SouthState Bank Corp (SSB) 2014 Q2 法說會逐字稿

Presentation

Good morning, and welcome to the South State Corporation second quarter earnings conference call. Today's call is being recorded and all participants will be in a listen only mode for the first part of the call. Later we will open the line for questions. I will now turn the call over to Ms. Donna Pullen, South State Bank Senior Vice President.

Thank you for calling in today to the South State Corporation earnings conference call. Before we begin, I want to remind our listeners that our discussion contains some forward-looking statements regarding both our financial conditions and financial results. We have included slides for this call that outline our results and our general comments this morning.

Let me first refer you 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 our call.

Good morning. I'll begin our call today with a few summary comments about our second quarter. John Pollok, our Chief Financial Officer and Chief Operating Officer, will then provide some detail on our operating performance. I will then wrap up our prepared comments with an update on our conversion and integration efforts, and then we will conclude the call with a Q&A session with the research analyst community.

A year ago we closed our merger with First Financial, and we shifted our strategic focus from mergers to enhancing our foundation, rebranding our five banks, improving our financial performance, and preparing for the future. The results from the second quarter certainly began to reveal the financial success of this focus, and the combined strength of the banks that have merged together the past two years.

We achieved record operating earnings of $22.2 million during the quarter, or $0.92 per share, which represents a 19.5% increase from a year ago. This quarter was highlighted by continued asset quality improvement, low charge off levels, improved expense management, and significant organic growth.

These improvements led to an operating return on average assets of 1.12%, and an operating return on tangible equity of 16.6%. Net income totaled $17.9 million for the quarter, or $0.74 per share, which was impacted by merger and branding expenses totaling $0.18 per diluted share.

Asset quality also improved this quarter with a $2.1 million decline in non-acquired, non-performing loans, and a $10.4 million decrease in OREO. These reductions are leading to lower credit cost.

The second quarter was certainly highlighted by organic growth. Our pipeline has continued to be strong and we are pleased with the quality and quantity of our growth.

On the loan side, we achieved net loan growth of over $60 million, as non-acquired loan growth outpaced the runoff of acquired loans for the first quarter since the closing of the First Federal merger. For the quarter, non-acquired loans grew by $195 million, or 26% on an annualized basis. The growth this quarter was diverse as we experienced gains in construction, consumer real estate and commercial lending.

On the deposit side, our non-interest checking balances grew by $42 million during the quarter to over $1.6 billion at quarter end, and we continue to have excellent success in adding new deposit relationships.

Wealth and mortgage were two areas that we knew would benefit greatly from the merger with First Financial, and the second quarter showed the strength of these combined units. Our mortgage and wealth teams had an outstanding quarter with income of $4.7 million and $4.8 million respectfully. These strong results contributed to a linked quarter increase in total non-interest income of $3.7 million.

On the mortgage side, we made some additions of experienced high producing originators in select markets, and have completed our conversion to one mortgage origination platform.

On the wealth side, our team successfully completed a systems conversion in investment services during the quarter, and continues to experience great momentum in attracting new assets under management. We did experience some margin compression this quarter, and could continue to experience some volatility in our margin.

John will provide more detail on this in a minute. I am very pleased with the team's performance, and after almost a year of preparation, how well our company is positioned for the future.

I will now turn the call over to John Pollok to give you some detail on our second quarter financial performance.

Thank you, Robert. On slide number 5 I will draw your attention to the linked quarter change in our interest earning asset composition.

During the quarter, our total interest earning assets increased by $62.7 million, with the most significant changes occurring within the loan portfolio. We had net loan growth this quarter of $63.5 million as the pace of acquired loan runoff slowed, and the non-acquired loan growth accelerated.

A good portion of the loan growth occurred during the latter part of the quarter, and therefore is not fully reflected in our average balances. Period end non-acquired loan balances were over $113 million more than the average balance for the quarter.

