SouthState Bank Corp (SSB) 2016 Q3 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 with a few summary comments about the third quarter of 2016, provide an update of the pending merger with Southeastern Bank Financial Corporation and offer additional insight into our performance and focus. Our performance metrics continue to be strong this quarter, as they have been throughout 2016.

Net income in the third quarter totaled $28.1 million, or $1.16 per diluted share, which represents a return on assets and a return on tangible equity of 1.28% and 15.86%, respectively. Adjusting for merger and branch consolidation expenses, earnings totaled $28.6 million, or $1.18 per diluted share. This represents an adjusted return on average assets and tangible equity of 1.3% and 16.11%, respectively. I'm very pleased with our team's performance this quarter as we have made significant progress in many areas this year.

We've also been working with the Southeastern team and our regulators to prepare for our 2017 merger. This merger is significant as it elevates us past the $10 billion threshold. We have received all necessary regulatory and shareholder approvals in conjunction with the pending merger. We still anticipate the transaction closing in early January and conversion of our operating systems in mid-February.

One of our core values is the relationship-driven approach we take in delivering service to our customers. We share this value with the team at Southeastern and as we move forward, it becomes more evident that our two Companies have similar cultures. This philosophical approach helps attract strong bankers to South State and generates customer loyalty.

During 2016, we have made significant progress on preparing for the changes that result from crossing $10 billion in assets. Investments in people and systems are positioning us for additional growth. The nature of these investments reflect our goal of building for the long term, ensuring we grow in a sound manner and improving the customer experience. Investments in technology are central to improving our delivery platform. These investments enhance the customer experience and create opportunities for operating leverage at South State.

In 2016, we introduce a centralized customer loan approval system and an online mortgage loan application process. Both of these have been met with broad customer and employee acceptance, have improved our delivery for the customer and generated efficiencies in time and money. Our size and our market density positions us for further enhancements.

We have also prepared for the next phase of growth by adding key employees, new technologies and robust risk management practices. This preparation is also taking place at the Board level. Recently, we welcomed Martin Davis as a new Board member. Martin is the Chief Information Officer for Southern Company, a publicly traded energy company based in Atlanta that serves more than 9 million customers throughout the southeast.

As we move into the final quarter of 2016, I'm very pleased with the talent we continue to add, the positioning of our Company, the infrastructure that has been built to support a larger bank and the merger progress with Southeastern. 2016 has certainly been a year of significant progress for South State. The Board of Directors has approved a $0.01 increase in the quarterly dividend rate to $0.32, this rate represents a 23% 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. We experienced solid net loan growth in the third quarter of 7% annualized as non-acquired loan growth outpaced acquired loan runoff by $109 million. While this growth was not at the 16% pace of the second quarter, we feel very good about the current pipeline and the prospects for continued growth.

Virtually every asset-quality metric improved this quarter with net charge-offs on our non-acquired loan portfolio totaling less than $400,000 or 3 basis points. Our provision expense on the non-acquired portfolio was down $1.7 million linked quarter and may be relatively modest going forward absent any unexpected deteriorations in asset quality indicators.

On slide number 5, you can see a relatively stable net interest income number over the past 4 quarters since the Bank of America branch acquisition. On a linked-quarter basis, net interest income declined by $154,000, as interest income decreased by $98,000, and interest expense increased by $56,000. The small decrease in interest income was mostly due to a decline in the investment income from lower balances and lower yields. Loan interest income was up $157,000 linked quarter, as increases in the non-acquired interest income more than offset declines in the acquired interest income.

Our net interest margin decreased by 9 basis points linked quarter to 4.18%, as the yield on earning assets declined 9 basis points and the cost of interest-bearing liabilities remained flat. The yield on the non-acquired and acquired loan portfolios declined 5 basis points and 28 basis points, respectively. About half of the decline in the acquired loan portfolio yield is the result of cash received on a zero carrying value pool in the second quarter and the other half is the result of extensions of the weighted average lives of certain pools due to the renewals in the third quarter.

On slide number 6 you can see the change in the mix of average interest-earning assets and that the acquired portfolio now represents less than 20% of total interest-earning assets. This is down from 26% a year ago. We continue to be careful and measured with the new investment portfolio purchase in this low rate environment, and had a fair amount of securities called away in the last several quarters. Fortunately loan growth has absorbed much of this cash flow and has helped limit reductions in interest income from the lower acquired loan accretion.

