Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

CenterState Banks, Inc. (NASDAQ:CSFL)

Q2 2014 Results Earnings Conference Call

July 25, 2014; 10:00 a.m. ET

Executives

Ernie Pinner - Chairman & Chief Executive Officer

John Corbett - EVP, President & CEO of CenterState Bank of Florida, N.A

Jim Antal - Chief Financial Officer

Stephen Young - Treasurer, EVP & Chief Operating Officer of CenterState Bank of Florida, N.A

Analysts

Brady Gailey - KBW

Enrique Acedo - Raymond James

John Rodis - FIG Partners

Eric Grublic - Private Investor

Operator

Good day ladies and gentlemen and welcome to the second quarter earnings call for CenterState Banks, Inc.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call may be recorded.

I’d now like to turn the call over to your host for today, Mr. Ernie Pinner, Chairman and CEO. Sir, you may begin.

Ernie Pinner

Thank you, Ben. Good morning everyone. Thank you for calling in and giving us your time and interest. We have today with us John Corbett, who is the President of our active bank, as well as the EVP of the company. We have Jim Antal, who is the CFO of the company; and we have Steve Young with us who is Treasurer of the company and the Chief Operating Officer of our operating bank. Again, thanks for being in.

I’m reminded to comment that just today we are working under our Safe Harbor discussion, especially when relating to any forward looking statements contained in the 8-K earnings we released last night, so we’re taking care of the legitimate things.

This quarter was, if I say big, it was a big quarter to me in the sense that just lots of activity. You see the term lots, noise. It was a very noisy quarter and that’s visible in a lot of things that went on, as well as I really think that noise will carry over into the third quarter also, because of the transactions we’ve been involved in.

If you stop and think about it, we closed and integrated the Gulfstream Bank in the first quarter, but during the second quarter we had to get everybody onboard new systems, new processes and I think that’s done and I think they run smooth and we should begin to see the positive impact with them in the third quarter.

We closed First Southern on June 1, which I think it was about 30 days ahead of where we thought and that was through just a herculean effort on everybody’s part to get it done, because you know when we had to close branches, we wanted it to move as fast as we could. When we think of the branches, I remember 10 of the 17 branches that were acquired at First Southern we intend to close. So there’s lots of activity in preparing the rules say for closure, as well as all the people involved.

We were able to sell some of those branches and we’re preparing for that as we look towards a September integration date. We through a lot of efforts from an accounting side and of a [background people] (ph), we were able to determine that the tangible book value at the First Southern deal was better than we thought. We found a lot of the energy around loan production and a lot of focus, because we recognize that’s the magic capsule for the next several quarters.

They have various close to the efficiency model and changes that we promised you a couple of quarters ago, we are close to being on target with that. We’ve got a couple of new products that we have developed and were leased; the correspondent bank operation and that’s taking a lot of the energy.

So there’s the noise throughout and not just in the sense of our numbers and the things that you look at, but we feel there’s a lot of noise in-house as we go about trying to do all these things. But I take a lot of comfort when I think about Florida and in my mind Florida is definitely on the comeback road. It encouraging to me that we can begin to see the change in our metrics and we’ll see some – I think there’s real promise for better wealth in the next two, three quarters.

When I look at it and when I dig down deeper and think about Florida and its comeback, the job count is up in Florida. The new form jobs, the non-form jobs are up 3% from a year ago. The unemployment has been steadily dropping for the last several quarters and I think in this past it was at 6.3%, which is equal to the overall nation.

Our Governor, Governor Scott has done a great job going about tallying Florida. He’s been saying that Florida is the number one destination place in the world. He’s my cheerleader; he never wins a race. I don’t think we’re number one. I know we have a target to be number one. The country of France out-beats us on our international investors, but I got it, that’s a country, we’re a state. And then we are always in a race with California. We beat California in the number of people, but I think they jump to some dollars.

The fact remains, we are right on the verge of being the number one destination place in the world. This past year we had 94 million, almost 95 million investors. That’s three years in a row we’ve see our investor count go up, 260,000 people a day, and that rolls into what drives us with our state is with regard to home and home sales.