On slide number 6, we show you the movement in the net interest margin over the three full quarters since the First Federal merger. On a linked quarter basis, the net interest margin declined by 24 basis points to 4.75%, driven primarily by a decline in the yield on earning assets of 26 basis points, with only a small reduction in the cost of interest bearing liabilities. This decline was a result of a drop in the yield on the non-acquired portfolio of 7 basis points, and a drop in the yield of 23 basis points on the acquired portfolio.

A change in the mix of the loan portfolio also contributed to the decline. The acquired loan portfolio, which is a higher yield than the non-acquired portfolio, represented 44% of our loan portfolio during the second quarter, compared to 47% during the first quarter.

The gold colored bars on slide number 6 represent the net interest margin adjusted for the effect of the amortization of the FDIC indemnification asset. This blended margin declined 15 basis points as the amortization expense declined linked quarter. This amortization expense, which is reflected in the non-interest income, is expected to continue to decline as we approach the end of [lost share] coverage on certain FDIC assisted portfolios.

We had further credit releases in all of our acquired portfolios during the quarter, with the exception of the First Federal portfolio. These releases only had one month impact on the yields in the second quarter. We will perform our first recast of the First Federal portfolio in the third quarter, and we have been pleased with the performance of the portfolio to date.

Switching to the expense side, non-interest expense, excluding merger and branding related expenses, totaled $69.4 million, down $2.1 million, primarily the result of lower OREO in loan related expenses. We are still on track with our cost save projections.

On slide number 7 you can see that these cost saves, along with the improved non-interest income levels, are contributing to the improvements in our efficiency ratio. We continue to drive toward our goal of an operating efficiency ratio in the low 60s post-conversion.

On slide number 8, we illustrate our continued operating earnings per share improvement as we drive towards $1.00 per share per quarter. We look forward to continuing this improvement as we complete our merger integration.

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

Thank you, John. The board of directors has declared a quarterly cash dividend of $0.21 per share, which represents a $0.01 increase from last quarter. Our teams have been working together as one for almost a year, and this is evidenced by our production improvements this quarter, but the efficiencies of operating as one brand and one system should further strengthen our performance and our franchise.

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

Thank you sir. We will now open the line for questions.

(Operator Instructions)

The first question we have comes from Jennifer Demba of Suntrust Robinson Humphrey. Please go ahead.

Thank you, good morning. Just a question, Robert, on the non-acquired loan growth. A lot of it came in construction development. Can you give us some color there? And can you give us a sense of geographically where all the loan growth came from?

Sure Jennifer. You know construction specifically, it was up $52 million for the quarter, so we had good loan growth there. About half of that really is residential, so it's going to -- you turn out fairly quickly. We also had some construction obviously on the commercial side. We had a couple of larger commercial construction projects that really closed probably over the last couple of quarters and began to fund up.

I'd say overall, Jennifer, my comments on the growth would be fairly, really quite [driven], really diversity, first in terms of the types of business we had. Construction was up 16%. The consumer real estate up almost 6%, [CNI] 6%, and then consumer non-real estate was up almost 16%. So probably the first quarter we've seen in a while where really each of our areas had pretty nice growth.

Geographically what we're seeing is kind of a similar story. Everybody helped. Every region of the company really helped this quarter to hit the kind of organic growth we had. But specifically the Greenville, the greater Greenville MSA, we had $36 million in growth in the Greenville MSA. In Georgia, we had $28 million come out of Georgia, Columbia $20 million, Charlotte $15 million. And then the Charleston market, which we talked about some last quarter, and the team really starting to come together there, had $23 million for the quarter. And even some of the markets that had kind of labored early in the recession, like Myrtle Beach, Hilton Head, we began to see them come back and really had pretty strong quarters themselves.

So everybody contributed. Greenville was certainly the overall leader, but Georgia had a big impact, as did Charleston, Columbia and Charlotte.

And can I ask a follow-up? You said on the call, and in the release, you made some hires during the quarter. Can you give us some color there.

