FCB Financial Holdings' (FCB) CEO Kent Ellert on Q3 2016 Results - Earnings Call Transcript

| About: FCB Financial (FCB)

FCB Financial Holdings (NYSE:FCB)

Q3 2016 Results Earnings Conference Call

October 20, 2016, 05:00 PM ET

Executives

Matthew Paluch - Director, IR

Kent Ellert - President & CEO

Jen Simons - CFO

Jim Baiter - Chief Credit Officer

Analysts

Joe Fenech - Hovde Group

Stephen Scouten - Sandler O'Neill

Dave Rochester - Deutsche Bank

David Eads - UBS

Operator

Good afternoon and welcome to the FCB Financial Holdings Inc. Third Quarter 2016 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Matthew Paluch, Investor Relations. Please go ahead.

Matthew Paluch

Good afternoon ladies and gentlemen and thank you for joining us today. Today, we have Kent Ellert, our President and CEO; Jen Simons, our CFO and Jim Baiter, our Chief Credit Officer here with me to review our third 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 may be 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 operations and results 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.

Kent Ellert

Thank you, Matt. Welcome everyone. And thank you very much for joining us to review FCB's third quarter results. This is another record quarter for our company marking the 15th consecutive quarter of improving core operating results.

As you know, the focus of our company remains centered on our organic growth engine and the evidence this quarter and once again strong with robust loan fundings and deposit growth each exceeding $425 million, highlighted by one of our best C&I quarters to date with $148 million of fundings and by demand deposit growth of $222 million, continued strong and stable credit quality and all while maintaining consistent operating efficiency.

All of our success relates back to our people and partners at FCB. With over 650 dedicated teammates, we have built a collaborative and customer centric banking culture that is reliable, confident and capable in the commercial and retail banking space throughout Florida.

This continued momentum across our organic platform is creating a foundation of sustainable growth within a framework of safety and soundness. This consistent performance and execution is helping FCB become Florida's leading independent banking franchise, as we continue to create GAAP as the largest peer play in the state of Florida with footings of over 8.5 billion.

As a point of comparison we are now 70% larger than the next Florida peer play bank and our model is centered on organic production as we are now approaching three year since our last acquisition and importantly 93% of our loan portfolio is organic.

Now let's review our third quarter results. The third quarter of 2016 was the most profitable quarter to date for company, with core net income of $25.4 million or $0.59 per share on a fully diluted basis.

On an annualized basis, core net income rose 19% sequentially and 21% year-over-year FCB's continued growth in core net income was a result of core revenue of $76.5 million, primarily driven by new loan interest income of $49.8 million, up 47% year-over-year. As a result revenue growth, coupled with disciplined expense management produced a core efficiency ratio of 42.8% and a core ROA of 122 basis points.

Before we discuss our key priorities, I want to update you on our human capital initiatives and briefly discuss the regulatory landscape. When we think about the business, two of the essential elements of a successful commercial banking culture are effective market coverage and strong human capital.

During the quarter we continue to add to our depth of talent with three new commercial bankers in the I-4 Corridor. As our commercial banking team continues to grow we've deepen our presence across the I-4, we continue to align our human capital to facilitate growth and momentum.

As a result of growing our origination team by 25% over the last two years to 64 bankers, this quarter we added wholesale executives to our north and south commercial banking teams, as we build the leading middle market commercial banking platform in the state. Overall it is the quality of our human capital that continues to be the most essential element of our ongoing success.

Another very important facet for our company is safety and soundness. One of the most important facets of safety and soundness is of course, reflected in the quality of our regulatory relationships.

During the quarter we completed our annual fullscope OCC exam. We continue to have a valued working relationship with our regulators and characterize our results as both constructive and positive.

From an asset concentration and quality perspective, our balance sheet remains well diversified and we continue to build the highest quality loan portfolio in Florida through a balanced approach to C&I, CRE and residential lending, through deep market knowledge and of course our core principles of cash flow coverage collateral and recourse.

Finally because concentration levels are topical, the portfolio remains diversified with C&I CRE each representing approximately 240% of risk based capital, sub concentrations including construction lending continue to be below regulatory thresholds representing 80% of risk based capital and this ratio declined further 52% when adjusting for our residential C2P product.

