Capital Bank Financial Corp (CBF) Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Capital Bank (CBF)

Capital Bank Financial Corp (NASDAQ:CBF)

Q2 2013 Earnings Conference Call

July 24, 2013, 10:00 AM ET


Ken Posner – Chief, Investment Analytics and Investor Relations Executive

Gene Taylor – Chairman, Chief Executive Officer

Chris Marshall – Chief Financial Officer

Bruce Singletary – Chief Risk Officer

Jack Partagas – Chief Accounting Officer


Paul Miller – FBR

Brady Gaile – KBW

Ron Nash – Goldman Sachs

Blair Brantley – BB&T Capital Markets

Ken Posner

Thank you Alan. Good morning everybody. I’m Ken Posner, Chief of Investment Analytics and Investor Relations Executive for Capital Bank Financial Corp. And I’d like to welcome you to our Second Quarter 2013 Conference Call. Today’s call is being recorded.

During today’s call we will discuss certain non-GAAP financial measures. You will find a reconciliation of those measures to the GAAP results in the new release and slide deck. You can find the slide deck by going to the Investors page of our website and following the link to the second quarter earnings conference call.

As a reminder, this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements among others regarding Capital Bank’s expected operating and financial performance.

Any statements made during this call that are not statements of historical facts maybe deemed to be forward-looking statements the words, belief, anticipate, plan, expect and similar expressions are intended to identify forward-looking statements.

We caution that forward-looking statements maybe effected by risk factors including those set forth in Capital Bank Financial Corp’s filings with the SEC and in this morning’s new release, and consequently actual operations and results may differ materially. The company undertakes no obligation to update publicly any forward-looking statements.

At this time for opening remarks, I would like to turn the conference over to the company’s Chairman and Chief Executive Officer, Gene Taylor.

Gene Taylor

Good morning. Thanks for being with us today for our second quarter 2013 conference call. In addition to Ken Posner, I’m here this morning with our Chief Financial Officer, Chris Marshall; our Chief Risk Officer, Bruce Singletary; and our Chief Accounting Officer, Jack Partagas. We’ll make some remarks about second quarter results and then we’ll take your questions.

Let’s start by addressing our second quarter highlights on slide three of the presentation. We felt this was a good quarter for Capital Bank and a clean quarter. We reported net income of $11.1 million or $0.21 per diluted share. On the core basis which we track internally is a measure of the company’s earnings power this translates into $12.1 million or $0.22 per diluted share in line with the consensus estimate.

Chris will cover the non-core adjustments which were minimal this quarter. The company’s return on assets improved from $0.52 in the first quarter to $0.69 in the second. We remain very focused on our target of 1%.

We grew originations to a new record level of $302 million or 20% both sequentially and year-over-year. I’m optimistic that our origination momentum will continue into the third quarter which historically has been a seasonally low quarter for us.

Our net interest margin expanded by six basis points to 4.47%, this expansion reflects the full quarter impact of paying out pack cost, trust preferreds and continued improvement in our deposit cost and the benefit of deploying excess cash in the securities.

We also recorded additional accretible yields related to the Southern Community Acquisition. After closing the transaction nine months ago, we are now seeing better credit performance than we had projected.

Our Special Assets seem to had a strong quarter resolving a $133 million in problem assets which is well above $100 million loan rates of recent periods. In addition to the tireless efforts of the teammates we’re benefiting from somewhat stronger economic conditions and proxy values in much of our footprint. As a result, non-performing loans are down, the inflows are down, and ROA is down, while at the same time, our newly originated loan portfolio is performing well.

Finally, we ended the quarter strongly capitalized with a 2:1 ratio of 13.3% after completing a $50 million stock repurchase authorization. Tangible book value fell slightly to $17.75 as higher interest rates led to an unrealized markdown in the fair value of our securities portfolio.

As Chris will explain, the bank’s balance sheet is asset sensitive and higher interest rates should help our net interest income once they impact securities and loan yields.

