Q3 2020 Seacoast Banking Corporation of Florida Earnings Call
Turning and welcome to the Seacoast third quarter earnings Conference call. My name is it now and I'll be the operator for today's call. At this time all participants are no listen only mode later.
Later, well conduct a question and answer session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone. Please.
Before we begin I have been asked to direct your attention to the statement contained at the end of the press release regarding forward looking statements.
Seacoast, we'll be discussing issues that constitute forward looking statements within the meaning of the securities and Exchange Act and our comments today are intended to be covered within the meaning of that act.
Please note that this conference is being recorded.
Now I'll turn the call over to Mr., Dennis Hudson, Chairman and CEO Seacoast Bank Mr. Hudson you may begin.
Thank you all for joining us this morning.
As we provide our comments, we will be referencing third quarter 2020 earnings slide deck, which can be found at seacoast banking dot com with.
With me. This morning is Chuck Shaffer, President and Chief operating Officer.
Tracy Dexter Chief Financial Officer.
Jeff Lee Chief Digital Officer, Dave.
David how the shell director of credit analytics, and policy and Richard Raiford, Our Chief Credit Officer.
As you'll hear in a few minutes. Despite the unprecedented operating environment for banks, we reported a strong Q3 with adjusted earnings per share of 50 cents.
Tangible common equity per share rose, 12% on an annualized basis in the quarter to $15.57.
Our tangible common equity per share has grown at a compounded 12% annual rate over the past three years.
During the quarter, we closed on the Freedom Bank acquisition bigger.
We began the process of PPP forgiveness and continue to operate the business safely and successfully for our associates and customers I.
I would like again like to express my sincere appreciation to the entire Cecos team for the hard work this quarter they.
They were able to onboard new customers and associates, all while operating remotely and you have to continue to achieve significant performance milestones as Chuck and Tracey will cover in a minute.
Chuck I'll turn the call call over to you to share a few thoughts on the quarter.
Thank you Denny I will also open by expressing my sincere appreciation for the seacoast team for producing another solid quarter of impressive result, despite the challenge of operating in a pandemic environment.
The company generated earnings per share on an adjusted basis of 50 cents and tangible book value per share grew 12% on an annualized basis the $15.57.
Asset quality liquidity and capital are all strong and we continue to generate meaningful capital growth bolstering our fortress balance sheet.
Our capital ratios are more substantial than most of our peers, which provides strategic flexibility as we move through the coming period and ultimately an economic recovery.
During the quarter, Florida Governor moved the phase three of the state's recovery plan fully.
Fully opening up Florida businesses with no restrictions.
We have seen our business customers return to full operation.
We are encouraged by the state's economic recovery, but are maintaining a conservative stance in the face of Cobiz uncertain path.
Our LTL coverage increased modestly from the prior quarter and we continue to model our AK steel in line with a more severe downturn Tracy.
Tracy will have more details on the Hcl modeling in our prepared comments.
We continue to be vigilant and maintaining our discipline conservative credit culture additions.
Additionally, we are passing on deals that are not pricing to an appropriate risk adjusted return.
Given our conservative position on both pricing and credit weaker borrower demand and increasing payoff as anticipated.
We saw our loan outstandings declined quarter over quarter, when you remove the freedom Bank acquisition contribution.
We are comfortable with this dynamic and continue to manage the balance sheet holistically carefully balancing the interest rate and credit environment, while protecting and prudently growing capital.
Loans on deferral status as of last Friday have fallen to 290 million or 5.6% of total non PPP loans compared to a peak back in June of over 20%.
Overall, we're pleased with the deferred portfolio's performance today.
And expect deferrals to continue to decline into the fourth quarter.
Given the significant amount of loans returning to payment status in October we will provide an updated disclosure in mid November.
We focused on building fee based revenues during the quarter with mortgage banking wealth management and the interchange income all having a record breaking quarter.
The mortgage banking business had the best quarter in its history, taking share from larger competitors. The team consistently hit service level standards, while prioritizing purchase money volume supporting our local realtors.
The group generated over 5 million in fees in the third quarter and its position for an outstanding fourth quarter.
This increase performance contributed to the increase in mix and expenses in part quarter over quarter.
As much of the expense base is variable, albeit more than offset by higher revenue production.
We also completed the successful acquisition of Freedom Bank headquartered in St. Petersburg won a Florida fastest growing markets. We're excited to have the freedom Bank team joined Cecos and believe this combination will generate meaningful momentum looking forward.
To conclude given the full reopening of the Florida economy. This quarter continued positive momentum of loans on deferral, returning the payment status.
And increasingly positive conversations with our customers. We are cautiously optimistic that the outlook may be improving however.
However, given the pandemics unpredictable path and it's broader impact on the economy, we will continue to maintain our conservative posture.
Our goal remains to continue increasing market share in a disciplined manner, while delivering consistent growth and tangible book value per share and positioning the company post pandemic to acquire we can players across the state of Florida should those opportunities develop I will now turn the call over to Tracy who will walk through our financial risk.
