Seacoast Banking Corporation of Florida (SBCF) Q3 2018 Earnings Report, Transcript and Summary

Welcome to the Seacoast Third Quarter Earnings Conference Call. My name is John, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Before we begin, I've been asked to direct your attention to the statements 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 will now turn the call over to Mr. Dennis Hudson, Chairman and CEO of Seacoast Bank. Mr. Hudson, you may begin.

Thank you, John, and good morning everybody, and thank you for joining us today on our call. Our press release, which we released yesterday after the market closed, and our investor presentation can be found at the Investor portion of our Web site under the title Presentations. With us today is Chuck Shaffer, our Chief Financial Officer, who will discuss our financial and operating results. Also with us today is Julie Kleffel, our Community Banking Executive; Chuck Cross, our Commercial Banking Executive; David Houdeshell, our Chief Risk Officer; and Jeff Lee, our Chief Marketing Officer. I'm going to open the call today by discussing Seacoast's business model and then reviewing our third quarter results. This quarter's operating results and financial performance show the continuing strong fundamentals that underline Seacoast's balanced growth strategy. Last year at Investor Day, we took a deep dive into our strategy, which has produced a very granular, diverse loan book that continues to absolutely avoid any theory concentration. Our customer-focused balanced growth strategy has been the foundation upon which we build strong operating results. Our strategy requires us to build diverse customer relationships, and as we've discussed many times, we've developed a data and analytics competency that drives our execution of the strategy. We're proud of the balanced growth that we've produced, and one of the real payoffs particularly in the rate environment we now see is the impact that our strategy is having on our funding, this was very evident this quarter as we continue to grow low cost deposits. Our non-interest bearing deposits were up 8% year-over-year. Our cost of deposits increased only four basis points from the prior quarter, and remained a very low 43 basis points, while our average rate on new loans added for the quarter increased 16 basis points to 5.12%. This quarter we also saw our best ever growth in consumer and small business loans and our prospect in platforms are driving solid growth for our commercial loans. These very strong metrics result from our unwavering execution of the strategy, we shared with you at that Investor Day. As we move forward into the higher rate environment, we see ahead, we expect to see further improvements, our analytics platforms will continue to help us achieve better pricing and pick up share in small business and consumer. We'll continue to maintain limited exposure to the CRE segment and our improved add-on yields will be helped by our intentional mix change favoring consumer, small business, and commercial lending. Chuck is going to talk with us a little more about that in a minute. This means we'll continue to avoid parts of the market where we have seen tighter spreads and looser terms. I got to say Seacoast is firing on all cylinders. We're forecasting a stronger Q4 and an even stronger 2019 which reflect our continued growth and also the impact on our operating leverage that the acquisition we completed last week will produce. Our improved volumes and yields are supported by our industry leading analytics platforms which help us drive better execution around deepening relationships. You add all this together and you get a company that can produce industry leading growth and returns with a lower risk profile. As I've said many times, our CRE exposure is among the lowest in the country, our low loan to deposit ratio suggests less risk as well and importantly relieves us of the funding pressure others are feeling, all of this points to continued performance even in a more challenging environment. Turning to the third quarter's result, we grew adjusted net revenue 12% to $64 million and achieved adjusted net income of $17.6 million up 16% from last year. We reported $0.37 on adjusted earnings per share, an increase of 6% year-over-year driven by strong loan originations and net interest margin expansion. These results included a $0.05 impact of a specific reserve related to a single CRE loan that was originated way back in 2007. This is a loan that we discussed last quarter when we placed it on non-accrual, that provision of stock [technical difficulty]. Our results reflect the sustained execution of an integrated business strategy that is generating consistently strong returns. As Chuck is going to detail further, we are executing our balanced growth strategy which is focused on delivering attractive returns via organic growth and strategic acquisitions while remaining true to our credit guardrails. Speaking of strategic acquisitions First Green is a great example, this acquisition has excellent economics and it strengthens our franchise in two key Florida markets Orlando and Fort Lauderdale, we're already ahead of schedule in our expense consolidation efforts and we are highly confident in exceeding the compelling returns, we announced at the outset of the acquisition. I'm delighted to welcome First Green's customers and employees to the Seacoast family and look forward to working with them to strengthen our leading position in Orlando and growing our presence in Fort Lauderdale. In summary, the fundamentals of our business and execution ever strategy are now as strong as they've ever been, our balanced growth strategy is supported by a healthy balance sheet, strong loan pipelines and deposit growth opportunities and some very attractive MSAs. All grounded by a rigorous credit discipline. We will continue to reinvest in our business providing the fuel to continue driving robust financial performance, taken together the strength settles up to generate revenue, profitability and significant value in the coming years and we'll continue our momentum as one of the nation's top performing community banks. With, that I'd like to turn the call Chuck who will review our quarterly results in a little more detail. Chuck?

