CenterState Banks' (CSFL) CEO John Corbett on Q2 2016 Results - Earnings Call Transcript

| About: CenterState Banks, (CSFL)

CenterState Banks, Inc. (NASDAQ:CSFL)

Q2 2016 Earnings Conference Call

July 26, 2016 14:00 ET

Executives

Ernie Pinner - Executive Chairman

John Corbett - President and Chief Executive Officer

Jennifer Idell - Chief Financial Officer

Steve Young - Chief Operating Officer

Analysts

Brady Gailey - KBW

Tyler Stafford - Stephens

Joe Fenech - Hovde Group

Michael Rose - Raymond James

John Rodis - FIG Partners

Operator

Good day ladies and gentlemen, and welcome to the CenterState Banks Second Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I'd now like to turn the conference over to Chairman, Ernie Pinner. Please go ahead, sir.

Ernie Pinner

Thank you, ma'am. Good Afternoon everybody. Thank you for calling in. In the room, we've John Corbett, President and CEO of company, Jennifer Idell, who is CFO and Steve Young, our Chief Operating Officer.

I want to thank again each of you calling in and I want to express my appreciation for your support as well as your interest in our company. I hope that this 2 o'clock call, the change of time from 10 to 2 is still working for you. We have heard from several of you that that was a better, so I hope the 2 o'clock time is cut out to be what we thought it was. But, thanks for calling.

As we make comments today I want to remind you of our Safe Harbor language. You can find on Page 18 of our earnings release, our full Safe Harbor Statement and there you can review it. See everything that we're talking about with regard to that. Any statement made by any of us this afternoon is subject to the Safe Harbor rules.

Second quarter was a great quarter. We continued to see a lot of the validity for many of the commitments we've made to you in the past. And it appears to me that we will continue to enjoy tailwinds for prospering through the rest of this year. Momentarily you'll hear from John and the rest of the staff and dig into detail into more of those numbers.

But first, I'd like to give just some quick thoughts with regards to Florida. Florida is still strong and growing economically. In 2015, the pace of economic growth increased relative to most all of the other states. We ranked fifth in the country with regard to that growth. Our GDP is -- in 2015 had real growth of 3.1% and was above the national average for the third year in a row.

Our unemployment rate was down to 4.7%, this quarter and is equal to the United States rated the same. Just for reference purposes you think back -- our high unemployment was 11.2% in January of 2010. And our low was 3.1% in April of 2006. We have room for improvement I think we're doing in the right direction. You’ve heard me say many times and I still believe the population is Florida's primary engine for economic growth. It fuels both our employment and our income growth.

In 2004, the Florida population was 15 million. At the end of last year, 15 as you know we’ve crossed over the 20 million mark. In our hay day we were doing about 362,000 net new people a year -- a day into Florida. Most all of the forecasters now say for the next five years, I think we'll see in the range of 311,000 a day not as high as we have been than much higher than what we've been for the last few years. And in fact the first part of 2016 we are approaching almost little over 900 a day.

Single-family homes when you look at the permits that are issued, it's an indicator in my mind of new construction and that permit range remains in positive territory. In the first five months of 2016 the permits were running about 18% over the same period last year of 2015. However, that's still behind our historic standards, but definitely much improved and going in the right direction.

When I look at housing from an existing home sales number you’ve heard us talk about that many times. In 2016 to-date we still exceed the peak of 2005 in fact we are about 103% above, however, that is down from last year but still way past the peak we've enjoyed in the past. The other side of that is foreclosures for a long time we were leading the pack the country on foreclosures that's pretty much behind us now as pretty much throughout the state when I think of all credit in the heights of foreclosures we were running 6x our normal number prior to the great recession.

First quarter this year we were only 26% greater than that peak, so we are going from 600x down to about 26% increase over the peak. When I think of homes being underwater not long ago 50% of the homes in Florida were underwater with regard to their debt and value that down now less than 10%.

The Florida growth rates in my opinion are generally returning to the more typical levels and they continue to show progress. However, the drags that are holding us back are more persistent than in the past and in the opinion of many forecasters they will take another year completely to come out of the whole left by the recession. However, most of the forecasters think that will end by late 2016 or some time early 2017. And I'm of the same opinion.