In June, it was the 31st month in a row that we’ve had an increase in home prices. Now they went to the bottom, that I’ll be the first to admit, but they are steadily coming back. I think last year it averaged. Through June we’re at the 185,000 medium priced and that’s up over 5% from a year ago. It appears that July home sales, we’re at a number count of 23,000, that’s up almost 15% from a year ago.

When I look at inventory, the inventory on single family homes is now at 5.6 months and the condos are at 5.8 months. So part of it is on the comeback and that gives me a lot of comfort, especially with all the things we’ve got going and the noise we’re creating and we’re going to try to give you some insight as we go around this morning with comments from various people.

At this point I want to ask Antal, our CFO to give us some insight to his point of view.

James Antal

Thank you, Ernie. Good morning everyone. As we reported last night, we earned $0.03 a share on net income of $1.37 million for the current quarter and $0.11 a share excluding non-recurring charges, basically merger expenses. We closed the First Southern transaction at June 1. The biggest impact to us was the tangible book accretion that John Corbett will talk about in a few minutes.

First Southern was in our numbers for one month this quarter. They had a positive contribution to our operating earnings, but they also increased our average share count, so we earn in terms of operating income $0.11 a share with them and without them we would have also earned $0.11 on less income and less shares outstanding. So basically they were neutral to our operating earnings and about $0.08 a share dilutive to our GAAP EPS, merger expenses basically being the difference.

Going forward, we are having to operate 10 branches through the end of September, before we can close them. Now these are the – we’re selling six of these branches that Ernie had mentioned and we’re consolidating and closing four. We’re also having to retain First Southern support staff through late September as well. The system conversion is scheduled for September 19.

In addition to the branches we have two operation centers that we have to operate, at least through the end of September. Also let’s not forget that there will be equipment that will no longer be used once the branches are closed, the operation center is closed and the system conversion is complete.

In the meantime, additional depreciation expense and office occupancy continues through at least the end of the third quarter. This all means is that we cannot completely accomplish our planned cost phase, until at least the fourth quarter. So there is a lot of moving parts right now, but we think third quarter earnings, will more likely than not be closer to the current quarter than the current third quarter consensus.

A couple of points on our net interest margin. Our NIM this quarter was 4.37% and was down compared to the first quarter of 4.65%. A couple of the items in there; First Southern, their standalone NIM was about 3.84%. Now they were only in our numbers for one month, but a contracting effect nevertheless.

Our purchase credit impaired loans excluding First Southern, the first quarter that was 13.27%, it decreased to 12.3% in the second quarter. This was due to the timing of the expected cash flows only. We did not make any negative adjustments to expected future losses, but again, it’s a contracting effect.

Taxable securities, they also were decreased form a 2.86% in the first quarter to a 2.67% in the second quarter, again contracting effect. Also there were higher balances this quarter and a lower yielding cash accounts, basically the overnight fed funds. The result of all this is the reason for our NIM contraction.

A point I wanted to bring out here too is that if First Southern was in our numbers all quarter instead of just one month and everything else stayed constant, our NIM would have been 4.28% at this quarter instead of 4.37%. Also, partly because we will be holding higher average cash, overnight fed funds during the third quarter and again everything else stays relatively constant, leave us more likely than not that our NIM could be sub-4.25% next quarter.

Our allowance for loan losses; there is a table on page 10 of our earnings release that summarizes our ALLL during the current quarter and compares it to the prior quarter. Our FAS 5 allowance, that’s a general allowance on a non-impaired loans excluding Gulfstream and excluding First Southern increased from 1.39% in Q1 to 1.32% in the second quarter. There are factors driving there, but mostly are historical charge off rates trending downwards.

You’ll notice on page 10 if you have it there, that the Gulfstream loans and the First Southern loans have no allowance for loan losses associated with them. These were mark-to-market on their acquisition date and not permitted to have an ALLL day one. Because they have no allowances associated within them, it causes an overall lower ALLL ratio. Eventually we’ll have to start reserving loan losses for them, and this will be based on their performance and their history and probably something for Gulfstream by the end of the year and more than likely something early in 2015 for the First Southern.

