SouthState Bank Corp (SSB) 2016 Q1 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 will begin the call today with a few summary comments about our start to 2016 and then John Pollok our Chief Financial Officer and Chief Operating Officer will provide some detail on our operating performance. 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 and with our results during the first quarter of 2016. Operating earnings totaled $25 million or $1.04 per diluted share. This represents an operating return on average asset intangible equity of 1.18% and 15.36%, respectively.

The performance this quarter reflects the significant steps forward our Company has made the last few years. We continue to focus on ensuring strong and efficient operating platform, a culture that is consistent throughout the Bank, and generating organic growth. I am very pleased that our culture continues to attract great bankers, and our team is having success in building excellent banking relationships.

We are seeing success in each line of business and market we operate in. Our culture and business model are significant differentiators for us. And we see excellent opportunities for continued growth.

We achieved strong net loan growth this quarter of $160 million or 10.7% annualized. The growth came from many of our markets most notably in Savannah, Charlotte, Greenville and Columbia. I was especially pleased to see the success we are having in building C&I relationships, which had significant growth this quarter. Our core funding increased by $120 million or 8% annualized, with non-interest-bearing checking account balances increasing by $45 million to over $2 billion.

A year ago we announced the Bank of America branch acquisition. That closed in the third quarter of 2015. We are very pleased with our results to date, particularly with the engagement of these new employees and the new business opportunities that these teams are generating.

This quarter we also continued to experience asset quality improvements, with further declines in NPAs and non-acquired net charge-offs of only 9 basis points. During the quarter the tangible book value increased by $1 to $28.88, an annualized increase of over 14%. And the Board of Directors has declared a quarterly cash dividend of $0.30 per share, which represents a $0.02 increase from the previous quarter and a 25% increase a year ago.

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

Thank you, Robert. On slide number 6 we show you the increase in net interest income from $81.4 million linked quarter to $81.6 million. This increase is primarily the result of strong growth in the non-acquired loans this quarter, making up for the decline in higher-yielding acquired loan portfolio balance. This resulted in a small increase in interest income.

When coupled with the decrease in interest expense, net interest income increased $170,000. Net interest margin increased 5 basis points linked quarter from 4.32% to 4.37%. The non-acquired and acquired portfolios both had small increases in yield but the aggregate yield declined by 8 basis points due to the change in the loan portfolio mix.

In the fourth quarter the higher-yielding acquired portfolio represented roughly 31% of the loan portfolio compared to 29% in the first quarter. This change was more than offset by a positive change in mix resulting from deploying some excess liquidity into securities and loans. The end result is a 5 basis point increase in the yield on earning assets. You can see the changes in the average balances on slide number 7.

Average short-term earning assets are down over $200 million, while average securities and loans are up $78 million and $162 million, respectively. On the funding side our cost of interest-bearing liabilities decreased by 1 basis point to 16 basis points, bringing our total cost of funds to 12 basis points. Our balance sheet is predominantly core funded, which continues to be a great source of strength to our Company. At quarter end non-interest-bearing checking accounts and transaction accounts make up over 81% of our funding.

Switching to the non-interest income side, our totals were flat on a linked quarter basis after excluding the OTTI charge in the fourth quarter and the gain on sale of securities this quarter. Fees on deposits decreased $950,000 mostly a result of seasonally lower NSF fees. Offsetting this decrease was an increase in mortgage banking income of $1 million and a $140,000 increase in trust and investment services income.

Amortization of the FDIC indemnification asset was $1.5 million for the quarter. The commercial loss share agreement from the Habersham acquisition expired on March 31. And we continue to have discussions with the FDIC regarding early termination on all of the remaining agreements.

Our entire experience with the FDIC since the start of the lost share agreements has been very positive. And we anticipate final settlement of these agreements in the second quarter. First-quarter EPS would have been approximately $0.05 higher, assuming we had no amortization of the indemnification asset, and assuming we retained all the recoveries received on the covered assets.

Turning to the expense side, non-interest expense excluding one-time items, were up $800,000 linked quarter and totaled $71 million. This increase is primarily related to unseasonal increase in payroll taxes this quarter. As previously announced, we are still on track for future cost saves from the 11 branch consolidations, 8 of which are planned for the second quarter, with the remaining occurring in the third and fourth quarters.

