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

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 two 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 this call with summary comments about the second quarter observations on our overall performance. John Pollock will review the quarter in more detail, and we will then conclude the call with questions from the research analyst community. Our focus continues to be on building long-term shareholder value and this quarter marked continued progress towards that goal. Adjusted net income was 49.4 million or $1.40 per diluted chair, and represents a 1.28% return on average assets and a 15.79% return on tangible equity. Net income totaled 41.5 million for the second quarter or $1.17 per diluted share. This represents a 1.08% return on assets and a 13.38% return on tangible equity. In December of last year, we met with investors to provide further insight into our progress and the road ahead. As part of the conversation, we articulated longer term financial performance targets. While we did not put a timetable on the achievement of those targets, our performance in the first six months of '19 have us off to a good start. One of the highlights of the quarter was considerable improvements in adjusted operating leverage. We showed meaningful growth in revenues and demonstrating good expense control. Interest income growth was fueled by an increase in average loan balances and fee income was up in all lines of business. Ultimately, it is the ability to grow customer relationships that is critical to the creation of shareholder value. And our company continues to perform very well in this area. The strength and integrity of our balance sheet is core to the success of South State. Capital levels remain strong, asset quality metrics continue to be impressive, and funding remains a key competitive advantage. The quality of our funding makes continues to improve with solid growth and non-interest bearing deposits. Despite remaining active in share purchases, our tangible book grew $0.70 in the quarter to $37.85 per share and capital levels remain strong. The Board of Directors has declared a cash dividend of $0.43. This is an increase of $0.03 from last quarter and represents a 22.9% increase in our dividend from a year ago. I will now turn the call over to John Pollock for more detail on the financial performance for the quarter.

Thank you, Robert. My comments this morning will focus on our margin, non-interest income and expense and capital management, showed significant improvement in adjusted operating leverage this quarter with nice increases in both net interest income and non-interest income while limiting expense growth. On slide number five, you can see the 3.9 million improvement in net interest income. The margin declined 10 basis points as much as the growth and interest earning assets was in short-term investments and the investment portfolio. As shown on slide number six the growth in average loans was 4.9% linked quarter, which had a very positive impact on net interest income. Net interest income and the margin also benefited from $162 million increase in average non-interest bearing checking accounts this quarter. Our cost of funds increased to 71 basis points up four basis points linked quarter as rates on deposit accounts were unchanged except for increases in certificates of deposit. Slide number seven shows the impact of accretion this quarter, which is down to 6.1% of total interest income as the balance of this portfolio continues to decline. You can see those balances and the discount remaining on the portfolio on slide number eight. We had very strong improvement in non-interest income this quarter as shown on slide number nine, led by $2.9 million increase in mortgage banking income. Fees on deposit accounts and wealth management were up 900,000 and 400,000 respectively. Our capital markets group also had a very nice quarter with $900,000 in income due to the increase in back to back swap activity. Slide number 10 shares our linked quarter expense detail. Adjusted non-interest expense which excludes branch consolidation and pension plan termination cost was up $700,000 linked quarter primarily in professional fees and marketing. We had good expense management this quarter…

We are optimistic about the balance of 2019 and continue to make progress on improvements in systems and processes to make us more efficient and prepare for future growth. Our markets are exhibiting strong underlying economic activity and South State is well positioned with a solid balance sheet and a great team to build upon the results of the first six months of 2019. This concludes our prepared remarks and I would like to ask the operator to open the call for questions.

We will now open the line for questions. [Operator Instructions] The first question comes from Stephen Scouten - Sandler O'Neill. Please go ahead.

Good morning, guys. How you doing?

Fine.

Hi Steve.

So I'm curious if you could talk a little bit more about the leverage strategy, you're undertaking with adding some more of these borrowings? I think it's maybe 700 million over the past two quarters, just kind of wondering where you are in that process. That's something we should expect to continue? And kind of, I guess, what's the driving force behind that in terms of expected balance sheet growth, and otherwise, that's leading this to be the right path for you?

