SouthState Bank Corp (SSB) 2015 Q4 法說會逐字稿

Good morning and welcome to the South State Corporation quarterly earnings conference call. Today's call is being recorded.

(Operator Instructions)

I will now turn the call over to Jim Mabry, South State Corporation Executive Vice President in charge of Investor Relations and M&A.

Thank you for calling in today to the South State Corporation earnings conference call. Before beginning, I want to remind listeners that the discussion contains forward-looking statements regarding our financial condition and results. Please refer to slide number 2 for cautions regarding forward-looking statements and discussion regarding the use of non-GAAP measures.

I would now like to introduce Robert Hill, our Chief Executive Officer, who will begin the call.

Good morning. I'll begin the call with a brief overview of our accomplishments during 2015, and then John Pollok, our Chief Financial Officer and Chief Operating Officer, will review the highlights of the fourth quarter. I will then close with a few summary comments prior to concluding the call with a Q&A session with the research analyst community.

We're very pleased with the performance of our team in 2015. For the year, operating EPS total $4.31, up 15% from 2014. Tangible book value increased 9% for the year to $27.88. The results reflect a focus on building a foundation that positions the Company for future growth while attaining record financial performance. The Board of Directors has declared a quarterly cash dividend of $0.28 per share, which represents a $0.02 increase from the previous quarter, and a 21.7% increase from a year ago.

The year was marred by low levels of nonperforming assets and 5% net loan growth in the fourth quarter. Annualized net loan growth was 9%. This growth was exhibited across the franchise. Our Company is well-positioned today, as the alternative to the large banks in our market. We believe the pieces are in place to continue the momentum into 2016.

Wealth management and mortgage banking both continued strong success. Assets under management in wealth management now exceed $4 billion, and mortgage banking income grew 34% in 2015.

I will now turn the call over to John Pollok for more detail on our financial performance this quarter.

Thank you, Robert. We had a strong finish to the year with operating earnings for the quarter of $27 million, which represents a 10% increase from a year ago. This represents $1.11 per share on an operating basis and operating return on assets of 1.25%, and an operating return on tangible equity of 16.8%.

Net income totaled $25.5 million, or $1.05 per diluted share, which was impacted by nonoperating items totaling $0.06 per share. These items included pre-tax branch consolidation and acquisition expenses totaling $1.6 million, and other than temporary impairment expense of $500,000, reflected as a reduction to non-interest income.

Excluding the OTTI charge, non-interest income was flat on a linked quarter comparison. Fees on deposits increased $1.9 million linked quarter with the largest increase coming from bank card services. Offsetting this increase was a reduction in mortgage banking income of $1.6 million and a reduction of $800,000 in trust and investment services income.

On slide number 6, you can see our net interest margin declined 20 basis points from 4.52% in the third quarter to 4.32% this quarter. As you recall from last quarter's discussion, this decline was expected as we noted two primary items. First, the fourth quarter would be the first quarter that the margin would have the full impact of the excess liquidity balances from the branches acquired on August 21. Second, the acquired loan yield earned in the third quarter was somewhat elevated.

Lower acquired loan yields were the primary contributor to a 22 basis point decline in the yield on earning assets. The performance of the acquired loan portfolio continues to improve as we identified $16.9 million in additional credit releases as part of our quarterly review of the portfolio. While these releases help hold the yield higher, the impact is somewhat mitigated by the increase in the weighted average lives of some of these pools.

Turning to slide number 7, we made good progress this quarter in deploying this liquidity in securities and loans. The investment portfolio averaged $944 million during the fourth quarter, but the period end balance was over $1 billion. So we should see some small improvement from the higher-yielding mix next quarter. You can also see that we had a roughly $200 million increase in the average non-acquired loan book from the prior quarter. The average balance increased to $4.08 billion, but the period end balances totaled $4.221 billion as much of the growth came toward the end of the period.

Turning to the expense side, non-interest expenses excluding one-time branch consolidation items were roughly unchanged from the third quarter and totaled $70.3 million. We achieved the remainder of the cost saves as planned this quarter from our branch consolidation efforts announced earlier in the year. These additional saves offset the small increase in expenses due to a full quarter of the branch acquisitions that closed at the end of August.