Thank you, Denny, and thank you all for joining us this morning. As I provide my comments I'll reference to the third quarter earnings slide deck which will be found at seacoastbanking.com. Starting with Slide five, we had another strong quarter as we continue to build momentum across our business lines and benefit from investments in analytics, C&I focused business banking, low cost deposit base and expense control. We're on a clear path to achieve the Vision 2020 objectives we presented at Investor Day in 2017. GAAP net income grew to $0.34 per diluted share and adjusted net income grew 16% year-over-year to $17.6 million equivalent to $0.37 per diluted to common share. As Denny mentioned this is net of an increase in a specific reserve for a single loan we discussed on last quarter's call equivalent to $0.05 per share. We reported a 1.225 adjusted return on tangible assets and a 12.4% adjusted return on tangible common equity and we ended the quarter with a tangible book value per share of $12.1. Highlights included the third consecutive record quarter for consumer small business originations which increased 20% sequentially and are up 45% from the prior year. This portfolio continues to benefit as our investments in pricing, credit and marketing analytics matured. Additionally this portfolio is averaged out on a rate increase 25 basis points sequentially and is up 84 basis points from the prior year. Our commercial banking business enters the fourth quarter with a strong pipeline of a $197 million supported by a proprietary commercial portal software tool. This tool which we discussed last quarter allows our bankers to significantly expand customer relationships by providing direct insights in the current commercial customer behaviors and needs. Early in its implementation, we're seeing good results. And turning to the net interest margin we saw an increase of five basis points quarter-over-quarter while the increase in the cost of deposits was only four basis points. All the result of a healthy balance sheet we possess. Our liquidity positions as well to take advantage of a growing Florida economy and provides more flexibility than most to position the balance sheet for continued NIM expansion and rising rates. As I mentioned this quarter's results were impacted by a $3.1 million increase and a specific reserve for a single retail property we discussed on last quarter's call. We moved this asset to non-accrual last quarter and as circumstances evolve the asset required further reserve for future potential loss. As a reminder this asset is a unique one off situation a retail facility originated in 2007 with a dominant tenant caring 75% of the cash flow. We do not believe this is any indication of deteriorating credit conditions. In addition to reducing diluted earnings per share by $0.05, the recording of this specific reserve reduced adjusted return on tangible assets by 16 basis points and reduce the return on tangible common equity by 1.6%. Turning to Slide six last Friday we completed our acquisition at First Green. This acquisition strengthens seacoast presence as the number one community bank in the Orlando MSA and expands our Fort Lauderdale presence. We're ahead of plan on our expense consolidation initiatives and fully expect to exceed the returns we presented at announcement. As a reminder our expectation was for earnings per share accretion up greater than 10% and IRR well over 25% and tangible book value dilution will be earned back in less than one year. This acquisition is gone extremely well and we're excited to have the First Green team join Seacoast. Turning now to SLIDE seven and looking more deeply at the quarter. Net interest income was up $1.4 million sequentially and the net interest margin was up five basis points from the previous quarter to 3.82%. This was in line with our prior guidance of low 380s in the third quarter. The yield on loans increased 10 basis points. The yield on securities increased 15 basis points and the cost of deposits was up only 4 basis points. The 11 basis points increase in the cost of interest-bearing liabilities was in line with our expectation. We remain disciplined in loan pricing and deposit pricing. Our average add-on rate for new loans increased 16 basis points sequentially to 5.12% and are up 75 basis points from the prior year. The increase in add-on rates accelerated over the prior year as investments in credit pricing and marketing analytics, drug pricing increases, particularly in consumer and small business lending above the change in the treasury curve with an average add-on rate for that portfolio, a 5.50% in the third quarter. Our commercial banking business also saw new origination yields increase quarter-over-quarter by 19 basis