FCB Financial Holdings (NYSE:FCB)
Q2 2016 Earnings Conference Call
July 21, 2016, 05:00 PM ET
Matthew Paluch - Director, IR
Kent Ellert - President & CEO
Jen Simons - CFO
Dave Rochester - Deutsche Bank
Steven Alexopoulos - JPMorgan
Ebrahim Poonawala - BofA-Merrill Lynch
Stephen Scouten - Sandler O'Neill
David Eads - UBS
Brady Gailey - KBW
Joseph Fenech - Hovde Group
Good afternoon and welcome to the FCB Financial Holdings Second Quarter 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 of Investor Relations. Please go ahead.
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 second 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.
Thank you, Matt. First of all, welcome everyone and thank you very much for joining us to review FCB’s second quarter results.
This was another milestone quarter for our company as we celebrated completing our second year as a public company and our 14th consecutive quarter of improving and record core operating results. Looking back two years ago, we were a $5 billion bank built on the strength of healthy organic momentum rooted in our human capital and the principles of quality, quantity and sustainability, we are very confident in our growth outlook but also ever mindful of potential emerging risks.
And over the last eight quarters, the team has delivered a number of very strong results: consistent quarterly new loan growth totaling over $3 billion, and total deposit growth of over $2.5 billion, while at the same time driving our efficiency ratio to 43.8%. As a result, quarterly core net income is tripled to $24.2 million. And today it's really no different. The rhythm of the business feels strong as we continue to build on the organic momentum we've enjoyed since we established the platform.
This quarter's record results is more proof and highlighted by organic loan fundings of over $500 million driven by record C&I new loan fundings of $186 million, CRE findings of $175 million and residential fundings of $148 million, deposit growth of over $550 million and of course strong and stable credit quality. This consistent execution and performance is helping us build Florida's leading independent banking franchise as we create gap as the largest pure play in the state with footings of now over $8 billion.
Exploring the numbers more closely, the second quarter of 2016 was the most profitable quarter to date for our company with core net income of $24.2 million or $0.56 per share on a fully diluted basis. On an annualized basis, core net income rose 27% both sequentially and year over year. FCB’s continued growth in core net income was a result of core revenue of $74.5 million, primarily driven by new loan interest income of $46.1 million, up 57% year over year. As a result, revenue growth coupled with continued disciplined expense management produced a core efficiency ratio of 43.8% and a core ROA of 123 basis points.
Before we discuss our key priorities, I want to update you on human capital and briefly discuss the regulatory landscape. When we think about the business, the two essential elements of a successful commercial banking culture are effective market coverage and strong human capital. Our commercial banking teams have been in place and consistently calling across our footprint for a number of years. This coupled with no regrettable turnover in our wholesale banking teams, including C&I and CRE has contributed to our sustained momentum.
Additionally we continue to add depths to our team with three new commercial bankers in the I-4 Corridor and we added a residential mortgage manager for the East Coast. Based on our stable and talented banking team, the FCB brand is now becoming known as reliable, confident and capable in the commercial banking space across Florida.
Another very important facet for FCB is our safety and soundness profile. Presently we're in the off quarter between our two regularly scheduled exams which occur in the spring and the fall. We continue to work on organizational improvements and monitor balance sheet composition with the focus on asset concentrations and sound underwriting practices. As it's been topical in recent months, I want to mention to you that our new loan portfolio concentrations remain well diversified with C&I and CRE each representing roughly 240% of risk based capital.
Some concentrations, including construction lending, continue to be below regulatory thresholds representing 80% of risk based capital with HV [ph] CRE of 5%. We do not see any limitations on our current growth strategy based on concentration limits.
With these two updates addressed let's take a look at the core business and walk through the results. Once again our key priorities include: disciplined organic loan growth; core deposit growth; diligent acquired asset portfolio management and continued operational efficiency.
First, this quarter we had record organic loan production with $509 million of organic fundings on $670 million of commitment. This production mix was balanced and led by C&I findings of $186 million, CRE findings of $175 million and residential fundings of $148 million. As a result, the new loan portfolio grew by $415 million. As of quarter end, the utilization rate on the new loan portfolio remained consistent at 85% with unfunded commitments of $1 billion. Moving forward we expect commitment utilization will continue to offset a significant portion of pay-downs and amortization.
