SouthState Bank Corp (SSB) 2017 Q4 法說會逐字稿

Good morning, and welcome to the South State Corporation Quarterly Earnings Conference Call. Today's call is being recorded. (Operator Instructions) I will now turn the call over to Jim Mabry, South State Corporation Executive Vice President, in charge of Investor Relations and M&A.

Thank you for calling in today to the South State Corporation Earnings Conference Call. Before beginning, I want to remind listeners that the discussion contains forward-looking statements regarding our financial condition and results. Please refer to Slide #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 look forward to providing an overview of the 2017 performance and then provide some insight on our near-term focus. John Pollok will review the year in more detail, and then we will conclude the call with questions from the research analysts.

Before commenting on recent performance, I want to reflect on how far South State has come in a relatively short period of time. Only 5 years ago, we were $5 billion in asset bank in good markets, but with relatively low deposit market share. Adjusted returns on average earning assets were 86 basis points and adjusted return on tangible equity was 11.3%. During the past 2 years, we have almost tripled in asset size and taken returns on average assets and tangible equity to over 1.25% and 15%, respectively.

Today, we have almost 6% market share in our combined counties of operation and have our sights set on winning more share in what are great markets. We set out a number of years ago to have a deep and dense footprint and to be top 5 in market share and I'm very pleased with the progress that has been made. Now let me turn to 2017.

The year saw a number of significant steps forward and the financial performance of the company was very strong. For the year, net income was $87.6 million or $2.93 per diluted share, representing a 0.77% ROA and a 9.63% return on tangible equity. Adjusted net income totaled $145.1 million or $4.85 per diluted share and represents a return on average assets and return on average tangible equity of 1.28% and 15.49%, respectively. The year saw significant changes for the company. Among the developments were the completion of 2 acquisitions and crossing the $10 billion regulatory threshold.

The merger with Southeastern Bank Financial Corporation was consummated at the beginning of this year. Teams in Augusta and Aiken recorded strong performances and are seeing meaningful opportunities for growth. This addition has contributed financially to South State, but more importantly, we have added tremendous talent in the market. On November 30, we completed the Park Sterling acquisition. Systems conversions will take place in the second quarter and the integration is progressing well. The merger adds 20 branches in the Charlotte market, established a meaningful presence in Richmond, Virginia and added density in our Carolinas and Georgia markets. We now have over 180 branches stretching from Richmond, Virginia to Richmond Hill, Georgia and serve over 700,000 customers.

Soundness is an important operating principle of South State. Several years ago, we set a goal of crossing the $10 billion threshold. I'm proud of our team's ability to navigate these regulatory challenges and still produce growth in our businesses. It's also gratifying to report that all lines of business at the core bank are performing at a very high level. Excluding the impact of Park Sterling, annualized loan growth was approximately 8%. Production was balanced across markets and asset quality remained very strong. Nonperforming assets were 0.25% of assets at year-end and net charge-offs for the company totaled only 4 basis points for 2017. Funding continues to be a strength of the bank. Core deposits represent 85% of total deposits and the funding base is comprised of a large customer base with average deposit account size of $12,000.

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

Thank you, Robert. Starting on Slide #3, net income for the quarter totaled $2.4 million or $0.08 per diluted share. It was impacted by the revaluation of the deferred tax asset due to the Tax Reform Act, as well as merger costs related to the Park Sterling merger, which closed on November 30. Adjusted net income, which excludes these items, was $41.4 million or $1.30 per diluted share. This represents an adjusted return on average assets and tangible equity of 1.33% and 15.83%, respectively.

On Slide #4, you can see the merger expenses net of tax of $12.4 million for the quarter and the revaluation of the deferred tax asset of $26.6 million. We would expect the DTA impact to be earned back fairly quickly with a significantly lower effective tax rate going forward.

On Slide #5, you can see the $12 million increase in net interest income for the quarter as a result of the addition of Park Sterling for 1 month. For the quarter, our margin expanded 7 basis points to 4.18%.

