SouthState Bank Corp (SSB) 2016 Q2 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 would 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 with a few summary comments about the second quarter of 2016 and then John Pollok will provide detail on our operating performance. I will then close with final remarks prior to concluding the call with a Q&A session with the research analyst community.

Net income in the second quarter totaled $24.5 million or $1.01 per share, which represents a return on assets and a return on tangible equity of 1.13% and 14.59%, respectively. Adjusting for branch consolidation expenses and the FDIC loss share items, operating earnings totaled $28.5 million or $1.18 per diluted share. This represents an operating return on average assets and tangible equity of 1.32% and 16.85% respectively.

This quarter reflects further progress in establishing our position as a financial service leader throughout our franchise. The momentum we have enjoyed in attracting great talent into a culture that prioritizes customer relationships is recognized in our markets. We have become the bank of choice for many commercial clients as our size and our product offerings now fit a broader range of businesses.

Our brand visibility continues to grow and increasingly, opportunities are presented to us through referrals from existing customers and business professionals in our markets. Net loan growth in the quarter was $253 million or 16.5% annualized growth. Growth came from across the franchise and was balanced among loan categories. Loan quality remained a highlight, with annualized net charge-offs of only 6 basis points.

In the second quarter we announced the signing of an agreement to merge with Southeastern Bank Financial Corporation. We are very excited about the potential benefits of this combination and we continue to work towards the closing in early 2017. During the second quarter tangible book value rose $0.98 to $29.86 per share.

The Board of Directors has approved a $0.01 increase in the quarterly rate to $0.31 per share. This rate represents a 24% increase from a year ago. I will now turn the call over to John Pollok for more detail on the financial performance this quarter.

Thank you, Robert. On slide number 6 you can see a relatively stable net interest income number over the past three quarters since the Bank of America branch acquisition. During the second quarter interest income decreased by $400,000, but was offset by $200,000 in lower interest costs. The decrease in interest income was mostly due to a decline in the investment portfolio as rates declined, and many investments were called prior to maturity.

Loan interest income was basically flat link quarter, as the declines in acquired interest income were mostly offset by an increase in non-acquired interest income. This was due to the $200 million increase in average balances which you can see on slide number 7, along with other link quarter shifts in interest-earning assets.

With the very low yields available in new investment portfolio purchases and the uncertainty of Fed action, we are particularly pleased with our loan growth year to date and our prospects for the remainder of the year. Net interest margin decreased by 10 basis points link quarter, as the yield on interest-earning assets declined by 11 basis points and the cost of interest-bearing funds declined by 1 basis point.

Average non-interest-bearing demand deposits increased over $100 million link quarter and our cost of funds was 11 basis points. Core funding is a great source of strength to our Company and continues to serve us well during this lower for longer rate cycle.

Switching to the noninterest income slide, our totals were up $5 million link quarter, excluding the amortization of the FDIC indemnification asset. This increase is due to $1.4 million increase in fees on deposit accounts. A $1.4 million increase in mortgage banking income, a $1.1 million increase in recoveries on acquired loans, and a $1.1 million increase in other income due primarily to a positive resolution of a previously acquired credit impaired loan.

As previously disclosed, we completed the termination of all of our FDIC loss share agreements this quarter and the vast majority of the increase on the acquired loan recoveries this quarter was due to the termination allowing us to retain 100% of the recoveries received on these previously covered assets.

Turning to the expense side, noninterest expenses, excluding one-time items, were up $1.2 million link quarter and totaled $72.3 million. Decreases in personnel expense and OREO and loan-related expenses were offset by modest increases in business development, bank card expense, professional fees, marketing expenses, and a $1.8 million increase in the other expense category. This category was up due primarily to increases in operational losses, donations, and secondary mortgage reserve expenses.

Of our previously announced branch consolidations, we closed eight during the second quarter and have one more planned for the third quarter and two planned for the fourth quarter. On slide number 8 you can see our operating efficiency ratio decreased nicely from the first quarter due primarily to the strong, noninterest income quarter.

Finally, on slide number 9, you can see our progress over the years and the earnings per share and our performance year to date. I will now turn the call over to Robert for some summary comments.

Thank you, John. We are pleased with these results and the first half of 2016's. South State is enjoying progress on many fronts and is well-positioned to continue to make further gains. We appreciate your interest in South State.

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

We will now open the line for questions.

(Operator Instructions)

The first question comes from Jennifer Demba at SunTrust.

Thank you, good morning.

Good morning, Jennifer.