So this time, I want to turn this over to John Corbett, our CEO and he along with the staff will dig into these numbers more to your liking. John?

John Corbett

Good afternoon and thanks for taking the time to join our second quarter earnings call.

I'd like to begin by congratulating Jennifer Idell, on her new role as our company's Chief Financial Officer. Jim Antal served in that role since we formed the company back in 2000 and has been the primary Investor contact with those of you in the analyst community for the last 16 years.

Prior to Steve and I recruiting Jennifer to CenterState, she was the CFO of another Florida bank when the recruited her in 2010. And since that time she has served as our bank level Chief Financial Officer. She has worked side-by-side with Jim over the last six years and Jim will continue to consult with us through the end of this year. We want to wish Jim all the best in his retirement. He's been a great partner since Ernie and I started the bank and the company and we will miss having him around on a daily basis.

We are equally excited for Jennifer to take on her new role. Having worked together for the last six years, we know that she is the perfect cultural fit and absolutely the right person for the job. She's also an over achiever. She decided that taking on the Chief Financial Officer role was not a big enough challenge for her in 2016, so she decided to have a baby at the same time. Her baby is due in September and she is anticipating and we are to a smooth transition into motherhood along with her new role as CenterState this fall.

And I'm pleased to report on our second quarter results and afterwards Steve and Jennifer will share some guidance to help you refine your models for the rest of 2016. We reported net income for the quarter of $15.7 million or $0.32 per share. There were no one-time items so was a clean quarter. This equates to a 52% increase in earnings per share from the same quarter last year.

Highlights of the quarter included completing the systems conversion of the First National Bank of South Florida on May 20 and on that same day we consolidated six branches in South Dade County. This follows the consolidation of two other branches in Polk County in the first quarter tied to the acquisition of Community Bank of South Florida. As a result, you'll see that we achieved our targeted cost savings on these two acquisitions faster than we had planned and had communicated to you previously.

Return on average assets for the quarter was a strong 1.27% and our efficiency ratio dropped to 57%. Our return on tangible common equity was 15.6% versus 10.4% a year ago. So our goal moving forward is to continue to maintain our return on tangible equity in the mid-teens.

On the balance sheet for loan growth I continue to characterize loan demand and production as steady. We produced $235 million of new loans for the quarter, which is close to the run rate we need to hit our $1 billion production target for the year for 2016. Excluding the purchase credit impaired loans we experienced 11% annualized loan growth in the first half of the year which is what we forecasted and where we hope to end the year.

Our loan to deposit ratio fell from 81% last quarter down to 77% because of the two acquisitions, so we have ample cheap inventory to lend and there's no pressure to raise our deposit cost in the near term.

On the deposit side growth slowed down a little bit from the first quarter pace but still at a 13% annualized growth rate for the first half of the year. So loan and deposit growth are consistent with our long-term goal of growing everything good in the bank at 10% annually.

From a capital management standpoint, we ended the quarter at a tangible common equity of 8.5% that's up from 8.2% at the beginning of the quarter. And because we've got excess core deposits to lend we are not pushing the balance sheet larger for the sake of size. And with our earnings rate a 1.27 return on assets, we're accumulating at a fairly rapid pace so we should have ample capital to use if it's warranted in an acquisition.

Also with our $0.04 dividend, our pay out ratio is only 12.5% of earnings, so there's plenty of room to continue our current pace of dividend increases.

Taking a moment and talk about the goals for the company. For the last couple of years, we've communicated three financial goals. To achieve $5 billion in asset size, to achieve a 1% return on assets and an efficiency ratio sub-65%. All of those goals have now been achieved.

As I've mentioned previously our primary financial goal now has shifted to manage the business in a way that produces sustainable shareholder returns in the mid-teens and creates a sustainable compounded growth rate of earnings per share intangible book value per share. We are in no rush to content with the issues of becoming a $10 billion bank in the near-term, so growth and asset size is no longer the primary goal.

