Q3 2019 Earnings Call
Mr Guy and I will be your operator for today.
At this time all participants are in I listen only mode later, well conduct a question and answer session. During the question and answer session that you have a question. Please press Star then one on your touched on top.
Before we begin I happen to direct your attention to the statements contained.
A press release regarding forward looking statements.
Well be discussing it shifts that constitute forward looking statements within the meaning of that Securities and Exchange Act and our comments today are intended to be covered within the meaning of that.
Please note that this conference is being recorded.
I will now kind of go over to Mr., Dennis Saxon Chairman and CEO Seacoast back Mr. How come you may begin.
Good morning, everybody and thank you for joining us today for Seacoast third quarter 2019 conference call.
Our press release, which we released a yesterday just after the market close and our investor presentation can be found on the investor portion of our website under the title presentation.
With us today, our truck Shaper, our Chief Financial Officer, and Chief operating Officer, who will discuss our financial and operating results.
Also with US today, our Julie collateral our community banking executive.
Crossed our community our commercial banking executive David how to sell our Chief Credit Officer, and Jeff Lee, Our Chief Digital Officer.
I cannot grow.
We posted record revenues and earnings for the quarter adjusted earnings per share with 53 cents for the quarter and $1.50 for the first nine months of the year.
That's represented earnings growth of 43% compared to the third quarter of 18 and 30% yeah here today.
The previously announced cost reductions, which were completed last quarter took full effect this quarter.
As I said last quarter, the adjustments to our cost structure were taken in response to a more challenging outlook.
For the a buyer buyer my brought about by a flat yield curve.
As a result in spite of the rate environment, we produce meaningful improvement in operating leverage this quarter.
Our incredibly valuable customer franchise has produced very favorable deposit funding costs.
Which helps us mitigate much of the effect of a persistent.
Inverted and today flat yield curve.
And our work earlier around the year around our cost structure more than offset the rough.
Additional contributions to operating leverage came from record growth and fee revenue for the quarter.
Proactive changes, we made and our mortgage unit earlier this year in response to the yoker are producing better returns for that business.
And investments that we made in well together.
With better execution.
Continued to produce consistent growth than a U M.
All of this produced improved that's an overall fee revenue in spite of the effect Hurricane Dorian had on our customer transaction fees.
Moreover, our ramp up of investments to drive additional loan production over the past few quarters in South, Florida and in Tampa began to take hold during this quarter.
As you know we have been guiding to this over the last couple of quarters.
And as Chuck will walk us through in a minute, we saw meaningful improvements in organic loan production.
In fact.
We had very solid loan production.
For this quarter.
Moreover, we've had we have today, a record pipeline, which positions us well moving into Q4.
We saw substantial progress against our vision 2020 objectives this quarter.
And expect continued progress next quarter.
Adjusted return on assets was 1.67% our overhead ratio fell below 50% for the first time.
And our return on tangible common equity stood at 15.3% despite strong growth in our capital position, resulting in an end of quarter tangible capital ratio of 11.5%.
All of this was an outcome of our focus to balanced growth strategy that we laid out during our investor day presentations.
By cuts by consistently investing in both growth and efficiency initiatives and by challenging our legacy costs and taking a long term view.
We continue to build what has become a very valuable Florida franchise.
A customer franchise that supports a lower risk granular and diverse loan portfolio with lower operating costs that reflect the efficiencies of our unique strategy.
Taken together, we believe we are well positioned to continue to benefit from continued growth and they have vibrant Florida economy.
With that I'd like to turn the call over to Chuck who is going to review a little more detailed in our first quarter results and then of course, we'd be happy to take a few question Chuck. Thank you Denny and thank you all for joining us this morning.
The provide my comments I'll reference the third quarter 2019 earnings slide deck, which can be found it cecos banking dot com.
Beginning with slide for our team produced a strong quarter with adjusted net income growing year over year, 57% to 27.7 million, resulting in earnings per diluted share of 53 cents.
We reported a 1.67% adjusted return on tangible assets and a 15.3% adjusted return on tangible common equity.
We continue to build shareholder value with tangible book value per share growing 4.8% sequentially the $14.30.
We ended the quarter, where the tangible common equity ratio of 11.1% and an average loan deposit or loan to deposit ratio of 88% affording ample room for continued growth.
As we continue to grow our capital base, it's worth mentioning that if the third quarters tangible common equity the tangible asset ratio was adjusted to an illustrative target of 8%.
Return on tangible common equity would be 20.5% increasing from 19.2% in the prior quarter.