I have a couple of questions. First of all, on the other income increase, could you just talk about that in a little bit more detail?

Sure, Jennifer. This is John. The other income increase -- we had a loan that had a previous charge-off on it that was a loan that we acquired through the First Federal merger. And so that was charged off actually before the merger, so we had a really nice recovery on that and that was about a $1.1 million gain. It comes through that line.

Okay, and you also had other expense, I guess, up disproportionately as well. How much of that do you think might be non-recurring in future periods?

That's a little hard to tell. Clearly we had some volatility there this quarter. It really relates to some debit card charges we took, donations that were in that area, but, Jennifer, it's really hard to tell exactly what that would be in the future. It clearly is up more than what we've had in the past.

Okay, and can you just talk about the sources of loan growth? You have had great loan growth this quarter, geographically, and by category give us some color there?

Jennifer, this is Robert. Overall, the pipeline has been strong, continues to be strong. And I think obviously we were pleased with the amount of growth, but I think the quality and the diversity of it really felt even better. As you know, our CRE concentrations are still very modest, just up 165%, and C&D at 73% -- so as a percent of capital. So a lot of room in those categories to be able to find opportunities for growth.

This quarter in particular I'd say -- I would highlight the C&I piece. It is about 10% of our book, but this quarter it was about 20% of our production.

We also had a good consumer non-real estate quarter that we put in a new consumer loan process at the beginning of this year. We are certainly seeing good traction there.

We had a really strong construction quarter -- it goes in that construction and land development book. It is really not land development. It is mostly construction, but it's mostly commercial and some residential construction in that category. CRE continued to be strong, but we continue to be very selective there.

But it's all end market. As you look through -- I look through the names of the borrowers and the relationships that we are picking up. It's just really A-plus business. It's really strong companies and really strong individuals, relationships that we are picking up.

Same thing geographically is, all of our markets had good loan growth for the quarter, several had exceptional. I would say, in terms of leading the way, it was certainly Charlotte. Charlotte had a phenomenal second quarter.

But the Greenville market, Savannah had a very strong quarter, and the Columbia market were certainly the leaders for us -- very diverse geographically, very diverse in terms of the loan portfolio, in terms of various categories. Overall, the quality, I think probably we feel better about even than the quantity.

Okay. Thank you.

The next question is from Jefferson Harralson at KBW.

Thanks. I might follow up on Jenny's comments there.

Can you talk about the pricing of that growth relative to what you have on the book? The non-acquired loan yield went down by a little bit. Can you talk about I guess that pace? Do you expect that to continue to decline and at what pace?

I will take the first part of that, Jefferson. In terms of the new loan production for the quarter, the yield on the new production was about [3.60%]. I believe around 40% of that was variable rate and around 60% of that was fixed rate.

Okay. Very helpful, and then the recoveries that you started to get in pretty immediate seems like after the termination -- are those always going to come through fee income? And can you talk about what happened this quarter in those recoveries? It seemed like they came pretty quick after the termination.

Jefferson, I think if you look back at loss share in the recovery line, there is about $900,000 that we wouldn't have gotten if we still had loss share in place. That's kind of what we were able to recover this quarter.

I will go back to the guidance that we gave when we looked at loss share termination is we felt like that it would probably add about $0.05 a quarter through the end of this year. That's both in recoveries and less negative amortization. Start off next year somewhere in the $0.05 range, and probably blend down to probably somewhere in the $0.04 range. Obviously, that number can be volatile based on the recoveries, but yes, we did begin to see some immediate pickup on the recoveries side.

All right. And that is not going to present as a lower provision; it is going to continue to show up as a fee?

That is correct.

Okay. Thanks, guys.

The next question is from Nancy Bush at NAB Research.

Good morning, guys.

Good morning, Nancy.

I was in Gainesville, Georgia, not long ago, driving through, and I noticed several billboard advertisements there, as well as at least one project, maybe two I saw that had a South State sign in front of them. I guess you guys have got, what, one branch there? And I'm wondering if -- just get your thoughts for the rest of north Georgia, and now that you are in Augusta, is there a fill-in necessary between Augusta and Gainesville, or what your whole thought is about that geography?

In the county where Gainesville is located, we have several offices there, but our Gainesville team is strong. Gainesville is kind of a regional hub I would say for us. We've got a very strong commercial team there that we have been able to acquire and put together over the last few years, and they've got a lot of momentum.