points. Mortgage banking add-on rates remained flat over the prior quarter, but are up 70 basis points from the prior year. Looking to the fourth quarter, we expect an net interest margin to be in the high-3.80s to low 3.90s driven by continued margin expansion and the Seacoast portfolio as well as the addition of First Green. This assumes a 25-basis points rate increase in December. As a reminder, the First Green acquisition will increase our overall loan purchase discount and we expect the consolidated cost of deposits to be approximately 50 to 55 basis points in the fourth quarter, including First Green and our deposit book. We remain asset sensitive and a 25 basis points increase in the Fed funds rate results in approximately 3 to 4 base points improvement in net interest margin. Assuming a parallel shift in the yield curve and excludes any impact from purchase loan accretion. Moving to slide 8, adjusted non-interest income decreased $0.4 million from a prior quarter and is up $0.9 million or 7% from the prior year. During the quarter, we saw strong performance from interchange and server storage income driven by growth and customers and broader customer engagement. We also continue to see improvements in wealth related fee income driven by growth and assets under management. We have added over 100 million in assets under management year-to-date. Other income, which is primarily SBA swap fees and other customer fees declined quarter-over-quarter due to lower SBA volumes and lower premiums paid on sold loans. Mortgage banking fee income declined quarter-over-quarter due to compression and service release premiums and a lower saleable pipeline at quarter end. Moving to slide 9 adjusted non-interest expense was down 0.6 million sequentially, and up 3.1 million from the prior year. Salaries and wages and employee benefits increase quarter-over-quarter as we continue to invest in commercial bankers and talent to scale the organization. After acquiring two commercial banking team leaders and four commercial bankers in the second quarter, we added two more commercial bankers in the third quarter and have three offers accepted for the fourth quarter. We're targeting another five hires by year-end and we have more than a dozen bankers in various stages of an interview process. We outperformed our guidance on honest expense in the third quarter. The result of an expense management program we launched late in the second quarter, we continue to look for ways to re-engineer the organization by removing costs from lower return activities investing in higher return strategic initiatives. This expense control is already paying off, and reduces the adjusted non-interest expense to 2.48% of our average tangible assets down from 2.57% in the prior quarter. Looking ahead, we're targeting a $7 million expense reduction in 2019, which we plan to reinvest in selling a fully digital loan origination platforms digital directs and element for small business and building out our commercial banking team in Tampa and South Florida. These investments will allow us to drive both growth and operating leverage in line with our vision 2020 objectives, we will maintain our discipline focused on efficiency and expense management. Looking forward to the fourth quarter of 2018, we expect adjusted non-interest expense to be approximately 30.5 to 39.5 million excluding the amortization of intangible assets, which is approximately 1.3 million per quarter and any one-time merger related charges related to the First Green acquisition. Moving to Slide 10, our adjusted efficiency ratio improved one percentage point from the prior quarter and a 140 basis points from the prior year. We remain confident, we are on track to achieve our below adjusted efficiency ratio as we laid out in our vision 2020 plan. Turning to Slide 11, loan out standings increased $85 million in the core or 9% on a annualized basis, excluding any loans added by last year's bank acquisitions, organic loans grew 8% over the prior year. Looking forward, we have healthy pipelines and are making investments in bankers and new technologies to drive continued loan growth given our robust pipeline at the end of the third quarter. We expect loan originations to continue to be strong in the fourth quarter. Looking more deeply at the mortgage banking business in Florida, we see greater volume shifting to construction, which a current market spread is no longer meeting our return expectations. And as a result, we expect lower portfolio mortgage production and we will focus on generating saleable volume while reducing overhead in this business. Our plan will add 0.03 to 0.04 per share to earnings in 2019 from our current run rate, but will modestly reduce growth and loan outstandings. As a