Now, let me talk about some of our challenges. First, we’re getting very close to reporting net loan growth for the loan portfolio, but we didn’t quite get there this quarter. During the second quarter, the portfolio shrank by 1%, with just an improvement from the 2% shrink reported in the first quarter and 3% in the fourth quarter of 2012. Special Assets have done such a good job of resolving problem loans, we’ve enclosed to flat this quarter but we’re glad they did. We expect will return the corner on net loan portfolio growth during the second half of this year.

Legacy credit expenses remain high during the second quarter totaling $11 million and representing a significant drag on our profitability. Over time, as we work down our legacy problem assets, these legacy shrinkage should largely go away, and as they do, our earnings should benefit accordingly.

Finally, while there has been much talk of rising interest rates in most of wigs, we continue to see competitive pricing as the old banks in the market, until loan yields rise meaningfully we’ll be working to maximize net interest income by growing our loan portfolio and further reducing our deposit costs.

I’ll be back with some further remarks in a moment. Here is now, Chris is going to now discuss our financial results in more detail.

Chris Marshall

Thanks Gene and good morning everyone. I’m going to start my remarks by turning to slide four which summarizes our second quarter earnings. Now, as Gene mentioned, our core net income $12.1 million or $0.22 per share and that translates into a core return on assets of 69 basis points, which is a nice improvement from last quarter and totally in keeping with our projections. As you know, our goal remains 1% or higher ROA and we’re confident that we’re on track to achieve that over the next couple of years.

Our core income excludes non-core items totally approximately $1 million after tax which are detailed on page 18. But to summarize these non-core adjustments consisted of approximately $1.3 million in non-cash stock compensation expense related to our original founder equity grants. About $100,000 in data conversion expenses related to our Southern Community Acquisition, a $200,000 CVR accrual and approximately $200,000 in securities schemes.

Now, let me take a minute and give you a high level summary of our income statement. Net interest income was down sequentially by $600,000 or approximately 1% as expansion in our margin was offset by a small decline in the loan portfolio and I’m going to talk about that a little bit more in just a minute.

Core non-interest income grew by $2.4 million sequentially due to higher mortgage and debit card fees as well as slightly lower expenses associated with our FDIC indemnification assets.

The provision was down $3 million sequentially to $3.9 million and that was split evenly between newly originated loans and acquired legacy loans. And you may remember that our provision in the first quarter was unusually high due to a fraud related charge-off that was related to the single commercial credit. Overall, we’re very encouraged by credit performance throughout the portfolio including both new originations and legacy assets and Bruce is going to cover that in more detail in a few minutes.

And then finally, core non-interest expense rose by $1.1 million largely due to higher incentive accruals. So, given this overview let’s move into a little bit more detail starting with slide five, which summarizes our new loan production.

Now, as you know, we previously forecasted 20% year-over-year improvement in loan originations. And the past two quarters have been spot on that projection. Now our focus continues to be on building a high quality diversified portfolio and doing that by selectively investing in high quality sales force. This quarter originations were up 20% both sequentially and year-over-year but more importantly we made very good progress in expanding and top grading our team in Tennessee.

In addition to growth in commercial loans, we’re seeing a little more momentum with consumer loans which rose to 31% of total production from 29% in the prior quarter. Now, we’ve made good progress in expanding our consumer sales team in Tennessee over the past few months and expect that expansion to continue through the end of the year.

Overall, Florida and Carolinas have been consistently strong markets for us and with our new teammates in Tennessee now in place, we expect to see higher volumes out of that market in the second half.

As Gene mentioned, our loan portfolio declined by 1% and I’m turning to slide six here. It declined by 1% or $45 million during the second quarter which was an improvement from the 2% decline in the first quarter but still short of our goal generating positive growth. The one challenge we encountered was a pick-up in commercial real-estate pay-offs which rose from $38 million in the first quarter to $114 million in the second quarter.