Yes.
Thanks, Jeff Good morning, everyone.
Turning your attention to third quarter results, let's start with slide five.
Third quarter non-GAAP basis earnings per share was 42 cents.
On an adjusted basis, which excludes M&A and isolated branch consolidation charges earnings per share was 50 cents.
To 48 cents in the second quarter.
Tangible book value per share increased to $15.57 up 3% from last quarter and 12% annualized.
Excluding the variable impact of TPP and accretion of purchase discount on acquired loans net interest margin contracted four basis points from 3.46 last quarter to 3.42% this quarter.
Lower cost of deposits had a positive impact on our margins with a decline of seven basis points from 31 basis points last quarter to 24 this quarter.
Our mortgage banking business generated record revenue this quarter with a 48% increase to $5.3 million.
As a result, not only of hiring bound volumes due to market conditions, but also due to our team's ability to keep service levels high.
And our digital and omni channel mortgage specialist.
Reported with leads from our marketing analytics tools have represented an increasingly high proportion of total volume.
The wealth management team continues to build on AUM growth, we reported 2 million in revenue this quarter.
Loans with deferred payments declined 35% from 1.1 billion last quarter to just over $700 million at September Thirtyth.
Another 528 million due to return to contractual payments through October.
And simultaneous with the Freedom Bank acquisition in August, which added two branches in Saint Petersburg, We consolidated a legacy St. Petersburg branch, which we expect will result in an ongoing annual expense reduction of 0.5 million.
Further branch consolidation is expected in 2021.
Turning to slide six.
Net interest income decreased 3.8 million sequentially. This was the direct result of the change in timing of recognition of PPPC.
The duration of the TPP program for originations from April through early August we earned 17.2 million in origination fees from the Sci not relevant cost.
We expect to recognize the entire 17.2 million as these loans are forgiven overtime.
In the second quarter, we recognized 4 million of the total based on our expectation that forgiveness would start in the third quarter and that application will be submitted and processed at a rapid pace.
However, the FDA only began processing forgiveness application in October and with what we feel is less certain fee. This quarter about the timing of early forgiveness, we've extended our recognition schedule for the long haul contractual period and recognized only 200000 in PPPC in the third quarter.
We expect to recognize $2.1 million in each of the next six quarters. If no early forgiveness occurs although actual early forgiveness events may create variability in timing.
The net interest margin, excluding PPP and accretion of purchase discounts decreased by only four basis points from 3.46% to 3.42%.
That decrease results from lower loan and securities yields, partially offset by lower cost of deposit and utilization of some excess liquidity.
The effect on net interest margin from accretion of purchase discount on acquired loans were 17 basis points in the third quarter of 2014 compared to 16 basis points in the second quarter.
Effect on net interest margin, a PPP along with a reduction of 19 basis points in the third quarter compared to an increase of eight basis points in the second quarter.
Quarter over quarter, the yield on loans, excluding TPP and accretion of purchase discounts decreased nine basis points, reflecting higher paydowns and refinancings.
The yield on securities decreased 56 basis points affected by rate resets and faster prepayments.
Well as additional investments of excess liquidity into securities this quarter.
The cost of deposits decreased seven basis points from 31 in the second quarter to 24 basis points in the third quarter.
This reflects a favorable product mix, including an increase in the proportion of noninterest bearing demand deposits to total deposits.
We expect the cost of deposits continued to decline in the coming quarters.
Moving to slide seven again this quarter. We are pleased to report record levels of non interest income in key categories on.
On an adjusted basis, which excludes realized gains on security sales noninterest income was $16.9 million, an increase of $3.2 million or 23% from the previous quarter, and an increase of $3.1 million or 22% from the prior year quarter.
Our mortgage banking business continues to capitalize on a vibrant residential refinance market and strength in the Florida housing market.
With revenue, increasing 48% to $5.3 million in the third quarter.
As a reminder, we sell in the secondary market. The large majority of residential mortgages that we originate and use rate lock with investors at the time of application to eliminate exposure to interest rate risk.
This quarter, we were able to generate substantial growth in this area. The omnichannel approach is supported by analytics based marketing tool and the success of our digital channel team has done a tremendous contributor generating 20% of our third quarter mortgage production and 20% of the quarter end mortgage pipeline.
The third quarter was also a record quarter for our wealth management team with 2 million in revenue and additions of 43 million new assets under management, bringing total to $793 million.
Interchange revenue increased 16% to $3.7 million with notable increases in business card utilization, resulting from recent growth in business customers and our marketing focused on driving spend behavior.
Moving to slide eight.
Adjusted noninterest expense totaled $45.4 million, an increase of 4.8 million from the prior quarter and an increase of $8.5 million compared to the prior year quarter.
On an adjusted basis salaries and benefits increased by $3 million compared to the second quarter of 2020.
Back in the second quarter, we originated nearly $600 million in PPP loan.