A few additional details for the quarter around organic loan production. Quarterly new loan production yields were 3.57% led by C&I yields of 3.70% and 63% of the total production price on a variable rate basis. Top line new loan interest income grew $46.1 million, up 32% annualized from the prior quarter as average outstandings increased by $379 million.
The team also generated $1.7 million of swap and secondary market fee income and the C&I production was balanced with 42% coming from South Florida, 35% in Southwest Florida, and 23% in the I-4 Corridor. Overall this was our best C&I quarter to date marking a 51% increase in production over the second quarter of last year.
With respect to credit quality, all of our key metrics remained very healthy. There were no delinquencies, charge-offs or downgrades in the commercial and CRE portfolios and our overall policy exception levels continue to remain at acceptable thresholds.
Secondly and equally important is our focus on core deposits. We continue to make progress growing core deposits and repositioning the deposit book and this quarter marks the fourth consecutive quarter where deposits grew the same rate as our new loan portfolio as deposit growth totaled $565 million or 38% annualized.
A few overall deposit details for the quarter. Deposit growth was split 50:50 between time and non-time deposits. Demand deposits grew by $130 million highlighted by over 4250 new DDA count and over 85% of our branches contributing to overall deposit growth.
Over the last 12 months demand deposits have grown by $600 million or 66%, improving the demand deposit mix from 20% to 23%. Our cost of deposits during the quarter was 69 basis points reflecting the time deposit promotions we had early in the quarter.
As of quarter end, our loan to deposit ratio improved to 93% from 101% a year ago. This improved liquidity position will enable us to focus on lower cost core deposit generation in the third and fourth quarters to benefit the bank's net interest margin.
Overall we're pleased with our deposit gathering momentum but recognize the need for growth in low cost deposits. With that in mind, we continue to focus on the development of our deposit centric teams in the areas of business banking, homeowners associations and public finance as well as managing closely our quarterly special incentives to drive low cost core deposit growth.
Next, our third priority is diligent acquired asset management. We remain committed to earning the full value of our acquired asset portfolio while maintaining stable revenue from this portfolio. In the quarter we generated $19.4 million of acquired asset revenue taking into account interest income, gain or resolution and gain on OREO sales. Our stated target for the total acquired asset revenue is in the range of $20 million per quarter and we continue to expect to have consistent level of contribution from this area throughout the remainder of the year.
As part of the overall strategy to replace lost accrettable yield from the acquired asset portfolio and continue to drive revenue growth, we first and foremost want to outperform on our organic growth guidance as we believe this builds the most franchise value. Secondly, we may periodically purchase high quality residential mortgages that satisfy our credit and return metrics. However we did not purchase any mortgages in the second quarter due to the very strong organic loan production and growth.
Our fourth and final priority is the focus on operational efficiency centered on disciplined expense containment. Core non-interest expenses were $33 million for the quarter, in line with our guidance of flat with the prior quarter. As a result of the stable expense base and revenue growth, our core efficiency ratio declined to 43.8%.
OREO and acquired loan resolution expenses totaled $2.2 million for the quarter. As a result of significant OREO sales in the second quarter and the resulting lower balances of assets held for sale at the end of the quarter, we expect meaningful expense savings going forward. Overall we're confident that core expenses will remain at the high end of our guided range as we continue to take advantage of opportunities to hire new human capital.
With another healthy quarter behind us, our constant focus on these principles of quality, quantity and sustainability is rooted in our human capital and operational discipline. As the year unfolds, we remain very confident on delivering on our stated growth and operating objectives.
With that said, I'd like to now turn it over to Jen Simons for more details on our financial results. Jen?
Thank you, Kent. As Kent has described, we had a very strong quarter. Now I'll review the financial drivers in further detail.
First, there were a few adjustments between GAAP and core net income in the second quarter of 2016, including $1 million of expense related to restructuring of employment contract and severance and a $324,000 gain on the sale of investment securities. From a tax perspective, our effective tax rate is 36.1%, consistent with our guidance.
Slide 2 of the presentation provides core financial highlights over the last five quarters. Core net income of $24.2 million reflects sequential growth of $1.5 million from the $22.7 million as reported in Q1 and the 27% higher than the $19 million reported in the second quarter of last year. The primary driver of our core net income increase was the growth in total revenue to $74.5 million. Revenue growth has primarily driven by new loan interest income of $46.1 million, up $3.4 million or 32% annualized from the prior quarter.