On Slide #6, we show you the composition of our interest-earning assets, both in terms of the average balances for the quarter as well as the balances at year-end. As you can see, the acquired loan book made up 25% of interest-earning assets for the quarterly average but represented 1/3 of our total interest-earning assets at period-end.

On Slide #7, we have increased our disclosure to now include details behind the 6.57% yield or on the total acquired portfolio this quarter. The acquired noncredit impaired portfolio, which represents 85% of the total acquired portfolio, generated a 5.73% yield for the quarter. You can see the impact of purchase accounting accretion enhancing the contractual yield earned as well as the remaining discount to be accreted in future periods. The pace of the pay-downs and payoffs of this portfolio going forward will obviously determine the impact of the total accretion recognized. The acquired credit impaired portfolio generated a 9.67% yield. This portfolio had very little impact from the Park Sterling merger as 97% of the portfolio was noncredit impaired. In total, the yield on the acquired loan portfolio for this quarter was 6.57%, which is down 8 basis points from the prior quarter.

Switching to the noninterest components, both noninterest income and noninterest expenses increased due to the Park Sterling merger. Slide #8 shows the continued improvement in our adjusted efficiency ratio, which was just under 57% for the quarter.

Slide #9 gives an update on the Park Sterling merger. We are on track on our cost saves, having achieved a small amount already in December and are looking forward to completing the systems conversion in the second quarter. As we normally do in post-merger periods, we are doing some balance sheet repositioning such as selling a portion of the acquired investment portfolio and the shared national credit portfolio and paying down some borrowed money with the proceeds.

You can see the significant progress we have made over the years in earnings per share growth on Slide #10.

And Slide #11 shows the $0.05 decline in tangible book value this quarter. With 2 mergers during the calendar year, our tangible book value still improved $2.39 or 7.7% year-over-year.

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

Thank you, John. We look forward to the years ahead for South State. We have been busy building market share over the last 10 years. We now have the opportunity to get better and become more efficient. In the near term, we have a keen focus on the successful conversion and integration of Park Sterling. We also intend to make meaningful advances in product offerings and processes that we expect will enhance our customers' experience and enable us to make further market share gains.

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

(Operator Instructions) The first question comes from Stephen Scouten of Sandler O'Neill.

This is actually Peter Ruiz on for Stephen. I just wanted to maybe touch base first on loan growth. I mean, organic growth is certainly strong here at a mid-teen pace, but it's kind of slowed a little bit from the maybe 20% to 30% earlier in the year and maybe in 2016. Can you maybe give a little bit of color on what the pipeline looks like going into 2018 and what -- if maybe net growth can kind of rebound to a higher single-digit or maybe a lower double-digit pace?

Peter, this is Robert. I'll just touch on overall. Let me start with just kind of touching on '17. The first 2 quarters of '17 were really strong. We also acquired Georgia Bank & Trust, Southeastern in January of '17. So we've got a lot going on in the first half, but the pipeline was strong. It continued to be strong through most of the rest of the year. We saw some slowdown towards the fourth quarter and has seen a little bit of slowdown as we start the year. But some of that may be seasonality, we'll just see. But overall, we felt good about kind of mid- to high single-digit numbers. That's what we thought for '17. And so we ended up '17 at about 8% annualized loan growth. That felt really good for us mainly because it was very balanced. I mean, we had 8% consumer growth, 8% C&I growth, 12% CRE growth, and we had really good geographic dispersion really across the board. None of our markets really just took the lead. It was the coastal markets, the central markets, the metro markets really across the board had -- I felt like had very good balance in terms of our overall loan growth. I think '18 is little unusual from a loan growth perspective. We closed Park in November or -- yes, excuse me, closed Park in November. That, in and of itself, creates some turbulence in terms of loan portfolio. As with all of our mergers, we tend to buy and then kind of reposition. We take concentration management pretty seriously. So just for example, Park had a higher level of CRE and C&D than we do in the bank so it kind of takes our levels up. And -- but we're still well below the 300 and 100 level. So we've got roughly $1 billion in runway to get to those 300, 100 level. So there's plenty of balance sheet strength to grow in those categories, but that doesn't mean that's where we're headed. It just means we've got a lot of firepower left in terms of our balance sheet to grow it. But our primary focus really will be to reposition the balance sheet, to get inside the segments that we want inside our loan portfolio. So if you go back to First Federal, when we bought them, they were pretty much a -- they were a thrift, so it took our resi portfolio up to 45% of our loan book. It was too high. When you look today, it's 30%. And over the last few years, we've been repositioning that portfolio. So with all that said, the first half of '18, loan growth is going to be muted mainly because we're going to be in this kind of repositioning period with Park Sterling, and then we begin to see growth begin to pick up in the second half of the year. Probably won't get up to a double-digit number in '18, but we still think the second half of the year, we'll be getting back to a more normalized run rate.