After Brexit, the entire banking industry is working to develop strategies to create shareholder value in spite of the headwinds of a lower for longer interest rate environment. So I want to share our strategy. Prior to achieving our profitability goals we were very focused on managing the expense line by leveraging our backroom infrastructure with M&A and through branch consolidation.

Moving forward, we plan to begin investing into revenue producing teams to grow organic revenue capabilities. Our strategy is threefold. We want to improve our earning asset mix from 77% loan to deposit ratio to about 85% by 2018. And we're going to do that by investing in new commercial lending teams. The second strategy is to invest in new fee income lines of businesses and teams.

We've talked about it before and Steve can talk about it some today. Mortgage is a lever we have not pulled yet. SBA is a line of business we have not been involved with. And one business line that has done very well for us and will continue to invest in is our loan hedging program in our corresponding department.

And the third strategy continues to be M&A. While not necessary, given our scale right now, we will pursue a partner if the price is right, the geography is right and it will help us leverage our expense base or accelerate our fee business -- our lines of business.

As for M&A during 2015 there were 20 announced bank sales in Florida, which brings us down now to about 141 banks remaining in the state. There have only been three sales announced in Florida through the first seven months of the year including one announced today. However, based on the activity that we're seeing the number of closings should occur at a much faster pace in the back half of the year. We have evaluated a few possible partners now but our current capital levels and earnings profile, we feel no pressure to announce a transaction for the sake of growing assets.

That concludes my prepared remarks, I'll turn it over to Steve to talk about revenue guidance and then Jennifer will give some expense guidance. Steve?

Steve Young

Thank you, John. Good afternoon everyone.

I will report out on our revenue results for both net interest income and non-interest income as well as our near-term forecast. First of all net interest income. Tax equivalent net interest income increased approximately $3.6 million from the first quarter primarily as a result of the assets acquired on March 1 in our Homestead acquisitions.

Net interest margin declined from 4.35% to 4.14% as expected and as we guided. The core NIM, which excludes the impact of accretion on the PCI loan declined 2 basis points from 3.72% in quarter one to 3.70% in quarter two mainly as a result of lower yielding securities in the investment portfolio as a result of the Homestead acquisition.

As a point of reference that same core NIM was 3.75% in the second quarter of 2015 which results in about 5 basis points of compression from the same quarter last year. Non-PCI loan yields increased 7 basis points from the first quarter as a result of full-quarter impact of higher yields in the Homestead acquisition. The average loan acquired coupon was north of 5% in this acquisition. PCI loan yield declined as expected as a result of blending in the new Homestead PCI loans at approximately 8% to existing higher-yielding legacy PCI loans. Per page eight of the earnings release, the company still has a $72 million discount on PCI loans or approximately 25% of the unpaid principal balance.

There continues to be significant future accretion in order to soften any NIM compression in this low rate environment. Security yield fell to 2.49% on a tax equivalent basis as a result of higher mortgage-backed prepayments which accelerated the amortization of the premium as well as lower yielding assets deployed as a result of the Homestead acquisition.

I'm happy to report cost of deposits remains flat at a healthy 17 basis points. So as we move forward based on our loan growth forecast as well as smaller PCI loan balance, we expect our net interest margin to continue to contract 5 to 6 basis points each quarter for the next two quarters.

Our original forecast for the last couple of quarters was to be 4% at the end of the year. It looks like we may end up slightly ahead of that. Our core NIM which excludes the impact of accretion to decline 2, 3 basis points each quarter before the investments that John talked about before in lenders move our loan to deposit ratio up above 77%, which should soften any core NIM compression.

Moving onto correspondent banking and non-interest income results. Our correspondent banking non-interest income increased to $9.3 million from $8.8 million in the prior quarter. This increase in revenue from prior quarter's primarily result of our loan hedging product sales as it compares to the second quarter of last year 2015, non-interest income increased approximately $700,000 quarter-over-quarter driven primarily by the same thing loan hedging product sales.

