Seacoast Banking Corporation of Florida (SBCF) 2019 Q3 法說會逐字稿

Welcome to the Seacoast Third Quarter Earnings Conference Call.

My name is Hilda, and I'll be your operator for today.

(Operator Instructions) Before we begin, I have been asked to direct your attention to the statement contained at the end of the press release regarding forward-looking statements.

Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and their comments today are intended to be covered within the meaning of that act.

Please note that this conference is being recorded.

I'll now turn the call over to Mr. Dennis Hudson, Chairman and CEO, Seacoast Bank.

Mr. Hudson, you may begin.

Good morning, everybody, and thank you for joining us today for Seacoast's Third Quarter 2019 Conference Call.

Our press release, which we released yesterday just after the market closed, and our investor presentation can be found on the investor portion of our website under the title Presentations.

With us today are Chuck Shaffer, our Chief Financial Officer and Chief Operating Officer, who will discuss our financial and operating results.

Also with us today are Julie Kleffel, our Community Banking Executive; Chuck Cross, our Community -- our Commercial Banking Executive; David Houdeshell, our Chief Credit Officer; and Jeff Lee, our Chief Digital Officer.

Seacoast reported an exceptionally strong order -- quarter with continued solid growth -- solid organic growth.

We posted record revenues and earnings for the quarter.

Adjusted earnings per share was $0.53 for the quarter and $1.50 for the first 9 months of the year.

This represented earnings growth of 43% compared to the third quarter of '18 and 30% year-to-date.

The previously announced cost reductions, which were completed last quarter, took full effect this quarter.

As I said last quarter, the adjustments to our cost structure were taken in response to a more challenging outlook for the environment brought about by a flat yield curve.

As a result, in spite of the rate environment, we produced meaningful improvement in operating leverage this quarter.

Our incredibly valuable customer franchise has produced very favorable deposit funding costs, which helped us mitigate much of the effect of a persistent inverted and today flat yield curve.

And our work earlier around the year around our cost structure has more than offset the rest.

Additional contributions to operating leverage came from record growth in fee revenue for the quarter.

Proactive changes we made in our mortgage unit earlier this year in response to the yield curve are producing better returns for that business.

And investments that we made in wealth together with better execution continue to produce consistent growth in AUM.

All of this produced improvements in overall fee revenue in spite of the effect Hurricane Dorian had on our customer transaction fees.

Moreover, our ramp-up of investments to drive additional loan production over the past few quarters in South Florida and in Tampa began to take hold during this quarter.

As you know, we have been guiding to this over the last couple of quarters.

And as Chuck will walk us through in a minute, we saw meaningful improvements in organic loan production.

In fact, we had very solid loan production for this quarter.

Moreover, we've had -- we have today a record pipeline, which positions us well moving into Q4.

We saw substantial progress against our Vision 2020 objectives this quarter and expect continued progress next quarter.

Adjusted return on assets was 1.67%, our overhead ratio fell below 50% for the first time and our return on tangible common equity stood at 15.3% despite strong growth in our capital position, resulting in an end-of-quarter tangible capital ratio of 11.05%.

All of this is an outcome of our focused balanced growth strategy that we laid out during our Investor Day presentations.

By consistently investing in both growth and efficiency initiatives and by challenging our legacy costs and taking a long-term view, we continue to build what has become a very valuable Florida franchise, a customer franchise that supports a lower risk, granular and diverse loan portfolio with lower operating costs that reflect the efficiencies of our unique strategy.

Taken together, we believe we are well positioned to continue to benefit from continued growth in the vibrant Florida economy.

With that, I'd like to turn the call over to Chuck, who is going to review a little more detail on our first quarter results.

And then, of course, we'd be happy to take a few questions.

Chuck?

Thank you, Denny, and thank you all for joining us this morning.

As I provide my comments, I'll reference the third quarter 2019 earnings slide deck, which can be found at seacoastbanking.com.

Beginning with Slide 4, our team produced a strong quarter with adjusted net income growing year-over-year 57% to $27.7 million, resulting in an earnings per diluted share of $0.53.

We reported a 1.67% adjusted return on tangible assets and a 15.3% adjusted return on tangible common equity.

We continue to build shareholder value with tangible book value per share growing 4.8% sequentially to $14.30.

We ended the quarter with a tangible common equity ratio of 11.1% and an average loan-to-deposit ratio of 88%, affording ample room for continued growth.

As we continue to grow our capital base, it's worth mentioning that if the third quarter's tangible common equity to tangible asset ratio was adjusted to an illustrative target of 8%, our return on tangible common equity would be 20.5%, increasing from 19.2% in the prior quarter.