As a result we do not anticipate any constraints on our current growth strategy based on our current balance sheet composition and quality. With these two important points addressed, let's take a look at the core business and go through the results. Once again our key priorities include, disciplined organic loan growth in core deposit growth, continued operational efficiency and diligent acquired asset management.

First, we continue to generate consistent, sustainable, quality organic loan growth resulting from $441 million of organic fundings on $620 million of new commitments in the quarter. The production mix was balanced led by new CRE of $165 million, C&I of $148 million and residential fundings of $128 million.

As a result the new loan portfolio grew by $315 million, as new loan fundings on existing commitments partially offset paydowns and expected amortization. As of quarter end our utilization rate on the new loan portfolio remained consistent at 85% with unfunded commitments of $1.1 billion that are well diversified in line with our balanced origination activity.

Some additional details for the quarter around organic loan production, quarterly new loan production yields were 3.7% as compared to 3.57% the prior quarter, led by C&I yields of 4.11%, 56% of the total production was priced on a variable rate basis. Top-line new loan interest income grew to $49.8 million up 32% annualized from the prior quarter as average outstandings increased by $360 million.

The team generated $1.7 million of swap and secondary market fee income, and one of the things that is unique about FCB and our position in the middle market space is our C&I growth. Over the last 5 quarters, it continues to be our most significant source of production with new C&I fundings of $763 million followed by CRE production of $632 million and residential of $618 million. And finally the overall portfolio remains balanced with C&I, CRE and residential each representing approximately one third of portfolio.

With respect to credit quality, all of our key metrics remained very healthy. The new loan portfolio continues to perform as agreed. There were no delinquencies or charge-offs in the commercial and CRE portfolios and the primary policy exceptions we track and monitor continue to remain at acceptable levels.

Secondly, and equally important is our focus on deposit growth. We continue to make progress growing core deposits to ensure our funding growth matches our organic loan growth. This quarter marks the fifth consecutive quarter where deposits grew at or above the same rate as our new loan portfolio.

As deposit growth totaled $450 million or 28% annualized, a few overall deposit metrics for the quarter, deposit growth was driven by demand deposit momentum as non-time deposits represented 77% total growth. Demand deposits grew by $222 million with over 75% of our branch network contributing to this growth.

Over the last 12 months demand deposits have grown by $700 million or 70%, improving the demand deposit mix from 21% to 25% and our cost of funds during the quarter was 71 basis point, reflecting the full quarter impact from prior promotions.

Overall we're pleased with our organic loan and deposit momentum and recognize adjusted net interest margin performance has been a key focus area for the bank. This quarter we continue to make progress on our loan pricing discipline, particularly on the commercial side of the business with an overall yield of 3.76% on our new C&I and CRE fundings.

For the point of comparison, C&I fixed and variable pricing was 47 and 60 basis points higher respectively than production one year earlier. From a residential mortgage perspective, although we have less pricing power due to the nature of these products, the yield continues to hold up at 3.5% for the quarter.

On the deposit side growth was balanced with commercial contributing 60% and retail contributing 40% of the overall deposit growth. The commercial growth was highlighted by $200 million of demand deposit growth which closely aligns to our expectations and fundings need for this business. As a result we outperformed on deposit growth moving our loan to deposit ratio to 90.6%, but this came at the expense of our cost of funds increasing to 71 basis points.

Due to the timing of our loan and deposit production, our adjusted net interest margin was 2.96%, as compared to 3% in the second quarter. Based upon on the full quarter impact of our third quarter production, our net interest margin will increase by approximately two basis points for the fourth quarter.

Moving forward we are comfortable with the loan and deposit ratio at 95% to 105% range and have a clear path to reestablish adjusted margin over 3% by the first quarter of next year due to our current visibility into the loan and deposit pipelines.

Our third priority is to focus on operational efficiency, centered on the discipline of expense containment, core non-interest expenses were $33 million for the quarter, in line with our guidance and flat with the prior quarter. As a result of stable expense base and revenue growth, our core efficiency ratio declined to 42.8%, REO and acquired loan resolution expenses totaled $1.8 million for the quarter, down 18% from the prior quarter.

