SouthState Bank Corp (SSB) 2018 Q1 法說會逐字稿

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

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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. We'll begin the call with summary comments about the first quarter of 2018, offer an update on the merger with Park Sterling and then provide further insight into our performance for the period.

We are off to a strong start for 2018. Net income for the first quarter totaled $42.3 million or $1.15 per diluted share. This represents a return on average assets and return on tangible equity of 1.19% and 14.69%, respectively. Adjusting for merger-related expenses associated with the Park Sterling acquisition, earnings were $51.2 million or $1.39 per share, which represents a return on average assets and return on tangible equity of 1.44% and 17.60%, respectively.

I'm very pleased with our team's accomplishments this quarter. Asset quality, expense control, deposit growth and continued progress with the integration of Park Sterling were performance highlights.

We successfully completed the Park Sterling system conversion this past weekend and are excited to build upon this merger. Even with the focus on our conversion efforts and crossing $10 billion, we were able to experience growth in checking accounts and in loan activity. The ability to attract talented bankers and new customers comes from a culture that is focused on a relationship approach to banking, which has taken decades to build.

Our board declared a quarterly cash dividend of $0.34 per share, $0.01 higher than last quarter, payable to shareholders of record as of May 11, 2018.

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

Thank you, Robert. Let's start on Slide #4 and take a look at the increase in net interest income and net interest margin linked quarter. We benefited from a full quarter's impact of Park Sterling as seen in the $16.7 million increase in net interest income to $129 million. Interest-earning asset yields were up 16 basis points and the cost of interest-bearing liabilities increased 12 basis points, resulting in 4 basis points of expansion in our net interest margin.

The yield on our nonacquired loan portfolio increased 10 basis points, and on Slide #5, you can see that it represented about 53% of our interest-earning assets. Our interest-earning asset yield also benefited from a greater weighting of the acquired book. The full quarter impact of the Park Sterling merger resulted in the acquired loan portfolio representing over 32% of interest-earning assets during the first quarter compared to 25% in the fourth quarter. The yield on the acquired book declined linked quarter by 34 basis points to 6.23%, but still contributed to a higher overall interest earning asset yield due to the higher weighting. You can see the impact of purchase accounting accretion enhancing the contractual yield earned on our acquired loan portfolio as well as the remaining discount to be accreted in future periods on Slide #6.

Slide #7 shows a $4.4 million improvement in noninterest income as our legacy lines of business showed strong performance and the period was also positively impacted by a full quarter of Park Sterling.

Our adjusted efficiency ratio increased from 56.9% to 60.7% as shown on Slide #8. As a reminder, we have planned annual cost saves of $30 million in total. We have realized 40% of these cost saves through the first quarter. Our systems conversion was this past weekend, and we expect to achieve the remainder of the cost saves by the end of the third quarter.

As you can tell from our muted loan growth, we continue to remix the Park Sterling loan portfolio as is customary post-merger. We are also focused on reducing certain noncore funding acquired in the transaction. This quarter also had the impact of $2.8 million in onetime employee incentives as a result of our strong 2017 performance and the tax reform act.

Slide #9 shows the great start to 2018 in earnings per share, and Slide #10 shows the $0.44 growth in tangible book value during the quarter. This was a nice increase given the significant merger cost and the AOCI impact from lower investment values due to the higher rate environment.

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

Thank you, John. We look forward to the rest of 2018. We have a unique franchise, great teams of people operating in fast-growing markets with a strong culture makes our company unique. We're well-positioned just behind the big banks to grow share. This bodes well for South State's continued success.

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

(Operator Instructions) The first question comes from Jennifer Demba of SunTrust.

Just question on the loan remixing for Park Sterling. Can you give us some details of maybe how many loans ran off -- that you exited during the quarter, and what you think you have left to do and how long that will take? And also, second question, are you seeing -- I know you've always seen opportunities to gain share from the bigger guys in your markets, but are you seeing outsized opportunities from Wells these days?

Jennifer, this is John. I'll start. So on the Park Sterling book we've -- as you know is historically for us, we have a tendency to remix the loan book, look at the different asset classes. So we've done a few things. I think as I mentioned last quarter, we have now sold about $68 million worth of their Shared National Credit book. We are in the process of unwinding their builder finance book, there was about $85 million in that book. And then, as you know, we have a tendency to kind of look at the CRE book so we're in the process of evaluating that. We had our systems conversion this weekend, so we just changed the signs. So what happens this quarter is as we go out and meet with all the individual customers, we continue to kind of look at the book. So typically, remixing for us it takes 6 to 12 months to do that so I don't see that anything unusual compared to what we've done in the past.