Stephen, this is John, I'll start on that, I think as we talked last quarter, we thought it was a really good opportunity to put a little bit of leverage on the balance sheet. I think companies our size, when you look at them, they have a little bit more leverage than we did. So we're kind of trying to look for an entry point. And we felt with where the yield curve was it was a really good time to go in. And you can see the blended costs on that 700 million with dividend. You see it's close to 2%. So I'd say first of all, we feel like that's kind of a permanent increase in the balance sheet. You can see it in our average earning asset growth; it's up 19% linked quarter, so we feel really good about that. You can see we did some work in the investment portfolio, we put on a little over 215 million of just kind of the traditional things that we buy in the investment portfolio, and Steve now yielded as right at 3%. So feel good about some of the deployment. Obviously, we still have a lot of cash to fund our loan growth. And I think in the future the good news is we still have more optionality around that. I think where we are right now, we're going to get this deployed, but we're going to continue to really look at that option in the future.

Okay, great. And then if I'm thinking about expenses, you guys noted some of the remaining I think was 6.4 million in annualized savings to come out in 3Q and 4Q from the effort you've already been undertaking. Is that something where you would believe that we could actually see the expense run rate move down quarter-over-quarter or will that be spent on new hires or other continued investments?

Stephen, this is John again, let me talk about expenses for a minute. So I think I'll go back to our long-term goals. And kind of what we said at investor day is we were trying to stay in that 0% to 3% range. So we did it one quarter, that doesn't mean we'll do it every quarter. But I think when you kind of dig into the expenses, you can kind of see what we're doing. So if you look at our kind of our professional and marketing – marketing line on this professional fees, we're spending money, we announced our partnership with nCino. You've heard us talk about our digital roadmap from. So I think as we said, we're investing there. I think the good news is the investment there doesn't mean that sort of permanent increase in the expense as we get some of these implemented. But I think our view on the expense side, Stephen is where we do best over a long period of time is try to stay in that 0% to 3% range.

Okay, so no change there.

Correct.

Okay, great. And then just last one little question for me is just on new loan yields. I think you said there around 4.7% last quarter. Where were those coming on this quarter? And how do you think about those with a potential Fed cut in the coming quarters?

They came down a tad this quarter. I think our view of the Fed cut is it does give us an opportunity to maybe get a little bit more balanced. Stephen, I think as you know, we have a pretty heavy residential loan book. And obviously, those rates were kind of stuck as rates went up. And I think our view is it gives us an opportunity to get more floaters on our balance sheet as we build the build the commercial bank. Today when you look at our floaters, we have right under 5 billion, but over half of that is really harbored arm. So we've got about 2.4 billion in floaters. You can see our capital markets income for the quarter; we're really starting to hit on all strides in our capital markets group. And so that was really nice to see. I'd say, I think as rates come down it does give us an opportunity. It really does the focus there. On the flip side on the mortgage side, I think one of the things that that we all need to kind of see now in the new world is rates are coming down Is it just going to see more refinances on the mortgage side. So when you kind of look at that, look at our loan book now 30 year fixed rate mortgages are below 4%. Obviously, equity line balances are tied to the prime rate. So you can see some churn there. But of course, Stephen, that's going to lead to more fee income and you, can really see our mortgage area really begin to click on all cylinders from a fee side.

Yeah, for sure, okay. Very helpful, thanks, guys. I appreciate it and congrats on a great quarter.

Thanks.

The next question comes from Jennifer Demba with SunTrust. Please go ahead.

Thank you. Good morning.

Good morning.

A question on your net interest margin outlook over the near term, with rate cuts likely coming here in the second half of the year.

Yeah, Jennifer, this is John. I think, clearly managing the margin today is been difficult for all of us. We got to the end of the year. Here we right thought there was going to be a lot of rate increases and here we go kind of the other way. So I think our outlook – if you kind of dig into our cost of funds, I think that's a good place to start. Outside of the CD book, we really saw stability on the deposit right side this quarter. So I think that was really good news. And we saw a little bit increase in the CD books. I say, I think first of all, it does feel like rates are beginning to come down. We don't guess a lot on rates, we try to – have always tried to manage maybe a little bit more towards neutral. I kind of go back to my comments with Stephen, we feel like we can get a little bit more balanced between fixed and floating in this environment. And then ultimately, on the margin for us, it gets back to the non-interest PDA growth. And you can see linked quarter we had significant non-interest DDA growth. So Jennifer, we got to stay very focused on that as rates come down. Our treasury area, I'll give you one example, our treasury area is really starting to hit on all cylinders. They completed their conversion of all the systems in April. And in fact, they've got over 100 million in new deposits that they generated this year. So clearly, rates are going to come down, we got to stay real focused on the funding, I think you all know us; we're going to be very measured on our funding calls. We've got checking accounts that have been with us 40 and 50 years, so we'll be measured as they come down. But it's good to see some stability, at least on the deposit side.