From a go forward perspective, we continue to anticipate the reduction of REO and workout expenses to generate future savings that we will again reinvest in the business to fund revenue producing jobs and network expansion.

Our fourth and final priority is diligent acquired asset portfolio management, consistent with our approach over the last three years, we remain committed during the full value of our acquired assets, while maintaining a predictable revenue stream from the portfolio.

This quarter was no exception as we generated $17.9 million of acquired asset revenue comprise as follows, $15.9 million in accretion income, including $10.4 million in excess contractual interest, $1.1 million and gain on resolution and 925,000 and the gain on OREO sales.

As of quarter end the $432 million acquired loan portfolio has approximately $42 million of discount remaining. Based on current cash flow expectations, we can anticipate that this discount will be principally recognized as income over the next 5 quarters.

Overall with another quality quarter behind us, we are experiencing momentum and the organic platform is creating a foundation of sustainable growth and producing strong financial results within a framework of safety and soundness.

Our continued success remains rooted at strong human capital and operational discipline and we are committed to delivering consistent quality and sustainable results.

With that background, I'd like to turn it over to Jen Simons for more details on the quarter. Jen?

Jen Simons

Thank you, Kent. As Kent has discussed, we have another strong quarter and I'll review the financial drivers in further detail. First to review adjustments between GAAP and core net income in the third quarter of 2016, including 72,000 of severance expense and a 749,000 gain on investment securities. From a tax perspective, our effective tax remained at 36.1% consistent with our guidance.

Slide two of the presentation provides core financial highlights over the last 5 quarters. Core net income of $25.4 million reflects sequential growth of $1.2 million from $24.2 million as reported in Q2 and is 21% higher than the $21 million reported in the third quarter of last year.

The primary driver of our core net income increased was the growth in total revenue to $76.5 million. Revenue growth was primarily driven by new loan interest income of $49.8, up $3.8 million or 32% annualized from the prior quarter.

Core non-interest expense was $33 million for the quarter, in line with our expectations and flat from prior quarter. Revenue growth and cost containment led to record core net income of $25.4 million or $0.59 per share on a fully diluted basis and a core ROA of 122 basis points.

Slide three displays new loan portfolio growth of approximately $315 million for the quarter, driven by total organic fundings of $441 million, led by C&I fundings of $148 million.

New loans have increased by $1.7 billion or 40% over the last 12 months with new loans representing 93% of our total loan portfolio at quarter end. We experienced in excess of $130 million in net new loan growth across the C&I and CRE segment with commercial production yields of 3.76%. Our portfolio remains equally weighted across our core product lines with each segment representing approximately one third of the new loan portfolio.

Moving to slide four, the credit quality of our new loan portfolio remained strong with a non-performing new loan ratio of one basis point as of quarter end. The provision for loan losses of $2 million recorded for the third of 2016 included $2 million provision for new loan and net recruitment of valuation allowance of 25,000 fully acquired loan portfolio.

The provision for new loans served to increase the related allowance to $30.5 million or 0.52% of the $5.8 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 0.5% of total assets.

You can see on slide five, the robust demand in overall deposit growth during the quarter stemming from balance commercial and retail production. Deposits grew by $450 million or 28% annualized link quarter to $6.9 billion on the strength of demand deposits and money market deposit growth.

Over the last 12 months demand deposits have grown by over $700 million or 70% and demand deposits have increased from 21% to 25% of total deposits. As of quarter end, our loan to deposit ratio was 91%

As slide six exhibits, we continue to enhance operating leverage through new loan revenue growth and disciplined expense management. The core efficiency ratio improved to 42.8% in the quarter, down from 43.8% linked quarter and 46.3% in Q3 of last year.

The core efficiency ratio improvement was primarily driven by new loan interest income of $49.8 million, up $3.8 million or 32% annualized from the prior quarter. From an expense perspective core non-interest expense was $33 million for the quarter, in line with last quarter, as the reduction in REO expenses have offset by occupancy and equipment cost.

Going forward we continue to anticipate the reduction of REO and troubled acquired loan portfolio expenses to generate future savings that we will reinvest in the business to fund revenue producing job and network expansion. For the remainder of the year we continue to expect non-interest expense to remain near the top of our guided range.