A couple of thoughts here regarding our indemnification asset or IA. The IA is currently at $61.3 million, which we expect to collect $28.9 million from the FDIC and $32.4 million as being amortized over the remaining terms of the related loss share agreements. The FDIC covered loans that we acquired from First Southern, that was about $144 million. Of that amount, approximately $101 million are in the PCI loan portfolio and $43 million are in the non-PCI loan portfolio for a lack of a better term loan or a regular loan portfolio.

The FDIC loss share agreement that transferred to us from First Southern are similar to ours, except we had 80% loss share from the first dollar of loss and there was no dollar limitations. New loss share agreements from First Southern, they are summarized on page eight of the earnings release. There are three trenches in each of these agreements and there is a range for each; 0% to 70% and 70%, 30%, 75%, sort of like a donut hole.

In that page eight of our press release, that also shows you what tranche we are now in for each of the categories, how much additional losses, at least as of June 30, that we can claim before it moves to the next tranche.

The additional amount added to our IA related to the effect of the First Southern acquisition was about $2.6 million. The reason this was lower than our – well again, I guess for lack of a better term, legacy IA, is due to the difference in this reimbursement allowed for $1 lost.

I’m glad to respond to any questions later, but at this time I would like to turn the presentation over to John Corbett.

John Corbett

Thanks Jim and good morning everyone. Let me start by give you some more color on the First Southern transaction. We announced the acquisition end of January and closed it on June 1, so we are very pleased with the speed of getting a deal of this size through the regulatory and shareholder process in about 120 days.

What we originally modeled and communicated was that the transaction day one would yield tangible book value accretion of about $0.10 a share and then earning per share accretion of about $0.07 or $0.08 annually thereafter. Instead of yielding $0.10 accretion day one, we actually printed $0.45 tangible book value accretion day one relative to the transaction. So it was 6.3% accretive immediately instead of the 1.4% that we communicated. In our minds this is a huge win for our shareholders who are focused on the growth of tangible book value.

So here is a couple of the components of where that delta was. We did not anticipate when we announced the transaction, that we would be able to sell six of our offices and $200 million of deposits to Fidelity Southern Bank in Atlanta, and that was a transaction that culminated in June, resulting in a premium on the deposits of 1.5%. So about $3 million deposit premium and we weren’t going to take quite the write down on the branches we sold. So it was about $4 million pre-tax ahead of or day one marks, by doing the deal with Fidelity.

There were a second -- there was also some swings in the securities book of First Southern, which were more positive that we planned; and third, we received more favorable treatment on our deferred taxes than we originally modified. If we had stated $0.10 accreted day one and then have $0.07 to $0.08 a year EPS accretions, it would have taken us four to five years to accumulate $0.45 to our tangible book value incrementally with First Southern, so that kind of puts it in perspective.

Another way to put it in perspective, earlier this year we closed on the acquisition of Gulfstream Business Bank, a very high quality strong bank is the Treasure Coast. It’s not perfect, but if you look at the tangible book value dilution we took with Gulfstream, and the accretion we took with First Southern in two subsequent quarters, it’s close to offsetting to where you were able to grow the bank by 60%, without taking much of any tangible book value dilutions combined.

Now, while the day one tangible book value impact was much, much greater than we anticipated, we are probably going to make in ALCO and capital management decision that could lower the EPS accretion in the next year by as much as $0.06, compared to what we initially forecast.

As it relates to the $200 million of sold deposits to Fidelity Bank, we’ve consider three options.

Number one, we could re-lever our balance sheet now into new deposits and securities at about a 2% spread and replace the lost earnings power of the deposits we sold.

Number two, we could re-leverage the balance sheet later when there is less rate risk. We kind of think we’re in a period of transitioning the rates and there could be some risk to unrealized gains and losses in our securities if we go out too long in the curve right now or number three, could leave the balance sheet $200 million smaller. And if you allocate 8% capital to those deposits, we could retain that $16 million of capital for additional acquisitions or a stock buyback in the future.