result, we are targeting high single-digit, loan growth in 2019 led by higher return lending activities in consumer, small business and commercial. This will add to bottom-line performance and support the expansion of the net interest margin. We are confident on our ability to drive loan growth. It is the top end of the industry given our robust analytics and expansion into the fast-growing markets to Tampa and South Florida. Turning to Slide 12, deposit outstandings declined $54 million quarter-over-quarter reflecting seasonal outflow and we're up $532 million from the prior year. The majority of this decline is in public funds in line with seasonal trends excluding the impact of acquired deposits, demand deposits increased 8% year-over-year and total deposits increased 4% over the prior year. Rates paid on deposits increased 4 basis points to 43 basis points quarter-over-quarter, approximately 1 basis point below our prior guidance. The overall cost of interest-bearing liabilities increased 11 basis points in line with our expectation. Looking ahead, we are targeting year-over-year deposit growth of 6% and expect deposit competition to remain aggressive. We believe we are well-positioned to manage funding cost with a lower loan-to-deposit ratio and a value proposition that is resonating with customers. The targeted deposit growth rate of 6% in combination with high single-digit loan growth will provide greater liquidity deleveraging away from higher cost wholesale funding and generate net interest margin expansion into 2019. Turning one slide forward to Slide 13, our deposit beta continues to perform very well, reflecting the transactional nature of our deposit book. Looking back at the last four quarters, the Fed funds rate increased to 100 basis points and our deposit book only inquiry price by 21 basis points. Non-interest-bearing demand deposits represent 31% of our deposit franchise and transaction accounts represent over 52% of our deposit book. And on the business side, we remain focused on developing core C&I relationships, which bring funding in fee-based products when compared to traditional CRE lending. We operate -- we also operate a very competitive retail consumer model, which continues to outpace the industry in growing customers supported by our franchise and innovative analytics toolset, we expect our deposit portfolio to continue to outperform like-size community banks. Turning to Slide 14, credit continues to benefit from rigorous credit selection that emphasizes through the cycle orientation builds on customer relationships and well understood known markets and sectors. As well as maintaining diversity of loan mix and granularity. The overall allowance to total loans was up 10 basis points to 83 basis points at quarter end, including 8 basis points from the increased to the specific reserve on the loan mentioned prior. In the non-acquired loan portfolio, the ALLL ended the quarter at 98 basis points of loans outstanding, up 10 basis points from the prior quarter, which includes 9 basis points related to the same impaired loan. We continue to prudently manage our commercial real-estate exposure, construction, and land development as a percentage of capital at 59% and commercial real-estate loans as percentage of capital at a 199%. Net charge offs were 800,000 for the quarter and looking back over the past four quarters our annualized net charge off rate was 10 basis points in line with our prior guidance. And looking forward to 2019, we forecast annualized net charge offs for approximately 15 basis points as the economic cycle matures. The provision for loan losses will continue to be influenced by loan growth and net charge offs. Turning, to slide 15, we continue to possess a healthy balance sheet and are delivering strong capital generation through our balanced growth strategy. Our robust capital standing positions us well for additional acquisition and organic growth opportunities and provide options to manage capital and returns moving forward. The tier-1 capital ratio was 14.8% and the total risk-based capital ratio is 15.5% at September 30, 2018. The tangible common equity intangible asset ratio was 9.9% of quarter in providing capital for additional growth in 2018. And to wrap-up on Slide 16, we have a solid foundation that positions us for continued momentum in the fourth quarter and in the 2019 and although this quarter performance was impacted by an increased single specific reserve, our fundamentals remain very strong and we can see continued robust opportunities to enhance our balanced growth strategy. Overall, we are confident. We remain on track to meet our vision 2020 targets we laid out in early 2017. Looking forward to your questions, I'll turn the call back over to Danny.