Our performance was highlighted by continued improvements in generating operating leverage with a focus on growing revenues while streamlining operations.

The adjusted efficiency ratio declined 2.4% sequentially to 49% and the adjusted noninterest expense to tangible asset ratio declined to 2.22%.

Year-to-date, we've generated 11% operating leverage with adjusted revenues increasing 18% and adjusted noninterest expense increasing 7% despite the headwind from a more challenging interest rate environment.

You can be assured that our continued diligent focus on efficiency has been accompanied by great care in ensuring that we do not impede on our ability to drive revenue growth.

Both our mortgage and commercial banking units showed continued momentum in the quarter with robust loan originations, resulting in disciplined growth in loan outstandings with a new record in mortgage banking gains.

We are exiting the quarter with a commercial pipeline totaling $360 million generating momentum heading into the fourth quarter.

Now turning to Slide 5. Net interest income increased $0.8 million sequentially, despite macro interest rate headwinds, and net interest margin contracted only 5 basis points to 3.89%.

Excluding accretion on acquired loans, the net interest margin declined 3 basis points sequentially, and is in line with the third quarter of 2018.

Our proactive work on deposit repricing helped defend our margin.

Quarter-over-quarter, the yield on loans declined 10 basis points, the yield on securities declined 4 basis points and the cost of deposits declined 3 basis points.

During the quarter, rates declined across all points on the yield curve, affecting the variable rate portion of our loan and securities portfolio and impacted add-on yields for both loans and securities.

Our average add-on yields for new loans declined 51 basis points sequentially to 4.66% and are down 46 basis points from the prior year.

The decline quarter-over-quarter was primarily the result of lower add-on rates in commercial and mortgage banking due to declining yields on the moderate and long end of the treasury curve.

We remain disciplined and vigilant over deposit pricing and earlier in the year recognized interest rates were headed lower in the back half of 2019.

As a result, we meaningfully shortened time deposit maturity offerings to terms of 1 year or less and began reducing rates paid to higher-yielding savings and money market products.

We continue to reduce rates -- we will continue to reduce rates in conjunction with reductions in the Federal Reserve overnight rate.

Other interest bearing liabilities such as trust preferred and Federal Home Loan Bank advances also benefited from falling short-term rates.

While variable, we model purchase accounting accretion to be approximately 24 basis points in the fourth quarter of 2019.

Looking ahead to the fourth quarter of 2019 and assuming a reduction in the federal funds rate of 25 basis points in late October and then again in December, we expect the net interest margin to be in the mid-3.80s in the fourth quarter.

Given the uncertainty regarding interest rates and yield curve, the conservative guidance of a potential slight decline in margin is the anticipated result of an assumed persistent flat yield curve and 1 basis point less of purchased loan accretion.

Despite the potential for compression in the margin due to anticipated rate cuts, assuming economic conditions remain unchanged, we expect net interest income in the fourth quarter to be higher than the third quarter and expand throughout 2020, the result of growth in the balance sheet and planned actions to continue reducing rates paid to deposit customers.

Moving to Slide 6. Adjusted noninterest income decreased $0.2 million sequentially and grew $1.5 million or 12% from the prior year.

We had another record quarter on our mortgage banking division with mortgage banking fees totaling $2.1 million or an increase of $0.4 million quarter-over-quarter.

Over the first half 2019, we introduced new salable products and focused on generating salable production.

And additionally, in the third quarter, benefited from heightened refinance activity as a result of declining rates on the long end of the curve.

While beneficial to the third quarter, we expect refinance activity to be more subdued in the fourth quarter.

We continue to see consistent performance in wealth management.

Year-to-date new assets under management acquired totaled $105 million tracking to our goal of growing AUM $120 million to $150 million in 2019.

We ended the quarter with $606 million in assets under management.

Service charges on deposits and interchange income were impacted by Hurricane Dorian by $0.2 million in aggregate.

The GAAP presentation of noninterest income includes $1 million in BOLI death benefits and $0.8 million in securities losses.

Continuing to optimize our securities portfolio during the quarter, $49.6 million of securities were sold with an average yield of 1.85%, resulting in a loss of $0.9 million.

These funds were reinvested in an improved average yield of 2.65%.

Moving to Slide 7. Adjusted noninterest expense totaled $36.9 million, declining $1.1 million sequentially and is up $1 million from the prior year.

This outperformed our previous guided range of $37.5 million to $38.5 million for the third quarter, the result of our proven success at disciplined cost control.