Recently, we’ve lost some renewals in commercial real-estate loans to lenders offering long term fixed rates and that would include both Conduit Financing Sources as well as traditional banks.

Now, consistent wit our asset sensitive positioning and our commitment to limiting the bank closer to interest rate risk, we generally don’t fall for the long-term fixed rate loans and don’t expect to.

We also enjoyed a very strong quarter to specialize that loan resolutions as Gene mentioned, and that’s obviously good news from the perspective of reducing our legacy portfolio. But it obviously offsets loan growth. Our specialized teams resolved $133 million of problem assets during the quarter which was significant higher than our $100 million projection. Our Special Asset portfolio which includes all criticized and classified loans and ROA has now declined to $854 million.

Bruce is going to give you a little more color on that in a minute. But our consistent progress and working through these assets should give you a lot of confidence and our ability to dramatically reduce legacy credit expenses over the next two years.

Now turning to slide seven, which covers deposits you can see that we reduced deposit cost by 3 basis points and this improvement was a continued run-off of legacy high cost CDs as well as a small reduction core deposit cost which dropped 1 basis point from 15 basis points to 14.

Core deposit balances were down by about $90 million during the quarter and most of that was due to attrition in public funds and most of those accounts as you know have fairly unattractive rates.

We also had some run-off in our money market accounts due to the lower rates we implemented earlier in this year. And we’re fine with this type of attrition as our focus, as we told you in the past is on building a deposit base built around service oriented customer relationships rather than around hot money accounts.

And as you can see from the slide, our consumer bankers have done an excellent job of generating consistent net growth and checking accounts and that obviously builds well for future inflows of sticky low-cost deposits. Core deposits overall now stand at 60.7% of total deposits, which is up from 66% last quarter. And as a reminder the bank is 97% deposit funded.

Now turning to slide eight, we’ll take a quick look at our net interest margin, which expanded by six basis points from 441 in the first quarter to 447 in the second quarter. We benefited from the full quarter impact of paying up the series a high cost trust preferreds late in the first quarter. We also as Gene said redeployed some case in the securities. And we also had to continue improvement in deposit cost that I just mentioned.

Now, these positives help to offset pressure on loan yields which declined by 20 basis points to 617 as yields or new loans down just below 4%. New loan yields were down from the prior quarter because of a higher proportion of residential mortgages and some large commercial deals that we brought with variable rates. Commercial originations which was evenly divided by variable rates in Q1, we’re 53% variable in Q2.

As interest rates were rising during the quarter, we did adjust rates on mortgages and commercial loans slightly into the extent that competition allowed us to but we left our deposit rates unchanged.

The margin also benefited from additional accretable yield associated with the Southern Community loan portfolio, which Gene previously mentioned. Needless to say and while it’s still early, we’re encouraged by the positive developments in this portfolio and overall we’re very pleased with the quality of the Southern Community franchise, and the momentum we’re starting to generate there.

Now, while we’re pleased with the expansion in the net interest margin this quarter, we would continue to guide you to margin compression going forward as we continue to book new loans at lower yields and run-off in our portfolio. In fact, if you will order adjust for the accretible yields and the trucks pay-off, NIM in the second quarter would have compressed by about 10 basis points.

Slide nine, addresses core non-interest income. And if you look past the FDIC indemnification line, which we think of as an offset to our legacy credit expenses, core fee revenues increased modestly due to higher mortgage and debit card fees. With the recent rise in interest rates, our pipelines, our mortgage pipelines are down about 20% from their peak in early June and like everyone else we would expect to see some level of compression on gain on sale margins going forward.

Now, having said that we’re benefiting from a couple of tailwinds on our mortgage business. First of all, property markets are recovering very nicely in our footprint which is leading the growth and purchase transactions which count for about 65% of our application volume so far in July, which is up from about 50% in the second quarter.

