SouthState Bank Corp (SSB) 2015 Q2 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. 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 would 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 in 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 few summary comments about our start to 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 a brief update on our branch initiatives prior to concluding the call with a Q&A session with the research analyst community.

As we began 2015 we set two primary objectives for the Company, first improve our processes, operating leverage, and efficiency levels and, second, ensure that we have the right structure, accountability, and focus to drive organic growth. We have made good progress through the second quarter in each area. You can see these results in our net loan growth, improved efficiency levels, and in operating leverage. Strong core deposit and loan growth and continued performance improvement in our mortgage and wealth management areas. The impact of this focus is a year-over-year increase in net income of 39% and a year-over-year increase in operating income totaling 19%, and from a linked quarter perspective operating earnings improved by 10% to a record $26.3 million. This represents $1.09 per diluted share compared to $0.99 last quarter.

Our second quarter was highlighted by an increase in total revenues of $4.8 million from the first quarter consisting of an increase in net interest income and growth in every non-interest income category. We're also beginning to gain efficiencies through some of our process improvement initiatives which help contribute to a reduction in total operating expenses of $1.2 million from the linked quarter. These improvements in revenue and lower expenses had a positive impact on our operating leverage and produced strong performance ratios. Our operating return on average assets totaled 1.32% and our operating return on tangible equity totaled 16.9%. Our operating efficiency ratio improved from 65% to 61.2% this quarter.

Asset quality, which has always been a hallmark strength of our Company, continued to be strong with net charge offs of 12 basis points and a very low level of nonperforming loans. We are particularly pleased with the loan growth that we experienced this quarter work. Our non-acquired loan growth of $202 million and net loan growth of $84 million represents net loan growth rate of 6% annualized.

Our organic growth is the result of several factors. First, the markets in which we operate are experiencing very good improvement in their local economies. Second, we are continuing to have the opportunity to add excellent bankers to our team and we continue to experience much success against the larger banks. And, third, our size, our brand, and our enhanced product set really differentiate us in the market. This is allowing us to compete more successfully and in a broader range than we have in the past. And, finally, after a period of steady M&A growth we have been able to ensure that we have the right accountability and structure to grow organically.

We also typically perform our best when each area of the Company performs well as we did this quarter. North Carolina, South Carolina, and Georgia all experienced strong organic growth and we experienced good diversity in our loan growth by loan type. Our C&I growth of $34 million and our commercial under occupied growth of $32 million were two of our stronger areas of loan growth. And while we experienced good loan growth in most of our markets, the Charleston market certainly stood out as a major contributor, especially so soon after our recent integration. And the Georgia market was also a major contributor to our loan growth this quarter.

So bank wide every line of business performed well this quarter. We experienced record mortgage banking income of $7.1 million, which is a 51% improvement on a year-over-year basis. We also had solid results from our wealth management area with income totaling $5.1 million in assets under care and management totaling $4 billion at quarter end. Retail banking also produced very strong results, opening approximately 13,000 new transaction accounts, a 58% increase from the second quarter of 2014. 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 that our net interest margin of 4.75% is relatively flat when compared to the past several quarters and is identical to the margin a year ago. From a linked quarter perspective, we declined 3 basis points as slightly lower yields on earning assets were almost fully offset by a decline in our cost of funds. 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 5 basis points as the amortization expense declined linked quarter from $3.2 million to $2 million. This amortization expense, which is reflected in non-interest income, is lower due to the expiration of the CBT commercial loss share agreement. We should continue to see the blue and gold bars pull closer together as the negative impact of the amortization lessens going forward.

On slide number 7 you can see our efficiency ratio has declined from around 72% a year ago to 63% this quarter. Our operating efficiency ratio, which excludes one-time items, totaled 61% for the quarter down from 65% linked quarter. All components of the efficiency ratio improved with the biggest impact coming from higher non-interest income. Absent one-time items, non-interest expenses were down $1.2 million with significant decreases in salary and benefits expense as well as OREO expense. Our branch consolidation efforts, which began in mid May, have helped reduce expenses as we have completed 8 of the 14 planned. The remaining branch closures and sales will be completed in the second half of 2015. Deposit runoff has been modest in these markets.

As recently announced, we have received regulatory approvals to proceed with the purchase of the 13 Bank of America branches and currently anticipate closing on August 21. We continue to expect this transaction to be immediately accretive to operating earnings per share and mid single-digit accretive in 2016. I will now turn the call over to Robert for some summary comments.

