Q2 2019 Earnings Call
Centerstate banks second quarter 2019 earnings release.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow with that time.
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Zero on your Touchtone telephone as a reminder, that this call may be recorded I would now like to introduce your host for today's conference Mr. will meshes Chief Financial Officer, you may begin.
Thank you Kathleen and welcome everyone to the Centerstate second quarter earnings call. Thank you for joining US joining me in our presentation today or Ernie Pinner Executive Chairman, John Corbett ER CEO , Steve Young our COO and Richard Murray, the CEO of Centerstate Bank.
Before we begin our remarks I want to remind you that our comments made include forward looking statements.
Within the meeting.
The proposed private Securities Litigation Reform Act of 1995.
Any such forward looking statements, we may make are subject to the safe Harbor rules.
Please review the forward looking disclaimer and Safe Harbor language on page 12 of our earnings release.
I'll also remind you that you can find our earnings release and other financial information in the Investor Relations section of our website.
I'll now turn it over to Ernie Pinner Executive Chairman.
Thank you will.
I want to be sure welcome everyone to the call today I want to thank you for your interest and support of Centerstate. We appreciate you bid on the phone.
My comments brief would be that.
From my point of view, the quarterly busy, especially when you consider that we are well you saw in my opinion, an excellent deal with.
Let's see income operation.
Ah interesting from my point of view again is it it's been a great mix. The cultures are very well all the people who work being excellent with each other and we're on track.
Our conversion in September so let in their process, there's a lot going on at all times.
Oh, and we appreciate sports you've given us in the processing. So at this time I'll turn this back to Mr. Corbett John .
Thank you Ryan good afternoon, everybody and thank you again for your interest in Centerstate and taking the time to join the call.
For the second quarter Centerstate produced a net income of 54, and a half million dollars or 42 cents per diluted share.
If you exclude merger costs. The net income improved to 66, and a half a million dollars and earnings per share increased to 51 cents.
The adjusted return on assets for the quarter was 1.6%.
Return on tangible common equity was 18% and the efficiency ratio landed at 52%. So basically stable with the first quarter, but we still have the cost savings to achieve from national Commerce.
Even with dividends and modest dilution from two large acquisitions in the last year, our tangible book value per share still grew 16% year over year.
Are we close National Commerce on April Onest and are on schedule to complete the systems conversion by the end of the third quarter.
We went back and.
We added together all the conversions that have been completed by Centerstate, Alabama National National Commerce, and combined our teams have completed over 50 conversions. So as challenging as conversions can be this has been a great opportunity for our teams to grow closer together.
By sharing ideas and collaborating on best practices.
Richard will or joining Steve and me a couple of days each week in our offices in Atlanta, and as anticipated had been great partners as we work on recruiting retaining and inspiring our team about the future opportunities centerstate.
In addition to working on the integration we spent a lot of time discussing the economic cycle and the inverted yield curve.
And from those discussions deciding how we want to position the balance sheet at this point in the cycle.
Three things are clear to us.
Number one macro risks are increasing.
Number two desirable growth that fits within our credit appetite is more challenging.
And number three our company is highly profitable and our capital formation rate strong.
So that leads to the question, how do we deploy our profits and excess capital.
Do we want to leverage our capital by investing in riskier late cycle loan growth.
Or is it the point in the cycle to use our capital to invest in Centerstate stock in a lower risk profile than we built earlier in the cycle.
The loan growth story, it's been interesting.
We had very strong production in the second quarter, we produced $864 million in new loans, which was 43% more than our two companies produced in the first quarter, but net growth was still modest and only 1%.
So the payoffs story, Israel, Richard has been analyzed it and we believe that the pay offs.
Our reflection of the mindset of our Florida, and Atlanta clients and their risk aversion because of the lasting scars from the great recession.
We're finding that many of our clients are skittish about the cycle risk and are just selling the projects or their entire companies.
But the opportunities for new lending are still abundant.
We analyze the deal flow in the second quarter and determined that we passed on $700 million of opportunities, we're 45% of the opportunities we review during the quarter.
No the $700 million, we passed on 85% of them.
Because they didnt fit our underwriting policy the policy.
And competitors were willing to stretch on loan to value debt service coverage and recourse.
If we had stretched in both just half of the deals we passed on our loan growth would've exceeded 10%.
So the credit team has taken a long range disciplined approach on linked cycle lending and in the meantime, we use the opportunity to purchase centerstates shares with our profits for the quarter, we repurchased 1.3% of the company, which still leaves us with a 10% tangible common equity ratio inc. capital continuing to build.
As we think about the inverted yield curve and the prospects of the lower for longer and reminds us of the summer of 2016 after Brexit.
At that time back in 2016, we laid out three strategies to create earnings growth in that challenging interest rate environment.
