Q3 2022 Seacoast Banking Corporation of Florida Earnings Call
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Walking to Seacoast Banking Corporation third quarter 2022 earnings Conference call. My name is Cheryl and there will be your operator at this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you have a question. Please press zero one on your Touchtone.
Phone.
Before we begin I have been asked to direct your attention to the statement at the beginning of the company's press release regarding forward looking statements.
Seacoast will be discussing issues and constitute forward looking statements within the meaning of the securities and Exchange Act and its comments today are intended to be covered within the meaning of the act. Please note that this conference is being recorded I will now turn the call over to Chuck Shaffer, Chairman and CEO of CECO.
Inc. Mr. Schafer you may begin.
Thank you Cheryl. Thank you all for joining us. This morning, as we provide our comments were referenced the third quarter 2022 earnings slide deck, which you can find at CECO spanking Dot com.
I'm joined today by Tracey Dexter, Chief Financial Officer, and Michael Young Treasurer, and director of Investor Relations.
Let me start by thanking the entire CECO team for their tremendous effort and recovering from Hurricane Ian last month.
All seacoast branches opened within a few short days and the group quickly transitioned to assisting our customers and communities.
Additionally, the team properly reverted to closing the Drummond and Apollo acquisitions, and one week. After the storm passed they completed the technology conversion at Apollo.
Which I'll say a little more in a moment.
Proud of their hard work and resilience and for supporting our communities in the face of such a challenging weather event.
And to comment further on hurricane Ian we reserved a little over 2 million during the quarter related to the storm based on an analysis of our exposure in the hardest hit counties of Florida, and an outreach program executed by our banking team. The results of the qualitative feedback from our bankers and customers and the quantitative analysis performed by our credit analytics team has been <unk>.
Several leading us to believe the impact on Cecos may be limited given the path of the storm, which primarily impacted southwest, Florida, where CECO has less exposure when compared to the remainder of the state.
We expect to have a more complete understanding of the impact by the end of the fourth quarter, but at this point, we believe any impact on our financial results will be inconsequential.
Turning to the third quarter results. The CECO team delivered another outstanding quarter of earnings while continuing to execute against our balanced growth strategy. The quarter was highlighted by a material expansion of our net interest margin, which excluding PPP in accretion on acquired loans increased 29 basis points from the prior quarter and net interest income increased 32.
Sent on annualized basis.
The cost of deposits only increased by three basis points, an annualized loan growth for the quarter was 10%.
The company generated $49 million of pre tax pre provision earnings an increase of 6% from the prior quarter, while achieving a 53% efficiency ratio.
Since the start of 2022, the team completed the Sabal Palm and business Bank of Florida transactions, enabling us to enter the highly attractive and growing Sarasota market.
And to continue to grow our presence in <unk> County.
And in early October we completed the acquisitions of Drummond Bank and Apollo Bank, expanding our presence in north, Florida, including Ocala, Gainesville, and expanded our franchise and the dynamic Miami Dade County market.
Also in October the Apollo and CECO teams completed a flawless technology conversion of Apollo Bank, which despite the disruption of Hurricane Ian was our smoothest conversion today.
And finally, we announced during the third quarter the acquisition of professional bank expanding our reach further in South Florida.
We continue to expect to close this transaction early in the first quarter of 2023.
Consistent with our continued focus on organic growth and our goal of being the best commercial bank in Florida, We hired a team consisting of well seasoned C&I commercial bankers.
Officers and credit officers in North, Florida, Complementing our acquisition of drama Drummond and further expanding our reach into Ocala Gainesville. Additionally.
Additionally, we augmented our commercial banking team in west and Central Florida with several hires from National Regional banks, and we also hired several credit and operational roles as we scaled franchise.
The timing of these expenses came a little earlier than anticipated, but a very strong opportunity presented itself and the payback period on this investment will be short.
I wanted to take a moment to discuss our credit metrics.
<unk> continues to be a disciplined conservative lender focused on building a carefully underwritten and diversified portfolio by nurturing full client relationships they bring low cost funding.
As a reminder, our portfolio our portfolio has been built over the long term with a consistent growth rate, while driving diversification by product type by segment and by vintage.