That's really helpful. I appreciate it. And I guess just maybe, you guys mentioned that the Park Sterling acquisition, the integration and cost saves are on track. Is there any -- do you guys see anything at this point in terms of incremental opportunity to extract some additional cost saves here? Or is it still relatively in line with the first guided 35% in cost saves?

Peter, this is John. I think we're on track. I think where more of the opportunity is on the synergy side. We spend a lot of time with the Park team and we see tremendous opportunity on the retail side and the wealth side and the mortgage side. So we really feel like on the synergy side, this year, we're going to see some things that are going to be very, very helpful. We still got to get through the conversion of the first part -- first half of the year, but on the expense side, we feel like we're still right on track.

The next question comes from Tyler Stafford of Stephens.

This is Gordon McGuire filling in for Tyler Stafford. First, I just wanted to touch back on the balance sheet restructuring on Park Sterling. You already called out some of the line items that you'll be doing in this call, so I just wanted to see if you had any additional commentary on when you think you can be done with everything, kind of restructured and normalized, and then any potential impact to the NIM from this.

This is John. Well, obviously, Park's only in our numbers for 1 month in the quarter. So clearly, our NIM's going to be impacted once we have Park in there for a full quarter. From the major balance sheet repositioning, we feel like all that will be completed in the first quarter. The only thing that really won't, as Robert mentioned, is going to be the remixing of the loan portfolio, and that's going to take us some time like it has with all the other acquisitions we've done.

And then just to kind of following it up. I appreciate the new disclosures around the accretion this quarter. What would be your expectations for the accretion this coming year? What kind of a good run rate for that with Park Sterling would be? And then just any general thoughts on the core NIM trajectory from here.

Well, yes, as I just mentioned, Park being in 1 month. Yes, it's going to take a quarter or 2 to kind of get that to settle down for the run rate, but I'd turn your attention back to Slide #7. So when you look at the acquired noncredit impaired bucket, so we've got another $65 million in accretion that needs to pour in. And if you go up a line on there and you look at the acquired credit impaired bucket, that $133 million, that's going to probably pour in over a 3- to 4-year weighted average life.

That's helpful. I didn't see it in the press release, but I was wondering if you had any commentary on your tax rate expectations this year. And any thoughts around your capital levels? Any deployment strategies within the new tax regime?

Well, I'll start on the tax rate and I'll get Robert to chime in on some of the things we're thinking about, but we feel today that our tax rate will probably be a little bit under 23%. Clearly, still under review, but our first pass, that's where it looks like we'll land. From a deployment strategy, I think like most companies, we're going to invest back into our company. There's clearly some things that we want to get done. Clearly, just really excited to have that come this year, especially as we're going to be faced with Durbin in the second half of the year.

So just a couple of additional comments. This is Robert. I mean, first is, obviously, there are a lot of positives that come with the tax impact, but obviously hurt our numbers in Q4. And so there's some tangible book value build that we did not get in Q4. So there's a sense that we want to at least close some of that gap as we evaluate dividend increases and things like that. We'd like to earn some of that $26 million back in terms of TBV build. I think secondly is we're in the valuation stage in terms of how we're going to deploy that revenue stream. It's obviously very impactful to the company. And I think there will be a combination and a balanced approach. I think we'll look at, obviously, what do we need to do for the shareholder from a dividend perspective. Certainly, what can we do from our strategic planning process and are there some things that we can accelerate into '18 that might have been on the drawing board for '19 or '20. And so those are the things we're balancing. We have not made any final decisions around those investments or impact to shareholder, but will in the coming quarters.

