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Edited Transcript of CSFL earnings conference call or presentation 24-Apr-19 6:00pm GMT

Q1 2019 CenterState Bank Corp Earnings Call

Davenport May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Centerstate Bank Corp earnings conference call or presentation Wednesday, April 24, 2019 at 6:00:00pm 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 & Chief Administrative Officer

* John C. Corbett

CenterState Bank Corporation - President, CEO & Director

* Richard Murray

CenterState Bank Corporaton - CEO

* Stephen Dean Young

CenterState Bank Corporation - Executive VP & COO

* William E. Matthews

CenterState Bank Corporation - CFO

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Conference Call Participants

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* Brady Matthew Gailey

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

* Joseph Anthony Fenech

Hovde Group, LLC, Research Division - Managing Principal & Head of Research

* 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 thank you for standing by. Welcome to the CenterState Bank's First Quarter 2019 Earnings Release. (Operator Instructions) And now it's my pleasure to turn the call to Jennifer Idell, Chief Administrative Officer. You may begin.

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Jennifer L. Idell, CenterState Bank Corporation - Executive VP & Chief Administrative Officer [2]

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Thank you. We appreciate everyone joining the call this afternoon to discuss the company's first quarter financial results.

Joining me in our presentation today include: Ernie Pinner, Executive Chairman; John Corbett, President and CEO; Steve Young, Chief Operating Officer; Richard Murray, CEO, CenterState Bank; and Will Matthews, Chief Financial 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, everyone. I want to thank you for calling in. Your interest is of genuine importance to us, so we thank you for having that.

I'd just comment to say that we had a very busy quarter, when you think about the management closed and converted to CharterBank, which was the part of the Georgia operation. That's a good group of bankers. They meld well into our company. Thus, also lots of busy activity as the management prepared for the closing of NCOM and as you are aware, we did close that on April 1 but that's also an excellent group of bankers that fit very well into this company and make us stronger overall.

Because from my viewpoint, the last several months have confirmed my belief in the extraordinary leadership throughout the bank. The legacy leadership, working in tandem with both Charter and NCOM, has melded the cultures and the leadership into a very viable and promising group for our future and I take a lot of comfort in that and it's visible to me and I think it would be visible to you even today as you hear some of their remarks that will give you more color into some of the things they released last night.

So I'm going to turn this over to Mr. Corbett. 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 thanks for making time to call in. We did close on the acquisition of National Commerce on April 1 so they did not prepare a separate earnings release for the first quarter. So what we're going to do is briefly report on the CenterState quarter and then we'll ask Richard and Will to give you an update on National Commerce.

We filed a separate investor deck along with the earnings release that we attempt to provide you with some of the results of both companies, including a balance sheet and income statement for National Commerce for your reference.

For the first quarter, CenterState produced a net income of $44.6 million or $0.46 per diluted share. If you exclude the merger costs, net income improved to $49.5 million and earnings per share increased to $0.51. The adjusted return on assets for the quarter was 1.6%. The return on common equity was 18.5% and the efficiency ratio landed at 52%.

And we're also very pleased to see continued growth in tangible book value per share, which is up almost 19% in the last year.

As Ernie mentioned, it was a busy quarter for our team as we prepared to close National Commerce on April 1. But we also completed the systems conversion of CharterBank in February, which added about 65,000 checking accounts on to our platform.

Combined, the company is now $17 billion in assets with 163 branches in the highest growth markets in Florida, Alabama and Georgia.

Now that we have converted Charter, those cost savings will be achieved in the second quarter and the National Commerce conversion is still on track for September, so those cost savings will be achieved as well in the fourth quarter.

We still have confidence that we'll achieve the cost savings that we modeled in each deal.

We've been friends with Richard and Will for almost 20 years now but they've only been a part of the CenterState team officially for less than a month, and I've made a point to sit back and observe their camaraderie with our executive team over the last several months and it's very much like they've been a part of the CenterState team all along.

So I couldn't be more excited about the team we've built and the markets that we will serve over the next several years.