And as discussed on last quarter's earnings call higher loan production driven by the PPP program resulted in higher deferrals of related salary cost, which lowered second quarter expenses by 2.9 million driving the variance quarter over quarter.
This quarter the provision for credit losses on unfunded commitments was higher by approximately zero point $6 million, primarily associated with lending related commitments acquired from Freedom Bank.
Other expenses were higher in the third quarter by $1.4 million, including higher FDIC assessment expense executive.
Executive recruiting fees and processing costs associated with higher mortgage production.
Much of the cost base for our mortgage business is variable in nature and the strong revenue performance. Therefore resulted in higher expenses.
Overall expenses were higher than our guided range from last quarter's call, resulting from better than expected performance in mortgage banking an increase in the reserve for unused commitments and also higher expenses associated with our self funded health insurance program with outside medical claims in the third quarter likely the result of.
18 medical appointments, having been postponed in the second quarter due to COVID-19 lockdown.
Outside of mortgage expenses, which we expect to continue to track higher revenue production, we do not expect these to repeat in the coming quarter.
As such we are guiding to a lower noninterest expense range of $42 million to $44 million on an adjusted basis, excluding the amortization of intangible assets.
Moving to slide nine.
The adjusted efficiency ratio in the third quarter increased to 54.8%.
That increase results from the PPPC accretion timing issue and higher expenses discussed on the prior slide partially offset by higher noninterest income.
Notwithstanding the unpredictable PPP forgiveness process.
We expect the efficiency ratio to decline in the fourth quarter as we continue proactive disciplined management of our cost structure.
We've demonstrated over the past several years, our commitment to efficiency and we will continue to apply that discipline as we look ahead.
Turning to slide 10 loan.
Loans outstanding increased to $5.9 billion, reflecting the addition of $309 million from freedom Bank and $176 million inorganic portfolio production this quarter offset by portfolio run off and lower demand from business customers.
Given the pandemic environment, we continue to take a conservative posture to new loan originations.
In commercial the pipeline at period end was $256 million, we continue though to maintain the discipline of our established credit culture, focusing only on relationships with strong balance sheet that can support significant stress.
The consumer pipeline fell to 17 million from 31 million last quarter.
Selecting lower demand for home equity line as consumers favor first mortgage refinancing options.
In the residential category pipelines have continued to increase now up 70% from the prior quarter to $183 million.
The refinance market has remained strong and our markets have benefited from high levels of purchase activity.
A significant majority of our residential mortgage volume is sold in the secondary market on a best efforts basis, probably after origination, thereby incurring no interest rate risk associated with the pipeline.
Looking forward to the fourth quarter, we expect loans outstanding to continue to be carefully managed modestly lower as a result of our disciplined posture given the pandemic environment.
Additionally, we expect PPP balances to continue declining at an accelerated rate as the forgiveness process begins.
Turning to slide 11 for.
Further highlighting our vigilant credit culture, we intend to continue to manage our credit exposures and robust capital position prudently.
Confident that our established conservative posture entering this environment will serve us well.
Our portfolio is broadly distributed across various asset classes.
Stabilized income producing commercial real estate represents 24% of loans outstanding owner occupied commercial real estate represents 19% of the portfolio and residential real estate comprises 24% of the portfolio.
Approximately 80% of our commercial portfolio is secured by real estate with borrowers that have meaningful equity in their investments and lower loan to value.
The average LTV of the commercial portfolio secured by real estate is 48%.
Fortunately for years, we have managed our portfolio to keep construction and land development loans and commercial real estate loans, well below regulatory guidance.
At September Thirtyth that represented 28% and 165% of risk based capital respectively.
Those levels have continued to decline and our lower than most in our peer group.
Our loan portfolio is diverse and broadly distributed across categories with an average commercial loan size, excluding PPP of 386000.
Turning to slide 12 for a look at loans on deferred payment status.
We supported our customers when the pandemic hit with short term payment deferral program.
What remains at September Thirtyth is largely loans with original six months deferral that started in April and are expiring in October.
Of the $703 million in loans on deferred payment status at quarter end. The majority is in commercial real estate and we'll see the detail of those on a later slide.
But first moving to slide 13.
Presented in the graph our lines on deferral as of September Thirtyth and the large majority of those deferrals expire and are due to return to making contractual payments in the month of October.
As of last Friday with over a week left in the month, we had already received payments on over 70% of the October expirations.
It's helpful to consider our experience with loans that came off of deferral in the third quarter, which is identified on the right.
Of the loans that were put on payment deferral earlier in the year and those deferrals expired in the third quarter, 83% have returned to making contractual payments or have paid off the loan balance.
13% had deferrals expiring in September so their first payment is due in October.
1% or 30 days past due and the remaining 3% of loans with deferrals expiring in the third quarter were offered additional accommodation. So they remain in our deferral balances at period end.
We have data available through October 20, Threerd and at that date, our total loans on deferral, we're down to $290 million or approximately 5.6% of total non PPP loans down from $703 million or 13% at September thirtyth.
We expect this will have declined meaningfully by the end of the year.