Our performance was highlighted by continued improvements in generating operating leverage where they focus on growing revenues, while streamlining operations.
The adjusted efficiency ratio declined 2.4% sequentially to 49%.
And the adjusted non interest expense tangible asset ratio declined to 2.22%.
Year to date, we've generated 11% operating leverage with adjusted revenues increasing 18%.
And adjusted non interest expense, increasing 7% despite the headwind from a more challenging interest rate environment.
You can be assured that our continued diligence focused on efficiency is accompanied by great care and ensuring that we do not impede on our ability to drive revenue growth.
Both our mortgage and commercial banking units show continued momentum in the quarter with robust loan originations, resulting in discipline growth and loan outstandings with a new record in mortgage banking gains were exiting the quarter with a commercial pipeline totaling $360 million generating momentum heading into the fourth quarter.
Now turning to slide five net interest income increases your point 8 million sequentially, despite macro interest rate headwinds and the net interest margin contracted only five basis points the 3.89%.
Excluding accretion on acquired loans. The net interest margin declined three basis points sequentially and is in line with a third quarter of 2018, our proactive work on deposit repricing helped defend our margin.
Quarter over quarter, the yield on loans declined 10 basis points the yield on securities declined four basis points and the cost of deposits declined three basis points.
During the quarter rates declined across all points on the yield curve affecting the variable rate portion of our loan and securities portfolio and impacted add on yields for both loans and securities.
Our average add on yields for new loans declined 51 basis points sequentially, the 4.66% and are down 46 basis points from the prior year.
The decline quarter over quarter was primarily the result of lower AD on rates and commercial mortgage banking due to declining yields on the moderate and long into the treasury curve.
We remain disciplined and vigilant over deposit pricing.
In earlier in the year recognized interest rates were headed lower in the back half of 2019.
As a result, we meaningfully shorten time deposit maturity offerings, the terms of one year or less and began reducing rates paid to higher yielding savings and money market products.
We continue to reduce rates and can we will continue to reduce rates in conjunction with reductions in the federal reserve overnight rate.
Other interest bearing liabilities, such as trust preferred and federal home loan Bank advances also benefited from falling short term rates.
While variable we model purchase accounting accretion to be approximately 24 basis points in the fourth quarter of 2019.
Looking ahead to the fourth quarter of 2019, and assuming a reduction in the federal funds rate of 25 basis points in late October and then again in December we expect the net interest margin to be in the mid three eightys in the fourth quarter.
Given the uncertainty regarding interest rates and yield curve the conservative guidance of a potential flight applying a margin as the anticipated result of an assumed persistent flat yield curve and one basis point less the purchase loan accretion.
Despite the potential for compression in the margin due to anticipated rate cuts assuming economic conditions remain unchanged. We expect net interest income in the fourth quarter to be higher than the third quarter and expand throughout 2020. The result of growth in the balance sheet and planned actions to continue reducing rates paid the deposit customers.
Moving to slide six adjusted noninterest income decreased 0.2 million sequentially and grew 1.5 man or 12% from the prior year.
We had another record quarter and our mortgage banking division with mortgage banking fees totaling 2.1 man or an increase of zero point fourmillion quarter over quarter.
Over the first half 2019, we introduce new saleable products and focused on generating saleable production.
And additionally in the third quarter benefited from heightened refinance activity as result of declining rates on the long into the curve.
While beneficial to the third quarter, we expect refinance refinance activity to be more subdued in the fourth quarter.
We continue to see consistent performance in wealth management year to date, new assets under management acquired totaled 105 man tracking to our goal of growing AUM 120 to 150 million in 2019, we ended the quarter with 606 million and assets under management.
Service charges on deposits and interchange income were impacted by Hurricane Dorian by 0.2 million in aggregate.
The GAAP presentation of non interest income includes 1 million and BOLI death benefits and 0.8 managed securities losses, continuing to optimize our securities portfolio. During the quarter 49.6 million a securities were sold with an average yield of 1.85%, resulting in a loss of zero point $9 million. These funds were reinvested.
An improved average yield of 2.65%.
Moving to slide seven adjusted noninterest expense totaled 36.9 million declining 1.1 million sequentially and is up 1 million from the prior year.
This outperformed our previous guided range of 37, and a half to 38 and a half million for the third quarter. The result of our proven success a disciplined cost control.
For the fourth quarter of 2019, we expect adjusted noninterest expense to be approximately $37 million to $38 million, excluding the amortization of intangible assets was approximately one and a half million per quarter.