Non-interest income increased by $2.4 million to $8.7 million from the prior quarter due to the gain on sale of OREO of $2.1 million coupled with an increase in loan fees of $200,000. Core non-interest expense was $33 million for the quarter, in line with our expectations and flat from the prior quarter. Revenue growth and cost containment led to record core net income of $24.2 million or $0.56 per share on a fully diluted basis and a core ROA of 123 basis points.
Slide 3 displays our new loan portfolio growth of approximately $415 million for the quarter driven by total organic fundings of $509 million led by record C&I production of $186 million. New loans have increased by $1.7 billion or 45% over the last 12 months with new loans representing 92% of our total loan portfolio at quarter end. We experienced in excess of $135 million in net new loan growth across each of the C&I, CRE and residential segments due to balanced loan production. 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 4, the credit quality of our new loan portfolio remained strong with the non-performing new loan ratio of 1 basis point as of quarter end. The provision for loan losses of $2 million recorded for the second quarter of 2016 includes a $2.2 million provision for new loans and net recoupment of valuation allowance of $0.2 million for the acquired loan portfolio due to recoveries and better than expected performance on the resolution of acquired loans. The provision for new loan served to increase the related allowance to $28.5 million or 0.52% of the $5.5 million 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 0.57% of total assets.
You can see on Slide 5 the strong demand in overall deposit growth during the quarter stemming from both retail and commercial production. Deposits grew by $565 million or 38% annualized linked quarter to $6.5 billion on the strength of demand deposits and time deposit growth. Over the last 12 months demand deposits have grown by over $600 million or 66% and demand deposits have increased from 20% to 23% of total deposits.
As of quarter end, our loan to deposit ratio was 93%. Moving forward we 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. The core efficiency ratio improved to 43.8% in the quarter, down from 45.4% linked quarter and 48.1% in Q2 of last year. The core efficiency ratio improvement was primarily driven by new loan interest income of $46.1 million, up $3.4 million or 32% annualized from prior quarter.
From an expense perspective, core non-interest expense was $33 million for the quarter, in line with last quarter as elevated loans and OREO expenses offset reductions in occupancy and equipment. Going forward we continue to anticipate the reduction of OREO and troubled acquired loan portfolio expenses to generate future savings that we will reinvest in the business to fund revenue producing jobs and network expansion. For the remainder of the year we continue to expect noninterest expense to remain near the top end of our guided 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 accrettable yield which exceeds the contractual acquired loan rates decreased 6 basis points from last quarter to 3% while reported net interest margin decreased 14 basis points to 3.51%. The excess accrettable yield over contractual interest rates totaled $10.2 million during the quarter. The overall new loan yield remained stable at 3.48% with average balances for new loans up $379 million during the quarter.
The adjusted net interest margin declined primarily to an increase in cost of time deposits and borrowings as well as the continued attrition of the acquired asset portfolio. We're maintaining an asset sensitive balance sheet that will respond to a 100 basis point and 200 basis point yield curve increase with a projected increase in net interest income of 5.4% and 9.2% respectively. Net interest income will benefit when interest rates rise as 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 at 10.3% and 11.3% respectively. Tangible book value per common share is $20.64 as of June 30, 2016.
During the quarter, pursuant to the share repurchase authorization the company repurchased 195,986 shares at a cost of $6.7 million. For the quarter our fully diluted share count is 43 million, including the effect of 2.4 million diluted shares.
And now I'd like to return the call to Kent for concluding remarks.
Thank you, Jen. As you can hear from the report, we're extremely pleased with our second quarter results. The rhythm of the business feels as strong as ever as we continue to build on the organic momentum we've enjoyed over the last three years.
Thank you again for your time this afternoon and now let's open up the floor for questions.
[Operator Instructions] And our first question will come from Dave Rochester of Deutsche Bank.
On the expense guidance, appreciated the updated guidance there. I was just wondering if you’d talk a little about how much more work you have to do to plan what you need to do to get ready for $10 billion, and at what point you think you'll be ready to cross through that?
Sure. Thank you, Dave. This is Jen Simons. As you know we've got some lead time before we reach that $10 billion mark, have to report under DFAS [ph]. We are -- we have undertaken a project to prepare for that. We are somewhat in the early stages but we are in the process of doing system evaluation or process evaluation. So we expect to make some progress on that this year and we expect to be prepared to implement DFAS [ph] ahead of time.
Jen, we've got a $0.5 million in the budget for the second half of this year.