Thank you, John. On slide 8 you can see the strong improvements in operating earnings in the past several years and the nice pace we are on so far in 2015. As a result of this performance, the Board of Directors has declared a quarterly cash dividend of $0.25 per share, which is a $0.01 increase from last quarter and a 19% increase from a year ago.

In closing, we are pleased with our progress year to date and we look forward to executing well on the branch acquisitions in the third quarter. While good progress has been made, we continue to see many opportunities for further improvement. Organic growth and continued efficiency improvements will remain our focus as we continue our progress toward our long-term performance goals. That concludes our prepared remarks and so I would ask the operator to open the call for questions.

We will now open the line for questions.

(Operator Instructions)

Jennifer Demba at SunTrust Robinson Humphrey.

Thank you. Good quarter. Question on the BAC branches. One of your counterparts I guess had a little bit more deposit attrition when they bought some BAC branches recently. Can you refresh us on your assumptions there in terms of deposit and attrition type assumptions you have there or any revenue assumptions you have there?

Sure, Jennifer. This is John. As we announced last quarter, it was about $580 million in deposits and we said there be about 15% in runoff is kind of what we said. We kind of looked at their expenses, we looked at the revenue, and we kind of said next year it would be kind of mid single-digit accretive.

Where we are right now, we're about within 30 days of closing, so the merger booklets have gone out. We're in the process of training, so to see how we do against the 15% it's still a little early to tell, but that's kind of where what we put out there in terms of what we think the runoff will be.

Okay. And in terms of the branch closures in the second half, do you think this is a good expense run rate going forward, or do you think you've got some more leverage from a core basis bring that down?

Well, in terms of the branch closures what we announced was about $4.5 million in cost saves annually, and what I would report to you today is we've realized about 60% of that.

Okay.

So, if you look at a quarterly basis you know that's right about $700,000 that we were able to recognize this quarter. And what I would say in general, Jennifer, about cost savings is we're just continuing to work at it. There's a lot of things that we still have under review and still got a ways to go there, but in terms of the branches we are about 60% of the way they are on our announced cost saves.

Okay. If I could ask one more question. Just curious if you look at your Charleston loans now, loans outstanding, how does that compare with maybe your plan when you first announced the FSCH deal?

Jennifer, this is Robert. I think with the magnitude of the integration in the conversion we thought we would get to the point where we are today, but we were thinking would take more time. And so, I would say with where we are today in terms of both retail growth, wealth growth, mortgage growth, commercial growth, I think we're about a year ahead of where I thought we would be, and all those lines of business in that market are leading the Company in growth, so we feel very good about the traction that we're getting in that market.

Great. Thanks a lot.

Stephen Scouten at Sandler O'Neill.

I wanted to dig a little deeper on maybe the operating efficiency ratio and kind of where you think you can drive continued leverage from here. I mean, is most of that going to come on the revenue expansion side at this point? It sounds like -- John, I appreciate the color there on the branch progress so far, but it sounds like maybe $300,000 a quarter less there, so any other costs that you think will come out, or where are you envisioning that efficiency ratio heading?

Stephen, this is John. I will start and then I will throw it to Robert. I think as we mentioned in last quarter, last October we kind of got together and began to lay out our road map on how we wanted to look at making sure that we operated the Company efficiently. So, we are still looking internally at a number of things. All of our lines of business, how we do mortgage, how we do wealth, how we deliver our products and services to the customer, so I can't give you an exact number today.

I feel like as we approach the end of this quarter we will probably have some more clarity around that, but there's clearly some things we could do on the expense side, and then obviously when you look at the revenue side in the lift that we are beginning to get, there's a tremendous amount of momentum on that side, so I feel really good about both sides of the equation.

Stephen, Robert. Not much to add on that. Obviously, we feel like to go over the $10 billion hurdle, we want to make sure we've got the efficiencies in line to cross that threshold, that's certainly on our mind. The initial reduction in our efficiency ratio, a lot of it is just coming from the efficiencies gained from the mergers over the last several years and getting that, but I think now we're really past that.

Now I think what will all get the next few quarters is more really looking at our lines of business, making sure that we're getting an adequate return on capital, making sure they are operating it as well as they can, making sure that we're implementing technology. So, there are more refinements to the business model to ultimately get us down, as we said in the past, closer to that 60% number.