For the fourth quarter of 2019, we expect adjusted noninterest expense to be approximately $37 million to $38 million, excluding the amortization of intangible assets, which is approximately $1.5 million per quarter.

We continue to take a proactive stance on expense management, positioning the company for success in the coming periods, regardless of what the economic or interest rate environment brings.

During the third quarter, the FDIC announced the achievement of their target deposit insurance reserve ratio, resulting in our ability to apply previously awarded credits to our deposit insurance assessment.

This quarter benefited by $0.3 million in lower FDIC assessment expense.

The company has remaining credits of $1.2 million, which we apply to future assessments if the FDIC's reserve ratio remains above the target threshold.

The company recorded $8.5 million in income tax expense for the third quarter of 2019 compared to $6.9 million in the prior quarter.

In September 2019, the State of Florida announced a reduction in the corporate income tax rate from 5.5% to 4.458% for the years 2019, 2020 and 2021.

This change resulted in additional income tax expense of $1.1 million upon the write-down of deferred tax assets affected by the change, offset by $0.4 million benefit upon adjusting the year-to-date provision to the new statutory tax rate.

For future modeling purposes, an effective tax rate of approximately 23% is appropriate.

Moving to Slide 8. Our performance was highlighted by continued improvements in generating operating leverage with declining overhead and a focus on growing revenue.

The adjusted efficiency ratio declined 2.4% sequentially to 49%, and the adjusted noninterest expense to tangible asset ratio declined to -- declining to 2.22%.

We expect the adjusted efficiency ratio to remain below 50% in the fourth quarter and move modestly back above 50% in the first half of 2020.

We expect the efficiency ratio to move back below 50% during the second half of 2020.

The increase in the first half of the year is primarily the result of 401(k), payroll tax and other compensation expenses and is in line with prior year's seasonality.

We remain confident, we're on track to achieve a below 50% efficiency ratio exiting 2020 on target with our Vision 2020 plan.

We continue to maintain strict cost control discipline, while ensuring that we do not impede on revenue growth.

Turning to Slide 9. Total new loan production was $488 million compared to $407 million in the prior quarter, resulting in net loan growth of 8% on an annualized basis.

Commercial originations during the third quarter of 2019 were $282.2 million, an increase of 80% or $125 million compared to the second quarter of 2019 and an increase of 115% or $151 million compared to the third quarter of 2018.

Increase in -- increases in loan production reflect the addition of business bankers across the company's footprint, strong execution by the legacy banking team and higher customer demand due to lower long-term interest rates.

The third quarter results include an opportunistic loan pool purchase totaling $52 million or 32 loans with an average yield of 4%.

These loans are supported by credit tenant leases with average loan-to-value of 59%.

The average loan size is $1.6 million and all are fully underwritten using our strict credit underwriting.

Our commercial pipeline has grown to a record $360 million at the end of the quarter and we are anticipating production volume to improve in the fourth quarter.

When coupled with an expanded team of bankers in Tampa and Broward County, we are well positioned to drive consistent loan growth.

Of all residential loans originated in the quarter, $81 million was sold in the secondary market, leading to a record quarter for mortgage banking gains.

We placed $22 million in the portfolio.

Late in the quarter, the company began testing a correspondent mortgage banking channel focusing on acquiring mass affluent, affluent and ultra-high net worth Florida customers, and we believe there is an attractive opportunity to acquire these customers using this channel and apply data-driven cross-sell to expand these high-quality relationships.

Consumer and small business produced 130 -- $103 million, down $33 million from the prior quarter.

We are well positioned to drive attractive loan growth moving forward without sacrificing our credit discipline.

During the last 2 quarters earnings calls, we provided loan growth guidance of mid- to high single digit in 2019 and stated that loan growth will accelerate throughout 2019.

We feel confident in our ability to achieve this objective and continue to reiterate this target.

As the economic cycle matures, we will continue to resist the temptation to chase deals that do not meet our strict credit underwriting standards.

Turning to Slide 10.

Deposits outstanding increased $132 million sequentially.

This quarter's growth reflects an increase of $189 million in brokered deposits, as we continue to shift between brokered deposits and Federal Home Loan Bank Advances, carefully optimizing our funding cost.

Removing the impact of this transfer, total deposits declined $57 million, the anticipated result of the summer season.

During the quarter, we continued to successfully acquire commercial customers with business checking balances growing 2% on an annualized basis despite the normal seasonal headwind, summer seasonal headwind.

Turning to Slide 11.

Rates paid on deposits decreased 3 basis points to 73 basis points.