So you're expecting some modest margin compression with these rate cuts that you'll keep focusing on the funding?

I think you'll see some, but I also think on the flip side of that you're going to see more fee income. So take mortgage, you're just going to see more on the fee income side. And so what we've always said on mortgage is when rates are coming down, you need to produce more fee income. When rates are at a very low point, you don't want to grow that book a fair amount. So I think some of the offset in that margin, not that it's totally correlated, but you can see it in our fee income this quarter, especially on the mortgage side and then the nice capital markets quarter we had.

Okay, a separate question. What's your interest in further M&A at this point?

This is Robert. I guess, strategically – maybe let me just start with where I see the company just overall and then how that plays into kind of where we go strategically is, I think a few things. First is where we are from a soundness perspective. It is pretty extraordinary. I mean, our balance sheet very solid, deposit base, as John mentioned, very granular, we're on pace to grow probably 12,000 new customers this year, treasury is really kicking in, capital stack is really almost all common, got a lot of optionality there and credit. I mean, so from a credit perspective, really, we're in a net recovery position for the year on the $11 billion book. So we're just overall feel really good about strategically the soundness pieces of the company, which is our number one focus. And then, you know, the last two years, as we explained in December, the investor meeting, the building blocks were just being put in place, and you look at commercial treasury, capital markets, digital transformation, on and on, tremendous headway getting the right platform in place. And then the expense manager, we made investments in technology, but we've also improved our productivity. So we found ways to pay for those investments and that is feeling like that's a really good path. So then it kind of goes to what's the future hold. And I think first and foremost for us is the forward momentum as a company feels really good. And I think you see a lot of it in our numbers this quarter. Obviously, net loan growth is not what we want. But if you look at our pipelines, the quality of the customers that we're bringing in, the momentum that we have, the talents of our teams, the productivity levels, that all feels really good and really every area of the company. And a year ago, that was still kind of spotty. So my point in saying that is the foundation now is in a really much better place than it's been in a long time. And we feel great about our organic path. But as you know, I mean, we're always open to create value for our shareholders and we want to build a great bank. So if there are opportunities to do that, we would certainly consider that just as we always have. But our primary focus is clearly on making sure we've got a strong foundation that's in place to really pursue whatever options are the best. And that had really changed from where we've been in the past. I think what has changed is our foundation is just stronger than has been in quite a while.

Okay, thank you.

The next question comes from Tyler Stafford with Stephens. Please go ahead.

Hey, good morning, and thanks for taking the question. I want to start on fee income. Obviously, you guys had nice fee results this quarter. Can you talk about your mortgage production again on sale margin this quarter? What that was relative to last quarter as well. And then just curious if there was a fair value in this impact this quarter as well.

Stephen, this is John. From a margin perspective and held in there pretty well, we don't disclose exactly what our margin is on fees, but held in there very well. One of the unique things was really the movement of the kind of the 10 year in mortgage rates and so mortgage rates kind of hit a bottom and treasuries kept on going, right. So that really kind of helped that gain on sale when you look at it. From the MSR side, in the last couple quarters it's been a battle. Last quarter didn't really make a whole lot of money on the MSR. This quarter, we generated about 2 million in fees out of our MSR asset on a quarterly basis. We got about half of that. And so I think on the mortgage side, we're seeing stability in the MSR. We added 5% in growth to that asset, so it's starting to build. We're getting more income stream. So if we could just get a little stability in the rates, I feel really good about where we are on the MSR asset. Clearly mortgage rates go below four, does the bottom kind of hold there to the 10 year? I think that's a question nobody really knows. Now on the on the flip side, if you just kind of go over to the production is, as I mentioned earlier in the call, our view in mortgage is we'd like to use our balance sheet. But we also like to generate secondary market business. So you're going to see, as Robert talked about our growth – there's just going to be more pressure to grow the mortgage portfolio on balance sheet. It's going to create more fees in the secondary market. So we feel really good about the momentum on the fee side. But ultimately, this is how you want your mortgage book to work. As rates go down you want to get that churn and have those hybrid arms, as we talked about earlier, either refinance into the second – get refinanced in the secondary market or they'll go and pick up a new arm product.