Deposit growth was solid for the quarter with demand deposits up $229 million and non-CD deposits up 9%.

Loan production softened from the fourth quarter and growth was flat but we don't feel like that's a trend and believe that the production will return to the levels we saw in the fourth quarter.

So I'll stop there, and I'll turn it over to Steve for a deeper dive in to our revenue.

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

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Thank you, John. Good afternoon, everyone. I will report out on the first quarter earnings results as well as our first quarter revenue results, including net interest income and noninterest income.

As John mentioned, for the first quarter, CenterState earned $0.46 per share. Adjusted for merger costs, we earned $0.51 a share, which compares to $0.50 a share in the prior year first quarter.

Adjusted ROA, ROTCE and efficiency ratio for the quarter was solid at 163 -- 1.63%, 18.5% and 52%, respectively.

Now moving on to revenue. Reported net interest margin increased 3 basis points to 4.40% in the first quarter versus 4.37% in the fourth quarter.

Excluding all loan accretion on acquired loans, net interest margin improved 3 basis points to 3.90% this quarter.

During the quarter, the originated loan portfolio yields increased 10 basis points from the previous quarter to 4.87% while new funded loan production yields increased by 15 basis points to 5.34%, which remains accretive to our originated loan portfolio yields.

Investment security yields increased 8 basis points for the quarter, mainly due to the fourth quarter effect of the reinvestment of the Charter investment portfolio.

Lastly, total deposit costs including DDA increased 6 basis points from the prior quarter to 57 basis points.

Total deposit beta for the quarter including non-bearing DDAs was 24%, which decreased from 36% in the prior quarter.

Moving to noninterest income. During the current quarter, noninterest income as a percentage of average assets declined from 105 in the fourth quarter to 96 basis points in the first quarter. But this also improved from 91 basis points in the prior year first quarter or approximately $6.3 million.

For the quarter, the decrease was primarily due to a decrease in correspondent banking revenue, seasonal changes to deposit service charges and a decrease in other noninterest income.

Correspondent banking revenue decreased $900,000 from the prior quarter but increased $900,000 from the prior year first quarter, primarily due to the change in interest rate swap revenue.

As you'll recall, this revenue fluctuates between quarters.

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 was flat from the prior quarter but increased by $1.6 million from the first quarter of 2018.

The mortgage pipeline is strong going into the second quarter.

Service charges and card income were down seasonally but increased significantly from the first quarter of last year due to continued organic growth in checking accounts and the positive impact of the Charter acquisition.

So with that, I will turn the call over to Jennifer to discuss allowance for loan loss and noninterest expense results for the quarter.

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Jennifer L. Idell, CenterState Bank Corporation - Executive VP & Chief Administrative Officer [6]

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Thanks, Steve. First, provision expense and allowance for loan losses. The company recorded $1.1 million of provision expense in the first quarter, which is less than previous guidance, mainly due to the lower loan growth in the quarter.

Nonperforming assets increased $11.6 million in the quarter, of which $9.4 million represents administrative delayed renewals of acquired loans.

Management expects the majority of these loans to return to performing status after renewal.

Net charge-offs for the first quarter were 4 basis points annualized.

Second, noninterest expense. The company reported $78.1 million of noninterest, expense excluding merger-related costs of $6.4 million. This is slightly higher than anticipated due to a few main items: there was $800,000 in payroll tax expense paid on annual incentives in the first quarter; we had $400,000 less credit in deferred fees due to lower anticipated loan growth; the company experienced $300,000 in fraud losses in the quarter; and finally, we incurred $300,000 additional FDIC insurance expense due to the larger bank status over $10 billion, which came into effect this quarter.

Additionally, as John previously mentioned, we completed the integration of CharterBank in the first quarter and are in line with expected cost saves.

Finally, the company's effective tax rate in the first quarter was 23%, which was also in line with previous guidance.

Now I'll turn the call over to Richard Murray.

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Richard Murray, CenterState Bank Corporaton - CEO [7]

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Thank you, Jennifer. As John said, the official close was April 1, but we're really almost 5 months into the integration of the 2 companies.