Switching to non-interest income on slide number 7, our totals were up $3.2 million linked quarter, mainly due to the amortization of the FDIC indemnification asset in the second quarter as we terminated our Loss Share Agreements. Excluding the amortization of the FDIC indemnification asset, noninterest income was down $1.2 million, primarily due to the $1.1 million positive resolution of an acquired credit-impaired loan that occurred in the second quarter.

Fees on the deposit accounts were down $700,000 due to a lower shared revenue from Visa. A very active mortgage banking quarter contributed to a $600,000 increase in income to $6.2 million, and our Wealth Management revenue was $4.9 million, unchanged from the prior quarter. Acquired loan recoveries totaled $2.2 million, roughly half of which were from previously covered FDIC loss-share assets.

Turning to the expense side, noninterest expenses were down approximately $700,000, primarily due to lower branch consolidation and merger costs. Excluding these items, expenses were roughly flat linked quarter, up about $200,000. The more notable increases were in employee benefits expense of $1.4 million and OREO and loan-related expenses of $1.2 million.

These increases were mostly offset by reductions in the Other expense category, due to the high second-quarter expenses and operational losses, donations and secondary mortgage reserve expenses. Of our previously announced branch consolidations, we have completed nine, with two more consolidations, one planned for the fourth quarter and one planned for the first quarter of 2017.

We continue to be very disciplined and focused on holding expenses steady during this period of low interest rates, while ensuring we satisfy additional requirements of crossing the $10 billion threshold. The added cost of many of these requirements are being offset with the branch consolidation saves and other efficiency initiatives. On slide number 8, you can see our efficiency ratio decreased from 64.5% to 62.3%, while the adjusted efficiency ratio increased slightly to 61.7%.

Finally on slide number 9, you can see our progress over the years in 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. Lastly, I want to update you on the impact of hurricane Matthew. The storm affected large portions of our footprint. Fortunately our bank facilities were not damaged and our people were safe.

The markets we serve, however, are still recovering. Hundreds of our employees were forced to evacuate their homes and despite this, our team rallied to open branches and our call center on the Monday morning immediately following the storm, which also happened to be a bank holiday. In many of the impacted markets we were the only bank open and this is a great testament to our team and their focus on our customers. That concludes our prepared remarks. And I'd ask the operator to open the call for questions.

(Operator Instructions)

Jennifer Demba, SunTrust.

Thank you. Good morning.

Good morning, Jennifer.

Could you just give us some color on around this lower loan growth this quarter? And kind of talk about what your expectations are over the next few quarters?

Sure, Jennifer. This is Robert.

If you look period end to period end for Q3 it was 7%. We were coming off a big quarter in Q2. Don't really see -- a lot of it was just timing.

If you look at the average loan growth for Q3, the average loan growth was 12%, if you look Q2 into Q3. And year-over-year, we're north of -- right at 11% and a year-to-date a little above 11%. So, obviously loan growth is not perfectly linear and feel really good about our pipeline, really good about the relationships we're bringing over, and feel really -- even though the numbers are different, feel just as good about in the third quarter as we did in the second.

Are you seeing any slowdown in your pipeline for maybe presidential election uncertainty, things like that? Are you noticing any difference in your customers' attitudes there?

No. I don't think so. You know, obviously, the pipeline in the second quarter, we just had a lot closed in the second quarter, but the pipeline began to refill. It's just a strong now as it really was back at that point. I don't really see any seasonality, any external events impacting it.

It's also been really diverse this quarter. 20% of our growth this quarter was in owner- occupied commercial properties, so that feels really good. And one that didn't get a lot of mention, it's not as huge of dollars, but we put in a consumer loan platform in Q1 and we've really automated our consumer lending platform. As you know, we have a big retail presence in our Company, and the consumer loan growth year-over-year is up about 10%. So really, in all categories, we are feeling pretty good.

In the mortgage area, not a lot of mortgage loan growth on balance sheet, but really significant volume. And that's really just a rate issue as we're refinancing some of that volume. But we had big refinance in the third quarter, about 40% of our total volume, compared to 30% in the second quarter. And so we're refinancing a little bit of the on balance sheet consumer mortgage piece. But really feel very good about where we are loan-wise, really across the board.