Deferrals or additional accommodations extending beyond six months have been rare.
Turning to slide 14 for a more detailed look at our CRT and construction portfolios, including deferrals in those categories.
Diversification across industries and collateral type has been a critical tenet of our strategy, which we believe positions us well in this environment.
The largest exposure in our aggregated owner occupied CRT CRT and construction portfolios is office buildings, which represents only 13% of the portfolio.
18% of these loans were on payment deferral as of September thirtyth down from 27% last quarter.
The average loan size in our office portfolio is 578000, the average LTV is 53%.
57% of the portfolio is classified as owner occupied comprised primarily of independent professional practices, including medical accounting engineering healthcare and other like pipe professionals.
The remainder of the office portfolio is stabilized income producing investment properties.
And as an update on deferrals status through last Friday loans on deferral in the office building category have dropped from the 135 million presented on the slide to only $56 million.
Our second largest segment is retail real estate, representing only 8% of total loans were 32% of these on deferred payment status down from 38% last quarter.
These are typically multi based shopping centers and many were provided with an initial six month deferral period. When the shutdowns began so will be expected to return to payment status in October.
As we progress through October as of last Friday loans on deferral. In this category has declined from the $147 million presented on the slide to only $75 million.
The average loan size in our retail portfolio is $1.3 million and the average LTV is 46%.
The portfolio does not include regional mall complexes outlet mall movie theaters or entertainment venue.
Our exposure is low in some of the most seriously affected industries.
Our hotel portfolio is $135 million and restaurants are $48 million.
Restaurant and hotel portfolios are primarily secured with real estate with an average loan to value of only 52%.
To date, both portfolios have performed better than we expected at the outset of the pandemic.
Our hotel exposure is well diversified the majority of our exposure is beef side or along the Interstate and major arteries, both of which have benefited from weekend travel and there are no occupancy restrictions.
We have little exposure in theme park locations and do not finance resort or conference center facilities.
Turning to slide 15 for a more detailed look at our commercial and financial loans.
The largest exposure is in holding company owned by high network individuals for aircraft and marine vessels and this represents a modest 3% of total loans.
22% of this segment had payment deferrals earlier in the year and only 3% remain on deferral at September Thirtyth.
The remainder of commercial and financial loans spread across multiple industries with no concentration above 2%.
Turning to slide 16, and 17 for the Securities portfolio.
With the decline in rate and faster prepayments on mortgage backed securities yields are down this quarter by 56 basis points we.
We made additional purchases of primarily agency grade MBS at an average add on yield of 1.31% and an average duration of 4.6 years, we're carefully investing in bonds that have little extension risk and we'll roll down the curve over a three to four year period.
Overall, the portfolio is in a net unrealized gain position of $33.6 million.
Turning to slides 18, and 19 deposits outstanding increased $248 million or 4% sequentially.
The change includes the addition of $330 million in deposits from Freedom Bank, partially offset by lower brokered balances.
The cost of deposits is lower by seven basis points this quarter to 24 basis points and we expect it to drop further in the fourth quarter.
Transaction accounts represent 55% of total deposits.
Our analysis of PPP loan proceeds shows that approximately 60% of those funds remain in the bank.
Turning to slide 20, we present the changes in the allowance for credit losses in the chart.
During the quarter. The addition of loans from Freedom Bank increased the allowance and that was offset by the impact of declines in other loan balances.
We ended the quarter with a slight increase in coverage from 1.76% at June Thirtyth to 1.80% at September Thirtyth, excluding PPP.
On the right you can see the impact on the income statement during the quarter of provisioning for credit related items, which totaled less than 100000.
Moving to slide 21, the allowance for credit losses under Cecil reflects our estimate of lifetime expected credit losses, which includes our expectation that some loans will migrate into loss through the cycle.
In addition to what we feel is a prudent level of allowance note that we also have $34.6 million in purchase discount that will be earned over the life of those loans as an adjustment to yield.
Also of note our obligations under unfunded loan commitments have a separate reserve of $3 million.
Turning to slide 22 on asset quality note.
Note that the trends were in part influenced by the closing of the Freedom Bank acquisition during the quarter.
We're confident that our credit mark associated with the transaction adequately reflects the expected performance of this portfolio.
Turning to specifics Tom.
Adopt were flat this quarter at $1.7 million.
The level of nonperforming loans increased by $7.2 million to $37.2 million and now represents 0.64% of total loans.
The changes include additions of 3 million from the Freedom Bank acquisition, and a net increase of $4 million in portfolio loans, including one borrower for $3.3 million that paid off in early October.
Criticized loans were 18% of total risk based capital at September Thirtyth.
The increase from prior quarter is primarily in the special mentioned category, which came from 10 loans totaling 54 million this quarter.
We're taking an appropriately conservative approach to grading given the pandemic environment and the majority of loans moving into special mention our from our hotel exposure.
The overall allowance for credit losses at September Thirtyth is $94 million, increasing from prior quarter with loans added from freedom Bank, partially offset by the decline in balances in the remainder of the portfolio.
