Q3 2024 Seacoast Banking Corp of Florida Earnings Call
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Speaker Change: Welcome to the Seacoast banking Corporation's third quarter 2024 earnings Conference call. My name is jail and I'll be your operator.
Speaker Change: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Speaker Change: If you'd like to withdraw your question simply press Star one again.
Speaker Change: Before we begin I've been asked to direct your attention to the statement at the end of the company's press release regarding forward looking statements.
Speaker Change: He coast, we will be discussing issues that 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 that act.
Speaker Change: Please note that this conference is being recorded.
Now I'll turn the call over to Chuck Shaffer, Chairman and CEO Seacoast Bank. Mr. Schafer you may begin.
Alright, Thank you and good morning, everyone.
Speaker Change: Before we start I want to express our sympathy for all those affected by the Hurricanes.
Speaker Change: Our Hearts go out to all those who lost loved ones or experienced catastrophic losses I also want to express my sincere appreciation for our associates, who with unwavering resilience valiantly reacted to both hurricanes, securing our facilities, while preparing their homes and families and quickly focusing on supporting our customers and communities.
Before and after the storm.
Incredibly impressed and proud of our entire team.
Speaker Change: And Tracy will provide a few further thoughts on the hurricanes here shortly.
Speaker Change: As we turn to the quarter, we will refer to the third quarter earnings slide deck, which is at seacoast banking dot com and I'm here with Tracey Dexter our CFO, Michael Young Treasurer, and director of Investor Relations, James Stallings, Our Chief Credit Officer.
Speaker Change: The seacoast team produced an excellent quarter.
Speaker Change: The results this quarter evidenced the inflection in growth and the start of margin expansion that we expected to materialize in the second half of 2024.
Speaker Change: We continue to see our investments in banker talent marketing and customer focused culture paying off producing annualized loan growth of 7% and annualized customer deposit growth of 7%.
Speaker Change: And of note loan originations were up 22% quarter over quarter and commercial noninterest bearing demand deposits grew by $67 million.
Speaker Change: Importantly, this quarter also generated annualized growth intangible book value per share of 20% to $16 20.
Speaker Change: And Additionally, net interest income noninterest income pretax pre provision earnings and the NIM, excluding accretion on acquired loans.
Speaker Change: All improved sequentially.
Speaker Change: This quarter showcases the strength of the banking team we've been attendant building over the last few years.
Speaker Change: And while completing our acquisitions in late 'twenty, two and 'twenty. Three we also recruited an exceptional commercial banking team credit team and retail banking talent with additions in all markets this quarter we.
Speaker Change: We continue this expansion with further investments in bankers and Fort Lauderdale, Gainesville and Tampa.
Speaker Change: And importantly, as we transformed our frontline. We've also made all the necessary governance and enterprise risk investments to be a well functioning compliant midsize bank.
Speaker Change: So in summary, this quarter demonstrated several proof points of our operating strategy.
Speaker Change: Organic growth was substantial compared to the industry driven by the investment in talented banking teams across the state over the last 24 months.
Speaker Change: And secondly, we saw growth in net interest income in the core net interest margin, which align with our previous guidance.
Speaker Change: Says were well controlled noninterest income was up over 30% from one year ago.
Speaker Change: The combination of an expanding margin into 2025 with strong organic growth will support earnings improvements as we move into the coming year.
Speaker Change: Okay.
Speaker Change: And just to remind you we are unwavering in our commitment to maintaining our conservative balance sheet principles. This commitment is the cornerstone of our strategy and a key factor to ensuring our long term success.
Speaker Change: We remain steadfast in our mission to establish seacoast as the leading player in Florida now pass the call Tracy you to talk about our financial results.
Thank you Jack good morning, everyone.
Tracy: Directing your attention to the third quarter results beginning with slide four.
Tracy: <unk> reported net income of $30 7 million or <unk> 36 per share in the third quarter.
Tracy: Pre tax pre provision earnings on an adjusted basis increased nearly 2 million quarter over quarter benefiting from growing revenue sources and well controlled expenses.
Tracy: Tangible book value per share increased 20% annualized to $16 20.
Tracy: Loan production was strong with growth in balances of six 6% on an annualized basis and the pipeline for future production remains robust.