Net income for the quarter in that division was $0.05 per share fully allocated or $0.06 in the first quarter and $0.05 a year ago second quarter, so very steady results. Based on the ramp of our loan hedging product along with the favorable environment fixed income, we would expect the run rate of all of our correspondent banking non-interest income to approximate $7.5 million to $8.5 million per quarter for the foreseeable future which translates -- continues to translate between $0.04 and $0.05 per share.

As it relates to other non-interest income excluding the correspondent banking it increased $1.1 million or 17% from last quarter from $6.5 million to $7.6 million. This was a result of fourth quarter impact of the Homestead acquisition which resulted in more service charges. Based on some of the initiatives we have in place, we would expect the run rate for other non-interest income to approximate $8 million by quarter four.

So in summary, you put the correspondent non-interest income appears to be ramping toward a $7.5 million, $8.5 million quarterly run rate, while the rest of the bank should run around $8 million by the quarter four.

With that, I will turn the call over to Jennifer to discuss non-interest expense and the allowance for loan loss.

Jennifer Idell

Thank you, Steve.

I'd like to comment on allowance for loan loss and non-interest expense. First, the allowance for loan loss; the company recorded 911,000 and provision expense this quarter. And had $139,000 of net recovery resulting in an increase in the allowance of $1,050,000 to $24,000,000 in total. This increase is due to a $1.2 million increase in the allowance for originated loans which is offset by $156,000 decrease in the allowance for acquired loans and a very small decrease of $14,000 in PCI loans and this is all shown in the table on page 8 of the release.

The allowance for non-impaired originated loans increased primarily from the $170 million increase in loan balance is outstanding. The classified ratio on these loans remained at a 1.04% which is consistent with the prior two quarters. The total allowance of $24 million on total loans of 3.2 -- on total loans of $3.2 million. When the unamortized fair value discounts are included, the total ratio would rise to be 3.59%. We believe that the company's allowance is adequate and provision expense should remain relatively flat to the second quarter given our current credit metrics.

And now to comment on non-interest expense. There was $37 million of non-interest expense in the quarter of which $3.5 million is related to the correspondent division variable commission, $611,000 is credit related leaving $33 million of core non-interest expense compared to $30 million of core non-interest expense in the prior quarter. This increase in core of $3 million in the quarter is mainly attributable to the acquisition in Homestead that were closed in the first quarter.

Core non-interest expense as increased $4.6 million versus the fourth quarter when there was no impact of the Homestead acquisition resulting in an annualized run rate of additional $18 million. We anticipate the core run rate in future quarters to be consistent with the second quarter as we expect any further cost cuts from the Homestead acquisition to be reinvested in future quarters.

Regarding credit expenses, we anticipate those to be in the $650,000 to $750,000 for future quarters as we continue to work through existing OREO. And corresponding commissions continue to be a function of revenue.

So in summary, we anticipate that non-interest expense will continue to be consistent with the second quarter with any adjustments in variable comp expense regarding correspondent revenue. Thank you.

And I will now turn the call back to John Corbett.

John Corbett

Okay. This time we are happy to respond to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Brady Gailey of KBW. Your line is now open.

Brady Gailey

Hey, good afternoon guys.

John Corbett

Hey, Brady.

Brady Gailey

We have heard from some other Florida banks this quarter that they are slowing down there growth plans in the state of Florida just given the shape of the yield curve and increased competition in the CRE space. How do you all think about the opportunity of some other banks may not be able to lend as much in CRE or maybe they are scaling back, is commercial real estate a big opportunity for you all to grow loans?

John Corbett

Brady, this is John. Historically we had a very, very low CRE ratio -- concentration ratio. We continue to be below the guidance. On a consolidated basis we were about 268% on the CRE and only 31% on construction and development. So our philosophy has always been we did not want to be a faucet on faucet off bank to where we couldn't continue to help our clients. But because some of these other banks are backing out, it seems like there are some dislocation in the commercial mortgage-backed market. There's probably some opportunities to get better yields maybe than we did last year. So, our plan is to continue to study on, take care of our clients but maybe get a better yield than we did in 2015.