And there will probably be another $1 million next year. And that’s probably the likely cost path for us.
And then you guys had some great loan growth once again this quarter. If you’d just talk about the pipeline heading into 3Q and how that compared to what you had heading into 2Q to give us a sense for what we might expect?
Sure. Thank you for the comment on the production levels. We’re very pleased with the consistency that we're seeing within each of the business units and most excited about the commercial bank in the C&I area coming on, because we think that creates more franchise value. And you notice that we're getting better yields in that space based upon our new pricing discipline. Having said that, to your question the pipelines right now look like they should deliver very similar results to what we enjoyed in the second quarter. So as you can see we're starting to perform now above the upper end of our guided range. We're not going to change that. We're just going to quietly celebrate the fact that the consistency and the quantity is building in behind the quality.
So the thought that you may forego purchasing loans in 3Q, maybe you do actually purchase some in 4Q.
Yeah, we don't have any plans right now to do any purchases. We -- first of all, it's not clear how attractive it is to buy any assets in the marketplace right now. So we're happy that we don't have to do that. And we also think that if we can maintain this level of run rate we won’t need to. So we can't draw any conclusions too far out. But right now we don't anticipate doing any purchases this year.
And then just switching to the NIM, has the low rate environment at all impacted your expectation there on the adjusted NIM going forward – sorry if I missed it but could you talk about what that range might be going forward?
I think our guidance on the adjusted NIM has been 3 to 3.15. We're not changing that guidance at all. What I would tell you as it relates to the rate environment it is just creating a lot more focus and a lot more work on our part to get much better around pricing discipline both on assets and liabilities. Last quarter we put in place formal pricing guidelines and it's a little against my grain to build bureaucracy. But we just have to have greater discipline around credit pricing and it's starting to show up in our new originations. So we have a plan in place right now that if it all plays out the way we think, the NIM -- the adjusted NIM would widen back to first quarter levels. But it is the challenge of the day.
Our next question will come from Steven Alexopoulos of JPMorgan.
Kent, one of your peer Florida banks has become a lot more cautious on the quality and profitability of new loans, sounds a lot like you did about a year and a half ago. Could you tell us what you're seeing in the markets today and any reason to be changing your appetite?
Sure, I am happy to do so. And I think for us the first priority is consistency. We think that the marketplace will reward you if you don't come and go from the marketplace and your appetites are changed radically. And as it relates to the hot spots in the market you're right, it was at the end of ’14 that we sort of said there were some pockets in Miami that made us a little nervous. And those are the areas I think that the other bank was referring to in their earnings call. So from our standpoint I don't see our approach to the market changing at all. I feel very good about the credit quality of our originations, the servicing activity which we monitor very closely is demonstrating that the marketplace is generally very healthy.
Having said that, in real estate which I think is another other topic of the day, there are a few things happening that would cause you to make sure you're playing in the right space. First of all, it's harder to find good credit because asset prices are higher. So the low lying fruit is no longer with us. The second thing, the spots in the market that we were worried about in ’14 of being overbuilt too much inventory, that is in fact happening now, sales are slowing, prices are coming back. We have no exposure to that space perspectively or within the portfolio. So we don't see that as an issue.
The third thing that is going on that, that you could point to for caution is in the real estate space the C and D level developers, the ones with less capital, less experience, they're re-entering the market chasing the opportunity. And I think frankly that's where the smaller banks take a lot of risk because those tend to be the smaller deals. And if you're not as familiar with the market or familiar with the players, you can find elevated risk, no doubt. But as far as FCB is concerned we're not changing our course at this point. We don't see a need to.
And so if we think about the loan growth which is obviously very strong and you’re seeing you think you could do above the upper end of the range next quarter. I would have thought you would have taken down the adjusted margin guidance because I would assume that you would need to be hitting the time deposit campaign again to fund that. Do you think you could fund that level of loan growth and not rely on time deposits next quarter?
Well, a couple of things. Look at the loan to deposit ratio, that has come down from a little over 100 to little over 90. And so we want to make sure that that we stay within that range but that takes a little pressure off in the current quarter. The other thing we have is about 200, 250 in CDs rolling this quarter. So we might get some benefit from repricing on that. And then the third thing is we have become disciples of deposit gathering and part of that discipleship is we're paying big incentives. And we're actually doubling the incentive level for deposit gathering of low cost deposits and I really believe that our credit appetite from a banker standpoint will stay in place. We won't see any attrition in the pipelines and hopefully we’ll build on the momentum we have now. So the plan, net-net, Steve, is to improve our deposit performance from a cost of funds standpoint. I think this quarter we grow 350 to 450. It'll be everything we need and then we'll see what the momentum looks like going into Q4.