Tracy: Growth in customer deposits was also strong total deposits grew four 2% annualized which includes a decline in brokered deposits, excluding brokered customer deposits grew six 6% annualized and noninterest bearing accounts grew over 5% annualized.
Tracy: On the net interest margin consistent with the guidance, we provided last quarter the margin excluding accretion of purchase discount on acquired loans has begun to expand increasing three basis points during the quarter to $2 nine zero percent.
In addition, we saw 2% growth in net interest income consistent with our expectations.
Tracy: Noninterest income increased 7% from the prior quarter and 33% from the prior year quarter with continued success and deepening customer relationships through services, including wealth management Treasury management and insurance.
Tracy: And we continue to grow the team with additional investments in talent in key markets.
Tracy: Our capital position continues to be very strong.
Tracy: <unk> tier one capital ratio was 14, 8% and the ratio of tangible common equity to tangible assets is nine 6%.
Tracy: Also notable if all held to maturity securities were presented at fair value the TCE to Ta ratio would still be over 9%.
Tracy: Turning to slide five.
Tracy: Net interest income expanded by $2 3 million during the quarter with growth in loans and securities along with growing noninterest bearing deposits outpacing a three basis point increase in deposit costs.
Tracy: Core net interest margin expanded three basis points to 290%.
Tracy: In the securities portfolio yields increased six basis points to 375% benefiting from recent purchases.
Tracy: Loan yields excluding accretion also increased six basis points to 558% occur.
Tracy: Accretion of purchase discounts on acquired loans was lower by 1 million compared to the prior quarter.
The cost of deposits increased to 234%, but with exit rates in September beginning to more fully reflect rate decline.
Tracy: Looking ahead to the fourth quarter. We expect continued expansion of net interest income and expect the core net interest margin to expand in a range of five to 10 basis points, driven by continued loan and deposit growth and declining deposit costs.
Tracy: Our expectations include 225 basis point rate cuts in the fourth quarter.
Tracy: Moving to slide six now.
Tracy: Noninterest income excluding securities activity increased $1 3 million in the third quarter to $23 5 million.
Service charges increased with continued expansion of our commercial treasury management offerings and new customer acquisition.
Tracy: Wealth and insurance agency income continue to grow other.
Tracy: Other income was higher by $1 5 million, including higher Spic's income and higher loan swap fees.
Tracy: Looking ahead, we continue to focus on growing noninterest income and we expect fourth quarter noninterest income in a range from 22 million to $23 million.
Tracy: Moving to slide seven.
Tracy: Assets under management have increased 16% year to date to just under 2 billion and have increased at a compound annual growth rate of 26% in the last five years.
Tracy: Wealth management revenues year to date reached $11 1 million up 17% from the corresponding period in the prior year.
Tracy: Moving to slide eight.
Tracy: Noninterest expense for the quarter was $84 8 million consistent with the guidance, we provided last quarter.
Tracy: Recent expense reduction initiatives are benefiting nearly every category with the increase from the prior quarter, reflecting continued investments in revenue producing talent.
Tracy: Expenses are well controlled and the efficiency ratio improved to 59, 8%.
Tracy: Discipline around expenses will continue to be a focus and in the fourth quarter. We expect core noninterest expense to again be between 84 and $86 million.
Tracy: Turning to slide nine.
Tracy: Loan Outstandings increased at an annualized rate of six 6% and average loan yields excluding accretion on acquired loans increased six basis points to 558%.
Tracy: And the pipeline remains strong and looking forward, we expect mid single digit loan growth in the coming quarter.
Tracy: Turning to slide 10.
Tracy: Portfolio diversification in terms of asset mix industry and loan type has been a critical element of the company's lending strategy.
Tracy: Exposure is broadly distributed and we continue to be vigilant in maintaining our disciplined conservative credit culture.
Tracy: Non owner occupied commercial real estate loans represented 35% of all loans and our distributed across industries and collateral types.
Tracy: As we have for many years, we consistently manage our portfolio to keep construction and land development loans and commercial real estate loans, well below regulatory guidance.
Tracy: These measures are significantly below the peer group at 34% and 227% of consolidated risk based capital respectively.
Tracy: We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk.
Tracy: Moving onto credit topics on slide 11.