Excluding PPP loans, our coverage of allowance to total loans is 1.80% up slightly from 1.76% in the prior quarter.
We continue to have a cautious view of the economic outlook. So our allowance estimate give significant weight to the Moody's asthree moderate recession scenario, where the characteristics of the downturn might be more unfavorable and could be sustained over a more extended period.
Turning to slide 23, our capital position continues to be strong and our long standing commitment to maintaining a fortress balance sheet has positioned us for resilience.
Tangible book value per share to $15.57, an increase of 3% over prior quarter.
The tangible common equity to tangible asset ratio was 10.7% at quarter end and has ranked amongst the highest in our peer group.
The tier one capital ratio was 16.8% and the total risk based capital ratio was 17.9% at September thirtyth, each increasing over the prior quarter.
In measuring return on tangible common equity.
On an adjusted basis was flat compared to prior quarter, reflecting the impact on equity of the freedom acquisition.
To wrap up on slide 24, since 2017, we've achieved a compounded annual growth rate in tangible book value per share of 12%.
Having shareholder value creation.
We are confident that our established conservative posture and efficient operating model will serve us well as the recovery progressive.
Seacoast is well positioned to take advantage of opportunities as they ultimately arise.
We look forward to your questions I'll turn the call back over to Chuck and Denny.
Thanks, Tracy and thank you operator, we'd be pleased to take a few questions.
Absolutely. Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone. If you are using the speaker phone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone.
Moving on standby for any question.
And our first question comes from Michael Young from Suntrust. Please go ahead. Your line is open.
Hey, good morning.
Hey, Michael.
First of all just wanted to offer my congratulations to Denise.
So what we will Miss hearing your voice on future calls is frequently to enroll book ball.
One of the last long those consumers.
Okay My respects there.
[music].
In terms of questions I guess just on on.
Capital I'm trying to get the interplay between capital and growth correct. So capital levels are obviously very high.
And you have plenty of excess capital. So it would seem like you could begin to return some of that assuming regulators blessed that new but is there something either in the M&A pipeline out there that you see where you want to maintain these higher levels or.
See growth kind of returning in a more material way that would eat into some of this capital on a go forward basis.
Well I'll kick off here, Michael and thanks for your comments.
Yes, as you know our board and the management team do take a look at that very seriously uses of capital.
On a on a fairly regular basis.
We think right now where we are in a given the unpredictable nature of the environment, we're in with the pandemic.
As of right now, we're comfortable with our current robust capital levels, which along with.
I think tracy's.
Very detailed comments or other credit discipline support our our commitment to maintaining a fortress balance sheet Murphy said that gives us a heck of a lot of resiliency and a heck of lot of opportunity to use that capital as we look ahead. Our primary goal has been to build consistently over time shareholder value and I think thats best evidenced by the.
12% CAGR.
That we produced in tangible book value per share since 2017 that said.
We do recognize our capital continues to build and we think as the full impact of the pandemic is further revealed in the coming months.
We'll we'll want to reevaluate the full range of capital management alternatives, and we're going to seek to deploy our capital.
Carefully and prudently.
Based on the circumstances as we look out over the medium to long run we have a lot of options. In fact, we have multiple options for the use of capital.
As you said, including buybacks dividends organic growth.
And M&A.
We're going to carefully weigh these options as we as we look ahead, all while ensuring that our capital position does remain robust and supports what we see as potential acquisition opportunities that we think could develop later.
In 2021.
Okay. That's helpful. And then maybe just moving to the net interest margin.
3.4% on kind of a core basis this quarter.
Looks like maybe there's a little bit of room through the cost of deposits and funding to come down from here, but not not a tremendous amount. So should we think kind of gradual downward pressure absent more material loan growth and then as loan growth comes back.
Mid we hold the line or expand slightly is that kind of the right way to think about that.
Yes, Thanks, Michael This is Tracy.
Maybe going through the pieces, assuming a similar rate environment in the fourth quarter. We expect continued pressure on securities yield.
The dilutive effect of lower new add on yields there.
Loan yield loss of drift down, but at a slower pace as you said.
Partially offsetting we expect lower funding cost that we do still expect continuing effect from higher levels of liquidity with all that core NIM, excluding TPP and purchased loan accretion likely see slight compression in Q4 from the low Fortys, we reported in Q3.
Out anything beyond Q4, it's very difficult to provide any guidance Michael given all the variable issues that are ahead of us, including an election, and pandemic and everything else and so redeployment of that liquidity into loans and other things could be very supportive of the NIM in 2021, but.
That'll be very dependent upon how things play out with the current environment.
Right that makes sense maybe <unk>.
Dollars is a better way to think about it so.
Ex kind of PPP, which will be volatile but.
Starting from 63 64 million and we would expect that to kind of move higher as you deploy some of that liquidity, maybe some loan growth returns.
Even though the margin may come down.
Yes, I think it will all depend on how the economic recovery continues and the strength of that and how the environment improves.