The next question comes from Catherine Mealor of KBW.

One other one on the margin, turning to the funding side. How much of the -- I mean, your funding costs are still really low, so I don't mean to knock it, but the -- if we look at your CD rate, it increased quite a lot linked quarter. How much of that was just from you adding in the impact of Park Sterling versus an increase in your core CD rates?

It is probably about 4 or 5 basis points.

Okay. Was from Park Sterling?

Yes.

Okay. And as you think about the remix of your portfolio on the funding side, what's your outlook for deposit betas and kind of any commentary you can give us on what you're seeing in your markets in terms of deposit behavior so far?

Catherine, this is Robert. I guess, my general thought is you see a few outliers on the deposit side in terms of kind of chasing rate because maybe their balance sheet structure is just different than ours. We certainly don't see that from the large banks and really don't anticipate seeing that from the large banks. That's where the bulk of the deposit share is. As you know, we have a lot of customers and a lot of granularity in our deposit book, so we feel really good about our ability to kind of manage that piece. And we've had good core funding growth kind of pretty consistently for decades. So overall feel really good. I think the ultimate answer though to your question is not just how much deposit rates go up. I really think it's around loan growth and loan demand. So as we move into the year and we see the level of loan demand, how big an impact economically this tax reduction has, how companies decide to spend or invest that money, I think that will end up really being the ultimate determination of kind of how deposit bases move.

Yes. And could you argue in the first half of the year when we'll probably see a little bit slower growth rate from you all? That would probably put a little bit less pressure on the funding cost as well, which will help that side of the balance sheet.

I do. And we don't always just manage it exactly that way. I mean, we look at funding as something we're going to need over decades, not just a quarter or 2. But we certainly don't feel the need to go out and just go out and attract a lot of excess funding just to build up the securities portfolio or just get a really thin margin. Ours is going to be around focus on core funding and helping support the growth we have in the loan portfolio.

Okay, that's great. And then one other follow-up on the acquired side. What are your expectations for the pace of runoff on the acquired book?

Catherine, this is John. That's a great question. I'm not sure. They're all very different and now Park doubled the size of our acquired loan book, but I think it'll take us a couple of quarters to kind of really get our arms around that.

Okay. And maybe one on that. How was the size of the shared -- of this mix portfolio that you are selling or pulling out of?

About $68 million.

$68 million, okay. And the timing of that? Has that already happened or is that the 1 quarter?

In our current process, we've done some of that in the fourth quarter. We have a little bit more to go this quarter.

The next question comes from Jennifer Demba of SunTrust.

First, back to the loan growth topic for 2018 -- or excuse me, 2017. I'm just curious, I mean, the industry saw a lot of pay-downs last year. Was that an impact? Do you feel like, to you guys, disproportionately? And also, did the competitive environment heat up in your markets given all the new entrants and expanding -- the other mergers in the market?

Jennifer, this is Robert. I don't really see where there was a competitive shift at all. We have not seen or really experienced that at all. The -- I mean, we felt, at the beginning, this time last year, we kind of said we thought we have high single-digit loan growth, 8%, that's where we landed. So we felt like overall, we kind of landed where we thought we would. The timing was a little unique. Some of it came more front-end loaded than back-end loaded. But overall, we thought 8%, especially when you're bringing on roughly $1.2 billion, $1.3 billion portfolio from Southeastern that you're working through in year 1. We overall felt pretty good, really, about the pipeline and the types of business and the mix of business really all year. We probably feel as good about the 4 lines of business that we're in overall and their ability to grow organically as we have in a while. Now you did see in the marketplace this huge run-up in certain segments of CRE. Some of that we participated in, some we did not, but you certainly saw multifamily being probably the #1, but there's also hospitality. We certainly had done some multifamily lending and we had done some hospitality lending, and we did slow down those segments in the second half of the year and we saw some of those go to the life insurance companies in the second half of the year, so those loans are chunkier. They tend to be a bigger hit when they pay out and we did see a little bit more of that in the second half of the year.