Yes, we picked up a number of new people. We've hired some new bankers in the Charleston market. We've hired a number of new Charlotte -- excuse me, a number of new mortgage bankers as well. And then we've added some people on the IT side.

So I would say it's nothing kind of out of the normal for us. We typically on a quarterly basis add 5 to 10 new producers, and I'd say we're still in that same pace.

Okay. Thank you.

(Operator Instructions) Next we have Chris Marinac of FIG Partners.

Thanks, good morning. Robert and John, I just want to ask about the small decline we saw in the accretion income. Is that something that it will be a permanent change here or do you think we'll see some variability in the coming quarters?

Chris, hey this is John. Good morning. I think, as we've always said, we're going to have some volatility. As I mentioned in my comments, you know we're getting ready to do our first recast of the First Financial portfolio next quarter. So we've been very pleased with the performance there, so there's some potential that we could see some increases.

As you know, as we've stated in the past, we still continue to have fairly high credit marks on our portfolios. We continue to see credit improvement throughout those, but I think the main thing is volatility. As we finish the recast in the third quarter, we'll have one month impact there. And then I think as we reach the fourth quarter, after having a full quarter of the recast from First Financial, you ought to be able to get some stability in the margin and hopefully see the direction a little clearer.

Okay, great. And then I guess my follow up just has to do with operating expenses. Will this run rate that we see coming up in third quarter, sort of be the new run rate with everything else, to kind of build off of any growth in the future? I'm just kind of trying to understand here what our natural growth rate of expenses should be beyond Q3, after the changes (inaudible).

Well we've got, I think as you think about this quarter, obviously we just did the conversion, so we don't have all the cost saves in. So I think, as we've said all along, you know our goal is to get to $9.5 million in expense saves on a quarterly basis, pre-tax. We're a little bit over halfway there. Coming in the third quarter, we think we could almost get another $2 million. And then in the fourth quarter we'd get the rest of that.

You know we've got eight branch closures. They all did not happen at conversion [weekend]. They're spread out through August, we we've got eight more offices to close. And then obviously we've been running two operating systems and we're in the process of obviously switching over to the new system and turning off the old system. So we'll see some more cost saves there, Chris.

Okay. And then just a follow up there, John, is there any natural expense growth in 2015, just kind of comparing 2014 to 2015 with the kind of run rate that is in place at the end of [December].

Yeah, Chris, I'm not sure yet. You know we'll get into our forecasting process as we get into the fourth quarter and take a look at that, really take a look at everything, but not sure exactly what that would be in 2015 yet.

Okay. Great. Thanks for the color.

Next we have Peyton Green of Sterne, Agee.

Yes, good morning. I was wondering maybe if you all could talk about, on a linked quarter basis, the end of period loans. The acquired portfolio was down about $133 million, and the acquired was up about $195 million, and I was just curious how much of the acquired went into the non-acquired.

Peyton, this is John. Not really any. I think, as we've talked in the past, this First Federal, with its thrift tradition in the past obviously did a lot of residential, but we really didn't see a whole lot of transfer at all over. It was really all new production this quarter.

One of the things that we're very focused on is to make sure, from a duration standpoint on the loan side, that loans maybe traditionally that were held in the loan portfolio at First Federal, we're taking those and refinancing those into the secondary market, but really didn't see much churn coming out.

I think probably the biggest place you could see it is, as Robert mentioned earlier, is you know we did a lot of construction this quarter, so a lot of people building new homes, primary homes and secondary homes. And so we saw a little bit of churn out from the lot loan portfolio into the construction book.

Okay. And then just to clarify, how much of the expense save do you feel like you had recognized in the second quarter, out of the $9.5?

We're a little over 50% of that. And as I mentioned, you know we've got about $2 million to get in the third quarter, and then about $2.3 million to get in the fourth quarter.

Okay. And then, Robert, I mean you mentioned last quarter that you felt good about the potential for an increase in loan production. How do you feel now after seeing such a good quarter? Does that draw down the pipeline or is the pipeline really quite good?

