the more mortgage retail footprint. We <unk>. We grew core banking segment noninterest expenses by 3.3% over the second quarters, we continued to make investments in the back office infrastructure built to support organic and acquisitive growth.
Over the last two quarters noninterest expenses increased primarily due to the ACB acquisition.
Higher incentive compensation seats on the nation expenses and continued investments in people throughout the company.
As we face revenue headwinds into 2020, we will attempt to control that grows in the low single digits, but will not certain past investments needed to prepare prepare ourselves for future growth.
Our effective tax rate was 24.4% for the third quarter for the remainder of 2019, we expect our effective tax rate to be in the 23.5% range due to projected equity comp social benefits in Q4 and back in the 24.5% range for 20 to 20 being slightly higher in Q2.
In Q4, a lower in Q1 in Q3.
On slide 10, and our asset quality remains sound and provides a strong foundation for a company nonperforming assets to total assets increased slightly for the quarter, but on the whole our loan portfolio remains in solitary provision expense increased as compared to the second quarter as we're prepared for a decline in credit and Brian .
But we're still figuring out the impact of seasonal but anticipate our overall provision expenses and 2020 than in 2019.
On capital since the first quarter following our IPO, our tangible book value per shares increased by $6.47 or 56%.
$18.03 at the end of the third quarter or excess capital was utilized on the brands <unk>.
Just one in the second quarter, which helped drive our adjusted return on average time tangible common equity to 17.7%. This quarter, we anticipate our pending acquisition to be roughly neutral at close the transaction. We believe that we're well positioned to continued growth organically support our dividend and execute on future M&A as well as support <unk>.
Your repurchase plan needed.
With that overview I want to turn the call back over to Chris for closing comments and then we'll open the call to your questions.
Alright, Thank you James.
I appreciate your comments, where again were pleased with the results of the quarter and excited about the foundation of have headed into the last quarter and the rest of and 2020. So.
With that Molly we will will take some questions.
Thank you if you would like to ask a question she signal by pressing star one on your telephone keypad.
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[noise].
We'll take our first question some Catherine Mealor KBW. Please go ahead.
<unk>.
Thanks, Good morning.
Wondering rather than either.
Yeah, great I'm eating a lot of on information, which is really how supposedly everything on the margin.
I think I missed what.
Did you say James was seen.
Rate as loans for the month of September .
Let me just couldnt make sure either the right number.
Sure.
Great.
[laughter].
The.
Make sure I give you the right number for the month of the month of September our contractual rate was 5.42%.
Got it okay and that compares.
Yes, it back.
Hi, there.
It was roughly <unk> point.
5%.
Third quarter.
[noise] contractually.
Okay that makes sense.
No no on the deposit side I mean, how does the margin guide a super helpful and and stop you tend to her retirement until it makes sense.
Think about how quickly you'll be able to push down.
Your deposit cost I mean that the.
Cds maturing make sense seems that 64 million reprices down, but as you think about kind of core deposits and negotiated rates.
Much traction have you been getting on those deposits it brings deposit costs down so far.
Yes, so to gather we.
Think about it as a going as quickly as possible as how we think about it and [laughter], we it too and we did see declines of three or four basis points. Each month in the quarter a July August and September and so that's the way we continue to think about it.
As it's become a more.
Or is this is a little more qualitative and quantitative but as it's become more.
Apparent that rich.
Or going to or D or certainly decreasing then.
It seems to be that the market is a has picked up some and so we've got some optimism there are as we say not as much in the fourth quarter as we do probably going into next year that rates hopefully, we'll begin to pick up and accelerate or in terms of the pot.
Pricing habit.
I haven't seen that in the rough numbers, yet like said that it was what we saw the last three months.
But we are optimistic that that could be the case and so that's that's how we're thinking about it.
And we have additional liquidity I think to defend and to the.
You know any deposit you know pricing that we need to be more rational that may cost us a little bit in growth for for the near term. So I think we can eat up can manage that you know fairly a you know have affected we've taken a you know with each of the cuts and then even since the Alaska, we've taken a pretty aggressive.
You know cut particularly in our.
Certificate of deposit rates, the particularly on those the thatll be renewing so we're optimistic but it's still a tough tough battle on that front.
And then as you think about the higher liquidity of 100 instead of nine we saw this quarter is your as you think about next quarter or do you feel like you'll maintain this same level of up what do you feel like bringing that down here.
The way to kind of manage the margin helps.
Compression has.
I think we would bring us today.