But it would be likely then in 4Q we’d see some margin pressure from where we were this quarter?
Well, I think we have to be committed to stay where we are, and as I made -- the comment that I made earlier the plan we have in place right now which is doing the math very closely against the pipelines and the CDs that are maturing as we think we can get the bank back to Q1 margin NIM and with that, that's a positive move of five or six bps. So I'm not prepared to capitulate on the margin guidance.
And just one follow-on -- final one, on this slide one, and this may have been there every quarter and I haven't noticed it. But this comment about there is no asset growth or strategic activity restrictions. What exactly does that mean in terms of no strategic activity restrictions?
Well, early in the history of our company when we were under the operating agreement, we basically produced a comprehensive business plan that said these are the things we're going to do, including what assets we were going to grow and by how much. If we deviated from that plan by more than 10% on any line item it had to be pre-approved. As you know we were released from the operating agreement more than a year ago and as a result we have had no regulatory influence in our pursuits. Obviously if you were to do M&A you need to seek approval. Obviously if we were to deviate in a material way in our business model we would seek their guidance in an informal approval. But we haven't -- for years have them give us – have the regulators give us any specific guidance about real estate or sub asset classes in terms of what we can or cannot do. I'm not sure that every other bank has that privilege.
Our next question will come from Ebrahim Poonawala of Merrill Lynch.
Steve actually asked my question, but let me just ask on the expenses. I think it's pretty clear in terms of your outlook for the back half of the year. I think as we look into ‘17 and as the bank continues to grow, Kent, can you talk about in terms of how much more operating leverage is there in the platform to bring down the efficiency ratio, or will we be able to defend it in this low 40s where it is currently?
I think without question we'll be able to stay in the low 40s. We don't see anything at the present time that is going to cause us to change our guidance. The workout people led by our credit shop have done a great job reducing our exposure to OREO expenses and we're going to see some nice pickup there as we head into Q3 and Q4. I hope we spend that savings though on new revenue generating talent but that gives us the lever to make sure we're not overspending because we have that additional room.
And just a quick question in terms of future hiring. Any sort of focus in terms of getting deposit bankers versus lending, I know we’ve been focused on deposits recently. So I am wondering if there's any sort of pipeline of additional hiring over the coming months?
We're very active in talking to people presently. I think the performance of the bank, the scale that we now enjoy in Florida, there's just some natural momentum that is occurring, that is causing people to give us inbound calls relative to opportunities. You're a 100% right, the bankers that we want to hire have to be deep in knowledge on the credit side, hopefully people we've known and worked with but equally important, they have to be deposit gatherers as well. So we don't have any lift-out plans or anything specific like that. I think the number one attribute of our team is stability. So we build that confidence in the marketplace. And then on the margins we're going to add more bankers. I would suspect in the I-4 Corridor and probably in Southeast Florida and the West Coast feels pretty good right now for us.
Our next question will come from Stephen Scouten of Sandler O'Neill.
In regards to just thinking about the deposit cost and deposit gathering strategy, it sounds like you feel like that could come down given the positive improvement in your loan to deposit ratio. But can you talk a little bit about how you'll manage that and what’s the cost you're seeing on FHLB – new FHLB borrowings and the like and why you prefer that maybe the continued growth in money market and time deposits?
Well, as you can tell from our balance sheet our Federal Home Loan Bank’s borrowings decreased this quarter as a result of deposit gathering. We see -- to the extent that we continue to gather deposits, we wouldn't expect to increase growth in those borrowings.
Does it help?
It does but I mean I guess if you're not going to grow deposits as fast that that would revert back to maybe the previous path. So I am just curious what those new FHLB fundings are coming on at and what kind of duration you're taking there?
We didn't have any significant new FHLB findings this quarter. We did have some findings in the first quarter and that was related to match from that first quarter portfolio purchase. So it's something that we continue to evaluate. It will depend upon deposit gathering.
It sounds good and as it pertains to the remaining accretion, what’s the total amount of accretion that you guys have remaining and what do you think the path will be from here, obviously that would assume down but how sharply could that come down?
