SouthState Corporation (SSB) Q4 2015 Earnings Report, Transcript and Summary

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 with the research and analyst community. I will now turn the call over to Jim Mabry, South State Corporation’s Executive Vice President, in charge of Investor Relations and M&A.

Thank you for calling in today to the South State Corporation earnings conference call. Before beginning, I want to remind listeners that the discussion contains forward-looking statements regarding our financial condition and results. Please refer 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 the call.

Good morning. I’ll begin the call with a brief overview of our accomplishments during 2015, and then John Pollok, our Chief Financial Officer and Chief Operating Officer, will review the highlights of the fourth quarter. I’ll then close with a few summary comments prior to concluding the call with the Q&A session with the research analyst community. We’re very pleased with the performance of our team in 2015. For the year, operating EPS totaled $4.31, up 15% from 2014. Tangible book value increased 9% for the year to $27.88. The results reflect the focus on building a foundation that positions the company for future growth while attaining record financial performance. The Board of Directors has declared a quarterly cash dividend of $0.28 per share, which represents $0.02 increase from the previous quarter and 21.7% increase from a year ago. The year was marked by low levels of non-performing assets and 5% net loan growth. In the fourth quarter, annualized net loan growth was 9%. This growth was exhibited across the franchise. Our company is well positioned today as the alternative to the large banks in our market. We believe the pieces are in place to continue the momentum into 2016. Wealth management and mortgage banking both continued strong success, assets under management and wealth management now exceeds $4 billion, and mortgage banking income grew 34% in 2015. I will now turn the call over to John Pollok for more detail on our financial performance this quarter.

Thank you, Robert. We had a strong finish to the year with operating earnings for the quarter of $27 million, which represents a 10% increase from a year ago. This represents $1.11 per share on an operating basis, and operating return on assets of 1.25%, and an operating return on tangible equity of 16.8%. Net income totaled $25.5 million, or $1.05 per diluted share, which was impacted by non-operating items totaling $0.06 per share. These items included pre-tax branch consolidation and acquisition expenses totaling $1.6 million and other-than-temporary impairment expense of $500,000 reflected as a reduction to non-interest income. Excluding the OTTI charge, non-interest income was flat on a linked quarter comparison. Fees on deposits increased $1.9 million linked quarter with a largest increase coming from bankcard services. Offsetting this increase was a reduction in mortgage banking income of $1.6 million in a reduction of $800,000 in trust and investment services income. On Slide number 6, you can see our net interest margin declined 20 basis points from 4.52% in the third quarter to 4.32% this quarter. As you recall from last quarter’s discussion, this decline was expected as we noted two primary items. First, the fourth quarter would be the first quarter that the margin would have the full impact of the excess liquidity balances from the branches acquired on August 21. Second, the acquired loan yield earned in the third quarter was somewhat elevated. Lower acquired loan yields were the primary contributor to a 22 basis point decline in the yield on earning assets. The performance of the acquired loan portfolio continues to improve as we identified $16.9 million in additional credit releases, as part of our quarterly review of the portfolio. While these releases help to hold the yield higher, the impact is somewhat mitigated by the increase in the weighted average lives of some of these pools. Turning to Slide number 7, we’ve made good progress this quarter in deploying this liquidity in securities and loans. The investment portfolio averaged $944 million during the fourth quarter, but the period end balance was over $1 billion. So we should see some small improvement from the higher yielding mix next quarter. You can also see that we had a roughly $200 million increase in the average non-acquired loan book from the prior quarter. The average balance increased to $4.80 billion, but the period end balances totaled $4.221 billion as much of the growth came toward the end of the period. Turning to the expense side, non-interest expenses excluding one-time branch consolidation items were roughly unchanged from the third quarter and totaled $70.3 million. We achieved the remainder of the cost saves as planned this quarter from our branch consolidation efforts announced earlier in the year. These additional saves offset the small increase in expenses due to a full quarter of the branch acquisitions that closed at the end of August. On Slide number 8, we are announcing some additional consolidations; we’re consolidating 11 additional locations, 8 of which are planned for the second quarter, with the remaining occurring in the third quarter. We expect to incur a one-time cost of approximately $3 million with cost saves of approximately $3 million on an annualized basis by 2017. These consolidations will help slow the growth in our overhead costs, as we continue to prepare to cross the $10 billion threshold. On slide number 9, you can see our operating efficiency ratio increased slightly due primarily to the reduction in net interest income linked quarter. Finally, on slide number 10, you can see the significant progress; we have made over the years in operating EPS. I’ll now turn the call over to Robert for some summary comments.