As a result of this discipline our credit metrics for the quarter were outstanding with almost zero net charge offs declining nonperforming loans and declining criticized and classified loans.
Moreover, our relationship base philosophy, and heavier focus on operating companies compared to peers will pay off in the environment ahead by providing a lower deposit repricing as evidenced by our cost to deposits increasing only three basis points this quarter.
Seacoast is operating from a position of strength with capital and allowance ratios at the top of our peer group during the quarter, our ACL ratio increased to 142% and considering the loss absorption, including in our purchase Mount purchase accounting marks the company is reserved at a $1 seven 1% coverage rate.
Our TCE ratio was nine 8% and our tier one ratio was 16, 5%.
Additionally, we believe Florida has the potential to outperform the rest of the country, if a downturn materializes given the wealth accumulation and population growth over the prior few years.
Florida has exceeded every state in the nation and attracting affluent wealthy individuals and corporations during the last two years, adding materially to the states GDP.
And to conclude considered Nick can see continued economic strength of Florida are carefully underwritten credit portfolio.
Leading capital levels, and our high quality customer franchise, we have one of the strongest balance sheets in the industry, providing optionality if a recession materializes.
This will allow us more flexibility than most to be opportunistic and client selection organic growth and acquisition opportunities I will now turn the call over to Tracy.
Thank you Chad good morning, everyone.
Directing your attention to the third quarter results beginning with highlights on slide seven.
The net interest margin expanded 29 basis points to 367% and on a core basis expanded 33 basis points to 357%.
Loan originations at higher yield and the low cost of deposits. We maintained during the quarter supported higher net interest margin.
Our asset sensitive balance sheet is beneficial in this rising rate environment, which will continue to benefit net interest income and the margin in the coming period.
Our loan to deposit ratio ended the quarter at 76%, leaving us room to continue to fund growth at higher yields in the coming quarters.
Our cost of deposits increased only three basis points during the third quarter to nine basis points.
Continue to manage deposit pricing on an exception basis, but we do expect to see an increase in the cost of deposits in the fourth quarter, given the velocity of rates over the last 120 days.
Pre tax pre provision earnings continue to increase with results on an adjusted basis up by 6% compared to prior quarter and 16% compared to the start of the year.
We grew loans at an annualized rate of 10% this quarter with the strong commercial talent that we've added to the team in recent periods.
Emphasized that the growth is in keeping with the bank's credit standard and as a combination of solid production in the quarter and slowing loan prepayments.
Average core loan yields increased 20 basis points to four 3% and the September weighted average add on yields reached five 5%.
Credit risk metrics remained strong with non accrual loans lower compared to the previous quarter and only 100000 in net charge offs.
Quarterly provision for credit losses includes the estimate we made at quarter end to provide for losses potentially resulting from the impact of hurricane Ian.
<unk> not seen any specific concerns at this point and overall coverage, reflecting economic factors, including persistent high inflation and expectations for higher rates.
In deposits well balances were down overall, which I will discuss shortly average balances in noninterest bearing demand accounts increased quarter over quarter. Despite the typical summer seasonal decline.
Wealth management was a particular bright spot during the quarter with large wins in assets under management and also our ability to provide existing client relationships with access to higher rates.
Notably, we moved 100 million of cash deposits into either money market funds or the bond market to achieve returns for our clients, while keeping the funds within the seacoast relationship.
An update on hurricane and.
We suffered no notable damage to any of our properties nor was there any damage to the Apollo Drummond or professional locations.
<unk> were quickly reopened after the storm and only a small percentage of loans in our portfolio are collateralized by properties in the most highly impacted areas are.
Our borrowers so far appear to have fared well.
In the allowance for credit losses as of September 30th we included an estimated $2 million for potential losses, having limited information at the time about the economic impacts from the storm.
Now that we're a few weeks on we've been able to confirm that for the large majority of our borrowers things are back to business as usual.
As you know there's been significant activity on the M&A front, including the October closings of the Apollo and Drummond transactions on October 7th and the announcement of the upcoming acquisition of professional bank in South Florida.
Closing is expected early in the first quarter of 2023 with system conversion late in the second quarter of 2023.
Turning to slide eight.
