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Edited Transcript of CSFL earnings conference call or presentation 23-Jan-19 7:00pm GMT

Q4 2018 CenterState Bank Corp Earnings Call

Davenport Jan 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Centerstate Bank Corp earnings conference call or presentation Wednesday, January 23, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ernest S. Pinner

CenterState Bank Corporation - Executive Chairman of the Board

* Jennifer L. Idell

CenterState Bank Corporation - Executive VP & CFO

* John C. Corbett

CenterState Bank Corporation - President, CEO & Director

* Stephen Dean Young

CenterState Bank Corporation - Executive VP & COO

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Conference Call Participants

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* Blair Craig Brantley

Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst

* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

* Tyler Stafford

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the CenterState Bank Fourth Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Chief Financial Officer, Jennifer Idell. You may begin.

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Jennifer L. Idell, CenterState Bank Corporation - Executive VP & CFO [2]

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Thank you. Thank you all for joining the call this afternoon to discuss the company's fourth quarter financial results. Joining me in our presentation today are Ernie Pinner, Executive Chairman; John Corbett, President and CEO; and Steve Young, Chief Operating Officer.

I would like to remind you that our comments made today may include forward-looking statements. Any of those statements made by any of us this afternoon are subject to the safe harbor rules. You can review the safe harbor language in detail found on Page 12 of our earnings release. As a reminder, you can find all of the documents that we discuss today on our website under the corporate profile tab of the Investor Relations section.

At this time, I will turn the call over to Ernie Pinner to begin the presentation.

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Ernest S. Pinner, CenterState Bank Corporation - Executive Chairman of the Board [3]

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Thank you, Jennifer. Good afternoon, everybody. I want to thank you for calling in, but more importantly, I want to thank you for the interest you have in CenterState.

From my viewpoint, we had a great solid quarter in this past fourth quarter. It's indicative to me that we will have a good year in 2019. I envision 2019 as the year of stability, with management focus on growth of loans and deposits with a continuing growth of steady earnings.

I based my feelings for this steady Eddie 2019 on the stability of the Florida economy as well as the team that we have here. When I think about the Florida economy, Florida posted their GDP in the second quarter and that's the most recent that we can document but that GDP growth in 2018, the second quarter is 4.5%. That surpassed the national average of 4.2% and makes us ninth in all of the states within the union.

The personal income growth of the third quarter, more current, was 4.3%, which was over the national average of 4% and put us in the 16th place throughout all the states in the union. Our population continues to grow in April of 2018, which is the more current that we have. We surpassed 20.8 million people in Florida. And we grow -- grew about a net growth of about 1,000 people a day, 356,000 people. And that makes us the third most populous state in the union. Combine all that, I feel real good as we start into 2019. And these bright people here could put a lot more flavor and color to it than myself. So John?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [4]

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All right. Thank you, Ernie. Good afternoon, everybody, and thank you for making time to join the call. I'm pleased to report that for the fourth quarter CenterState produced a record net income of $51 million or $0.52 a share. If you exclude merger cost, net income improved to $52 million and earnings per share increased to $0.54. That left us with an adjusted return on assets for the quarter of 1.68%, a return on tangible common equity of 20% and efficiency ratio that remained constant at 50%.

Several years from now, I believe, that when we pull out the CenterState yearbook, I think, we're going to remember 2018 for 2 milestones in our company's history. First is, crossing the $10 billion threshold, and second will be the expansion into the Atlanta, Georgia market. In order to effectively cross $10 billion, we closed on 3 acquisitions in 2018 to take us to $12 billion in assets and paid for the incremental cost of Durbin. One of their legitimate investor concerns of bank M&A is the potential dilution to tangible book value. Looking back, we are confident that we made the appropriate moves at the appropriate time when we had a strong currency.

The net effect of acquiring with a strong currency is the tangible book value per share grew by 11% in 2018 even with the completion of the 3 acquisitions.

I think we're also going to look back and recognize that we made the appropriate move into Atlanta at the only time possible. As far as bank M&A is concerned, 2018 was the year of Atlanta. 6 of the 8 largest banks in Atlanta sold during 2018 and CenterState acquired 2 of the 6, including Charter Financial and First Landmark as a part of the National Commerce acquisition.