And any disproportionate opportunities from Wells in terms of hiring or customer acquisition these days?

Jennifer, this is Robert. Let me -- I'll touch on -- just a couple of things before I touch on that, let me just touch on the portfolio. I mean, the underlying trends that we're seeing in terms of loan volume, obviously Q1 was very noisy, but the underlying trends are positive. If you kind of look market-by-market, we're seeing a pretty good growth really. From our nonmerger-impacted markets, the growth looks good. The pipeline, Q1 to Q4, was up about 11% and I think we feel good about the segments it's coming from. So the consumer business had been strong, commercial operating companies has been very strong and makes up a significant part of our pipeline. And then on the CRE side, we've got about $1 billion in dry powder. Charlotte was obviously the most impacted from the merger and so Charlotte had a fairly flat quarter. Actually we're down some as we remix some of that portfolio, but they have the most significant pipeline that we have in the company. So overall, feel like the underlying trends from a loan perspective are probably as good as they've been in a while. The -- switch gears on your other question. I think we've seen this for a while and I would -- in terms of talent from larger banks, we've seen it for a whiles, of course, Wells included. I think it's twofold. I think one is obviously disruption at Wells and other larger institutions, but also there's the change in our company, and I think that may be impacting this as much as the disruption at the other companies. We have a stronger platform than we've ever had, especially in the commercial bank, our treasury platform, our capital markets platform and that's just bringing over a higher-caliber banker from these larger banks. And we just brought one from Wells this past quarter who's a guy some of our bankers had relationship with for a couple of decades. Very well-known, a solid, solid banker. And a few years ago, we might not have had the platform to be able to attract that talent and today we do. So I think it's multifaceted. I think there's unhappiness or dissatisfaction from some bankers and also some support people inside the large organizations and we've got a more robust platform than we've had in the past to be able to attract them.

The next question is from Tyler Stafford of Stephens.

I wanted to start on -- maybe just following up on Jennifer's Park Sterling remix question. Given that repositioning, do you still think you can hit that mid- to high-single-digit pace for the back half of the year?

Tyler, this is John. I think it depends. Our view is we've got to kind of get back to that number. Is it the second half of the year, the beginning of the next year, little hard to tell. I will tell you kind of in the second quarter, as Robert mentioned, our pipelines are good, the growth looks good, but I think it's still a little early to tell exactly when that happens.

I do think, Tyler, it is front end-loaded. The Shared National Credit, $68 million, the builder finance book's around $80 million. All of that is not unwound at this point, but is certainly being unwound. And then our CRE concentration, as you saw our [CRE-rated] capital declined and there are certain CRE segments that we're getting out. And then we're shifting banker focus away from more -- Park was just a heavier CRE bank, so that can take a little bit of time to do. But the pipeline looks good. The underlying trends look good. It's just a little noisy right now, but I think we feel good about the productivity side. It's the question is how quickly do we move some of this stuff out of the bank.

Tyler, when you come off a year growing 60%, I think it's just a natural time to where you're going to remix the book. And so we had a heavy, heavy growth year last year with 2 acquisitions. So this is something we've done before. Clearly, a part of our strategy is we try to grow the core -- tried to grow the core bank.

That makes complete sense.

And just to add on to that is we find it's better to do it right on the front end is decide, all right, what are you going to be in, what are you not going to be in, what does the credit box look like and then everybody comes out of the gate kind of knowing what's going to fit and what's not going to fit. And I think we've certainly gotten there quickly. There were a lot of similarities, credit, culture-wise between our 2 teams, but we're trying to get it right on the front end and that creates a little bit of the front end-loaded portion of the runoff.

Yes, okay. I appreciate that color. And just on the -- on Park's builder finance portfolio, you mentioned that the $80 million. Are you exiting that portfolio in its entirety? Or just more selectively culling the credits that you want out of that portfolio?

No, we're winding that portfolio down. We do -- just to be clear, we do a lot of construction finance, but it's for the end user. This was more of a speculative builder finance group and it -- there weren't a lot of what I would consider deep relationships. We would be one player of amongst many with some of these larger builders and that's just not an area that where we want to deploy our capital. We think we can deploy it in the mortgage space, the consumer space and the middle market space more effectively.