And Jennifer, this is John. Just a reminder, we don't really do any wholesale loans. So we're not doing purchase loans, just pure organic growth really in our markets.

And Jennifer, one other -- obviously one other piece to the growth equation is just the reduction in the acquired book. So if you look back in Q3 of 2014, 30% of our interest earning assets were the acquired book and now it's 20%. So it's come down real meaningfully and as it gets lower, obviously, there's just less churn, there's less runoff, and you are starting to see our ability to out run that at a nicer clip. So that impacts the growth level as well.

Thanks so much.

Jefferson Harralson, KBW.

Hi. Thanks. I'd like to ask a question on expenses. You had mentioned that the employee benefits were higher and the OREO was higher this quarter. Does that suggest that the run rate of expenses should be lower?

(Multiple speakers) This is John. I'll take both of those. On the employee expense side, I think one of the things to think about -- We got two things ahead of us.

One, going across $10 billion and obviously the Southeastern merger. So when you think about our employee benefits, one of the things is we've added some FTEs. We had a net reduction, but we've clearly gone ahead and added some FTEs for $10 billion. And we're trying to get ourselves ready for the conversion of Southeastern.

We're going to close and convert that in the first quarter. As we have done in the past, really, with all of our mergers is, we've tried to get our operational staff up, trained, and running so we can run that system. So that's clearly had an impact in the number. Our healthcare costs were up some this quarter. That clearly had an impact.

I think when you think about as from an FTE side, is to get a real feel for that, we have got to get past Southeastern, get the expense saves in, which we're going to get 75% of the $17 million next year. That was the 35% cost saves on that. Then I think you'll really be able to get a handle where we are on the expense side.

On the OREO side, one of the main reasons that is up link quarter, if you look at our balance sheet, we have about $22 million in OREO today, and we have actually 40% of that under contract that we plan to close in the fourth quarter. So we took some write-downs on those. We clearly have some gains on some of the OREO properties that we are selling. But obviously I can't run that through the financial statement.

You'll have to -- you'll see that in the fourth quarter. So all things being equal, we would hope that our OREO expense would come down in the fourth quarter.

Jefferson, this is Robert. Just to add on, if you look at total expenses, obviously, close to flat year-over-year, the -- we consolidated a number of branches this year. We are almost through that project. It will move over into Q1 of 2017 just with one additional branch. But the majority of that's behind us. And we said when we were going to do that, the majority of that would go into the preparation on the $10 billion hurdle and we've been able to do that.

So we been able to get the cost saves and the efficiencies. We've been able to grow, even in spite of that, pretty nicely, both on the -- we opened about 10,000 new retail accounts and had good loan growth. So we been able to pay for, to a large part, really the significant investments we've been made in ERM and compliance and sovereign IT and project management. And so where we are today in terms of the readiness of the $10 billion spectrum of where we were a year ago is significantly further down the path.

And so we are -- obviously, this is a big move with Southeastern to take us -- taking us over. We received regulatory approval in four months. So I think all those pieces are all coming together and you see that in the expense equation.

Right. And shouldn't this occupancy piece be going down, or is that being replaced elsewhere because of the branch closures and such? Or maybe it is. It goes down in the future as there all -- as we get all of these closures in the numbers?

Jefferson, this is John. Let me give you a little color on that, as there's a few pieces there. Our expense saves, when we announced the branch closings, a lot of it had to do on the FTE side.

And as you can imagine, especially when you look at the map, we had to take a lot of our offices and make them bigger. So we expanded the size of a lot of offices that we had. We also were able, in Charlotte, to pick up a lot more space in our headquarters, and so now we have our name actually on that building. We picked up another floor and that clearly drove that up some. So you might see a little bit more come down there, but we've kind of redeploying some of that.

And then the third piece, as you can imagine, getting ready for $10 billion, we've got to have a place to put all these support people so we've retrofitted a few places to try to efficiently put them into our operation. But a good question on why it didn't come down more. But a lot of it's just related to the FTE side on that $4.5 million in saves.

Okay. All right. I'll let someone else ask questions. Thanks, guys.

Nancy Bush, NAB Research.

Good morning, gentlemen.

Good morning, Nancy.