Right now our current thinking is not to re-leverage the balance sheet right now. That would have the impact of reducing our EPS estimates by $0.06 a share, $200 million or 2% with our tax rate at 45 million shares is about $0.06.

When we think conditions are more favorable, we could re-lever into deposits and securities or we can deploy the $16 million of capital into acquisitions. Our tangible common equity ratio in the quarter with this transaction actually rose from 8.5% to 9.1% and if we don’t replace the deposits we sold, our TCE will run rise to about 9.5% when the branch sale is complete. So we’ve got ample dry power and it gives us a multitude of options going into the next several quarters.

Let me shift gears and talk about non-interest expense for a minute. Clearly the noisy quarter, because it’s the first quarter with First Southern and there was a couple of non-recurring CenterState items I can touch on, and some of you guys modeled the First Southern being included in the second quarter, but most of you didn’t model it until the third quarter, so the consensus wasn’t clear.

As a remainder, and this was in our initial presentation, the run rate on First Southern non-interest expense, up $35 million last year. We anticipate about 46% cost save, so we would save about $16 million in the run rate by 2015. We think the new run rate will drop from $35 million, down to about $19 million in 2015.

Now, as Jim touched on, we’ll realize none of those savings in the third quarter, because we are going to operate all 17 of the branches and it won’t convert until the end of the quarter if all goes well. But at the end of the third quarter, we’ll sell the branches to Fidelity, the six, and we’ll consolidate four other branches into nearby locations, so 10 of the 17 offices will close at the end of the quarter.

So as we think about rolling into the fourth quarter, we think we’ll achieve 75% of those cost savings in the fourth quarter with only 7 branches operating. And then as we roll into 2015, we think we’ll get 100% of the cost savings by the first quarter of 15.

I mentioned there was a couple of one-timers on the non-interest expense side with CenterState. We had about $0.001 a share of extra legal and professional expenses that we do not see in our run rate going forward. They were tied to some new product development and the correspondent and a couple of legal settlements, but we see that number coming back down about $600,000. We also had a about $0.001 a share in more OREO cost and write-downs in the second quarter versus the first.

Now talking to our special assets folks, we’ve got about $11 million in OREO. They secured contracts on about 45% of that OREO in the second quarter and were hopeful that a large amount of that will close in the third quarter. I can’t say for sure, but we’re hopeful a lot of that will close. So the write-downs in OREO that were about $0.001 above the normal run rate or to get the OREO down to the contract price, that realizable price we’ll get on the sale. And then we have an increase in our corresponding commissions. Of course Steve will talk about it. We did have an increase in our revenue from correspondent.

Now, in First Southern originally we disclosed pretax merger related cost of about $8 million. Now we incurred about $5 million in the second quarter, and the release last night says we’ll incur about $2 million in the third quarter, and that will be somewhere in that $2 million to $3 million as we unwind the occupancy cost to First Southern and some severance costs. So we should be right in, not $8 million, it will be in the $7 million to $8 million total one-time cost for merger related with First Southern.

Now, let me go back to the CenterState efficiency plans that we announced in the first quarter. We talked about reducing our non-interest expense of the legacy bank by about $6 million by the summer of 2015. The biggest piece of that was a reduction of headcount by about 60 FTE’s and the closure of seven branch offices. I just want to report that that FTE reduction and the branch closure did occur in April as we planned.

Now let’s take a minute and let me just bring you up to speed on where we are on our loan portfolio. We finish 2013 at 9% net loan growth. So far in ’14, for the first half, our loan growth has been less then what we planned on.

Now, the executive team has been very, very focused on the two acquisitions, getting them integrated, getting them converted and the efficiency initiative. But John Traynor, our Chief Banking Officer at the same time has been working hard on improving our commercial calling efforts and improving our commercial loan production.

The encouraging news is that our production was up in the second quarter by about 29% at about $99 million of closings. More encouraging is that the pipeline is up about 70%, headed into the third quarter. So a lot of that’s coming out of the South Florida market, both First Southern and Gulfstream and then also our market more locally in Lakeland. So we’re much more encouraged about the back half of 2014 as it relates to the loan growth portfolio.