Yes, understood, okay. And then just on the deposit side of the house, can you help us parse out how much of the deposit cost increase was Park Sterling-related from kind of the full quarter average versus just the normal market pricing you're seeing across the legacy South State portfolio?

Tyler, it's John. It's a little hard to say. I think when you step back and you look at that side of the balance sheet for us is one of the things that we wanted to focus on was kind of getting rid of the noncore funding, so FHLB advances, some sub debt, some brokered CDs. So our strategy has been to kind of go back into the market, get a little bit more aggressive on the deposit pricing and replace that. As you can tell in our deposit growth for the quarter, we were up nicely, but clearly wanted to be a little bit more aggressive because we wanted to replace that noncore funding. So now, our loan-to-deposit ratio is back down to about 92%. So clearly, makes it a little noisy trying to split it out that way when you're trying to replace that much noncore funding, but we clearly got a little more aggressive on the CD side, but I think when you step back and you look at our noninterest DDA growth, we're growing core checking accounts in the bank. Over 25% of our funding now is noninterest DDA. So our strategy was a little bit different because of the transaction, not just because rates were going up and it was a little more competitive. We want to replace that noncore funding.

And Tyler, just to kind of add on, I mean it's kind of a similar story to the loan growth, it's just noisy, but the underlying trends we feel really good about, so obviously, we remix. But noninterest DDA, as John said, did grow 9%. But probably our strongest new account growth quarter we've ever had, so a lot of new account volume. I think a lot of that goes to really 2 areas. We picked up a much more robust treasury platform with Park Sterling. We have a significant pipeline on the treasury side and our team is doing a really outstanding job there. That conversion took place this weekend and we'll be migrating the South State customers to that platform between now and the end of the year. But the new customer pipeline for that has been very robust. And then we've expanded our digital delivery. We had 20% year-over-year growth in our mobile deposit platform and now 66% of all our deposits are coming in, in a digital format. So we just see positive momentum underlying the overall deposit side of the bank.

And Tyler, one last thing. If you go back to the third quarter of last year, with kind of Park Sterling's last release, and their cost of funds was almost 60 basis points. (inaudible) I think about it, big picture, take that 60 basis points, got a full quarter now and we were up about 10. So we're pretty pleased with what we've been able to accomplish on that side, bringing in those cost of funds and ours are only going up about 10.

The next question is from Catherine Mealor of KBW.

Can we talk about the expenses a little bit? And are you able to give us an outlook for how expenses should trend next quarter? I guess we'll have the $2.8 million bonus come out and probably some higher seasonality and then the full impact of the cost savings. So is there a way to kind of look at the puts and takes for what the expense run rate can move to over the next couple of quarters?

Catherine, this is John. Let me see if I can take a shot at that for you. When you look at Park, they had annualized expenses of about $86 million a year. We announced about $30 million in cost saves. We've realized $12 million of that. So we've got about $18 million to go on an annualized basis. So if you look at next quarter, we ought to be able to get -- we've realized 40% now, we ought to be in that 60% range. But as we get to the end of the third quarter, we feel like we'll realize about 100% of that.

Okay, that's helpful. And then any way to quantify the seasonality of 1Q as well? I think you mentioned in the press release, higher FICA taxes and things like that.

I'm not sure I could totally give you that in dollars, but clearly you have the FICA taxes. We have raises that go in that during that time. Yes, I think, historically, where we've been successful on the expense side is when we can kind of contain core expenses under that 3% growth rate. So that's something that we focused on a lot. So that'd probably be the color I would give you around as you think about looking at our expense growth rate over the last few years.

Okay, that makes sense. Helpful. And then how about -- back to the margin, how about on legacy loan yields? I think your nonacquired loan yields were up about 10 bps linked quarter. Any commentary on asset betas, and as rates continue to rise, how quickly you think you'll be able to move legacy loan yields higher? Or -- and how much is increased competition offsetting some of that?