The first strategy was to increase our loan to deposit ratio from 77% then goal of 85% and we've done that and today, we're at 89% and our net interest margins up as a result.
The second strategy was to invest in non interest income lines of business that make us less dependent on interest rate margin.
Since the second quarter of 2016 or fee income is up nearly 12 million a quarter, so $48 million per year of new fee revenue.
About half of that new revenue is in mortgage.
Third is in our interest rate swap business and the balance in SP a growth.
The third strategy was utilizing M&A and branch consolidations as a means to drive efficiency.
Since the summer of 2016, we've completed six acquisitions with 147 branches.
We have consolidated 63 of those branches are 43%.
The result is a 40% increase in our average deposits per branch today, we stand at $88 million per branch deposits. So we acknowledge that this is a challenging interest rate environment for the banking industry.
But this team is faces challenging forward proven that it can adapt and be successful regardless of the environment. So now I will turn it over to Steve to talking about our net interest margin and fee businesses and it will and talking about our expenses and capital management Steve.
Thank you John Good afternoon, everyone I will report out on our second quarter changes in our organic balance sheet, our second quarter revenue results in both net interest income and noninterest income as well as our updated expectations for both balance sheet and revenue for the remainder of 2019.
So first of all related to the balance sheet as John mentioned net loan growth was 1% annualized for the second quarter and 1% annualized year to date.
Non CD deposit growth decreased 1% for the quarter, primarily due to seasonal impacts, but it increased 4% for the year to date.
As a reminder, non CD deposits increased approximately 9% in the first quarter.
Deposit composition remained strong at 630 as total checking account balances represent 49% of total deposits of which 30% of noninterest bearing deviate.
Moving onto the revenue results reported net interest margin remained strong and increased five basis points to 445 in the second quarter versus 440 in the first quarter, which was higher than our core 25 to 435 guidance.
Loan accretion decreased from 49 basis points in the first quarter to 44 basis points in the second quarter, but was higher than our expectations.
Excluding all loan accretion on acquired loans net interest margin improved 11 basis points to four one this quarter, which was in the center of our guidance of 395 to four or five.
The primary driver of higher NIM is due to the income acquisition closed on April 1st.
One other item on margin total deposit costs increased 13 basis points from the prior quarter to 70 basis points.
Excluding the impact of income total deposit costs increased only four basis points from the first quarter, while total interest bearing liabilities increased only one basis points in the first quarter.
Noninterest income as expected during the current quarter noninterest income as a percentage of average assets declined from 96 basis points to 91 basis points due to income acquisitions, but was better than our guidance of 85 to 90 basis points pre durable.
Total noninterest income increased $8.6 million for the prior quarter, primarily due to increases in mortgage banking revenue correspondent banking revenue and the effects of the additional income and noninterest income.
Mortgage banking noninterest revenue increased by $2.6 million for the quarter to 6.8 million.
New mortgage loan origination for the quarter was a record 416 million versus 289 million pro forma for income in the first quarter.
63% of production with secondary while 37% was booked on the portfolio.
The secondary gain on sale margins were 2.61%.
And purchases were 82% of the closings of since second quarter versus 18% of revised.
Correspondent banking revenue increased two and a half million from the prior quarter and four and a half million dollars for the prior year second quarter, primarily due to continued increase in the interest rate swap revenue.
For our interest rate swap program transactions for the second quarter of 2919 increased by 43%, while notional value increased by 90%.
An expanded customer base flatter yield curve and lower rates are the primary drivers for the increase production.
Interest rate swap revenue and pipeline is strong it's because she has continued to be a tailwind in a flat yield curve environment.
So lastly, our 2019 balance sheet and revenue guidance.
Loan growth based on John's earlier discussion on our credit appetite, our loan production and pipeline and our payout expectations loan growth is expected to increase low to mid single digits for the remainder of 2019.
Deposit growth, we expect deposit growth to continue to approximate mid single digits as it has in the first half the year.
As a reminder, due to the seasonal nature of some of our accounts typically we see deposit balances grow at a higher pace in the first quarter in the fourth quarter that are more muted in the second quarter and third quarter.
So theres no change in our guidance there.
Net interest margin based on the new lower yield curve as well as our forecast of two rate cuts. This year, we're revising our NIM guidance ex loan accretion.
Down to 3.90% to 4% for the remainder of 2019 versus 395 to four or five in the previous quarter.
Reported NIM continues to be a little higher than expected due to higher payoffs and higher loan accretion.
Based on our internal forecasts, we would expect loan accretion to add approximately 35 to 40 basis points for the remainder of 2019.
This potentially remains lumpy based on prepayment rates, which could affect results.
In total we would expect reported margin to be between 430 and 440 for the remainder of 2019.