Well the pipeline I would say continues to be about at the same level that it was in the first quarter. A lot of the business though that we did, a lot of the growth, you'll see, Peyton, that the average balance is more or less in our period end balances, and a lot of that reason is a lot of this business was closed in June.

So you know I don't know the exact timing of the pipeline, but it still feels about the same it did in the first quarter. But you know I will also say, I think the volume of business from what we closed in June, is probably going to continue to have a lag effect in terms of July. And so I think maybe August, September, we'll see if it picks back up and see what closes then. So don't expect to have a big July, but maybe the end of the third quarter will be kind of back on pace with the second quarter.

And Peyton, this is John. You know I'd add, our teams are very focused on the conversion so we're doing a lot of, you know internally a lot of things, changing out our mortgage platform, you know just a lot of stuff that we're internally focused on that obviously we want to make sure we got all those bases covered before -- to get all that behind us before we increase the production again.

Sure. No, and I guess, Robert, how are you seeing customer behavior change or not change? I mean are you seeing any improvement out there?

We continue to see improvement. We have over the last year. I think the biggest thing that we've seen that's been different is really the business customer. And we've seen consumer real estate, mortgage activity, construction, really over the last year continue to improve. Really on the consumer side, the refinancing wave is pretty much over. Almost all our volume really now is almost new construction and new purchase.

So we've seen that building over the last year, but the commercial side, you saw your commercial borrow [would] just kind of continue to sit on the sidelines, and now we're still seeing -- we're seeing a lot of activity there, a lot more demand picking up on the commercial side. It seems to be the confidence level has grown. And then we've got some changes in our market with business models at some banks or integrations of others and that's creating some opportunities as well.

Okay. And then last question, I mean you've mentioned John, and Robert, that you've been very internally focused with making sure that the conversions and the integration went correct. Do you feel like people are now coming to work with a different frame of mind or do you think there's still a little bit of a lag in that?

Well you know we just did the integration. What we [saved in part] the big, the core conversion was just a little over a week ago. So I'd say we're still kind of in the throes of it and working through it. I think the integration is going very well, but we're at the point right now we're just kind of executing the plan we've been building for the last year and that's going to take another four to six weeks before it really settles out.

Okay. Great. Thank you for taking my questions.

Next we have Blair Brantley of BB&T.

Good morning guys. I just wanted to talk about your excess cash you have on the balance sheet and kind of what's your plans around there. I know we talked about some different ideas last quarter. Just maybe an update there.

Yes, Blair. Hey, this is John. You know I think that, as we've said all along, is long term we feel like we can grow the loan portfolio. Obviously we had a quarter this year that we weren't expecting. I think as we'd mentioned, we felt like we'd continue to shrink some this year, and we still could. So we don't want to go out and take a lot of duration risk with it in the investment portfolio.

I think as you can see with our balance sheet, our investment portfolio is about 12% of our earning assets, or about 10% of assets. So I think we're going to continue to work and try to lend the money out.

Any more thoughts on paying back some of the trusts and everything we talked about last quarter?

I think so. I think, as you can see in the build in our tangible book value, the build in our capital ratios, as we get to the latter half of the year, I do believe that's something that we will continue to focus on. I think long term, as we've always said, is we want to be more of a common funded bank, from a common equity standpoint. But yes, it's something that we're definitely going to consider as we get later in the year.

Okay. And then [flippance] and mortgage, can you give us the production numbers this quarter versus last?

In terms of mortgage, when you look at it today, is you know our current pipeline today is a little over $200 million. We've got, you know if you look at the second quarter, we had over $300 million in volume. It was over 1,200 loans. We were very pleased with the mix with over 73% of the volume being purchase business and only 27% refi (sic). And the majority of it came through our retail channel.

Okay. And have you shifted more to selling direct completely now or are you still doing best efforts?

That's correct. We have really shifted our model to sell direct. Obviously that's going to have a nice impact on our mortgage servicing asset. But yes, we're selling all of our fixed rate paper direct now.