Okay. That's great color. Thanks guys. And then maybe you just touched on, Robert, that $10 billion threshold and obviously on an organic aces with the runoff asset growth isn't such that, that would be any sort of near-term risk, so what are the maybe updates or thoughts currently about putting your currency to work? Obviously, stocks had a great run. Does that make it more likely or more financially beneficial obviously for you to get some near-term M&A completed?

It really doesn't impacted. Kind of our M&A strategy is our M&A strategy. If we find the right partner at the right time and it's a good cultural fit, and has a net positive to both companies, and is certainly something that we're certainly can take a hard look, but exactly where the stocks trade doesn't make us more or less aggressive, it's more the right long-term fit for the Company. We continue to have a lot of conversations and inbound calls but, as you know, we look at probably 12 to 15 transaction before we ever pull the trigger on anything.

So, I'd say our primary focus is making sure that we run our Company internally as strong as we can, as efficiently as we can. We've got a lot of runway left to get to $10 billion just organically with growth, and that is certainly the most profitable thing and the highest return thing that we can do. And if the right acquisition comes along, we'll certainly -- that is additive, that we'll certainly consider that as well.

Okay, great. Maybe one more. On the press release you guys mentioned a strategic increase in the investment portfolio as the percentage of assets. Could you kind of talk about the size of that plan and what you think that'll do in terms of transforming the balance sheet at all, or is that just going to be kind of small incremental growth? Thanks.

Sure. This is John. I think when you look link quarter we did see some buying opportunities out there as rates went up, so you can clearly see we've come up little bit. I think the big piece of that, Stephen, is obviously with the Bank of America transaction, we'll be getting a lot of cash into the Company here in late August. And so, obviously, what we're evaluating is, how do we invest that cash short term and make sure it comes back as our loan growth increases, and obviously there's going to be some art to that.

So, I think you'll see our investment portfolio on the short term maybe bump up to 14% to 15% of assets, but we're really trying to time that as our loan growth continues to pick up and have that comeback. That's kind of the view we have right now in terms of what's going to happen as we go forward, but it sure is nice to see some lift in the rates and, as you know, it's volatile so we're trying to pick our spots when we want to purchase things.

Okay. Super. Thanks for the color, guys. I'll let some other folks hop in. Thanks.

Christopher Marinac at FIG Partners.

Robert, I was wondering if you could give us a little thought about the loan pricing environment and maybe talk about how it varies by market across the footprint?

I would say in our metropolitan markets it is fairly consistent. In some of the rural markets it can be a little bit unique, but in the markets where we're getting the growth, markets like Charlotte, Greenville, Georgia has been very good, Charleston obviously, the Hilton Head market. So markets like those I'd say the pricing is fairly consistent. Our new loan production this quarter compared to last quarter was a few basis points down, but nothing meaningful, so we still kind of hover in that plus or minus a little bit 4% range, and we have not seen much movement there.

We did see this past quarter I think some -- we saw a lot of activity in the municipality sector, so where a number of cities or towns or municipalities borrowed money and some of that was tax-free, so that had a little bit of impact on our new loan yield. And then we also had a lot of growth this quarter, Chris, in C&I, which as you know, is typically more variable priced and typically a little thinner margin, but typical variable. So, we're competing more in larger companies and for C&I business, and that's a little thinner margin business, but overall I think it's fairly consistent with what we've see in the past.

Okay. Great. And then for either you or John, are there other opportunities for re-class within your required portfolio? Is that still an opportunity going forward?

Chris, this is John. I want to make sure I understand your question. You said re-classes. Are you talking about credit releases?

Yes, credit releases and just re-class like you had a couple quarters ago.

Well, I think when you look at our acquired book, and obviously the big credit mark is on the acquired credit impaired book, which is a little over $800 million, today we have a little over a 5% credit mark on that, and so hopefully things continue to perform well, so that still a pretty healthy credit mark. I think one of the things that we've seen, Chris, and you can see it in our acquired loan yield, is that it accelerates up.

We've seen some compression in the cash flows. The cash flow is coming back quicker. We obviously had those credit releases out there and that is driving the yield up on those acquired loans.

Okay. Great. Thanks, guys, for the background.

Jefferson Harralson at KBW.