Moving forward, we're going to have a $1.5 billion Atlanta bank franchise with a great leader in Stan Kryder. After we close with National Commerce, the CenterState franchise will be anchored with a $4.5 billion deposit franchise, along the Interstate 4 corridor, stretching from Tampa to Orlando to Daytona, a $1.5 billion deposit franchise in Atlanta and roughly $1 billion each in Miami and Jacksonville. So we positioned the company to operate with a reasonable scale and some of the best growth markets in the United States.

Things are progressing as planned with the National Commerce integration. Richard, Will and their team been a pleasure to work with as we make plans to combine our banks in the next few months. With their past integration experience and our 19-year personal relationship, we're finding it's very easy for us to reach a consensus and make decisions to keep things moving forward.

They released their earnings yesterday and experienced a great fourth quarter, with loans increasing 11% annualized and deposits increasing 12% annualized with a stable NIM. Things are moving forward as expected, with the regulatory and shareholder approval process with no surprises, and we anticipate the closing will occur in the second quarter, with the systems conversion in September.

As for CenterState, revenue trends were positive during the quarter, led by our interest rate swap business, our mortgage team and deposit service fees. Loan production was up 22% compared to the third quarter, resulting in net loan growth of 6%.

We experienced approximately $60 million of higher loan payoffs in the fourth quarter than we did in the third quarter, which slowed net loan growth by about 3%. Asset quality continues to improve, with our NPA ratio trending down every quarter this year to finish the year at 22 basis points.

Now I'll turn it over to Steve for a deeper dive into the revenue.

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [5]

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Sure. Thank you, John. Good afternoon, everyone. I will report out on 4Q earnings and year-to-date results, our fourth quarter revenue results as well as our updated expectations for both the balance sheet and revenue for 2019, including the acquisition of National Commerce.

Just to reiterate the fourth quarter results. For the fourth quarter, CenterState earned $0.52 a share. Adjusted for merger cost, we earned $0.54 per share, which compares to $0.35 per share or a 54% increase over the prior year fourth quarter.

As John mentioned, ROA was 1.68%, ROTCE was 20.2% and efficiency ratio was right at 50%.

As we look back for the full year, CenterState earned $1.76. Adjusted for merger costs, we earned $2.06, which compares to $1.41 in 2017, which is a 46% increase. For the year, ROA was steady at 1.67%, ROTCE was steady at 20.5% and efficiency ratio was at 51%.

Now moving on to revenue results. We had a nice pick up in revenue for both net interest income and noninterest income this quarter. Here are some of the components. Reported net interest margin increased 6 basis points to 4.37% in fourth quarter versus a 4.31% in the third quarter and higher than our guidance of 4.15% to 4.25%.

Loan accretion increased approximately $3.2 million from the previous quarter due to $1.2 million of additional cash income from PCI loan pool payoffs as well as a full quarter accretion from Charter acquisition.

If you exclude all loan accretion on acquired loans, net interest margin was stable, down 1 basis point to 3.87% this quarter from the previous quarter, with the full effect of the lower-margin Charter Bank.

This core margin did increase 7 basis points from 3.80% in the fourth quarter of 2017.

During the quarter, the originated loan portfolio yield increased 6 basis points from the previous quarter, while new funded loan production yields increased by 11 basis points to 5.19%. Even as John mentioned, loan production increased 22% or $109 million from the previous quarter. Investment security yields increased 18 basis point for the quarter, due mainly to the reinvestment of the Charter investment security portfolio in the current quarter.

Lastly related to margin. Total deposit costs, including DDA, increased 9 basis points from the prior quarter to 51 basis points, mainly due to the repricing of CDs in a higher rate environment, along with the impact of higher Charter cost to deposits for a full quarter.

Total deposit beta for the quarter, including noninterest-bearing DDAs, was 36%. Total deposit costs are up 34 basis points from the bottom in rates in September of 2015, which represent a 15% beta. Total deposit beta over the last 4 rate hikes has been 27%, as deposit costs have increased 27 basis points since December of last year.