Which increased five basis points from our core 25 to 435 guidance in the previous quarter.
On a smaller balance sheet.
Non interest income non interest income to average assets was 91 bits for the second quarter, which was better than expected due to some of our noninterest income businesses performing at a higher clip.
Based on the current environment, we would expect noninterest income to continue at these elevated levels in the back half of the year.
The third quarter will be our first quarter with the Durban penalty as it is.
18 months since the company crossed 10 billion in assets the impact of Durbin is expected to be approximately $10 million to $12 million annually.
Or six to seven basis points of non interest income to average assets.
As a result of both our expectation for elevated non interest income as well as the Durbin impacts we would expect the ratio of non interest income to average assets to range between 80, and 90 basis points for the remainder of the year.
With that I will turn the call over to will discuss credit noninterest expense and share repurchase results.
Thanks, Steve we had good improvement in our non performers this quarter with our npls to loans plus Oreo down from 51 vets last quarter to 28 basis points this quarter.
We ended the quarter at 26 million in nonperforming loans, and including or a $32 million and npis.
Our allowance coverage of nonperforming loans rose back to healthy, 154% our loan loss provision of 2.8 million exceeded the 2.2 million and net charge offs.
This represented an annualized net charge off rate of eight basis points for the quarter, which brought our cumulative five quarter total to 19 basis points. So an average of about four basis points annualized per quarter over the last five quarters.
With respect to Cecil our project team continues to do a great job and has us on track with our plan.
As we've noted before we're not yet at the stage, where we are prepared to disclose the expected impact on our allowance levels, but we plan to be in a position to give some guidance there on our third quarter call.
We did include in our lease on the bottom of page six the current breakout of our $71 million discount on PCI loans, which shows a credit discount of approximately 28 million and a non credit discount of approximately $43 million.
Thats a new disclosure.
This quarter.
On the non interest expense side.
Hey totaled 106 million, excluding the $15 million in merger related expenses, which was about where we expected that number to be with the addition of the income CEDIA amortization and having the charter conversion behind us.
This resulted in an operating efficiency ratio of just under 52% again, excluding the merger related expenses.
The third quarter will again be messy with a smaller component of the income conversion occurring this month in July but the main income conversion occurring in September .
But for the fourth quarter should be pretty clean after that.
We still expect the income cost saves to be in line with our modeling.
But we do also acknowledge that our.
Case may fluctuate somewhat from quarter to quarter based on a number of factors, including the performance of our noninterest income business lines.
Our effective tax rate in the quarter remained pretty consistent in the 23.5% range, which is about where we expected to remain for the rest of the year.
Turning to repurchases as we noted in the release, we repurchased 1.68 million shares at a price of just under $23 per share during the second quarter, leaving our remaining unused authorization at 4.8 million shares.
As you heard John say with attractive growth more challenging and was high profitability, we're forming capital at a rapid rate.
In a in a quarter, where we were active in share repurchases and we were we had 15 million in merger related expenses, we still grew our Tc ratio.
10%.
As investors and capital management, we're going to continue to assess the environment and we'll make capital decisions that we believe are in the best interest of the company and its shareholders.
Thank you Kathy we will now take questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered your question movies. So from the Q press the pound key.
And our first question comes from Brady Gailey with KBW. Your line is open.
Hey, good afternoon guys.
Okay very very.
So will argue that expenses will kind of continue to be to be messy, but when you look at core expenses.
In Threeq here should we expect them to be roughly flat with the twoq level, just due to the timing of the intercom conversion and then as we get towards Fourq to an end to 2020, that's when you'll see expenses kind of step down as those cost saves are realized.
Yeah, and a general sense, and Steve or John Richard May jump in and I'll elaborate here and add to my answer, but I guess a component in a general sense that status as an accurate portrayal I think the components that.
Are hard to predict to be number one we have several non interest income business lines that have commission based compensation structures, and therefore has a variable expense base with revenue and depending upon.
The business line and.
The various variable expenses, including cost that could be a roughly 50% expense increase for every dollar of revenue. So we have additional $2 million and swap revenue an additional $2 million in fixed income sales or mortgage.
Each one of those would be add another million dollars so to that quarters non interest expenses. So you got that component.
And as we approach the back half of the year. There are other other things that are harder to predict like health insurance, we're self insured and our health insurance run rate is roughly $20 million annualized expense the company so depending upon our experience in the back half of the year there that's hard to predict.
And then of course as you get near the end of the are you beginning to.
True up your incentive accruals with a little more precision.
And that's always hard to predict halfway through the year as well so with a lot of qualifiers, yes, your portrayal would be accurate.
Okay.
All right and then on the buyback it was great to see some activity this quarter.