Coming out of the recession, one of the things that we’ve noticed is that the average loan size is small than it was maybe before the recession. So it’s a less efficient way to produce loans and there’s a lot of energy that John Traynor’s put into improving our commercial lending focus, and really since 2012 we’ve really worked to shift more resources or non metro areas as it relates to loan production, to more of the metro markets and more commercial lending, particularly in Jacksonville, Orlando, Palm Beach and Fort Lauderdale.

So with that, let me turn it over to Steve and he can talk you through some of the non-interest income items in correspondent banking. Steve.

Stephen Young

Sure. Thanks John. Good morning everyone. I wanted to report out quickly on the correspondent banking segment, discuss some of the new product revenue drivers, as well as just touch on some of the points that John made on the ALCO management strategies, particularly in this rate environment and then also as we have a changing balance sheet.

So first of all, let me talk about the correspondent banking segment. You’ll notice, this quarter revenue increased significantly from the prior quarter. We recorded about $5.3 million in non-interest income, compared to $3.9 million in quarter one. This $1.4 million increase is primarily driven by our capital markets income of a little over $1 million, while re-acquiring fee income increased approximately $300,000, so nice to see both of those things happen.

If you look at the net income for the segment, it was about $0.02 a share on a direct basis. $0.01 on a indirect, and this was an improvement from the prior three quarters which were breakeven . So it feels like we’ve come off bottom and with some of these other products and I think we’re moving in the right direction.

As it relates to our capital markets income, I think we typically had a fixed income revenue in there before, but we’ve introduced a couple of new products that were offered in our correspondent bank clients, including national commercial industrial credits, along with new hedging product. These products are complementing our customers bank focuses on growing loans. So even though fixed income continues to make up a bulk of the of a primary driver of the revenue, we now have I would say a hedge to that income and some things that are really mobbing in the right direction.

The re-occurring income is really as it relates to international payments, our payment areas, we continue to grow more bank customer relationships and that was a real positive as that’s just a -- we have a fixed cost against those international payments, so that’s a nice lever.

As from a forecast perspective, as far as if we continue to kind of being in a range here, in the tenure from 2.50 to 3 weeks, but capital markets to probably be similar to the second quarter, which is up about $1 million in revenue over the previous three quarters. So that’s kind of our -- just kind of a correspondent banking. Sometimes it can be volatile, but I think we’re kind of settled within, unless yields move significantly.

From an asset liability management strategy, you’ll notice this quarter is the tenure treasury dip below 2.5%. We took the opportunity to sell some longer duration securities. The investor portfolio decreased about $75 million on sales and pay downs. We think that long term this had the effective of protecting our tangible book value and eventually enhancing over future yields as rates move higher over the next 6 to 12 months.

Jim had mentioned I think that some of the yields on securities was down a little bit and that was just in direct correlation of some of those longer duration securities that we felt like it was the appropriate thing to protect, so.

We also sold the entire First Southern portfolio, which is why we have a lot of excess liquidity at the end of the quarter. You will notice on our balance sheet at the end of the quarter we have about $500 million in cash. As you’ll recall, we have a couple of things going on there. One, is we still haven’t paid out all the First Southern shareholders, so that’s an amount that we need to invest into that, as well as the branch sale is upcoming.

So we are going to keep a high level of cash over the next couple of quarters, particularly the third quarter until all that settles out, the branch sales up $200 million and then we expected to start redeploying that excess liquidity, either probably some portion of that into investments and as the pipeline, the loan pipeline continuous to increase into loans as well.

From a standpoint of cost to deposits, it was 22 basis points for the quarter on the incremental basis, but deposits we’re keeping for First Southern are 20 basis points, so we should see that continue to trend down in that way, but that’s probably going to be a floor for us. Approximately $3.3 billion in deposits this quarter, $1.6 billion in checking accounts and after the sale of our deposits, our time deposits will make up less than 15% of our total deposit basis.

So just in summary, overall we’ve taken the opportunity to continue to reposition the balance sheet for 2015 particularly, to be more asset sensitive by selling longer duration investments, putting on more floating rate loans through our hedge desk and continuing to work down our CD balance and focus on growing core deposit relationships.