We continue to take a proactive stance on expense management positioning the company for success in the coming periods, regardless of what the economic or interest rate environment brings.
During the third quarter, the FDIC announced the achievement of their target deposit insurance reserve ratio, resulting in our ability to apply previously awarded credits to our deposit insurance assessment.
This quarter benefited by 0.3 main and lower FDIC assessment expense.
The company has remaining credits of 1.2 man, which we applied to future assessments, if the FDIC fees reserve ratio remains above the target threshold.
The company recorded 8.5 million an income tax expense for the third quarter 2019, compared to 6.9 million in the prior quarter in September 2019, the state of Florida announced a reduction in the corporate income tax rate from 5.5% to 4.458% for the years 2019 2020 2021.
This change resulted in additional income tax expense of $1.1 million upon the write down of deferred tax assets effected by the change offset by zero point for May and benefit upon adjusting the year to date provisions of the new statutory tax rate.
For future modeling purposes, and effective tax rate of approximately 23% is appropriate.
Moving to slide eight our performance was highlighted by continued improvements in generating operating leverage.
Declining overhead and a focus on growing revenue.
The adjusted efficiency ratio declined 2.4% sequentially to 49%.
And the adjusted non interest expense to tangible asset ratio declined to two but declining to 2.22%.
We expect the adjusted efficiency ratio remained below 50 in the fourth quarter and move modestly back above 50 in the first half of 2020.
We expect the efficiency ratio to move back below 50 during the second half of 2020.
The increase in the first half of the year is primarily the result of four on K payroll taxes other compensation expenses and is in line with prior year seasonality.
We remain confident we're on track to achieve a below 50% efficiency ratio exiting 2020 on target with our vision 2020 plan.
We continue to maintain strict cost control discipline, while ensuring that we do not have Pete on revenue growth.
Turning to slide nine total new loan production was 488 million compared to $407 million in the prior quarter, resulting in net loan growth of 8% on an annualized basis.
Commercial originations during the third quarter of 2019 were $282.2 million, an increase of 80% or $125 million compared to the second quarter of 2019, and an increase of 115% or 151 million compared to the third quarter 2018.
Increase and increases in loan production reflect the addition of business bankers across the company's footprint strong execution by the legacy banking team and higher customer customer demand due to lower long term interest rates.
The third quarter results included an opportunistic loan pool purchase totaling 52 million or 32 loans with an average yield of 4%. These loans are supported by credit tenant leases, where the average loan to value of 59%. The average loan size is $1.6 million and all were fully underwritten using our strict credit underwriting.
Our commercial pipeline has grown to a record 360 million at the ended the quarter and we are anticipating production volumes to improve in the fourth quarter.
When coupled with an expanded team of bankers in Tampa and Broward County, we are well positioned to drive consistent loan growth.
Of all residential loans originated in the quarter 81 million was sold in the secondary market.
Leading to a record quarter for mortgage banking gains, we placed 22 million in the portfolio late in the quarter over quarter. The company began testing a correspondent mortgage banking channel focusing on acquiring mass affluent a fluent and ultra high net worth Florida customers.
And we believe there is an attractive opportunities to acquire these customers using this channel and applied data driven cross sell to expand these high quality relationships.
Consumer and small business produced 130 103 million down 33 million from the prior quarter.
We are well positioned to drive attractive loan growth moving forward without sacrificing our credit discipline. During the last two quarters earnings earnings calls, we provide loan growth guidance a mid to high single digit in 2019 and stated that loan growth will accelerate throughout 2019, we feel confident in our ability to achieve this objective and continue to reiterate this time.
Yes.
As the economic cycle matures, we will continue to resist the temptation to chase deals that do not meet our strict credit underwriting standards.
Turning to slide 10 deposits outstanding increased 132 million sequentially. This quarter's growth reflects an increase of 189 million and broker deposits as we continue to shift between brokered deposits on federal home loan bank advances.
Carefully optimizing our funding cost.
Removing the impact of this transfer total deposits declined 57 million. The anticipated result of a sub of the summer season.
During the quarter, we continue to successfully acquire commercial customers with business checking balances growing 2% on annualized basis.
Right the normal seasonal headwinds summer seasonal headwinds.
Turning to slide 11 rates paid on deposits decreased three basis points to 73 basis points. Looking ahead, we're targeting deposit growth approximately 4% to 6% and we expect deposit costs in the fourth quarter to be below the third quarter, assuming another reduction in the overnight rate by the federal reserve in October .