We are very differentiated in that market. It's a market where the larger banks certainly have a larger percent of the market share, and we've been able to really compete pretty favorably there. It is, in terms of north Georgia, certainly one of the markets that is higher growth, along with Athens where we've had good success as well.

We always said we want to build a Franchise east of Atlanta, and so we had it book end; we had Savannah where we have very good presence, and we had northeast Georgia, Athens and up. But Augusta was the main missing piece of the puzzle. Not that there aren't smaller fill-ins that could round that out, but Augusta certainly fills the major piece of the puzzle that we were missing in terms of Georgia.

Okay. And I think in the past that you have said to me that you really did not have an interest in being in Atlanta, and I just want to make sure that is still the case.

Yes. No interest there. There's just so much opportunity in our current markets. Just to continue to take share, even though we have -- we're top five in most -- there is still tremendous opportunity to take share from the large banks. And then we have a market like Charlotte, which is a market that we can really have a meaningful impact in. And in Atlanta you're just going to be [also rand] -- it is going to be very hard to ever really differentiate yourself in that market.

Okay. Thank you.

The next question is from Stephen Scouten from Sandler O'Neill.

Hey, guys. How are you doing today?

Good morning, Stephen.

Question maybe, Robert, to follow up on what you just mentioned about Charlotte, and obviously with the transaction announced yesterday, there could be some dislocation within that market to come. Would you guys look to pick up lenders or teams or anything of that nature if any of that presents itself, maybe on a more organic basis? Or would further expansion there be more likely to be via M&A?

Steve, for the 20 plus years we have been here, that has really been our primary growth mechanism is carve outs and talent hires. We don't highlight it as much as maybe we should, but in the second quarter we picked up six really talented bankers in the existing markets we're in. I would say that is an ongoing focus for us in market, and in markets where we don't serve in terms of talent pickup.

We see that as probably the best use of capital in terms of deployment of capital that we can do. That is certainly high on our priority list.

Okay. That is really helpful.

Any kind of governors, if you will, on forward growth for you guys? I know, as you mentioned, your regulatory ratios on concentrations are nowhere close to any thresholds, so I wouldn't think so, but seem to have heard a lot of divergent messages from various banks this quarter about what they think growth prospects are like. Just curious for you guys, any constraints there, any worries, anything that would slow the growth profile at all?

I'm not sure I totally follow you. To make sure I am clear on your question, are you talking about regulatory strengths, or strength in the market, or that we would put on ourselves?

Maybe across the board I guess. Some people have mentioned concerns about, whether it's their CRE thresholds or just general weakness or concerns about the market. Just curious if there is any of those things that might impede your loan growth?

We said at the beginning of the year that we felt like double-digit loan growth -- we felt like was building, and our focus over the last years has been building towards that. We obviously exceeded that in the second quarter; first quarter we were right on that pace. Don't see anything that would really stop that type of growth.

The pipeline feels good, the opportunity in the market, the demand is strong. Our markets are really holding up quite well.

As you can see, our growth from our total portfolio is not all CRE and C&D. There's just a lot of quality company relationships that we're picking up, and strong consumer lending. Don't really see anything at this point, certainly on the regulatory side, but don't see anything in the markets or self constraints that would hinder our further growth.

This is John. I'll just add, it is all about balance, right? It is all about balance in these different categories, geography, and then the type of loan that you do.

And I think that is one of the things that you are seeing the strength of our Company is we have a lot of balance on the loan side. We are not doing wholesale funding, we are not doing shared national credits, we're not doing wholesale loans. So it is all about the balance there, and I think what you're seeing out there is sometimes you're seeing some folks get a little unbalanced and that's starting to constrain them.

Stephen, Robert, just one final comment. It is a good question. The same thing on the funding side. We tend to talk about the loan side; we don't talk about the funding side as much -- we really believe that is the biggest differentiator for us, and we continue to have a lot of liquidity to deploy.

Southeastern had a very low loan-to-deposit ratio. We think there are already relationships over there we have identified that we will be able to expand. So we think there is -- with the funding that we have on our balance sheet -- still a lot of opportunities on that front.

And then the other -- as just to wrap up with southeastern, is I think the nice thing about that transaction, one thing we didn't -- would not do is what you just mentioned. It's not going to take our focus really off of any other strategic initiative, which our priority is organic growth. It does not hinder our organic growth. In fact, I think it will enhance it, and then it leaves the door wide open for us on anything, if we wanted to pursue anything on the M&A side.