Okay. Thanks, I'll step back.
Thank you. Our next question comes from David Feaster from Raymond James. Please go ahead. Your line is open.
Hi, good morning, everybody.
David.
I just.
Warm start alone side I'm, just curious some of the.
What's driving the run off how much is the competition.
Either pricing or structure, and then you know or just clients conservatively paying off debt and then maybe how much you just even strategic where it's just credits from either acquisitions or freedom that you've you may not want to hold onto what just strategically runoff just and then maybe like how should we expect the pace.
Run off to keep pace with what we've seen in the past few quarters.
Yes, I think theres, a few components around that David to think through one.
Obviously in the quarter, we didnt have the level of originations, we normally would have had particularly in the commercial side and thats, a 100% because of our prudency around making sure we've taken appropriate approach to credit taking in the current environment something we're comfortable with.
Secondly, when you look at loan growth, we did have a a portfolio of residential mortgages that are generally being refinanced.
In this environment, where the the originations we are.
Handling here at seacoast of our portfolio, we're selling in the secondary market given the better economic return of doing that activity and I think that played into it and then thirdly I would just say we've seen some deals traded very very low cap rates and some things be sold out of our portfolio that we didnt have an interest in Rio.
Originating primarily not necessarily structure credit, but just where those cap rates were in the pricing on those deals and so we continue to take a very conservative approach that led to a little bit higher run off looking.
Looking forward in the next quarter.
Just on loan Outstandings I would.
I would expect loan outstandings to be down slightly but not at the pace that we saw this quarter and probably we'll see some improvement on originations quarter over quarter.
Okay. Okay. That's helpful. And then just digging into the commercial pipeline pipeline more broadly we are glad to see that recover within the commercial pipeline.
What we are talking about where are you seeing opportunities both by market segment and.
Our new yields.
On new originations in the pipeline.
Yeah, we're holding the line on yields is best we can I would say the bulk of that portfolio is current customers that we already know that we do business with that.
Looking for further opportunities with expanding their their businesses and the like to or looking for opportunities in the marketplace. Those are.
For the most part going to be and for the significant most part going to be customers that are well understood that can demonstrate.
Earlier projections on cash flow can support strain regardless of the environment ahead. So we're being very picky I would describe it as around what kind of credits were willing to take and being very selective it's coming from all parts of the state we're not seeing one area over the other but.
But we are being very careful and very cautious and the environment we're in and.
Yes, it's.
Try to be thoughtful given where we're at and if you just step back more broadly look at our sort of approach to credit in this environment Weve been very conservative and what I think is positive in the quarter as we continued to grow tangible book value per share driving it through fee based categories versus extending.
Our credit profile to removing the the impact of the freedom Bank acquisitions, our overall credit risk exposure actually declined quarter over quarter, while tangible book value per share increase something I see positive and.
Any further loan growth type our origination tight philosophical approach will be highly dependent upon the the outlook for the pandemic and how more clarity comes into the marketplace, but for now we think a conservative prudent approach as appropriate we will continue to be position there.
Okay. That's.
That's helpful and then on technology, I mean kind of staying on that defensive topic. You guys have had a tremendous amount of success using data analytics on the offensive front right. Just I'm just curious how that can play into your defensive posture. What are you doing to maybe have principally potential credit issues and address those.
Early and then maybe just walk us through some of the other initiatives that you have on that and using your technology to the place of defense.
David you want to give us off there and then Jeff maybe a follow up Hey, David. This is David have a shell. So yes, if you think back to our call for first quarter results. We talked about some rule early action, we bill and leverage some of our tools, we use for our seasonal models.
We focused on looking at industry factors customer characteristics depository transaction information and built our models. So we've been running those models every month trying to bring in new data assets materialize.
We've used this data for outbound calling.
Okay, maybe suspected distressed customers to do a health check see how they're doing gather some additional information a good example would be of course I think we all know by this time, but back in April we started pretty assertively going after the hotel portfolio ask some questions at that time started looking.
Deferral programs loan modifications and I think that very early quick action. This turned into some very positive results for the company.
We've also use those models that weve been building to look into basically provided challenger model for our laminates, so pretty much running two models.
With some fundamental differences in some of the assumptions in the economic scenarios to stress test the portfolio to really give us some assurance that when we do produce flowers for credit loss that we're comfortable with the risk that fit in the portfolio. So a couple of examples there and how we have used the credit information and.
We're taking some of the model results pushing it into our proprietary connections tool or connections tool is useful for outbound calling tracking next call action and maybe Jeff you could speak about some of the activities and the benefits we're getting from marrying those two systems.
Yes, David as.
As you know connections as it has been a big platform for US ride what it's really done is it's just enabled us to operate a lot more quickly in terms of taking advantage of the insights that we see we pipe those insights to retail bankers to other business bankers and the other folks across the bank and its really enabled us to move quickly we think that will serve us.