Brady Gailey

Okay. And then on the hiring side and I know you have all been successful on hiring away some talent. I know it's one of your three strategies as far as to get the loan and deposit ratio higher. What are your hopes in hiring over the back half of this year and into next year? I mean do you have a number of lenders you want to hire? Or how are you going about finding that talent and bringing them into the CenterState umbrella?

John Corbett

Roughly 65 commercial producers including our market presidents now. You asked for the back half of the year. I'm kind of looking at a little longer-term basis. I'd like to see us add maybe 15, maybe up to 20 over the course of the next year and a half or two years. And I prefer to do it by way of teams. Bringing a team leader over and letting him bring his team. And so some of these contacts come from our existing lenders in the field, some of the context are coming through our correspondent bank and we've been here a long time. So I mean Ernie myself, lot of the team we just know a lot of folks that are looking to join the CenterState team. And up to this point as I said earlier we've been so expense focused we really haven't made it a priority to go out and recruit. And we think hiring teams there are some opportunities now.

Brady Gailey

Okay. Great. Thanks for the color.

Operator

Thank you. And our next question comes from Tyler Stafford of Stephens. Your line is now open.

Tyler Stafford

Hey, good afternoon guys.

John Corbett

Hey, Tyler.

Tyler Stafford

I wanted to start on deposits. And we have seen from a few other Florida banks so far I think in 2Q, slower or virtually non-existent deposit growth this quarter. Is there anything that you point to specifically this quarter that is causing that slower deposit growth?

Steve Young

Sure, Tyler. This is Steve. If you look at our numbers for the first quarter of this year we grew deposits excluding the acquisitions of 21%. So it makes tons of sense that we would -- I think we came down around 4% which if you average out the first six months of the year it's around 11% growth. So that's kind of where we want to be from a long-term horizon perspective.

And if you think about it in terms of our loan to deposit ratio being 77%, there is no reason for us to chase other than VDA and core accounts. There's no reason for us to chase deposits. And so if you look at our actual core deposits actually increased as a percentage up to 85% non- CD deposits from 84 from last quarter. So we're not seeing any issues today maybe what you are seeing in other places.

Tyler Stafford

Okay. No, that's helpful. And then, I wanted to follow-up on the NIM guidance. In the prepared remarks, I believe you said earning asset growth should be relatively flat but for the NIM -- there to be a NIM accretive remix between loans and securities as you work that loan to deposit ratio up to 85%, I guess I would have thought that NIM accretive remix would have been more of an offset to that 5 bps of margin compression for core year expecting it. Is it mainly as a compression just coming from lower loan yields from new credits you are putting on the books?

Steve Young

Right. Yes, Tyler. And part of that has to do with kind of our duration expectations on the loan yield. I think right now we're in a place where you want to be neutral you don't want the best of farms certainly that we are going to be in race for lower nor do you want to bet it on the farm that you're going to have rates a lot higher. And so where we're putting assets on this past quarter was around 2.5 years to 3 years and the spreads are about 3%. But, your 5-year yield curve, we are putting on it 375. So we're putting on new loans at 375 and durations of the curve or the spread of the curve is right at 3%.

So it depends a little bit on what the curve does. But, I would just expect from a core NIM perspective what we disclosed a 3.70% to have some pressure over the next couple of quarters until some of these other investments that were made in lending from our 77% loan to deposit up to 85% over time as we move that up that will help that.

And then from a PCI accretion perspective, there is still a lot of it out there like I mentioned on the call, we have $72 million worth of discounts, which if you compare that to any of our peers it's pretty substantial and it will help offset, if we do stay in here and low rates for longtime continue to help offset any compression.

Tyler Stafford

All right. Okay. That's helpful. And then, just last one for me. Do you have an accelerated accretion number you recognize this quarter?

Steve Young

Sure. It's around $4.8 million. So total PCI accretion was $8 million. If you pull off the coupon payments of around 3.2, I guess it was -- 4.8 would be the accelerate.

Tyler Stafford

And just to be clear that's apples-to-apples with the 1.2 last quarter?