Thank you, Chuck, and John on the phone. I guess we are ready for a few questions.

Thank you. [Operator Instructions] And our first question is from David Feaster from Raymond James.

Hi, good morning, guys.

Hey, Dave.

I'd like to start it on the loan yields. There's pretty impressive sequential growth there. Could you just talk about what drove this specifically, and maybe your thoughts on new loan yields, how pricing stranded, we've heard that there might be some pressure on the CRE side, obviously that's not as big a growth driver for you, but is there any where you're seeing pressure and -- or benefits? And secondarily, maybe some insight into what drove the increase in securities yields, is that a portfolio restructuring, what drove that?

Yes, sure, all right. We'll start with the loan yield question and then migrate to securities yield. Starting with -- just talk a little bit about consumer and small businesses, we talked a little bit on the last call about this, but I think we did some great work, we add our credit and our analytics guys, as well as our finance team spend some time really looking at the way we think about pricing, both in small business and consumer. We put in the new pricing models kind of middle part of the second quarter, and that led to both growth and increases in new loan add-on yields is something that we will continue to expand in the commercial part of our business as we move forward, but that turned into real results and the quarter was above the kind of the change in the treasury curve. So we are very pleased to see that, and then…

I just like to kind of add that in the environment we're in today, very important for us to look at pricing, and something we talked about internally few months back, and I think you did a great job kind of explaining what we are doing. I'm trying to explain why we are doing it, and that is that we are just moving into another -- a different kind of phase here where this becomes very, very critical for us to get the right pricing in these things. The second thing I would say, just to add-on to what you said, Chuck, is a bigger factor probably was the mix, and we believe that it's appropriate in this environment to really focus we've been saying that for quite some time on small business consumer, some of the segments of the market that continue to perform well and give us the opportunity to have the kind of spreads we think we deserve as we look forward. So and again, back to strategy of all supported by the analytics prowess [ph] that we developed and then to assist our folks with better execution as we go into the market. So this is not something, it is kind of a one-off deal or a temporary thing that we think this is very sustainable and something we will continue to see.

Yes, I'll add to, if you look at our balance sheet, look at the liquidity on the balance sheet with a lower loan-to-deposit ratio and the build and the fact that we operate multiple business lines and including as we talked in the past about a competitive consumer so, we have options to manage that mix maybe more than most. So we come into this, into the part of the cycle with more liquidity, more options to manage mix and we think that all leads to NIM expansion as we move into 2019. Now, this is not the time in the cycle you want to really be pressing down on theory growth. This is not the time in the cycle where you want to have liquidity issues. This is a time to be very thoughtful and careful about how pricing and how mix really starts to give us advantage in terms of margin. You got comments on the investment book?

Yes, just quick comment on the security portfolio, we are about 40% of that portfolios variable, David, and we saw that reprice in the quarter, we carry a CLO portfolio, that's a floating rate portfolio that we invested in early 2017 that turned out to be a great investment, it has yielded nice returns, that repriced in the quarter as well as we saw some slowdown in amortization of discount and that helped the -- our premium sorry, the amortization of a premium and that helped us well. So the combination the two lead to yield expansion in the securities portfolio.

Okay, that's helpful. Thanks. I appreciate the NIM guidance too, your ability to manage the loan-to-deposit ratio up as helped, you defend your NIM and then provide for expansion and based on guidance, it seems like you'll be exiting next year around 93% loan-to-deposit ratio, inclusive of First Green. I guess where are you comfortable with that ratio going? I think previously we've talked about 90% or so, are you comfortable with that going and then the NIM guidance 3 to 4 basis points of expansion. What kind of betas are you assuming for that? Or are they accelerating in? You think of that 3 to 4 basis points sustainable and feature hikes inclusive of First Green?

Yes, so I'll start with loan deposit ratio. I think with the guidance we provided the high single-digit loan growth the 6% target deposit growth, we think we hit about a 90% loan deposit ratio into 2020. So we think we have plenty of room to go there as we move forward and, we have the ability to manage that as to how much we put on and manage the mix and the NIM as we move forward and yes, I feel confident in 3 to 4 basis points NIM expansion on each core point rate hike, primarily because the deposit beta does continue to perform very well. We only saw a little north of 20 basis points move and the deposit beta over the last 12 months given a 100-basis point increase and Fed Funds as I mentioned before, 52% of our deposit books transactional and if you look 32% of DDA, but above that is a large portfolio of very low operating type accounts with small amount of interest paid on them. Now, certainly deposit competition remains aggressive. And it's something we are carefully monitoring, but we think we can manage as we move into next year. And again, back to the strategy the growth we've seen in the lean and shift we've made in the small business and consumer over the last couple of years, really puts us in a stronger position to defend the deposit growth number as well, so and to defend the cost of deposits as well. So that's been a big, big, big impact.

Just to wrap-up yield curves and the way they change can impact this, but looking forward, we continue to see NIM expanding into 2019.