Very well in this period of time, we're already seeing that play out we think it will serve us very well when we get back to a rapid growth mode as well the other aspects were pushing on David as you know well, we're pushing very hard on digital servicing we're pleased with the way customers continue to migrate to those low cost channels to manage the day to day banking that's.
Thats been a boon for us and we think thats going to continue.
The last piece that I'll talk about is through this notion of bank group efficiency, which is to come about by focusing on and see no. We're still making refinements and tweaks into that system with the overall goal of being on the other side of this with a very efficient commercial banker workforce and so I think combining the speed and power of connections and.
Analytics, the push to digital servicing and banker efficiency, driven by and see though it all internal platforms that bundles kind of how we're thinking about using technology to to unlock further value.
Okay. That's helpful. And then he can congrats and the well deserved retirement.
Thank you.
Thank you. Our next question comes from Steve Moss from FBR. Please go ahead. Your line is open.
Hi, good morning, guys.
Yes.
What I'll start off R&D expense guidance, just you know.
Mostly down here in the upcoming quarter.
Kind of curious how that incorporate.
The potential impact of another.
Strong mortgage banking quarter or just what are your assumptions, maybe around mortgage and expenses.
Yes.
Our expenses were in line with the guidance, we provided last quarter and one of the unusual item that you'd consider.
Seeing that is the higher mortgage banking related expenses.
They were higher than our forecast by about 0.5 million given the outsized production results there.
So with that we'll.
We'll we'll be back in the middle of the range that we guided to for this quarter also remember that the second quarter had the benefit of pp.
Originations that were.
That were deferred and.
So when we look ahead to the fourth quarter, we're expecting expenses to come lower to a more normal range 42 to 44 million.
Although certainly those higher mortgage production related costs will continue to some extent.
Hey, Steve Let me just jump in there real quick so I think you're thinking about mortgage banking I think.
Another very strong quarter likely won't be quite as strong as this quarter. So revenues will still be very good, but maybe down modestly as well on the expense side and so I think thats all baked into the $42 million to $44 million guide that Tracy provide.
Okay. That's helpful and then on PGP forgive. This just wondering if you give us some color as to.
What are the applications, you're seeing local application you are seeing for forgiveness Sir.
Yes.
Yes, just asking what we've seen for PPP forgiveness in the level of applications today actually the application flow has been fairly light I think theres still a lot of uncertainty out there in the marketplace. As you know the SBA has produced a third application for.
Forgiveness processing all of them I think they create like a.
Very complicated software customers are waiting to really gather the data get some additional guide.
Guidance, we are providing and we are processing a few applications would come through but the flow was very light.
There's also still some hope with the next stimulus program there could be a bigger wave of forgiveness for some of the smaller balance loans. The SBA government is talking about may be less than 100000. So I think we're seeing a lot of wait and see customers from that position some of them are still gathering information and.
We're working with customers.
As they raise their hands that were also working on the outbound program to help them get.
Get prepared gathered documents and help guide them through the process.
And we're standing by and ready to assist with needed Tracey you can add anything to that yes, no just that my data from about a week ago, and we had reviewed and submitted around 70 loans to the FDA. The FDA has 90 days to decision the submission.
We will continue to build that pipeline and wait for notification from the FDA.
For goodness applications were successful and I know we've had a few that were approved I checked.
Couple of days ago, we've had a few that have been approved they've all been typically smaller loans under 100000.
Okay. That's helpful. And then just one more on the hotel loans just following up on that I know you know.
The bulk of your downgrade chair to criticize your special mention work for hotels just as.
As we think about longer term plan just kind of how are you guys thinking about working out or what what level of shows.
So its a borrower liquidity.
Goals in terms of just trying to get people to the other side there.
Yes in this hotel portfolio, we've had some very good results as Chuck mentioned Weve been very conservative in our risk rating, we moved a few of our hotels. This special mention.
Based on what we thought were more tenuous type situations.
In this month of October there first the deferral period did come up and they have made payments. So we're very pleased to see them.
Do you need to be able to perform.
Thank you our outreach been very close to them throughout the summer we've been working with the additional options if of restructure is needed, but they are basically telling us that they're very comfortable we do have a couple smaller loans, though that may not be great story based on occupancy levels will work with those customers is very reasonable.
But the the ones that we did downgrade that were buried more nervous about based on tenancy or occupancy levels. The our rates there.
They seem to be performing very well and they really have much better business activity on the weekends.
When they are none of them are really targeted toward the business travelers. So they are depended on transient people people going on vacation or just trying to get out of their their houses into a different location for an extended weekend. So we feel pretty good about that portfolio and we will be prepared to help.
Hotels, and then the other customers and are re deferral rate as Tracy mentioned has been very few it's been a very nominal need.
Okay. Thank you very much and Denny I'm sure. Congratulations on your last earnings call I'm sure we'll be in touch in the future. So I'll be on the last one will be in January.
And we'll be talking about the year end and then they'll turn everything over to Chuck, but I'll still be on the room, keeping an eye on Chuck.
Im sure you will [laughter].
Right.
