SouthState Bank Corp (SSB) 2015 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, and all participants will be in 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 Donna Pullen, South State Corporation's 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'll begin our call today with a few summary comments about our start at 2015, and then John Pollok, our Chief Financial Officer and Chief Operating Officer, will provide some detail on our operating performance.

We will then provide detail around our recently announced branch initiatives, prior to concluding the call with a Q&A session with the research analyst community.

We started the new year with the first financial integration fully behind us, and we have really begun to see the power of this merger. This is evident throughout our first-quarter results, with record mortgage earnings, strong core-deposit growth, and continued growth in assets in our wealth-management area.

The end result is a year-over-year increase of 51% in net income. From a linked-quarter perspective, net income improved by 12.6% to $23.9 million, which represents $0.99 per diluted share.

Other highlights of the quarter include margin expansion and improved management in some expense categories. This was also the first quarter in a while where we had no merger- and conversion-related costs. Return on average assets and average tangible equity totaled 1.23% and 16.21%, respectively. And our efficiency ratio improved to 65%.

As a result of this performance, the Board of Directors has declared a quarterly cash dividend of $0.24 per share, which is a $0.01 increase from the last quarter and a 20% increase from a year ago.

This quarter, we also continued to make improvements in asset quality, with a 10% improvement in the level of nonperforming assets, down to $71.7 million. NPAs to total assets now total 89 basis points, down from 1.02% linked quarter.

Our non-acquired loan growth this quarter totaled $118 million, or 13.7%, which did not cover the reduction in the acquired loan portfolio of $133 million. A shift in mortgage loan production to sellable product contributed to the decline in total loan. We would also note the loan pipelines remain healthy.

This shift in production resulted in record mortgage banking income of $6.6 million for the quarter, as revenue synergies from the First Financial merger are being realized. Mortgage banking income more than doubled from the first quarter of 2014.

We also had strong results from wealth management, with income totaling $4.9 million. Assets under care and management continue to grow, totaling $4 billion at quarter end, compared to $3.5 billion a year ago.

Retail banking also produced very good results, opening nearly 13,000 new transaction accounts, a 30% increase from a year ago. A few balance-sheet changes during the quarter worthy to note include the retirement of $46 million in high-cost trust-preferred securities and a $117-million increase in noninterest-bearing deposits.

Increasing by $22.6 million this quarter, our total shareholder equity now exceeds $1 billion, as retained earnings continue to strengthen our capital position.

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

Thank you, Robert. On slide number 6, you can see the increase in our net interest margin linked quarter, due to a small improvement in loan yields and lower funding costs.

Our cost of interest-bearing liabilities declined from 29 basis points for the fourth quarter to 23 basis points this quarter. The cost of certificates of deposit declining by 5 basis points and an improved funding mix were the primary factors contributing to lower funding cost.

We anticipate our cost on other borrowing to decrease to around 4.7%, due to the previously mentioned retirement of the $46 million in 7% trust-preferred securities.

The gold-colored bars on this slide 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 from $4.2 million to $3.2 million.

This amortization expense, which is reflected in noninterest income, is expected to decline considerably next quarter, as the commercial loss share coverage on the CBT FDIC-assisted portfolio ended in March. We should see the blue and gold bars continue to pull closer together as the negative impact of the amortization lessens going forward.

On slide number 7, you can see our efficiency-ratio improvement from a little over 69% in the fourth quarter to 65% this quarter. The improvement is primarily the result of no merger-related expenses this quarter, compared to $4.6 million last quarter.

Absent merger expenses, noninterest expenses were basically flat. Increases in salaries and benefits expense, as well as OREO expense, were offset by decreases in discretionary expenses and lower passive losses from investment tax credits.

The increases in salary and benefit expenses were higher, primarily due to payroll taxes, and OREO expenses were higher due to the write-downs from the auction of the 70 assets in February. We continue to take steps towards driving the efficiency ratio lower.

On slide number 8, you can see the improvements we have made in the operating earnings per share over the years and the great start we are off to for 2015.

I will now turn it over to Robert to discuss some of the branch initiatives that we think will help continue our EPS improvement.

Thanks, John. This quarter, we focused on two branch initiatives. First, we focused on optimizing our existing branch network. To this end, we announced a planned consolidation of 11 branches into existing South State offices, the closing of one ATM location, and the sale of two branch offices.

On slide number 9, you can see these branches have about $200 million in deposits. We anticipate very little customer disruption, as the majority of these consolidated offices are in very close proximity to existing offices.

Subject to regulatory approval, these consolidations will be completed over the next few quarters. We estimate about $4.5 million in cost saved annually by 2016, and we should begin to see the impact of these savings in the third quarter.

We estimate we will incur about $4.5 million in one-time costs over the next several quarters as a part of this consolidation project. These one-time costs should be partially offset by about $1 million in gains related to the sale of two of the branches, which includes roughly $8 million in loans and $32 million in deposits.

The second initiative was announced last week. We signed an agreement to purchase 13 Bank of America branches located across our existing footprint. This purchase provides the perfect opportunity to round out our branch network in South Carolina and provides entry into six new markets.

I will turn it over to John to give some details.

Thank you, Robert. On slide number 10, you can see that 1 branch is in Georgia and 12 are in South Carolina. We anticipate assuming approximately $580 million in deposits, as well as approximately $3 million in loans from this acquisition.

The average branch age is 45 years and will provide us with great low-cost funding, which you can see on slide number 11. On slide number 12 and 13, we give you some detail on the financial aspects of the transaction.

Apart from the assumption of great low-cost funding, the fee income in these branches significantly exceeds the overhead expenses. From a modeling perspective, we have assumed a 15% run-off in deposits [shock the] fee income lower and the overhead higher and [conservatively] deploy the acquired funds.

Subject to regulatory approval, we anticipate a closing in the third quarter. We estimate the transaction will be immediately accretive and the impact in 2016 to be mid-single-digit accretive.

I will turn it back over to Robert for some summary comments.

Thank you, John. The branch map on slide 14 will give you some insight into the impact of the branch initiatives and shows the overall impact these changes have on building out the entire state of South Carolina.

We have always said we wanted to be in a dominant position in each market we serve, and this will certainly be the case in South Carolina with these additions.

With 92 offices, $5.4 billion in total deposits, 85,000 new customers from the branch acquisition, and approximately 8% market share in South Carolina, this places our Company in a position in South Carolina that would be very difficult to replicate.

These branch initiatives, along with executing on process improvement and bank-wide efficiency initiatives, should provide strong momentum toward our longer-term earnings goals.

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

(operator instructions) Christopher Marinac, FIG Partners.

Thanks, good morning. John and Robert, I just wanted to get a little more color on the accretion income, and I saw the disclosure that what you had will change late quarter. Is there additional reclassifications that can occur this year, and do you have any visibility on whether this level of yield on the [acquired] portfolio can be consistent from here?

Chris, this is John. Obviously, it's going to depend on a number of factors, and we still have roughly a 6.5% credit [mark] on the acquired loan portfolio, so credit could continue to improve there.

We are seeing the weighted-average life pension some -- as you know, First Federal had a lot of residential mortgages in their portfolio, so we've seen some acceleration of the payoff of those. As you can see in our fee income, we're refinancing those into the secondary market. So there could be some.

Okay. And then from the valuation that was on the branch acquisition from last week, what does that tell us about where pricing is going? I just was curious if those were in different locations how different the pricing would have been if they were in bigger metro cities versus the locations that you're in.

Chris, this is Robert. Obviously, we paid a little bit more than what some of the prior transactions had gone for. And each deal is unique to each buyer, so it's hard for me to say why they were priced that way for those.

I know for us, this was the only way to really complete the map in South Carolina. They're 45-year-old offices. They have significant share in the markets they are, and 85,000 customers right in the middle of our footprint.

So that is the reason why it was very valuable to us. Obviously, the EPS impact is meaningful, but it really completed the entire state footprint and was a pretty unique opportunity for us.

And I guess Robert, it's safe to say that the payback period is comfortable, given the accretion that comes [into it] as you outlined it.

Chris, this is John -- absolutely.

Okay. Great, guys. Thank you so much.

Jennifer Demba, SunTrust.

Thank you, good morning. On the Bank of America branch (inaudible) do you see any revenue [fees] that could potentially [come in there] for these offices, Robert?

Jennifer, what I would say there is, we're picking up 85,000 customers and we're buying $3 million in loans. So I definitely think there's a lot of opportunity, both to look at those branches and how they operate today and how that applies to our footprint bank-wide. So I think there are positives on that front.

But I also think when you pick up 85,000 customers that don't have a car loan or a mortgage or any other relationship with you that the opportunity to expand that and cross-sell that customer base is significant. Obviously, in our pro forma, there are no revenue synergies, but our opportunities to cross-sell 85,000 customers is meaningful.

Is there any talk to consolidating any branches within those?

We're going to evaluate it. Obviously, in a couple markets there are some pretty close overlap. But that is not our focus today. Our focus today is making sure that we retain the customer base. And we'll look at the traffic patterns, just like we did with the First Financial merger. We'll watch those traffic patterns, see customer behavior, and then determine what the best way is to serve those customers.

Jennifer, this is John. I think as in the past, what we've always tried to do is preserve that low-cost core funding, and you're talking about a transaction that's going to add over $260 million in checking-account balances. So number one is to make sure we preserve that.

Great. Thank you very much.

(operator instructions) Stephen Scouten, Sandler O'Neill.

Good morning, gentleman. Thanks for taking my call.

Good morning, Stephen.

Question for you guys on the [forward] expense run rate. It's good to see the detail, the $4.5 million around the annualized cost saves, and it sounds like most of those will show up 3Q and 4Q. And then what could we see additionally in terms of your deeper dive into your expenses and maybe the goal to get under 60% efficiency ratio -- do you have any [frame off] that in any way?

Stephen, this is John. As we announced at the beginning of the year, we're kind of in our phase-two efficiency process, so we're bench-marking really everything throughout the Company.

The first initiative was really to look at our branches. We got that behind us, but really everything is under review, in terms of the expenses today.

We completed an OREO option in the first quarter. The CBT loss shares we've talked about a lot over the last quarters -- that was our largest assisted deal. And as you can imagine, there was a lot of expense associated with that. So we're hopeful that OREO cost will continue to improve.

And then obviously, it doesn't show on the expense side, but the negative accretion that runs through the noninterest-income side with CBT going away, that piece of it will materially decrease as we move forward.

Also, on the funding side we talked about the retirement of the trust. We didn't get a full quarter of that, so you should see some improvement there on the interest-expense side.

Stephen, this is Robert. Just a couple things I would add is -- we really started last fall post integration with First Financial. Kind of our next step last fall was really to look at our expense run rate, which obviously had been murky with all the integration and merger-related expenses.

So as that began to settle out, we wanted to put in a detailed expense review company-wide. We came out, obviously, in the first quarter with a meaningful part of that, which is the branch consolidation; but it's just the first part.

And the expense increases by line item that you saw in the first Quarter were mostly around salary and benefits and OREO; and the salary and benefits were some higher commissions, but the bulk of that increase was really FICA expense that's more -- not a one-time expense, but it's certainly more front-end-loaded.

Net on the [FTE] front, we were able to reduce 30 FTEs in the first quarter. And as we further roll out more of these efficiency projects throughout the year, I think you'll continue to see our FTE base contract.

Okay, that's helpful. And I know you guys put out there maybe a longer-term number of getting to $5 EPS -- can you frame up for us what your vision is for getting there? Is that predicated on additional M&A, or is that something where you feel like with what you have and the franchise you have today that maximizing efficiency you can get to that number? And if so, what else needs to be done to get there?

Stephen, this is Robert. We didn't give a time frame around that number when we mentioned it, but we clearly feel like it's a very reasonable, achievable target and a reasonable period of time.

I don't think there's magic to it. I think what we're doing in terms of driving our expenses down, getting organic growth, growing 13,000 customers in a quarter, lending and deploying the excess liquidity that we have now and $580 million more that we will have with the Bank of America deposit acquisition -- we certainly feel like it's going to take us right down that path.

Okay, great. And maybe just one last followup on that excess liquidity you mentioned. Obviously, that increased here this quarter, and as you said, will increase with the new deposits and the branches. How long do you think -- or would you anticipate that will take for you to deploy that excess liquidity?

I think it's hard to tell. We've been watching this portfolio remix a little bit over the last 18 months after the first federal merger. They were, obviously, a former savings and loan, had a lot of mortgage assets on the balance sheet.

So step one when we announced is, we said we're going to remix, and we've done that really with every acquisition we've done. A year ago, we had about a net decline of $75 million in net-loan growth, acquired and non-acquired together; and this quarter it's down to about $15 million. Fourth quarter, we actually exceeded the acquired run-off.

So I think you're seeing us gain traction there pretty meaningfully. The pipeline is very strong. The opportunities to grow organically are very good.

So the exact timing that we'll deploy it -- we have about $500 million today in excess liquidity. We're acquiring another approximately $500 million, so we'll have $1 billion, which gives us a good runway to really absorb the loan growth over the next few years.

Great. Sounds good. Thanks, guys. I appreciate it.

Blair Brantley, BB&T.

Good morning, everyone.

Good morning, Blair.

Just actually a followup to your comment, Robert, about the total loan growth prospects. How should we think about the pay-downs and what we saw this quarter from the acquired book, and how should we think about that going forward?

Blair, this is John. Let me start. If you look back over the last several quarters, the acquired run-off has definitely slowed. This quarter, the residential piece remixed a little bit more.

So we really feel like we're getting closer to the point where it's just purely amortization off the books. We've got a few other credits we want to get rid of.

But I think as we said last quarter, really the goal is to begin to [out] run off the acquired loan run-off -- which if you look year over year, we've made a lot of progress -- and then we've got to get our growth back to mid-single digits. And so that's what we're hoping as we get later in the year we can really begin to do that.

So that mid-single digit total growth is more of a next-year focus?

Hopefully later this year. We did it in the fourth quarter of last year, but we ought to be able to begin to outrun it a little bit, hopefully as we get through the year.

Okay. And thinking of that -- in terms of the core loan yields [is probably off] a couple basis points -- could you provide any color as to what you're seeing out there -- pricing, competition, expectations there?

Loan yields are hovering right around 4% is kind of what we're seeing. We do a lot of small loans, which obviously helps us on the loan-yield side, but roughly around 4%.

Okay. And then for the acquired loan yields, they were a little bit lower than maybe what I was expecting, given the [reclass] last quarter. Is there anything that happened this quarter that may have impacted that, or what's driving that side of it?

We had the big release last quarter. Obviously, the acquired loan yield went up, so it was affected by that. And it was also affected by faster prepayments due to the residential portfolio at First Federal. So we actually saw a little bit of pick-up, but it did increase linked quarter.

I was just saying because of the previous quarter they had jumped about 40 basis points on a smaller reclass -- I was thinking because the reclass was larger, even though they're longer-duration loans, that they would have seen a little bigger pick-up, or at least a similar pick-up. So that's why I asked the question.

Well, as you know, it's based on the cash flows that come out. So it's not all just what's coming out of the credit release. But it did pick up some, but probably not -- like you said, not as much as you thought.

Is there any potential for that to increase down -- as time passes, or what are your thoughts around that side of it?

Well, again as I mentioned earlier, we have a loan mark today over 6%. And if credit continues to improve, there could be further releases there. I don't anticipate anything as large as we saw in the fourth quarter, but obviously with the reserve on those credits still over 6%, there is some potential there.

Okay, great. Thank you.

(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 Gulf South Bank Conference beginning on May 5 and the SunTrust Robinson Humphrey Conference in New York beginning on May 19; and we look forward to reporting to you again soon.

The conference is now concluded. You may now disconnect.