On the Wealth Management. You manage to keep Wealth Management revenues flat in spite of what was a pretty lousy quarter for the markets. Can you just tell us a little bit about the underlying developments there? Just give us a little color on that ability to keep it stable?

Yes. The Wealth Management area has been very good for as. It really composes a few parts. I'd say the two most meaningful parts, from a revenue perspective, are just the wealth management, the money management piece we do, and then our investment services group. So they're very different.

One is a pure money management and traditional trust-type area and financial planning. The other is more retail investment. The Wealth Management part -- the financial planning, the trust part, has been really good. It has continue to grow at a nice pace. It's ahead of plan.

We were off a little bit has been in the investment services group, just the retail area. And that is really just been because last year we had a few fairly significant sales in there in the third quarter that we didn't have this year, so we're down a little bit in one area and we're up in the other area, and so together it's been able to keep us flat.

But in the -- in both areas, though, we continue to feel good about how we're growing the quality, the people we are recruiting on the team and the quality of the customer. We continue to see as other Wealth Management areas continue to move the bar up in terms of assets that they are willing to take in and manage, there's a nice niche for us in our markets and that's really what is driving the growth in the Wealth side.

So you're basically saying you're going to remain a wealth manager for the smaller accounts, basically. You are not going to buck -- you're not going to go along with the industry-wide trend?

Yes. What you're seeing is -- from our client base, is -- let me just touch on the Wealth Management side. The retail is a little bit different, but on the Wealth Management side, what we're seeing is, in our customer base, are mostly an older group who have sold a company or had some kind of liquidity event. Their goal is to preserve wealth, not just create and not just have an income stream.

So we work very closely with those clients in terms of a financial plan, of an investment process for other assets, and then also a wealth preservation and trust plan. So it's not just us versus a mutual fund. It's a much different approach than that, and that space has served us quite well.

Okay. My second question would be this. One of your regional peers who has also recently blown through, or is blowing through the $10 billion mark, talked about a couple of days ago seeing these sort of optimal size now as having moved up to the range of $15 billion to $25 billion.

Any reflections on that? I mean, do you see some scale advantage, et cetera, in moving to the next tier of asset size?

Well I think if you look back, $10 billion aside, if you look back at the last 20-plus years, just in building our Company, there were a lot of years where we were going in markets and we were kind of low market-share guy. And we were 8 or 10 in market share or worse. And so a lot of infrastructure, not high returns, and it's just an expensive way to grow your bank.

But that was really what laid the platform in place for us. Then we were able to leverage it up, partially through M&A. Well, today, we are able to leverage it to the next level through really organic growth, without significant needs and investments in that space.

So said differently, we can just, through operating leverage and growing organically, have a meaningful impact on the performance of the Company. So I think, $10 billion aside, that, that is just how the math will work for us and where our lot lies. Because today we are number 1 or 2 in many of our markets and top 5 in almost all of our markets. So our reputation, our position in the market, leads us to a place where we will be able to just produce more organic growth with less investment in those markets.

So that feels good overall. Now, then you throw in the $10 billion equation, the overhead associated with that, the Durbin impact of that, and all that, clearly you've got to have scale, and to be able to support that. And just getting barely over $10 billion is a very difficult way to support all that overhead.

We have been able to do it through reducing expenses to pay for it. I feel like that will continue to be the path and we'll be able to continue to execute on that. So I feel good about that, but also we're building obviously a platform to build a larger company, and when that next step comes or what that next opportunity is, I don't know. I don't know that anybody really knows what an optimal asset size is to support it, but it's clearly not $10.5 billion. You know?

Right.

Is it $13 billion? Is it $15 billion? Is it $17 billion? I'm not sure.

I think our next move will not be driven purely on size. It's also, as you know, going to be driven off the quality of the bank, where it's located, the management team, the trust level we have there, the cultural fit, so all those dynamics will come into play. But clearly we're not making these investments to stay just over $10 billion.

If I could just ask as, an add-on to that, has there, and I'm sure you will discuss that at the meeting coming up, but any difference in the markets that you want to be in? Do you see any -- you talk about not wanting to be small in the market.

So that implies to me that you don't want to go into Atlanta and you've never wanted to go to Atlanta and I don't see that changing. Any difference there?

Well, there always markets that we're not in today that are on our radar screen. It's how do you get there? Do you have the right team?

