FCB Financial Holdings (NYSE:FCB)
Q1 2016 Earnings Conference Call
April 21, 2016, 05:00 PM ET
Matthew Paluch - Director, IR
Kent Ellert - President & CEO
Jen Simons - CFO
Jim Baiter - Chief Credit Officer
Joe Fenech - Hovde Group
Steven Alexopoulos - JPMorgan
Dave Rochester - Deutsche Bank
Stephen Scouten - Sandler O'Neill
David Eads - UBS
Welcome to the FCB Financial Holdings First Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Matthew Paluch, Director of Investor Relations. Please go ahead.
Good day, ladies and gentlemen and thank you for joining us today. Today, we have Kent Ellert, our President and CEO and Jen Simons, our CFO and Jim Baiter, our Chief Credit Officer here with me to review our first quarter results.
Today’s call is being recorded and the slide deck we’ll refer to during the call can be found on the Investor Relations page of our website www.floridacommunitybank.com.
This call may contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, strategies, predictions, forecasts, objectives or assumptions of future events or performance, are not historical facts and maybe forward-looking. We caution that forward-looking statements may be affected by the risk factors, including those set forth in FCB Financial Holdings’ SEC filings and actual results and operations may differ materially. The company undertakes no obligation to publicly update any forward-looking statements. Please remember to refer to our forward-looking statements disclosure at the beginning of the presentation and the reconciliation of certain non-GAAP measures displayed in the appendices.
And now, I would like to turn the call over to our CEO, Kent Ellert.
Thank you, Matt. Welcome everyone and thank you very much for joining our call to reveal FCB's first quarter results. This is another record quarter for our company, the 13th consecutive quarter of improving and record core operating results. As you know, the focus of the company remains centered on our organic growth engine and this quarter was no exception with robust loan and deposit growth each over 450 million highlighted by C&I loan originations and non-interest bearing demand deposit growth. We also continued to enjoy strong and stable credit quality. All of these positives are occurring with a backdrop of consistent operating efficiency.
The continued momentum across our core businesses is creating a foundation of sustainable growth and producing strong financial results within a framework of safety and soundness. Exploring the numbers more closely in the first quarter, it was our most profitable quarter to-date with core net income of 22.7 million or $0.53 a share on a fully diluted basis on assets approaching $8 billion. Core net income rose 26% year over year primarily driven by new loan interest income growth of 61%. For the quarter, our revenue growth coupled with continued disciplined expense management produced a core efficiency ratio of 45.4% and a core ROA of 121 basis points.
Before we discuss our key priorities, I'd like to update you on our human capital initiatives and briefly discuss the regulatory landscape. As we continue to grow and deepen our footprint within Florida, we remain committed to combining a level of personalized service generally associated with a local bank, but the financial strength of a large institution. To ensure we grow the business in this manner, we continue to strategically recruit nationally trained bankers who've been known to us for years and have deep experience in the Florida market. This quarter, there are two strategic hires that I'd like to mention. First as we work to expand our deposit team we've hired a Director of Public Funds. I've known Jim Mitchell for many years and he's a seasoned Florida banker having served Florida municipalities for decades, both in his role at Fifth Third and in working for the county clerk's office in Southwest Florida.
In Florida, the over 400 municipalities represent a rich and diverse base for both deposit and loans, and Jim brings a rare level of expertise that our company needs to successfully navigate the business opportunities this market represents. Secondly, we opportunistically added to our commercial real estate team in Palm Beach. David Lukes brings over 25 years of experience in real estate and banking and he has been a top producer throughout his career and at KeyBank, GE Capital, and City National, having been handpicked by Leonard Abess at City National more than a dozen years ago, David brings the knowledge and client following that will fit very well within our current real estate team.
Another very important facet for FCB is our safety and soundness profile. One key aspect of this is reflected in the quality of our regulatory relationships. This month, we completed our annual targeted review with the OCC. We're pleased that our relationship remains positive and constructive and we were satisfied with the exam conclusions across a broad range of operational areas. As we continue to grow and execute our business plan, we have begun discussions with the OCC to build a roadmap and readiness timeline as we approach the $10 billion asset milestone. I look forward to updating you on our progress as we make organizational improvements to be prepared for DFAST and CFPB regulatory landscapes well ahead of schedule.
With these two important points addressed, let's take a look at the core business and walk through the results. Once again, our key priorities have been consistent for the past two years. These include disciplined organic loan growth, core deposit growth, diligent acquired asset portfolio management, and continued operational efficiency. First, we continued to generate consistent sustainable and quality organic loan growth resulting from $327 million of new organic fundings on $567 million of commitments for the quarter. Our total new loan fundings were 512 million on commitments of 752 million with total fundings consisting of the 327 million of organic production I mentioned and 185 million of purchase residential mortgages.