Sure. So we still have on balance sheet $50 million to $60 million off-mark. From an accrettable yield perspective that's a different question, depends on how long those assets remain on our books. So historically last two, three quarters we've been recognizing about $9 million to $10 million of that excess accrettable yield per quarter. So with 60 million left, that's six quarters or so remaining from that perspective. And in terms – to the extent we stay at the same levels we are at currently, see, extend that drag that further as we head into 2018 as well.
And then maybe just one last one for me. I think you guys spoke last quarter about trying to increase floor pricing by about 25 basis points. What's been the success rate there and how do you feel about the firm, just so the kind of new loan pricing, obviously new loan yields were up quarter over quarter which is great, I guess is that sustainable moving forward?
If you break it down into the three big businesses, residential mortgage, commercial real estate and C&I, we’re extremely happy with the progress we're making in C&I. And we've had less success in the commercial real estate space probably because of our client profile being at the more conservative end of the risk spectrum. And then in the mortgage space, you get commoditized down so quickly on pricing. So it's sort of a speculative really really good news to – we’re not being -- we're not showing any difference in the marketplace.
I think as it relates to floors, we've pretty much put floors on everything we're doing on a floating rate basis. We started that early in the year and that really was defensive when everybody was worried about rates going down. And we have not had much pushback at all from our client base on that.
Our next question will come from David Eads of UBS.
So you started off the call – pretty quickly – you’re talking about all this conversation we've had on concentration limit this quarter. I was just curious if you’ve really seen much change in behavior in the market as a result, from other folks related to this increased scrutiny around concentration?
We hear anecdotally that some of the very large players are less active in the market. I would tell you I think more for credit risk reasons than concentration reasons, there's less supply for construction finance than there was a year ago. We're not soaking that up but that's just the evidence in the marketplace. There's a lot of talk about it but in our conversation with the regulators, that’s really a one component of a broader discussion around risk selection and underwriting. And they were quick to point out their banks have lived over that guidance in perpetuity. It's really a function of your risk management systems, your capital levels, your liquidity, what those assets really look like. So we don't feel charged up about it but here is the way we think about that issue. We don't think about it as a commercial real estate concentration issue. We think about it as an enterprise risk management issue. We want our balance sheet diversified so that over the long haul that we're not beholden to one any asset class for growth or for risk. And so our goal has always been to keep real estate sort of pare back to a third of the book and that plays well against those ratios. But I haven't talked to a banker who said that the ratio has stopped them.
And maybe just another kind of environment question. Have you heard any change in the discussions around M&A in Florida area and the Southeast, now that we're kind of – everyone’s kind of resigned to the Florida for longer and more difficult environment, has that led to any more pickup in conversation?
It doesn't feel like there is any significant change in the dialogue that's going on. And then again late July and August are pretty quiet months in Florida for that kind of stuff. But I don't have any change to note for this discussion.
Our next question will come from Brady Gailey of KBW.
So there you are at 240% CRE to risk based capital. I think as you continue to grow, as you continue to deploy your capital that ratio will go up. I mean do you put the brakes on when you get close to the 300% range or are you comfortable going through that level?
We model out sort of our expected new fundings in our amortization and maturities. And then we look at our earnings contribution to capital levels. I don't really think that we're forecasting that we're going to push through that any time soon. Having said that we're very proactive and having conversations with our regulators. And I think that's a conversation that we started early this year and we’ll continue to have. But we want all of our constituents happy. We want our shareholders happy first. We obviously enjoy a positive relationship with the regulators and we're very sensitive to the guidance that they give us. So the way I would just tell you is I don't think we see that as something we're going to cross through in the next few quarters. But if we see that coming we're going to have a conversation and make sure everybody's happy.
On back to the funding cost, I heard you say you had a time promotion. Funding cost, as it was last year they continue to go up, kind of in each category like time deposit is up from roughly 100 basis points to 150 now. So the forecasts there, do you think it will continue to rise as you all continue to need deposits to fund the growth, or how will that trend?
I was looking to Jen, I thought she wanted to take that. But well I'll go back to what we said a few minutes ago. We're at a place now where we feel like the momentum every quarter on the demand side is improving. Having said that, we enjoy very strong asset growth. So from time to time we may be put in a position to take on more time deposits. This quarter, however, is a little different. We've got a $200 million book that is cycling through, that should reprice down. Our pipelines around demand look very strong at the beginning of the quarter. And so we would think that we're going to have a positive benefit from that.