Underscoring the value of our deposit franchise noninterest bearing demand deposits represent 29% of deposit franchise and transaction costs accounts represent 49% of our deposit book in line with the prior quarter.
Turning to slide 12 credit continues to benefit from rigorous credit selection that emphasizes through the cycle orientation and build the customer relationships and well understood known markets and sectors.
As well as maintaining diversity of loan mix.
The overall allowance to total loans was down two basis points to 67 basis points at quarter end.
Let me take a moment to remind you that under purchase accounting loans acquired through an acquisition are placed in the acquired loan portfolio and the purchase market, including both characteristics for credit and rate is applied and accretive back through net interest income is these loans pay down our mature.
At the end of the second quarter. This discount represents 3.76% of purchase loans outstanding.
And the non acquired loan portfolio, a triple ended the quarter at 84 basis points of loans outstanding down three basis points from the prior quarter.
We continue to prudently manage our commercial real estate exposure, well construction and land development as a percentage the bank capital at 42% in commercial real estate loans as a percentage of bank level capital at 204% down from 51% and 205% respectively in the prior quarter and well below regulatory guidance on a consolidate.
The basis construction land development and commercial real estate loans represent 39% and a 191% of risk based capital respectively.
We continue to see acceleration and commercial real estate loans being refinanced away with minimal or no covenants limited or no guarantees in combination with increasing leverage and projects. This is being driven primarily by non bank competitors. We remain patient. This late in the cycle and will not chase deals carefully defending our.
Underwriting integrity.
Consultations concentrations continued to be well manage with the funded balances of our top 10, and top 20 relationships, representing 19% and 33% of total consolidated risk based capital, respectively down from 21% and 38%, respectively, one year prior and down from 32%.
And 53%, respectively three years prior our largest committed exposure totals $30 million and our average commercial loan size is approximately 350000.
Net charge off over the quarter were 2.1 million or 17 basis points of average loans up two basis points from the prior quarter, we forecast annual net annualized net charge offs approximately 15 to 20 basis points through the first half of 2020.
Non performing assets increased by 5.8 million to 39.6 million in the third quarter 2019, primarily the result of five customer relationships moving to nonperforming status all of each where either fully collateralized. Our previously written down to realizable values.
Classified and criticized assets declined from 3% and 12% of risk based capital, respectively to 3% and 10% of risk based capital period in the.
The provision of of per loan losses will continue to be influenced by loan growth and net charge offs.
Now turning to Cecil, we're well underway with parallel runs and analyzing the results for ongoing model validation and refinements. We haven't shared an estimate of the magnitude of this impact our process has not yet reached that point, yet, but with that as with most in the banking industry. We do expect an increase in reserve when we adopt Cecil in January .
One reason for the increases the introduction of life of loan concept and incorporating economic forecast and these particularly effect segments with alarm longer address average life.
Another reason for the increase will be the impact of our purchase loan portfolio. We acquired these loans at a discount and the purchase discount which currently stands at 3.76% Accretes into interest income over time. The vast majority of our acquired loans were not considered credit impaired at the time of acquisition under Cecil that purchase discount.
No longer shields these loan from getting an allowance. So the day one impact US diesel will include recording a reserve on these loans thats essentially a double counting the of the credit Mark on these loans, but that's what the new accounting standard will require us and other banks to do.
Keep in mind Theres no change in the purchase discount.
And that will continue to be accretive to interest income for purchased unimpaired loans.
The portfolio of purchase credit impaired loans is only approximately $13 million. These loans will be treated as a newly defined category of PCD or purchase credit deteriorated. Upon adoption there will be an incremental reserve for these loans the increases the allowance on adoption and the impact on PCI accretion going forward will be nominal.
We're focused on continuing to evaluate the model and analyzer analyzing the results and the actual impact on adoption will depend on the outcome of our continuing review.
The impact that adoption will also be influenced by the loan portfolio composition and by macroeconomic conditions and forecast at the adoption date.
Turning to slide 13, we continue to possess a healthy balance sheet are delivering strong capital generation.
This positions us well for additional disciplined acquisition and organic growth opportunities.
And provides options to manage capital and returns moving forward.
We are committed to maintaining a fortress balance sheet through the cycle built around strong capital and strict credit underwriting.
The tier one capital ratio was 14.9%.
And the total risk based capital ratio was 15.5% at September 32019.
The tangible common equity ratio to tangible asset ratio was 11.1% at quarter end, providing ample capital for additional prudent growth.
Using 8% TC ratio Illustratively would imply over 203 million in capital available for deployment and as I mentioned earlier implies a 20.5% return on tangible common equity for the quarter.