Would you consider that more of a one time thing or do you think the buyback is going to be something that you'll consider kind of on an ongoing basis.
Yes, I think Brady.
Yeah, we always consider the environment.
That we face when we make decisions about capital and if we continue to face an environment where growth of an acceptable quality is a challenge.
And an environment as well where bank stocks are pretty much out of favor.
Then we would definitely expect to continue to return capital via share repurchases. While also maintaining very healthy capital ratios. So that we can operate from a position of strength. If we are to head into an economic downturn.
So based on the current environment, we anticipate reinvesting a portion of our profits and share repurchases, but it's likely to be lumpy from quarter to quarter.
Based on what we see.
All right and then finally for me.
You know it within calm you picked up.
A small kind of below the line.
Call. It non controlling interest was about 600 Grand this quarter, but it's not a big number but.
As far as forecasting that out it should that number be fairly constant on a forward run rate as we look quarter to quarter.
Yes Brady.
I'll answer that is related to as you may recall that the factoring business that and come on us.
And when National Commerce acquired that business in 2014 and acquired 70% interest.
And that's from the 30% minority interest piece.
The call option that we own to acquire the remainder of that business that window opens up during the third quarter.
So.
It it would be our intention sitting here today that we would plan to exercise that call option and clean that up although that's not not at a final decision weve dependent we've made but that's that's our likely intent.
And so that that sort of noise. If you will for minority interest piece will go away.
In the not too distant future.
Got it so if you do exercise that option and own a 100% of the company that I guess does that 600 Grand would.
Move up in the income on a quarterly basis.
Correct.
Okay.
All right great. Thanks for the color will be paying but we'll be paying cash for that.
That component.
As well ready.
How much cash would be paid.
It is a variable.
Formula based upon a multiple of trailing 12 earnings. So the trailing 12 period is not yet closed out but in round numbers its somewhere in the 12 13 million ish.
Well 30, 40 minutes range, depending upon the final two months of that trailing 12 period.
Play out.
Okay, great. Thanks will.
Certainly.
Thank you and our next question comes from Michael Young with Suntrust. Your line is open.
Hey, good afternoon.
Hey, Mike.
Wanted to start maybe just with the acquired loans I think the.
I'd ever was just a little less than what I was thinking I would think a income was around 3.3 billion at the end of the year and it looks like about 2.8 billion.
Came over I know you kind of mentioned that but could you just walk through maybe some of the moving pieces. If there were specific portfolios or loans you walked away from a just a little color there would be helpful.
Yes. This is Michael Michael This is Steve I think what you're referring to is the the drawdown in the acquired book and of course in the acquired book there with the National Commerce loans, but there was also.
Several other banks loans in there. So those are always kind of a drawdown books. So.
There wasn't a $500 million to $500 million payoff in the National Commerce itself. It was full blow came over full book came over 3.3 ish.
And then every bit as expected yes.
Expected. So it would have been the entire portfolio, including other banks that were purchased that brought that number down.
Okay and is there anything there read into that I mean, just from a bigger picture.
No the comments about kind of the theory projects and some sales from businesses, but.
And then the other.
Loss of lending personnel or anything in specific markets.
No. Mike This is Richard definitely no loss of lending personnel and I'll give you an answer to that in a second but the loan growth in particular as John mentioned it was 1% annualized growth rate had really strong production 860, some odd million, which was significantly above what we produced.
On a combined basis a quarter ago, we did have a roughly $100 million in increased early payoffs and pay downs compared to the quarter before.
But the loan production was still really good across all of the markets at National Commerce in particular, it was proportional to the size of roughly 25% of the production.
Our south region, our west region, as well as the Central Florida Orlando over to the East Coast those were all very strong production.
Regions in the pipelines continue to grow so we're encouraged as we look forward to Q3.
We do think loan growth will be more pronounced in Q3, but there does appear to be some pockets of caution that John mentioned, which is probably why we had the $100 million and increased payoffs and pay downs.
In the second quarter.
So we don't feel like this is the time for us to stress. So we won't get every deal were shooting for but the economy is still good.
Like I said the pipelines have continued to increase so we're getting some good looks.
And we've got really good bankers and really good markets and so we're going to continue to grow organically and it may be more than what we expect.
That would be great, but given our experience in Q1 and Q2.
Our expectations are more in that mid to low to mid single digit growth rates.
But to mention are to focus on the relationship managers, obviously were always recruiting new relationship managers, that's been a priority of ours from the beginning of our relationship manager Count actually we had 234 relationship managers at the end of the quarter. That's about 14 more than at the end of Q1.
And we're recruiting in all markets and we're recruiting all the best bankers that we feel like are the best bankers that can be successful.
Centerstate summer part of the Suntrust BB and T.