Slide seven and eight 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 loan rate decreased 4 basis points from last quarter to 2.96%, while reported net interest margin decreased 7 basis points to 3.44%.

The excess accretable yield over contractual interest rates totaled $10.4 million during the quarter. The overall new loan yield remained stable at 3.48% with average balances for new loans up $360 million during the quarter.

The adjusted net interest margin declined primarily due to an increase in cost of money market deposits and borrowings, as well as the continued attrition of the acquired asset portfolio.

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% and 8.4% respectively.

Net interest income will benefit when interest rates increase is over $2.4 billion of our C&I and CRE loans are tied to LIBOR.

Page nine reflects our strong capital position that is well in excess of regulatory requirements with TCE and total risk based ratios of 10.4% and 12% respectively. Tangible book value per common share is $21.57 as of September 30, 2016.

During the quarter pursuant to the share repurchase authorization the company repurchased 99,565 shares at a cost of $3.5 million. At this time we had no plans for additional buyback activity. For the quarter our fully diluted share count is 43.2 million, including the effect of 2.5 million diluted shares.

And now I'd like to turn the call back to Kent.

Kent Ellert

Thank you, Jen. As you can see we're pleased with our third quarter results and the rhythm of our organic growth engine. As we rapidly approached to $9 billion in assets we continue to realize our strategic potential as Florida's leading independent peer play.

With that in mind, let's open the floor for any questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Joe Fenech with Hovde Group. Please go ahead.

Joe Fenech

Afternoon.

Kent Ellert

Hey, Joe. How are you?

Joe Fenech

Pretty good, Kent. Thanks. Couple questions, I wanted to ask first about the securities portfolio, the yield on that portfolio sitting just over 3.5% you know, above where peers are, can you guys talk about the types of securities you've been buying recently and sort of the composition of that portfolio generally and also what you think the sustainability is keeping yields at around the third quarter level here, above 3.5%?

Jen Simons

Sure, Joe. This is Jennifer. The composition of the portfolio really is not changed. So we still monitor to about a third and be up, a third ABS [ph] and then third corporate, so that competition is been consistent over the last few quarter's. As far as the yield goes, the 3.5%, you k now, our target is anywhere from 3.4 to 3.6, so we think that’s right in the range.

Joe Fenech

And the duration on that portfolio?

Jen Simons

Duration is around three years, that’s unchanged as well.

Joe Fenech

Okay. Thank you. Kent, on the update - any update on the approach to $10 billion, specifically what percentage of the expected costs are now in the run rate and remind us of the expected hit on Durban if you could.

And you know if you do go through $10 billion as an independent company any updated thoughts on turning to M&A to sort of you help you accomplish that more efficiently than going through the threshold organically?

Kent Ellert

Sure. Happy to do it. So as we sit here at 8.5, we obviously think we'll be crossing through the middle of next year. That will give us four quarters to prepare filings for that. As we mentioned in prior calls, we've had light conversations with the FDIC - with the OCC and have had connectivity with their DFAST team.

At this point, we are still what I would characterizes as road mapping out our plan to attack it next year and as we see it, it probably manifest in some expense level in the second half of next year in Q3 and Q4, a $0.5 million or so a quarter, maybe a little bit more for some software additions.

As it relates to Durban expenses and things of that nature in terms of loss interchange fee income, we don't really see that as material based upon our income statement, our customer base and our fee-base.

So from our standpoint we see going through $10 billion is a likely event next year. We think we're starting early enough to deal with the DFAST issues. We think the consumer orientation of the bank is minimal as it relates to compliance impact.

So I think it's not probably absorbing of any real time or expense presently, but we'll bake that into the budget for next year and I don't see it is really change in any of our outcomes.

Joe Fenech

Okay. And last one for me, you've had a number of banks start to talk about increases to reserves based on qualitative factors, you guys still seem to be very comfortable in the low 50s range in the allowance to the to the non-covered piece, to the new loans, are you just not seeing anything in the market Kent or Jen that generally that’s bothering you at all, is it more the quality of your own portfolio and what you are bringing on. I guess just generally what gives you that comfort that bothering need to be with respect to the reserve cushion?