Net interest income expanded 8% during the quarter, adding $6 6 million with higher yields and a shift in asset mix.
Net interest margin expanded 29 basis points to 367% and excluding PPP in accretion on acquired loans, which introduced significant variability net interest margin increased by 33 basis points to 357%.
In the Securities portfolio, we've continued to pace, our investments of excess liquidity and yields increased 38 basis points to 236%.
Core loan yields expanded 20 basis points to four 3% and in September add on rates averaged five 5%.
We continue to benefit from our strong low cost funding base with 65% transaction accounts at September 30th and this strength with with further further enhanced in October with the acquisitions of Apollo and Drummond banks, which have similarly long standing granular relationships.
Looking ahead, we expect net interest income and margin to continue to benefit from rising rates.
In the fourth quarter, we expect the core NIM, excluding purchase accounting accretion to expand to the high 300 Ninety's.
We expect net interest income in the fourth quarter in a range between $115 million and $120 million.
Moving to slide nine.
Adjusted Noninterest income was $16 5 million a decrease of 0.8 million from the previous quarter and a decrease of $2 6 million from the prior year quarter.
The decrease from the prior quarter and prior year is largely driven by lower mortgage banking activity impacted by rising rates and limited housing inventory.
Quint out that wealth revenue overcame third quarter market conditions to remain flat with the addition of significant new relationships.
Other categories were generally stable with increases in F. B I see investment income offset by lower loan swap related income and lower SBA gains during the quarter.
Looking ahead, we continue to focus on growing our broad base of revenue sources and with the benefit of the expanded franchise, we expect fourth quarter non interest income in a range from 18 million to $22 million, which is inclusive of the operations of both Apollo and Drummond.
Moving to slide 10.
Adjusted noninterest expense for the quarter increased $5 2 million to $56 9 million include.
Included in the quarter or approximately $2 6 million unique expenses, including the provision for unfunded commitments elevated recruiting costs and project related expenses that are not expected to recur in the coming periods.
Salaries and benefits increased 0.9 million, reflecting successful recruiting, particularly with the addition of new commercial banking talent.
All in there were 15, new commercial bankers and treasury sales professionals, including our new team in Ocala.
Expansion in support functions reflects the acceleration of investments to scale the growing organization.
Noninterest expense includes the provision for credit losses on unfunded commitments, reflecting modeled results of changes in economic factors.
In other expense $1 million of the increase from prior quarter relates to a gain in the prior quarter on the sale of an Oreo property, causing a decline in the comparative results.
Also included within the other category are nonrecurring charges related to investments and initiatives in the third quarter.
Not reflected in adjusted results is 900000 in write offs of certain leasehold improvements.
We took the opportunity during the third quarter to purchase two branch properties that we had been leasing which will lower ongoing occupancy expense by approximately 300000 annually.
Looking ahead, we expect to maintain our expense discipline, while continuing investments to support growth.
We expect fourth quarter expenses scaling with the growing size of the organization and excluding the amortization of intangible assets to be in the range of 72 million to $77 million inclusive of the operating results of both the Apollo and Drummond entities.
As a reminder, the full benefit of cost synergies on both the Apollo and Drummond transactions will not be recognized until the second quarter of 2023.
On slide 11, the efficiency ratio on an adjusted basis remained flat quarter over quarter.
As we scale the company for growth and become the leading bank in our Florida markets. We continue to pace, our investments with discipline evidenced by our consistent focus on efficiency and looking forward to the fourth quarter, we expect the efficiency ratio to be in the low to mid fifties with the addition of both banks and then we will move lower from that point forward.
As we execute against the cost synergies of the combined organization.
Turning to slide 12, highlighting the continued diversity of our exposure and concentration levels, well below regulatory guidance and the peer group.
This diversification highlights our disciplined approach to managing concentration.
Construction and commercial real estate concentrations remain well below regulatory guidelines.
Turning to slide 13.
Outstandings increased $161 million or 10%, excluding PPP on an annualized basis.
The commercial pipeline increased to $530 million at quarter end and includes a number of loans, where closings were delayed into the fourth quarter due to the disruption of the hurricane in the last few days of September .