Okay. Second question, you mentioned early in the call that you're planning to add to your products set and maybe make some changes to your processes. Can you give us some more detail there?

Sure. I'd say the biggest one, it kind of goes a little bit back to Catherine's question as well on funding, is if you look at how we're positioned now, we are -- we're #1 or 2 in a lot of our markets, but we're top 5 in a lot of our markets in terms of market share. And the biggest opportunity in front of us is really the market share that the large banks have. There's a pretty big gap between us and the small banks and other entrants in our players -- in our markets just because they don't have significant market share. So what we're seeing is more opportunities for more C&I, more middle-market type companies. So we're rolling out with Park a new treasury platform. It really elevates the opportunities we have on the treasury management platform. We've got a really good group of treasury people -- leadership and people in that area to tag that area. So that's a really main one that we're focused on this year. We did a gap analysis in '17 on all of our digital-type products, and we have a strategic plan over the next 3 years that we're using to close any gaps that remain in terms of our digital process or digital products. Some of those with the tax cut, we may accelerate and be able to do them a little bit faster, but we think we'll be able to close the time line of that pretty quickly. And then obviously, we said that for the year, for '18, Park Sterling is our #1 focus for the year. We want to get past that. And if you kind of equate that back to '17, that was the #1 goal for '17 was Southeastern. Well, if you look, they had the #2 mortgage producer in terms of dollars, #1 in terms of units and our mortgage group in '17. They had the top 2 investment service producers during the year. So having a good execution and integration and I think effective just that team at Southeastern, helped us in a big way this year. Park is going to be the same way, and that's where we're going to be focused heavily for the first 6 months of the year, is making sure we do that, we execute that well, that we get similar results. And then the second half of '18 is really where we'll begin to accelerate some of these technology investments going forward.

(Operator Instructions) The next question comes from Christopher Marinac of FIG Partners.

Robert, I wanted to continue your line of thinking on the last question as it pertains to kind of the upside in these markets. If we use Charlotte as an example, is it fair that you're still in the first or second inning of that market compared to where you want to be? It's part of a conversation you started at the Investor Day last fall.

Yes. I mean, we're early. We've been there for 10 years, right? So I mean, we've been kind of crawling from the bottom up. Now we're up to #6 in market share. We have 25 or 26 offices now in that market, have a great team. And we have a very robust platform, whether it's wealth or mortgage, retail. Park Sterling was more of a commercially focused bank. We think we bring those other lines of business to really build a much robust delivery system to that market than we have in the past, same in Richmond, kind of same dynamic there and same dynamic in Raleigh, but it has been meaningful. But it's not just there, Chris. I mean, if you look, just take Charleston, for example. One of the markets where we're #2 in market share, we have the same number of branches in Charleston and the same math kind of applies to even a Greenville or a Savannah, but we have the same number of branches in Charleston that Wells Fargo has and we have roughly $1.2 billion, $1.4 billion in deposits in that market. They have almost twice that. So the infrastructure in Charlotte, in Charleston and Savannah and other markets, we don't have it all that we need in Raleigh. In Richmond, we have great infrastructure and great leadership, but I think it's really across our whole footprint now is we just have a lot of the infrastructure that we have in place so we could go in and our market share could increase meaningfully with very little addition in terms of kind of branch infrastructure.

Got it. That's very helpful. And then just to continue on Raleigh for a second. Is that a market where just a handful of changes on the infrastructure makes a big difference? That, because of technology, you don't have to have a massive footprint. Just put this incrementally more will help.

Yes, absolutely. I think that's going to be a branch-light market for us and it's going to be a team-heavy market. We've already began to add talent on the commercial side. We've got a vertical line of business in the dental health care area. We'll begin to build that out. We've brought in a new head of our mortgage group in Raleigh. And all this has been done just as we closed Park Sterling in November. So making some really good inroads there as in Richmond.

Okay, great. Then last question, just for John. The accretion that we saw in the fourth quarter, has any of that kind of sort of accelerated? Or I know it's not onetime per se, but just curious if that -- how much of that was scheduled versus non-scheduled.