The team that everyone's talking about asking about and were certainly focused on those as well because we think thats a very unique opportunity given the size and where those markets are relative to our markets, but we're focusing on all bankers in each of the markets and we've had some success there, but we're also mindful of our own.
Situation to change that we're going through the conversions that we're currently planning and about to embark on so we're also paying a lot of attention to our back door. So thats a focus for our state.
Okay. Thanks for all that color one last one just on I guess kind of Cecil maybe for Steve or will but.
Obviously, the loan loss reserve is at a pretty low number but the acquired loans have a reserve allocated to them could you just remind us what the all in kind of credit Mark is and then what your expectations are if you have any yet for Cecil pro forma basis.
Yeah, Michael as well and Steve collaborator.
Well you know if you look on page six the bar on page six we did add up.
No disclosure too.
Our disclosure of the.
Loan discount on.
On our acquired portfolio. So at the bottom there you'll see the total purchase loans at about just under 7 billion.
In principle balance carry balances six 6 billion eight it's unchanged total loan discount of about 145 million about 71 million of that discount was attributable to PCR loans and of that 71 million.
As of our last cash what we forecast about 20, 820, 728 nano was related to credit.
The remainder of the other 44 million just be an either or.
Or rate type discount.
Cecil I am sorry, I forgot that part of question.
We expect to be able to give some guidance there. Our plan is to do so with our third quarter call. We were on pace with our modeling and.
Model validation, all that sort of stuff, but not yet at a point, where we take it.
His information we're ready to disclose.
Right and I'll, just follow up to Will's point on that disclosure on page six which was new for us.
Yeah, we are disclosing that theres, a credit component, which if today, all things being equal to that change, which it will over a period of cash flows.
There'd be or roughly a $27 million reserve that would be created out of the PC I and the rest of it would continue to accrete, which is how the model today.
Of course, we'll have a couple of more recast and that'll change over the next couple of quarters, but that that disclosures there to try to help.
Investors and analysts see the seasonal impact on the PCI portfolio.
Okay. Thank you.
Thank you and our next question comes from Michael Rose with Raymond James Your line is open.
Hey, guys.
Sorry, if I missed this but as it relates to the core NIM.
Our outlook for the rest of the year.
Does that include rate hikes.
All right, it's human rate cuts.
Yes, Michael This is Steve we have four we have excuse me two rate cuts in our.
Outlook.
And what our expectations last quarter was 395 to four five was our expectation of the core NIM for the remainder of 2019.
We have changed that with the new environment and with the two rate because it's gone dramatically over the last quarter to 390% to 4% range. So we moved the range down.
Five basis points, you will recall this quarter, our core NIM was for one but we expect you know in our forecast today, we expect to rig cuts.
Okay. So.
Couple basis points for every.
Got it and I guess, what would make you what are the drivers that would make you come in towards the top end you know relative to the bottom end of that range is it I'm sure. It's a myriad of things, but would just love to hear your thoughts.
Sure couple of things.
First of all would be kind of our loan to deposit ratio would be one lever today. It's at 89 were comfortable taking that up a little bit further probably not going to take it greater than.
90% to 93% or so but that is a particular lever for for that as well as the moderation of deposit costs I think what we're seeing in our markets is at least.
Last management Alco about a week ago is that the pressure is still there. Although we are hearing from many of these calls with others that the the pressure might moderate. So my guess is that pressure, but doesn't moderate a lot in the third quarter, but maybe by the fourth quarter. If they do a rate cut for two you would start seeing that kind of moderate down if you look at our balance sheet.
In our disclosures to the 10-K.
Yeah, we have a pretty neutral balance sheet.
But understand yes.
The time, you have a neutral balance sheet there for when they move rates quickly you have to catch up a little bit. So there's some catch up that probably would happen in the first quarter to the other component Michael I would add it's harder part of that of course is prepayment risk on your loan loan book and whether some of those things pay off sooner than your modeling would indicate that of course would be a downside risk on loans that are priced above where the replacement would be today, but you know I would say we were really pleased when we put the two companies together that this is the first time.
The cycle that we had at a core NIM above 4% so.
If you think about how John mentioned in the course of the last three years, when we had Brexit that we had a NIM and probably in the 370 range and you know we we have moved to that lever that up to around a 4% in the great core deposit base. So yes.
I like our position as well as anything.
Okay, that's very helpful.
Im wondering about the correspondent business.
Obviously, a good quarter I, just remind US again you know my understanding is obviously if rates are moving or there's some volatility that that business will do better, but if you can just remind us.
Yeah.
What what is the optimal environment for for that business.
Sure.
Sure. There's really three three types of business that we do there we do fixed income we do interest rate swaps and then three would you payments the payments business is pretty steady under any scenario. So I'll stop talking about that.