So with that, I will turn the call back over to Ernie

Ernie Pinner

Thank you, Steve. I think it’s pretty evident, the noise we talked about jumps of the page. When I think about all the things, I feel like we are seeing a strong rebound in the State of Florida and the things going on in our state, as well as the things that we are putting together internally. I’m convinced we’re priming the pump for an earnings space that I think we can validate to you for sure in ’15 and hopefully we’ll begin to see it, the beginning of that in the fourth quarter.

So at this point we’d love to take and respond to any questions. So we’ll let the telephone people – any questions we have at this point.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today comes from the line of Brady Gailey of KBW. Your line is open. Please go ahead.

Brady Gailey – KBW

Hey, good morning guys.

Ernie Pinner

Hey, Brady. Good morning.

Brady Gailey – KBW

So it’s great to see the additional tangible book value accretion. But your comments on EPS accretion, just so I would get it right, so if we were planning on First Southern being $0.07 to $0.08 per share accretive to earnings, and then are you saying it’s now forecasted to decline to $0.06 per share of accretion or its going to decline by $0.06, so down to like a $0.001 or $0.002 of accretion.

John Corbett

So Brady, its John. So think about the $200 million of deposits that we solid to Fidelity Southern, those were branches we were going to close anyway. We had planned on about a third of those deposits to run off the first year, a third of them to run off the second year and then we might retain a third of them. But if you take $200 million of depositions times a 2% spread, we would have just had that extra deposits and securities. I guess that’s $4 million tax effect that and divide it by 45 million shares. It’s about a $0.06 give us in the EPS number. So it drops if from about $0.08 to about $0.02.

Now we can go back Brady today and replace that, okay. The correspondent bank, we got about $700 million of fed funds of our clients. It’s all balance sheet at the federal reserve. So the correspondent guys can pay a little bit up. More than the feds paying we can bring on $200 million right back on the balance sheet and invest that money and get that $0.06 per share earnings power back immediately or within a quarter. Okay.

I think what – and Steve, you can comment on this. I think as we’re watching the Federal Reserve and we’re watching the interest rates being in a transition period of time, we’re probably going to see a rise in rates in the next couple of quarters. I think Steve’s position is that maybe we shouldn’t rush out to go out two, three four years on the securities portfolio. It may wind up hurting us.

But we’ll just continue to watch that at any point, whether its next quarter, the following quarter, three quarters, whenever Steve thinks its right to lever the balance sheet back up, buy the securities, we can do that or we can take this $16 million of extra capital, $200 million times 8% and that $16 million bucks. Not that we’re in the mode to do share buybacks, but you could do share buybacks or we could issue it into a new acquisition where the spread maybe 4% instead of 2%. So those are things we are weighing right now and we are just going to take it a quarter at a time.

Brady Gailey – KBW

Okay, but for now, we should kind of take $0.06 out and once you figure out what you’re doing, we can add it back in later.

John Corbett

Correct.

Ernie Pinner

That’s exactly right Brady.

Brady Gailey – KBW

Okay. All right, and the margin, so if First Southern had been in the whole quarter, it would have been 428. I’m guessing that doesn’t include any sort of discount accretion from First Southern. So once kind of the dust settles and maybe you start getting some discount accretion, that in and of itself alone should put some upward pressure on the margin, right.

James Antal

Brady, this is Jim. First Southern was in for the one month and that would have included the accretion from – that yield at their low marks, so that would have included accretion on their PCI loans, if that’s what you’re referring to.

Brady Gailey – KBW

Okay. So what you’re saying is the margin of under 425, right around 425 next quarter. How do you think the margin shakes out next year, any idea?

Ernie Pinner

I think right now I’d also consider that – we expect the margin to be sub-4.25 in the third quarter. The dollars are what’ll actually be increased, so I mean we’re going to earn more on the net interest income. It’s just on the margin we are picking up additional spread that’s smaller than our previous 465. I think after the third quarter, when we release some of those excess fed funds related to the branch purchases, you’ll probably see a slight pickup in the margin in the fourth quarter.