Jennifer Idell

No. This is Jennifer. The comparison to the 1.2 million is $650,000. That would just be accelerated accretion what from payoffs et cetera. So the $650,000 is part of the 4.8 that Steve is speaking of from PCI perspective.

Tyler Stafford

Okay. That's clear. Thank you so much.

Operator

Thank you. And our next question comes from Joe Fenech of Hovde Group. Your line is now open.

Joe Fenech

Good afternoon guys.

John Corbett

Hey, Joe.

Steve Young

Hey, Joe.

Joe Fenech

John or Steve I guess, maybe Steve on the correspondent piece we all think of it as mostly tied to volatility and rates in the fixed income aspect of the business et cetera, et cetera. I know you have all had made some changes in that business. So it's not entirely driven by those factors, can you maybe take a minute and breakdown for us the specific components from where we sit today of that revenue and income stream.

Steve Young

Sure. Happy to. So we have traditionally back in 2008 got into the correspondent business and really we were focused on two things, the bond business and then the payments business. And the bond business practically made up 85% of the revenue as we are building payments business. In 2013, we were able to get into a new product line with a group of people that we knew for a long time, who are involved in the loan hedging business -- the swap business that we provide a product for banks in order to help them on the duration of their assets and liabilities.

And so as you characterize the revenues this quarter of the $9.2 million worth of revenue and $9.3 million about $1.2 million of it in the payment perspective, payments world. About -- it's a little more than $4 million -- around $4 million within the bond business and other $4 million roughly in the hedge business. And so what has happened is we were [indiscernible] another business that really has a good ramp ahead of it, which is not really as high density interest rates as much as -- obviously the bond business is. So that's where we kind of diversified the business out and so it kind of look at it 40% hedging and 40% bonds and maybe 15% to 20% payments.

Joe Fenech

Then is the hedging primarily helped by volatility?

Steve Young

It's what is doing is, it's helping our Community Banks hedge their interest rate exposure. So if they want to do long-term fixed-rate loans in order to help their customers. We're able to provide a middleman and get a fee between us and the upstream Wall Street banks in order to provide the swap. But a flat yield curve is the best environment for them to sell that product.

John Corbett

Right.

Steve Young

There is no advantage to go out long.

Joe Fenech

Okay. That's helpful thanks. And John you surpassed the 15% ROTC threshold maybe a little sooner than maybe I was expecting. It would seem as though you maybe have some excess capital here to put to work. Is there a stretch target, you think you can get to of certain acquisitions for your way? And you can put some of that excess capital to work on the ROTCE and how should we think about where you are comfortable with where the denominator in that equation sort of ultimately settles out?

John Corbett

It's not a stretch target that I would speculate on. I think about TCE levels, we probably want to maintain them in that 8% to 8.5% range. I think I said historically that if we dip below 8% temporarily, we feel like that's mitigated because of the off-balance-sheet equity and these discounts, number one. And number two, because we are trying to leverage the deposits we've got today, we're not growing the balance sheet. We are not purposely trying to grow deposits and grow the balance sheet. So therefore at the rate of income that we have got, we're going TCE maybe in the 75 to 85 basis points a year. So we think there is ample capital if an opportunity came along.

And conversely the stocks traded around 190 to 2x book range. It's not a bad time to issue shares instead of cash as well. So that keeps there from being a limiter on capital of accretion shares. But, I think we will stick with the guidance of mid-teens as kind of our goal.

Joe Fenech

Can you maybe fine-tune how you characterize a dip, is that 50 basis points, 70 basis points that the amount that you would be willing to temporarily go below the 8%?

John Corbett

I think the bottom would be 7.5% and for the perfect scenario I can't ever see us going below that in the near-term. That I think that's probably where the bottom would be in -- it's probably not likely.

Joe Fenech

Okay. And in the release you guys said that the cost saves and the deals were achieved at a faster pace than you expected. Should we take that to mean that the bulk of the cost saves are already the numbers here and is that maybe alter the timeline relative to how you're thinking about your readiness for the next deal back in March when you close the deals since the implication is maybe the integration is gone even smoother and quicker than you thought.