On slide number 8 you can see our operating efficiency ratio increased slightly from the fourth quarter due primarily to the increase in overhead expenses.

Finally, on slide number 9 you can see the significant progress we've made over the years in operating EPS. The first quarter of 2016 is only $0.01 shy of the annual results in 2011.

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

Thank you John. This is a solid start to 2016. We have a very strong balance sheet, significant liquidity, a strong culture, and dedicated teams in excellent markets, clearly a formula to continue to build shareholder value. The Company is operating as well today as it has in years. But there are still many ways we can improve. We look forward to providing updates in the coming quarter on our progress.

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

(Operator Instructions)

Our first question is from Christopher Marinac at FIG Partners.

Thanks, good morning.

John and Robert, I was curious if you could talk to us about the provision expense. And could we see this be repeated, or is this going to be dependent on loan growth?

Chris, this is John.

I think when you look at our legacy provision, I think you'll see more dollars go in the provision. I think the percentage probably could come down some. If you look at our charge-off rates, our last 4-quarter charge-off rate was 11 basis points, the last 8 quarters was 12, and the last 12 quarters was about 18 basis points in charge-offs. I think you'll see some growth in dollars, but you could see that percentage come down some.

Okay, great. And then I was curious, your observations on your markets and how they have been acting, any acceleration trend, or perhaps any changes you've noticed this last 90 days.

Chris, this is Robert.

I would say that overall, really, the markets that we are operating, we continue to see improvement. I think that is obviously reflected in our loan growth this quarter. First quarter is normally a seasonally low quarter for us or low work quarter for us from a growth perspective. But our pipeline was really strong.

And all of our growth was really core. No new lines of business, no shared national credits. It's all really coming from the geographies that we operate in today.

I think some of that is our position in the market, but I think a lot of it is we just happen to be in great markets. You saw, particularly, Georgia performed really well in the first quarter. Savannah, in particular, we saw it, and continue to see it very strong in Charlotte. The Greenville market, the Charleston market, the Columbia market are all really doing quite well.

Great. And last question, somewhat big picture, is just the pricing trends. Robert, would you see anything less competitive or any easier on the pricing front?

I would say it's pretty consistent. It's always competitive, right? We are continuing to see our overall loan yields remain in the high 3%s where they've been for quite a while. You are seeing some stretch on maybe longer terms. But overall ours seem to still be very much in the box from a pricing perspective. I don't see too much out of the norm in that regards.

I think the other indicator that we see in terms of just overall economic health of our markets this quarter, Chris, was really the core deposit number. We tend to look at the loan growth number, but I think core deposits tells a lot about what is going on in the local economies.

Our core deposits up 8%, especially in the first quarter, which normally is not that strong a deposit growth quarter. That made us feel really good. And the pipeline is strong. We continue to see steady improvement, I would say, in, really, all the markets we operate in.

Chris, I would add, if you look at the loan growth side and you go back to the first quarter of last year and the year before, those are two years we shrunk loans. So, economically we are really seeing some nice balanced loan growth in our markets.

Sounds great, guys. Thank you for the feedback.

The next question is from Jefferson Harralson at KBW.

I was going to ask you about the FDIC receivable and the indemnification of [pasa] going away and just the mass on the $0.05. The asset sales on the $2 million, you had amortization of $1.5 million. So, you have maybe one more quarter of that anyway, so it seems like you're really close to having that amortized all the way down.

And then on the other side of it you had $0.04 in receivable costs. And them I'm backing into $0.01 of recoveries. That's a lot of numbers there, but going forward, if you were to buy it out, the main stream you would get is the recoveries. So, so can you just help me? Am I thinking about that correctly? Can you help me walk through the math of what happens if you buy it out?

Sure, Jefferson.

We think the tangible book value earn back is clearly less than a year. One of the things that is a little bit different about what you said about the negative amortization is we have a true-up on the other side. So, the negative amortization would not go away in the quarter. It would continue to trail down.

So, if you look at next quarter, our prediction was it would probably be in the $1.3 million range, but it would continue to trend down. We have a true-up on the receivable, too, because we just did better on the losses. So, you've got that component, and then we obviously don't have to share 80% of the recoveries back with the FDIC.

So, our view is this year we'd have probably about a $0.05 a quarter impact through the meaning of the year, and then next year it would probably be in that $0.03 to $0.04 a quarter for what we would see next year. The only caveat to that is we could do a lot better on the recoveries. And as the economy gets better we just continue to do extremely well on the recovery side.