Okay. Thank you very much.

Thanks Blair.

Next we have William Wallace of Raymond James.

Good morning, guys.

Good morning.

In your press release you talk a little bit about the yield on the loans in the non-acquired portfolio and the pressure you're seeing there. I'm wondering if you could talk a little bit about the pricing environment, if there's any difference between markets and how you guys are combatting that.

Wally, this is Robert. We've seen continued increase [in] competitive pricing, mostly just people going out further on the yield curve. But we've continued to stay relatively short. Our new loan yield is still north of four, and nicely north of four. So we've been able to continue to grow the loan outstandings and still get what we feel like is acceptable returns for the risk that we're taking. But obviously the metropolitan markets are the ones where the competition gets more fierce. And then for larger projects, you're also seeing just people take more duration risk.

So I think from an interest rate standpoint, you're seeing a fairly tight range. I think from a duration perspective though you're seeing people really reach out 10, 15 years. And so we've been very selective with our duration and feel really good about the yields that we've continued to be able to produce.

Do you guys happen to know maybe the average duration on the new loans you're booking on the commercial real estate portfolio?

Wally, I don't offhand. We can get you that information and get back to you. I felt like I've got a pretty good gut reaction of what it would be, but let us make sure we got the right answer and get back to you on it.

Okay. But you guys are standing pretty strong? You're not going out 7, 10, 15 years on commercial real estate?

I won't say that we've done none. We've done very few selective transactions, but the majority of the business that we're doing is five years or less. The vast majority of the business that we're doing is five years or less.

Okay. That's helpful.

I mean I'm not saying if we've had a long-term customer, if we're going to protect a relationship, that we wouldn't take a spot here and there. But the majority of what we're doing is really what we've always done, five years or less. We're looking at our [Sendero] model closely.

We continue to be asset sensitive, obviously very core funded. A similar philosophy to what we take in the investment portfolio. We've stayed very short there on our duration risk. We've given up some yield to get that and we're doing some of that same approach in terms of the loan portfolio.

And Wally, you know we, as Robert mentioned earlier, you know we were able to grow our construction perm portfolio fairly significantly. And the duration on that is fairly short on the residential side. And what we've found in the past is you know these times where construction picks up and we focus on primary homes and secondary homes as you know that's such a great feeder system to the mortgage line of business.

And our commercial real estate portfolio too is, I can think of very few really if any examples where we've gone and extended maturities on a commercial real estate project. Our philosophy has always been either, as John said, on the construction side, to get at construction and then let them flip it out to the permanent market on the commercial side, or we do mini perm. So we're typically not in these projects 8 to 15 years.

Okay. And then switching gears a little bit, John, can you remind us maybe how we can think about the accretion on the FDIC indemnification asset as the various different agreements that you have expire? I assume, maybe you can give us an idea of some of the timing of some the expiration of some of the larger agreements.

Sure. Well you know we have a number of deals. Cape Fear that came through the First Financial merger, that expired this quarter, so we're done with that one. Is really our next big piece is our CBT, which we did in Georgia. That's in the first quarter of 2015. Then our next deal is in 2016. We have two in 2016. And then you have to get out to 2017 on the non-single family. Then we have a number of single family (inaudible) agreements and those get out of 2020 and 2021.

Okay. And then so when I look at the big drop in the negative accretion in this quarter, was that related to the Cape Fear expiring?

Well we had a couple pieces to that. So the net decrease was a little over $24 million. So $5.8 million of that was the negative accretion. We had almost $11 million in claims and then we had about a $7.5 million adjustment on the Cape Fear. That was offset by a lower credit (inaudible).

Okay. Thanks, John. I appreciate that. That helps.

(Operator Instructions) Well at this time there appear to be no further questions. At this time I would also like to turn the floor back over to Mr. John Pollok. Sir?

Thanks for everyone joining us today. We look forward to reporting to you again next quarter. Thanks again.

We thank you sir, and to the rest of the management team for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day everyone.