Overall, total new fundings led to new loan growth of 498 million or 43% on an annualized basis. During the quarter, new loan fundings on existing commitments matched expected pay downs and amortization. While at the same time, our utilization rate remained consistent at 84% and unfunded commitments increased to $1 billion. Some additional details for the quarter around organic production. Quarterly new loan production yields were 354 and the overall new loan portfolio yield increased 10 basis points to 3.48 due to higher production yields over the last two quarters and of course the impact of December's rate hike on the portfolio given we have just over $2 billion of LIBOR based commercial loans.
Topline new loan interest income grew to 42.7 million, up 59% annualized from the prior quarter as average outstandings increased by 540 million due to consistent production throughout the quarter. The team generated 1.6 million of swap and secondary market fee income, and the organic production mix was led by C&I fundings of 135 million, residential of 117 million, and CRE of 76 million. This is our second best C&I quarter to-date and certainly our best first quarter of the year marking a 21% increase over the first quarter of last year.
With respect to credit quality, all of the key metrics remained very healthy. There were no delinquencies, charge offs, downgrades in the commercial and CRE portfolios. We have no exposure to China. Our oil and gas exposure is only 1.7% of total loans and is tied to gas station operations within our footprint that continued to exhibit strong cash flow and are all performing as agreed, and our overall policy exception levels continued to decline year over year and remained at what we believed to be very acceptable levels.
For the quarter, 96% of our production carried personal guarantees. Over 97% of our originations was in FCB's debt service coverage and loan to value policy limits and there were no originations with policy exceptions for length of term. Secondly and equally important is our focus on deposit growth. We continue to make strong progress growing core deposits and repositioning our deposit book. This quarter marks the third consecutive quarter where deposits grew at the same rate as our new loan portfolio as deposit growth totaled 472 million or 35% annualized. A few overall deposit details for the quarter. 94% of deposit growth was in non-timed deposit. Demand deposits grew by 140 million, highlighted by a 100 million in non-interest bearing growth.
Over the last 12 months demand deposits have grown by nearly 600 million or 75% improving the demand deposit mix from 19% to 23%. Our cost of the deposits during the quarter was 66 basis points reflecting money market promos and the full quarter impact of last quarter's time deposit growth and the growth was balanced across commercial banking contributing 2/3rds and retail contributing 1/3rd to our overall demand deposit growth. We're very pleased with our improved deposit momentum and the balance organic growth we currently enjoy. Moving forward we will continue to focus on the alignment of retail and commercial banking teams around deposits, integrating deposit opportunities into the credit approval process [indiscernible] incentives to drive low cost core deposit growth.
Next our third priority is diligent acquired asset portfolio management. We remain committed to earning the full value of our acquired assets while maintaining stable revenue for the portfolio. This quarter we generated 20.3 million of acquired asset revenue taking into account interest income, gain on resolution and gain on OREO sales. Including 1.3 million of interest income on purchase residential loans identified as part of the strategy to replace lost accretion from the acquired portfolio, total revenue was 21.6 million. This marks the eighth quarter of consistent acquired asset revenue of over 20 million. Our fourth and final priority is a focus on operational efficiency centered on disciplined expense containment.
Core interest expenses were 33 million for the quarter in line with our guidance and expectations. The increase of 400,000 from the prior quarter was primarily driven by a seasonal increase in payroll taxes of about 500,000. As a result of the stable expense base and revenue growth, our efficiency ratio remained steady at 45.4%. I would like to refine for your guidance with respect to operating expenses over the near term we can expect core expenses to remain close to the current level at the high end of our guided range as we continue to take advantage of opportunities to hire new human capital. Overall though we do expect to deliver double digit revenue growth this year and single digit expense growth.
You know we continue to make healthy progress executing on our operating priorities and remain confident moving forward yet ever mindful of the potential emerging risk of the marketplace.
And with that said at a fairly high level review of our performance and in conversations with some of you express a desire for additional detail that you may find of interest.
With that in mind let's spend a few minutes to take you a little deeper into the rhythm of the business. This maybe more detailed than you want but will certainly find that out over the next few minutes. Let's start with loan growth in C&I. C&I is certainly the most challenging line of business to effectively develop in the Florida market. The key is to success are a strong well trained human capital team and consistent market coverage. Our commercial banking teams have been in place now for years consistently calling across our footprint and dealing with many prospects we have known throughout our careers.
Overall the C&I portfolio remains very balanced representing 32% of the banks total new loan portfolio with a yield of 3.34%, 68% of this book is priced on a variable rate basis with 18% priced with an interest rate swap. Within C&I the portfolio is diversified with respect to industry and customer concentration has no industry represents over 15% of this book and a top customer exposure is 3%. Top C&I industries are distribution, manufacturing, finance and aviation. Within these industries we traditionally bank companies with long standing operating histories or who are leaders in their space. For example distribution and manufacturing, portfolio contains companies with over 60 years of operating history including a leading food distributor for Southeast United States and a leading manufacturer of chlorine water treatment chemicals and our finance and aviation portfolios include tax certificate investments and a number of leading FBOs both in and outside of Florida.