Tracy: The allowance for credit losses totaled $140 5 million or $1, 38% of total loans compared to 141% in the prior quarter.
Tracy: The allowance for credit losses, combined with the $142 million remaining unrecognized discount on acquired loans totaled $282 million or two 8% of total loans, that's available to cover potential losses, providing substantial loss absorption capacity.
Tracy: As we move into the fourth quarter, we're continuing to assess the potential impact of hurricane Melton on our customers and whether and to what extent that may result in future credit losses.
Tracy: That may result in the need for a build in allowance in the fourth quarter and based on our work to date that may be in a range between five and $10 million.
Tracy: Moving to slide 12, looking at quarterly trends and credit metrics.
Our credit metrics remain strong charge offs included the resolution of a small number of individually evaluated credits with previously established specific reserves.
And the continued run off of isolated acquired portfolios.
Tracy: Nonperforming loans represented 0.79% of total loans.
Tracy: Additions to nonaccrual loans in the third quarter included a small number of credits delinquent on payments, but for which no loss is expected as collateral values are well in excess of the loan balances.
Tracy: The level of criticized and classified loans to total loans remained flat at $2 five 9%.
Speaker Change: Moving to slide 13 in the investment Securities portfolio.
Speaker Change: Average yield on securities is benefited from purchases in recent quarters at higher yields with the portfolio yield increasing during the third quarter to 375%.
Speaker Change: Changes in the rate environment positively impacted portfolio values and as a result, the overall unrealized loss position improved by $83 million.
In October we took advantage of favorable market conditions and have repositioned a portion of the available for sale portfolio.
We sold securities with proceeds of approximately $113 million, yielding an average two 8%, resulting in a pre tax loss of approximately $8 million impacting fourth quarter results.
Speaker Change: The proceeds were reinvested in agency mortgage backed securities with a book yield of approximately five 4% for an estimated earn back of less than three years.
Speaker Change: Turning to slide 14 in the deposit portfolio.
Speaker Change: Total deposits increased by $127 5 million with an increase in customer deposits of nearly 196 million, partially offset by a decline in brokered balances.
Speaker Change: The cost of deposits increased this quarter only three basis points to 234% a slower pace of increase than in previous periods consistent with our expectations.
Speaker Change: In September based on actions, we've taken and the portfolio rates began to decline.
Looking forward to the fourth quarter, we expect continued growth in core deposits and a continued decline in deposit costs and we remain very encouraged about the continued activity and focus across the franchise on deposit gathering.
Speaker Change: On slide 15, Chico's continues to benefit from a diverse deposit base.
Speaker Change: Customer transaction accounts represent 49% of total deposits, which continues to highlight our long standing relationship focused approach.
Speaker Change: Our customers are highly engaged and have a long history with us and low average balances reflect the granular relationship nature of our franchise.
Speaker Change: And finally on slide 16, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet.
Speaker Change: Tangible book value per share increased to $16 20.
Speaker Change: And the ratio of tangible common equity to tangible assets remains exceptionally strong at nine 6%.
Our risk based and tier one capital ratios are among the highest in the industry.
Speaker Change: In summary, we remain steadfastly committed to driving shareholder value and our consistent disciplined expense management positions us well as we continue to build Florida's leading regional bank.
Speaker Change: Jeff I'll turn the call back to you.
Jeff: Thank you Tracy and operator, we're ready for Q&A.
Speaker Change: Thank you.
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Speaker Change: Your first question comes from the line of Russell Gunther of Stephens. Your line is open.
Russell Gunther: Hi, good morning, guys.
Speaker Change: Morning, Russell Gordon.
Good morning, I wanted to start with the margin I. Appreciate all the color that you guys shared particularly the piece on where deposit costs were for September wondering first if you could talk to how the margin.
Speaker Change: Shook out in September as well.
Speaker Change: And then as we think about the guide for core expansion of five to 10 bps in <unk> could you just help triangulate that to where you would expect the reported margin to head as well.
Speaker Change: Sure Russell this is Michael.
Speaker Change: So.
Speaker Change: Maybe.
We'll start with the deposit cost side, a couple of questions kind of were embedded in there on the deposit cost I think just from a high level perspective, if you zoom out over the whole cycle, we had about a 45% deposit beta on the way.