Moving on to noninterest income. I'm pleased to report that we've exceeded our stated goal at the beginning of the year of bringing noninterest income to average assets to 1% by this quarter.

During the quarter, noninterest income, as a percentage of assets, increased from 96 basis points in the prior quarter to 105 in this quarter.

As you may recall, we started the year at 91 basis points, so a 14 basis point improvement from the beginning of the year due to the investments made over the last few years in these revenue streams. Recurring noninterest income more than doubled from the previous year fourth quarter even as the bank efficiency ratio continued to improve from 56% to 50%.

For the quarter, the $5.2 million increase was primarily due to correspondent banking revenue, mortgage banking revenue and the full effect of Charter on the quarter.

Correspondent banking revenue increased to $1.7 million from the prior quarter and $3.3 million from the prior year quarter, mainly due to higher interest rate swap revenue. For our interest rate swap program, the fourth quarter marked a 47% increase in notional volume as well as an increase of 11 more client banks using the product than in the third quarter.

Interest rate swap revenue and pipeline is strong and should continue to be a tailwind in a flat yield curve environment.

Mortgage banking noninterest income increased approximately $1 million from the prior quarter but increased by $3.6 million from the fourth quarter last year as we fully build out this line of business.

New loan origination was a record $244 million compared to $180 million in the third quarter.

Additionally, a full quarter of noninterest income from Charter Bank added approximately $2.7 million for the quarter.

Now moving on to the 2019 balance sheet and revenue guidance. For the current quarter, loan growth approximated 6%, core deposit growth was 2%. As John mentioned, NCOM in their release last night showed a very solid fourth quarter with 11% loan growth and 12% deposit growth.

We reiterate our guidance for loan growth in 2019 to be upper single digits, while total deposits are expected to increase mid-single digits. So there's no change in guidance from the previous quarter.

Secondly, net interest margin. For the current quarter, our reported margin was 4.37%, while NCOM was 4.74%, which combined would be 4.47%. Excluding all loan accretion on acquired loans, our net interest margin for the quarter was 3.87%, while NCOM was 4.47%, which combined for the quarter would result in a core margin of approximately 4%.

Based on our forecast, we reiterate our net interest margin guidance of 4.15% to 4.21% -- 4.25% before the closing of NCOM and to 4.25% to 4.35% after the closing of NCOM, with a nice increase in core margin ex-loan accretion to approximately 4%.

Lastly, as we mentioned before, noninterest income to average assets was strong at 1.05% for fourth quarter, which increased from the prior quarter. We would expect to start the year around 1% and to continue to grow from there. NCOM has a noninterest income to average assets of 49 basis points, which combined would result on around 90 basis points before the effects of Durbin in the back half of the year.

With that, I will turn the call over to Jennifer to discuss noninterest expense, allowance for loan losses and taxes for the fourth quarter as well as 2019 guidance.

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Jennifer L. Idell, CenterState Bank Corporation - Executive VP & CFO [6]

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Thank you, Steve. First, regarding noninterest expense. The company recorded $77.9 million of noninterest expense before merger-related costs compared to previous guidance of $75 million. This variance is attributable to 3 main items: First, as Steve mentioned, both correspondent and mortgage had increased revenue in the fourth quarter, which resulted in increased variable compensation costs of approximately $1 million. And as we mentioned in the earnings release, another $1.1 million is related to legal costs as we worked through and finalized immaterial cases of obtained from acquired banks. And finally, the fourth quarter typically has increased employee benefit cost, such as incentive and health insurance accruals which round out the remainder of the variance.

So as we look forward into 2019, we anticipate noninterest expense in the first quarter to be consistent with the previous quarter at $75 million to $76 million. We will fully integrate Charter Bank after the conversion of the core systems, which is occurring later this quarter. We expect to realize the remaining cost saves beginning in the second quarter, as originally planned for Charter.

As we anticipate the acquisition of National Bank of Commerce, we continue to expect cost saves of approximately $22 million per quarter to be fully realized beginning in the fourth quarter of 2019.