For the quarter C&I funding totaled a 135 million on a 162 million of commitments with a yield of 3.65%. The average credit exposure is a 3.6 million on 45 relationships and 84% of the C&I deals were cross sold, an average of 3.3 additional products. This led to $27 million of deposits at a cost of funds of 15 basis points.
Next let's take a look at our commercial real estate portfolio. The CRE portfolio comprises just under a third of our total portfolio and as a yield of 3.71%. 63% of the portfolio is priced on a variable rate basis with 23% with an interest rate swap. Within CRE we've avoided significant concentration levels in any asset class with office retail multifamily each representing 20% of the CRE portfolio and from a credit perspective the portfolio is well collateralized with an average LTV of 57% and policy exceptions remaining at very appropriate levels.
For the quarter CRE funding is totaled 76 million with a yield of 3.64%. Average credit exposure of 8.7 million on 28 relationships and 89% of the CRE deals were cross sold with an average of 2.5 additional products. This lead to $29 million of deposits and a cost of funds of 28 basis points. Over all the real estate portfolio remains very well balanced and we continue to focus on infill deal staying away from speculative markets.
Moving to our residential platform, residential loans represent 37% of our new loan portfolio with a yield of 3.47%. The organic residential portfolio is over 75% purchase financing with an average LTV of under 70% and average FICO of over 750. We primarily originate 5, 7 and 10 year arm product and all of our product is QM compliant with the exception of the construction phase of our C2P [ph] product and as you all know upon completion of construction that product becomes QM compliant.
For the quarter residential fundings totaled 117 million on commitments of 162 million with a yield of 3.48%. The team originated over 275 mortgages with an average deal size of about 600,000. We generated over $400,000 of secondary market fee income on the pass through sales of $13 million and the retail channel continues to support the mortgage business with 85 approved applications referred during the quarter.
Finally with respect to credit quality, our commercial credit team continues to diligently service the existing portfolio and review and underwrite new opportunities. For the quarter our commercial credit department in conjunction with our internally developed master's associate program completed over 325 servicing events covering approximately a $1 billion of credit exposure with no meaningful evidence of credit deterioration. He reviewed a similar amount of new credit opportunities and from both of these efforts the credit team identified as much as a $130 million in new deposit opportunities.
In addition of providing insight into the financial strength of our credit book, our servicing activities give us insight into the Florida economy. Within the portfolio we're seeing positive EBITDA trends, stable loan to values and increasing guarantor strength. From an overall Florida economy perspective, we see these positive trends indicating that a majority of the sub-markets of the state remain healthy. Once again we think the pullback in the for sale product in pockets of Southeast Florida is something we predicted over a year ago and is now playing out in an appropriate manner and will not cause undue financial stress certainly to our bank. Overall we believe we're building the highest quality loan portfolio in Florida by focusing on a well-known companies with proven performance and management. Our industry knowledge coupled with sound lending practices focused on strong cash flow, appropriate collateralization and personal guarantees are the foundation of our credit book.
Now let's take a look at deposit production by line of business starting with retail. Retail grew deposits by over a 120 million with non-interest bearing growth of over 30, money market growth of 60 and time deposits of 30 million. Retail opened, 3176 new demand deposit accounts proudly up 25% over the prior quarter. 91% of the branches in all five of our retail districts experienced overall deposit growth. Deposit growth was balanced throughout the footprint with our top performing districts being both Southwest Florida and Southeast Florida each growing by 8%. Retail had a record quarter for its mortgage loan application closed units and branch participation. The HOA [ph] team also grew deposits, in their case by 32 million for the quarter. They opened 269 new accounts and we continue to have success both targeting self-managed [indiscernible] and property management companies through outreach efforts and effective delivery of both our deposit and credit products.
Next, the commercial team had its best deposit growth quarter to-date. With deposit growth of 213 million highlighted by non-interest bearing growth of 64 million and now in money market growth of 140 million. The commercial team opened 350 new demand deposit accounts and provided treasury management services to 51 new customers generating a 142,000 an annual fee income. 84% of the commercial bankers' experienced overall deposit, a portfolio growth and the cost of funds for the quarter was 35 basis points in this group.
With that little bit of insight into the rhythm of the business we feel very much on path with our plan and our financial and strategic goals. Our constant focus on the principles of quality, quantity and sustainability of our organic business is rooted in human capital and operational discipline. This focus gives us continued confidence in delivering on our stated growth and operating objectives.