If we did take another step at some point on the M&A side, then at that point, depending on the timing, then I think we probably would pause and make sure that we were digesting everything and executing our business plan the way we want to. But at this stage I would say we're executing our plan, and don't see anything that would really interfere with that.

Okay, great. Maybe one last one for me -- just on the direction of the NIM and the various moving parts. I know, John, you spoke to the [3.60%] new loan yields in the quarter. Can you remind me what that did quarter over quarter, and if you would expect similar levels of compression, as well as similar levels of deployment of cash, because obviously that really helped your funding costs and your mix there?

Sure. Linked quarter, the yields were fairly close, so we didn't see a whole lot of change in the yield.

I think one of the things when you think about our margin, I think page 6 in our slide deck is a great place to look. We've got the margin laid out there for you over the last several quarters. We think the last three are the most relevant since we have the BofA transaction.

And also when you look at the slide, we have shown in the past the negative accretion. We always felt like negative accretion was part of the margin. And as you can see on that slide, net the negative accretion, we actually went from about $80 million last quarter to $81.4 million, less the negative accretion. We feel good about that piece.

As Robert mentioned, funding is really, really key for us. We really like to focus on the quality of the growth, so we're not running out and deciding that we are going to set up a wholesale line of business on the loan side or beside it and take our CRE concentrations up to a very, very high level. And lastly, if you look at our period-end loans, they're up about $150 million over the average.

Yes, that's a great point. Thanks, guys, and congrats on a really nice quarter.

Thanks, Stephen.

(Operator Instructions)

Our next question is from Christopher Marinac at FIG Partners.

Thanks, guys; good morning. Wanted to ask about, within the non-interest expense, the other operational charge-offs that were highlighted. Would you just remind me of what those are and any background there?

Chris, they are just all related to debit card income -- debit card charges.

Okay.

We had some breaches, so you've got to, one, reissue cards; you've got to obviously pay the customer back, but a lot of that related to that.

So as that business grows, that naturally grows as well, just as volume increases?

Yes. I think this quarter was a little high, so hopefully we'll come down some.

Okay. Great. Thanks for that, John.

And then just an oddball question -- outside of Charleston, can you talk about the coastal markets in South Carolina and to the extent you have commentary on Wilmington as well, just to how things are behaving with the real estate demand, et cetera?

Chris, this is Robert. Charleston is clearly the hottest of the coastal markets. It is doing really well, and our penetration there we feel really good about.

Outside of that, let me just kind of start in Georgia. I would say that the market that is performing very well is Savannah. We obviously went through the merger a number of years ago. It is really hitting on all cylinders. They are doing well in all lines of business.

The market is one where we are really differentiated in, and we've just got an A-plus team. Savannah continues to both economically and from a banking perspective do really well. They had a really solid second quarter, both in terms of growth and just volumes of business.

Moving up -- and I would say just on Savannah I would say the real estate market pretty much fully recovered. It was a little slower to come back than Charleston, but I would say it certainly is fully recovered.

Then as you move up, the Georgetown, Myrtle Beach area is certainly more second-home, more retiree, not as many operating businesses, but home sales, home prices in-migration has returned at a pace that we really hadn't seen since pre-downturn. The in-migration had kind of stopped to a certain extent; and over the last 18 to 24 months, we have certainly seen it return. It doesn't have the diversity that Savannah has, doesn't have the port, doesn't have the diversity Charleston has, but still a market where now in-migration is starting to drive growth, and the real estate market seems to be pretty fully healed there as well.

Then there is Wilmington for us, and Wilmington we did not have -- we got into that market through the First Federal merger. We don't have the market share that we want to have in that market, but we feel excellent about the prospects. It is a more diverse market; it is one where we can really differentiate ourselves; the large guys have a lot of the market share. It is a market that I would say has fully recovered, too, and growing at a nice pace.

Overall, we feel very good about the coastal markets. Obviously, Charleston is kind of leading the way, but all of them feel pretty good.

Thanks for that. I guess, one follow-up -- it seems that the housing market in Charleston is so strong that you've got a lot of forward momentum there that is hard to break. I guess I just want to understand how far into the future can you have visibility with Charleston? Is it beyond 12 months at this point?

You're talking about just from a residential housing demand or are you talking about the economy as a whole?

It is really residential first, but I guess the economy as a whole, wouldn't mind your feedback there.