And while no 2 companies are identical, our initial thoughts about how these 2 companies would come together have only been reinforced as both teams have been working very closely together since that late November announcement, and we've really made a ton of progress.

The legacy CenterState team has done a great job of welcoming and orienting the National Commerce team, and we're all very excited about the future together continuing to build this bank.

So I'll make a few comments about changes in our balance sheet in the first quarter for National Commerce, and then I'll turn it over to Will to make some comments about the income statement.

While our quarter 1 loan and deposit growth has traditionally been soft at National Commerce, we had a pretty decent first quarter growth in both of those categories and feel pretty good about the environment. Loan growth was $43 million in the first quarter, 5.3% annualized from Q4, average loans were up just under 10%.

The growth was primarily in Alabama and Central Florida with the largest increases in one- to-four-family first mortgages as well as non-owner-occupied CRE.

The loan production was strong at $150 million in payoff, while not as high as what we experienced in Q4, were higher than what we had experienced in Q2 and Q3 of last year.

Deposit growth was about $59 million, 7% annualized from Q4 and was spread pretty evenly across our markets. The bulk of that net deposit growth was in interest-bearing checking accounts. This is not unusual for our Q1 deposit growth as we lose a fair amount of noninterest bearing as well as some interest-bearing municipal deposits that build up through the fourth quarter and empty out generally pretty quickly in the first quarter.

Asset quality remains in good shape. We only had 1 meaningful non-performer added to the list in the first quarter. It was a $2.3 million acquired loan. It was a C&I loan that we feel like is fully secured. Economic environment still feels good. The pipelines are either steady or growing depending on the market.

But that said, we're all cognizant of the business cycle and the realization that credits underwritten today will likely go through the next downturn regardless as to how severe or not that downturn will be.

So now I'll turn it over to Will, to give you a couple of income statement comments.

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William E. Matthews, CenterState Bank Corporation - CFO [8]

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Thanks, Richard. And just a quick one on National Commerce's first quarter. Our net interest margin taxable equivalent was 4.81%, which is up 7 basis points from the fourth quarter of last year.

If you exclude accretion and some of the accelerated loan fees associated with the April 1 closing, our core NIM was 4.45%, which is down 2 basis points from the fourth quarter.

Our loan yields were 5.99%, which is 11 basis points up from the fourth quarter of '18 or up 3 basis points if you exclude accretion in those accelerated loan fees I mentioned.

The bank-only core loan yields excluding the factoring portfolio were up 6 basis points, excluding accretion and the accelerated loan fees.

The yields on the factoring portfolio continued to be strong in the quarter but it represented a smaller percentage of the overall interest income in the quarter, about 9% versus 10% in the fourth quarter.

Our deposit costs were up 9 basis points from Q4 at 89 basis points for the first quarter.

On the noninterest income side, we had a record quarter in our merchant sponsorship business where we had revenue of about $1.1 million versus $835,000 in the fourth quarter and $720,000 in the year-ago quarter.

On the mortgage business, we also had a solid quarter, which is up slightly from Q4 and Q1 of '18 levels.

Additionally, you'll see when you look at the income statement in the slide deck for National Commerce, other noninterest income included a $1.4 million write-off of servicing rights associated with the SBA portfolio and that's, of course, merger-related.

And as you might expect, the first quarter was rather messy with respect to noninterest expenses due to the merger and including -- if you exclude expenses related to the merger, it looks our first quarter's normalized NIE was around $28 million.

Lastly, I just want to reiterate Richard's comments about our team's excitement about the opportunity to be a part of this company and the excitement we have looking ahead.