With that said. I'd like to turn it over to Jen Simons, our CFO for additional detail on the quarter. Jen?
Thank you, Ken. As Ken has described we had a very strong quarter and I will review the financial drivers in further detail. First, there were a few adjustments between GAAP and core quarter net income in the first quarter of 2016 including 200,000 of severance expense, 100,000 of [indiscernible] expenses related to the repositioning of our branch network and 50,000 loss on our sale of investment securities. From a tax perspective our effective tax rate is 36.1% consistent with our guidance.
Slide 2 of the presentation provide core financial highlights over the last five quarters. Core net income of 22.7 million reflects sequential growth of 200,000 from 22.5 million as reported in Q4 and as 26% higher than the 18.1 million reported in the first quarter of last year. The primary driver of our core net income increase with the growth in net interest income to 65.4 million. Net interest income growth was driven by new loan interest income of 42.7 million up 5.5 million or 59% annualized from the prior quarter. The overall acquired asset portfolio and identified residential purposes generated 21.6 million of income for the quarter marking the eight successive quarter of total acquired asset portfolio income over 20 million.
Core non-interest expense was 33 million for the quarter up 400,000 from last quarter due to the cyclical impact of increased payroll taxes in first quarter. Revenue growth and cost containment led to a record quarter core net income of 22.7 million or $0.53 per share on a fully diluted basis and a core ROA of 121 basis point.
Slide three displays new loan growth of approximately 500 million for the quarter driven by total funding of 512 million consisting of 327 million of organic loan growth and a 185 million of purchased residential mortgages. New loans have increased by 1.75 billion or 52% over the last 12 months with new loans representing 91% of our total loan portfolio at quarter end. We experienced in excess of 100 million in net new loan growth across each of the C&I, CRE, and residential segments as new loan production and commitment utilization exceeded expected pay downs and amortization. Our portfolio remains balanced with each segment representing approximately 1/3rd of the new loan portfolio.
Moving to slide 4, the credit quality of our new loan portfolio remains strong with a non-performing new loan ratio of two basis points as of quarter end. The provision for loan losses of 1.4 million recorded for the first quarter of 2016 includes 2.6 million provision for new loans and net recoupment valuation allowance of 1.2 million for the acquired loan portfolio due to recoveries and better than expected performance on resolution of acquired loans. The provision for new loans served to increase the related allowance to 26.3 million or 0.52% of the 5.1 billion in new loans outstanding. Once again, there were no new loan portfolio charge-offs during the quarter.
From an overall balance sheet perspective, with the improved performance of the acquired asset portfolio and the continued strong performance of the new loans overall non-performing assets continue to decline and represent 0.79% of total assets.
You can see on slide 5, the strong demand in overall core deposit growth during the quarter which stems from both retail and commercial production. Deposits grew by 472 million or 35% annualized linked quarter to 5.9 billion on the strength of demand deposit and transaction deposit growth. Over the last 12 months demand deposits have grown by nearly 600 million or 75% and demand deposits have increased from 19% to 23% of total deposits. As of quarter end our loan to deposit ratio was 96%. Moving forward we expect deposit growth to parallel total portfolio bone growth and expect to maintain our loan to deposit ratio between 100% and 105%.
As slide 6 portrays, we continue to realize improved operating leverage through new loan revenue growth and disciplined expense management. On a sequential basis, the core efficiency ratio remained relatively flat at 45.4% in the quarter and improved from 48.9% in the first quarter of last year. The core efficiency ratio improvement year over year was primarily driven by net interest margin expansion up 15.8 million or 32% from the first quarter of 2015 which is consistent with our continued new loan growth and the continued out performance of collection and resolution activity from the acquired loan portfolio.
From an expense perspective core noninterest expense was 33 million for the quarter, up 400,000 from last quarter due to the cyclical impact of increased payroll taxes in the first quarter. For the remainder of the year we continue to expect non-interest expense to remain between the 31 million and 33 million range on a quarterly basis. Slide 7 and 8 provide detail on the drivers of our net interest margin. The adjusted net interest margin which removes the accretable yield which exceeds the contractual acquired long rates remained flat for last quarter at 3.06%. While reported net interest margin decreased four basis points to 3.65%. The excess accretable yield over contractual interest rates totaled 11.4 million during the quarter.
The adjusted net interest margin remained stable. As the 10 basis point increase on the new loan portfolio was offset by the full quarter impact related to extending the duration of time deposits and borrowings in the fourth quarter. The overall new loan yield increased to 3.48% with average balances for new loans up 542 million during the quarter. We are maintaining an asset sensitive balance sheet that will respond to a 100 basis point and 200 basis point yield curve increase with the projected increase in net interest income of 5.2% and 9.1% respectively.