Next, provision expense and the allowance for loan loss. The company recorded $2.1 million of provision expense in the fourth quarter, which is within the range of previous guidance. Allowance for loan losses on the originated loan portfolio is 88 basis points. Credit quality remains good, with nonperforming assets consistent quarter-over-quarter at 22 basis points and net charge-offs for the full year 2018 were 2 basis points.

As we forecast loan growth and credit for the first quarter, we anticipate provision expense to be approximately $2 million to $2.5 million.

Finally, the effective tax rate. The company's effective tax rate in the fourth quarter was 23.8%, which is also in line with previous guidance. We anticipate the first quarter effective tax rate to be consistent between 23% and 24%. Thank you.

This concludes our discussion of the fourth quarter results. We're happy to answer any questions you may have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [2]

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Wanted to just start on the fee side, the mortgage production was very good and up versus the industry down. And just wondering if you could give a little more color on kind of the State Bank lift out team and what their production levels were? And if any of the strength this quarter was, kind of, a pull forward of their pipeline that was moved over last quarter?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [3]

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Sure, Michael. So just to give you some stats maybe in total on the portfolio, I think, last quarter, in the third quarter, we had about $180 million production. This quarter ended up around $244 million of production. 82% of that was purchase, 18% was retail. As it relates to the gain on sale, if you netted it together is around 2.6%. And of the production, the $244 million, about 2/3 of that was secondary production and 1/3 of that was portfolio. So that's what if you do the math on that, that will generate your $4.2 million. If you looked at the state of our mortgage operation at the end of the fourth quarter, we have around, I think, it's 62 originators of which -- I forget the number, but it's somewhere around 17 or 18 State Bank originators. So it makes up roughly 1/4 of the originations staff may be a little bit more 30% of the origination staff. But that -- hopefully, that helps answer your question.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [4]

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Okay. So it was generally just good production, not necessarily some accelerated closing on the pipeline that was pulled over.

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [5]

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No. We -- it was good locks all the way through, and we actually lifted that team out in the middle of September. So this is really the second full quarter of those originators being involved.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [6]

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Okay. And then, similarly, just on SBA, obviously, I think, the industry as a whole has been facing a little more challenges there and that had been a decent growth area for you all. Can you just talk about the strategy going forward, doubling down in that area? Or do you look to kind just pull back there? Any outlook?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [7]

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Yes. We look at that as I think it's a -- it's been a small piece of our business. It's something that we want to grow. It's back to these fee lines of businesses, it's stuff that we've invested in. I think we have -- we've increased from about a year ago. We had about 2 or 3 originators. Now we have 12. And then, of course, with National Commerce, we'll add to that. So we're looking forward to growing that piece of business. It's a natural add on to what we're doing. I think, this year, we did a little less than $50 million in production. I think it was $45 million. And I think, next year, we're looking -- try to get to $75 million or $80 million of production. Obviously, those margins have come under pressure. And of course, with the government shutdown, we're not able to sell loans right now, but I imagine that will ease up, so I imagine over a full year you should see good growth year-over-year.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [8]

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Okay. And last one just on deposits. There was a bit of DDA outflow this quarter. Was that just kind of year-end movement from companies? Or you're seeing a little bit of attrition on some of the acquired deposits? And then any outlook? I guess, in the next year on betas overall, have increased to 34%, but you're going to broaden the markets that you can draw deposits from. So will that help on the deposit costs and funding going forward?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [9]

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Sure. Yes, if you looked at the last -- if you look at our average balances for DDA for the quarter, I believe, they were slightly over $3 billion -- $3.50 billion or so. I think, our ending balance was in the [$2.9 billion] something range, which is probably what you're talking about. I think there was some outflows of the last calendar day or 2. Some of that's picked back up. There were some correspondent bank things that move around some, but, yes, we'll see if that's a trend. But I think, the average for the quarter, if you look at that, is pretty consistent quarter-over-quarter. As it relates to betas, this quarter, again, it was 36%. I want to say that National Commerce is slightly higher than ours. So if you think about the NIM related to guidance from us and National Commerce, National Commerce has a bit more asset sensitivity on the asset side. So their floating rate loan percentage is 35 versus our 29. So you get a little bit better on the asset side, but their betas are slightly higher than ours. And so you kind of come back to the same place for the same -- with a different reason. But I would say those betas somewhere in that 30% to 35% range probably makes sense going forward, especially if the fed does raise it.