Average core loan yields increased by 20 basis points during the quarter with the September weighted average add on yields reaching five 5%.
Importantly, since the majority of our variable rate loans are tied to prime and the prime rate didn't reset until the end of September we can compare ending portfolio yields at September 30th to those at June 30th ending.
Ending portfolio yields increased 35 basis points to around four 5% at September 30th.
Are the benefit than a third quarter rate movement will be seen in the fourth quarter.
Loan yields will continue to benefit from the higher rate environment, and we expect corn yields in the fourth quarter, excluding purchase accounting accretion to expand meaningfully to the $4 70 range.
Also in the fourth quarter, we expect loan growth to continue with an annualized growth rate in the high single digits.
Turning to slide 14.
In the investment Securities portfolio, the average yield increase during the quarter by 38 basis points.
236% with purchases concentrated early in the quarter near 4%.
The value of the portfolio continues to be negatively affected by higher rates, we will opportunistically seek to redeploy portfolio run off and take advantage of higher rates, while prioritizing the utilization of cash for loan production.
Turning to slide 15.
Deposits outstanding were $8 8 billion and I'll take a moment to address the decline in deposits.
The team did an excellent job managing our deposit costs this quarter with our cost of deposits increasing by only three basis points.
Deposits declined by $423 million with 100 million that moved to wealth AUM $110 million decline in public funds as municipalities moved funds to the state's investment program.
41 million with time deposits and $25 million with brokered deposits.
So when you look at the components of the outflows only about 150 million exited the bank with some impact from rate sensitivity and a general absorption of liquidity in the market, but not otherwise and consistent with our typical seasonal trends during the Florida summer period.
I'll remind you that our deposit book is primarily small business and consumer operating accounts and keeping with the relationship nature of our business model and these accounts are typically less rate sensitive when compared to other deposit funding categories.
Transaction accounts represent 65% of total deposits and the strength of the deposit base. We think we will start to show up as a differentiator amongst the peer group.
On deposit pricing, we expect the competitive environment to become increasingly dynamic we have a very strong deposit base and expect that will continue to outperform our peers on deposit beta while we do expect to see our own cost of deposits start to increase at a faster pace than in the third quarter.
Moving to slide 16.
The allowance for credit losses increased during the quarter by $4 6 million to an overall $95 3 million with an increasing coverage a three basis point to 1.42%.
The provision this quarter was $4 7 million.
We remain watchful of inflation pressures and are carefully considering the impacts of higher rates on the economy, though our credit metrics remain very strong and continue to improve.
We will continue to take a conservative approach to provisioning and have considered the potential for losses related to the impact of hurricane in in the estimate.
On to credit metrics on slide 17, we're seeing sustained positive trends with net charge offs near zero nonperforming loans decreasing to 0.32% of total loans.
And the percentage of criticized loans to risk based capital moving lower this quarter.
We continue to assess the environment and the factors that might affect loan performance and this quarter the allowance for credit losses as modestly higher at 142% of total loans.
Turning to slide 18.
Our capital position continues to be very strong tangible book value per share was $15 98.
A decline from last quarter, that's attributed solely to the decline in accumulated other comprehensive income the result of recording increasing unrealized losses in the securities portfolio.
Without the year to date impact of security valuations on a OCI tangible book value per share would have been $18 92.
The ratio of tangible common equity to tangible assets increased to nine 8% and remains among the highest in our peer group.
Regulatory capital ratios were not affected by changes in the securities valuation the tier one capital ratio was 16, 5% and the total risk based capital ratio was 17, 5%.
And finally on slide 19, a longer term look at tangible book value per share.
Over the last five years, we've achieved a compound annual growth rate of 8% driving shareholder value creation and without the impact of securities valuation declines impacting a OCI that compound annual growth rate was 11% over the five year period.
Our growth outlook remains favorable evidenced by growth in commercial loans, driven by the expansion of our commercial banking franchise.
Rising rates will continue to have a material positive impact on net interest income and margin in the fourth quarter.
All of this on a foundation of strong liquidity and capital positioning us to maximize opportunities and continue to execute on our strategic growth initiatives.
We look forward to your questions Chuck I'll turn the call back to you.