Jennifer Idell

Yes. This is Jennifer. As I mentioned before, most of the cost saves were achieved, however, as John mentioned we did close six branches in the second quarter. And so any future cost saves that we would realize fully in the third quarter are going to be reinvested into some of the future revenue producing opportunities that we spoke about previously.

John Corbett

That's the expense side of your question Joe. But relative to -- if an opportunity came along, there's nothing precluding us from moving ahead both the conversions are done fully integrated. So if there was an opportunity we would be precluded from it at this point. There are integrations behind us.

Joe Fenech

Okay. And last one for me and I will hop off. John you touched on sort of the state of Florida earlier, but can you talk about by submarket what you are seeing areas where you have concern, areas where you are more optimistic relatively speaking and seeing any signs of overheating generally by market.

John Corbett

Yes. I will make this general comment from a big picture standpoint. When we got into the recession, it typically, it started in South Florida and moved up to Central Florida and then hit North Florida last. I would say as far as how things have come out of the recession and heated up clearly South Florida is the hottest followed by Central Florida and North Florida would be the earliest in the recovery stage.

From a submarket standpoint, when I look at Dade county we're not in Miami centric we are down 20 miles south of Miami. But as I have gone to conferences and things down there clearly there has been an abundance of construction of condos and multi-family. And even up in Orlando and some of the Metro markets a lot of multi-family construction. So we continue to be a little concerned about multi-family. But other areas of retail office we feel like there is a longer ramp ahead of us further than multi-family.

Joe Fenech

Any markets that you are particularly excited about?

John Corbett

I'd love to continue building out Orlando and Jacksonville. We are -- one day we will find an opportunity to create a large team in Tampa, but we don't have it today. We have got one LPO small office, but would love to build out Orlando and Jacksonville. Again, I feel like the economic cycle is going to last longer there than it might down in South Florida.

Joe Fenech

Great. Thank you guys.

John Corbett

You bet.

Operator

Thank you. And our next question comes from Michael Rose of Raymond James. Your line is now open.

Michael Rose

Hey, guys. How are you?

John Corbett

Good morning.

Michael Rose

Hey, just following up on the hiring question, I think you said 15 to 20 lenders and you just mentioned Jacksonville and looks like one of the bigger banks in that market while more of a national player in terms of their business line might create some opportunities there. But as you think about those 15 to 20 lending hires, mean, would you expect kind of a concentration or focus in the Jacksonville market? And then, what other priorities outside of geographic -- I mean it sounds like you might look into SBA but what -- kind of what opportunities are you looking at this point?

John Corbett

So we're going to follow the talent and the cultural fit first, but geography wise naturally we are trying to urbanize the lending team. We've got a great core sticky deposit base, but a bank our size of $5 billion, we need to be doing larger loans to grow this loan book quicker. And so the urban market Jacksonville, Orlando, Tampa, Palm Beach and Boca Raton areas have been good for us.

From a type of lender standpoint, you can load the boat on CRE in the state of Florida, so we -- the way we try to balance that out is through hiring. And we've got some incredibly talented CRE lenders with the bank and we do not want to slow them down. So, I think we look for -- trying to get some balance on more C&I small business owner occupied type of lenders. And then, naturally these lines of businesses relative to SBA, we did bring on an SBA individual in the last month that started up an SBA division for a couple of other banks. We've not done that in the past so that's a brand new line and we're going to crawl before we walk and walk before we run, so we are going to get it up and running and love to make that scalable around the state.

Michael Rose

Okay. That's helpful. And then, just kind of wanted to dig into your thoughts around the efficiency ratio. So, if I heard you correctly, obviously margin is going to be a little bit of a headwind, I don't think that's unanticipated. But, on the flipside, it looks like the cost saves in the few deals are coming a little bit quicker. Looks like the run rate in the correspondent business is going to be flat to maybe modestly down $0.45. In a quarter earning asset growth is going to be relatively benign maybe here in the short-term. So how should we think about progression either positive operating leverage or maybe more specifically as it relates to where you expect the efficiency ratio to kind of trend through the next year or two?