Yeah, I think we would keep the relatively flat to down and that will be dependent on you know loan growth and deposit roads that to offset that like I said, we'll we can defend deposit growth because we have built up that excess liquidity.
You know coming coming into the quarter. So it will have flexibility to do to do either you or or whichever one is more profitable at the end of the day. It may impact the margin a little bit, but you know I think is some noted including yourself to that actually helps on the you know the dollars right I'm not so much on the rate this fall.
Which accounted for about half of our you know decline and the in the margin, but it helped our dollars actually be up and non interest income.
Great and then on.
Buybacks I mean, you announced a small acquisition this quarter in your commentary clearly suggest that you're still actually looking at other small deals are you interested in buybacks or is really M&A preferred method, if that's capital deployment right now.
Yeah, Amadeus preferred right now and so we're not not actively in the market right now.
Okay that makes but also remember that deal, we announced and you know when it it would try not to take any tangible book value dilution. So we're really not leveraging capital now forget to something else and we've decided to do that that would be a a different deployment options were for the capital.
Got it.
Hi, Chris I'll step out thank you.
Thank you guys.
If you find that your question has been answered you may remove yourself from the Q.
Sorry to.
We'll take our next question from Peter.
O'neil. Please go ahead your line is open.
Hey, good morning, guys.
Good morning Theater.
Maybe just a looking at mortgage obviously really really nice quarter here and you guys. Essentially you know matched your full year guidance just in this quarter alone and I. Appreciate the color on kind of the you know the slightly above breakeven in the fourth quarter and maybe in the first quarter as well, but can you kinda talk about.
The dynamics there I mean, your margin was up pretty significantly I think 62 basis points than quarter. So maybe kind of what drove the higher margin this quarter and how much of that is sustainable and those there's puts and takes there.
Yeah, I think there's a a couple of them and then I'll try to answer but don't come but come back to me, but I think on your first point about the you know we've seen some increase a you know when the last several weeks and the you know in the tenure and mortgage rates, where the tinder no haven't seven days, one what 80 range, so that'll that'll slow down.
Some of that some of the reverse repo activity plus the seasonal nature of you know the purchase money too you know, we're optimistic but one of the realistic or at the same time on the margin going up but I think that was really two fold one was taking out the lower margin businesses for from the old.
So on channels that we sold to the PEO and correspond to as well as.
A lot of capacity and the or the lack of capacity allowed us to to getting better margin even on the production levels. So it was somewhat the environment and then some why the change in of the mix of our of our business structure.
Second was probably on that hire them because the the environment, but it should be up and much higher than it than it was previously because of the changing the mix.
And maybe just one more for me on expenses, you know taking out mortgage I'm kind of the impacts there still thinking mid single digit for for the banking segment here you know the near term.
Yeah, that's that's kind of what we're thinking in the near term will continue to evaluate it and 2020, but oh, that's what we're thinking in the near near term as we as we continue to to.
Ah grow the whole company, we're trying to make sure one we're prepared with the right people in infrastructure, but to that we're controlling that at a at at the right pace into Ah. That's that's a good estimate.
And we will but we'll be evaluating it depending on the environment and 20 point.
Okay. That's it for me thanks.
Thanks, Peter Thank you good.
We would take our next question from Tyler Stafford of Stephens. Please go ahead. Your line is open.
Hey, this is actually Andrew Terrell on for tower. This morning, a good morning.
Good morning, Andrew Good morning.
Hey, Chris I think in your prepared remarks, you mentioned deposit costs move lower each month throughout the quarter do you have the breakdown of just what the total deposit cost for each month in the corner and then just where they ended September thirtyth up.
Yes, I do give me one.
Second.
Actually got them I'll give you a so starting in July they were at that 115, and then 111 and August one Oakley in September .
Got it okay. Thanks.
Hmm, maybe just to make sure to back to mortgage now I'm. So you guys had 1.2 billion in sales during the quarter like 23% of that's still came from third party in correspondent.
Just to be clear there are no more sales expected from third party or corresponding moving for that's kinda ball out now right.
Right, we closed out that closed inventory, we actually transferred the locks.
To two of them I mean, there, maybe one or two loans, but nothing significant.
Yeah.
Understood and just trying to figure out how kind of the exit of those two channels affected the gain on sale margin on the corner do you have what the the sales for the third party in correspondent work from a gain on sale perspective.
No well you know for the sales happen remember, we book called income with a lots and we didn't really locked much much activity none of the Ti Vo because we sold at June Thirtyth and the only a minimal amount locks on on that so it's a very little impact from from those two oh the gain on sale margin during the quarter.