We would expect a similar level of performance on the way down we have an acceleration of that data later in the cycle. We also we still think we have a very strong deposit base.
Speaker Change: We were very customer friendly during a liquidity tight environment and we think we'll be able to move pretty quickly on the way down as a reminder, our deposits are mainly an exception tiers. So we have the ability to flex those as we need.
Speaker Change: You saw the deposit costs in September that stepped down pretty materially.
Speaker Change: And we expect continued benefits into October from a full run rate of those reductions. So we would expect the margin expansion that <unk> guided to in the fourth quarter. When you take into account the amount of deposit reductions there plus we do assume two additional rate cuts, although one and November one and December the one in <unk>.
Speaker Change: Obviously, though not being that impactful for the quarter.
Speaker Change: Okay.
Speaker Change: Thanks, Michael.
Speaker Change: And then maybe switching gears to loan growth really strong quarter pipelines look good.
Thoughts on the coming quarter.
Speaker Change: How should we think about into 2025, given some of the hires mentioned.
Speaker Change: The.
Speaker Change: The strength of your markets, but also considering the potential impact of pay downs.
Speaker Change: Yes, and maybe Michael just kind of follow up on the growth, but I'll just sort of reiterate what I had in my opening comments really proud of the team. We're building I think they're exceptionally strong I think the growth you saw this quarter is the outcome of the investments in talent. We've made over the last 24 months and as you see kind of coming in here in the fourth quarter.
Speaker Change: Pipeline remains strong so yes, I think our guide here for Q4 is mid single digits in the long run we'd like it to be a little north of that as we move into <unk>.
Speaker Change: Late in the next year, assuming the economy and everything plays out, but I think just generally mid single digit type guide as a way to think about at least over the next few quarters dependent on the economy and rates.
Speaker Change: How things play out here, but.
Speaker Change: Feel very good about the team we have feel very good about the.
Speaker Change: Volume, we saw this quarter and expect.
Michael Young: A similar production quarter here coming in Q4, Michael anything you'd add to that yes, just Russell obviously, we have the two hurricanes late September and October.
Michael: Probably impacted growth a little bit in Q4, which is why maybe a slight step down in the growth quarter to quarter, plus a little higher maturities in Q4, but we still see the momentum in the pipeline and the customer conversations just a slight probably lag at the beginning of the quarter here.
Speaker Change: Got it okay, great. Thank you both and then just maybe tying it all together last one for me so.
Speaker Change: Like we've got the expanding Dan we've got growth inflicting higher how are you guys thinking about an ROA target for 25.
Speaker Change: Yes, we don't have anything out there, but obviously, we want to be north of one as we move through time and we're very keenly focused on profitability I would say as we look over the next coming quarters and into next year that is our primary objective right now we've made a lot of really solid investments and talent around.
Speaker Change: The company over the last 12 months like I said earlier 12 to 24 months, but over the coming quarters. Our goal right now is to drive profitability North.
Speaker Change: Morris literally deliver a better profitability profile and so that is our objectives coming into the year.
Speaker Change: Got it alright, thanks, Chuck Thank you guys.
Mike: Go ahead Mike.
Mike: I was just going to add on that if you look back historically, our net interest margin is significantly higher than where we are today I think with our kind of fixed fixed rate balance sheet and low cost deposit franchise that we want to kind of re evidenced youll see the margin expansion.
Mike: Going forward that will kind of get us back to profitability level that we're happy with.
Mike: Yeah and I'll just thank you all.
Mike: I will just.
Russell Gunther: Yes, Thank you Russell.
Mike: Momentum is strong and with the strong momentum inflection in margin.
Mike: That all sets up a good company here.
Speaker Change: Your next question comes from the line of Woody lay of <unk>. Your line is open.
Speaker Change: Hey, good morning, guys.
Hey, good morning.
Speaker Change: Wanted to just touch on the smaller bond repositioning you announced for October is this motivated by the pickup in loan growth and if we see the growth sustained from here.
Speaker Change: There potential for some.
Speaker Change: Further restructuring.
Hey, everybody this is Michael.
Michael: Did we did reinvest the proceeds of that restructure into new security. So it's not necessarily something we did to fund loan growth and we're seeing quite frankly strong deposit growth as well.