Secondly, we’re slowly but steadily staffing up on mortgage sales force to a level as consistent with the reach of our 162 branch network. As of July, we had increased the sales force to about 30 people from 23 at the beginning of the year and expect to end the year at approximately 40 people.

Now, the purposes of modeling the FDIC indemnification asset bear in mind that that’s going to fluctuate with the level of losses or recoveries we recognize in the covered portfolio. And quarters without any type of unusual levels of losses or recoveries, we would expect about $1 million to $2 million of expense each quarter.

The slide 10 shows you the trend in core non-interest expense, which as you know is a very important focus for us. And looking past the ROA write-downs which Bruce is going to cover, you can see we had a slight increase in other core non-interest expenses which is almost entirely the higher incentive accruals I mentioned earlier.

I’ll briefly point you to slide 11, which gives you some information on our liquidity and capital. I’m sufficed to say that we have very strong liquidity and a very strong capital base. And following the completion of the $50 million stock repurchase that we completed last quarter, we ended the quarter with tier-one ratio of 13.3%.

With the recent volatility interest rates, I want to take a minute to discuss our asset, we’ll remind you of our asset sensitive positioning which is summarized on slide 12. As we’ve told you, our business plan calls for us to maintain a conservative posture with respect interest rate risk. And we have been consistently asset sensitive since we began operations.

You can see in the chart on slide 12, which shows our asset or sensitivity to up 300 and down 100 basis points rate chart over the last 18 months. And to help you better understand our asset sensitive position, we provided duration estimates from our outgo model for the assets and liabilities on our balance sheet.

As you can see our asset duration is just slightly over one year and that’s largely because half of our loans are variable rate. And you can also see that our liabilities are longer in duration estimated about two and half years and that’s largely due to the strong core deposit base and because many of our legacy CDs are longer dated.

So, with liabilities having longer duration and assets obviously you’d expect our earnings to benefit in an environment where rising interest rates cause loan yields to widen relative to our core deposit rates.

So, with that, let me turn it over to Bruce who is going to talk a little bit about our credit trends.

Bruce Singletary

Thanks, Chris. Turning to slide 13, you can see that our originated portfolio of $1.8 billion is performing well. Past dues are very low at 20 basis points, only 1.2% the originated portfolio is clear sized and classified. Non-accruals were at 35 basis points, which is, down from 80 basis points in quarter one.

Turn to slide 14, as you get an update on our progress and resolving Special Asset portfolio. As previously mentioned, Special Asset resolutions of $133 million in second quarter was a record to our company. Non-performing loans failed 6.7% from 7.8% in the prior quarter. Your inflows in the non-performing status, was $33 million which is the lowest in the past five quarters.

I’m pleased with the progress we’re making with exposing of ROA. Last quarter I mentioned that we had a $28 million in ROA and contract, which was 20% of that portfolio. During the second quarter we in fact sold $28 million of ROA and did so of net gains of $2 million. I’m encouraged that we entered the third quarter now with $38 million on contract which is 26% of this portfolio.

Turning to slide 15, legacy credit expenses increased in the second quarter, the reason is, last quarter, we recorded a mega provision of $3.1 million for legacy portfolio to cover impairments taken in prior quarters. This quarter, with the provision on this portfolio was $1.9 million, which no more less mortgage.

I’m pleased to mentioned that a $2 million gain on sale of ROA in the quarter, despite the gains, total ROA expense remained high at $6.2 million with a stronger economic backdrop and the stabilization of profit values, I’m optimistic this calls for fall-over time, we just hope to project when this will happen.

That concludes my comments. And I’ll now turn it back to Gene for concluding remarks.