Okay understood. Thanks for taking my questions and congrats on the corner.
But like better.
As a reminder, she would like to ask a question see signals by pressing star one.
Well take our next question Kevin Fitzsimmons Davidson. Please go ahead.
Hey, guys good morning.
Good morning, where they haven't welcome.
Just up Chris I appreciate your comments on M&A and just maybe a follow up in terms of if you are.
Interested in other opportunities and you're having conversations.
What you know what what's higher on your priority list in terms of appetite or in terms of where.
In what what that balance you would look like.
Yeah, So oh in terms of where we'd love.
Existing geography burst instead, we love existing geography, and continuing contiguous markets are first it really what we love that thinking I think in theirs.
His operating leverage and ER and trying to gain some more density in places where we are that creates some operating leverage for us and so that would be be highest or our list.
And then right behind that is gonna be liquidity and so we're going to look at the or like a deposit side a balance sheet well good solid deposit relationships preferably or are those that.
How about that would cost deposits lower than than ours.
Or things that we look at it so the quality of deposit deposits our balance sheet would be the second thing and then we're going to look it at the financial metrics and so and I think the the acquisition to be soften after September is a good.
Is a good example of what we look for that that we didn't take any tangible book value dilution on that so James made reference when he was going to capital doesn't cost us any any capital in that case, and so and we get some earnings accretion in this case it was pretty small small relative size bridge malt trends.
Action and so we didn't get a lot of the P.S. accretion, but we did get some and if we you can think about that if we can do a two or three of those you know those numbers really begin to add up.
So we we'd like to the we'd like to look for some others.
Alright, thank the other thing on the balance sheet starts or Oh, no loan side, we were like good alone booked up some more granular and very customer focused not a lot of wholesale purchase you know participation snicks or any of those kind of things, which the smaller guys tend not though.
Right right that make makes logs and just one follow up on the margin. So as I just want to clarify so what what you're saying is five to 10 basis points or so.
Per fed rate.
So just just from a one we got in September that would imply five to 10 and I would think that.
Reasonable to think that to be toward the higher end because deposit repricing hasn't really caught up yet, but that would diminish going forward and then separately. If we got another caught this month and that would be on top of the five and 10 basis points were were already talking about thanks.
Yes, so some of the September Cod is already in the numbers you know since a lot doors kind of as I call. It as a front run you know the job drop in effect as we're sitting right you know the today levels already coming down in advance of the cuts. It. So you know some of that is in there. So I'd say you know it'd be took away the look.
When it did go we basically had a full quarter of a rate because when you kind of balance out the two cuts in the third quarter. We were at 10, but roughly half of that was the build in the middle liquidity just on the margin and didn't impact the dollars or the that much too.
Yes, so we'll have some continuing impact of the September Cod and then another cut the you know maybe come next we and then maybe even another one in December so I think it would be on the you know the higher side of the five to 10 when you combine all of those together in the fourth quarter.
Okay. That's helpful. Thanks James.
[noise] pick up.
We will take our next question from Jennifer Demba Suntrust. Please go ahead. Your line is open.
Hey, guys, it's actually Steve I for General Jennifer.
To to kind of quick questions. Here, you guys talked about hey, op margin potentially increase in the back half of next year does that include a potential future rate cuts or is that if kinda we stabilize from here.
Yeah, that'd be more reached stabilized from here it wouldn't be thinking about.
I'd be at any rate cut to the on the four or you know got really the rate cuts. It may happen, you know fourth quarter early first quarter, depending which which they looked at with when they expect Greek gods, but and then you know a three to six month lag before you can fully get deposits caught back up you know with the the you know compression.
And your variable rate loans so.
So if we got a cut in October say, yet do you guys. Thank the second half of next year, you could start to see the deposit cost kind of caught up in and margin increasing.
Yeah, I think that's a reasonable that's a reasonable assumption, yes, okay and then on provision you guys talk said the increase was due to just kind of conservatism on the credit rate environment, maybe maybe we're sitting a little bit are you seeing something that made you do that.
Battery, just being a little more conservative out there.
Yeah, I'm really glad you asked that question no we're not seeing anything in our portfolio, that's making us think that's all the be clear at good good cracking glad you asked and we're not seeing anything in our portfolio. We are seeing things in the market.
In competitive pressures that just make a shake our heads and that is not a I want to make.
That was also there that is not a quantitative.
Leading indicator, it's purely qualitative but.
We see some things in the market, where we're just going man. This you know.