Net interest income will benefit when interest rates increase is over 2 billion of our C&I and CRE loans are tied to LIBOR. Page 9, reflects our strong capital position that is well in excess of regulatory requirements with TCE and total risk based ratios of 10.4% and 11.1% respectively. Tangible book value per common share is $19.77 as of March 31, 2016. During the quarter, pursuant to the share repurchase authorization the company repurchased 421,564 shares at a cost of 13.6 million. For the quarter our fully diluted share count is 42.8 million including the effect of 2.1 million dilutive shares.
With that I'd like to turn it back to Ken for concluding remarks.
Thank you, Jen. As everyone can hear we are extremely pleased with our first quarter results and excited with our momentum for the remainder of the year. Thank you. And at this time let's open up the floor for any questions.
[Operator Instructions]. Your first question comes today from Joe Fenech with Hovde Group. Please go ahead.
In terms of the $10 billion threshold Ken and preparing for the ramp that you mentioned earlier, can you just talk a little bit in more detail about how you foresee that occurring. I know it's tough to say with M&A and what have you but is there a possibility we see you leap over 10 through an acquisition or do you think it's more likely that you just kind of continue on the current path and sort of organically go through it over time.
As it relates to your question, I think there are a couple pieces to it. And first of all, there is a fair amount of work that is going to take place to ready us to move through the process and a key underpinning of that is the relationship that we have with the OCC. During the most recent exam cycle, they were good enough to put our team together with their DFAST team and spent very good quality time in sort of talking through the key elements of a timeline and workflow plan.
And so our team has taken that back, we are probably going to hire Protiviti to work with us and start to assemble the pieces of work flows that we need to conduct and clearly very robust stress testing is a big part of this and you know it really ends up leading to buying more software and hiring three or four analysts to work full time on it. So that’s sort of the first order of business for us is sort of putting together the roadmap and we'll do that over the next couple of quarters and we will use the OCC to get that done.
The second thing is being realistic about when it really applies to the bank. As I understand it, we need to have four consecutive quarters where average assets exceed $10 billion and then it applies the following year. So if we stay on our organic path that could be a 2019 or 2020 event for us. So we really have a fair amount of time in front of us to work through this. I think that the reason FCB wants to do it early is not so much about M&A and doing an acquisition to leap over although that could happen, to me it's really about the trajectory of the company.
I want us to be thinking about what do we look like you know we're knocking on 8 billion today, but what are we going to look like at 10, 11 and 12 and what do we need to look like to be very healthy and to be very strong because in today's world you know the safety and soundness profile is important as how quickly you can grow.
So for us if it's a $0.5 million to a $1 million at the back half of this year to get out in front of this, I think it's a good investment because you know you get the 10 billion and you decide to clean things up. That could really sidetrack you and I just think a company like ours we have the bandwidth, we’re growing quickly. We've got a clean balance sheet today, we've done a lot of stress testing that has had very favorable outcomes. So let's go ahead and take it to the next step.
Okay, I know you talk – just switching gears from it, I know you talked about the margin on the adjusted basis, ex-accretion, but the reported NIM has except for the blip back in the second quarter last year, it's been fairly stable within sort of a 10 basis point or so range. So with the purchase resi product helping it to offset the accretion runoff, just wondering how we should be thinking about reported NIM on a long term basis.
I think we're going to stay within the guidance that we have, reported NIM on a GAAP basis will come down with the acquired portfolio obviously as that [indiscernible], but the adjusted core NIM should stay within a stable range. I think our guidance is 310 to 315 or something in that neighborhood and what I would furthermore tell you is that as the company evolves and we focus on first the organic growth around credit, now we're getting good at deposits. The next couple of phases for the company has to be profitability and non-interest income, and so we are doing the real good work to try to improve the margin through yield and send people to do that as well as focus on cost of funds. So from our standpoint I would say the adjusted yield will be stable and hopefully slightly up. Matt's giving me a couple of stats if you want to share that?
Sure so from our reported GAAP perspective Joe, we would expect those two to converge over time considering a number of the factors that Ken mentioned relating to over the next few quarters, we'd probably expect that to decline by approximately 10 basis points or so per quarter.
And then last one for me Ken, the inter-agency guidance on the commercial real estate concentration of 300%, can you talk a little bit -- any comments on that and then can you talk a little bit about how you all feel you’re positioned?
Certainly I’d be happy to talk about it, and I'm happy to share that we obviously had constructive conversation with the OCC about it both in the specifics on its calculation and what it means, and what I would tell you for the audience is it's not a hard stop, it's guidance but it's one of those quantitative factors that goes into the overall risk assessment and risk profile of the bank in the view of the regulators. So having said that, I'm sure a large number of banks who operate above those thresholds on a continuous basis, can they prove through the level of underwriting and risk selection that that's something that everybody is comfortable with, and in our particular case we’re comfortably below the 300% and 100% thresholds both on CRE and total and from the construction portfolio standpoint.