So with that, I think we're ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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So I know NPAs went up a little bit linked-quarter on the CenterState side. I think in the press release, you talk about some administrative delays and renewals. Could you just provide a little more color behind that NPA increase? And it feels like as soon as those get worked through the renewal process, those will come right back out of NPAs. Is that the right way to think about it?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [3]

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That's correct. Brady, this is John. Typically from an accounting standpoint, if a renewal goes 90 days past due, we immediately put it on nonperforming status even if we're planning on renewing it. And we had a series of acquired loans this past quarter where, looking back, we should've just renewed them for another 90 days in order to collect financial statements. We find sometimes that our documentation and financial statements requirements may be more than the customers are used to from an acquired bank. So looking back, we should've just renewed those another 90 days and not even had them on the NPL list, and we plan to get them renewed and not have them on there in the second quarter. So we don't see it as a deterioration of asset quality. It was more an administrative issue that we didn't clean up.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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All right. That makes sense. Then I know we have been talking about a net interest margin range for CenterState of 4.15% to 4.25% with NCOM adding about 10 basis points to that. So takes it up to 4.25% to 4.35%. But I also realize the yield curve and the outlook on rates has changed a lot from when we were talking a quarter or 2 ago. So maybe just an update on how you're thinking about the NIM going forward with NCOM in the fold?

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

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Sure, Brady. This is Steve. As you mentioned that just putting the 2 pieces and parts together, the current quarter, our margin -- reported margin was 4.40% while NCOM ex accelerated loan fees reported was around 4.47%. If you exclude all the loan accretion on acquired loans, our net interest margin was 3.90% while NCOM was 4.45%, which combines the core result in the margin of approximately 4%. So just to kind of finish the thought, based on our forecast, we continue to reiterate our net interest margin guidance that we reported from 4.25% to 4.35% with a core margin ex loan accretion from 3.95% to 4.05%. So no change in prior guidance.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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All right. And then with National Commerce, again, included I think your fee to average asset ratio is around 90 basis points. So it's below the 1% target and the 1% level that CenterState has been operating at. How quickly do you think you're going to be able to get that 90 basis point ratio back up to the 1% level?

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

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Sure, Brady. This is Steve again. I think this quarter, our noninterest income average assets was around 96 basis points, so a little bit below 1% but that fluctuates with some of the seasonal lines of business. National Commerce is around 50 basis points, so if you just kind of add them together, we're between 85 and 90 basis points post Durbin. I would say that it's a goal of ours to move noninterest income to average assets back up, but we don't have any particular target in mind in order to move it back over 1%. Clearly, with the $4 billion acquisition to get those assets to have a 1% from 50 basis points is going to take some time. So there's no express goal other than we try to grow organically at a really -- just a basis. But no particular guidance or goal there.

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Operator [8]

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And our next question is 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 [9]

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I wanted to just follow-up on that NIM guidance. Obviously, I understand you're kind of leaving it the same but also note that you're well above kind of that 4.15% to 4.25% range today. So what exactly is anticipated in there that kind of brings down I guess stand-alone CenterState from 4.40% to that 4.20% sort of range that we're not seeing in there today? Is there a buildup of increased deposit costs? Or is it on the funding side or what kind of color can you lend to that?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [10]

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Let me -- sorry, it's Steve. And let me try to summarize. So if we think about core margin, we do see an increase from our 3.90% level to 3.95% to 4.05%, so we see an increase in the core margin. As you think about reported margin, I think our reported margin this last quarter was 4.40%. What we're guiding to is 4.25% to 4.35%, which is similar that we had last quarter. The reason is as we think about accretion and accretion sometimes is highly unpredictable, but the marks that we have on National Commerce are -- and because of the size of the acquisition, the accretion as a percentage will be less just going forward. So that's where it takes it from 48, 49 basis points down to something low, almost half of that. Just because the...

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [11]

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Got it. Yes. Okay. Yes. That makes sense. Great. And then just any color you guys can give on the loan production this quarter. Were there any kind of things worth noting that led to the lower production? And what gives you confidence that those production levels will indeed kind of ramp back up to 4Q levels next quarter as you noted?