Thank you, John. I believe South State is prepared to prosper in the years ahead. We look forward to 2016 and the opportunities to improve upon these results. We continue to look for ways to better serve our customers and add more talent to our team. The efforts over the last two years have prepared us to drive performance through organic growth and to consider opportunities to enhance shareholder value through acquisitions. That concludes our prepared remarks. And so I would ask the operate to open the call for questions.

We will now open the line for questions. [Operator Instructions] Our first question comes from Chris Marinac at FIG Partners.

Thanks. Good morning. Robert, John and Jim, I was curious if you could give some additional color in terms of what you’re seeing within your markets. So has there been any change in activity these last six day weeks in term of either slow down or sort of I guess additional feedback from customers.

Chris this is Robert we’ve obviously stayed close to customers tried to get feedback on how they see it. And really see no direct co-relation between the volatility in the stock market and the overall economy or really our customers’ outlook, they continue to feel good about the stability of their businesses are investing. I think we saw that in our fourth quarter loan growth and in our pipeline. So we continue to really don’t see a connection between what’s happening in the stock market and the overall economy.

Okay, great and I guess there is a quick follow up. I guess this has to do with reserves and how that plays out. Do you see yourself floating reserves just for growth or for what extent do losses sort of drive what you do ultimately with the vision?

Chris, this is John. I guess the way we look at the reserve, it is somewhat of an accounting exercise and we have a model that we put our – put all of our performance through but – our NPL coverage now is up to 180%, our charge-offs for the year were 9 basis points. Our NPAs are down to $53 million. So our credit costs, just continue to do extremely well. Clearly looking at growth will be looking at the provisions, but our view to historically on the provision has been you put it in the model and we kind of look at that in capital in tandem, when we think about the stability of our balance sheet.

Okay, great. That’s helpful guys. I’ll yield the floor. Thank you.

The next question is from Nancy Bush at NAB Research.

Good morning. Just have a question for you on the efficiency ratio, you’re kind of bouncing around the low 60s here. And have you guys ever sort of explicitly put an overhead target out there and are we – we’re going to stay sort of at this low 60s level these things throughout 2016 or is there another leg down in front of us.

Nancy, this is John. I think clearly, every year we look at expenses, you can see we have announced some new initiatives for this year. What we’ve kind of said we wanted to get down in the low 60s, we clearly are going to have to continue to get more efficient as we get bigger. Our hope is we can have more revenue growth, I think if you step back and look at our company in 2014, we’ve really shrunk assets when we had 1% loan growth, 2015 we had a 5% loan growth and almost 9% loan growth in the fourth quarter. And so, our hope now is that we can continue to grow those loans and get some more on the revenue side. So I think it’s a combination of both.

Nancy, this is Robert, just to kind of add-on, I mean, if you look back in 2014 – 2013 we obviously did the merger 2014 and 2015 it was really about kind of rebuilding a platform and part of that rebuilding a platform was one that’s – one scalable and two more efficient. So just for example, I mean, the late third quarter this last year, we rolled out our online mortgage application a much more efficient process. In the fourth quarter we had 400 online mortgage applications. We’ve expanded our electronic product delivery platform growing at a new mortgage loan platform this year. So we’ve done a lot to lay the ground work for it. And now, we’re starting to outpace the acquired loan runoff. So I think all those things together, we certainly feel like the efficiency ratio will continue to improve. Ultimately, we’ve got to get at sub-60.

Right, okay. Secondly, I would just ask an M&A related question. I mean, your philosophy about M&A is out there. I mean you guys have said you want what dense and old, I think were the two words that you use for the franchises that you’re interested in. Are you seeing more of those types of franchises perhaps ready to turn the keys over? Or is it going to be sort of the same pace for you guys, which is less than some of your peers for reasons of your pickiness? How do you just see the whole – your whole M&A outlook playing out?

Well, let me kind of tackle two things and kind of may be add-on to your question there a little bit. I’ll address the M&A piece. So, let me just talk about kind of the organic piece along with that.

Okay.