On slide number 8, we are announcing some additional consolidations. We are consolidating 11 additional locations, 8 of which are planned for the second quarter, with the remaining occurring in the third quarter. We expect to incur one-time costs of approximately $3 million with cost saves of approximately $3 million on an annualized basis by 2017. These consolidations will help slow the growth in our overhead costs as we continue to prepare to cross the $10 billion threshold.

On slide number 9, you can see our operating efficiency ratio increased slightly due primarily to the reduction in net interest income linked quarter. Finally, on slide number 10, you can see the significant progress we have made over the years in operating EPS.

I will now turn the call over to Robert for some summary comments.

Thank you, John. I believe South State is prepared to prosper in the years ahead. We look forward to 2016 and the opportunity to improve upon these results. We continue to look for ways to better serve our customers and add more talent to our team. The efforts over the last two years have prepared us to drive performance through organic growth and to consider opportunities to enhance shareholder value through acquisition.

That concludes our prepared remarks and so I would ask the operator to open the call for questions.

(Operator Instructions)

Christopher Marinac, FIG Partners.

Thanks. Good morning. Robert, John and Jim, I was curious if you could give some additional color in terms of what you're seeing within your markets? Has there been any change of activity these last six to eight weeks in terms of your slowdown or any additional feedback from customers?

Chris, this is Robert. We've obviously stayed close to customers, tried to get feedback on how they see it and really see no direct correlation between the volatility in the stock market and the overall economy or really our customers outlook. They continue to feel good about the stability of their businesses, are investing. I think we saw that in our fourth-quarter loan growth and our pipelines. So we continue to really don't see a connection between what's happening in the stock market and the overall economy.

Okay. Great. And I guess just a quick follow-up, I guess this has to do with reserves and how that plays out this year. Do you see yourself building reserves just for growth or to what extent do losses drive what you do ultimately with the vision?

Chris, this is John. I guess the way we look at the reserve, it is somewhat of an accounting exercise. We have a model that we put all of our performance through but our MPL coverage now is up to 180%. Our charge-offs for the year were 9 basis points. Our NPAs are down to $53 million, so our credit costs just continue to do extremely well. Clearly, looking at growth, we'll be looking at the provisions, but our view historically on the provision has been, you put it in the model and we kind of look at that in capital in tandem when we think about the stability of our balance sheet.

Okay. Great. That's helpful, guys. I'll yield the floor. Thank you.

Nancy Bush, NAB Research.

Good morning. Just have a question for you on the efficiency ratio. You're kind of bouncing around the low 60%s here, and have you guys ever explicitly put an overhead target out there? And are we going to stay at this low 60%s level do you think throughout 2016? Or is there another leg down in front of us?

Nancy, this is John. I think clearly every year we look at expenses. You can see we've announced some new initiatives for this year.

What we've kind of said, we wanted to get down in the low 60%s. We clearly are going to have to continue to get more efficient as we get bigger. Our hope is we can have a more revenue growth.

I think if you step back and look at our Company, in 2014, we really shrunk assets. We only had 1% loan growth. 2015, we had 5% loan growth and almost 9% loan growth in the fourth quarter. And so our hope now is that we can continue to grow those loans and get some more on the revenue side. So I think it's a combination of both.

Nancy, this is Robert, just to kind of add-on. If you look back, in 2013, we obviously did the merger. 2014, 2015, it was really kind of rebuilding a platform and part of that rebuilding a platform was one, scalable and two, more efficient.

So just for example, the late third quarter this last year, we rolled out our online mortgage application. A much more efficient process. In the fourth quarter, we had 400 online mortgage applications.

We've expanded our electronic product delivery platform. Rolling out a new mortgage loan platform this year. So we've done a lot to lay the groundwork for it. And now, we're starting to outpace the acquired alone runoffs. So I think all those things together, we certainly feel like the efficiency ratio will continue to improve. Ultimately, we've got to get it sub-60%.

Right. Okay. Secondly, I would just ask an M&A related question. Your philosophy about M&A is -- it's out there. You guys have said you want dense and old I think were the two words that you use for the franchises that you are interested in.

Are you seeing more of those types of franchises perhaps ready to turn the keys over? Or is it going to be the same pace for you guys, which is less than some of your peers for reasons of your pickiness? How do you just see the whole -- your whole M&A outlook playing out?