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Richard Murray, CenterState Bank Corporaton - CEO [12]

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Sure. Hey Stephen, this is Richard. The overall loan production in the quarter was pretty good. It was $600 million in the combined company and loan production tends to be a little seasonal with it being softer in the first half of the year more so than the second half and while payoffs were elevated versus 2018 as a whole, they were mostly flat, so that's not a big component of it. But the pipelines are still very strong. At CenterState, the legacy pipeline there is up 20% compared to the fourth quarter. The economy still feels pretty good. It's not really accelerating like it might have been in parts of the year last year but it's not declining either. But there are competitive pressures out there and I do feel like or we do feel like that the competitive pressures are increasing, but we are very mindful of where we are in the credit cycle and so we're keeping that all in front of us. But we do expect loan growth in the second quarter to be more pronounced than it was in the first quarter. We're still expecting or expecting a mid- to high single-digit growth going forward from today and so for the year being closer to mid-single-digit. But I don't know if there's any one thing to answer your question at the beginning that kind of played a role. There are a lot of things that play a role. It's kind of loan growth can be seasonal. It can be lumpy. And there's also credit discipline that we feel like we have especially at this point in the cycle, and so that kind of all plays a role.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [13]

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Okay. Helpful. And then maybe just last thing from me. On the expense side, obviously, I heard Jennifer's comments about some of the items that caused the range to be higher than expected. But can you remind us what the cost saves are from Charter that should come out in 2Q and kind of any renewed guidance around what that expense run rate should be on a combined basis?

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Jennifer L. Idell, CenterState Bank Corporation - Executive VP & Chief Administrative Officer [14]

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Yes. So we should be looking in the range, we realized some of that already, so we're looking at about $2 million or so a quarter coming up starting in the second quarter from Charter.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [15]

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Okay. And are you giving a kind of combined expense range kind of as a starting point? Or where are we looking there?

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William E. Matthews, CenterState Bank Corporation - CFO [16]

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Steve, this is Will. You've got to keep in mind that we closed our acquisition, the NCOM acquisition on April 1. The conversion for NCOM will be the 3rd week in September, so really won't start to see any of the cost saves from us to speak of until you get to the fourth quarter. So it will be -- our run rate pretty much staying like it has -- like it is for another couple of quarters before we really start to see cost saves on the -- out of the NCOM side.

But then we -- as Jennifer said earlier, the Charter cost saves, it looks like we're right on track on top of what we modeled, and we hope to be able to report the same when we get to the fourth quarter on the NCOM cost saves as well.

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Operator [17]

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And our next question is from Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [18]

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I wanted to follow up on the purchase accounting accretion kind of discussion. First, is there anything within the NCOM loan book or some of the acquired loans where there are shorter duration loans or something where the PAA will fall off more quickly for a certain portion of that and we should expect that on the next quarter or 2? Or any kind of color you can provide there?

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William E. Matthews, CenterState Bank Corporation - CFO [19]

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Hey Michael, this is Will. Really if you look at our 2 loan portfolios, they were remarkably similar. The only exception would be our factoring portfolio but that is so short that you -- that all the impacts of it are felt within the first 90 days because that average turnover of that book is 43 days. So if you mark a factoring receivable, you pull a mark back in by the end -- by that quarter, and so that doesn't really impact it at all. But if you look at the 2 core loan portfolios, they are remarkably similar. So no, there's not anything there. I think what Steve was referencing is that the mark -- we haven't finished the fair value marks but the expected fair value mark for our -- the NCOM loan portfolio will be lower as a percentage of total loans than what we have typically seen in some of our previous acquisitions. So therefore, the amount of accretable yield on that portfolio will be a little bit lower going forward.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [20]

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Okay. And then as we think about kind of a lot of those loans since you guys are so similar as you mentioned in terms of your underwriting, et cetera. It sounds like a lot of those will be refinanced. How should we think about kind of the provisioning level going forward as some of those get renewed at full provision? Just trying to think about that for the duration of the year.