Really our primary focus is the organic growth of the company. So, we had 9% loan growth in the fourth quarter and that’s really even with selling off $7 million in loans from our branch dispositions, 29% of that growth was C&I. And we’ve really are now – are positioned in most of our markets really as the alternative to the big banks. So, when you look at the share, it’s kind of the big banks and then there’s us. The other thing that we’ve invested heavily in is just talent recruitment and as a growth strategy. So this past year, we added 32 new bankers across our footprint from our direct competitors that we’ll continue – that are bringing over relationships and adding to our growth rate. So that is our primary focus to make sure our mortgage wealth, retail, and commercial platforms are effective and that we’re winning in the marketplace. And I’d say today, we feel really good about where those are then we see kind of M&A as an add-on to that. If the right opportunity comes along with the right team in the right markets, then it’s the good fit, absolutely going to pursue it. I would say over the last six months, the activity has been very robust. But as you said, we tend to be very selective on our partners, very deliberate in our M&A activity. We have a very defined M&A strategic plan and we live by that plan. So we’re seeing a lot of opportunities. Obviously, there’s been a lot of volatility in the market over the last 30 days.

All right.

That could accelerate some opportunity, there may be slow some things down, but overall the platforms in place for us to add more volume is the scalable platform, our leadership teams in place, and now it’s just a matter of if we found the right opportunity, we’re very open to it.

Okay. And if I could ask finally, I mean, the consolidation of these branches that you’ve announced. Was there any particular factor that that leads you to close these eleven? And is this going to evolve and sort of a regular program?

Nancy, this is John. We continue to look at out branches, obviously customer habits are changing.

Right.

The BofA transaction, we have branches that were literally sitting on top of each other. And as we’ve said a number of times, what we would like to do is watch the customer behavior before we do some of the consolidation. So, this one was a little unusual because of the BofA piece…

Right.

But I think you’ve got to continue to evaluate your footprint. And I think our big thing is we want to make sure, we maintain our core funding. That is clearly the most important thing for us as we move into the future.

Okay.

And I think that’s reflected in our M&A strategy as well. As our core funding is obviously an important piece.

Okay, thank you.

Your next question is from Jefferson Harralson at KBW.

Great, thanks. You guys have a lot of cash in our balance sheet obviously from the branch purchase and on an average basis a lot of it came in this quarter, you put some to work. Can you talk about what you did this quarter, what the excess cash and what the strategy is going forward? It seems that I could – it’s always a great time to have excess cash, but with rates going up. You don’t want to possibly going up anyway. You don’t want to invest in things that are immediately going to lose values. So how do you think about using this excess cash and what should we think about on the yield we should earn with this cash at some point in time? And one more, what is the run rate of cash that’s normalized for a bank of your size?

Jefferson, this is John. Let me start a little higher level. I think, first of all, our loan to deposit ratio is 85%. So, we’ve got in our mind a billion in excess out there, do – some in cash, some in the investment portfolio as we said over the – really the last couple of quarters, we have a tendency to stay very short. We like investing in mortgage backs, where we can get the cash flow back. And so our view is to stay very short on that. What we announced on our excess cash is we hope that we cold get it invested in around the 2% range. And so that’s what we have done with some of it. So obviously, we had nice loan growth this quarter, you know 9%, so you’re able to put some of the – some of the cash to work there. But I think ultimately what we’ve tried to do is create this balance sheet with core funding, not a lot of advances. And then we’re going to really lever up on the loan side. Our – in the past, we have typically had our securities book about 10% of our assets. I think as we mentioned in the last call, we’ve taken that up a little bit. But over time I do see that coming back as a percentage in reinvesting that into loans.

And I think Jefferson, this is Robert. As our investment strategy has been to try to time as best we can the investment – purchasing of investments in the bond portfolio that would pay off in time for us to just kind of redeploy that in loans. I think we’ve got a pretty good plan around how to execute that.

And Jefferson, one follow-up. We’ve seen many go out there and buy wholesale loans and do that, that’s not our strategy. As we know, we’ll make a little bit less on it right now, but good core solid relationships in the market. We think that’s where you create a tremendous amount of value for your company.

So that’s where you go by the BofA deal, I mean that was one of the whole reasons for kind of doing it. It gives us a lot of firepower to go out and take off relationships and with what we’re seeing that we can move in terms of share from the larger banks, it just puts us in a very patient, but well positioned liquidity spot.

Okay. And a follow-up on the yield on your acquired loans, you guys had guided to below 8, and it came in better than that, but it was still down a lot from last quarter. Can you give us any direction or pace of the direction of that metric?