Okay, last one from me. I know it's early but I guess given some of the cost saving initiatives that you highlighted and the operating leverage from your digital investments, somewhat offset by continued hiring and further investments in the business, you think core expenses, exclusive of First Green could essentially be flat, year-over-year in 2019?

I think, if you look at the 2019, if you take the expense guidance, I gave you and Q4 and that, we closed on First Green on the 19. So we didn't have a full quarter of First Green expenses. So, modestly increasing, I think from the first quarter out through the fourth quarter, we do expense -- I believe expenses remain flat throughout 2019.

Okay, thanks, guys.

Our next question is from Michael Young from SunTrust.

Hey. Michael, and I would just point out follow-up, why do we think they'll remain flat? Because we are de-investing in areas that don't give us returns? And when you look at the whole picture, we think we can achieve that. Sorry, Mike.

No, that's all right. Michael.

I wanted to maybe just start off on the credit piece this quarter, obviously, the last two quarters is kind of offset some pretty good results. So maybe can you just walk us through kind of where that stands now? I think it was maybe a $7 million credit, seems like there is at least maybe $5 million reduction and your exposure on that credit. So just kind of where are we now? And is there any hope for some positive improvement down the road on that at all?

Hey, Michael, this is David. Yes, just for perspective, next level is originated in 2007, really, it's a peak to the valuations with regard to a lot of theory. We've been working this down, it's closer to $8 million in verses $7 million and the core tenant was occupied close to 80% of this space vacated they continue to pay. So we sort of have this position where we have a performing -- non-performing like credit although we're still looking for a replacement tenant to carry overall deal downside analysis our reserves appropriate we just competed 30 days ago or evaluation of the market we updated our appraisal and we feel very good with the position that we have down the assets going forward.

I don't so point out that the tenant that left did not leave because of economic issues like the concerns or problems of quite the contrary that tenant was performing exceedingly well in that location and moved to a larger preferable location in the market in that same market. And so it was the tenant really vacated for very positive reasons unfortunately, this issue for us, so we're not seen this confidently say this is not the beginning of something worse, we actually see a very strong environment out there and the rationale for the vacancy was actually for very positive reasons. And so how did we end up here, well unfortunately it just kind of dates back to a very difficult time in 2007 and the spring was over leverage after the crisis and we've been working a down as David said and we do not believe there's any further loss or charger.

And so it's just there is a replacement of that tenant in the future I mean could this end up you're getting upgraded or paid off for at some point and kind of removing it from the books or any kind of thought on what could happened to the positive.

Yes, well that we're not counting on anything positive and we've kind of built into the special provision that we took kind of a what we think is a pretty negative scenario, so there could be some upside but it's not something we would ever count on.

Yes and I would just add to that our for standard guidance this mark down market rates would be today, so we are very flattened the assets is found if it's sold would be believe with trade for the investments we have so, there is not a lot of upside with any sense.

Okay. Thanks for that color and Chuck just back on the kind of expense outlook I think you said 30.5 to maybe 39.5 x fee amortization in the fourth quarter. That's with First Green or without First Green.

That's with First Green.

Okay, so essentially you guys have gotten almost all of the cost savings already.

Yes, we are head of schedule on the cost saves Michael and we expect to have a lot of those benefits in Q4.

We worked hard to get everything integrated in close simultaneously last weekend and so there's now some small amount that will continue to see but it.

Oftentimes will carry branches side-by-side for a very good time in this case for just give you a tangible example we consolidated the branches same weekend, so we worked harder this time to move things faster.

Okay, yes that's pretty impressive and then just moving into next year that the $7 million in cost saves you mentioned kind of the investing I guess in certain areas sounds like maybe mortgage is one of those but can you just give a little color around kind of where you're harvesting some of those expenses from potentially?