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William E. Matthews, CenterState Bank Corporation - CFO [21]

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I don't know that we've got a great answer on that other than the similar nature of the credit make-up and the nature of both of us being secured lenders, we're probably pretty similar, probably default and probably pretty similar loss given default that I don't think provision expense relative to the loans movement from acquired to -- out of the acquired book will see fairly similar to what CenterState has experienced in the past, I would imagine, but that's a pretty high level answer because that's about all I can give you right now.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [22]

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Okay. And then just last one on the mortgage business. You guys have made a good bit of investment there on the -- at least on the CenterState side, especially, with the team lift out, et cetera. We've seen a lot of banks putting more mortgage production on balance sheet versus selling it just given kind of the rate outlook. Have you guys made any shifts in terms of your stance there or your expectations on how much you'll originate to sell versus retain?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [23]

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And Michael, if you looked at this past year, we were probably putting -- selling about 2/3 of the originated book and then keeping about 1/3 on the portfolio. Interesting enough in the first quarter, it went -- our production went more towards secondary than it did portfolio. I think we did maybe 80-20. I would expect that as we combine our 2 companies together, it would be in the middle somewhere so around 70% of the production would be on secondary and 30% somewhere in there would be portfolio. I think it has to do with if you think about the rate environment related to fixed rate lending, it's pretty attractive right now. So as the yield curve moves up and down, consumers right now are probably going to do more fixed rate and we're probably not going to put a lot of fixed rate loans on our books and that will go into the secondary. But if there's an environment where the rate curve changes a little bit and the ARMs are a little bit more attractive, we certainly would put some more ARMs on our portfolio.

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Operator [24]

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Our next question is from Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [25]

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Maybe one around CECL. So I know you guys got a lot going on with a few deals here and just wanted to know if you guys have done any initial work around the day 1 impact and then how the accretion will change when you flip over from PCI to PCD.

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William E. Matthews, CenterState Bank Corporation - CFO [26]

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Michael, this is Will. I can give you a high-level answer. We're not yet far enough along, particularly integrating the NCOM portfolio into the analysis, to be able to give you anything that would help you with your modeling. But other than just to tell you we're on track, we've run a parallel model first quarter. We are planning to do a second one in the second quarter with NCOM in it. We're in the middle of planning out all of our model validation work and things like that. But we're not yet at a point where we're ready to give any guidance on CECL's impact at this point. So have some patience and stay tuned and we'll hopefully be able to do so sometime later in the year.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [27]

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Okay. Appreciate it. And then now that the dust has kind of settled a little bit around a large acquisition, or at least it's been announced. Have you guys been able to size kind of the opportunity set that you think you see, particularly in the Atlanta market from that particular transaction?

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Richard Murray, CenterState Bank Corporaton - CEO [28]

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Yes, I guess you're talking about recruiting and -- relationship managers and -- for particularly new customers. Sure, I mean, recruiting new relationship managers is always very high on our to-do list. It was a year ago and it will be 30 years from now. The relationship manager count for the combined company is about 220. Our original goal at the beginning of the year was to add 20 to that number and that was unrelated to any particular opportunity and obviously, the one that you're referring to in Atlanta is a pretty unique event. It should provide some opportunities for us and we are proactively working on that. But we don't think it's necessarily a this quarter event for us and nor is it a situation where the talent at those 2 institutions is not being well taken care of.

But we are -- our proactive recruiting is not limited to this. We're recruiting every day. It's just part of our jobs and while our initial goal of adding relationship managers might have been 20 at the beginning of the year, if we have the opportunity to add 30 or even as many as 40 or so, if they were the right people, we would move ahead and do that. And we're certainly having ongoing conversations with several relationship managers in the markets you mentioned as well as other markets with obviously no guarantee any of them will join at any particular time, but it's an ongoing part of our job and it's an ongoing event for us. While this may provide a unique opportunity, it's something we've got to continue to work on all the time.