Michael: You saw this quarter on a core customer basis. So it's not really a liquidity play so much as just our focus on kind of the math and the earn back and when we find opportunities where its reasonable with kind of the rates moving higher here recently and less convexity in terms of what we would reinvest into it made sense to go ahead and take the opportunity.
<unk> to do.
Michael: A small reposition on a select group of the book So we will just keep doing that.
Michael: If if the opportunities present themselves and we will stay away from it if it doesn't make sense.
Speaker Change: Got it and then wanted to hit on Accretable yield real quick it was a little bit of a headwind in the third quarter.
Speaker Change: Just any any kind of guide you can give for the next couple of quarters do you think the $9 million a good run rate or does it take a further step down from here.
Speaker Change: Hey, Trey.
Speaker Change: P.
Speaker Change: Yes, that's going to continue to be difficult to predict.
Speaker Change: But you might expect and if you look back over the last few quarters you can see as we get further out from the periods of acquisition that.
Speaker Change: That level of accretion start to taper off so I think it.
Speaker Change: It's difficult to put a specific number on around timing. That's obviously just uncertainty around timing over the next few years.
Speaker Change: But maybe the trend that you've seen in the last few quarters could be a good indication of where.
Speaker Change: Christian goes in the next few quarters, if you think about the portfolios and burn it off at a pretty stable rate at this point, given where rates are and so.
Speaker Change: If you just trend it out from where it's gone in the last few quarters. It probably gives you a good sense of where it's headed into the coming year.
Speaker Change: And then maybe one other sorry this Michael one other thing to tack on there what he just as you think about it in aggregate, we do have the CDI amortization as well thats headed down so those will both be moving lower with time. So the net impact is a little more marginal than just the purchase accounting accretion by itself.
Got it I appreciate that color.
And then maybe just last from me shifting over to the noninterest bearing deposits I mean, the growth was great to see in the quarter. It feels like trends are strong there.
Michael Young: Do you think balances can continue to March higher from here just given the the new client onboarding.
Yes, I mean, I was really encouraged about that.
And I do think it is 100% because of the new client Onboarding. So yes, I think as we move through time, we can continue to move kind of at the pace. We have it's a key focus of ours.
Michael Young: On the C&I side of the business, we are 100% focused on full relationships. So when we're lending to these clients were expecting the clients move basically the entire banking relationship and we're seeing that fairly consistently so.
Michael Young: Encouraged to see that and expect that to continue.
Speaker Change: Great. Thanks for taking my question.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of David Feaster, Raymond James Your line is open.
David Feaster: Hey, good morning, everybody.
Speaker Change: Okay David.
David Feaster: I wanted to start on the organic growth side I mean, it was great to see what we've been talking about for a while come to fruition and it's also good to see the stability in the pipeline, which again supports that.
David Feaster: Sustainable I'm, just kind of curious how you think about the complexion of the pipeline obviously growth in this quarter was driven by CRE I know we've had a notable focus on trying to drive C&I growth that obviously it takes time to bring over relationships, but I'm. Just curious how you think about the complexion of the pipeline and.
And drivers of growth going forward do you still expect it to be CRE heavy near term in and when do you think we can start seeing more of a C&I contribution.
Speaker Change: Yes, and I would say, David its somewhat dependent upon where fundings happened and whats term debt versus not but if you were to look at the production in the quarter. It's about 50 50, CRE C&I I think that probably continues in the coming quarters.
Speaker Change: And Thats about what our run rate has been thats about kind of where.
<unk> been now for a while so I do think over time you can see if you look owner occupied CRE was up.
Speaker Change: Non owner occupied CRE was up a little more as you mentioned.
Speaker Change: It would be pretty balanced as we move through the coming quarters.
Speaker Change: And that does I said, it's about 50 50.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: And then maybe touching on the deposit front I mean, you talked about.
Speaker Change: Starting to reprice deposits lower.
Speaker Change: Curious how's reception, Dan with your clients so far.
Speaker Change: No.
Speaker Change: As you think about trying to find that point, where you can start.
Speaker Change: You could push deposit costs lower without losing the relationship or was in the deposits.
Speaker Change: How are those conversations going in and.