Looking ahead, we're targeting deposit growth of approximately 4% to 6%, and we expect deposit cost in the fourth quarter to be below the third quarter assuming another reduction in the overnight rate by the Federal Reserve in October.

Underscoring the value of our deposit franchise, non-interest-bearing demand deposits represent 29% of the deposit franchise and transaction accounts represents 49% of our deposit book, in line with the prior quarter.

Turning to Slide 12.

Credit continues to benefit from rigorous credit selection that emphasizes through-the-cycle orientation and builds on customer relationships and well understood, known markets and sectors as well as maintaining diversity of loan mix.

The overall allowance to the total loans was down 2 basis points to 67 basis points at quarter end.

Let me take a moment to remind you that under purchase accounting, loans acquired through an acquisition are placed in the acquired loan portfolio, and the purchase mark, including both characteristics for credit and rate, is applied and accreted back through net interest income as these loans pay down and mature.

At the end of the second quarter, this discount represents 3.76% of purchased loans outstanding.

In the non-acquired loan portfolio, the ALLL ended the quarter at 84 basis points of loans outstanding, down 3 basis points from the prior quarter.

We continue to prudently manage our commercial real estate exposure with construction and land development as a percentage of bank capital at 42% and commercial real estate loans as a percentage of bank-level capital at 204%, down from 51% and 205%, respectively, in the prior quarter, and well below regulatory guidance.

On a consolidated basis, construction and land development and commercial real estate loans represent 39% and 191% of risk-based capital, respectively.

We continue to see acceleration in commercial real estate loans being refinanced away with minimal or no covenants, limited or no guarantees in combination with increasing leverage in projects.

This is being driven primarily by nonbank competitors.

We remain patient this late in the cycle and will not chase deals, carefully defending our underwriting integrity.

Concentrations continue to be well managed with the funded balances of our top 10 and top 20 relationships representing 19% and 33% of total consolidated risk based capital, respectively, down from 21% and 38%, respectively, one year prior and down from 32% and 53%, respectively, 3 years prior.

Our largest committed exposure totals $30 million, and our average commercial loan size is approximately $350,000.

Net charge-offs for the quarter were $2.1 million or 17 basis points of average loans, up 2 basis points from the prior quarter.

We forecast annual net -- annualized net charge-offs of approximately 15 to 20 basis points through the first half of 2020.

Nonperforming assets increased by $5.8 million to $39.6 million in the third quarter of 2019, primarily as a result of 5 customer relationships moving to nonperforming status, all of each were either fully collateralized or previously written down to realizable values.

Classified and criticized assets declined from 3% and 12% of risk-based capital, respectively, to 3% and 10% of risk-based capital, period-end.

The provision for loan losses will continue to be influenced by loan growth and net charge-offs.

Now turning to CECL.

We are well underway with parallel runs and analyzing the results for ongoing model validation and refinement.

We haven't shared an estimate of the magnitude of this impact, our process has not yet reached that point yet.

But with -- as with most in the banking industry, we do expect an increase in reserve when we adopt CECL in January.

One reason for the increase is the introduction of a life-of-loan concept and incorporating economic forecast and these particularly affect segments with longer average life.

Another reason for the increase will be the impact of our purchased loan portfolio.

We acquired these loans at a discount and the purchase discount, which currently stands at 3.76% accretes into interest income over time.

The vast majority of our acquired loans were not considered credit impaired at the time of acquisition.

Under CECL, that purchase discount no longer shields these loans from getting an allowance.

So the day 1 impact of CECL will include recording a reserve on these loans.

That's essentially a double counting of the credit mark on these loans, but that's what the new accounting standard will require us and other banks to do.

Keep in mind, there is no change in the purchase discount, and that will continue to be accretive to interest income for purchased unimpaired loans.

The portfolio of purchased credit impaired loans is only approximately $13 million.

These loans will be treated as a newly defined category of PCD or purchased credit deteriorated upon adoption.

There'll be an incremental reserve for these loans that increases the allowance upon adoption and the impact on PCI accretion going forward will be nominal.

We are focused on continuing to evaluate the model and analyzing the results, and the actual impact on adoption will depend on the outcome of our continuing review.

The impacted adoption will also be influenced by the loan portfolio composition and by macroeconomic conditions and forecasts at the adoption date.

Turning to Slide 13.

We continue to possess a healthy balance sheet and are delivering strong capital generation.

This positions us well for additional disciplined acquisition and organic growth opportunities and provides options to manage capital and returns moving forward.

We are committed to maintaining a fortress balance sheet through the cycle, built around strong capital and strict credit underwriting.