And as you trajectory -- if you look out and you say okay what's the unfunded commitments within the construction book around CRE? What is rolling out of that portfolio and what is coming in the way of new fundings offset by growth and capital associated with core earnings. We don't see breaching any of those thresholds this year and I wouldn't go out on a limb and say we'll never breach those thresholds that’s really not our intent. Our intent is to run a very clean book and it just so happens because of the way we think about diversifying our asset base and the amount of capital we presently have. It should not be an issue for us over the near term. It was not an issue and our most recent exam I would tell you that it is a highly topical item for the regulators at the present time.
The next question is from Steven Alexopoulos with JPMorgan. Please go ahead.
Jen I thought you said the deposit growth would now match loan growth. I just was wondering, was there any change. I might have missed this, do you expect the loan growth -- you guys have previously talked about 300 million to 400 million.
No we expect our loan growth to remain within the guidance that we provide.
I'm just going to tell you people sometimes they say well Q1 is slow, Q2 is fast all of that. We obviously felt very good about the organic credit production and a deposit production in Q1 and we’re already in a point where the pipelines are far enough along where you can sort of look into the quarter and we feel that production levels should be at the high side of that guidance.
So to follow up on that this quarter, you’re over 500 million which is a strong quarter, you’re actually over a 100 million over the high end of the range and purchases really drove that what was the motivation behind the such large purchases this quarter?
The purchase philosophy is really a component of the acquired asset management process and what we have done is as you know we're committed to maintaining a $20 million of revenue every quarter coming out of the acquired loan book and the composition of that is interest income but it's also a gain on resolution and gain on sale of OREO and as we look out over the decline and accretion has especially when we resolve [indiscernible] early and take gains we often look at the interest income trajectory and say do we need to put in a plug to keep that interest income at a certain level.
Now in the first quarter if you look at the total revenue from the acquired asset activity. It was over 20 million without the interest income from the purchases but we're really mapping that out two and three quarters out. So we made that purchase so we could load in and have that on balance sheet, get the provision done and that was like a $1.5 million of interest income. We don't see the need to do any acquisitions of portfolios in Q2 or Q3, it's a little hard to look out past that depending on what pools we resolve. But my comment about where the pipelines are at the high end of the guidance that's a comment that strictly organic.
And then Ken, in terms of Florida real estate you guys had nice commercial real estate growth in the quarter that tells you feeling better on Florida real estate?
I would say our view on the real estate has been very consistent and what feels better to me and to our team is that the way the pockets that maybe have got a little overheated are slowing down or backing off feels to be a very measured, very appropriate, not a whipsaw. You're not seeing problems in the press with developers and projects and so that feels good because that’s good for Florida's reputation and that means that there's not over stress levels within the real estate community. But quite frankly we have not changed our approach at all.
Okay. And then just one final and following up on Joe's question regarding crossing 10 billion asset level. How much will that ultimately cost you guys? Can you help us think about the timing of when we will see those costs?
Originally I thought we were going to experience most of that sort of front end loaded expense on infrastructure, software people this year. I think we have got in the budget of $0.5 million for this year, that is more -- it's already in the numbers that'll will take us through this year. And I suspect that we'll probably spend a 1 million next year on it.
The next question comes from Dave Rochester with Deutsche Bank. Please go ahead.
Quick question just back on the [indiscernible], you're saying that the 500,000 I guess for this year is already in the numbers for the quarter is that right?
It's in the third and fourth quarter, we haven't spent any incremental dollars on it thus far.
And then back on the loan growth, just a quick question on the purchases, when do you think you're going to be done with those? Should we expect more purchases in 2Q or really through the back half of the year? How do you think that’s going to trend?
My best guess is that we won't even think about it till the fourth quarter. So you won't see it in Q2 or Q3 and what happens is remember if we choose the buy mortgages to fill the plug as we resolve more rapidly the acquired loans from the formerly covered FBIC [ph] pools. If we choose to do that that's only because we've had more rapid resolution due to higher than expected credit quality and more value than we may have thought originally and we'll try to free that up. So it would happen for good cause but. We think we've mapped out Q2 and Q3 very precisely. So as in anything changing within the performance of that book, my best guess is we won't think about it to Q4 and it's probably a little probability.
And then on the competitive environment, can you just talked about what you’re seeing from the larger banks there and have you been able to successfully widen spreads at least on the CRE?
So as it relates to the larger banks, where we see them competing less is in the construction space. We think the evidence of that is because our opportunities for inbound construction have gone way up that doesn't mean we're doing them. That just means that we think the developers we talk to are probably getting less of their needs met by the bigger institutions that we see that across the book but we also get that anecdotally from our client base. As it relates to widening the spreads and getting paid for what we're doing you know it is a very challenging market to get paid and we have installed 25 basis point increases to our floor pricing for all of our asset classes and we have tried to push that through the pipeline and the first part of the pipeline we concluded it was too late as the deal had more less than been negotiated and then we went to work on the back end of the pipeline to try to get in there and convince everybody that there is a less available debt therefore we should get paid more and you know all the reasons that we all know.
I personally took it upon myself to get involved in three transactions and unless we’re playing major league baseball my hitting average isn't good enough. So I can tell you one deal, I raised the pricing, the customer took it without question. One deal the client said after a pleasant conversation well that's how you feel but I won't do it with you. So we relented. The third deal was a prospect deal, a deal I wanted, I wish I had and I took the lead, I personally negotiated and I lost the piece of business. So it is -- you know what everybody says it's hand to hand combat out there on pricing, it really is and the solution for us is adding more value through our speed to market philosophy which means being more responsive to the client and being better at cross selling and getting a deeper relationship on the front end to enhance profitability and continue to fight on profitability through better incentives and. Maybe I'll let the rest of the team negotiate the deals because apparently batting at 300 ain't good enough.
And then switching to the margin, it sounds like you're comfortable with that range but with the new production yield above the book yield it sounds like we'll probably end up stabilizing here absent some kind of a move higher on the cost of funds. Is that a fair statement?
I think that's very correct.
Okay. And then just one last one on capital, what are your thoughts on completing the buyback this year? And then on the total capital ratio I know you guys have a little bit of an offset in your Tier 2 capital which is related I think to something you've got in the securities book. Any thoughts on repositioning that to free up some more room on that ratio?
It is a great question and we're doing some work on it and I will ask Jen just to walk us through it.
Sure. So we recognize that you know as we’ve grown and we’re now an $8 billion bank. Our goal this quarter is really take a deeper dive at our capital structure and our capital levels and we expect the outcome of that to determine what the optimal capital level to support the bank currently and support for the future. With regard to the tier deduction, we do hold some investments in non-significant financial institutions [indiscernible] required to take a deduction. However we’re aware of that and we often know that those are saleable, in fact we could sell some of those securities in the first quarter. So we’re not concerned about that deduction at this time, we still remain well capitalized.
So just to push on that point a little bit, up to this point you know the capital levels were about supporting the organic growth of you know on and off desire to do M&A and a cushion that really improves your safety and soundness profile. But as we've evolved what is happening is we have a much more clear picture and path around our organic business and as a result the earnings that that will generate the support capital growth. I think we have a view around M&A with a greater sense of certainty relative to our appetite versus the pricing in the market.
And I think that every quarter that goes by where we were earning this kind of ROA the quality of earnings prove something around our safety and soundness profile. So with that said what we're going to do this quarter internally and with some external help is we’re going to sort of look at the asset mix of the company. Speaking to those securities you spoke you referenced and decide well what kind of regulatory pressure do you have by having those securities on balance sheet and if we were to release those, sell those buy something else we would give up a little bit of net income but create great strength in our ratios.
If that's true and we decide to do that then what's our capital level look like and do we have truly some level of access capital 50 million - 100 million, whatever it may be and if that is true then what is the deliberate path to return that to the shareholder that's efficient and effective. You know we've bought back $48 million worth of stock since we became a public company and we've done that when we felt that the market price of the stock was clearly below the intrinsic value. When you're trading a 1.6, 1.7 a book and above that debate becomes harder. So we haven't entered into using the buyback that was recently made available we have 21.5 million available but our commitment to our shareholders is to this quarter do the analysis that's a little more complex around composition to balance, regulatory relationships, total capital relationships and set our targets and then get the capital going in the right direction and that that’s more work than a quick back of the envelope and so we want to be very precise about it but well we set a target date for the end of this quarter to have it.
Next question is from Stephen Scouten with Sandler O'Neill. Please go ahead.
One quick follow up on that buyback, Jen, can you give me that number again? I want the actual buybacks were in the quarter and the average price I missed that earlier.
With 13.6 million of buybacks during the quarter, I think the price was 32.
Kind of question on the fixed rate production, it looked like that was kind of a greater percentage of production again this quarter as it was kind of last quarter. And I know you said you were kind of comfortable with a five year mini-perms you were doing that. Is that kind of basically what's comprising this fixed rate production again and do you think this will be a continuing trend?
Yes. It's basically that 3 an 5 year sort of product and I would tell you that we probably could manage it with more precision. What we really want to do is good business to good clients and if the fixed portion was a little higher in Q1 than in Q4 I wouldn't call it a trend, it wouldn't surprise me if it goes back to 50:50 or 60:40 floating to fix.