Steve Young

And Brady, this is Steve. Back to the capital management and the deposit base, it really depends on what we do with re-levering the balance sheet or not from a margin percentage. In other words, if we ended up re-levering the balance sheet in 2015, then you would expect margins to be down incrementally, but if we don’t, then the margin number will build from 4.25. So there’s probably a few moving parts in there.

But if you model that we don’t re-lever the balance sheet, which I think is where you are going, then you would see margin back up, because essentially what you end up having is about $600 million in loans and $650 million in deposits, so that the margin percentage wise will grow.

Brady Gailey – KBW

All right great, thanks guys and I’ll see you’ll next week.

Ernie Pinner

Yes, thank you Brady.

Operator

Thank you. Our next question comes from the line of Enrique Acedo of Raymond James. Your line is opened. Please go ahead.

Enrique Acedo - Raymond James

Hey, good morning guys.

Ernie Pinner

Good morning.

Enrique Acedo - Raymond James

The vast majority of my questions have already been asked and answered, but just on the M&A topic, obviously you guys are getting this one wrapped up pretty quickly. So how comfortable are you getting back into the M&A game, towards the back half or the latter part of year, maybe the beginning of 2015.

Ernie Pinner

We are comfortable with that. You’re right; I mean at this point it is just evident that we’ve been focused a great deal of integrating this last deal at First Southern as scheduled for the middle of September. Hopefully by the end of October all this is gone smooth and we can validate to ourselves the model worked and we would at that point internally be in a position to start saying, okay, these are another potential partner. I envision there will be other partners sometime into the early part of next or at least by next year.

Enrique Acedo - Raymond James

Is there any specific region you guys are trying to grow specifically?

Ernie Pinner

The focus is still on Florida. If you look at the map we’re still working hard you know, up

95, up 75 and across our floor. Just anywhere in those areas that we got gaps to fill. We feel like we definitely need something in downtown Tampa. We have our bank in Hillsborough, but we’re not really in downtown Tampa.

Enrique Acedo - Raymond James

All right, thank you very much.

Ernie Pinner

You bet. Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of John Rodis of FIG Partners. Your line is opened. Please go ahead.

John Rodis - FIG Partners

Good morning guys.

Ernie Pinner

Good morning.

John Corbett

Morning John.

John Rodis - FIG Partners

Ernie, maybe just to follow-up on the M&A question, as far as future deals, what sort of size do you think is most appropriate going forward since you are bigger today.

Ernie Pinner

It’s a great question. I mean we’ve come to realize you moved the needle talking about bigger deal, but when you look at the deals that are bigger in Florida, we are limited. So ideally we think of something between 10% and 35% of our asset base. However the majority of the banks in Florida are under $300 million and we are not ready to step out of Florida. But we have called some deals because the size did make sense, but I mean I guess we are looking for something between $400 million and $1 billion.

John Rodis - FIG Partners

Okay. And just curious, what would make you want to go outside of Florida?

Ernie Pinner

That’s a great question. I really think that once we’ve kind of filled in all the gaps here in Florida and taken advantage of what we have of people on the ground, we don’t really have any live bankers outside of Florida on the ground. I mean, we’ve got other bankers didn’t do a great job, but we don’t have any live, boots on the ground, so we really need to finish up the potential in Florida. I mean the fish are biting here, so let’s keep fishing here. But at some point yes, it would make sense to step out of Florida, but I don’t see that in the near future.

John Rodis - FIG Partners

Okay, and just switching gears for a second, core loan growth, I guess the portfolio was the non-PCI portfolio. If you back out all the noise from the acquisition and so forth, it was basically flat this quarter with the first quarter and the first quarter was down a little bit from year end. It sounds like and if you look at the pipeline, it sounds like you guys are optimistic for the second half of the year. Could you maybe just give a little bit more details why you feel optimistic?

John Corbett

Hey John, it’s John. The pipeline, I went back and checked our pipeline and our close rate for the last several quarters and we’ve pretty consistently closed about two-third of the loans that were in the pipeline at the beginning of the quarter.