Do you do a team carve out? Is there an acquisition opportunity? So we certainly have a number of markets that we are not in today that we would like to be in if the right opportunity presents itself to go there.

On the other hand, if that does not happen, we feel great about where we are. I mean, I was in Charlotte last week and I had dinner with about 80 of our customers and the opportunity there, the opportunity in Greenville, in Charleston, with our position -- and if you look at banks in our marketplace, between $10 billion and $100 billion, there are only a few of us.

Right.

And that is a wide -- I mean from $10 billion to $100 billion that's a wide gap with just a few players in that space. So we really like where we are. We really like how we're positioned in those markets and I think, regardless of the new markets, that will be our primary focus.

Thank you.

This is John. Just remember, too, on size, you got remember we're throwing off an ROA that's almost 1.3%.

Right.

And so our profitability is pretty high on that when you look ROA. And obviously our return on tangible is right there at 16%. So we just -- the returns and the ROA that we're producing clearly doesn't mean that we got to scale-up like some of the folks are going to have to.

Okay.

We just continue into here in the marketplace, Nancy, it's where. We are we just continue to hear your bankers are better and you can compete head-to-head with the large banks, which have, and the reason I mention them is because they have the bulk of the market share. So between the quality of our teams, the size of the Company and the markets we're in, we feel really good about how we're positioned.

Yes. I think we're just all looking right now, now that there are a number of you that are breaching that $10 billion mark. It is how does the industry go from there? Because we haven't been here before.

Yes.

As you say, there are only a couple of banks that are in that -- I don't even know what you call it. It's smaller than mid-size, bigger than small-size, and clearly the industry, the community banking industry is headed that way. It's just -- it's going to be a bit of a question mark, I think, over the next couple of years.

Nancy, I think so much of that work goes in before you get there. And you know, so it's not like you cross it and then you've got to figure it out. You've got to figure it out, we're $8.7 billion, or so today.

You have to figure that out way before you get there that -- you've got to commit to it and then you got to figure out a strategic plan of how to get there. And that's what we've been working on very hard the last 18 months. We didn't know when Southeastern would come, or if it would come, or who the next partner would be, or when we would go over $10 billion.

So I think you've got to be willing to commit to it, both financially and from a focus perspective and strategic perspective, really much further ahead than $10 billion. I think once you get past $10 billion, then it comes to really more of capital allocation. All right?

How are we going to -- what's the best way that we can allocate the capital? As John said, we're throwing off high returns, we're building capital at a fast rate. So what's the best way to leverage up the infrastructure that we had to invest in and what's the best way to deploy that capital?

And that's kind of where we are now. We're not to the end of the preparation for the $10 billion, but we are certainly on the backside of it.

Yes. Well, I look forward to hearing more about it on the 2nd. I'm sure you guys will discuss this at length. Thank you.

Thank you, Nancy.

Peyton Green, Piper Jaffray.

Yes. Good morning. John, I was wondering if you could maybe provide a little update on what you expect the roll down in accretion income to do over the next -- quarter of next year.

Sure. I'll give you some color on that, Peyton. I think when you think about our acquired loans, I think slide the number 5 in our packages is a really good place to start. It's our net interest margin slide.

And you can see last quarter, we had about a little over $81 million in net interest income and that's really what our focus is. It's really on the net interest income side. It's not necessarily what the margin number shows.

And so the thing that we've been working real hard at, Peyton, is to grow loan interest income and we were able to do that $200,000 this quarter. If you look link quarter, obviously, our net interest income is down and that has to do with the investment portfolio. And so obviously investment portfolio yields are coming down.

We clearly have the Southeastern transaction coming on. They have an investment portfolio. It's a little over $650 million. So from an investment portfolio side, obviously we're going to have a pick up there.

When I look big picture at the accretable yield piece of it, Robert talked about this earlier, but if you go back and look at earning assets, used to be that if you got back third-quarter 2014, over 30% of our earning assets were acquired loans and now were down to about 20%. So I think that's a really nice decrease, and we've been able to drive our income. I think when you think about how the accretions going to do, you've got to look at really the runoff.

Right? How fast are the acquired loans going to run off? And so, if you go back to September of 2015, our acquired loan runoff was almost $120 million and now, when you get to this quarter, it's right at $83 million.