The Tier 1 capital ratio was 14.9%, and the total risk-based capital ratio was 15.5% at September 30, 2019.

The tangible common equity ratio to tangible asset ratio was 11.1% at quarter end, providing ample capital for additional prudent growth.

Using 8% TCE ratio illustratively would imply over $203 million in capital available for deployment and, as I mentioned earlier, implies a 20.5% return on tangible common equity for the quarter.

And to wrap up, on Slides 14 and 15, we are well positioned to sustain and advance the momentum in the fourth quarter and into 2020.

Since announcing our Vision 2020 targets in February 2017, we've achieved a compounded annual growth rate and tangible book value per share of 13%, steadily building shareholder value.

Our fundamentals remain very strong with a well-capitalized, low-risk balance sheet and attractive funding, and we continue to see robust opportunities to enhance our balanced growth strategy in some of Florida's fastest-growing markets.

We are on track to meet our Vision 2020 targets and remain focused on continuing to create meaningful value for our shareholders.

We look forward to your questions, and I'll turn the call back to Denny.

Thank you, Chuck.

And operator, we'd be pleased to take some questions.

(Operator Instructions) We have a question from Michael Young from SunTrust.

Wanted to start on the efficiency ratio comments, Chuck, you made.

There's obviously a lot of different rate assumptions that could be embedded in that.

So maybe you could just kind of clarify what's reflected in that outlook for 2020 in terms of curve steepness and number of rate cuts, et cetera?

And is this kind of a target you guys are going to hit regardless of what that looks like?

Yes, certainly, Michael.

We've assumed in that a rate cut in October, December and March, 25 basis points each.

Okay.

And any curve steepening embedded in that?

No.

We assume, it's basically the -- we -- because basically it's all we have at this point to go on, is the forward curve and that's what's in the model.

Okay.

And then similarly, maybe on just kind of the loan-to-deposit ratio, obviously, still pretty low.

So you guys have a lot of room there.

Should we expect that to start to increase next year with some positive remix to defend the margin?

Or kind of how should we be modeling that going forward?

I think the way to think about it is, it certainly is something that provides room for growth.

And it's something we manage carefully.

We do expect it to increase over time and sort of end in the low 90s as we are exiting 2020.

Near the low 90s.

Okay.

And then the last one just on capital.

I understand you kind of made some comments around it already in terms of having flexibility, but the capital levels have built pretty significantly at this point and the outlook would be for that to continue, especially with the pace of loan growth currently.

So can you just give us a little more color around kind of priorities there and timing?

I mean, should we kind of be thinking, wait till 2020 and achieve Vision 2020, and then that's when we would look for more capital flexibility?

Or are you seeing something on the near-term M&A horizon?

Or anything that gives you encouragement that that's going to get deployed sooner?

Thanks, Michael.

Our Board and our team, the management team, really regularly reviews our capital position in light of our outlook and forecasts, including opportunities that we see for balance sheet growth and also kind of a look at the forward operating environment.

And we are certainly comfortable that our current very robust capital levels, which along with, as we continue to say, our diligent credit discipline supports our commitment to maintaining a truly fortress balance sheet through the cycle.

We are focused on consistently building shareholder value as evidenced by the returns that we just pointed out.

The CAGR growth in tangible book value since we announced our Vision 2020 objectives in early '17 has been around 13%.

So we're really delivering value to shareholders and as the capital grows.

That said, as we continue to see growth in capital, we are going to regularly reevaluate the full range of capital management alternatives and will seek to deploy our capital prudently as circumstances warrant.

So all I can say is, we continue to look at it and will certainly let you know as we have thoughts around the whole capital management issue.

Okay.

And just on the fortress balance sheet comment.

I mean does that imply a higher capital level than the 8% TCE, Chuck, that you kind of referred to earlier.

I don't know if you have any thoughts around where you guys kind of plan to maintain that over a longer period of time?

We haven't given a target sort of on a forward basis, but certainly want to maintain a balance sheet and maintain a strong robust balance sheet at this part of the cycle, and we'll continue to look at the growth in capital and update you on our capital options as we move forward.

The next question comes from Stephen Scouten from Sandler O'Neil.

I apologize, I missed some of the prepared remarks, but I'm curious, on the securities remixing, kind of where you are in that progress?

If there is much more efforts to be done there or how you think about that as a percentage of assets?

And kind of where you are on fixed to floating within the securities portfolio today?

Yes, so maybe I'll start with the back part of your question, then I can talk about the remixing.