So, now this pipeline, we’ve got some new lenders and we’ve got some new markets, so the closed rate may be different. But as a leading indicator the pipeline is telling us we’ve got increased loans coming forth and then also we’ve run a lot of loans through the loan committee in the last couple of weeks successfully and July’s been a good month for us as well, so a lot of its getting rid of some of the noise and the integration.

When you merge Gulfstream in, First Southern in, you’re not just merging the computer system, your also merging the credit administration teams, the lending teams and so there is distractions and those distractions will die down going into the third and fourth quarter.

John Rodis - FIG Partners

Okay. And back to the discussion, I guess the excess liquidity or the ALCO change. You talked about the $200 million. I guess one other option would be if core loan growth had picked up, you could redeploy those funds into higher yielding loans, isn’t that correct?

John Corbett

That will be the preference John. I mean that’s where the New York synergy is.

John Rodis - FIG Partners

Okay, makes sense. Thanks guys.

Ernie Pinner

Thank you, John.

Operator

Thank you. Our next question comes from the line of Eric Grublic (ph), a private investor. Your line is opened. Please go ahead.

Eric Grublic - Private Investor

Hi, good morning.

Ernie Pinner

Hi Eric.

John Corbett

Hi Eric.

Eric Grublic - Private Investor

Yes, by the way, good comment on the comparison of France to Florida. You might not have what they have, but you certainly have nicer people. So, just a little bit of a follow-up on John Rodis’s question. Just on the M&A side, how about geography. Is there is a preference on the geography or not at this point.

Ernie Pinner

Well, as I mentioned, ideally and Corbett you can step in here. I mean we just feel like and we planned it in the major metro areas. We’ve taken care of Jacksonville. We’ve kind of taken South Florida with West Palm and Fort Lauderdale. We really would like to put something into Tampa. We have offices in downtown Orlando, but we need to expand those also. So from a metro area, it will be Orlando and Tampa.

John Corbett

Yes, I’d like to add Ernie, back to looking at partners that are 10% to 35% our size, in the markets that we’re in currently, there’s only a hand full of banks that are in that size and we’ve got relations with all those banks and we’ve got ongoing discussions and we think a number of them are going to look to partner up in the next 24 months. So that’s where our focus and our energy is. It’s in the relationships that we’ve built over the last couple of years with these banks that are looking at their options.

There’s still a lot of fatigue in Florida after six years of zero interest rate in the credit cycle. So those are the conversations we’ve been having and we want to continue to quote those folks in the next 18 months.

Eric Grublic - Private Investor

Okay, I had one other thing, kind of unrelated to the quarter, but it was maybe more related to how quickly you’re able to announce and close the FSOF transaction. So my question is this, some of the bigger banks have been dogged by these BSA, AML reviews of issues that the regulators have come down pretty hard on them; you know who they all are.

From your perspective and the conversations you’ve had with your regulators, is this something that is going to get stuffed up maybe with smaller banks like yours at some point or are they just like waiting to go down the food chain or not. Do you have any color on that for us?

John Corbett

Yes, I mean, when we think about things that can delay a merger announcement, one is the SEC and reviewing the S4; number two is a CRA protest and number three, just as you’ve articulated, frequently BSAs getting involved more now compared to where it was more CRA years ago.

So as we enter more into the South Florida markets, those are more hotbeds of BSA activity. We’re intently focused on making sure that we have a good relationship with the regulators, because we do think that’s potentially a risk and we want to make sure that we’re staffed properly and we’ve added staff and we’ve added expense in that area to be sure that the regulators are happy with our operation.

Eric Grublic - Private Investor

Okay, great, thanks. That’s it for me.

Ernie Pinner

Thank you.

Operator

Thank you. And I’m showing no addition questions in the queue. I’d like to turn the conference back over to Mr. Pinner for any closing remarks.

Ernie Pinner

Thank you all once again for giving us some time and good questions. I hope we’ve responded well and we’ll probably see several of you next week when we’re in New York.

Thanks again for being with us this morning. Have a great day. Bye.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CenterState Banks (CSFL) CEO Ernie Pinner Discusses Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts