SouthState Bank Corp (SSB) 2014 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 and all participants will be in listen-only mode for the first part of the call. (Operator Instructions).

I will now turn the call over to Donna Pullen, South State Corporation 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 condition 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 will begin our call today with a brief overview of our accomplishments during 2014. John Pollok, our Chief Financial Officer and Chief Operating Officer, will then provide some detail on our fourth-quarter operating performance. I will then wrap up our prepared comments with some summary comments, and then we will conclude the call with a Q&A session with the research analyst community.

I'm very pleased with the performance of our team in 2014. This was a year of significant change for our Company and our team executed very well. The primary focus in 2014 was the integration of First Federal and the rebranding of our five brands into South State.

In our comments this time last year, we said that the successful integration of the First Financial merger would be a great long-term building block for the future of our Company. I'm happy to report that today, having successfully executed the merger integration, we now have a platform that will support our future growth initiatives and also a platform that will continue to improve on our already strong performance metrics.

While the major focus for the year was on the integration and rebranding, I am very pleased that our continued focus on delivering a great banking experience also continued to drive organic loan and deposit growth.

I have had the opportunity to speak with many of our customers in the last few months. It is clear from these meetings that our team is engaged and our opportunities to add and expand relationships and to add new bankers are growing. This is having a very positive impact on our Company. Our team, our market share, our size, our balance-sheet strength, and our relationship banking model differentiate us in a way that we have not experienced in the past.

During 2014, we further strengthened our balance sheet by achieving organic loan growth of over $600 million, increasing core deposits by $195 million, and retiring $65 million in preferred equity. Tangible common equity to tangible assets improved from 7.13% at 2013 year-end to 8.28% at 2014 year-end. Tangible book value improved $3.23 per share to $25.59, which represents a 14.5% improvement.

Performance measures for 2014 were also greatly improved, with an operating return on average assets of 1.15% and an operating return on average tangible common equity of 16.6%. Operating EPS totaled $3.75 for 2014, which represents a 19% increase over 2013.

Improved credit cost during the year was also an important part of our performance. Net charge-offs on non-acquired loans improved to 16 basis points from 41 basis points in 2013, and NPAs and OREO both declined meaningfully. The improved credit cost and the achievement of the cost saves from the merger allowed us to hit the $1 per share per quarter operating EPS target, which was provided when we announced the merger.

I am pleased with our performance in 2014 and how we are positioned for the future. While many good things are happening in our Company, we also have many opportunities to improve. Our efficiency ratio, while significantly improved, needs to be further reduced. We will be watching expenses closely and are developing plans to further improve in this area. Our process integration and the South State brand are new and we have many opportunities to better utilize our systems and to improve our brand recognition.

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

Thanks, Robert. I will start with a couple of quick highlights of the quarter.

We achieved record operating earnings for the quarter, totaling $24.4 million or $1.01 per share. This represents a 27% increase from a year ago.

We achieved strong returns on assets and equity, with an operating return on average assets of 1.23% and an operating return on tangible equity of 16.9%. Net income totaled $21.2 million for the quarter or $0.88 per share, which was impacted by merger and branding expenses totaling $0.13 per diluted share.

Our organic loan growth during the quarter outpaced the decline in our acquired loan portfolio by over $50 million. This growth in the total loan portfolio annualizes to a 3.7% growth rate.

Due to some tax credits available beginning in December and their ability to be used for the entire tax year, our effective tax rate for the quarter was a little less than 31%. Looking ahead to 2015, we would anticipate it to become more normalized and back into the 34% range, due to a higher level of projected taxable income in 2015.

Non-interest income increased by over $800,000 linked quarter. Our wealth management and mortgage liens of businesses continue to produce excellent results, with income of $4.5 million and $4.1 million, respectively, but the primary increase in non-interest income linked quarter was lower negative accretion on the FDIC indemnification asset.

On slide number 6, we show you the linked-quarter change in the composition of our interest-earning assets, shown on an average basis. The average balance of the non-acquired loan portfolio increased by $137 million and the acquired portfolio balances decreased by $119 million. We hope to see this trend continue as the pace of the decline in the acquired portfolio moderates and our pipeline for new loan growth remains strong.

On slide number 7, you can see our net interest margin increased by seven basis points linked quarter, driven by a 40 basis-point improvement in the acquired loan portfolio yield. As you may recall, we had a $22 million credit release at the end of the third quarter, which was partially reflected in the third-quarter yields. The impact of that release is fully reflected in the fourth quarter.

Also contributing to the increase in the yields is another release of approximately $51 million, primarily from the First Financial portfolio. This release is due to the improved credit metrics of these acquired portfolios. Even after these releases, we still have a credit mark of over 6% of the unpaid balances in the purchase credit impaired portfolios.

The gold-colored bars on slide number 7 represent the net interest margin adjusted for the effect of the amortization of the FDIC indemnification asset. This blended margin increased 11 basis points as the amortization expense declined linked quarter. This amortization expense, which is reflected in non-interest income, is expected to continue to decline as we approach the end of the commercial loss share coverage on our CBT FDIC-assisted portfolio in March of 2015.

Switching to the expense side, non-interest expense, excluding merger and branding related expenses, totaled $70.1 million, up $1.9 million. Although we had decreases linked quarter in salary and benefit expense, we had increases in certain other categories, due to discretionary-related spending, timing relative to the conversion during the third quarter, and loan production related costs.

The fourth quarter included $800,000 in passive losses related to the investments and tax credits that contributed to our lower effective tax rate this quarter.

On slide number 8, you can see our operating efficiency ratio increased from 61.3% to 62.7%, due to the higher spend in the fourth quarter. With the merger, conversion, and integration complete, we continue to believe there are opportunities to further improve our efficiency ratio in 2015.

On slide number 9, we illustrate our continued operating earnings performance improvement. As you can see, our operating earnings per share improved from $0.51 per share in the first quarter of 2012 to over $1 per share in the fourth quarter of 2014.

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 $0.23 per share, which represents a $0.01 increase from last quarter and $0.04, or 21%, higher than a year ago.

Our earnings momentum and performance metrics are very strong. This level of performance is providing a strong capital base to build on in the future. It has also provided the ability to retire $45 million in high cost trust preferred securities earlier this month.

While I am pleased with our team's results in 2014, we have many opportunities to improve. We will focus on improved efficiencies, expanding relationships with our 550,000 customers, and we will continue to find opportunities to grow and leverage our capital.

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

(Operator Instructions). Christopher Marinac, FIG Partners.

Robert and John, can you tell us what the accretion number was this quarter in terms of the impact on net interest income?

We had negative accretion for the quarter on -- are you talking about the non-interest income piece, Chris?

Actually, I am talking -- the spread income, the net interest income.

Yes, that's something that we will disclose when we get our K out there.

I think the way that we look at the accretion is you really need to just go in there and look at the yield that we have on the acquired loans. I think one of the big -- the big impacts there is last quarter we had a $22 million release, and then this quarter we have got a $50 million release.

So we are going to continue to have a fair amount of impact when you look at that category, but I would really go to the margin table, Chris, and look at the yield on the acquired loans.

Got it, all right, very good. Do you think the visibility is such that you will have additional releases beyond what you have had in Q3 and Q4?

Chris, obviously we review the portfolio every quarter. We today still have a credit mark in excess of 6% on the acquired credit impaired portfolio, so there is potential there, but that is something we review every quarter. I think in today's world, a 6% credit mark is still fairly healthy on some of the acquired credit impaired books we see out there.

Okay, and then I guess back to the cooperation. What is your sense in customers in terms of their interest level in terms of expansion this year? Maybe compare and contrast the various cities in the footprint. I was just curious on pipeline and a little bit of how you feel the tone has changed or stayed the same in the last three months?

Chris, this is Robert. I would say things have continued to improve. How much of it is a better focus on our part getting through the integration and the conversion and how much of it economic is hard to tell.

But our loan portfolio and pipeline continues to build. The fourth quarter in terms of just non-acquired loan growth was up $30 million in the fourth quarter over the third quarter.

I think for us there have been really a number of drivers. One, obviously, the economy. I think people are more confident on where things are today.

But we have continued to been able to add talent. We continue to add strong talent really the last several years and throughout 2014, but in the fourth quarter, that continued, as it will in the first quarter.

Our market position, Chris, is very different. You have known our Company a long time. Demographically, we are a really remarkably different company than we were just a few years ago.

Just for example, today two-thirds of our deposits are really in six markets -- Charleston, Greenville, the Hilton Head area, Savannah, Charlotte, and Myrtle Beach, and what we are seeing the economy come back to is the in migration, the business expansion, is ticking back up.

If you look at the population growth rates of those markets, many of them are -- Charleston is over 8%. Myrtle Beach is over 8%. Greenville, Hilton Head, and Savannah, all over 7%. You're more than double the US growth rate, so that's having an impact.

Then the other big piece that we are seeing, Chris, is the impact on just traditional C&I lending. That grew $50 million for us in the fourth quarter. We are seeing a competitive -- a place in the market now where we can compete against the larger guys that traditionally it was harder for us to.

I think part of that is the perception now with the company, obviously a bigger balance sheet, the team we keep adding to from a banker talent perspective, and then just the convenience with our footprint and a focus on these growth markets.

That's a long answer to your question, but bottom line, I think it's multifaceted that we are seeing more potential for growth organically than we have seen in a while.

Great, that's helpful, Robert, and just one quick follow-up on the non-acquired loan growth we saw this quarter. Are there any examples where you are having payoffs of formerly acquired portfolios that get renewed into this non-acquired bucket?

I think there are some, but it's a fairly small percentage.

Okay, very good. Thanks a lot.

Stephen Scouten, Sandler O'Neill.

I wanted to talk a little bit about expenses here first. I know on last quarter's call, you mentioned there was some movement late in the quarter that you would see in 4Q, some benefit there in expenses, as well as maybe another $1.5 million savings that you expected. Did you realize that in full in the quarter and what kind of suppressed the net realization of those benefits, if so?

Chris, this is John. Let me just take a minute and talk about the expenses in the fourth quarter, obviously a lot of moving pieces.

First is when you look at our expenses, we had an additional $800,000 related to investments, which provided the tax credit for the quarter, so in the passive loss section, that was up $800,000.

We really felt like it was time to begin to go more on offense and get out of the conversion mode, so, for example, on advertising and marketing, we really didn't do a whole lot of that during the conversion quarter, so we increased our advertising and marketing for the quarter. We had some things that were timing related, so, for example, sometimes what happens is is the billing you get in the fourth quarter is really for the third-quarter activity. So, for example, our postage and printing and supplies were up. We had a lot more expenses during the quarter in terms of extra statements with the conversion going on.

On the loan growth side, we clearly spent more money there on the business development side. Loan costs, those type of things, you can clearly see that in our loan growth.

I think one of the things we have tried to do is as we have talked to really everybody about expenses and our efficiency ratio, what we didn't want to do is not invest in revenue growth. When you step back and look at the quarter, we hired two investment reps, two in Georgia. We hired a private banker in Charlotte. We hired a private banker in Lexington, South Carolina. We hired a private banker in Charleston, South Carolina. We have continued to try to invest in those -- when we got opportunities there.

I think as you think about 2015, obviously in the first quarter, we are going to have some merit increases. We have got -- obviously going to have some higher payroll taxes. Obviously, that will have a little bit of impact there.

Then I think the other thing as you think about next year and think about really our overall run rate is, as I mentioned in the comments earlier, is the CBT loss year expires at the end of the first quarter and that is having a fairly significant impact on the amount of negative accretion that we are taking.

Kind of a long answer to your question. We did realize the amount of cost saves that we needed, but we didn't stop really investing on the revenue growth side.

The only thing I would probably add there from an expense side is when you go through an integration, we typically focus very much on getting the cost saves that we feel like and announced that we were going to get. But there is always, once that is behind you, an opportunity to really dig deeper and to look at all your processes and a phase 2 of really getting the expenses down to where they need to be.

I think in 2015, that is where we will be is now that things are stabilized, integration and rebranding are behind us, it will give us an opportunity to really focus internally to drive that number down.

Okay, so just making sure I got it. Most of these items are not necessarily going to pop down in 1Q. We can run rate a lot of these increases. It sounds like pretty much all the FFCH savings have been realized prior to a further dig down, as you just mentioned. Then the inflection point for maybe the loss share expenses could come in 2Q 2015, is that about right?

That's right. I think the way I would characterize it is really got to get through the first quarter. I think that will give a much more clearer picture of exactly where our run rate is on expenses. We clearly have a lot of noise linked quarter. If you go back and look year over year, you can clearly see a fair amount of expense reductions, but I think to really begin to fine-tune your number, you're going to need the first quarter to really look at where our expense run rate is.

Okay, great. Then just moving to loan growth a little bit, what kind of progress are you guys seeing in Charleston? Are you still looking to add commercial lenders there and do you feel like you have made any inroads, as well as what kind of new loan yields are you seeing on your current production?

This is Robert. Charleston was our top-performing loan growth market for the fourth quarter, which was great to see because, obviously, third quarter they were quite distracted. But of our $163 million in non-acquired loan growth, $44 million of it came from Charleston.

We feel really good about the momentum. We are continuing to add talent down there. We are not complete in that process yet. We will continue to build that team over the next several years, but felt very good in the fourth quarter that it led the Company in terms of loan growth.

Okay, and then just on those new loan yields and what you think could be present from a core NIM compression standpoint or do you feel like continued liquidity deployment will abate much of the yield compression on a core basis?

From just the yield perspective for what happens in the fourth quarter is our new loan yield was right at -- a little over 4%. It is actually slightly up from the second and third quarter this year, so it was 4.08% in the fourth quarter. That's been fairly stable over the last 12 months.

I would add, Stephen, too, on the margin, we clearly just had another release, with the majority of that coming from the First Financial portfolio, so we still feel like the acquired loan yield is going to continue to go up. I think overall when you think about the margin, it is going to really depend on the mix, how much that shrinks, how much we grow in the non-acquired.

But overall, our margin continues to remain very healthy and we sure are benefiting from continued credit releases out of our acquired portfolios.

Great, okay, guys. Thanks for all color.

(Operator Instructions). Jennifer Demba, SunTrust Robinson Humphrey.

Just curious if, Robert, you feel like you guys are ready to actively look at acquisition opportunities, now that the integration is essentially done, and I have a follow-up as well.

Jennifer, I felt like the fourth quarter was a real transitional quarter for us. Some of that you see in the noise, in the numbers, kind of a move from an integration mode to a more normalized business environment here. You can see that on the expense side, and then you can begin to see it, too, on the loan growth that we have.

As we transition into a more normalized business environment, we're going to be looking, number one, internally for additional ways to get more efficient. We feel good about our organic growth and revenue opportunities, and then we are going to acquire where it makes sense.

We have had -- the calls in the fourth quarter and over the last years and discussion have been very -- have been plentiful, and we think that will continue. There are a number of opportunities out there for us to pursue.

But I think our primary focus is going to be on our ability to make sure that we can create value without M&A, and we feel very good about that. But we are very open now to the right transaction, if it's with the right partner at the right price.