Gene Taylor

Thanks Bruce. As I mentioned earlier, we were pleased that we reported a higher level of return on assets of 0.69 this quarter up from 0.52 last quarter. Also our return on equity was 4% up from 3%, while they are improved, these metrics are clearly not at levels consistent with our business plan or what you as investors would regard as appropriate levels of return. 1% return on assets is very important target for Capital Bank. Over time, we will drive down legacy credit expenses, but we will also as contained with low interest rates and competitive costs. That’s why generating net loan portfolio growth is becoming number one priority followed by continued improvement and deposit cost, higher fee income and appropriate management of expenses.

On a normal level of capital, a 1% return on assets would translate into double digit return on equity. At present, our return on asset equity is dampened by significant excess capital. Over time, we would deploy this capital through acquisitions or returning it to investors.

As we would improve our return on assets and thoughtfully deploy excess capital, we believe we would generate attractive returns to our investors, which in turn should lead to higher stock price.

Ken Posner

Thank you, Gene. This completes our prepared remarks this morning. And now I’ll ask Alan to open the floor for your questions.

Question-and-Answer Session


Thank you, sir. (Operator Instructions). And we would take our first question from Paul Miller with FBR.

Paul Miller – FBR

Yeah, thank you very much. Hi Gene, can you talk a little bit about – did you bring any more new lending teams on-board this quarter? And can you remind us how many teams you have and I think you’ve told us last time and where you are on that aspect?

Gene Taylor

Hi Paul, good morning. And the answer is yes, we brought on new teams, we brought on later in New Tennessee named Brian Reeves who had 25 years at a competitor and is going to make a huge difference for us in New Tennessee. And he likewise will have people join him. So, and frankly we needed to do better there, I didn’t have the skill-sets in place to attack the middle-markets, the way I wanted.

And so, we brought on both commercial bankers and treasury management people that are new. My performance there was not up to my standards. And these people have the skill-sets to do the job. And we’re adding in South Florida, and we’ve added in the Carolinas. It’s a cost of battle as you know in this business. They have the right people at the right place to take care of the cost.

I’m proud though what we’re doing Paul. We’ve got a good mix of the historical people that were there that know the customers and can take care of them. But we’re supplementing them in every place with people with appropriate skill-set particularly in middle-market banking and treasury. And credit management, portfolio management, Bruce and I work together daily in the acquisition of both people and new assets.

Paul Miller – FBR

And how long does he take when you bring on these teams to start to really add to the portfolio but it takes a little while, doesn’t it or can they add other gate?

Gene Taylor

It’s very based on, they’re half as good as they told me. The real answer though is if you look at the $302 million in the past quarter, you can see that we are – we’re getting traction. At the very time we’re seeing this big run-off that we would want, you would want as an analyst and our investors so they want PS grow. So we’re doing it in my view on both side, Bruce and the Special Asset teams worked, the numbered 854 and problem assets and dramatically reduce the inflow in advance.

So, on new people, will it vary, sometimes you get people that are able to do it right away and some others it takes a little longer. But I have clear, consistent, concise communication with people who want to perform.

Paul Miller – FBR

Okay. And to change a little bit, on the net interest margin guidance for modeling purposes, you talked about if you didn’t do any capital – I mean, really any liability management over the quarter, the name would have been down 10 basis points. Is that something that we could expect this quarter also, or is that just too steep?

Gene Taylor

No, Paul, we’ve generally guided towards about that level of margin compression quarter over quarter. We’ve just been positively surprised by higher cash estimates over the last two quarters. So, we’ve had two quarters of expansion of – without those cash flow improvements 10 basis points compression is probably a good expectation.

Paul Miller – FBR

And you don’t think you can get – I mean, initial surprise that same type of cash flow movement?

Gene Taylor

Say it one more time.

Paul Miller – FBR

I guess, you said, I mean, holding everything common that’s what we can expect over the next couple of quarters?

Chris Marshall


Paul Miller – FBR

Okay. All right, thank you very much.

Gene Taylor



And we would take our next question from Brady Gaile with KBW.