Speaker Change: Where are you able to drive like what rates are on a blended basis are you able to drive new core deposit growth today.
Yes.
Speaker Change: I'll take the second part of that question around the sort of new deposits coming on but just in terms of client reaction, we really didn't see any pushback at all it's gone pretty well.
Speaker Change: Clients accepted it and we've seen the competition moved down so.
<unk> been kind of a good news and that was the thing that we have to watch carefully is whereas the competition go.
Speaker Change: As Michael mentioned earlier as we went through the prior year, obviously coming on the back side of the banking crisis in mid to early 'twenty three with the bank failures, we were very client friendly and.
Speaker Change: We move things up pretty rapidly there and we wanted to protect client relationships and maintain liquidity in the balance sheet and maintain our core deposit franchise as you know over our history. We continue to maintain a very customer focused non transactional funding base and so we protected that.
Speaker Change: As rates come down on the other side I think it gives us a lot of <unk>.
Speaker Change: <unk> ability to move rates down so as the market moves we're going to move and so I think that is that a benefit to our balance sheet given that.
Speaker Change: Kind of hurt us on the way up the heavy level of fixed rate and the loan book it'll help us on the way down and I think we'll have a little more flexibility than probably a lot of others on the deposit side. So I think thats a benefit we see out ahead for US and then Michael I don't know if you want to take the one on what the new add on rates for deposits was yes, David new add on rate on a blended basis.
Michael Young: We were kind of in the low threes generally across the quarter, we've pretty typically been around 200 basis points below fed funds through the cycle. So those rates had lower we would expect to be adding on.
Speaker Change: Incrementally lower rates.
Speaker Change: Okay.
Speaker Change: And then last one from me just kind of maybe a high level question.
Speaker Change: Yes, I just wanted to get your thoughts on the Florida economy, especially post Hurricanes right. I mean, you talked about it I mean, these storms can be catastrophic right.
Speaker Change: Insurance costs have already been an issue in the state I'm curious.
Speaker Change: You got to imagine that premiums are probably going to continue to increase maybe some insurers leave the state I'm curious how you think about how does that impact the Florida economy, especially the coastal ones and impacts on CRE from these trends.
Speaker Change: Curious, how you think about some of the impacts on the broader economy.
Speaker Change: From this.
Speaker Change: Great question really hard to answer David.
Speaker Change: I think our initial reaction is we've been through a lot of hurricanes in the state and things.
Thanks.
Speaker Change: Are always challenging at the outset, but we work our way through it and I think the state will work their way through this you know the insurance.
Speaker Change: Premiums are certainly an issue here, we started to see we kind of look back over the last couple of years, we saw a big run up then we got some tort reform, we saw insurance premiums start to stabilize and arguably start to come down a little bit as insurance companies started to reenter the market.
Speaker Change: As that continues to happen I think in terms of the storm impact I think it was.
Speaker Change: Yes.
Speaker Change: Focused on the Tampa, St Pete kind of West coast markets, and particularly the barrier islands, but when you get beyond that the rest of this data I think is pretty much 100% backup business. So.
Speaker Change: I think the impact will be limited and I know the state goes through these things we always come out the other side, okay, and so I still feel very confident in the economy very confident in Florida, and yes, we probably will see insurance premiums continue to be a bit of a challenge.
Speaker Change: Okay. That's helpful. I appreciate you all.
I appreciate it Dave.
Speaker Change: Again, if you would like to ask a question simply press star one on your telephone keypad.
Speaker Change: Your next question comes from the line of David Bishop.
Speaker Change: Of the half the group your line is open.
David Bishop: Yes, good morning Chuck.
Chuck: Hey, David.
David Bishop: Hey, a question.
We've had a lot of your peers talk about.
David: A lot of headwinds from loan payoffs. This quarter is maybe there is some clarity or taking some profits off the table.
David: Maybe reinvest in new projects, just curious how payoffs loan payoffs this quarter versus recent trends.
Michael Young: Luckily you want to take that one I think you got pay off yes, Sir yes, David This is Michael honestly it was actually it was a positive for us.
Michael: We saw lower levels of payoffs this quarter I think again, if you kind of zoom back out.
Michael: We were a little more cautious in late 'twenty two in mid 'twenty, three and had less construction fundings and things that were maturing.