Well, let me kind of tackle two things. And maybe add on to your question there a little bit. I'll address the M&A piece but let me just talk about the organic piece along with that, because that's really our primary focus is the organic growth of the Company.

So we had 9% loan growth in the fourth quarter. That's really even with selling off $7 million in loans from our branch dispositions. 29% of that growth was C&I and we've really are now are positioned in most of our markets, really as the alternative to the big banks. So when you look at the share, it's kind of the big banks and then there's us.

The other thing that we've invested heavily in is just talent recruitment as a growth strategy. So this past year, we added 30 new -- 32 new bankers across our footprint from our direct competitors that will continue -- that are bringing over relationships and adding to our growth rate. That is our primary focus, to make sure our mortgage wealth, retail and commercial platforms are effective and that we're winning in the marketplace. And I'd say today, we feel really good about where those are.

Then, we see kind of M&A as an add-on to that. If the right opportunity comes along with the right team in the right markets and it's a good fit, absolutely going to pursue it. I would say over the last six months, that the activity has been very robust.

But as you said, we tend to be very selective on our partners. Very deliberate in our M&A activity. We have a very defined M&A strategic plan and we live by that plan. So we're seeing a lot of opportunities.

Obviously, there's been a lot of volatility in the market over the last 30 days that could accelerate some opportunities or maybe slow some things down. But overall, the platform's in place for us to add more volume, it's a scalable platform, our leadership team's in place and now it's just a matter of if we find the right opportunity. But we're very open to it.

Okay. And if I could just ask finally, the consolidation of these branches that you've just announced, was there any particular factor that lead you to close these 11? And is this going to evolve into a regular program?

Nancy, this is John. We continue to look at our branches. Obviously, customer habits are changing. The BofA transaction, we had branches that were literally sitting on top of each other. And as we've said a number of times, what we like to do is watch the customer behavior before we do some of the consolidation. So this one was a little unusual because of the BofA piece.

But I think you've got to continue to evaluate your footprint. And I think our big thing is we want to make sure we maintain our core funding. That is clearly the most important thing for us as we move into the future.

And I think that's reflective in our M&A strategy as well as core funding is obviously an important piece.

Okay. Thank you.

Jefferson Harralson, KBW.

Great. Thanks. You guys have a lot of cash in our balance sheet obviously from the branch purchase, and on an average basis, a lot of it came in this quarter. You put some to work.

Can you talk about what you did this quarter with the excess cash and what the strategy is going forward? It seems like -- it's always a great time to have excess cash, but with rates going up you don't want to -- possibly going up anyway, you don't want to invest in things that are immediately going to lose value. So how do you think about using this excess cash and what should we think about on the yield we should earn with this cash at some point in time? And one more, what is the run rate of cash that's normalized for a bank your size?

Jefferson, this is John. Let me start a little higher level. I think, first of all, our loan to deposit ratio is 85%. So we've got in our mind a $1 billion in excess out there today, some in cash, some in the investment portfolio.

As we've said over the last couple of quarters, we have a tendency to stay very short. We like investing in mortgage backs where we can get the cash flow back and so our view is to stay very short on that.

What we announced on our excess cash is we hope that we could get it invested in around the 2% range. And so that's what we've done with some of it.

So obviously, we had nice loan growth this quarter, 9%, so we were able to put some of the cash to work there. But I think ultimately what we've tried to do is create this balance sheet with core funding, not a lot of advances and then we're going to really lever up on the loan side.

In the past, we've typically had our securities book about 10% of our assets. I think, as we mentioned in the last call, we've taken that up a little bit. But over time, I do see that coming back as a percentage and reinvesting that into loans.

And I think -- Jefferson, this is Robert. Our investment strategy has been to try to time as best we can the investment -- purchasing of investments in the bond portfolio that would pay off in time for us to just redeploy that in loans. And I think we've got a pretty good plan around how to execute that.

And Jefferson, one follow-up. We've seen many go out there and buy wholesale loans and do that. That's not our strategy. We know we'll make a little bit less on it right now, but good core solid relationships in the market, we think that's where you create a tremendous amount of value for your Company.

That's so you could go back to the BofA deal, that was one of the whole reasons for doing it. Is it gives us a lot of firepower to go out and pick off relationships. And with what we're seeing that we can move in terms of share from the larger banks, it just puts us in a very patient but well-positioned liquidity spot.