Brady Gaile – KBW

Hi, good morning guys. I’m a little surprised we didn’t see another buyback authorization. Can you just give us your updated thoughts on the buyback given you repurchased a lot this past quarter at 17.50 your stock is now closer to 20? Are you still interested in repurchasing from stock here?

Chris Marshall

Yeah, I think the way Gene put it is exactly what we said in the past Brady. And that’s if – we are going to deploy capital through acquisitions on an acceptable schedule of over going to return them cash to our shareholders and that may include another buyback in the future. But obviously we haven’t announced anything to date. But our commitment to making efficient use of capital hasn’t changed at all.

Brady Gaile – KBW

Okay. And on the acquisition front, I think I heard you guys enter quarter at a conference talk and somewhat downplaying acquisitions, mentioning that it’s harder to get regulatory approval now. I guess, Gene, can you give us your thoughts on the likelihood of your actually doing a deal near-term in the regulatory environment for getting the deal approved?

Gene Taylor

I’ll do the first part and then the second part on the regulatory. The first part is, we continue to be in discussions with numerous targets of interest as you already know and everyone on the call knows, we intend to be a disciplined acquirer on pricing. And we’re prepared to be patient.

On the regulatory front, we have a track record of once we announce a deal of being able to close and that would be our intent. There is a lot more activity and a lot more discussion and lot more people are talking and you see it in all the other clients are speaking with. What we try to do for our team for (inaudible) just to keep our dialogue going with people. And it’s something developed is developed but I want to emphasize we intend to be a disciplined acquirer on pricing.

Brady Gaile – KBW

And lastly, the 1% ROA, is that dependent on either a higher interest rate environment or capital deployment through acquisitions or can you get through one ROA without those two?

Chris Marshall

No. The 1% is, assumes no change in interest rates and does not assume acquisitions. The biggest lever there is as we mentioned earlier is the improvement in legacy credit expenses, $11 million this quarter, we would expect at the current level of resolution, again it was $133 million in the quarter, we’ve previously forecast $100 million, $133 million means we’ve resolved that portfolio in two years or less. And over that period of time we expect the bulk of those legacy credit expenses to go away.

Brady Gaile – KBW

Okay. All right, thanks for the color.


(Operator Instructions). We will take our next question from Ron Nash with Goldman Sachs.

Ron Nash – Goldman Sachs

Good morning guys.

Gene Taylor

Good morning Ron.

Ron Nash – Goldman Sachs

Just a question on the outlook for loan growth and loan originations. It seems like you guys had a nice ramp up in the quarter and the teams from what – at least what we referred from some others that – the South East seems to be improving at a pace better than other parts of the country. So, I guess the first question, is that consistent with what you’re seeing and as you look across the different parts of the market in commercial real-estate and regular commercial. Where are you seeing a pick-up, is it mostly in multi-family, are you seeing it moving down to small business and type of all that?

Gene Taylor

Hi Ron, Gene. We’re seeing it across the board. We don’t do much commercial real-estate or much multi-family that sort of thing. Bruce and I and Chris and Ken committed when we got our charter from our OCC in the fair that we would be very powerful relative to real-estate binding in. We’ve brought that portfolio down from approximated 50%, we’re now just below 30%. And we’re numbered in the 20s and that’s the number we’re comfortable with. But we don’t do a lot in that space. So I can’t comment on that as much as maybe others would.

We’re seeing good growth in our business lending across the board, whether you would define it as small business or business banking or commercial banking or middle-market lending. We’ve – in achieving that $302 million growth that was clearly driven by improvements in our market share in each of those categories. And so, I think that other banks are benefiting from managed wealth. And our goal would be to see that trend continue through the rest of the year.

Ron Nash – Goldman Sachs

Got it. And I guess, just thinking more in longer term, I know you’ve talked about getting to 1% ROA but just given the assets sensitively that the balance sheet has right now. Assuming rates do rise at some point, what kind of ROA do you think the bank would be capable of in a higher interest rate environment?