Fixed income generally does a little bit better in a low rate environment, but typically when a low rate environment comes you get a little more steep yield curve and that's typically wants fixed income that better. So we saw an improvement in the second quarter and fixed income, although not a dramatic improvement.
Just because of all the rates fell it was under a flat curve environment.
Where we really saw a huge improvement was in their interest rate swap business and that's when you have as you know.
A flat yield curve that business.
It really takes off.
And that business has been building its not that its only rate dependent it certainly.
Yes, certainly dependent upon curve, but new customers as well so the interest rate swap business does really well in a flat curve environment and as you kind of look at it going forward you would expect.
As far as we can see right now it appears that we're in a flat rate environment for a little bit longer for sure.
So as I think about it if if we do get a rate cut or two and the curve, we're actually to steepen, a fixed income piece might do a little bit better, but the swaps swapping called might come off a little bit.
Yes, that's exactly right, they probably offset each other but at a higher level than where we have been over the last year or so.
Understood and maybe just one final one from me just just on the loan growth outlook for the rest of the year that was end of second quarter to the end of fourth quarter all in on a period end basis.
Yes, yes, low to mid single digit growth.
Yes.
Yes annualized.
Annualized okay.
Perfect.
Hi, guys. Thank you so much.
Thank you and our next question comes from Stephen Scouten with Sandler O'neill. Your line is open.
Hi, guys, how you doing its afternoon.
All right David.
Good Hey, I wanted to get some clarification on some of the commentary you know John I felt like your commentary at the beginning was fairly cautious and maybe leading me to believe that share repurchases could be a bigger part of what you guys are doing then maybe loan growth would slow, but then it sounds like especially in Richard's commentary that that threeq growth does look attractive to you all and it there do seem to be ample opportunities here. So I'm. Just wondering if you can kind of help me reconcile those two.
Statements or if it's just growth now, but cautious as we look out further.
Yeah, I think it's really when we captured this analysis of looking at the deal flow the deals we didn't do.
So we did 864 million of production.
And then there were $700 million of deals we passed on so we looked at a billion 560 during the quarter and we passed on 45%.
And so from an activity standpoint from a pipeline standpoint.
The market is still very active.
So this is just really were disciplined comes it if were willing to only do a 75% loan to value and a competitor will do 80% is this really the time in the cycle to go outside of loan policy. So.
I think what Richard is saying is theres plenty of activity plenty of things to look at our lenders are busy but this is the hard part of the cycle, where you've got to make tough forward looking choices not to take on late cycle risk. We're perfectly we've always said Steven that we're trying to build the company to grow organically, 10% a year through a cycle faster the first half of the cycle slower the back half of the cycle.
So.
Yes, if we want to grow and 89% and that would be fine as long as it's within our credit appetite, but if were not growing.
Let's say, we continue to grow loans in a low to mid single digit range.
Our Tc is rapidly marching up.
So we ended the quarter at 10% you know a few quarters, you're looking at 11% Theres a point here, where we need to deploy the capital and we're going to do it and dividends M&A loan growth or buybacks and this is really the first quarter in the second quarter, we really got active in the buyback piece. So a slow growth environment for your growing capital. That's it that's an option that we plan to utilize on a quarter by quarter basis based upon the market.
Perfect really helpful. Thank you.
And then just as I think about some of the maybe longer term macro risks you spoke to and just that those are increasing at least slightly today and then you begin to monitor them more closely is there anything specifically you guys are seeing from a credit perspective that gives you pause any any segments any sectors and geographies or otherwise that kind of you're starting to get more cautious on now.
It's no different than what we've said the last couple of years.
We're cautious on multifamily hotels Miami those are some things, we said repeatedly but I think what we're seeing right. Now is more is more macro risk I mean think about what happened the stock market in December .
That was a shock to the system and two business sentiment the consumer seems to be doing fine, but the business sentiment seems a little more cautious and when we talk about.
Late cycle risk for US is bank managers, it's a little different than investors investors have the optionality to make a sell decision in a day any loan decision that we made were planning on living with for the next five years. So you know I'm not saying we're at the end of the cycle, but we're clearly late cycle and we're trying to be forward looking and looking at every decision we make as a three to five year risk yes.
I would just add.
Based on Johns commentary Richards that.
Our payoffs were elevated this quarter about $100 million versus last quarter and some of the underlying trends in there which were interesting was that we had several business owners, who you know is in some of the top payoffs that actually sold their businesses not just their projects, which means they are de risking as well and thats probably the lessons learned from the last cycle. So.
You kind of have a portion of the best borrowers do you want to be around.
Our selling out to go to just be more cautious as well. So that's yeah, that's who we want to align with.
Yes, I mean these are some of these are multi generational business that have been clients of ours for a long long time and they just punched out and said they are going to go on the sidelines.