So here's what's happening inside that acquired loan portfolio. That acquired credit-impaired piece, as you know, Peyton, if you look at the regulatory filings, many of those loans are paying today. We've had a lot of those loans for an extremely long period of time, and so the weighted average lives are getting extended out. That's obviously driving the yield down but, hey, we get to keep the asset and earn interest income off of it. So I think as you look at it, last year I think we got it -- we were on that $90 million pace on acquired loan run-off. Now we're down in the low $80 millions.

Will have to see the next quarter or two how that holds. Obviously, a lot our acquired loans are on the mortgage side, from the First Federal side. I think that's why you're seeing some of the increases that we have on the mortgage fee side. So I think if I'm in your shoes, it's really the pace of how those acquired loans are going to run off.

Okay and then maybe -- and I apologize if I missed this. But as you're bringing on new volume, what kind of blended yield are you getting? And is that -- at the margin are you seeing more competitive pressure push that down, or is it starting to stabilize?

But it's been pretty steady in that 3.6% to 3.7% on the yield side, on the new things that we're bringing on, so I'd say it's been pretty steady over the last few quarters.

Okay. All right.

And ultimately it's about growth, right? So if you look over the last several years, at first we could not outpace the acquired loan runoff. Than the goal was, let's breakeven. Then, I think as we mentioned this year, let's get to 5%. And we felt like if we could get to 10% net loan growth at the end of this year, we'd be doing well.

Obviously, we been able to do that over the last few quarters. So we've got to grow that book. We see plenty of opportunities. If you look at our construction and land development to total risk-based capital, our CRE to total risk-based capital, we are way below any of the thresholds and we do believe those are thresholds that you need to pay attention to.

We did not pull any triggers on any wholesale loans, as I mentioned earlier. So it's -- what we're trying to do is not -- we're trying to get good core relationships. We think it's a jump ball in the industry today to really move some really meaningful relationships.

Okay. Great and then one follow-up in terms of liquidity. I know it's come down from about $640 million on average in the third quarter of 2015 to roughly $470 million in the second quarter, down to $354 million on average in the third.

How much would you expect -- what's the right level to run your bank? I mean that's still a little over 5%, or right at 5% of earning assets, which is high. Will you break that down?

We can bring it down. Obviously, it's getting ready to go back up. When we bring Southeastern on. 35% of their assets are in their investment portfolio. And then, I think the other thing to remember is, we don't have any FHLB advances. We don't have any brokered CDs. So you can look at people's liquidity on balance sheet.

We almost have $1.9 billion in secondary sources of liquidity from FHLB advances, you name it. So, Peyton, from a liquidity side, we are in really, really good shape today. And Southeastern' s loan-to-deposit ratio

65%.

65%. But it's going to refuel the gas tank as we get into next year. We're excited about what they are doing. And our teams are really gelling together, and so we're just excited to get this deal closed, get through conversion, and they are going to be another nice growth engine for us.

Sure. No, I guess my point, or my question, is just on the fed funds piece. The very short overnight partner.

A couple hundred million. $200 million, if you want a number. But my point is, you can look at somebody's balance sheet and they might have $400 million, but if they've got $1 billion in brokered CDs or $500 million in advances, I think you have to think through that part of it. What I was trying to say is, you can see how core really our funding base is, and really our debt side of our Company.

Sure. No. It just seems to me like there's a little earning asset mix improvement there, so that's all. Thank you very much.

Tyler Stafford, Stephens Inc.

Hey. Good morning, guys.

Morning, Tyler.

Nice quarter. Most of my questions have been answered. I've got a couple left.

First on the loan growth, trying to get a handle on how much net growth you could see next year with the runoff of the acquired. How much of that acquired book are you able to keep and retain and refinance into the non-acquired portfolio?

It's really not a lot. We look at every loan that is of any size. So you got two pieces of that. So the acquired credit-impaired, those are going to stay in the pools. So I think when you think about that number, looking at our regulatory disclosures of how many of the loans of those are passed.

What the grade is? You can see that acquired credit-impaired -- a lot of those loans are in really, really good shape. So when you say keeping, I think to look at that disclosure helps a lot. And then, on the acquired non credit-impaired, the big piece of that, really a lot of its mortgage.