Catherine, this is John. I'll start. What we were excited to see is our legacy loan yields now back in the first quarter are north of 4%. We're closing in. As you can see, our legacy book was up 10 basis points linked quarter. Park made us more asset-sensitive. We kind of went from what I would say a book of about 60% fixed rate, now we're about 55% fixed rate. One of the great things about the churn you're seeing in our portfolio, right, more asset sensitivity, didn't grow a lot, a lot of churn there. As Robert mentioned, the pipelines are full. So that clearly has a big impact on the margin. Our average loan amount still holding in there, a little over $125,000 of what we've seen. So seeing some nice growth on what I'd say the small side. The mortgage business, we've shifted to more on balance sheet so the 3/1s and 5/1 ARM business, we like a lot. We like seeing that now, that the rates there are a little bit better. So I think we feel pretty good about pricing. Is it competitive? Absolutely. Good loans are -- especially on the commercial side -- are extremely competitive. I think as Robert mentioned though now, we've got -- we've just got more firepower. We have a robust capital markets area where we can go out and compete on some bigger deals, but not have to take all the interest rate risk. And then our new treasury platform, we've just put that in. We have a number of customers that have tested that and we've got a fairly good list of prospects I think we'll be able to bring over. I think when you think about betas in general, I think, as you know, we focus on core funding. When you're 81% funded by core deposits, we continue to focus on growing that noninterest DDA, our betas have just performed better. As I mentioned, I think in Tyler's question, it gets a little noisy when you're trying to kind of wean the noncore funding off the balance sheet. But beta-wise, we know it's going to be more competitive out there, but I think when you look at that remix of the loan portfolio, where our yields are going, we feel good on the loan side that we'll be able to continue to drive our yields up.

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

John and Robert, could you tell us a little bit about the things you are avoiding within the loan portfolio, whether that's types of deal, structure, just some sort of color.

This is Robert, I'll start. Fundamentally, we just believe in relationships. So I think the dividing line for us primarily is relationship versus transaction and that doesn't always go perfectly down, one regulatory segment of credit or type the way it's structured. But if it's just a transaction, we tend to just not be interested. We find that we get the best returns when we've got a whole relationship and we've got good funding. So I'd say the major dividing line is transactional businesses like Shared National Credits or like the builder finance group. Lending to national builders to take a piece, just to get credit outstanding, that's just not really what we do. Shared national credits' really the same way. So I'd say that would be the ultimate dividing line. CRE has certainly been very hot for a while. I would say the multifamily space, the hospitality space, certainly we've seen a lot of growth in those areas especially in the markets that we're in. So we don't see any weaknesses occurring in those markets, but we certainly have seen a lot of demand and so we're careful there. And then we've seen some businesses that have -- economy's been good and we've seen some that have leveraged up. So companies that have leveraged up on their balance sheet are ones that we're going to be a little bit more cautious about. So that's a broad range. I think the big differentiator is relationship versus non. John, anything to add?

I think, what I would add is we want to be able to get the deposits to fund our bank so if we -- as Robert said, the transactions that don't come with deposits is something we're really not interested in. So we feel like the way this -- the way the rates are moving is you've got to be able to core fund your bank. If you look at wholesale funding prices today and you consider those in some of the betas is, those things are moving at an extremely fast pace. So it gets back to really can we round that relationship? Can we be their bank? As Robert mentioned, for us to be the second or third partner in a relationship, that's not really something we're interested in. I think what we're really excited about now, when you take that treasury platform and the hire -- the quality of the hires that we're getting in the middle market space, we feel like we can grow our balance sheet. We feel like we can fund it from a core perspective. And then at the end of the day, we've got a lot of options left, right? We've got -- we still have the ability to pull the trigger on the wholesale side if we needed it. But ultimately what we see today just seems like $1 of earnings is valued whether -- the same whether it's coming from a transaction or a core relationship and we just view that very differently today than it looks like is being out there what some people are doing.

And Chris, we're trying to -- we've been making sure that we've got the platform and the talent that can -- to deliver to all size companies and just -- we expect to be the first call. And I don't think it's just commercial banking. I think we're absolutely there in our mortgage area. We're absolutely there in our consumer bank. Our wealth area wasn't there a few years ago, now they're clearly there today. So -- and our commercial bank has been in segments but not all segments and I think we're moving our commercial bank into where we're going to be the first call for these customers and that's the position that we expect the company to be in.

This is great. John, just a quick follow-up. The original merger charge on Park Sterling that you gave us way back when, is that still a good figure today?

It feels like we're going to come in a little bit lower than our original number, but we still got a couple of quarters today -- to go. So today, looking at merger costs, it's probably going to be about $20 million next quarter and about $5 million the quarter after that, but feels like we're probably a little under our original estimate.

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

Thanks, everyone, for your time today. We will be participating in the SunTrust Robinson Humphrey Financial Services Conference in New York beginning on May 22. We look forward to reporting to you again soon.

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