Jersey, and Sheryl I think we're ready for Q&A.
Thank you we will now begin the question and answer session. If you have a question. Please press star zero one on your Touchtone phone. If you are using a speakerphone you may need to pick up your handset first before pressing any numbers. Once again, if you have a question. Please press star zero one on your Touchtone phone.
Our first question comes from Brandon Kim from <unk> Securities. Your line is now open.
Thank you and good morning.
Good morning, Brian .
Yes.
So I wanted to start on deposits I understand you're bringing on a sizeable amount of deposits with acquisitions, but we're not wanted to know what was the.
I'll look for organic growth.
In the near term.
Hey, Brandon this is Tracy.
Outflows in transaction accounts in the third quarter really didn't appear to be largely rate driven.
I kind of broke down the balances there, but we expect to continue to see headwinds to overall deposit growth in the fourth quarter, we do expect to see others move quickly on deposit pricing and just general absorption of liquidity across the system will likely be a factor, but all that said Q4 is typically an active and pretty strong quarter for deposit with.
Reasonable inflows for us we're conscious of the velocity of change in the market, but we will continue to be intentional in our actions were competitive and focused on relationships. So far we've been willing to let some of the transaction and rate focused deposits go but we'll just continue to be intentional about that.
Okay.
Even with the acquisitions come online and then being close could you update us on what the marks were and kind of what you're expecting for purchase accounting accretion in the fourth quarter.
Yeah, it's all pretty I'm pretty recent so we're still in the process of finalizing the Mark we really don't have anything to share at this point about the October 7th club.
Okay and that high 390, <unk> net interest margin that includes that's on a reported basis.
Yes.
The high free Ninety's margin is a core basis.
Okay, Okay all right.
Well I'll step back in the queue. Thank you for taking my questions.
Right.
Thank you. Our next question comes from Stephen Scouten from Piper Sandler Your line is now open.
Hey, good morning, everyone.
Good morning, I guess I'd love to hear what you were seeing more holistically throughout your environment low demand looked like pipelines were back up a bit quarter over quarter, which is nice to see so just kind of wondering what you're hearing from your customers, how youre thinking about demand into the next quarter and into 'twenty three given the.
Environment, and all where we're seeing and hearing.
Yeah, when you step back I mean, I guess I'll start with <unk>.
And now the time to be thoughtful as we move through this period.
And we continue to be.
Very deliberate in what were willing to put in the portfolio, where we're not and kind of looking back over time, we've talked about.
Our intention to be a conservative lender remained disciplined remained focused on diversity and so I think thats positioned us incredibly well as to where we are a lot of what we've seen coming in we've done a lot of hiring over the last 18 months and so we see material relationships moving over what gives me a lot.
<unk>.
Excitement is the fact that not only are we bringing over.
The loans, we're bringing over deposits wealth and other full sort of relationships out of out of it.
Other organizations and so I think that that momentum continues we put together an incredibly strong commercial banking team over the recent period, we continue to grow that team.
At least looking into the coming quarter, we expect so high single digit growth rate.
Tend to be very intentional on maintaining underwriting standards in some.
Asset classes, we backed away from given where we are and we continue to be very careful around monitoring the ability for operating companies to manage margins in an inflationary period, but.
Ultimately, we continue to be cautious thoughtful.
But had momentum going here into the fourth quarter. When you look out into the coming year, it's tough to give.
Any further guidance, we'll see how things continue to play out through the fourth quarter, but I do think now is the time to be cautious now is the time to be thoughtful.
And.
The good news is as I think that as everybody somewhat is moving back to a more conservative position. It opens up the ability for us to get the structures that we like and pricing that we like and so we remain disciplined early through this cycle. This allows us to be thoughtful as we move through this part of the cycle and ultimately get the risk adjusted.
Returns, where we want them.
Yes, that's great color and then are you seeing any kind of changing dynamics from competitors that last comment made me think maybe so are you seeing any I.
I don't know, whether it's the larger regional banks or smaller banks or what have you pulled back at all degree that does create opportunity for you guys.
There definitely is a significant pullback in commercial real estate across the <unk>.
The markets.
I'd say that <unk> seen in commercial real estate spreads move widen way out.
And.