Kent Ellert

Well, I think there is a couple of things. First of all, we haven't changed our credit appetite to the marketplace in any significant manner since we started the business. And so we probably have a somewhat more conservative orientation to each of the asset classes that we are in, that we would say our collective peer groups.

Secondly, we have identified some weak spots within the commercial real estate marketplace, but we've identified those weak spots in 2014. So that's not something we would see affecting our portfolio or originations.

As it relates to qualitative factors in peer group, we have done some minor adjustments to that. In fact, if you get close to the numbers in the third quarter our new provisioning for new originations we've taken up about 10 basis points just based on qualitative factors.

And this doesn't really reflect anything at all we seen in our portfolio. There is no change whatsoever in the organic portfolios performance from a credit perspective. We do not see any servicing evidence or deterioration in our portfolio. But you know over the cycle of time for some caution.

So if we're at 52 Bps today and the allowance on the [indiscernible] and we're provisioning at 62, what that will do is allow us to slowly build up the allowance over the next few quarters and just to be prudent given the uncertainty that’s in the marketplace. Jim, I don’t know if you – do you have anything you want to add to that.

Jim Baiter

Kent, good evening. This is Jim. Kent, I think you covered everything, it’s really about the no deterioration in the portfolio and our current agreement culture in terms of how we look at credit is been the same, since we started the company.

Joe Fenech

Great. Thank you, guys.

Kent Ellert

You bet.

Operator

And our next question comes from Stephen Scouten with Sandler O'Neill. Please go ahead.

Stephen Scouten

Hey, guys. Thanks for taking my question.

Kent Ellert

Good to be with you.

Stephen Scouten

Thanks. So question for you here, but maybe a high level, can you talk a little bit about expense levels and how you guys were able to sustain, you know, pretty flat expenses obviously over the last few quarters, especially in the salary line [ph] with the heavy new productions that you guys are doing, I would assume you'd have higher incentive comp and like.

So I mean, you guys are running like a 150 expense to average assets which is impressively below peers. But can you give some color about how you are able to sustain that level of expenses?

Kent Ellert

Yes. First of all, I'll say at a very high level for the way you framed the question, so that we try to run a simple model. So we haven't entered into a lot of businesses that have high front end expense loads you know before you see the revenue return. So we're just trying to be careful on the next dollar we spend and make sure that we're going to see revenue from it.

Now as it relates to the most recent trajectory in the expense line items, for the most part we've enjoyed the benefit of the declining acquired loan portfolio. As you know over the years we had a pretty substantial workout operation and OREO operation and over time we've been able to pair that back and that shows up both in your FPEs and your salary and benefits expense, but it also shows up in your direct loan expense around legal fees and things like that.

And finally carrying an OREO properties can be expensive when your operating rental properties or restaurant or things like that. We've done all that. So as we bleed it out of those businesses by selling those assets and selling those loans we've been able to take those expense raise and redeploy them back into human capital for revenue generating positions.

Now forward-looking against that, we sort of bumped up against the high end of the range for the last two or three quarters of about 33 million in OpEx and that we're not changing our guidance for the rest of the year certainly.

But here is a couple things that I can tell you, that we're looking at right now that gives us comfort. As we sold a few more OREO properties we know that we're going to save about $200,000 a quarter on OREO expenses.

I can also tell you at the beginning of this quarter we took some redundancy out of our business and some antiquated positions as we've grow 14 FTEs came out of the business, so we took out carefully and that's going to give us about $300,000 a quarter.

And then we've also announced that we're pruning two financial centers. We're going to close two centers in December and that will save us about $200,000 a quarter. So you put that together we've got $700 a quarter to work with.

And what I can tell you is we're going to spend every dollar of that and it will primarily go on to revenue generating jobs, we'll probably put a couple of FTEs and BSA risk management and a couple of FTEs into credit. But really the way we manage the business thus far is we try to run the business so that it has appropriate resources to execute for the client services we provide and for safety and soundness.

Where we see businesses or operations that we can bring down, we take them down and redeploy those dollars. This will get us into 2017 and I think when we finally button up the budget, we might see a slight up-tick in the range, but it would be probably somewhere in the 1% to 3% range, it's not going to be a big movement in our OpEx number.