One last clarifying point, Stephen I think we ought to make is that the 700 million or so in loans that we.
It didnt fit within our box wasn't the other field of Crazy stuff, it's just one or more combinations of factors that didn't fit within our underwriting parameters and we chose not to not to deviate, but it wasn't like this is while stuff going on Oh, yes, no. There really wasn't I mean, there was no real pattern in terms of the metrics or the craziness or.
Any particular competitor and again this is the first time, we've really gather this information.
So we think it will be helpful going forward it will be more helpful actually been able to gather it for 234 quarters consistently so we know exactly what we're looking at.
But it really wasn't anything and another thing these were not.
Transaction for the most part or opportunity excuse me for the most part that were appealed by folks in the field, which gives us the feeling that we're not shrinking our credit box as much as.
You know there are these opportunities, we're just a little bit more of a stretch than we were willing to do or we didnt feel like at this point in time in the cycle was the right time to try to find a way to stretch.
Makes sense makes sense and maybe one last one for me if we tried to kind of isolate how you expect the interest bearing deposit cost to react to these potential rate Tina, especially as we get.
You know three or four potentially what the forward curve implies today, how do you think you know on a quarterly basis for each 25 basis point hike.
Does interest bearing deposit costs might perform or if you peg debated to it on the way back down or can you just give some color on how you're thinking about it.
Sure.
And we have models around all of this and it's based on a lot of assumptions you know what the one comment I would make is our betas on the way up have been pretty low. So you would expect your beta is back on the way down are going to be reasonably low because theres a lot of core deposits in there we do want to make sure that when we cut deposit rates, which were actively looking at relative to deposit costs that we don't cut the core customer because at the end of the day, our core deposit base is the foundation of our bank and it is a very quality low cost. One so we don't want to be shortsighted in moving too fast and cutting out some of the things that we've built over the past two two decades, but I would say that if you think about the beta is going down so.
Beyond this is checking accounts aren't going to move very much the money markets are going to be probably one that moves a little faster on the way down to.
The Cds are going to be 100% correlated.
Within the first six or nine months, our CD book is pretty short average life is probably around six to seven months.
So those will be 100% correlated to the rate movement and CD the money markets will be roughly between 40 and 50% data. So as you kind of think about each one of those those structures you could see yeah.
Once once we get.
The fed rate cuts for you know, maybe a quarter or so you'll see you'll still see deposit costs increase for the next quarter. So once we get that into the system and we start actually decreasing many of these costs, you'll probably see three or four basis points.
On on that margin.
On the cuts side on the deposit cost side.
But that's just an estimate based on a lot of assumptions.
Marketplace.
Got it great. Thanks, so much for taking the questions guys.
You bet. Thank you.
Thank you and our next question comes from Tyler Stafford with Stephens. Your line is open.
Hi, Thanks, guys.
I wanted to start on on fee income and specifically just the mortgage business do you have what the.
Out of mortgage loans sold during the quarter were.
Beef for 16 times 60 cents, 63% over that was.
I don't have it right in front of me, but we can.
Okay, Great and then I can I can do the math.
So.
Lots of inputs I guess over the last several quarters with the addition of the state Bank team income this quarter and just the obviously the low rates and the added volume that the mortgage markets producing for you guys can you just give us sense a sense for how to think on a sustainable kind of annual production level. If there is a target amount of a total mortgage production that you want to sell each here just.
Given all that Joe.
The puts and takes on just how to think about that from a from an annual kind of big picture perspective.
Yes, so it's a good question kind of our target secondary to portfolios around 70% sold 30% portfolio.
Of course that will change in the various.
Vitamins like for instance, what you're seeing now is an inverted yield curve. So therefore, you would expect.
The pipeline was closed this quarter, probably has a little more bent towards the secondary versus portfolio just because.
Cheaper from a portfolio from a secondary perspective since the 30 year rates are overweight hovering around 4%.
As you think about.
Our targets for that business. We're looking I think we've said in the earlier in the year with income we're looking at around a billion and a half dollars of production.
And back to 70% of that.
Would be our target cell so.
You know if you do that math and our gain on sale that would kind of gets you from an annual basis, and then of course, you're going to have puts and takes relative to refinances or.
Yield curve steepens or what have you.
Is that helpful. Yes, a billion and a half on an annual basis is kind of a rough approximation is that the number you said.
Yes, yes, okay got it.
Okay perfect.
Just thinking about the deposit trends you saw this quarter can you just talk about.
I guess legacy Centerstate and legacy National Commerce of just what you saw from that from both a pricing and kind of product trend product growth trend perspective during the quarter.
Yes.
This is Steve again.
As I mentioned in my prepared remarks, the deposit cost went up four basis points, if you kind of normalize.