We definitely see the competition pulling back Steven.
Okay great.
I think I know the answer this question based on some of your earlier commentary, but it would seem to me that the strength of Florida, and a weakening environment nationally. We don't just shine through more I mean, it seems like population flows are still strong real estate market is still relatively strong there compared to the rest of the country.
Or would you expect your deposits and your geography to be a big differentiator and then maybe less certain environment.
So what I like about where we are as we have optionality as we move through time right. So if you step back and look at the position of our balance sheet.
And look at the capital we carry the reserves and the allowance the reserves and the purchase marks the strong diverse core customer base and the discipline that we've executed over time and then you combine that with what Florida has been particularly over the last three or four years, if you will.
Look at the amount of wealth accumulation that's come in the market the economic drivers I definitely think that.
Florida outperforms through this cycle and.
So the what.
Gives me comfort is we do have the strengthened its balance sheet. We have the optionality that will provide opportunities again to take advantage of organic growth through well priced well structured credit relationships deposit relationships as well as potential acquisitions over time, and so I think.
I think we are about as positioned as best as we can be.
This is a moment, where a company like ours tends to outperform and when you step back and look even more broadly as we pull these three deals together our ultimate goal is to come out the other side of these deals with a 160 plus <unk> on the back half of the year. After we execute against the cost saves so when you have there.
That profitability momentum the capital and the position of strength and then the last thing I'd add is just the momentum with our culture in the company and the desire to be a part of our company. We're in really good shape and but as we move through this period, we need to be thoughtful cautious conservative.
And.
I'll be very aware of the risks that are emerging in the economy.
Yes, great color and then if I could squeeze in one last question just kind of around the pro forma balance sheet with professional let's see they are up to around 90% loan to deposit ratio do you guys have a feel for where with the two recently closed deals and then professional where you might be on a loan to deposit ratio perspective, and kind of how you have to think about I guess protecting.
Protecting your deposits.
The absorption of that.
Yes, I mean, we're still liquidity.
We're in the mid to high 70 is probably when you put all three organizations together as we move through this period.
The good news is on all of our transactions. They are tracking right in line with the models. When you look at the income Thats being generated in all cases, just like youre seeing across the banking system balance sheets tend to be a little smaller but margins tend to be a lot higher.
So I think we're in good shape going into this period their loan to deposit ratio is a little higher ours is a little lower Drummond has certainly way lower.
So I think when you put it all together it really probably doesn't move the needle from where we are much which still gives us a lot of liquidity as we move through time to redeploy into loans.
And Stephen this is Michael.
I was just can add that really we're just working to optimize the right volume mix as we move forward. So we're obviously in a very dynamic environment. So we'll continue to monitor that and manage through that to just optimize profitability and returns to shareholders.
Perfect I appreciate the color it sounds like a lot of good things to come thanks, guys. Thanks, Dave.
Thank you our next call.
Question comes from Brady Gailey from <unk>.
Your line is now open.
Thank you and good morning.
Good morning, Barry.
So I just wanted to be clear on the expense guidance the 72 to 77.
That includes the two acquisitions and that excludes the.
The intangible amortization does it also exclude merger charges.
It does it excludes merger charges.
Okay. So it seems like that's just a pretty big step up.
From where consensus was.
Sir you caught into the hiring.
You've made but any other cause I mean is it just the hiring or is there any other.
Inflationary pressures, that's pushing those expenses higher.
A couple of things I think consensus didn't fully contemplate a full quarter's worth so given that we had guided that we would close in Q4, we closed early.
So the other sort of issue is drummond.
Just picked it up doesn't file a Friday and see so it's hard to see the full consolidated which includes the insurance sub.
So when you work the math all the way through that I think we're kind of right on a run rate.
And then just kind of talk about expenses in Q3 looking back we took the opportunity to bring in what I believe to be probably the best group of people up in sort of the I 75 corridor, very solid well performing well executing team that.
Probably our largest team we've acquired to date and so that impacted the quarter with some onetime signing bonuses et cetera, but the payback on that will be material in terms of our ability.
To grow in that market and when you bolt that together with Drummond.
It's a really nice.
Group to put together.
So.