Today, the portfolio is 66% fixed and the remainder is floating with some of that being sort of adjustable with fixed rate terms and then floats.

But if you're modeling, I'd assume 66% fixed.

Just generally, and thinking about the balance sheet, really, we'll just continue to be focused on putting loans on the balance sheet over securities, but as the 10-year moves around, we continue to be opportunistic depending on where that's at, and we will take action where we can reinvest at higher rates.

And if the 10-year were to fall low enough, we may take action the other way.

So we continue to manage the portfolio from a total return perspective and continue to be active there, and we'll see how things play out with interest rates as we move forward.

Okay.

Great.

And then loan demand or new originations were obviously very strong this quarter.

What are you seeing in terms of changes in competition?

I know you gave the number of, what was it, 51 basis point sequential new loan yield decline, but are you seeing compromising on structure as well as pricing?

Are you able to still find -- I mean, it seems you're able to find still credits that you like, maybe just at a lower yield, but they are still reasonable structures?

Yes, we're -- the majority of sort of the irrational behavior is coming from the nonbank competitors, particularly life companies and the CMBS market.

And that's primarily on larger deals.

So on the larger deals, we see the pressure there, and we're avoiding matching those terms.

And in the cases where we have customers that are being pushed into that type environment, we are letting that walk and looking to deploy our credit policy elsewhere.

So it's not something that we're going to do.

And you recall, we run a more granular strategy from a credit perspective than most.

And so that keeps us out of some of the most competitive parts of that market, although we do see, no question, more competition, and certainly with what happened with rates here over the last few months, that contributes to that competition.

But I guess, what I always say is, we just need to work harder and look at more opportunities, look at more deals, and we are pleased with the ramp-up of people in the commercial area, in particular, and how that is giving us access to more deals to look at, so that we can continue to be thoughtful and prudent around our credit criteria, and we will not waver from that.

Yes.

No, that's a good reminder, Denny, I appreciate that.

And then lastly, for me, maybe also as it pertains to the new loans, with that move in new loan yields, I was really impressed with the only 6 basis point decline in average yields for the portfolio.

So what exactly, I guess, maybe led to that performance there?

Is there maybe less movement on the existing portfolio than we would have thought?

Or is there a catch up that we should see in 4Q where the magnitude of the decline in average loan yields will be greater, specifically as we look at new loan yields?

Again, I was just kind of surprised it only moved down 6 basis points given the sharp move we've seen in rates.

Yes.

Remember, over 60% of that loan book is fixed rate, and then there is another 25%-or-so that are sort of fixed to adjustable that have fixed rate periods in them.

And we, given the outlook for lower long-term rates, have been adding some duration into that book.

And I think that's protected the downside risk.

I'd go back to my guidance, if you're thinking about the fourth quarter margin, mid-3.80s is probably about appropriate given where we see the yield curve headed.

The next question comes from Steve Moss from B. Riley FBR.

I just wanted to circle back on expenses and hiring.

I was just wondering if you added any new bankers this quarter.

And just what are you thinking for total expenses for the fourth quarter, I'm not sure if I heard it or if I just missed it?

Sure.

We added 3 bankers in the quarter.

We continue to, I would describe it as, opportunistically recruit where we find talent, we will make hires.

And we are still out in the market recruiting the best bankers that we can find, particularly in Tampa and South Florida.

And given our expansionary efforts there, we are out looking and we'll add as we move forward, but 3 bankers in the quarter.

On the expense guide, $37 million to $38 million for the fourth quarter, excluding the amortization of intangible assets is what we've provided, Steve.

Okay, that's helpful.

And then on the margin, I heard for the -- the 3.85% guidance for the fourth quarter, but if we do get that rate cut in the first quarter, what are you thinking for the margin kind of going -- thinking about a little different ways, if you have acceleration in loan growth, maybe not as much margin pressure into the first quarter?

Yes, we didn't provide any guidance out beyond the fourth quarter, but as you state, with loan growth being there, there is some protection to the margin as well as I still think we have a lot of opportunity if we continue to see rate cuts on the back half of this year to be very diligent with our deposit pricing and be ahead of that with the deposit cost.

So we look at that every week.

And we are very thoughtful about deposit pricing, and we'll continue to be so.

And I think that if you look at the way our deposit pricing has behaved here, it really does reflect the high value of the deposit franchise and how -- what the quality is there, given the customer base and the granularity of that customer base.

So deposit portfolio continues to perform incredibly well and will be ahead of rates.

I thought I'd try.