Okay.

Lastly, I will ask you about any expense efforts that may be underway. I'm pretty sure it's an ongoing thing, but you do have the acquired loan book that is shrinking down and some headwind there. Are you thinking about offsets on the expense side from here?

We are. A couple things on the headwind. One thing we've been real clear about is we needed to get north of 10% loan growth to outrun the accretable yield. You can check that box this quarter.

As we mentioned a minute ago, we have typically shrunk in the first quarter, so we are very excited about where our loan growth is. And our pipelines are very strong. On the expense side, as we announced last quarter, we've got some branch consolidations we are doing. We're going to close eight branches in the second quarter.

Our FTEs are down 19 linked quarter, and most of those FTE reductions came late in the quarter. As you know, Jefferson, we continue to work at expenses. We know that is something we've got to continue to do. We feel really good about the momentum we have, both on the expense side and the loan growth side.

All right, great. Thanks.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good morning.

M&A -- wondering about any change in strategy at this point of what you're seeing in your pipeline, and how you feel about your capacity to purchase other banks right now.

Jennifer, thanks for the question. This is Robert.

I would say that how I feel about the Company overall from a growth perspective is better than I have in a long time. And when I say better, I think it's just overall better-positioned for growth. What I mean by that is the support infrastructure in the Company, just much stronger than we have been a long time.

Our preparation -- work very closely with our regulatory bodies in terms of preparation for the $10 billion hurtle. Feel really good about where we are on the $10 billion front. Our balance sheet, the capital build that we have, and our liquidity, we really are poised for some good things ahead.

Now, our main focus was organic growth. We wanted to make sure after a period of high-growth that we really have the organic machine going. And I think you can see, you've seen steady progress over the last few quarters, but I think first quarter you certainly saw a full effort to where we are having success Company-wide from a lending perspective and organic growth perspective. That checks a very important box for us.

We are wide open to looking at the right next acquisition. But the key is going to be finding the right partner. But we are ready for that when the right partner comes along.

Thank you very much.

Our next question is from Stephen Scouten at Sandler O'Neill.

Hey guys, good morning.

I wanted to ask you what your thoughts are on the path for NII from here, and along with that what you experienced from the accretion standpoint in the quarter and any movement, non-accretable to accretable, if there was any big things of note there that helped the NIM.

No big things of note on the accretable side. We had, as we always do, a few one-time events that happened that have kept that acquired loan yield a little above 8%. But I think, as you know, Stephen, when you are remixing out of assets that you're yielding 8% on, and you're putting them in assets they you're yielding 4%, there is clearly going to be some compression there.

But we still are sitting on a tremendous amount of cash, as you know. You can see that in the margin table. So, as we deploy that cash that's clearly going to help. But the overall NIM margin number, there's going to be some pressure, as we said all along, from a rate standpoint just because of the remixing of the acquired loans into the non-acquired.

But what we're excited about is look at the net interest income line, and then think about the negative amortization going away. And, as you know, I've always theoretically tried to take that negative amortization and make it as part of the margin. We have that slide out there for you. Overall we feel really good about our net interest income dollars growing.

Okay, great. So, you feel like you can grow that with a positive organic loan growth even despite some additional compression.

Assuming we can stay at the 10%, north of 10%, loan growth is what we have directed over the last year, I think that would feel like we could accomplish that.

Okay, great.

And just to clarify something on the IA amortization, the FDIC termination and so forth, when you were saying the IA amortization would trail down to 1.3%, were you just saying that ex the termination or were you saying that even with the termination that would still trail off, not just go away completely?

I was talking about ex the termination. I was trying to get Jefferson back to the answer to his question, because I think he felt like all the negative amortization would be gone. But you can go in our disclosures and look. All banks are going to have some type -- most all banks would have some type of true-up, so that's a liability you would have to pay out in the future, so you would have to continue to fund that up.

Definitely. I just wanted to make sure I heard that right. Okay. And then you mentioned some strong C&I traction in the quarter. I'm curious, what do you think is leading that? Is that just an internal push or new lenders in the C&I space? Or what do you think has really helped you guys grow that book, disproportionately maybe?

Stephen, this is Robert. I would say that we had a strong C&I quarter. We had a pretty good C&I year last year. It's really the position of where we are in the market now.