Okay. And my follow-up on the yield on your acquired loans, you guys had guided to below 8% and it came in better than that but it was still down a lot from last quarter. Can you give us any direction or pace of the direction of that metric?

Jefferson, this is John. I think one of the things we're excited about was our acquired loan runoff slowed. So it was a little over $90 million this quarter. We've been running in that $120 million range. As you know, we do a recast of the second month of each quarter just to kind of see what the cash flows look like and what the new yields will be.

Clearly, the acquired book, the performance there is getting better. We've gotten rid of a lot of the things that weren't paying. So if you look today at our acquired book, really, only 10% of it is classified loans.

So those weighted average lives are going to extend a little bit. I think as I mentioned last quarter we felt like the yields would stay below 8%. We clearly did not know at the time we'd have that type of release. So I think it's going to kind of be in that range.

It will continue to get -- the loan portfolio will still continue to get smaller. So it's just, as we've said, over time is going to have less and less impact on us. And the big thing for us is going to be the net loan growth is.

We were excited to get to that 5% loan growth, excited to see what we did in the fourth quarter, clearly the first quarter there's going to be some seasonality in there from a growth standpoint. So I hope when we're sitting here this time next year, that we've been able to get our loan growth up in the upper single digits.

Okay. All right. Thanks, guys.

Stephen Scouten, Sandler O'Neill.

Hey, guys. Good morning. How you doing?

Hey, Stephen.

So I just wanted to follow up actually I guess on one of the last comments you made in regards to loan growth, maybe targeting the higher single digits for next year and do you see any impediments to that? The acquired runoff is slowing so it seems pretty achievable. I'm particularly curious about the 32 people you said you added and what kind of leverage you think they'll be able to deliver in the coming year?

Well, I think you saw some of the results in the fourth quarter. I think that if you look over a broader period of time then just the fourth quarter, the last couple of years have been about making sure that we've got a common culture with the two companies that we've brought together, a common sales culture, that we've got the eight players on the street and focused and knowing the impact that they can have and what type of business we like to go after. We also ran off some business that we didn't want and we got out of some lines of business that we didn't want. So there was a lot of cleanup.

And I would say that where we are today is highly focused. I think our culture is a major differentiator that we are able to bring over people from our competitor banks because of what we can -- how we can deliver in the marketplace. I think that's having a big impact.

So right now, organically, probably feel as good as we have felt in a while around one, the focus, the efficiency around how we are managing those lines of business and the impact and the results that we're having and that are in the pipeline. So we continue to feel good. Normally, first-quarter is normally -- there is a little seasonality and if our pipeline remains robust, I think the opportunity to continue to move business from the larger bank remains plentiful. And we've got a good strategy that is effective and working and very focused.

Okay, great. And then maybe looking at fee, specifically with mortgage. I know you mentioned you had some pretty strong application activity online, but as I look at mortgage banking revenues, obviously from the first half of the year to the back half of the year, there's a pretty big drop off. Is some of that fair value adjustments or has there just been a big volume drop off or what are you seeing there and what do you anticipate seeing in the coming year?

This is John. It's volume related. I think what we're excited about is to have this mortgage servicing asset that we obtained in the First Federal merger. We think that's something that's going to pay big dividends for us long-term.

What we're really seeing on the mortgage side today and you're seeing it in some of our growth, is on the construction side. We're seeing lots of folks buying lots, building houses, a lot of people up North are beginning to sell and relocating to the South. So seeing a little bit more on balance sheet in the construction piece.

That's up in the construction and land development category. But clearly, refinances have slowed down. We continue to attract very good originators. We're very excited about that. We have a very high market share in our footprint on the mortgage side. But clearly, fees have come down due to refinances slowing.

Okay. Got you. I can't figure out why everyone doesn't move down from the North but that's for another day.

On the M&A side, hearing what your answer to Nancy's question there, it sounds like you said activity's been very, very busy in the last six months but you're still selective. So are you just kicking the tires on basically everything that's out there or is most of this increased activity stuff that you think at least generally fits your parameters for what you'd want to buy and just the pricing is not there? Help me walk through why the activity would be so high but maybe we haven't yet seen anything.

Well, it's always been high to be honest with you. We've typically had -- looked at 15 merger transactions before we ever have done one. So it's -- I'd say it picked up in the last latter half of the year because really we were in a self-imposed M&A moratorium for 2014 and 2015 as we rebuilt the platform and integrated the last acquisition. Now that we've lifted that, I think that created a lot more conversation.