Jefferson, this is John. I think one of the things we’re excited about was our acquired loan runoff slowed, since a little over $90 million this quarter. We’ve been running in that $120 million range. As you know, we do a recast of the second month of each quarter just kind of see what the cash flows look like and what the new yields will be. Clearly, the acquired book, the performance there is getting better. We’ve gotten rid of a lot of the things that weren’t paying. So if you look today at our acquired book, really only 10% of its classified loans. So those weighted average lives are going to extend a little bit. So I think as I mentioned last quarter, we felt like the yields would stay below 8. We clearly did not know at that time we would have that type of release. So I think it’s going to kind of be in that range. It will continue to get – the loan portfolio will still continue to get smaller. So it’s just – as we’ve said over time as we’ll have a less and less impact on us. And the big thing for us is going to be the net loan growth is we were excited to get to that 5% loan growth, excited to see what we did in the fourth quarter. Clearly, the first quarter, there is going to be some seasonality in there from a growth standpoint. So I hope when we’re sitting here this time next year that we’ve been able to get our loan growth up in the – upper single-digits.

Okay, all right. Thanks guys.

The next question comes from Stephen Scouten with Sandler ONeill.

Hi, guys, good morning. How you doing?

Hi, Stephen.

So, I just wanted to follow-up actually I guess maybe on one of the last comments you made in regards to loan growth, maybe targeting the higher single-digits for next year. Do you see any impediments to that I mean, I guess the acquired run-off is slowing. So it seems pretty achievable, but I’m particularly curious about the 32 people you said you added and what kind of leverage you think they will be able to deliver in the coming year.

Well, I think you saw – some of the results in the fourth quarter, I think that if you kind of look over a broader period of time then just kind of the fourth quarter. The last couple of years have been about making sure that we’ve got a common culture with the two companies that we’ve brought together. A common sales culture that we’ve got the 8 players on the street and focused in knowing on the impact that they can have and what type of business we like to go after, we also ran off some business that we didn’t want. And we got out of some lines of business that we didn’t want. So there was a lot of clean up, and I would say that where we are today is highly focused. I think our culture is a major differentiator that we are able to bring over people from our competitor banks because of what we can – how we can deliver in the marketplace. I think that is having a big impact. So right now, organically probably the feel was good, as we have felt in a while around, when the focus the efficiency around how we’re managing those lines of business and impacting the results that we’re having and that are in the pipeline. So we continue to feel good, normally first quarter is normally there is a little seasonality in it. Their pipeline remains robust. I think the opportunity to continue to move business from the larger bank remains plentiful and we’ve got a good strategy that is effective and working in very focused.

Okay, great. And then maybe looking at these specifically with mortgage, I know you mentioned you had some pretty strong application activity online, but as I look at mortgage banking revenues obviously from the first half of the year to the back half of the year, there is pretty big drop off. Is some of that like fair value adjustments or is there just been a big volume drop off. Or what are you seeing there. And what do you anticipate seeing in the coming years.

Stephen, this is John, it’s volume related. I think what we’re excited about is to have this mortgage servicing asset that we obtained in the first level merger. We think that’s a something that’s going to pay big dividends for us long-term. What we’re really seeing on the mortgage side today and you are seeing it some of our growth is on the construction side. We’re seeing lots of folks by in large, building houses, lot of people out North are beginning to sell and relocating to the South. So its seen a little bit more on balance sheet in the construction piece. That’s up in the construction and land development category. But clearly, refinances have slowed down, but we continue to attract very good originators. We’re very excited about that. We have a very high market share in our footprint on the mortgage side. But clearly, these have come down due to refinances slowing.

Okay, got you, yes. I can’t figure out, why everyone doesn’t down from the North, but that’s for another day. On the M&A side, I was hearing what you answered to Nancy’s question there. It sounds like you said activity has been very, very busy in the last six months, but you are still selective. So I mean are you just kicking the tires on basically everything that’s out there or is most of this increased activity stuff that you think at least generally sets your parameters for what you’d want to buy and just the pricing is not there. Or kind of help me walk through why activity would be so high, but maybe we haven’t yet seen anything.

