SouthState Bank Corp (SSB) 2015 Q3 法說會逐字稿

Good morning and welcome to the South State Corporation quarterly earnings conference call. Today's call is being recorded.

(Operator Instructions)

Later, we will open the line for questions with the research analyst community. 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 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 highlights from our third quarter. And then, John Pollok, our Chief Financial Officer and Chief Operating Officer, will provide some detail on our operating performance. I will then provide a few brief summary comments prior to concluding the call with a Q&A session with the research analyst community.

We are pleased with the third-quarter performance and operating earnings of $1.12 per diluted share. The results reflect an emphasis on producing strong and sustainable financial performance while also making investments that position the Company for continued growth. Third quarter net income and EPS increased 30%, compared to the same quarter last year. The board of directors has declared a quarterly cash dividend of $0.26 per share. Which is a $0.01 increase from last quarter and 18% increase from a year ago.

The Bank of America branch acquisition was successfully completed in the quarter and we see this transition as being accretive to our franchise and future financial results. Also this quarter, we completed the vast majority of our previously announced branch consolidation plan and have realized the majority of the associated cost saves. The quarter was highlighted by an operating return on average assets of 1.29% and an operating return on tangible equity of 16.92%. Profitability, asset quality, capital adequacy, and liquidity are all at strong levels.

We continue to experience strong non-acquired loan growth of $206 million, or, 22% annualized. While the acquire run portfolio declined $120 million, resulting in 6% net loan growth. We experienced double-digit loan growth this quarter in many of our regions, added additional talent of bankers, and we continue to see excellent opportunities to move business from the large national banks with which we compete.

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

Thank you, Robert. I'd like to start by referring you to slide number 6 and giving you an update on the Bank of America branch acquisition that closed on August 21. We acquired had $438 million in low-cost deposits, $3.1 million in loans, and $4.1 million in fixed assets. For a total consideration of $25 million. The earnings impact in the third quarter was minimal as the additional fee income more than offset the additional overhead expense. We also continue to expect this transaction to be mid-single digit accretive to operating EPS in 2016.

As you can see on slide number 7, even though the margin declined 23 basis points, our net interest income increased to $83 million for the quarter. The decline is primary the result of a significant increase in the average balance of short-term earning assets. Yields on the loan portfolio declined 11 basis points link quarter, due to a decrease in the non-acquired loan yields and a change in the mix between non-acquired and acquired loans.

The yield on the non-acquired loans decreased by 8 basis points and the average balance on the non-acquired portfolio this quarter represented 67% of the total loan portfolio, compared to 64% last quarter. The acquired loan yield increased by 18 basis points link quarter, but, the average balance on this portfolio declined by $128 million. While we had net releases of $9 million this quarter, which helped push the acquired loan yield higher, we also had some transactions that elevated the yield higher than what we would expect going forward. Which include higher than normal accretion as a result of some payoffs.

We are also beginning to see an increase in the weighted average life of certain loan pools in the credit impaired portfolio, as good payment performance is justifying some extensions and renewals. We expect this to result in lower acquired loan yields in the fourth quarter of 2015 and in 2016, absent future significant credit releases.

On slide number 8, you can see our efficiency ratio has declined from 71% a year ago to 64.4% this quarter. Our operating efficiency ratio, which excludes one-tine items, totaled 61.7% for the quarter, slightly up from 61.2% link quarter. Absent one-time items, non-interest expenses were up $800,000. The additional expenses from newly acquired branches were mostly offset by the branch consolidation efforts.

The vast majority of the cost saves were achieved by the end of the third quarter and deposit runoff has been modest in the markets where these consolidations have occurred. Total non-interest income was flat link quarter. As the increase in fees on deposit accounts of $1.5 million, and the increase in trust and investment services income, mostly offset the decline in mortgage banking income from the record-setting second quarter.

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

Thank you, John. On slide number 9 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. Throughout the Company, we are making considerable investments in people and systems to position South State for improved efficiency and growth. We operate in dynamic markets and we see meaningful prospects to grow banking relationships in those markets.