Okay, and my follow-up is regarding expenses. John, will you guys have any more merger and acquisition costs here in 2015 or rebranding costs or are we essentially done with those sort of nonrecurring items?

Jennifer, we are essentially done. We might have a little bit spill over, but it will not be material. We are excited to get back to pure GAAP earnings again and not have that in the operating earnings piece.

Okay, thank you.

Jefferson Harralson, KBW.

I wanted to ask first about the CBT commercial loss share going away. Can you help quantify how much that helps on a quarterly basis? Is it about $2 million pretax?

Jefferson, if you look at the negative accretion for the quarter, we had a little over $4 million. More than half of that was related to the CBT portfolio, so we have got one more quarter of that.

Obviously, we've got to go back and look at the cash flows again, so as you get into the second quarter, if it is around half of it now, you can see it is going to have a material decrease as we report the second-quarter earnings.

Okay. Can you guys -- a lot of questions on expenses on this call and with the expenses going up this quarter. Can you talk about your medium- or long-term efficiency ratio goals? Or Robert talked about after the first quarter being able to press harder and take another look at expenses, but can you talk about where your medium- to long-term goals are there?

Yes, we feel like we need to get our efficiency ratio under 60%. We only have, obviously, just a couple quarters now and really, as John said earlier, just a lot of noise in the third and the fourth quarter because of the integration, and also a little bit of seasonality.

Some of the expenses in the fourth quarter, you begin to have overlap between what was pure merger related and what was the normal operating, but really impacted by the merger. We are beginning to look at all those, but I can't tell you yet exactly the time frame to get to 60% or less, but that is our target.

Okay. Thanks, guys.

Blair Brantley, BB&T Capital Markets.

I had a question on the margin. With the extra $50 million that was relief at the end of the quarter, what's the average life on that?

We haven't really disclosed the lives. What I can tell you is the majority of it coming from the First Financial portfolio, so it is going to have a little bit longer life because of the amount of residential real estate in there, Blair.

As we get our 10-K out there and you can see more detail in the accretion numbers, you can begin to make some assumptions on where you think the average life would go.

I think when you look at the yield, our acquired loan yield linked quarter went from 7.28% to 7.68%, and obviously we had a much bigger release this quarter, so the next couple of quarters, that acquired loan yield is going to increase.

My hope is as we get to the end of the first quarter, we could have some more releases out there, but it hopefully will help you on the modeling side so you can do some predictions of where you think the run rate will be.

Okay. Then on the fee income side, can you maybe talk about some of the other line items, about service charges and some of the things, what you are seeing there? Maybe talk about customer behavior with the service charges and how you are thinking about that fee income bucket overall.

Blair, I will start. This is John. Our service charge fee income obviously is down year over year. That's definitely been impacted by customer behavior. Obviously, a lot more people have more cash in their checking account, so that has definitely come down.

I think when you think big picture about our fee income, there is a number of exciting things that are in there. One, when you look at wealth management, to think that this year if you look at all of 2014 compared to all of 2013 is that our fees are up 24% year over year, so we have great momentum in the wealth management area.

Then another area we talked about was mortgage. Obviously, rates are down. We are starting to see more refis, but one of the things we were excited about at the beginning with this transaction was the amount of loans that we were going to service. You can see our mortgage servicing book today has increased over $280 million in balances since we announced the transaction.

We think mortgage and wealth are going to have tremendous activities. We're still very focused on opening core checking accounts, which has a nice impact, but a lot of good things happening in the fee income category.

Then, lastly, obviously, as we mentioned earlier, we get to the second quarter where our negative accretion is really going to begin to decrease.

Okay, thank you very much.

(Operator Instructions). There are no further questions, so I will now turn the call back over to John Pollok.

Thanks, everyone, for your time today. We will be participating in the Sterne, Agee Financial Institutions Investor Conference in Florida beginning on February 12 and the KBW Regional Bank Conference on February 25 in Boston. We look forward to reporting to you again soon.

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