And to wrap up on slide 14, and 15, we're well positioned to sustain and advanced the momentum in the fourth quarter and into 2020.
Since announcing our vision 2020 targets in February 2017, we achieved a compounded annual growth rate and tangible book value per share, 13% steadily building shareholder value. Our fundamentals remained very strong with a well capitalized low risk balance sheet and attractive funding and we continue to see robust opportunities too.
To answer our balanced growth strategy, and some of Florida fastest growing markets.
We are on track to meet our vision 2020 targets and remain focused on continuing to create meaningful value for our shareholders look for your questions and I'll turn the call back to Denny.
Thank you Chuck and operator, we'd be pleased to take some questions.
Thank you we will now begin the question and answer session.
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We have a question Michael young from.
Okay.
Hey, good morning, everyone.
Michael.
To start on the efficiency ratio comments, Chuck you made.
There is obviously a lot of different rate assumptions that could be.
Better than that so maybe you could just kind of clarify what what's reflected in that outlook for 2020 services curve steepness, a number of rate cuts cetera, and this kind of a target you guys are going to hit regardless of what that looks like.
Yes, Sir Michael we've assumed in that a rate cut in.
October December in March 25 basis points each.
Okay, and any curve steepening embedded.
No.
We assume it's basically the the we basically it's all we have the at this point to go on is the forward curve and Thats whats in the model.
Okay.
And then similarly, maybe I'll just kind of the loan to deposit ratio, obviously still pretty low you guys have a lot of crude they're up should we expect that to start to increase next year positive free mix to sit in the margin or.
How should we be modeling not going forward.
Yes, I think the way to think about it is it's certainly something that provides a room for growth and it's something we manage managed carefully.
We do expected to increase overtime and sorta in the low Ninetys is we're exiting 2020.
Okay near and they're not just.
Okay in the last one just on capital I understand kind of made comments around that already in terms of having flexibility, but the capital levels. So pretty significantly at this point in the outlook for that to continue.
Specially with the pace of loan growth currently so.
Can you just give us a little more color around kind of priorities, there and timing of each we tend to be thinking wait till 2020 and achieve vision 2020, and then that's when we would look for more capital flexibility are you seeing something on the near term M&A horizon.
It gives you.
Encouragement that that's going to get deployed sooner.
Thanks, Michael.
Our board and our team the management team really regularly reviews, our capital position.
Right of.
And our outlook.
And forecasts.
Including opportunities that we see for balance sheet growth and also a kind of a look at the forward operating environment.
We are certainly comfortable that our current very robust capital levels.
Which along with as we as we continue to say our diligent credit discipline. So.
Supports our commitment to maintaining a truly fortress balance sheet through the cycle.
We're focused on consistently building shareholder value as evidenced by the returns that we just pointed out the CAGR growth and tangible book value since we announced our vision 2020 objectives.
In early 17 has been around 13%, so we're really delivering value to shareholders.
And as the capital growth that said as as we continue to see growth and capital we're going to regularly Billy reevaluate.
The full range of capital management alternatives, and we'll we'll seek to deploy our capital prudently as circumstances warrant so.
All I can say as we continue to look at it and.
We'll certainly let you know as we have thoughts around the whole capital management issue.
Okay, and just on the fortress balance sheet comment does that imply a higher capital level than the 8% PC Chuck that you kind of referred to earlier I don't really if you have any thoughts around where you guys kind of plan to maintain that over a longer period of time.
Yeah, we haven't given a target sort of on a forward basis, but certainly.
I want to maintain a.
A balance sheet and maintain a strong robust balance sheet at this part of the cycle and.
We will continue to look into growth and capital and update you on our capital options as we move forward.
Okay. Thanks.
The next question comes from Stephen Scouten from Sandler O'neill.
Hey, good morning.
Steve.
So I apologize I missed some of the prepared remarks, but I'm curious.
On the Securities remix in kind of where you are in that progress if there is.
Much more.
Efforts to be done there, how you think about that as a percentage of assets and kind of where you are on fixed to floating within the securities portfolio today.
Yes, so maybe I'll start with the back part of your question and I can talk about the Remixing.
Today, the portfolio is 66% fixed and the remainder is floating with some of that being sort of adjustable with fixed rate terms, and then floats, but if you're modeling I assumed 66% fixed just generally in thinking about the balance sheet really will continue to be focused on.
Putting loans on the on the balance sheet over securities but.
The 10 year moves around we continue to be opportunistic.