A lot of these customers obviously bank with larger companies, and we didn't have really the position, the brand, the share historically. Today we have really strong share, really strong brand, and really good markets.

We are certainly perceived today in the market as the alternative bank to the large banks. And there really is not another alternative. We are uniquely positioned, I think, with our size and with our brand, and obviously the quality of our bankers. We continue to hire great bankers. We have tremendous bankers in the field. But I think where the Bank is positioned competitively has certainly been a huge part of the opportunities that we are having to move some really good companies into our Company

Okay, super. And maybe one last one for me here.

Any near-term structural risk to service charges that you see? I know the CFPB at one point said they were going to put out some guidance this year. Now it sounds like it's maybe next year. Who knows if they ever do anything. But is there anything that you see there that you're concerned about from the scale of that opportunity for you moving forward?

Chris, I think it's just going to evolve over time. It's not all regulatory. The consumer is becoming more mobile, just doing a lot more things with their phone. I think you've just got to continue to adjust with the environment.

Clearly, if you look first quarter of this year compared to first quarter of last year, the BofA acquisition, one of the reasons why we are so focused on core deposits, look at the fee income increase year over year. It's very strong.

But I think you've just got to continue to adjust as you move forward. I'm not so hung up on the regulatory side. I think it's more how do you present your core products to the consumer and be high touch but also be high tech, and that is something we're extremely focused on today.

David, this is Robert.

I would just add, I think one of the unique parts of our Company compared to many is our strong retail presence. We have close to 700,000 customers. We have a very strong card base in that customer base. So, there are a lot of opportunities as maybe one form of revenue flattens or declines to cross-sell other forms of revenue because we have such a large customer base.

That is a great point. I appreciate the color.

The next question is from Tyler Stafford of Stephens.

Good morning, guys. Congratulations on a good quarter. I just had one more follow-up that I may have missed in the opening remarks. I apologize if I did.

Just a question on mortgage banking. It looks like some better than expected, at least for me, mortgage activity this quarter. Can you talk about just what you saw in that business, what production was, margins, et cetera. Just any data on that you could provide would be helpful.

Thanks.

Tyler, this is John.

I think the first thing I would start with is our pipeline continues to build. You saw now the 30-year fixed rate is down in the 3.5% range. So, we see the pipeline continuing to build.

If you look from a margin standpoint on what we sell in the secondary market, not including the servicing income we're going to get over the life of the loan, we're in that 2.5% to 3% range. So, yields remain extremely robust.

I would say on the in-house portfolio side, one of the things we're excited about is if you look -- and Robert talked earlier about loan balance -- is now consumer real estate makes up a little under 38% of our loan portfolio. As we've mentioned in the past, when that was up at 40% we wanted to remix that. And so we feel good about the balance that we have there.

And then the last piece I would mention is the construction side, we're just seeing a lot of good construction business. We have a very strong construction team. And this is for primary and secondary residences. That looks to be very favorable. But the pipeline continues to build and typically the first quarter has historically been a little soft.

This is Robert. Just a couple comments I would add.

One, there is obviously a lot of regulatory changes on the mortgage front over the last year. I think we were able to execute on those regulatory changes really well. And I think that has really helped our position in the market. We've continued to add some really talented mortgage bankers in the markets where we are. And now -- this is just South Carolina -- we are number two in mortgage market share in the state. I it's just the velocity of our mortgage engine continues to be very strong.

That's helpful color. Thank you.

(Operator Instructions)

Our next question is from Nancy Bush at NAB Research.

Good morning, guys. A couple of questions on the liquidity side.

First, could you just update us on the retention in the Bank of America branches? And just give us your thoughts that if you have an opportunity to do a similar deal in the future, any different ways you would handle it?

Nancy, the retention has been very good. I think as we mentioned last quarter we're getting ready to go in phase 2 in the Bank of America transaction. We are consolidating six offices. Some of them were theirs, some of them ours historically. So, we are excited about being able to begin to get a little bit more cost saves out of it. But we feel very good about that.

The thing that was so unique for us on the Bank of America transaction, it was the only way we could fill out the center of the State of South Carolina. It was a very unique transaction for us. I'm not sure there's another one like that, but for us it was just the only way we could figure out that we could really get the center part of our franchise filled out.