Thanks. I was going to ask about the branch purchase, and could you just talk about, I think you had mentioned down in Gulf south the IRR was in the 30% range. Can you just talk about the major components that go into calculating that, if I heard that right down there?

Jefferson, you broke up at the beginning. So, you want to talk about the Bank of America branch purchase?

That's right. The IRR's and what the major components go into estimating those IRRs.

I think as we said, let's go back to the top a little bit. In terms of income, we think it's going to be kind of mid single-digit accretive next year. So if you kind of look out there where estimates are, that's probably in that $6.5 million range.

We obviously, as I mentioned earlier, is we got roughly $500 million going to come over in cash. We're going to invest that short term, so Jefferson you could use maybe a 2% yield around that, so that's a component of it. Obviously these offices produce a heavy amount of fee income.

As we mentioned last quarter, these offices are about 45 years old, so they're real old, sticky deposits, so we feel really good about the fee income piece. We have, as you know, spent a lot of time over the last year trying to build our infrastructure, so we're not really having to add a tremendous amount on the infrastructure side to add these offices.

Then the last piece of that is going to be, we're entering a lot of new markets is what type of loan growth are we going to get out of that. So those are really kind of the components that drive that to reach the mid single-digit accretive, and then obviously that translates into that IRR.

Okay. Thanks, guys.

This concludes our question-and-answer session. I'm sorry, we do have a further question from Stephen Scouten at Sandler O'Neill.

Sorry, guys. I had it on mute. I do want to jump in for one more if you don't mind. With your commentary on new loan yields and putting that excess cash to work, what do you think kind of the gap NIM, and I'm assuming maybe lower accretion, maybe at some point trending a little bit down over time, but the trajectory of the gap NIM, obviously, I think would be down, but can you frame that up at all in terms of the quantity of downside to the NIM, maybe through the end of the year into 2016?

Stephen, this is John. Obviously it's going to begin to get a little messy when you bring that amount of cash over from the BofA transaction. So as we said last quarter, we feel like that probably has a 40 basis point impact on the margin, obviously net interest income dollars will be up. I really think the place to look when you kind of think about where we're headed is on slide number 6 that we have.

You obviously can see our margin. You can see our margin with the effect of the indemnification asset. I view the indemnification asset as a very important part of our margin. We clearly had some lift there link quarter. Our negative accretion went from $3.2 million to $2 million, so we still have a couple of million dollars left of that.

One of the things we added when you look at the slide, if you look at the yellow line above that, you can kind of see the lift that we're getting in net interest income, including the amortization of the indemnification asset, and then you can just kind of see the pure margin piece at the top. Obviously, with the amount of loan growth that we've had, we're really beginning to see that line drive.

To kind of go and frame exactly where we're going to be on the margin, if we get the cash in mid August, obviously they'll have some impact. The fourth quarter I think you'll be able to get a much clearer view of where the margin is, because as you know, the rates are very volatile. If rates pull back, we might be sitting alone a little bit more of that cash.

If we can see some good buying opportunities, then we can get that deployed out in the investment portfolio little bit quicker. I think on the acquired yield side, as you can see and we've said this now for a couple of years is, the balances are going to get smaller, it's nice to see some compression in those cash flows that help driving that yield up, but you're going to see nice yield on the acquired loans but, as you know, that's just got a get smaller and smaller over time.

So I hope in terms of giving you, getting more clarity it's going to take you another quarter or two, but we feel like we are in very good position in terms of our asset sensitivity and where we're headed in terms of the margin dollars overall.

Okay. That makes sense. That's helpful, but just to clarify just in that 3Q you're saying it could be a 40 basis point drop in the NIM?

Well, it won't be -- that's a quarter basis for a full quarter, so obviously, we're not going to have it for a full quarter, but think about it, we're going to bring $500 million in and if we invested it at 2% in terms of NIM, obviously the NIM is going to come down, but our net interest income is obviously going to be climbing at a very nice clip.

Absolutely perfect. That's really helpful.

Then the question long-term, Stephen, is just how long does it take us to loan out that excess cash. I think that's the ultimate question.

Perfect. Thanks so much guys. I really appreciate it.

And this concludes today's question-and-answer session. I'd like to turn the call back to John Pollok for closing remarks.

Thanks everyone for your time today. We will be participating in the FIG Partners CEO forum in Atlanta on September 28, and we look forward to reporting to you again soon.

The conference is now concluded. Thank you for attending. You may now disconnect.