Sure, yes I think the way of think about it is, part of it is mortgage you're right there and then some of the costs will come out of mortgage thoughts are include some vendor renegotiation some staffing efficiencies that we see across the organization and accessing some legacy technology type expenses on the front side as we mentioned we're investing that in commercial bankers and tools for those commercial bankers and both fulfillment. And if you remember back to start overall technology strategy is the build a world class analytics tool set we think we've built at least invest in class for community banking for using that as a way to generate leads. We now are putting fulfillment on top of it going to out that faster pull through both in commercial and small business and so we think the combination of taking some cost out of these lower return parts of the company, putting it into the fulfillment and be able to pull deal through as well as in investing in expansion markets campus and Broward County south Palm Beach County those are markets that are expanding markets where we have very low market share. And building out a banker team and in those markets I think what the three key investments they're leads to both better growth moving into next year as well as NIM expansion as we bring in some higher yielding assets.

And better operating leverage over time, the fulfillment of creating a fully digital fulfillment process. Allows us to further levers the analytics capabilities to drive top line and as we get better at that and do that it drives better operating leverage which is a key component of our 2020 vision.

And alongside that I will one I'd just like to know any timing or expectation on when you might be able to start standing those off or well kind of occur throughout the year and then on the direct fulfillment side and then also you guys have been able to I guess it's focused on listing pricing already in kind of consumer small business to reflect probably higher cost funds et cetera but this will allow you to originate with a lower cost structure so but there's kind of benefit of maybe being able to charge higher price for speed versus having higher operating leverage in anticipate giving some of that pricing back or kind of how do you look at that piece of the equation.

I think you nailed it that's exactly the plan. Everything you said, I think getting paid for speed, particular for small dollar loan to fulfill more directly. I think as really important it provides real value to the customer and that builds value throughout the whole customer value chain, so that it's really important part of what we're doing and in terms of the timing it will happen throughout the year and I think our goal, overall goal is to have this completed all of it completed by the end of next year. And if we can move faster we just might on getting some very looks in room.

Okay, thanks for that color. Appreciate it guys.

Thanks, Michael.

Our next question is from Stephen Scouten from Sandler O'Neill.

Hey guys, how you're doing today?

Hi, Stephen.

Question for you, I mean obviously the deposit franchise holding up phenomenally and just showing a real strength there. I'm wondering in your modeling and as you think about your NIM guidance, how are you thinking about the non-interest bearing deposits and if we could see some remix away from non-interest bearing and back into CDs kind of more to a historical kind of percentage or kind of how you're thinking about that theoretical risk?

I just want to say something; we are growing customers at a rate that supports the numbers that we've described. We are growing customers at a rate that allows us to confidently say we believe we can grow, the overall deposit book 6% and you see where over indexing on that growth rate in DDA and that is a 100% due to the customer growth that we have and the lean into which we talked about the last several years into doing a better job of growing a small business which is meant incredibly impactful. I mean with when you look at the small business growth in customers that we've created over the last year. They've essentially funded themselves, so as we're growing new calls customers particularly leaning into small business we have many of those that bring just deposits and then we have others that bring deposits and loans and when you kind of add it all together. It all in an aggregate way funds itself, critically important in the environment we're going into that be where our focus is, that's where all the value creation is going to come is in that kind of a thinking in terms of the strategy that we have, so it included in everything I just said is any kind of mixing that began to occur out of DDA. But that DDA book is core customers it's not large unusual types of customers that you're going to see that going back and forth.

Okay, very helpful. Thanks Denny and then and maybe thinking about the technology investments you guys have made, can you remind me us any of the investments you made it created proprietary products that could create any revenue opportunities I mean it's obviously been phenomenal for your franchise and what it's done for your earnings potential but I'm wondering if there's any kind of ancillary benefits on top of that.

Hey, Stephen, Jeff Lee. Good to hear from you. Yes we certainly looked at and we've had quite a bit of interest this right now that we see so many opportunities within our own franchise to continue to leverage our technology and our analytics to fuel our associates to drive further growth, so we are weighing options but I would tell you right now we see a lot of opportunities to continue to harvest what we have within our own customer base, so that's where our focus is.

We're developing so many proof points on that but which has been so astounding but as we find other ways to utilize this, across the franchise and even into some of the back office areas and in the risk areas we're already seeing that yield really good results we talked a little bit about that earlier on the call. We just have so much more to do, we think that's where frankly the near term value is in this.

Okay, fantastic and then maybe just lastly from an M&A perspective. I mean you guys have put up a great organic growth and deal that was some incremental M&A over the last couple years but I mean with the pullbacks we've seen in the market as a whole and then obviously your stock is based on as well, how do you think about M&A and the ability to announce the deals from here with the value of your shares?