Michael: So I think thats, just all else equal a little less of a headwind for us and then just having stability kind of post the M&A environment I think you're just seeing lower levels of pay offs.
Michael: To achieve greater levels of net growth.
Michael: It wasn't.
Michael: It wasn't really much of an issue for us in the quarter.
Michael: Yes.
Speaker Change: Got it.
Speaker Change: Look ahead anything alarming from our larger payoffs or not really.
Speaker Change: No I think we're seeing more stability in the book.
Speaker Change: Obviously lower rates, you could see higher prepayment speeds across the portfolio, but we're we haven't seen that yet at least with just a 50 basis point cut.
Speaker Change: And then we do have a little higher as we talked about earlier, a little higher level of maturities in the fourth quarter, which is why we're kind of thinking the net growth between the hurricane and that could be more mid single digit levels as opposed to where we were this quarter, but nothing else thats really idiosyncratic to call out.
Speaker Change: Got it and then I wasn't sure if I heard correctly.
Speaker Change: During the preamble the uptick in non accrual loans did I hear that you guys are well reserved or not expecting much in the way.
Speaker Change: Of loss content, given appraised values.
Yeah go ahead, Chris.
Thanks, David we did see a little bit of an uplift in nonperforming loans. This quarter, it's really a handful of lines and.
Speaker Change: And those have sufficient collateral no loss is expected there.
Yes, those are alright, thats part of the question.
Speaker Change: They were already graded in the classified assets and just moved to NPL. There just go on through the natural cycle.
Speaker Change: Okay got it.
Speaker Change: And then Chuck you.
Speaker Change: You noted as well, it's been pretty pretty stellar growth on the wealth management side of the business.
Just curious.
Later, we can frame it in terms of like new new account growth versus sort of market depreciation and is this an area where you could dip your toe O&M.
Speaker Change: Look to acquire additional <unk> or really add more aggressively on that front. Thanks.
Speaker Change: Yes, it's a business, we really like the return on capital in the wealth management business is exceptionally strong.
Speaker Change: And as we bank wealth management clients and both on the bank side and the wealth side they tend to be clients for life and so we think very highly of the business. It's a business. We're very focused on union, we looked at wealth.
Speaker Change: Wealth management acquisition opportunities, we will look at them over time.
Speaker Change: We've not done one to.
Speaker Change: To date, but it is something that we could do if something was unique that they came along.
Speaker Change: But we really like the business as we've talked about in the past and we think it's a really solid business for us and I think our business is deeply interconnected to our commercial banking franchise and we see very often when our commercial banking clients liquidate companies, we often times get the opportunity to manage the assets and help those family.
Speaker Change: He's out so.
Speaker Change: Phenomenal business for Us, we love the business and it's something we'll continue to focus on.
Speaker Change: Great. Thank you for the color.
Speaker Change: Thank you.
Your next question comes from the line of Stephen Scouten of Piper Sandler Your line is open.
Stephen Scouten: Hey, good morning, everyone. Appreciate the time.
Curious Chuck when you talked about getting back to that 1% ROA and time I assume that would primarily be driven by kind of loan growth.
Stephen Scouten: Balance sheet mix and an improving NIM is that is that fair to say or would you think there's like another.
Stephen Scouten: Driving force there that's worth that's worth, noting as well that'd be more impactful.
Speaker Change: Yes, I think at a very high level, our expense base is well invested and I think we've got the team to drive.
Speaker Change: Growth over time, and when you kind of sort of.
Speaker Change: Thanks.
Speaker Change: <unk> got a lot of those investments made and then you look at kind of the growth that we've seen in our focus on noninterest income the investments in commercial bankers investments in Treasury management talent investments and well what Youre seeing is the operating leverage start to pull through and so when you think about the coming year the combination of.
Speaker Change: <unk>.
Speaker Change: Decent to strong organic growth combined with potential for margin expansion in particularly as rates come down when you kind of put the two of those together it starts to really drive some profitability improvement and then I know you can see that in the model and so.
Speaker Change: We've got a really great team, that's really focused on growth and they're consistently onboarding new clients and so it gives me some confidence that that in combination with getting past the margin headwinds that we've been faced over the last year or so are really starts to set us up to speed.