While the focus remains on generating growth from within, we continue to see opportunities to enhance our franchise requisitions and we will explore those opportunities as well. That concludes our prepared remarks. And so, I would ask the operator to open the call for questions.

Thank you.

(Operator Instructions)

We will pause momentarily to assemble our roster. Jennifer Demba, SunTrust.

Good morning.

Good morning, Jennifer.

Good morning.

Hi. I had a question on your acquired loan yield first. Is there any way you could quantify for us the impacts you talked about in terms of the higher pay down and the other items that inflated the acquired loan yield this quarter?

Jennifer, this is John. Obviously, that yield on the acquired book went up to 836 and last quarter it was 813. In the first quarter it was 793. And then, if you look back to last year it was in the mid 7s.

So, it just, as you get up to 836, obviously, that's getting way up there. So, our view was a fair amount of credits paid out that had large credit marks on it. So, as you know, Jennifer, we'll do another recast this quarter. But, my feel is it obviously is going to go back down probably, maybe, a little bit below 8. But, we don't know that until we do the recast again this quarter.

But, you can clearly see in our acquired credit impaired portfolio that there's some good credits in there. You obviously can't take 'em out of the pools. And, the last piece is, obviously, those get extended out a little bit.

Do you have the dollar amount of those pay downs that occurred?

The dollar amount of the paydowns?

Yes.

Are you talking about the one-time events through the financial statement, from those marks? It was right around $1 million.

You also said in the release that the deposit runoff from the BAC branch acquisition was a bit higher there than you estimated. Can you give us some color around that?

Sure, Jennifer. I'll start. Yes, we modeled 15% deposit runoff. The ending balance was about 24% in runoff. If you look at the average balance of the deposits that came over. So, if you, kind of, look at that last 30-day average, the runoff was about 20%.

But really, what we were focused on is, obviously, the fee income side. So, if you look at the number of accounts that we brought over, those were only down about 17%. And, when I say about the accounts, we talk -- brought over, the main focus there is on the transaction side, the checking account side. And so our view is, is that we really didn't erode much of the fee income at all.

We won't know that until we get all the way through the fourth quarter. Obviously, we only had about 40 days with the BofA transaction in the quarter. So, I think as we approach the end of the quarter, we'll clearly have a much better feel of exactly where the fee income will be. But, number of accounts is what we've been tracking to, kind of, make sure we understand where the fee income is.

And, Jennifer, this is Robert. Just a couple other comments. Is the biggest drop in dollars was really just in the money market and savings area. Not really in, as much, in the transaction account. And that, so, because of that we really just don't see much material change in kind of our pro-forma EPS impact.

Okay. Thanks for that color. One more question, if I could, on M&A interest. Robert, can you refresh us at this point about what kind of targets you're going -- looking at in terms of size and geography? Has that changed in recent months as you're getting closer to the $10 billion threshold?

Okay. Just overall on M&A is, as you know, last year we just wanted a period to really focus on integration, execution, preparing for the $10 billion hurdle. And, obviously, making sure that we executed our first federal transaction well. That went very well. Obviously, those initiatives, kind of, carried over into this year.

And then, we announced the BofA acquisition. Executing that crisply was very important to us. It went extremely well. We were very, very pleased with how that was integrated into our Company and at the speed at which it was. So, I think the difference is not so much geographic or size. But, the difference today from an M&A standpoint, is really that our decks are very clean and we're certainly very ready for -- to take the next step when the time is right and we find the right partner.

I'd say, geographically and size-wise, our -- really priorities have not changed at all. What -- we have a very defined strategic M&A plan that really has not moved. We're looking for banks in the Southeast, primarily the Carolinas and Georgia that are older, that are core-funded, that fit culturally with our Company, and that continues to be our primary focus.

Thanks so much.

(Operator Instructions)

Stephen Scouten, Sandler O'Neill.

Hello, guys. Good morning.

Good morning.

Good morning, Stephen.

I apologize. I hopped on a couple of minutes late. So, hopefully I'm not being redundant in any way. But, in terms of the excess liquidity that you had on the balance sheet and the excess cash from the Bank of America branches. I was a little surprised to see that not more rapidly deployed in the securities in the quarter.