Depending on where that's at and we'll take action, where we can reinvest at higher rates and the tenure waterfall low enough. We may take action. The other way. So we continue to manage the portfolio from a total return perspective and continue to be active there and.
We'll see how things play out with interest rates as we move forward.
Okay, Great and then loan demand or new originations were obviously very strong this quarter.
What are you seeing in terms of changes in competition I know you gave the number of.
I was at 51 basis point sequential new loan yield decline, but are you seeing compromising on structure as well as pricing are you able to still find I mean, it seems you're able to find still credits that you like maybe just at a lower yield but they're still.
Reasonable structures.
Yes, where the majority of sort of the irrational behavior is coming from the non bank competitors, particularly life companies and the CMBS market and that's primarily on larger deals. So in the on the larger deals we see the pressure, there and where avoiding.
Matching those terms and cases, where we have customers that are being pushed into the that type environment, we're letting that walk.
And looking to deploy our credit policy elsewhere. So it's not something that we're going to do.
And you recall, we run a more granular.
Strategy from a credit perspective than most and so that keeps us out of some of the most competitive parts of that market. Although we do see equestrian more more competition and certainly with what happened with rates.
Here over the last few months that contributes to to that competition, but.
Yes, what I always say as we just need to work harder and look at more opportunities look at more deals.
And we're pleased with the ramp up of people.
In the commercial area in particular, and how that is giving us access to more deals to look at.
So that we can continue to be thoughtful and prudent around our credit.
Criteria, and we will not waiver from that.
Yeah. That's a good reminder, Denny appreciate that and and then lastly from me maybe also as it pertains to the new loans and with that move in new loan yield does really impressed with the only six basis point decline in average yields for the portfolio. So.
What exactly I guess, maybe led to that performance there is there.
Maybe less movement on the existing portfolio than we would've thought or is there a catch up that we should see in Fourq, you, where the magnitude of the decline in average loan yields will be greater.
Specifically as we look at new loan yield again, I was just kind of surprised that it only move down six basis points given given the sharp move we've seen in rate.
Well remember.
Over the silver 60% loan book is fixed rate and then there's another 25% are so that are sort of fixed through adjustable that have fixed rate periods in them and we given the outlook for lower long term rates have been adding some duration into that book and I think thats protected the downside risk.
I'd go back to my guidance, if youre thinking about fourth quarter margin mid three eightys is probably about appropriate given where we see the yield curve headed.
Okay Super Thanks for the color and congrats on a great quarter guys.
Thanks.
The next question comes from Steve Moss from B. Riley.
FBR.
Good morning, guys.
Good morning.
Circle back on the expenses in hiring just wondering if you added a new bankers this quarter and just what are you thinking for total expenses from the fourth quarter Im not sure if I heard it or if I just missed it sure. Yes, we added three bankers on the quarter, we continue to I would describe it as opportunistically recruit where weve.
Fine talent, we will make hires.
And we are still out in the market recruiting the best banker, So we can find particularly and Tampa in South Florida.
And.
Given our expansionary efforts there we are we are out.
Outlook and then we'll add as we move forward, but three bankers on the quarter on the expense guide to 37 to 38 million for the fourth quarter, excluding amortization of intangible assets as well we provide Steve.
Okay. That's helpful and then.
On the margin I heard for the three five times for the fourth quarter, but if we do get that rate cuts.
In in the first quarter.
What are you thinking for the margin gain.
Thinking battle little different ways, if you have acceleration loan growth, maybe not as much margin pressure into the first quarter.
We didnt provide any any guidance out beyond the fourth quarter, but as you state.
With loan growth being there there is some protection to the margin as well as I still think we have a lot opportunity. If we continue to see rate cuts on the back half of this year to be very diligent with our deposit pricing.
And be ahead of that with the deposit costs. So we we look at that every week and we are very thoughtful about deposit pricing and we'll continue to be so and I think that if you look at the way our deposit pricing has behaved here and really does reflect the the high value that positive franchise and how.
But the quality is there given the the customer base and the granularity that customer base. So far the portfolio continues to perform incredibly well and we'll be ahead of rates.
I thought it try on.
On credit here with.
Charge offs 15, 17 basis points. This quarter, just kind of wondering what you're thinking about trends there going forward I'm, assuming that there is just pretty much no recoveries left to offset charge offs.
By our modeling I would model somewhere between 15, and 20 basis points between now and the middle part of next year and as we move into next year I'll update that guide as we move forward.
Alright, thanks, very much good quarter. Thanks.
The next question comes from Michael Rose from Raymond James.