Speaker Change: Solid profitability improvement.
Speaker Change: Yes, Okay. That's super helpful. That's great to hear and then I guess as I think about the margin expansion.
Speaker Change: And you guys talked about kind of trends continuing to improve there and return maybe closer to the historical levels. If I look at the core NIM and I don't know if thats. How you guys think about it but it was like three six range back in <unk> 'twenty two before we started the rate hike cycle is that kind of where you would think it could get back to you.
Speaker Change: Or is there anything thats changed around the balance sheet that would allow that core NIM.
Speaker Change: To be above that level or how can you kind of frame up the potential for the core NIM the core earnings power from that perspective.
Michael Young: Hey, Steve its Michael.
Michael: We're not going to give any guidance for 2025 on where we think that's going to get to obviously I think everyone's expectations around the number of fed cuts is going to be sort of a determining factor as we move through next year as well as kind of the shape of the yield curve. So those caveat out there I think we do expect.
Michael Young: Margin expansion.
Michael Young: Per rate cut maybe two to four basis points could be a little better it could be a little worse, depending on the shape of the curve et cetera.
Michael Young: But we expect that to come through and so if you think about the moving pieces into next year.
Michael Young: We now and the end of next year, we've got $450 million of securities cash flow at <unk>.
Out of three 3% rate, that's going to reprice up into a higher rate environment. We've got another $750 million plus a fixed rate cash flows off the loan book that are going to reprice from around.
Kind of high fours into the current environment. So those provide some pretty steady tailwind regardless of what happens with with rates.
And the number of cuts and then the cuts themselves are just very additive given our fixed rate nature of our loan book and the adjustable rates even on our loan book don't reprice really until 'twenty six 'twenty seven so we've got pretty stable asset yields.
Michael Young: With.
Michael Young: Improving deposit costs that I think youre going to drive the margin expansion. So we feel comfortable with the direction and pace of that going forward into next year, but the number of cuts will have some output impact in terms of where that goes and how high and how quickly.
Speaker Change: Yes, yes, that's extremely helpful color, Michael and just to clarify when you talk about the two four bps.
For <unk>.
Speaker Change: Per rate cut are you thinking about that on a core basis or on a GAAP basis.
Michael Young: Yes core basis, I think thats, what we can manage the GAAP basis around the accretion will depend on just the pace of repayments there.
So it really talks about the core and I do think given given our sort of friendliness with clients.
Michael Young: Early on their deposit rates I think there's more opportunity to move a little more quickly on the front end, but that will obviously start to decelerate a little bit on the back end of kind of the rate cycle. So just like we saw on the way up.
Speaker Change: Yes. It makes sense and then last thing for me just you guys. Obviously have created a ton of excess shareholder value since 2014 by M&A.
Speaker Change: The environment has not really been.
Speaker Change: Maybe setup.
Speaker Change: Set up for that in the last year or so but with rates coming down are you seeing a pickup at all in conversations or do you think there is a greater likelihood of something manifest manifesting here in the near medium term.
Speaker Change: And kind of continue on that path.
Speaker Change: Just kind of give you a flat I don't think anything's really changed in terms of the level of conversations there are certainly conversations out there we have relationships throughout the state that we continue to chat with.
Speaker Change: We will be disciplined it's going to have to make sense from our earn back perspective, and it's going to have to make a lot of sense from a return perspective, because I think our organic story is so strong so we'll be really thoughtful if we do anything but.
There are conversations happening.
Speaker Change: Got it very good thanks, Chuck Thank you Michael and I appreciate the time.
Steve: Thanks, Steve.
Speaker Change: With no further questions. This concludes our Q&A session I would now like to.
Speaker Change: Ill turn the conference back over to Chuck Shaffer for closing remarks.
Chuck Shaffer: Alright, well. Thank you all for joining us this morning, and just again to reiterate my great appreciation for our associates that worked so hard to get us through the two hurricanes, there's a lot of work and there's a lot of or a few weeks and you all did a phenomenal job.
Chuck Shaffer: Both getting the bank prepared and taking care of our clients. So just thank you to all our CECO associates for that I appreciate everybody joining the call. Thank you that'll wrap us up.
Speaker Change: This concludes today's conference call you may now disconnect.
Okay.
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