Jennifer Idell

Michael, this is Jennifer. We did achieve 57% just down from 58%, so we are targeting in the high 50s. So just below the 60% range going forward in for the next few quarters.

Steve Young

We could pull it down a little bit further, but again, there is this reinvestment mentality right now. So, we have been so focused on getting it below 65, we're now below 60. And so maintaining that sub-60, we think is doable, but we don't want to box ourselves in because as opportunities arise to hire these teams, we want to get the organic engine accelerating.

Michael Rose

Okay. That is helpful. And then, maybe one last one for me. So, Florida, I don't know how you guys are characterizing it, where do you think we are kind of in the recovery, and are you seeing any sort of blips on the credit front that might give you some pause? Or maybe make you a little less reticent to make some loans in either a particular geography or category? Thanks.

John Corbett

Yes. So far within the bank credit is great right now as we sit here today. We have two consecutive quarters of net recoveries past dues are declining. Some of the problem assets that we acquired with the Homestead banks are quickly being resolved. Our OREO dropped from about -- almost $16 million down to $12 million this quarter and today we've got contracts on another $4 million in the third quarter. So we could see that in close to $1 million of that. So we could see OREO drop from 12 to 8.

So, right now, everything seems to be going the right direction on credit. But, as we looking our crystal ball, I think I answered in response to Joe's question, I continued to talk to the lenders about staying away from multi-family, staying away from international Miami with all of the South American influxes which were really not there. But, the rest of the state looks pretty good. Particularly, I think Central and North Florida got ways to go.

Housing -- single-family housing I think it's going to be incredibly strong for the next 2 to 3 years. Ernie gave some of those statistics. We have got something in one of our investor presentations we're going to print for the second quarter here. Clearly, the state of Florida overbuilt in single-family housing, but if you look at the data of the new permits per person in Florida, we have way under built single-family housing over the course of the last seven or eight years. I see that as a great opportunity. Now, how we engage in that business whether it's putting portfolio loans on the books, whether we get involved in the builder lines, I don't know. But I think there's quite a ways to go with single-family housing.

Michael Rose

Okay. That's great color, John. Thanks for taking my questions.

John Corbett

Sure.

Operator

Thank you. And our next question comes from John Rodis of FIG Partners. Your line is now open.

John Rodis

Good afternoon guys.

John Corbett

Hey, John.

Steve Young

Hey, John.

John Rodis

I guess most of my questions have been asked and answered. But maybe just Jennifer on the tax rate still around -- should we assume 35% or so going forward?

Jennifer Idell

Yes. We are at 34.4% right now. So I think 34% is probably a good, 35% is a good assumption for your models.

John Rodis

Okay. And John just sort of back to growing the loan to deposit ratio, would you guys sort of consider buying a pool of loans or anything like that?

John Corbett

Yes. I mean that's down the list. I mean, I think if we are not as successful as I hope we are in recruiting teams, we might consider that. There's couple of other banks. And that gets back to residential. I think I'd be more interested in purchasing residential right now. But, you worry about the prepayment speeds on those. So I think we want to give it a couple of quarters to see what kind of momentum we can get with these hires in our organic loan rate before we consider buying pools. Historically, we have not been a wholesale bank everything has been pretty organic.

John Rodis

Okay. And then, Steve, maybe just a quick question for you on the securities portfolio. Would you expect it to sort of stay around this $1 billion range going forward?

Steve Young

Yes. Good question, John. Yes, I would. I don't think we will increase a lot and back to the strategy here is to increase the loan to deposit ratio. So back to -- take 50 basis point, Fed fund numbers and put them in loans that are close to 4%. That sort of the strategy from here. I don't see huge movement in the yield curve that would make this opportunistic in buying any more securities.

John Rodis

Okay, great. Thanks guys.

John Corbett

Thank you, John.

Operator

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Corbett for closing remarks.

John Corbett

Okay. Thank you, Candice. And I appreciate everybody calling in this morning. As always feel free to call Steve, Jennifer, myself if you have any follow-up questions. And I think we're going to be on the road this quarter visiting several of you at your conferences. So we look forward to seeing you then and thank you for calling in. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone.

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