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Operator [10]

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And our next question comes from Bradley (sic) [Brady] Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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It's Brady. So maybe just start on fee income. It's nice to see it clearly above 1% this quarter. But kind of as you all said, once you add NCOM in there it goes down to 90 basis points, then in a post-Durbin world for you all, it's less than 90. Do you think that over time, you will be able to get back to that 1% level? Or are you thinking about fee income differently now that you're over $10 billion and you have NCOM in the mix?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [12]

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No, Brady, it's a similar strategy. And the holistic strategy there is to make sure we have diversified revenue streams over a long period of time, particularly, as we go through interest cycles. So interest cycles go up and go down. Sometimes, NIM is better. Sometimes, it's worse. But we would love to see our noninterest income get to -- get back to 1%. And we'd love to see fee revenue as a percentage of total revenues to be in that 25% range. That's going to take time on a bigger balance sheet to grow back up. But from -- fundamentally, from a goal perspective, we want to strive to get back to that.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13]

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And is that something that you think could happen by 2020? Or is it more longer term than that?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [14]

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Yes, I -- we haven't really I'd say forecast on that. I think it'd probably be a little steadier than that, maybe 5 basis point increase or something like that year-over-year. But I think, ultimately, what we've tried to do over these last 2 years that we knew we were going to have some growth from acquisition we felt like we would. We wanted to build platforms that we could add to. So that's the point on mortgage. It's the point on SBA. We didn't really have much of a platform at all 2 years ago. We wanted to build the infrastructure so that we can add on, so that we can grow fee income. And so we're not really able to forecast out 2020, but I would imagine that we like to grow everything good 10% around the year. So if we can do that, we should probably be able to get there within a reasonable time period.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [15]

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All right. And then John, you mentioned how active you guys were on the M&A side in 2018. A lot of that was Atlanta. As you look to 2019 with all the acquisitive growth that just happened and NCOM hasn't even closed yet. I mean, do you think you'd take a breather on the M&A front in 2019? Or do you expect to continue to be kind of just as active as you all have always been?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [16]

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I think 2019, Brady, will be a year of integration for us. I think we kind of make the case of the activity levels we've had in the last 2 years were to get us over $10 billion and to get us to Atlanta. We've accomplished those goals, and we did it when there was inventory available. The amount of inventory is dwindled considerably. So I think, 2019 will largely be a year of integration.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [17]

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All right. And then, finally, for me. I use CenterState as my best idea for 2019. I think almost all of your sell-side analysts did the same. So congrats on that. But one of the pushbacks that I get pitching your story is, just hey, it's mostly a Florida franchise. If you look at where we are in the cycle, it feels like we're talking peak cycle timing and Florida is known to be more of a boom-bust state, and I just get a little push back. So I'd love to just get your thoughts on, kind of, where you think Florida is? I mean, do you think it's frothy? Do you think we could see any sort of near-term correction in real estate values or any economic weakness? Or is the market being too negative when they think about Florida?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [18]