But having said that we're growing now at $400 million to $500 million a quarter and over time that deposit mix is going to be influenced by how quickly we can gather the demand deposits. So we might be in an environment where we're putting on more time deposits. But the cost of funds in doing so is a function of where market rates are. So we've got some high priced CDs rolling off right now. We're benefiting from rates being a little higher when we booked them back in the day. We have not forecasted, Brady now to your point, a change in our funding costs. We really think that as a team we're getting much more practiced and disciplined around deposit growth and bundling of products and cross-selling. And we're becoming more aware of where the deposit centric opportunities are. I think if we get better at the distribution side of the deposit gathering business, that will outweigh the potential cost associated with time deposit gathering.
And then finally for me, in Florida, do you all compete a lot against BankUnited and they are tapping the brakes here. Is that an opportunity for you all to pick up a little more market share on the loan side?
I would tell you that they're a viable competitor in the marketplace. But for the most part we spend a lot of time working our former clients at the big banks, a lot at Wells, Chase, Sun and Bank of America. From time to time there will be a client that migrated from one of those big banks to BankUnited as they got started. And we'll go talk to those folks. But we are really not head to head against them on a daily basis but we do see them periodically.
Our next question will come from Joe Fenech of Hovde.
Kent, you’ve got a history obviously as an asset acquirer, but not as a public company. But if the board were to determine stated that you all want to cross the $10 billion threshold, would you look to do that by turning back to deals or would you be willing to cross over organically? I know it might not necessarily be a choice given the timing and the availability of acquisitions. Just curious in an ideal world, how you would think about crossing $10 billion if you decided to do that?
Good question. I think that, first and foremost we're big believers in consistency, how we execute, what our appetites are and the trajectory of the company. So I think notwithstanding changes in the external marketplace around risk we're going to keep doing what we're doing. So if you think about it growing it $400 million, $500 million a quarter and we're over a billion it’s not far away. So that's one way to think about it.
The M&A side, the board is very open to considering acquisitions but they have to make sense and they have to be priced right. And you know the Florida landscape as well as anybody. Would you pay a premium for $400 million, $500 million credit book from a small bank when we can create very high quality assets ourselves in one quarter that's equal to that size? So if you agree with us that it's better to organically build it, that takes out of the equation the vast majority opportunities to acquire in Florida. When you get larger than that, that's when we start putting on our credit hats and our financial caps and we look a lot but we just haven't found anything that's met our needs either from a asset quality and human capital quality standpoint or financial metrics.
Our last deal we did was at 85% of tangible when we bought GFB and boy, I would like ten of those deals because that was a money maker for us and it worked out really well for our customers and shareholders. But those deals are just not out there as far as we can tell. So I think it's a low probability for us but that doesn't mean it couldn't happen.
And then just switching gears for a second, doesn't seem to be an issue for you guys, Ken, I am interested in your take. Do you get the sense for the regulators’ crack on the CRE issue? Is it more in your view institution specific around say risk management processes or whatever, or do they seem to focus more on specific markets they are concerned about by their questioning? What's your sense of what’s sort of predominant in their thinking?
I think that -- first of all, I think that the concern about commercial real estate starts with fundamentally how strong the bank is. They're very interested in what your capital levels are, how your liquidity works. And so really they want to know what kind of stress you can sustain. And so for us when you look across our real estate book our average loan to value is 57%. I don't know of anybody else who can quote that kind of number. So they don't come in and overreact to what's in the portfolio. So I think when they have conversations I can't telescope what they do with other banks. But with us they talk generally about the climate, generally about pricing of assets and generally about concentrations in geographies and in product types. And we have a very open and back and forth dialogue and they see everything in the marketplace that we see. And so if you're a bank and you're getting heavy into construction and development at this time in the cycle, I think we would all agree that that would require a deeper conversation. But if you're a bank that has a conservatively built portfolio that finances proven cash flow is a primary endeavor in real estate. They have not overreacted and they have not been unfairly punitive. I quite frankly think that they are just evaluating the marketplace the same way we do and they want to make sure everybody, the board members and the management teams are not getting too far afield in the quest for asset growth. And think about us we're as fast growing as anybody. And we have not had a conversation about the brake pedal. We've had a lot of conversations about common sense but that's about it.
And ladies and gentlemen having no further questions, this will conclude our question and answer session and conclude the FCB Financial Holdings conference call. Thank you for attending today's presentation. You may now disconnect your lines.