And so, I think what you're seeing there is you're seeing a lot of refinances out as the rates have been so, so low. And what we're excited about on that side is, they might be refinancing out, but we're building our mortgage servicing asset.

In fact this last quarter, if you just look at the loans that we are servicing, it almost went up $40 million, in terms of loan balances that we're servicing. So remember, that credit, non credit -- the non credit-impaired bucket, those do churn out. But there's not significant movement over from -- into the non-acquired bucket.

Okay. That's helpful. Thank you.

And then, with Southeastern coming on in 1Q, should their margin firm up the margin pressure that you're seeing?

Just optically, I hear you on focusing more on NII, but just from an optics perspective, will that firm up your margin compression or will that -- what are the margin impacts from that?

Well, their margin today is about 3.15% so clearly that's not going to help. We have not gotten through all the fair values of that. Clearly, they have a very large investment portfolio.

Obviously, you won't see us run our investment portfolio at 35% of assets, So we've probably got some work to do there. I think ultimately, Tyler, it's going to take til the end of the first quarter, get all our fair values done and then you'll see where we are. But on the surface, their margin today is about 3.15%.

Okay. And then do you have the recognized PCI accretion this quarter?

The recognized PCI portion? I think the way we've explained it is, you've got to just look at the acquired loan yield and if you want to back out some amount of that, the [$766 million] is -- you could really back some of that out if you'd like.

We'll have a disclosure in the Q that will show what the accretion buckets are. But that's how we disclosed it.

Okay. All right. Thanks, guys.

Thanks, Tyler.

Christopher Marinac, FIG Partners.

Thanks. Good morning. John and Robert, I wanted to the back to the comments you were making earlier on the big picture, back to Nancy's question. When we think of Charlotte, how big is your lending team there? And where do you think that will be in one or two years? Just want to get a gauge of where that directionally is going.

Well, it's been our fastest growth market. We have a brilliant, extraordinary team in that market.

We just -- a large CPA firm moved out of our headquarter building in Charlotte. We took down all that space. Which gave us -- I don't remember exactly how many additional square feet, but --

More than doubled.

Yes. Doubled our square footage. So I think there probably tells -- gives you an idea of where we're headed. It is a market, obviously, that is dominated by the large banks. And it has been a market where we've been able to really bring on some really nice talent. And the middle-market space there and private banking space has been exceptionally strong.

So it's a market that we will continue to invest in. We are, if you look all in, we're not -- in terms of the loan portfolio, it's not quite at the $1 billion level yet in the Charlotte MSA, but it's getting there. And we would like to see that. I think we'd like to see that doubled.

Is the capacity there to simply do that organically, given the connections and obviously the space you now have and the momentum you already been building for several years there.

Sure. Well, we've done it basically all organically thus far.

And it's certainly a whole lot easier to build -- take $1 billion to $2 billion than it is to go from zero to $1 billion. So we've got the infrastructure, the culture, the focus. I think Charlotte, for us, today, is operating as well as it ever has.

We're competing very nicely in the treasury management space. We've brought on additional talent there. We're competing very nicely in the mortgage space and that's one of the things that's important to us in a market. And I thought Nancy's question was a very good one.

Talking about Atlanta. Well, it's can be really hard for us to compete in all the most -- all lines of business that we offer in an Atlanta-type market. And then Charlotte, there are pieces of retail that will be more challenging to compete in, although there are parts of it where we have really a strong retail-based. But I think we'll be able to compete pretty effectively in all four lines of our business. And what we see when we can do that, is we just see high returns.

So lower efficiency ratios, lower -- higher ROAs in those markets. So Charlotte will be -- has been but will continue to be a major focus and an allocation of both resources and capital.

So, Robert, does your continued evolution in Charlotte, just as an example, allow you to continue to push north, geographically up I-77, I-85? And again, doing that without acquisitions?

It does. I think it all goes back to people. That's how we've really built our Company. I know we've been through this M&A wave since the financial crisis, but -- and if you look back, that's how we did it.

That's how we did it in almost every market that we're in. And I think that you look at our lines of business in wealth and mortgage and commercial today, it's a platform that scalable and easily moved into new markets with the right people.

Great, Robert. Thanks very much for reinforcing these points.

Thanks, Chris.

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 Sandler O'Neill conference in Naples, Florida, beginning on the 16th of November. We look forward to reporting to you again soon.

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