National Commerce, and Centerstate as of the first quarter I think our cost of deposits that we put us together with 66 basis points. This quarter at 70 basis points. So it was up four basis points, but if you looked at our interest bearing liabilities, which would include you know all our federal home loan Bank advances trust preferred and so on are our interest bearing liability costs were only up one basis points.
The reason for that was we saw an opportunity late in the first quarter to move some of our federal home loan bank pay those off and go to brokered Cds. So what happened was our deposit cost went up a little bit because there was a funding advantage to doing brokered Cds that shows up in deposit costs versus.
Federal home loan bank advances, which opened interest bearing liabilities. So as we look at it.
Total funding was up a basis point for the quarter, having said that where we see the most pressure is on the money market side of the house I think that's that's where we're seeing.
Any pressure at all the rest of CD pressures, maybe still there, but we're not a big CD shops, I don't think there's a ton of pressure with money market is probably the biggest pressure point, Tony just to clarify that it's as Steve said that one basis point and four basis point, respectively. Those both were excluding the effect of the income merger just.
Yes, Okay got it thanks guys.
And then just lastly from me on just given the income deal did close 90 days ago or so.
Any interest in <unk> or what's your interest in in M&A your appetite for M&A at this point thanks.
Tyler it's John .
Really it's no different than what Weve communicated earlier 2000, nineteens kind of a heads down integration year to make sure that we get all the pieces put together.
Correctly.
Having said that though.
The industry is facing revenue headwinds, we've got an inverted yield curve growth is potentially slowing so if we're going to get growth and earnings per share. It may have to come on the expense side and there's no better way to do that.
And through M&A. So we are entertaining and we're having discussions but we're thinking about what to do in 2020 and one of our goals is to continue to.
Grow the franchise in markets, where there is great demographics, great population in migration, our first choice would be to.
B in the markets, we're currently in and Florida, and Georgia and Atlanta.
If we had to leave these markets.
In order to replicate the kind of population in migration. If you went east it's got to be the Carolinas view in west you'd have to go into Texas to keep the same kind of demographic profile.
But that's sort of our thinking, but but heads down in 2019 and planning for 2020.
So John Texas and at a certain point would not be too far west for you.
You know it feels kind of far west, but if you look at how.
Larger banks have built their franchise in the markets that they've gone too.
If you went west from Atlanta.
Every one of them goes to Texas.
I normally don't stop along the way. So that's that's not saying that's something that we're going to do and that's just the.
The demographic reality of a man up it's really to the east if you head up 85, if you could go to Greenville, Charlotte Charleston, those kind of markets are very attractive similar to ours and if you're going to ask you really got to go over to Texas in order to have a similar demographic profile.
Understood. Okay. Thanks, guys.
Thank you and our next question comes from John Rodis with Jane Janney Montgomery. Your line is open.
Good afternoon guys.
Just to I guess.
A little different question I had seen a.
The other day, a thirteend filing at a regions financial that they bought some stock like a little bit over 1% of stacking centers. Thanks.
Just curious if you had any conversations with them just about what that what that position is.
Hey, John its well I'll.
Short circuit that that is not its readers Trust department. It is it's a.
Shareholder group of shareholders that were national large national Commerce share owners that have their shares in a trust and resist resist Trust department. So.
We had the same question international commerce over the years as well so it's not regions.
Okay, no that I thought that might be the case, but I just wanted to get it out there. So no I appreciate it all my other.
Questions were asked and answered so thank you guys.
You bet. Thanks.
Thank you and we have a follow up from Michael Young with Suntrust. Your line is open.
Hey, Thanks for the follow up just on the M&A commentary.
If you win.
In the past you wanted to go with a little bit of scale that kind of the way you're thinking about at this time or just the fact that were late cycle.
You want to make smaller bets just trying to kind of size up how you're thinking about that.
Yeah, Michael It's John I think we're more interested in the quality of the loan book and the size of the institution.
The reality is if you look at the chest for today, there are not as many smaller opportunities as there were over the past five years, we really built the company doing 500 million to a billion dollar deals. We've always said, 10% to 10% of our size to a third is kind of ideal, but we have to play within the reality is the chess board and there aren't as many smaller opportunities out there.
Okay. Thanks.
You bet.
Thank you and I'm showing no further questions I would like to turn the call back to Mr., John Corbett for any closing remarks.
Okay, Kevin Thank you for calling in today and thank you for your interest in Centerstate were planning to attend a number of investor conferences in the third quarter will be at the KBW Conference in New York next week and then in September The Stephens Conference in Milwaukee, and Raymond James in Chicago. So we hope to see many of you there in the meantime, if you have any questions feel free to reach out to any of us and have a great afternoon.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.