Hey, guys good morning.
Wanted to dig into the loan growth commentary a little bit. Some comments you made Danny if I strip out the.
The purchase of the loans that you guys made this quarter. It looks like loans were up about 4% annualized but are you guys are guiding to mid to high single digits, but you made some comments and I think a lot of banks have made comments around being a little bit more cautious you had one bank.
Has been pretty big presence in your market So last week.
Two stupidity.
In the market I'm sure you heard those comments so as I think about moving into next year granted the pipelines have continued to grow but theres, obviously, some cautiousness on your part to project to protect risk adjusted returns.
It's more of a single digit growth rate as we move into next year are good way to think about it or because of the growth in the pipelines and the hires that you have made in project to make do you still think you can can generate.
Outside loan growth. Thanks.
We guided mid to high for this year and I guess, we as we said in his remarks, we're going to stand by that guidance and we believe we'll hit mid to high.
You're right the organic growth this quarter, which we stated I think was.
Four to five I think it was 5%.
For this quarter and on an annualized basis and with the.
Overall the reasons, we stated we see that continuing to ramp up a little bit as we get into the next quarter. So so we feel pretty comfortable about that guide as we look into next year ago.
As we get closer to the end of the year, we'll give more color on guide for next year, but.
We think.
We think will.
At this point guidance mid to high do you have any other comments ill I think I'd add is earlier in the year and throughout.
2019, we've continued to expand our team of bankers and that's helped supporting the growth.
If you look at markets like Tampa Broward County, we continue to add talent, there and gotten a lot of that worked on going all the back to the fourth quarter 2018. So some of the guide does reflect the expansion of the team that we've put in place and for all the carping around competition on the like I mean, it is a pretty favorable.
We'll environment for growth given that rates are low.
And so there could be demand.
Out there and we're seeing that we pick that up again, we have to be disciplined careful.
Particularly careful today.
We want to continue to maintain the strict underwriting that we've been executing for many years now we want to maintain the granularity takes us out of some of the more hyper competitive parts of the market, which I think a smart and and we just have to work hard and probably work twice as hard as we.
I would have a couple of years ago to it to achieve the growth. So so we have plenty of room for growth with the loan deposit ratio that we had on the anticipation of continued deposit growth we're in a fabulous market.
As very deep and very diverse.
Here in Florida, and we'll continue to take advantage of that while remaining.
Very careful and.
Adhering to all of our strict underwriting guidelines.
Yes, that's that's all great color and again I was trying to reconcile more for next year as opposed to kind of the fourth quarter and full year. This year.
Just going back to the capital question, a little bit others, there's been a pick up I guess and M&A chatter.
In and around the markets that you guys are in.
Would you characterize that your conversations have been.
Relatively active and then separately.
Have you.
Gotten any inbound calls as of late thanks.
Yes, I'll take that when Michael.
Well, there's still active and as we've talked on prior calls we continue to have.
Charlie robust conversations with potential targets, we're still focused on Florida, only primarily southwest, Florida up the Tampa crossed I for into Daytona on down the east coast to Broward County, and.
We still believe there's plenty of opportunities and we'll continue to view them as opportunistic and want to create value in those acquisitions and want to do things that are shareholder friendly. So as we continue to have conversations will we'll we'll see where things go but it is active and we still view, there's plenty of opportunities as you know we've been very dear.
Upland thoughtful around our M&A strategy and it remains a key part of our of our strategy. As we look forward. We think there are will be more opportunities as Chuck said and we continue our conversations.
All right, maybe just one final one for me.
As it relates to capital.
I think you guys ceased the dividend back in the first quarter of.
22009.
Would that be.
Potential lever that you recall to deploy some of the capital as we as we move forward, whereas us on down the priority list I guess thanks.
As we said earlier.
We will continue to reevaluate the full range of our capital management alternatives, including dividends and.
And we'll have those conversations with our board.
And.
Our overall objective is to deploy our capital prudently as circumstances warrant as we look ahead. So.
All I can tell you is we'll continue to evaluate.
And look at that.
We have something to say, we're will certainly be talking with the on future calls.
Fair enough. Thanks for all the color guys.
Thanks, Mike.
We have a question from Jeff.
Well from Guggenheim Securities.
Hi, Good morning, Thanks for squeezing me in and congratulations on the results.
Thanks, Jeff.
I want to see if I could ask a quick follow up question related to your commentary on the current operating environment, you've been touching on this a bit but.