When you think about I know you guys are always looking for the next acquisition or looking for the next.
Higher opportunities to keep up the growth do you think you will still be.
Very focused on on the hiring effort like do you think that.
Expense growth could be a little higher doses do you.
No it'll it'll pay off over time, but do you expect to continue to hire kind of an above average pace here.
I think it probably slows Brady to some extent, given where we are going into potentially.
Slower economy.
In all likelihood we won't be hiring at the pace we are.
There will be hires along the way, but I think there'll also be some cost that comes out along the way and so I don't I don't think it moves at the pace that base. It is over time that being said, if we see great opportunities, we're going to take them in.
The market for that has been better than I've ever seen in many many years and so we'll be careful and cautious ultimately again, just kind of pointed back to coming out the other side of the deals I would like to be at or.
North of a one.
160, I think that will generate strong operating profits strong returns as we move through time, and we will continue to manage towards that we've got to balance the cost outs through the deals we got to manage manage the investments, we're making for growth, but when you go through all the wash of that that's where I want to land.
Then Chuck when you guys have been so active on the M&A front over the last few years.
Professional is a fairly large transaction for you all I mean do you take a breather. After you closed professional on the M&A side, especially considering kind of the economic uncertainty or or do you keep on going on that front.
Yeah, I would describe it this way our short term focus right now is integrating the three banks I mean, that's got to be our that Scott has to be our focus.
And.
We will potentially look at more deals as we move through next year. The challenges right now given the dynamic environment modeling deals right now.
Particularly challenging when you look at <unk>.
Deposit funding costs and a weaker economy. So.
It's possible, but for now we're focused sort of laser focused on integrating these deals and coming out with a strong profit profile.
Great. Thanks, guys.
Once again, if you have a question. Please press <unk> one on your Touchtone phone. Our next question comes from David Feaster from Raymond James Your line is now open.
Hi, good morning, everybody.
Good morning, David.
Maybe can we just touch a bit on on the middle market expansion efforts in and whether the new hires you've made have been.
To kind of support that and I guess, just any updates on the treasury management build out and anything else that you may need in order to support that.
<unk> more towards the lower end of the middle market and support some larger more sophisticated.
Borrowers.
Yeah, as we've talked we've been focused on executing against the lower end of the middle market.
Moderate size operating companies has been a target for us and we're seeing very good reception in that regard a fair amount of the commercial banking higher when we've done over the last year, our C&I operating focus hired and as hires including the team we just put inside the company.
And so we've made great progress on that we continue to onboard relationships I'm very pleased with our progress I'd say, we're about two thirds to three quarters the way through the Treasury bills and there's probably a little more cost to come on that is not anything material, but we still got some some build to do there, but as you know as we go into this period and when I look forward into.
What probably is the most important thing we can be focused on which is funding and deposits having a really.
Well put together C&I focused commercial banking team and then complementing that with really strong.
Treasury officers in combination with a lot of the investment we've made in technology late and early late last year. Early this year I think it really does put us in a position to begin to take material market share over the next few years.
And we've made real progress there David that's.
That's great.
Glad to hear it and then asset quality remains phenomenal you just you always have a great pulse on the local economy and you talked about some of the competitive dynamics that you're seeing in CRE I'm. Just curious as you look out there I mean, we're not seeing anything necessarily in your book, but is there anything that you're watching more closely are you starting to see.
Higher rates impact cap rates at all and I guess any other trends within your portfolio or even the industry from a competitive standpoint that might be worth pointing out.
Feel really good about our book I think it's performing extremely well I feel good about it over the cycle I think we've been very focused on maintaining discipline.
I'd say cap rates really have not yet adjusted to the reality of higher rates I still think that is a risk.
Probably the biggest risk to <unk>.
All banks right now is higher longer moderate to long term rates on the treasury curve if that were to move up I think the impact on commercial real estate valuations would be.
On an issue we would be dealing with.
You need to be really cautious there.
Sort of pulled out of non medical office kind of pulled out of retail unless it's truly credit tenant anchored.
Pulled out of hotels, we're not bringing on any builder lines AOS land very cautious with self storage.
We've taken a pretty conservative approach on what we're willing to do.