Thanks, Steve.
Thank you. Our next question comes from Christopher Marinac from FHLB. Please go ahead. Your line is open.
Hey, Thanks, good morning.
Okay, and Denny and Tracy and team I wanted to ask about the sort of adjusted efficiency and expense numbers I mean, as we get to whatever the new normal is going to be in future quarters. Do you think we can get back to that kind of sub 50 level.
Level that was their pre pandemic I mean is that realistic or is it too early to tell.
Yes, I think we want to be careful providing any guidance out beyond a quarter, giving all the variability in the marketplace. There are just too many variables to provide guidance beyond that given interest rates election, Pandemics is so much happening here any guidance beyond that but I do expect in the coming quarter or the efficiency ratio too.
Decline in line with Tracey guidance and be somewhere between 50 and 55 as we move through the coming quarter, but I do expect the efficiency ratio to come down quarter over quarter and I'll just reiterate we're very disciplined in our approach to expenses were also very focused on efficiency expect.
Further branch consolidation in the coming year. Our plan has about four branches that were considering for consolidation and as we continue to drive.
Digital transactions.
Drive transactions over to digital we expect to continue to take cost out of the franchise.
And we will maintain our.
Very keenly focused approach to expense management and efficiency.
Great I appreciate that given the circumstances and just a quick one for Jeff Jeff you talked about the digital servicing and the progress there.
Where is sea coast relative to the beginning of you still kind of in the second or third inning of this process or do you think you more advanced than that I mean, you have accomplished a lot. The last four plus years of Distech curious how much more from age.
Yes, I had a hard time hearing, but just to confirm your question is kind of where where where what where are we kind of what inning are we in in terms of that.
Digitizing parts of the business is that correct correct.
Correct exactly thanks, Yes, I think.
If you look on the consumer side I think we're we're probably middle innings in terms of where where we've gone. The numbers are really good. If you look at the business side. That's really picked up have laid the pandemic kind of shot that up I'd say, we're probably closer to the early innings on the business side that we are on the consumer side, but I think the bigger picture of what.
Processes in the Bakken, we digitized what processes. The bank can we further automate and that's an area that we're going to continue to look into as well just trying to streamline as much as we can not just where the customer but also for for the way. The whole bank operates in in terms of that I still think we're we're early innings. So consumer I think were mid innings.
Business I think we're probably coming out of the early innings and starting to mature a little bit better, but I'm thinking more broadly about the entire business. How do we streamline everything that we do make it more efficient and also make it more scalable kind of where our heads that right now.
An incredible progress on the residential business and that served us well on the pandemic. The full end to end process and the mortgage business is digital.
And we've made a move to some remote notary processes and so there's a lot that's gone on in the mortgage business is probably out ahead of most of our other businesses, but the commercial side of our company has a lot of work ahead of us and we are very much in the early innings, there and there's great efficiency gains to be put together here over the next.
A couple of years.
Just say add that the pandemic kind of opened up an opportunity for us to move more quickly on some of the process automation that has been very helpful. And then as you heard a little bit few few minutes ago around.
Around risk.
And we've really kind of leaned into that.
As a result of our perception of.
Things to be concerned about work from home environments and other things.
And quite helpful. So hopefully we'll continue to move.
A little faster as a result of the pandemic.
Great. Thank you the additional background out from you all very helpful.
Thanks, Chris.
Thank you.
I have another question from Michael Young. Please go ahead your line is open.
Hey, Thanks for the quick follow up just wanted to touch base on kind of the the caution around new lending opportunities, obviously very well understood but in general are there certain things that would give you greater confidence.
To be more I guess aggressive or more active in the market with new really sets new originations that better on a go forward basis, just anything you're kind of watching would be helpful.
The challenge right now nobody can predict where the pandemics headed and so when you look at the Pandemics impacts, it's a wide and.
Through almost all industries and some expenses some respects theres.
Theres, obviously, some industries that have been more severely impacted than others. So I think we all could see those hotels restaurants et cetera. So we're avoiding anything that's the obvious.
Impacted industry type vertical, but I would say they are going to be a lot more clarity emerge over the next two quarters, you're going to have the election happen, we're going to hopefully be moving closer to a vaccine and that all will provide more clarity on what 2021 will look like and is that.
Clarity emerges that will give us more confidence as to how we react but for now given the unpredictable nature I think a very conservative approach as appropriate and a focus on growing tangible book value through fee based revenue and other means of driving shareholder return or more appropriate.
And when more information comes to light will lean back into loan growth and the good news about that is we'll have a lot of liquidity. We're in the process of investing in the company. Both in terms of process development and being very opportunistic around talent and we'll be ready to perform when the time comes but for now.
Conservative approach as well.
What we think is appropriate.
All right Thanks makes sense.
Thank you Michael.
Thank you and I'm not showing any further questions at this time I'd like to turn the call back over to the host.
Thank you all very much for attending today and I think we all look forward to speaking with you in January as we wrap up the year.
Thank you.
Thank you and thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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