Well, it’s always been high balanced with. I mean it’s – we’ve typically had – look at 15 merger transactions before we ever have done one. So it’s – I’d that say it picked up in the last later half of the year, because really we were in a self imposed M&A kind of moratorium for 2014 and 2015, as we kind of rebuilt the platform and integrated the last acquisitions. So now that we’ve kind of lifted that I think that created a lot more conversation. I think part of it is that other companies are kind of searching for where they go from here. We’ve certainly made our decision on where we’re going from here, which is to continue to build and create a dominant South Eastern franchise. That is our goal. That’s what we’ll continue to try to build on. So I don’t think it is anything unusual. I think it’s kind of business as usual. If it is a bank that we would have no interest in, we would tell them that upfront and we do. That a lot – have a lot of those incoming calls where, there is just not a lot of interest. But if we’re having a serious conversation is obviously a company that we would have some interest in acquiring now, that I mean it will get to the finish line most of them don’t. But I would say active discussions would be people who would have a serious interest in.

Okay, great. And may be one last one. Obviously, you did a little bit of buybacks in the quarter. It is a little above $71, but given where the stock is trading now would it be safe to say you would be more encouraged to buy more stock here. Then you would have at $71 and because that looks for an increase in the buyback authorization.

Well, we’ve got about 87,000 shares I think remaining in our existing authorization, probably would renew it, even if we didn’t buy the 87,000 we would probably renew it anyhow, so that wouldn’t read any too much into renewal. I think the bottom line in terms of stock repurchases is that what our main goal, where we feel like we can create the most value for our shareholder is to leverage the capital we’re generating, which is significant. I mean, we’ve got a high return on tangible equity we’re throwing off a lot of capital we’re building our capital ratios and we see that as the best way to maximize value there is to leverage it, both organically and through M&A. And that would be our – clearly it would be our primary source of stock of repurchase really was just that we didn’t have share creep with some of our incentive plans and I think that’s how would continue to use our stock repurchase plan.

Okay, great guys. Well, thanks for the color and congrats on a strong 2015.

Thank you.

The next question comes from Tyler Stafford with Stephens Inc.

Hi, good morning guys.

Good morning Tyler.

And most of my questions have already been answered and I apologize if I missed this in your prepared remarks. But did you guys give any kind of modern outlook for the year. I got the comment on the acquired loan yields at least in the first quarter, but anymore broader outlook on the margin from here.

Tyler, this is John. No we did not. I think one of the big things last quarter, in the third quarter, we only had the BofA deposits in for 40 days. So I think now as you look at our margin, you’ve clearly got it in there for a full quarter, which can kind of help you with the margin side. Of course, for us is with the organic loan growth is going to be and how the acquired book runs away from us. That’s going to have the biggest impact on the margin. Our hope is that now we’re in position to be able to grow our net interest income.

Okay. And in terms of the – I guess the slow down of the acquired book we saw this quarter. Is that approximately a good run rate at this point? Or would you expect it’s to – I know it’s tough to see, but would you expect it to increase back towards where we work and averaging at the beginning of 2015.

Well, it is somewhat of a guess, obviously. But we feel like, we would kind been in that $120 million range now we’re in the down to the $90 million range in run-off. So if I was in your shoes, trying to model, I would probably model it somewhere between those two numbers.

Okay, that’s helpful. Thank…

As – but the acquired book did shrink around 30% last year. And so, I mean, it’s just – to a certain extent, it’s just going to get us to be a smaller and smaller portion in the overall balance sheet.

And as I mentioned earlier, only 10% of it now is classified. So, we’ve got a lot of really good credits in there. So, our hope is it would slow some.

Okay, very helpful guys. I appreciate it.

Next question is from Peyton Green at Piper Jaffray.

Yes, good morning. Actually, my questions just got answered. Thank you very much.

Okay, Peyton.

The next question is from Jennifer Demba at SunTrust.

Thank you. Good morning. What kind of tax rate are we looking at this year? John, your tax rate, I guess was a bit lower in the fourth quarter.

We had some things that on the benefit side that we were able to get in the quarter. We made a few investments that we got some tax credits for. So, I think, in your forecast it should be a little over 34 for next year.

And the gain on sale from the branches that you recognized this quarter, where was that recognized in the income statement?

It was recognized in where we had the branch consolidation calls, we just netted it in that number.

Okay, great. Thanks so much.

This concludes our question-and-answer session. One moment please. This concludes our question-and-answer session and I’d like to turn the conference back over to John Pollok.

Thanks everyone for your time today. We will be participating in the KBW Conference in Florida, beginning February the 10th, and we look forward to reporting to you again soon. Go panthers.

Conference is now concluded. Thank you for attending. You may now disconnect.