And with the potential impact of higher rates on cap rates, we're expecting a lot more equity in transactions.
Basically demanding more equity in transactions on the commercial real estate side. So.
It's definitely a it is not an environment, where you want to get over your skis is not an environment you want to be driving really high growth rates, its an environment to be thoughtful and cautious and make sure you have the right sponsors.
And importantly, probably most importantly, along with sponsorship would be having underwriting structures that will protect the bank through cycles and so it's it's a constant conversation here. It's a key focus of ours that being said in Florida things remain very benign and you can see by our portfolio past dues are well contained classified criticized ski.
Coming down it's probably the most pristine credit environment, we've ever seen so it's.
It's concerned about the future, but not the current periods.
And David just just just to rewind a quarter or two as well when other peers were growing at much faster rates, we were stressing a lot of our CRE deals.
Higher kind of leverage points and a lot of those pushed out of our pipeline. So we grew slower than the prior two quarters now we're seeing that market come back to us where people are willing to be accepting of those higher.
Amounts of equity that we force in the deals.
That's a good point.
And then last one from me just maybe touching on rate sensitivity to rate sensitivity you guys have done a great job driving margin expansion in the balance sheet naturally rate sensitive right.
I'm just curious how do you think about managing rate sensitivity going forward. Obviously, we've got another 75 is supposed to be coming next week and probably another 75 in December but just.
I'm just curious how you think about managing rate sensitivity and potentially lock in some of this and how you would look to approach that.
Yes, we continue to be really thoughtful there and careful David.
We over the last couple of years, we've demanded a lot of our commercial real estate go to swap and therefore saw a much bigger portion of our portfolio move into variable on the deposit side.
Really followed the national banks and had been slow to reprice deposits basically focused on profitability.
We've always been an asset sensitive organization, the sort of crown jewel of the company as the deposit franchise I think the deposit franchise will outperform that being said like I'm curious you talked about earlier.
Definitely got more dynamic, we're seeing rates specials from the national banks and things hitting the market now it's definitely gotten more.
More competitive, but ultimately we'll see the margin expand into this quarter, maybe a little bit into the first quarter and then what to see where rates go beyond that it's hard to say, but we.
We will continue to be thoughtful there we've been thoughtful in managing the duration of the investment portfolio. Most of the liquidity at this point will be used to fund loan growth as we move through time, and we will focus on driving strong margins and strong profits.
That's helpful. All right. Thanks, everybody.
Thanks, Mike.
Thank you. Our next question comes from David Bishop from D Group. Your line is now open.
Yes. Good morning, Thanks for taking my question.
Stripping out the bucket good morning in terms of how we should think about bone loan funding into next year, you mentioned a lot of the cash has been used up.
Given what youre seeing in terms of the competitive backdrop.
For deposits and such are especially with the state.
The wholesale funding brokered Cds play a bigger role.
In the near to.
Intermediate term in terms of funding that growth.
I think we still got plenty of liquidity to fund growth for a period of time the acquired balance sheets will bring liquidity to fund growth.
We will be able to reposition the bond books and use our liquidity for growth with time and so I think we still got a long road ahead before we're going to get into brokered or other higher cost funding sources that being said, we probably will begin to compete more with rate in the marketplace with our core customers I do expect us to continue to move some of our deposit.
It's over into our wealth management business, just it's the right thing for the customer when you can ladder CD or a ladder treasuries for those customers.
Got it and I think Tracy had mentioned.
Maybe the September core loan yields I think earlier on the call any chance you have the.
Cost of deposits at the same time frame.
All I had thanks.
Yeah, we've been a little cautious to give a guide on that just given the dynamic environment I'd just point you back to the NIM guidance.
As you model it out David it's really too dynamic to get too specific on cost of deposits I still think will be better than most and I don't think youll see a dramatic change, but we do expect it to go up.
I'll just add that our cost of deposits was it meaningfully different at the end of the quarter than what we reported for the full quarter.
Great. Thank you.
And we have no further questions in queue. At this time I will turn the call back to you Mr. Shaffer for closing comments.
Okay. Thank you Sheryl appreciate everybody's time this morning, and we'll talk to everybody soon thanks Joe.
Youre welcome. Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.