So I think it's just close management of business. It’s the opportunity to take the work out cost out and stay focused on try to be simple for the future.

Stephen Scouten

Perfect. That’s great answer. I appreciate that color. And then looking at the up-tick you had here in the cost deposit, you obviously had some really good deposit growth. What do you guys haven't to offer kind of on the incentive front on money market accounts and the like, what's kind of your teaser rate or what have you out there to attract new deposit with the high end of the range which your are offering customers?

Kent Ellert

Well, first of all it’s a - the increase in cost of funds and as it impacts our margin is probably the number one priority of the bank, as we think about improving margin over time. The second thing that occurred is you'll see that our deposit performance this quarter outstripped our performance in terms of loan growth and our goal is really to try to keep those as closely aligned as possible, that of course produced a loan to deposit ratio of 90% which is extremely attractive.

What happened with our cost of funds and the promo rates is really in the third quarter our promo activity in Q2 sort of pushed over into Q3 and then the timing of our loan originations were more backend loaded to the quarter. And so that again is something about getting better every quarter at what we do.

In fact, if we close everything in our pipeline this quarter on the loan side and we didn't bring in one additional dollar deposits – our loan to deposit ratio it still be under 100%. So what I can tell you we do promos on the money markets depending on who they are and what the money is and what market it is anywhere from 75 to 120 basis points, that's really not the key to our future successes of bank.

Our real key is to make sure we're driving demand deposits in the commercial bank which had a very good quarter. Our retails contributing appropriately as we go and making sure that the core base and transaction account are not about money are not promotionally driven.

So you can probably tell from this comment that we're not going to be promoting deposits in a rate case this quarter. It’s going to be maintain what we have and grow the true transaction accounts better, more appropriately priced and that will give us an opportunity to take the improvement we expect in margin up from two basis point to maybe three. So that’s the plan.

Stephen Scouten

And that’s perfect. And then last one from me would just be, how would you say we should think about the kind of remaining accretion - the excess accretion, in particular whether that you think will come through, I know you mentioned the remaining discounts should come through over the next 5 quarters.

But I mean, you know this numbers been the 11 – 10 or 11 million bucks over last four quarters, are we going to see a pretty sharp drop off there here in 2017?

Kent Ellert

So what we have done is worked pretty hard to sort of level out on how we bring into the income statement, what remaining mark we have and that was a really I think a good effort by the team throughout late '15 and all of '16 thus far.

We plan to continue the same sort of process through '17 and if we've got somewhere between $40 million and $45 million of mark left and then you think about the next 5 quarters that’s about $8 million a quarter and you sell some OREO and you pickup some gains there, it sort of feels like the rest of '16 and '17 we have an opportunity to enjoy the benefit of that mark.

And as you also know, we've been working hard to sort of outperform on the organic side of the business, so that we can have a very smooth glide path in replacing that revenue. Our goal is to make FCB a purely organic company and if '16 - the remaining part of '16 and '17 works out, we should be able to replace that additional revenue by the end of next year, as it abates filing we would expect in late '17.

Stephen Scouten

Okay. So that decline would be more of an '18 event at that point and you think the organic growth should be able to replace it by then?

Kent Ellert

If I will be talking about this in '18 unless we do another acquisition, that will have something you know, associated with it. So that’s pretty unlikely.

Stephen Scouten

Perfect. Thanks so much guys. I appreciate all the color.

Kent Ellert

Thank you.

Operator

Our next question is from Dave Rochester with Deutsche Bank. Please go ahead.

Dave Rochester

Good evening, guys.

Kent Ellert

Hey, Dave. How are you sir?

Dave Rochester

Good, good. Thank you. So on the expense side, you mentioned that 1% to 3% growth in OpEx, is that an expectation on '17 versus '16 in terms of the full-year growth or you talking about more like what you're expecting for the back half of '17 when you layer in the DFAS expenses?

A - Jim Baiter

That’s Kent, with the back of the envelope. We've obviously gone through a number of passes on the budget and we run a six quarter forecast pretty judiciously. And I think we're going to be fine in the next couple of quarters.