On credit here, with charge-offs 15, 17 basis points this quarter, just kind of wondering what you're thinking about trends there going forward, assuming that there's just pretty much no recoveries left to offset charge-offs?

Yes.

If I were modeling, I would model somewhere between 15 and 20 basis points between now and the middle part of next year.

And as we move into next year, I'll update that guide as we move forward.

The next question comes from Michael Rose from Raymond James.

Wanted to dig into the loan growth commentary a little bit and some comments you made, Denny.

So if I strip out the purchase of the loans you guys made this quarter, looks like loans were up about 4% annualized.

I know you guys are guiding to mid- to high single digits.

But you made some comments and I think a lot of banks have made comments around being a little bit more cautious, you had one bank, has pretty big presence in your markets, last week point to stupidity in the market.

I'm sure you heard those comments.

So as I think about moving into next year, granted the pipelines have continued to grow, but there is obviously some cautiousness on your part to project -- to protect risk-adjusted returns.

Is more of a single digit growth rate as we move into next year a good way to think about it?

Or because of the growth in the pipelines and the hires that you have made and project to make, do you still think you can generate outsized loan growth?

We guided mid to high for this year.

And I guess, we -- as we said in the remarks, we are going to stand by that guidance and we believe we'll hit mid to high.

You're right.

The organic growth this quarter, which we stated, I think, was 4% to 5%, I think it was 5% for this quarter and -- on an annualized basis and with the -- for all the reasons we stated, we see that continuing to ramp-up a little bit as we get into the next quarter.

So we feel pretty comfortable about that guide as we look into next year.

As we get closer to the end of the year, we'll give more color on guide for next year, but we think we'll, at this point, guide to mid to high.

Do you have any other comment?

Yes, the only thing I would add is, earlier in the year and throughout 2019, we've continued to expand our team of bankers and that helped supporting the growth.

If you look at markets like Tampa or Broward County, we continued to add talent there and have gotten a lot of that work done, going all the way back to the fourth quarter of 2018.

So some -- the guide does reflect the expansion of the team that we've put in place.

And for all the harping around competition and the like, I mean, it is a pretty favorable environment for growth given that rates are low.

And so there could be demand out there, and we're seeing that.

We picked that up.

Again, we have to be disciplined, careful, particularly careful today.

We want to continue to maintain the strict underwriting that we have been executing for many years now.

We are going to maintain the granularity, which takes us out of some of the more hypercompetitive parts of the market, which I think is smart and we just have to work harder, and probably work twice as hard as we would have a couple of years ago to achieve the growth.

So we have plenty of room for growth with the loan-to-deposit ratio that we had and the anticipation of continued deposit growth.

We're in a fabulous market that is very deep and very diverse here in Florida, and we'll continue to take advantage of that while remaining very careful and adhering to all of our strict underwriting guidelines.

That's all great color.

And I -- again, I was trying to reconcile more for next year as opposed to kind of the fourth quarter and full year this year.

Just going back to the capital question little bit, there has been a pickup, I guess, in M&A chatter in and around the markets that you guys are in.

Would you characterize that your conversations have been relatively active and then, separately, have you gotten any inbound calls as of late?

Yes, I'll take that one, Michael.

Yes, we are still active and, as we've talked on prior calls, we continue to have fairly robust conversations with potential targets.

We're still focused on Florida only, primarily Southwest Florida, the Tampa across the I-4 into Daytona and down the East Coast to Broward County.

And we still believe there is plenty of opportunities, and we'll continue to view them as opportunistic and want to create value in those acquisitions and want to do things that are shareholder friendly.

So as we continue to have conversations, we will see where things go, but it is active and we still view there is plenty of opportunities.

As you know, we have been very disciplined and thoughtful around our M&A strategy, and it remains a key part of our strategy as we look forward.

We think there will be more opportunities, as Chuck said, and we continue our conversations.

All right.

Maybe just one final one for me.

As it relates to capital, I think you guys ceased the dividend back in the first quarter of 2009.

Would that be a potential lever that you would pull to deploy some of the capital as we move forward?

Where does that stand on the priority list, I guess?

As we said earlier, we will continue to reevaluate the full range of our capital management alternatives, including dividend.

And we'll have those conversations with our Board, and our overall objective is to deploy our capital prudently as circumstances warrant as we look ahead.

So all I can tell you is, we will continue to evaluate and look at that.

And if we have something to say, we will certainly be talking with you on future calls.

We have a question from Jeff Cantwell from Guggenheim Securities.

Congratulations on the results.

I wonder if I could ask a quick follow-up question related to your commentary on the current operating environment.