Yes. Of course, Christian, we're going to have some pay-downs when we look at this. But when you look at that $11.1 million, about $2.5 million of that was due to prepayments.

The next question comes from Nancy Bush of NAB Research.

Quick question on your fiduciary and asset management businesses. Where do you stand in terms of the size of that business? Is it adequately sized for the new footprint? And are you bringing new customers in there?

Nancy, this is Robert. So just last year, overall revenues were up in that area year-over-year 28%. Some of that is Southeastern related. Southeastern had a very strong wealth group and wealth team. We're seeing -- but for Q3 -- just Q3 to Q4, we grew 6%. So we had a strong fourth quarter, and we're really seeing it really across the board. One, we have the ability to continue to add some really nice talent. We have gone from being kind of one of many players in that space to really one of just a few. So we're getting the phone calls early in the wealth group, where we used to be in mostly just a competitive situation with the team that we have in place. We go toe to toe with the larger money managers very, very well. So the sales portion has been really good. The new recruitment of wealth managers and also gaining new customer base, that's going well. The equity markets have obviously played into our favor to help that line of business as well. So that has helped. GBT has a very strong wealth base, so that's really been additive. Park Sterling was not as strong in wealth, but opportunities obviously in Charlotte and Richmond and Raleigh, especially with the commercial banks that we have in those markets, present really the upside. So I think the other markets do as well, but Charlotte, Richmond and Raleigh, there's significant wealth potential in those markets.

And that would lead me to just a follow-up question. Do you have -- as you grow larger, is there a need to sort of proportionately grow the fee businesses? And are there fee businesses that you're not in now that might be the targets of some of this reinvestment of tax riches?

Nancy, we talk about that a lot, and we really like the 4 lines of business we're in and really like the markets that we're in. And so our focus is going to be taking advantage of the market position that we're in, in really good markets and executing on our 4 lines of business. I think the technology investments and the like that we'll make will be the transition of existing customers to more self-service type technology. It'll be things that we can do just to make our overall process more efficient inside the bank, but it will be primarily focused on the 4 lines of business that we're in. Now we are in some more regional businesses. We've been in the mobile home finance business for years. So that's an area where we will continue to look at expansion. We also have rolled out this vertical in dental over the last 12 months. We really like that a lot. That's something we think we can certainly build further around our footprint. But our primary focus is not to go to some line of business that we don't know well or haven't done for a long period of time. We just see too much opportunity in front of us with retail, wealth, mortgage and commercial and really each line of business to improve both technologically, improve in terms of our process and the market is just -- the market is really right for continued growth in those 4 lines.

And just quickly -- go ahead.

This is John. I think the overall theme is we just have a lot of optionality in our company, whether it's a line of business, capital, concentration. So I think our view as we think about going forward is we want to maintain that optionality so we can take advantage of what the market will give us.

And just quickly with Park Sterling, you inherited or you acquired a sort of capital markets platform. And I think last quarter, you had seen some opportunities that, that was bringing. Can you just kind of comment on that sort of the scale of that platform and if that's something you're going to be investing in?

This is Robert. I mean, capital markets, I think it speaks to really the whole commercial bank. It's not -- there are pieces and parts. There's treasury, there's capital markets, there's the commercial lending space. But let me just speak to really commercial overall, is 5 years ago, at our size, it was very difficult to compete on some of the larger commercial opportunities in our footprint. Today, we're getting those opportunities. And -- but you have to bring all of the weapons to that situation. You have to bring a balance sheet that can support the credit facility. You have to bring the treasury products that can support a sophisticated treasury management platform. You have to bring the capital markets that can help their CFOs manage their companies and their interest rate risk and as ours, the way that are healthy and strategically attractive. So I think all those pieces fit together is what we were excited about with the Park Sterling merger, and we're in the infancy there, but we're getting the -- the [bets] are there. The opportunities to go and tag that market space is there. Now we have the product set to do it. And I just see capital markets as one piece of that overall commercial strategy.

There are no additional questions at this time, so I will now turn the call back over to John Pollok.

Thanks for your time today. We will be participating in the KBW conference in Florida, beginning on February 8, and we look forward to reporting to you again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.