But you know, as we grow this thing and we try to build out the I-4 a little more thoroughly, we're going to probably see a small up-tick of you know, that could be $1 million, $1.5 million a quarter and you'll probably see in the back half of next year.

Having said that, you know, we're going to do guidance for '17 after next quarter. And so we don’t see anything in the numbers in the immediate future that is going to cause us to go through our current guidance.

But I think realistically, we're going to have to invest in the business, both compliance, operations and sales and that’s why we're taking the cost out of it now to get ready for it and it may be a small up-tick in that small percentage range that I referenced.

Dave Rochester

So this sounds like the cost takeouts that you've already done can kind of fund that investments through maybe the first half of next year and then that’s start to see the step up in the back half of the year?

Kent Ellert

I think that’s a safe way to look at it and then we'll update our guidance after next quarter and if they [indiscernible] we can't do that, then we'll change it when we do the guidance for that.

Dave Rochester

Okay. Good. And then just switching to loans, I just wondered if you can give an update on the loan pipeline, how that stands going into 4Q versus the pipeline you had going into the last quarter that would be great?

Kent Ellert

Yes. Happy to do it. And so you know, as pleased that this quarter that we're reporting on was about 25% ahead of the same quarter a year ago. While we don't want to give any formal guidance, I would tell you how the pipeline feels right now, if we close what we have - what we have called high probability transaction level, all those deals that we think we can get done this year we'll have a record quarter in the fourth quarter.

And this will be a very strong quarter and we would continue to show improvement in our origination yields across C&I, CRE and the mortgage company will probably remain stable.

The best part about what I'm telling you is the strength of production in Q4 right now looks like C&I and it doesn't mean that we couldn't do more real estate because there is not quality real estate out there to do.

But when we think about the next dollar that we put to work in the marketplace, we get very excited about C&I because of all the tangential business that comes with it and we also think their scarcity value of building it a quality middle market book in the state.

So we would tell you that we're very optimistic about potentially, not guaranteeing it, not you name [indiscernible] here, but potentially delivering a record production quarter for the company in Q4.

Dave Rochester

That’s great. And then I know 1Q it tends to be a little seasonally soft, but as you look out to 2017 you see that momentum continuing. I know you've done a lot of investment in hiring lenders in both C&I and CRE, as well as in the mortgage side, it seems like you got the capacity there to generate at even higher level than you have historically, just any thoughts there it would be a great?

Kent Ellert

Yes, I think there are two things that would drive a more optimistic view. We're not people that like to predict the credit markets out more than a quarter or two. But let's assume that credit holds up.

A couple things that are benefiting the bank, first, as we add more human capital to the platform, I think we've grown the wholesale origination team by 25% over the last year and a lot of that’s happening in the I-4 Corridor. So that gives us better distribution power.

The second thing that’s happening that feels very good is the brand of the company, something is happening relative to how we're viewed in the marketplace. We don't spend huge dollars on marketing and advertising.

We're very focused, we're very banker to client driven, but now that we are without question the largest peer play in Florida, it seems that the press momentum around the bank, the talk on the street about where on borrowers [ph] want to go for the next opportunity to do financing, we seem to be on everybody's list.

And our bankers have worked very hard over the last five years to build the book this large and I think they are benefiting from the doors opening a little easier today than they ever have

So between having more high-tech, high-quality human capital, having some brand recognition and third others andyou know some of our competitors are just a little bit on their heels right now and we're going to take advantage of that by being extremely consistent. We want our clients that we think our consistency breeds confidence on the street and we're going to continue to be consistent and people can count on us. So we think we'll get more businessand move more share. So I think everybody feels good about next year, but we're not claiming victory yet.

Dave Rochester

All right. That’s great color. Thanks, guys. I appreciate it.

Operator

Our next question comes from David Eads with UBS. Please go ahead.

David Eads

Hello.

Kent Ellert

Hey, David.

David Eads

Maybe if you could discuss - have you really seen any meaningful changes in the – particularly, like in post- C&I and CRE, but particularly CRE market in Florida as kind of other banks are facing concentration limit or just kind of being a little bit more cautious in the base some of this discussion?