You have been touching on this a bit, but my question is, when you think about managing your business through this cycle, where have you been making the biggest adjustments in your strategic thinking over the past few quarters, could you talk to us a little bit about that?

It sounds like you're increasing your focus on cost containment and efficiency, but I was just hoping to get more thoughts on how you're thinking about being more opportunistic/pragmatic in the current operating environment?

I'll kick off, and then maybe, Chuck, you can add something.

But I -- clearly, we have been very attentive to the impact with the really rapid change in rate outlook had on the business.

And as you've pointed out, that required us to look more carefully at our cost structure and the like, and I think that's something we've certainly done.

Any other thoughts?

No, just we are continuously looking out ahead and what the environment is out in front of us.

And earlier in the year, we saw interest rates were going to be a challenge.

That's why we got very active on the cost side, and that's helped support and grow earnings.

And as we look forward, we continue to see opportunities to remain disciplined on cost containment as well as we see opportunities continue to work on our deposit costs if we -- if the yield forward curve continues to play out.

But importantly, I think we've positioned the balance sheet very effectively, and the balance sheet has liquidity, the balance sheet has strong capital, and the balance sheet's supported by strong underwriting.

So we feel good where we're at in the cycle, and we'll continue to look forward and make appropriate adjustments to continue to deliver value for shareholders.

We really think that's the key in terms of the medium-term outlook, and that is to maintain an incredibly strong diverse, profitable balance sheet as where we are today.

And that gives us options that maybe others would find more challenging.

So we think that's important.

I appreciate that.

Just a related follow-up to that is, when we think about the outlook for lending, I just want to circle back to what you were talking about earlier.

It sounds like you're contemplating maybe a more pragmatic approach next year given the flattening in the yield curve, is that a fair statement?

And clearly I understand this question comes in the context of your strong pipeline, but I guess, I'm just trying to get a better feel for where lending growth is going, were you clearly have to balance this strong economy, I guess, the flatter yield curve and the careful underwriting that you're mentioning.

So any more color there would be appreciated.

If you step back and look at our strategy, we have a diversity of loan mix.

And so if you look at the asset classes we grow, we have a consumer portfolio, a C&I portfolio as well as a CRE portfolio.

Where we see the heightened level of challenge on covenants and guarantees and the like is in larger CRE.

So in that part of the space, we have been cautious and in many cases have let deals either leave the bank or have not competed on deals, but the remainder of our lending function continues to see good inbound volume.

And then I would say the second thing as we move forward in the lending environment is we continue to expand the bank into robust markets, and so those markets continue to support growth and continue to provide opportunities to grow the balance sheet.

So there are -- there is pockets of the market that are very stressed, and we're staying away from that, and we're taking advantage of other areas that we think we can create value with and areas that meet our risk-adjusted return threshold.

And, again, to reiterate probably for the fifth time, staying true to our strict underwriting criteria and not allowing us to drift the portfolio in a direction that is anything but strong.

Great.

And then my last one is, you had a press release a few days ago on converting your platform to nCino.

I thought that was interesting.

Can you talk to us about that a little bit?

Is that cost-savings initiative?

Is that a growth initiative?

Is it significant?

What's the right way for us to think about that?

Would appreciate if you could frame that for us.

Jeff, this is Chuck Cross.

I'll take that question.

We've implemented the nCino operating system so that we could standardize and digitize our processes.

And it's not only in commercial banking, but small business, SBA, and treasury management.

And we just feel like that it's critical to our continued digital transformation, so that we can easily provide solutions to our customers.

So it's more how we do the business than just expense control.

Yes.

And I'll just weigh in and say that that investment has led to better productivity, and we expect even better productivity as it matures into 2020.

And it's led to and will lead to further cost control as well as leading to helping support the speed of how we get deals to market.

And so it has allowed us to have a lot more clarity and transparency around the lending process and that adds a lot of value to our operation.

It's not just the technology really, Jeff, it's how we implement and how we approach it to better serve some of the objectives that you just heard from Chuck and Chuck.

And we have been very focused on thinking through how we plan that, and we're going through -- we've had a very good result so far, and we think we are going to get a lot more efficient as we go through time into next year.

We have reached the end of the question-and-answer session.

I'll now turn the call over to Mr. Hudson for final remarks.

I'll just, again, thank everybody for attending today.

We are pleased with our progress, and we really look forward to reporting continued progress next year as we report on the fourth quarter and the total year.

Thanks, everybody, for attending today.

Thank you.

Ladies and gentlemen, this concludes today's conference.

We thank you for participating.

You may now disconnect.