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William E. Matthews, CenterState Bank Corporation - CFO [29]

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And Michael, I'll just add that, that also impacts the noninterest expense comments I made earlier in that as you know when you hire a revenue producer, the expense precedes the revenue but if we think it's a net -- NPV-positive event for our company, we'll certainly hire them and that may cause a blip up in -- on our expenses but one that we think will be more than paid for by the revenue they produce going forward. So I'll make sure I throw that caveat out there.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [30]

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Okay. That's helpful. One final one for me just around capital. I know it's probably not on the table here, but it looks like capital will build pretty nicely as we move through '20 once the accretion from the deal is realized. How should we think about what you view as, on a combined company basis, more optimal capital levels are? And how you plan to deploy some of that capital outside of organic growth perhaps in increased dividend or buybacks?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [31]

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Yes. That's a first world problem, we didn't have 10 years ago. So we're grateful for it. And I think our capital levels are building pretty rapidly right now. We increased the dividend slightly in the first quarter. But we have got a buyback in place. We've had it for about 1.5 years, 2 years and so I think we look at that from an opportunistic standpoint, Michael. So we've been kind of blocked out of that for the last few months and we weren't able to participate in the buyback because we had the proxy pending for National Commerce. So I think, going forward, after this quarterly release, that is open to us and that's something that we're going to look real hard at.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [32]

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And remind us again how much you have in authorization?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [33]

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Yes. So 3 million shares.

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Operator [34]

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Our next question is from Joe Fenech with the Hovde Group.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [35]

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Just generally speaking with the Fed on hold here and setting aside the purchase accounting and NCOM, is it fair to say from a 40,000-foot view, the way to think about this is that funding costs generally level out here and then you still get some residual benefit with the 9 rate -- prior rate -- Fed rate hike cycle and through and if you agree with that, how long do you think it takes for that benefit to cycle through the earning asset side? Just trying to get a sense for how you're thinking about core NIM here from a conceptual standpoint and then kind of how long it takes before core NIM then starts to level out after you get the residual benefit of those 9 rate hikes in the numbers?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [36]

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Sure, Joe. It's Steve. A couple of impacts at play. As we think about the funding side, the deposit cost numbers aren't going to flatten out any time soon. I think they continue to increase, probably at less of a rapid pace, but continue to do catch up on CDs and so on. But -- and you will see on the loan side as well, one of the comments I made in my prepared remarks, was that our loan yields this quarter on the originated was around 5.34% new production yields while our originated portfolio, total portfolios is 4.87%. So we're being -- we're accretive every time we book a new loan to that originated loan portfolio. So I think the best -- without any big changes on the curve, I think we're going to try to hold our margins flat, probably don't expect a huge increase nor a huge decrease from here assuming the environment doesn't change. But you'll have some benefit from the loan repricing that we did 5 years ago. For instance, we have about 38% of our portfolio that reprices in the next year, so you'll get some benefit of the 5-year treasury, was lower 5 years ago and now we reprice it again on hybrid. But then there will also be some offsetting costs at the deposit side that will offset that. So I don't -- it's not a great answer to your question but I don't see any huge movement one way or the other.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [37]

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Great. And guys I know you have loan growth guidance out there but what would you consider to be the longer term organic growth potential at the current size with NCOM as part of that? I know cyclical considerations will play a role in that but if you were to think about it across the cycle, how would you characterize your organic growth potential as a $17 billion company here through the cycle?

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Richard Murray, CenterState Bank Corporaton - CEO [38]

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Joe, this is Richard. At National Commerce and at CenterState, prior to us getting together, both of us have had the -- sort of the goal and default that we should be able to grow at 10% a year in most categories each and every year over a long period of time. And so if your question is over a long period of time, I think we both still feel that way together or independent, we should be able to, based on the markets that we're in, the people that we have employed, the strong teams that we have, the leadership that we have in these markets. Over a continuous number of cycles, we should be able to average a 10% growth rate including in the loan portfolio.

In the latter part of the cycle, you would think that, that would be somewhat less than that, maybe at the beginning part of the cycle, you'd feel more comfortable at a higher growth rate. But over time, I think we still feel like a 10% growth rate would be appropriate for a company our size and in the markets that we're deployed.

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [39]

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And just to add to Richard's comment, we've run a model. It's very decentralized, the tough days were very similar at National Commerce and CenterState and so we have 33 community Presidents, 10 Regional Presidents that have their own balance sheet and income statement. So it really is at a lower level that gets built back up, so our goal when we do a budget over a long period of time, always starts at 10% and that has an expectation that everybody knows is coming and gets built from the ground up.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [40]

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Okay. And then just one last one from me. The credits on administrative renewal that will cause the increase in nonperformers, were those all from the same acquisition or were they across a smattering of deals?