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Yes, great. Thank you for the confidence to name us a best idea and the other analyst as well. And we pass that on to Will and Richard and Will commented back that the pressure is on. We want to make you guys look good. So you're putting a lot of pressure on us, but thank you for the confidence. As far as the credit cycle and as far as Florida, I spent the last week or 2 talking with our regional presidents and asking them that very same question, Brady, that you're raising. And the general answer that I'm receiving when they talk to their clients, is there's not a canary in a coal mine event right now. Nobody sees a clear elevated risk that causes concern from a real estate cycle standpoint. The thing that we've been pointing to for 2 or 3 quarters that we're watching closely now is the cap rates have dropped pretty low in South Florida and Miami, but they're still pretty reasonable in Central and Northern Florida and in Atlanta. So that's something that we're watching. Right now, all the trends are positive. One of the comments I received back, Brady, from one of the regional presidents in Georgia, Lee Washam, that I thought made a lot of sense just thinking about the client appetite to invest and borrow right now after the fourth quarter volatility in the equity markets. And I thought he phrased it pretty well. You really need to look at it differently from operating companies to real estate companies. Operating companies are receiving orders. They're bullish, they're growing their business and things are good. I think that real estate investors potentially got spooked a little bit by watching what was happening in the equity markets in the fourth quarter. And we might see a little bit of a pullback in commercial real estate investment, which might be okay. So for us, in the fourth quarter, we actually saw our nonowner-occupied CRE and construction portfolios decrease, while our owner-occupied C&I and consumer portfolios increase. So that gives you a little bit of flavor for what's going on in the Street.

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Operator [19]

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And our next question comes from Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [20]

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Maybe just following up on Brady's question. This is something you've talked about in the past, John. You've mentioned that you could grow probably 2x if not more, but the focus has really been on the highest quality credits. And I guess, in the context of no signs of any real deterioration at this point. Do you think you've maybe put the brakes on too soon? And then, as we move forward, given the higher C&I mix at NCOM, I mean, do you actually see better opportunities outside of Florida on the loan growth side, specifically as it relates to C&I? Any color would be great.

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [21]

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Yes, sure, Michael. We're paid to be cautious and to be forward-looking and look for risk in the future. We're not seeing any clear risk. We're not seeing an abundant supply in any particular areas. It seems like there's been a little bit of a wall of worry the last couple of years, which is a healthy thing in the latter part of a cycle. And as we're seeing some of these commercial real estate projects start to -- the amount of new activity, maybe moderate a little bit. I do think headed into 2019, as I mentioned in my prepared remarks, with National Commerce, we are bulky enough to franchise in the metro markets in Atlanta, Orlando, Tampa, Jacksonville. So those are going to be growthier markets than some of the suburban markets. So I feel like it's appropriate for CenterState to continue to push and be thinking about upper single-digit growth.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [22]

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Okay. That's helpful. And then maybe just one clarification on the margin. I just wanted to make clear what your outlook assumes and what it doesn't? I mean, are you including any rate hikes? What are you assuming for the shape of the curve, et cetera?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [23]

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Sure, Michael. It's Steve. As it relates if you put National Commerce and us together at the fourth quarter, our core NIM would be around 4%. And so without any rate hikes, our assets and liabilities sensitivity is about the same as a combined company as a stand-alone. So flat, no more rate hikes, basically, I wouldn't expect any margin expansion or detraction. If you -- we get a 25 basis points or 50 basis points, I'd expect 1 to 2 basis points of margin expansion for each of those hikes, if we get them. But I would say based on what we look like today, flat would be probably an appropriate core margin to look at. And then, from an accretion perspective, approximately 30 basis points or so on a pro forma basis.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [24]

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All right. Maybe just one broader one for me, back to John. You guys have grown pretty substantially over the past 10 years. It's been nice. It's been a great story to watch. How has the culture changed? And as you execute in this metro market strategy, clearly, the credit size has gone up. Is there any concerns around that? And just broadly speaking, how was -- how do you maintain the culture as you build at the firm?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [25]

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You bet, Michael. We have grown rapidly. And that's the challenge for Ernie, myself, other leaders in the company to continue to maintain the culture that attracted people to us in the first place. And that's why made it our #1 priority of our top 4 priorities the last 2 years. We brought on David Salyers from Chick-fil-A who kind of led a lot of that effort for them for Chick-fil-A and then also Jody Dreyer from Walt Disney Co. to our board and our culture committee. So one of the steps we take to work on the culture is an engagement survey process. I think we had 86% response rate to our engagement survey this last summer. A lot of great constructive feedback. I will tell you that the top responses from our employees were that CenterState is going in the right direction. And CenterState operates from a set of strong values. The area that we were weakest from a feedback standpoint from our employees was CenterState Bank does things efficiently and well. So I think, that speaks to the rate of growth. And I think, it's much more important that they feel like we're going in the right direction. And as we work through this year of integration, continuing to improve how well and efficiently we do things. But then continuing to look to companies we admire, like Chick-fil-A, Southwest Airlines, Publix and try to learn as much as we can from them.