Yes, you've got a tremendous backlog of demand there. Just drive down the interstate and look what they're doing in terms of the Volvo plant. What's happening in Berkeley County, what's happening in Dorchester County, we are number -- it is not Charleston County, it is the two adjacent ones -- but those MSAs are growing, that MSA is growing at a very nice clip. That's just really coming out of the ground. That is really not even jobs on the ground yet, and we are number one, I believe, in both of those two counties.

There's a strong tailwind. There is not -- the availability of land is tough, and the permitting cycle is long. But the pipeline there looks really solid, and the in-migration of both individuals but also businesses into that market, because of the port and the access really to the East Coast through that port, continues to be very good.

The same driver as Savannah. If you look overall at our footprint, the port in Wilmington, the port in Charleston, the port in Savannah, and the airport in Charlotte, that triangular transportation hub really has tremendous impact on why companies want to be located in the footprint that we serve.

Great, Robert. Thanks for all the color there. I appreciate it.

The next question is from Peyton Green of Piper Jaffray.

Good morning. A question -- maybe, John, you can clarify this, but just to make sure, how much of the non-interest income is card fees?

How much of the non-interest income is card fees? You talking about on the debit card side?

Sure.

Hold on for me a minute. You got another question or is that the only one you had?

Yes. Just to be clear on the expense side -- (multiple speakers)

If you look at total service charges on deposit accounts, the bankcard services income is right around $11 million.

Okay. And then the increase in debit card expenses was not in bankcard expense in the quarter. It was down in other operating. Is that right?

That's right. We had some charge-offs there.

Okay. So could that drop down $1 million or so linked quarter in the third quarter do you think?

You know, I would hope so, as I told Jennifer, it's just hard until you get through the quarter and see exactly where you ran, right? But yes, I would hope it would.

Okay. And just in terms of maybe thinking out in terms of the capacity of the Company, where do you feel like you're unutilized capacity is greatest from a growth perspective in terms of markets?

Well, I think you have to start with funding, right? We have a lot of excess funding in terms of being able to grow. We don't feel like we have to go out and do anything wholesale today.

I think if you think about our different markets, really we had growth throughout all of them. We've mentioned in the past we felt like our portfolio in general was maybe a little too heavy residential. You will see those percentages coming down.

We're pushing more into the secondary market. In fact, when you look at our acquired book today, half of that now is related to residential. But I would say overall, growth in our markets is really, really good.

Peyton, this is Robert. I think, really for two decades, our focus was getting into high-growth markets and beginning to build meaningful share. Now we have a footprint that is demographically growing at well above natural averages. In-migration has really returned both for businesses and individuals in the markets that we're serving, and we've got deep and dense market share in those markets.

So now the ability to leverage up what we have without really -- we will continue to add talent, we will continue to pick up quality bankers as they become available. That is always a natural for us. But the need for major investment in infrastructure in the markets, we just don't need it. There is a -- but neither internally or externally, meaning we don't need it in terms of branch facilities in the markets and we don't need it in terms of investment inside the Company on the back room side either. Just organically, even if another M&A opportunity doesn't come our way that we want to pursue, the opportunity to grow several billion dollars with kind of what we've got in place seems very real.

Okay, and then with lower rates, does that affect the acquired portfolio cash flow? Would you expect it to accelerate, given the move down in the 10-year and that it is 50% resi?

Well, it could. I think the beauty there is we will be able to take that, refinance it into the secondary market, continue to build our mortgage servicing asset, which is going to build that income stream there. But I think in general, residential portfolios, when the 30-year now is sitting at about 3.5%, you're going to begin to see more refinance activity.

If you look last quarter, 70% of our volume was purchase and only 30% refi. So, Peyton, yes, you could see some pressure there.

On the flip side, as Robert mentioned earlier, in our construction and land development book, a lot of it is just residential construction, right? So, it is a little over $160 million; so that is a nice feeder system both to portfolio loans and secondary market loans. I'm sure as you are aware is, the jumbo market in the secondary world is still a little efficient, so we still see tremendous opportunities on kind of three- and five-year arms to be able to grow that portfolio some.

But I think as we have said in the past, it is all about balance for us, it is all about the quality of the loan book. So on the residential side, as I mentioned in my earlier comments, after the First Federal transaction is our loan book, in total was about 40% resi, and we've now got that down into the mid-30%s. And so we want to make sure we have the right balance in our portfolio. But yes, that could have an impact, especially when you are seeing 30-year rates sitting around at 3.5%.

Okay, great. Thank you 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 FIG conference in Atlanta beginning on September 19. We look forward to reporting to you again soon.

This conference has now concluded. Thank you for attending. You may now disconnect.