Some folks have lost like said its fixed behavior and so when we see that.
We begin to think of think back to times passed and what's come right. After that usually it's it's it's some credit issues and so that's that's so and that's that's just a anecdotal quality quanta qualitative, but that's that's what that's the reason so I will make sure we're not seen anything in our portfolio, that's causing us any concern.
Okay. So it's more the rate structure. Thanks, you guys were talking about that any kind of economic changes.
Right, it's more of a qualitative factors in a quantitative <unk> rate structure, but we're also seeing some compromise on some credit structure as well. So there's no aerated, which is there some credit things as well so.
Hey, which were the which will continually walking away from and so.
We we just what I can play that.
Okay, and then just one final thing I'd mortgage actually Ah you guys kind of seems to think that fourq. He was going to be more of a normalized a seasonally for Q, there's not really any holdover from this quarter being so strong in mortgage which.
Not really no not really we.
We've we've seen it kind of adjust back and it looks in the pretty normal.
To us as a so far for this quarter, you know and and we would anticipate that it would continue to be normal.
Okay. Thanks, guys.
[noise] are good.
We will take our last question from Onyx I always JP Morgan. Please go ahead. Your line is open.
Hi, good morning.
Good morning, Alex.
My first question is on C., So I know you're still working through the impact but from your initial thoughts does diesel impact your approach to M&A in anyway or or the types of deals that you would consider.
You know I think what is it do you know you shouldn't you saw in the last deal that we announced we actually are included the impact of Cecil in there and still have no tangible book value dilution.
What we're finding is it.
Got it mirror tangible book value either way it doesn't really change anything because of the additional accretion pick up you know you heard it back.
You know fairly quickly, but yes, we think.
I think it's just a you know another thing to consider when you're doing M&A and it'll in looking at that the and so we'll consider it and you know maybe.
Make the judgment on what's the right price is kind of with and without adding lumpy the impacts of it or you know our so that you know which is just one of the things we have to deal with now as one that has to adopt see soul and others that do not have to adopt suzano.
Got it thanks for that and just moving on to credit I think last quarter, you mentioned you're in the process of doing an annual credit review is one was there any findings from that is this what led to your comments around the irrational behavior in the market.
So yeah, we did comment on that last quarter I'd say that process. We believe we do that annually. We completed it it has gone well in one of the one of the the benefit to that process is it gives us opportunity to have some really direct communication with all of our relationship managers about credits.
Actually larger credits and gives us the opportunity to to evaluate those based on a changing Jake changing set of the economic dynamics and so.
We Didnt challenge more.
A little more a bigger than that and we sometimes wood in the face of potentially slow in the code and so that will that leads to yeah. So some are some pruning of the portfolio not a massive amount to be honest with you, but but we we challenged hard.
Other than we then we have in the last say five years and ER and that does lead to so some some pruning that's not what really leads to ER.
Comments on what we're saying, what's leading to my comments in Oh no.
Some things that are with it we don't we're not going to participate in that we're seeing in the marketplace is really just market activity and watching deals come in especially a election. So some credit terms, where we're [laughter], where we're we're not well that we're not willing to do but look at more than that.
Some pricing terms, which we're not willing to do we wish we see I.
We've seen.
In all of our markets, we've seen 10 to 20 year fixed rate deals anywhere from three at a border to 395 in and we're not talking about and we're talking about that.
Product types that I, just don't deserve that type of Ah those type of terms and sue.
We we consistently just said even even on a really strong credits. We just said they were not going to what I can do that and so that's really what's leading to those comments more than those reviews.
Got it really appreciate your comments around that the color on that behavior. Just on specific to that are there any industries are markets that you're seeing or is this generally broad based in your market.
Yeah, we've actually seen it fairly broad based UBS Im sorry, say and it's because it in and sometimes we could pinpoint and go you know what it's it's one or two small banks or its one.
Particularly in this case, it's not pitch. It there are there's more than one.
Ah vendor.
In our case in some of them or large enough that they stretch across multiple up our markets are and so.
And so and again, they see something that we don't see.
Thank you.
Okay.
Oh please.
That concludes today's question and answer session I would now like to turn the conference back to Mr., Chris home for any additional for closing remarks.
Okay. Thank you Emily that that concludes our our remarks are really appreciate everybody's.
Attendance on the call all the questions for from the analyst. We appreciate your interest in <unk> BK. We appreciate your support and everybody have a have a great day. Thank you.
This concludes today's conference. Thank you for your participation you may now disconnect.