Is that something we could expect to see next quarter? Or, what are your plans for redeploying some of those funds?

Well, Stephen, this is John. Obviously, as we closed the transaction. You go back to August the 21st. The rates went down a fair amount.

(laughter)

We're going to be patient as we invest that money. So, as you can imagine, even in our investment portfolio we had more calls and paydowns than we normally experience. So, we actually bought a fair amount, but that kind of churned it out a little bit. But ultimately, this money's going to be used to fund loans.

So, we're going to be patient. We're going to watch the yields. We don't want to take a lot of duration risk in the portfolio.

My hope is we would make some more progress. But, I think the reality of it is we just, kind of, have to watch what rates are going to do. And, if that means we need to stay shorter for a little bit longer, that would be our plan.

Okay. Yes, that makes a lot of sense. And then, just as it pertains to kind of net loan growth as we look into 2016. I mean, the pace of the paydowns on the acquired book obviously, will slow as that book continues to get smaller, I would think. What do you think you can achieve on a net basis if you have, kind of a range that you're targeting?

Well, Stephen, this is Robert. Overall, we feeling really good about the loan volume. The quality and the quantity that we're seeing. As I mentioned earlier, most of our regions all had double-digit loan growth in the quarter. So, we're really seeing great productivity.

Now, we're still going through, kind of, this period of remixing. Pulling back some of the lines of business, like the wholesale lines of business, from the first federal acquisition. And, that's driving us -- driving that acquired portfolio to shrink. It's down 24% year over year. But, if you look at the quarterly run rate a year ago, third quarter 2014, it would -- it dropped about $138 million. And, Q3 2015 is down about $119 million. And, as you said, we're going to continue to see that to slow.

So, yes, we're at 6% net. That number's obviously, we feel like, it continue to move up. And, I think we said in the prior calls with you guys, that high single digits certainly feels like an achievable goal.

Okay. Great. Well, thanks, guys. I appreciate it.

Jefferson Harralson, KBW.

I was trying to do the math on this first before I got to my place in the queue. So, I apologize. But, with the -- you think about the combination in your efficiency ratio of the acquired loan yield come in a little bit. But, you also -- you're going to have good growth some to offset that. But it sounds like major part of your expense initiatives are complete now.

Does the net of all that get you to a flat efficiency ratio? Since you're getting close to your 60% goal? Or, does -- it seems like that drop in the acquired yield might be big enough to back you up a little bit on your efficiency ratio goals?

Jefferson, this is Robert. Well, I'll start. I think that what we meant to say is that really we are at the conclusion of the announced efficiency goals that we had rolled out the first part of this year. But, I would say, by no means that we're finished.

We still have significant room, I think, to move expenses down, to hold areas flat, to not have a lot of growth. If you look year over year, our -- basically our expenses are flat. If you look year over year, our pre-tax, pre-provision, operating earnings are up about 16%.

So, we're looking at technology. We're looking at systems. We're looking at people. We're looking at branches. And, that's an ongoing evaluation and that's certainly not over. So, we feel like there's plenty of room on the efficiency side for it to clearly hold steady in this low 60 range.

Jefferson, this is John. What I would also add, obviously, we only have Bank of America branches in for 40 days.

Yes.

The fee income is obviously going to ramp up there. We're clearly looking at those efficiencies in those areas. We're in a number of new markets that we've never been in, in the state.

So, obviously, we didn't really get any loans in the Bank of America transaction. It was very, very small. So, I think you're going to start seeing some growth out of those markets that we haven't been in. So, we feel like when you add that with what Robert said, we've clearly got some things we still can do.

Yes.

Great.

So, I think it's going to get help on both sides. It's going to get help on the revenue side and help on the expense side to hold it steady.

All right. Great. Perfect. Thanks, guys.

There are no further questions. So, I'll now turn the call back over to John Pollok.

Thanks for everyone for your time today. We will be participating in the Sandler O'Neill conference in Palm Beach, Florida, on November the 11th. And, 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.