I think part of it is that other companies are searching for where they go from here. We've certainly made our decision on where we are going from here which is to continue to build and create a dominant southeastern franchise. That is our goal and that's what we'll continue to try to build on. So I don't think it's anything unusual. I think it's kind of business as usual -- if it is a bank that we would have no interest in, we would tell them that upfront and we do that a lot.

Have a lot of those incoming calls where there's just not a lot of interest. But if we are having a serious conversation, it is obviously a company that we would have some interest in acquiring now, that doesn't mean it will get to the finish line, most of them don't. But I would say active discussions would be people who we would have a serious interest in.

Okay, great. Maybe one last one. Obviously, you did a little bit of buybacks in the quarter at a little above $71 but given where the stock is trading now, would it be safe to say you'd be more encouraged to buy more stock here than you would've at $71? And could that look for an increase in the buyback authorization?

Well, we've got about 87,000 shares, I think, remaining in our existing authorization. Probably would renew it. Even if we didn't buy the 87,000, we would probably renew it anyhow.

So I wouldn't read any -- too much into renewal. I think the bottom line in terms of stock repurchases is that what our main goal and where we feel like we can create the most value for our shareholder is to leverage the capital we're generating, which is significant.

We've got a high return on tangible equity. We're throwing off a lot of capital. We're building our capital ratios.

And we see that as the best way to maximize value there is to leverage it, both organically and through M&A. And that will be our -- clearly, that'll be our primary source of stock repurchase really was just so that we didn't have share creep with some of our incentive plans. And I think that's how we would continue to use our stock repurchase plan.

Okay. Great, guys. Well, thanks for the color and congrats on a strong 2015.

Thank you.

Tyler Stafford, Stephens Inc.

Hey, good morning, guys. Most of my questions have already been answered and I apologize if I missed this in your prepared remarks, but did you guys give any kind of margin outlook for the year? I caught the comment on the acquired loan yields at least in the first quarter, but any more broader outlook on the margin from here?

Tyler, this is John. No, we did not. I think one of the big things last quarter, in the third quarter is we only had the BofA deposits in for 40 days. So I think now, as you look at our margin, you clearly got it in there for a full quarter, which can kind of help you with the margin side.

Of course, for us, is what the organic loan growth is going to be and how the acquired book runs away from us. That's going to have the biggest impact on the margin. Our hope is that now we're in position to be able to grow our net interest income.

Okay. And in terms of I guess the slowdown of the acquired book we saw this quarter, is that approximately a good run rate at this point? Or would you expect it to -- I know it's tough to see, but would you expect it to get -- increase back towards where we were averaging at the beginning of 2015?

Well, it is somewhat of a guess, obviously, but we feel like we'd kind of been in that $120 million range. Now we're down to the $90 million range in runoffs. So if I was in your shoes trying to model, I would probably model it somewhere between those two numbers.

Okay. That's helpful.

But the acquired book did shrink around 30% last year. And so it's just to a certain extent, it's just going to get us to be a smaller and smaller portion of the overall balance sheet. As I mentioned earlier, only 10% of it now is classified so we've got a lot of really good credits in there. So our hope is it would slow some.

Okay. Very helpful, guys. I appreciate it.

Peyton Green, Piper Jaffray.

Yes. Good morning. Actually, my questions just got answered. Thank you very much.

Jennifer Demba, SunTrust.

Thank you. Good morning. What kind of tax rate are we looking at this year, John? Your tax rate I guess was a bit lower in the fourth quarter?

Yes. We had some things that on the benefit side that we were able to get in the quarter. We made a few investments that we got some tax credits for. So I think in your forecast, you should be a little over 34% for next year.

Okay. And the gain on sale from the branches that you recognize this quarter, where was that recognized on the income statement?

It was recognized in where we had the branch consolidation costs, we just netted it in that number.

Okay. Great. Thanks so much.

This concludes our question and answer session. I would like to turn the conference back over to John Pollok.

Thanks everyone for your time today. We will be participating in the KBW conference in Florida beginning February 10, and we look forward to reporting to you again soon. Go Panthers.

The conference is now concluded. Thank you for attending. You may now disconnect.