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [41]

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Joe, it's John. It was a couple different acquisitions. It wasn't 1, it was 2 or 3. So it was a lapse on our part. We should've just gotten those things renewed for another 90 days to collect the financial statements, but we didn't. So it wasn't anything -- any one, in particular, institution.

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Operator [42]

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(Operator Instructions) And our next question is from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [43]

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I wanted to try one more time on expenses just to rein in the 2Q run rates. So $2 million coming out from the Charter cost savings plus the full quarter impact from NCOM. If I look at the P&L for NCOM in the deck, the expenses listed there were a lot higher than what I expected. Can you give us what the core expenses for $331 million for the first quarter would be that you'd expect to add for NCOM?

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William E. Matthews, CenterState Bank Corporation - CFO [44]

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Yes. Tyler, I'm sorry, I was -- I may not have spoken that clearly in my comments. But yes, it's around $28 million in sort of core expenses for NCOM in the first quarter if you back out all the noise. And so CenterState's core expenses excluding merger-related was around $78 million, which puts you at about $106 million right there. I think in our earlier comments about the merger when we first announced that once we got the cost saves out, you were somewhere in that $100 million range with the 2 added together after conversion and after the cost saves had been achieved. But that's not -- obviously not second quarter or third quarter that, that occurs.

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Tyler Stafford, Stephens Inc., Research Division - MD [45]

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Yes. But that $100 million range, that still feels reasonable to you after all the cost savings are realized?

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William E. Matthews, CenterState Bank Corporation - CFO [46]

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It does. Just with the caveat, there's no additional things that move forward against you. There is a hope out there that we can be successful recruiting some of these teams and as I said, we -- those always come with the expenses on the front-end and the revenue follows. So -- but that's one caveat.

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Tyler Stafford, Stephens Inc., Research Division - MD [47]

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Sure. Okay. Maybe one for Steve, just on the correspondent business. Can you give us a sense for what you saw on the fixed income trading side this quarter and then just expectations given where the yield curve is right now for the remainder of the year?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [48]

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Sure, Tyler. The fixed income business was down -- or actually is up a little bit in the first quarter, but it's not real meaningful. I think we had around -- the interest rate swap business was a little over $6 million of the revenue. I think the fixed income business was a little less than $2 million with another $1 million or so in payments revenue. So with the second quarter and as we kind of look forward and look at the yield curve and we really still think the interest rate swap business is very strong just because we have a flat yield curve and it slides a little bit lower.

The fixed income business, I'd say, probably, I don't see a huge improvement from here, although, I don't see a huge degradation from here either. Obviously, depending on the way the curves will change will affect both of us. But probably to some degree offsetting a little bit.

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Tyler Stafford, Stephens Inc., Research Division - MD [49]

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Okay. And then maybe just last one from me, just a minor one. On the fees for the quarter, anything in particular that stands out on what drove the other fee income line item $1.5 million lower this quarter and should that by anyway come back?

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Stephen Dean Young, CenterState Bank Corporation - Executive VP & COO [50]

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Yes. I think in the prior quarter, Tyler, there was a gain on the sale of branch real estate from one of the acquisitions that was in there. So I would expect that to be lower on a run rate that without is a little higher last quarter. But I think it was -- yes, this run rate is probably a little bit better this quarter.

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Operator [51]

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And sir, I'm not showing any further questions in the queue. I would like to turn the call back to John Corbett for his final remarks.

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John C. Corbett, CenterState Bank Corporation - President, CEO & Director [52]

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All right. Thank you for calling in today, and thank you for your interest in CenterState. We're planning to travel this quarter and we're going to be at the SunTrust Investor Conference in New York next month as well as the Gulf South Conference. So hope to see you all there. In the meantime, if you have any questions, feel free to reach out to any of us and have a great afternoon.

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Operator [53]

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And with that, ladies and gentlemen, we thank you for participating in today's conference. You may all disconnect. Have a wonderful day.