Yes, so we have them and we will remain focused on opportunities that provide real value for our shareholders. We're not going to give away our shareholders hard earned value and so if we were to consider anything in this environment and have to have the same payback, the same returns and most importantly add to the customer franchise. We're not looking to dilute the tremendous value we've created here from the customer side we're looking to create value and that's been and remains one of the key focus areas that we focus on is this new franchise going to add value from a customer standpoint over the long term. All I can say about the stock price as it certainly is not as it's not going to make us meeting those goals and easier to have stock price we are and we'll just have to see how things play out but I just want to make very clear that we're not going to step away from all of the, any of the metrics that we've used historically to create value for shareholders were those are hardened and in place.

Great, thanks a lot guys. Appreciate it.

Thank you.

Our next question is from Steve Moss from B. Riley FBR.

Good morning guys. Just wanted to touch a bit further on commercial real estate, I'm wondering should we think that portfolio being roughly stable or grown like mid single digits and then second thing, what are you guys seen for commercial real estate yield these days.

I think overall growth we have some growth in that most of our CRE growth has come through acquisitions so, most of the banks we've acquired have had great deposit franchises and a little bit more focus on CRE for all the reasons we probably understand, so most of our growth in CRE has come through that but we have had some, I think single digit growth but any common Chuck?

Yes, Steve this is Chuck Cross, CRE is a very competitive market in Florida right now and we're stick into our guns on underwriting and because of that we're not seeing great growth in our CRE loan portfolio but we do have some good CRE investor customers that we stick with and so we have some modest growth in that portfolio. As far as pricing right in this price in the Florida market it's you're not going to get great pricing but we get acceptable pricing and we stick their guns on our pricing models.

Yes and I'll just add to that, we have the risk adjusted pricing model. We use it on every deal and if a deal doesn't hit our risk adjusted returns we won't move the deal forward, so where pricing is gotten and I think we've talked in the past particularly into South Florida CRE pricing has been challenging we let deals go in that market and not competed given the risk adjusted return, so we remain disciplined and we'll remain disciplined as we move forward both on credit and pricing and will and that's the way we look at the market.

All right, thank you very much.

Thanks, Steve.

Our next question is from Christopher Marinac from FIG Partners.

Thanks guys. Good morning. Just one more question on the credit side just had to do with sort of where classifieds kind of trends would be what the kind of actually trend down for 930 just because you've taken the write down of that one credit.

Dave, you want to take that one?

Yes, non-performing loans assets would be pretty much flat if you take out the impact of that one for credit it's taken back to last two quarters.

Just to be clear we did not write it down. We booked a provision and so we have an additional allowance against that loan and so you would not expect to see that impact the level of substandard or non-accruals, just point out that the non-performing loans actually remain kind of flat.

We see no deterioration at all, Chris, then in the portfolio quarter-over-quarter remained consistent.

Right, so the small change that happened in CRE that already happened in the second quarter is old news and you're moving on with this decision, correct?

That's exactly the way to think about it.

Okay, perfect and then on another topics, the with your guide on margins for the next quarter, how does that play out into the first half of next year is there still the ability to push margin slightly higher even though you've got competition because you have the asset sensitivity pieces you outlined plus you still have the leverage component I mean is it just directionally okay for us to think of a slight uptick beyond Q4 in the margin.

Yes, I think if you think back to the way we manage the balance sheet, we've been prudent in managing liquidity. We've been prudent and managing wholesale leverage and that's now paying off for us. I think were uniquely positioned to manage the margin move in into next year. I think will outperform other banks like size banks in this manner but yes, I think as you move in a 2019. We do expect margin to continue to expand part of the expansion into Q4 as First Green part of it a Seacoast and we've modeled then for your rate hikes into next year one of March one in June and one in December and we expect the margin continue to expand into 2019.

Very good, thank you guys. Appreciate all the background today.

Thanks, Chris.

And I will turn the call back over to Mr. Hudson for closing remarks.

Great, well I'd like to thank everybody for coming today. We've enjoyed the conversation and we look forward to talking further in the Q4.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for participating, and you may now disconnect.