Gene Taylor

Well, we never try to guide through what is going to happen with interest rates. But you can see from our prior Q and you’ll see in this Q that we remain asset sensitive, we should see somewhere in the order of 10% improvement in net interest income for each would go up 200, 300 basis points. But there is so much guessing involved as to when rates may change and to what level, we wouldn’t want to forecast that. We’d rather focus on in a fixed environment we are capable of generating 1%, our goal is 1% or higher.

Chris Marshall

I would only say that I think we’re positioned, you can look at the typical 100, 200, 300 basis points interest rate shocks, parallel shocks that everybody discloses. And that’s somewhat indicative of what would happen, but more importantly I think we’re positioned for any rise in interest rates, virtually in any scenario, realistic scenario it’s going to benefit our earnings.

Ron Nash – Goldman Sachs

Got it. If I could just squeeze one last one, and Gene you talked about steadying in active discussion on M&A and it seems like the regulatory environment is a little bit harder. But given the move we’ve seen in stock prices are buyer and seller expectations starting to converge mark this point?

Gene Taylor

Ron, it’s never ending discussion about pricing. But as you know and everyone on the call knows, our bigger challenges, when we double check and when we do, we’re marking the portfolio and I think the real issue here is credit improvement, not stock price improvement. There is the expectation about one belief about their portfolio being dramatically better. In our view is that it is better but not generally dramatically.

Ron Nash – Goldman Sachs


Gene Taylor

So, that to us is by far the bigger driver.

Ron Nash – Goldman Sachs

Thanks for taking my questions.


And we would take our next question from Blair Brantley with BB&T Capital Markets.

Blair Brantley – BB&T Capital Markets

Good morning everyone.

Gene Taylor

Good morning Blair.

Chris Marshall

Good morning.

Blair Brantley – BB&T Capital Markets

I have a question on the operating expense side, can you give us any more update in terms of other plans you may have to kind of streamline those other expenses with the multiple operation centers and headquarters and things like that? Is there anything you can give us?

Gene Taylor

Blair, as you know, we’ve acquired seven banks and we’ve barely had seven headquarters and seven operating centers etcetera. We continue to shed those facilities and there are other related legacy expenses. So I think we sold three facilities in the quarter, it might have been extremely small. Our gain associated with that, we probably have another three facilities on the market. So, over time you’ll see our facilities expense which is much higher than the median bank start to come down.

We also have some other various expenses like legacy, insurance cost that reach more normalized levels of beginning in the first of the year. So there will be some improvement but there is not any big step function that we’re going to see, it will just be a gradual improvement over time.

Blair Brantley – BB&T Capital Markets

Okay. Thanks. And then I’ll follow-up on the M&A side. Are you – is there any change in strategy with issuing stock in any potential feature deals or is cash still the main focus at this point?

Chris Marshall

No, cash is the focus for two regions as long as we’re cash or equity rich. The second thing is that stock price is still – we believe greatly undervalued. So we would look to do all cash acquisitions.

Blair Brantley – BB&T Capital Markets

Okay. And in terms of any potential discussions, has there been a push more towards partnering up and getting stock versus cash or has that changed at all over the last quarter or so?

Chris Marshall

I think everybody has shown some interest in having cash in our transactions. But we have been disciplined about doing that or stay away from that. That’s not really a big issue for us. As Gene said, there are other things that tend to be big issues in any kind of acquisition discussion.

Blair Brantley – BB&T Capital Markets

All right, thank you very much. I appreciate it.


And that does conclude today’s question-and-answer session. Mr. Taylor, at this time, I turn the conference back over to you for additional or closing remarks sir.

Gene Taylor

I would just like to thank everyone that participated on the call today. We are very appreciative. And Ken, Bruce, Chris or I are ready at any time to take any additional questions you have. And with that, we wish you good day.


And that does conclude today’s conference. Ladies and gentlemen we’d like to thank you for your participation. You may now disconnect.

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