My question is when you think about managing your business through this cycle, where where have you been making the biggest adjustments in your strategic thinking over the past few quarters could you talk to us a little bit about that it sounds like you're increasing your focus on cost containment inefficiency, but I was just hoping to get more thoughts on how you're thinking about being more opportunistic slash.
Pragmatic in the current operating environment.
Thanks, Paul I'll kick off of the maybe Chuck you can add suddenly but clearly.
We've been.
Very.
Attentive to the impact that the really rapid change and rate outlook had on on the business and as you pointed out that required us to look more carefully at at our cost structure.
The like and I think Thats, certainly we certainly than many other thoughts now this.
We are continuously looking out ahead and what the environment.
Is out in front of us and earlier in the year. We saw interest rates were going to be a challenge that's why we.
Got very active on the cost side and Thats helped support and grow earnings and as we look forward. We continue to see opportunities to remain disciplined on cost containment as well as we see of our opportunities continue to work on our deposit cost. If we can if the forward curve continues to play out.
But importantly, I think we position the balance sheet very effectively and the the balance sheet as liquidity the balance sheet has strong capital and the balance sheets supported by strong underwriting. So we feel good of where we're at and the cycle and we'll continue to look forward and make appropriate adjustments the continued to deliver value for.
Our older.
And we really think thats the key in terms of Lee.
Medium term outlook and that is to maintain incredibly strong.
Diverse.
Profitable balance sheet, as where we are today and that gives us.
Options that maybe others.
Would find more challenging so we think thats important.
Thanks, I appreciate that just related follow up to that is when we think about.
The outlook for lending I, just wanted to circle back to where you were talking about earlier it sounds like you're contemplating.
Maybe a more pragmatic approach next year given the flattening in the yield curve is is that fair statement and clearly I understand. This question comes in the context of your strong pipeline.
But I guess I'm, just trying to get a better feel for were lending growth is going where you clearly have to ban in balance is strong economy, I guess, a flatter yield curve into careful underwriting that your meshing. So any more color there would be appreciated. Thanks.
Yeah, if you step back and look at our strategy we have.
Diversity of loan mix and so if you look at the asset classes, we grow we have a consumer portfolio, a cnine portfolio as well as a CRD portfolio, where we see the the heightened level of.
Challenge on covenants and guarantees and the like is in larger CRT. So in that part of the space, we have been cautious and in many cases of led deals either lead the bank or not competed on deals, but the remainder of our lending function continues to see good inbound volume and then.
I'd say the second thing as we move forward and the lending environment as we continue to expand the bank into robust markets and so those markets continue to support growth and continue to provide opportunities to grow the balance sheet. So there are there is pockets of the market that are.
They are very stressed and more staying away from that and we're taking advantage of at other areas that we think we can create value with and areas that meet our risk adjusted return threshold.
And again to redirect reiterate probably for the fifth time state staying true to our strict underwriting criteria not not allowing us to that's right.
Drift.
The portfolio.
And a direction that is.
Anything but strong.
Great and then my last one is you had a press release a few days ago on converting your platform to Encino I thought that was interesting.
Can you talk less about that a little bit is that.
Cost savings initiative is that a growth initiative is a significant what's the right way for us to think about that would appreciate if you could framed up for us.
Hey, Jeff This is Chuck Cross I'll take that question.
We have implemented the encino operating system, so that we could standardizing digitize our processes and it's not only in commercial banking, but small business SP and Treasury management.
And we just feel like that it's critical to our continued digital transformation.
So that we can easily provide solutions to our customers. So it's more how we do the business and just.
Expense control.
And I'll just weigh in and say that that investment has led to better productivity and we expect even better productivity as it matures into 2020, and it's led to will lead to further.
Cost control as well is leading to.
Helping support the speed of with how we get deals to market and so it's allowed us to have a lot more clarity.
And transparency around the lending process and that adds a lot of value to our operation.
And just not just the technology really.
Jeff, It's how we implement and how we.
Approach it.
To better serve some of the objectives that you just heard from from Chuck and truck and we've been very focused on.
Thinking through how we plan that and we're going through.
I've had a very very good result, so far and we think we're going to get a lot more.
Efficient as we go through time into next year.
Great. Thanks very much.
Thanks.
We have reached the end of the question and answer session I will now turn the call over to Mr. Hutson for final remarks.
And I will just again, thank everybody for attending today.
We are pleased where their progress and we really look forward to reporting continued progress.
Next year as we report on the fourth quarter and and the total year. Thanks, everybody for attending today.
Thank you ladies and gentlemen. This concludes today's conference. We thank you for participating you may now disconnect.
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