We are starting to see loan growth in those branches. As you know, we didn't really get many loans that came over and now our teams are really beginning to hit their stride on the loan growth side. So, overall it's been an extremely positive expense.

Nancy, Robert. I would just add a couple of things.

First is, when we underwrote the purchase of those branches, we did not take in any cost saves. None of that was in the original underwriting of the purchases of those branches.

And then we're also starting to add really good bankers. Bank of America obviously has a huge branch network, but not necessarily a leader in each of the markets that they serve. And we've been able to add some good talents in these additional new markets to us.

On the whole question of deposits and liquidity, you're still in an extraordinarily liquid position, and you said you would be continuing to deploy that over time. Any thoughts about when you will be at what you would consider, quote, normal liquidity for the Company?

Great question.

If you could tell me what the Fed is going to do with the 10-year, I probably could do a little better with that answer. I think rates have just been whipsawing back and forth, especially if you follow the 10-year. It's nice to see it's almost back to 190. Hard to believe I'm saying that.

Hopefully we can do a little bit more in the investment portfolio. But I think at the end of the day the main reason we wanted that extra liquidity was to be able to fund our loan growth. So, over time I'm not sure exactly how long it takes, but we're just going to continue to chip away at the loan growth side with that excess.

Okay. And just, finally, if I may ask a future strategic question. You can't turn around these days without reading something, hearing something about Semtech, and how banks are joining with online lenders, blah, blah, blah. Can you just give us your thoughts about that and what strategic planning you're doing for additional technologies, and just how you think about the whole subject?

Sure. Nancy, this is Robert.

We see it as probably one of the most exciting opportunities ahead for our Company. There is a tremendous opportunity to engage with your customers differently and more proactively. We are very excited about it.

Today about 75% of our customers interact with us electronically on a regular basis. So, it is a normal part of our business environment today. The other unique part is the fastest growing component of our customer base are the millennials who are obviously the biggest users of that technology.

We have seen it, both in terms of mobility, online, lending. We're seeing a lot of ways to interact. ATMs. We're deploying a lot of technology to better serve our customers, which will drive, with as big a retail bank as we have, there is a great opportunity for continued efficiency there because we're certainly seeing lower branch transactions than we have historically.

And then on the lending front -- this is not a customer-interfacing technology, but it's certainly financial technology -- is in the first quarter we implemented a new consumer lending platform. It's totally automated. It is significantly more efficient for both the customer and our bankers and our support folks in terms of handling consumer loan volume. We're looking at certainly internally, but great opportunity for us and it's being, I'd say, very successful at this stage.

Nancy, I would add, we also rolled out an online mortgage application last quarter that is customer interfacing. That is a huge step for us. As you know, TRID has slowed down how long it takes to get a mortgage approved. We see this front end online mortgage application getting our speed back to where we used to be able to close a loan -- very important, especially for us in the mortgage business.

And with the Bank of America transaction we have deployed a lot of ATM technology where we can take deposits at the ATM machine. And we're really seeing the mobile part of our customer business grow tremendously.

So, just let me make sure I understand, given your, what I would call innate conservatism, what you're saying to me is that your efforts -- online lending, et cetera -- are going to be generally homegrown rather than going out and partnering with somebody.

Yes.

We will build our own. I think the reason is scale. It's not cheap to invest in those things, so you have to have some critical mass and you have to have a large customer base. You take card, for example, we are a very large card issuer of Visa. So, we've got a lot of critical mass there. We have 700,000 customers. Our transaction volume is high. So, we have got the scale and the density, which is critical. And now, yes, we will build our internal products and not co-source with somebody else to drive that volume.

All right, thank you.

Our next question is from Christopher Marinac at FIG Partners.

Thanks. I had a follow-up just on the BofA branches, too. I was just curious, if you look at the fee evolution of those new accounts would you still be in early innings there, John and Robert, or would you have implemented most of what you wanted to do there?

I would say that we've implemented most of what we wanted to do there. There is still room, not just for the BofA branches, but in our legacy franchise. Chris, we feel like from a conversion of their accounts over into our structure that we are through that.

Okay, great. Thanks very much.

There are no further questions. I will now turn the call back over to John Pollok.

Thanks, everyone, for your time today. We will be participating in the SunTrust conference in New York beginning on May 24, and the KBW conference in Kiawah, South Carolina beginning on June 22. We look forward to reporting you again soon.

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