And I'm hearing from some folks down in Florida markets that some banks are starting to do 100% financing again on whether it's construction loans or other similar products is that anything that you guys are running up against from competitors, are you doing any of that yourself and if so how are you mitigating risk there?
We don't play in that part of the market at all. We don't it. We don't see it. I mean you heard our LTV, our average for the entire CRE book [indiscernible] is 57% and I can tell you, I mean I'm not speaking for our regulator but I wouldn’t want to show my credit files with that, I would if I can go very [ph] well.
No, I wouldn't think so that's what I asked the question is concerning that’s what I was hearing but you never know what the truth of that is when it's in [indiscernible]. And maybe last question for you just on the human capital front. I know you mentioned the two new hires that were meaningful already but any -- you know anything in the pipeline, anything of note where you think you'll do any larger team lift outs or anything that could ramp up the growth profile above it's already impressive base?
I would not signal that we're going to do big lift outs. That is really in our mind in Florida a difficult proposition. We're much more fixated on specific hires that fit well into our culture and you know our culture is highly accountable around credit. We like a lot of experience because -- and you have to be national bank trained and we perk prefer to know you for sure and because of that it tends to be very difficult for us to hire 10 people, we're going to have three that are great and we will deal with the seven that aren't, that's not a great kit for us.
Our team is too busy to take that on. Having said that, I think you know we've probably got you know 10 hires that are in the field 12 months or less and they're starting to ramp up nicely. You know Jim Mitchell in Public Funds he's got a $17 million closing pipeline already in place. David Lukes is at a $110 million pipeline, I know he has closed a few things so we'll see where that goes. So I think you'll see us continue to add to the group but we want to do it in a very measured way.
And maybe one last one for me, on the M&A front, what are you guys seeing in terms of any discussions you might be having as a potential buyer and what would be the focus geographically, would that potentially be Tampa if anything came about?
I think there's a fairly high volume of conversation in the marketplace amongst banks presently and you know where that goes it's very hard to predict. I think we've been public in that we would like to do something in the I-4 Corridor which includes Tampa in Orlando but I really think for us it's there but it's also anywhere within our current footprint where you can -- the execution risk on cost saves is a big consideration in deal value today and anything we do in footprint our team is very well equipped to execute and so I think that would make the most sense, having said that there's nothing at an elevated level at this time.
Next question is from David Eads with UBS. Please go ahead.
I think you said on the deposit side that the increase in funding deposit cost was primarily the carryover impact of some of the moves you made in 4Q, is that correct?
Half of it. There are two things, we did a sizable chunk of time deposits in Q4 that was my bright idea and then we did some money market promos and that was another three basis points of it. So if you took out those strategic moves if you will we would have been flat.
And do you’ve any sense as to the outlook for the that line, the cost over the next couple of quarters?
I would say where it is, Jen do you’ve a different view?
And maybe getting back the dynamics of the acquired portfolio and first lien mortgage and what have you. Is it just a coincidence that last couple of quarters where you've been purchasing mortgages, you also have had lower income from resolution of those portfolios and more has gone to the accretion in NII [ph], is that just a coincidence? And then is it your sense that you'll have more of that going forward or how does that all inter-play?
I will say something and then the accounting staff will correct me. The action and activity of the workout team is the same, notwithstanding where the revenue will show up whether it's a gain on resolution or it's with an asset that’s still on a pool and shows up in interest income. It's really about the targeted resolution of an opportunity with the specific credit or group of credits that adds up to a pool. So that's why we always talk about total income of 20 million notwithstanding geography because there's this core level of interest income you're getting off the book that's sitting there and not going anywhere but as we resolve everything else it's going to show up and gain in resolution or it could show up in interest income if it's still in a pool or it could show up in OREO sales. So I don't know if coincidence is the word I would use, it's just the nature of the accounting treatment depending on what the pool looks like where the asset resides. So Jen or Matt if I did some wrong?
Next question is from Brady Gailey with KBW. Please go ahead.
Most of my questions have been answered but I will just ask one more about the 10 billion in asset threshold, maybe ask in a little bit different way. Are you guys committed to cross the 10 billion in asset threshold? I know a lot of banks as they near that sometimes look at finding a strategic partner?
As a group and as a board or management team we operate the company on the premise that we are going to build the best independent bank in Florida every day as we come to work doing and as a result of that we tend to have a fairly nice path of growth and one of the things we need to address as that growth occurs is crossing 10 billion. We have a very strong finance team. We've got a very committed credit shop and therefore we're going to just put that on our cast list and do it. So we don't think about the businesses, we have to decide whether we stay or exit around 10 billion. If we work ourselves out of a job because we're such an attractive franchise so be it but until that point in time we are just putting that on the do list and we’re going to keep growing.
Ladies and gentlemen that concludes our question and answer session and thus concludes today's call. We thank you for attending today's presentation. You may now disconnect your lines. Take care.
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