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Operator [26]

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Our next question comes from Stephen Scouten with Sandler O'Neill.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [27]

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I was curious if you guys could give a little color around the composition of growth from a geographical perspective, maybe how much Atlanta, in particular, contributed to the uptick in origination levels. And if there was any material change in kind of average loan size this quarter versus the previous?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [28]

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Yes, Stephen, it's John. I'll kind of give you the information of the way I've got it presented in front of me. For 2018, our top markets, #1 was Broward County, Fort Lauderdale, #2 was Orlando, #3 was Lakeland and #4 was Tampa from order of highest production. From a pipeline standpoint, our biggest growth in our pipeline has been in Jacksonville. Atlanta has been -- we just entered Atlanta with Charter last quarter -- third quarter. So we're in the process of integration there. So I don't know that we've got enough of a length of data to show you trends yet in Atlanta, but we're bullish. That's an area that we're going to continue to hire lenders and continue to grow. And like I said, we're very excited to be working with Stan Kryder, who would be our leader up there. Ernie and I were talking about it before the call back when we all worked together at First Union 25 years ago. So we're excited to work with Stan.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [29]

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Okay, nice. And just in terms of average loan size, with that -- any changes there?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [30]

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Yes. So the average loan balance in the company is $200,000. So it's pretty granular, pretty low. But I would tell you that each quarter, as we continue to grow that average new production is drifting up. I don't have the exact number, but it's not to the point where it's getting chunky. If you looked at our top 25 loans in the company relationships, it gets down to around $10 million or $12 million at that number, 25 range. So I'd say you're going to see more and more loans that will be in that $3 million, $5 million, $7 million, $8 million range so it will drift up, but it's not going to -- we're not going to best to form and make it a chunky balance sheet.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [31]

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Okay. Great. And then maybe just thinking about potential for share buybacks. I know you guys haven't really been able to take advantage when the stock has been lower than it is today, but I'm curious kind of what your willingness is regarding share buybacks today? And maybe even how feasible that is today with the pending merger?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [32]

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Yes, great question. We put a share buyback plan in place back in 2017, I think, was when the hurricane came through and the stock really dropped. We've reaffirmed that. As a matter of fact, it was in the 8-K today that we have that available to us, and we intend to keep that option available. But to your point, we are limited on how we can exercise our buybacks right now with the pending deal with National Commerce, but we're really going to have to get through that National Commerce deal and then look at the stock where it is. But I wish we were in a position to buy back in December. We would have.

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Operator [33]

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And our next question comes from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [34]

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I just want to be super clear on the margin guide. So the context that's how you presented the 4.15% to 4.25% guide for the near term before NCOM closes was the 3.7% core NIM. So I just want to be clear, the 4.15% to 4.25% and then 4.25% to 4.35% with NCOM, is that GAAP or core?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [35]

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Yes. So sorry, Tyler, if I was confusing there. So the 4.15% to 4.25% before NCOM is GAAP. Core is that 3 in that same flat range where we are at 3.87%. When you include NCOM on the reported -- or, excuse me, the GAAP number, that ranges from 4.25% to 4.35% when we get this -- when we close sometime in the second quarter from then on.

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Tyler Stafford, Stephens Inc., Research Division - MD [36]

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Okay. Just wanted to double check. And then any idea yet how much the incremental CDI piece, if you guys did decide to exercise that remaining 30% ownership, would impact the margin?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [37]

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We modeled that. I don't have that number in front of us, but we have modeled that out.

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Tyler Stafford, Stephens Inc., Research Division - MD [38]

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Okay. But it is or is not included in the margin guide, as it stands today?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [39]

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Yes, it's -- I think we're expecting all things being equal that will happen. So that's included.