Kent Ellert

Yes. I mean, I'd be happy to. First of all quite literally our approach to the marketplace hasn’t changed since the first loan we've made. We're very driven by infill markets. We're very driven by existing cash flow deals and most of all we're driven by sponsorship. So we sort of know how we want to bank and we're less development oriented as we are by an existing cash flow streams and helping finance back endeavor.

Having said that, we do the gambit for the right sponsors, what to do we see in the marketplace that is different? First and foremost, access the construction financing is weighed out. So what's happening in our bank is we're getting lot inbound calls about if you would like to take look at our next construction project.

Well we all know that there is regulatory constraints going on with respect to construction portfolio and capital. We're under that guidance and we sort of would like to stay there and we just don't view construction financing as profitable from a return on capital perspective as fully fund loan origination. So we're not chasing that dream, that's not something we're particularly interested in.

The second thing is you do here certain banks that are sort of either in or out, maybe out right now of the commercial real estate space. That you know, the real estate industry if you're dealing with a larger more established developers, like any industry they all talk.

And so if one bank is out for whatever reason then everybody sits there and looks at their project pipeline and says well how do we redistribute this, how do we make sure we're taking on the other banks to launch, to keep them warm, we're feeling that as well.

And then the third thing I would tell you that as it relates to the hot pockets of real estate that we referenced earlier in the call, you know, we would just say that it feels like prices are high in the marketplace that means acquisitions are a little bit harder to get done at good pricing, we would say that the on the for sale product in certain markets the inventory levels suggest that there may be some pricing pressure coming on the retail product as it sells out.

And then thirdly and outside of those hot pockets, like Miami Beach and Brickell whatnot, we do see the emergence of what we call the C&D level developers. They are not bad people, they are just people with less experience and less capital. And if they are chasing the market, they are probably not really as astute about what projects will work and what absorption looks like they may not have the same power.

Those are the kind of borrowers we want to stay away from, that’s not our business model. And so we see that markets sort of forming around the smaller banks. That doesn't impact us. But we do this every day, so those are the observations I think that we would pass along to you about what we see in the marketplace.

David Eads

Thanks. That’s very helpful. And maybe just on the product portfolio and the effort you guys have done, the color for '17 was very helpful. I am just curious when you think about the bridge to '18 and kind of avoiding any kind of cliff, does that assume any further mortgage purchases to kind of go in this purchased bucket?

Kent Ellert

Yes. So you're very aware, we do a lot - we do a lot of modeling that looks out into '17 and '18 because this really were aware that there can be cliffs and we're very fortunate as a company that we identified you know the declining nature - the depleting nature of these acquired loan portfolios. We've identify that in '13, that's why we exited the FDIC agreements in '14, so we could start working through this in a more organized fashion.

So first and foremost, we don't want to see a cliff and we're very aware of it.

Secondly, what we've been doing is to sort of manage that glide path down against the ramp of our organic portfolio and really what we want to do is we want to build our organic business in a manner that provides to shareholder continuous opportunities for earnings growth in an absolute sense. So part of that equation would be to grow sufficiently to not only give the earnings growth, but also replace the accretable yield coming from that portfolio.

We think we're in a place today where things go as we hope they go and our history is our best evidence of our future, we would not have to acquire any loans to do that. Here is our fundamental belief, we think that your organic business is your most valuable business, it’s the business you have relationships with, its business where you really control the credit, it’s the business that you truly and thoroughly underwrite.

Now we could do mortgages as a diversification play against that portfolio and we could tuck in a few hundred million if we needed to. But it’s our preference that we push the bank forward and we tell our shareholders we're a pure organic engine because we think that creates more shareholder value over time than either buying little banks in varying [ph] accretion with some goodwill or buy mortgages in the marketplace. So we want to try to do in a high-quality way. We're not giving guidance tonight, but thus far we have no expectation to buy mortgages in '17 or '18 to get that done.

David Eads

Okay. Here is something we don’t – we aren’t talking about your scenario into '18. And thanks for the taking the question.

Kent Ellert

You bet. Good talking to you David.

Operator

This concludes our question-and-answer session. As well as today's conference. Thank you for attending the presentation. You may now disconnect your lines.

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