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Tyler Stafford, Stephens Inc., Research Division - MD [40]

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Okay. Got it. Is there any remaining balance sheet repositioning from Charter that's left to go?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [41]

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No. We took an opportunity, and glad we did, in the fourth quarter to reinvest their securities portfolio early on when reals were a little higher. So we did that most of that reinvestment in October and first part of November. So there's nothing -- no other positioning. No selling of loans or anything like that, that we would be -- we'd be doing.

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Tyler Stafford, Stephens Inc., Research Division - MD [42]

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Okay. And then just one on operating leverage. Obviously, Durbin after July is going to hurt the revenue side. But do you still think that you can drive positive operating leverage despite Durbin this year?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [43]

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When you -- just to make sure I'm clear, when you say drive positive operating leverage, is that what you're saying continuing to keep over a 1% tin-canned average assets or what do you mean?

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Tyler Stafford, Stephens Inc., Research Division - MD [44]

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I guess I was thinking about them in the context of further improvements in the efficiency ratio?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [45]

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Oh, yes, got you. I understood what you're saying. Yes, so I guess, for us, if you think about putting National Commerce and us together and if you think about the consolidation of the systems happening in the third quarter, by the fourth quarter, we should be fully phased into that. And we believe that we would have upside to the efficiency ratio. I think, this quarter, it was slightly over 50% that we could get in the high 40s as we get everything consolidated together.

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Tyler Stafford, Stephens Inc., Research Division - MD [46]

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Got it. Very good. And then just last one for me. Any early stab or attempt, color you could share on CECL impacts?

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Jennifer L. Idell, CenterState Bank Corporation - Executive VP & CFO [47]

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So -- yes, this is Jennifer. So currently, we've been working through our models and doing that. We've done, kind of, a first look at our financial impact, but we're still working through that. So we're on track with that, but we're not in a position to kind of talk about the financial impacts of that yet, but we are doing that. And we did that in the fourth quarter, and we're continuing to work through that. So we're on track with that. I think the goal is to continue to run parallel with CECL versus the allowance all throughout 2019 in preparation for the Jan 1, 2020.

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Operator [48]

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And our next question comes from Blair Brantley with Brean Capital.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [49]

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Just a quick question on your deposit growth outlook, you're going from mid-single digits, correct?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [50]

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Yes.

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Blair Craig Brantley, Brean Capital, LLC, Research Division - SVP and Senior Equity Research Analyst [51]

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Can you give us kind of a sense as what you think from a mix perspective may happen? Or kind of what you're expecting? And also, maybe a view as to what kind of rates are necessary out there to really grow deposits?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [52]

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Sure. As I think about this past year, Blair, just around your deposit question. We started out this year pro forma for the 2 acquisitions around 85% loan-to-deposit ratio. And our idea was to drive deposits as best we could early in the year to get some -- we've had 7, 8 basis points of margin expansion over the year. And as you recall in our acquisitions, we've consolidated approximately 40 offices in this past year. So there's been a lot of, I call it, disruption and maybe a little bit of focus in the offices as we've combined a lot of offices together. So as you think about going forward, we clearly have a expectation around deposit growth and particularly checking accounts and particularly below that is small business checking accounts, not that we're -- we are building out some treasury management systems for some of our metro areas and we -- our HOA business is very good. But if you think about where a lot of the growth will come will be in the small business checking areas. And that's where we incent most of our growth. So I don't know if -- from a putting it on rate perspective, that's going to be market-specific. But I'd say, generally, money market rates in our place is somewhere between 1.5 and 2 and CD rates are somewhere in the 2.25 to 2.50 range in the 12- to 15-month range. So that's where those new deposits generally are coming on there.

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Operator [53]

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Thank you. That concludes our Q&A session for today's conference. I would now like to turn the call over to John Corbett for any closing remarks.

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [54]

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All right. Thank you very much for joining us today. Appreciate your interest in the company. We'll be traveling, and I think there's a conference with KBW in Boca Raton and Raymond James in Orlando during the first quarter, and we hope to see you there. Have a good day.

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Operator [55]

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Ladies and gentlemen, thank you for attending today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.