Okay, thanks, John. Appreciate that. Just following up on Jenny's earlier question, just if we do get a cut tomorrow, just curious if you could size up just arrange for us to think about in terms of margin pressure with the July cuts if do get one?

Well, I wouldn't know exactly how much it would be. But typically, like, if you look – kind of look at our betas when rates come down, they average 15% to 25% of the cut. So kind of depends on the bucket. But clearly there should be some pressure you would think on the funding side as it comes down. But also think on the loan side, as Robert mentioned, I mean, our pipelines are really good. We went out and did this leverage strategy, we got more liquidity. I think we've really got a great entry point because of the yield curve. And so Tyler, from the growth perspective I think our view is that are a help there. And then obviously, I think as you think about the pressure, you also got to consider what – as we mentioned earlier, what's going to happen on the sea side?

Sure, sure. Okay, thanks. Just looking at, I guess, profitability and just ROA just the leverage strategy is obviously helping South State achieve that longer term 16% to 18% ROTC. I'm just curious if there's a corresponding ROA target that we should think about.

Nothing that we put out there, but I get it, clearly want a higher ROA. I think our view was over time we kind of talked earlier about kind of permanently taking the balance sheet size up some. And so we grew those average earning assets 19% linked quarter and we did those transactions. So I think our view is over time, I would much rather instead of putting over 200 million in the investment portfolio, but we did get 3% yields on that, you're going to see that shift into the loan growth. I think that's going to help us a lot.

Okay and then just lastly for me. John the earnings release talked about how the share buyback positively impacted EPS by one penny this quarter. And then later the release stated the tangible book value was impacted by $0.66 due to the buyback. So I'm just wondering what was that TBV earn back is on your repurchase and just how you think about kind of book value dilution and earn back associated with repurchases? Thanks and I'll hop out.

Well, I think if you're thinking traditionally on tangible book value earn back from an M&A perspective, it's clearly a longer time frame. But hey, these are assets I know, assets that we put on the books, assets that we've marked, we're very bullish on what we've been able to do from a share purchase reside of what it does for the shareholder. So clearly a little bit longer period of time than all the M&A, but it – you're investing in something that you know very, very well.

[Operator Instructions] The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Thanks. Good morning. Want to look at the change in staffing the FTE numbers year-over-year. Is that changed possibly similar either in percentage terms or just absolute numbers in the next year? Or is the bulk of that shift already behind you?

Chris, this is John. Yeah, we're continuing to look at staffing levels, how we run our lines of business, that's just a constant thing that we do. To say that the FTE reduction would be the same next year, I don't know that. We are beginning to approach our budget season for next year. So we'll begin to look at where we want to invest, is there a way to make things more efficient. So it will be something we will continue to look at.

Chris, just to kind of add on, this is Robert. We obviously continue to add as we always have is just continuing to add revenue producers. We added eight in Q1 I believe, 10 in Q2, that's just kind of a normal process. The same as done talking about on kind of the productivity and efficiency side is on the revenue side. That's been a pretty consistent number for us the last few quarters.

That's great. Thanks for that explanation. I appreciate it. And then when we step back and look at the change in kind of valuation on the acquired book and how that sort of progress as you had revaluations most quarters. What does that tell us on sort of the broader credit picture, either in general in your footprint or in your portfolio specifically? Just seems that you've had a lot of success on how that is looked for you, but I'm curious what it tells you about the health and your footprint?

Well, the – I think the soundness portion and the credit culture in our company is kind of where it all starts. And we were talking the other day about net loan growth not being quite where we want it to be, but productivity being good. And at what point in the cycle are you and really in the downturn of financial crisis or recession times like now where you just got some churn in the book and a little slower net loan growth are really robust times, our credit philosophy doesn't really change. So it's kind of time tested, cycle tested and we kind of stick to it. So I think ultimately, what it says we have a really good credit culture. I think it's what we're very selective. We underwrite well, we pick quality customers, I think on top of that – but we were in both rural markets and we're in growth markets and both right now or tending to perform extraordinarily well. We're seeing businesses that are well capitalized that aren't over leveraged. You've certainly seen some one offs in terms of credit in the industry over the last quarter or two. But we've not witnessed any of that in our in our markets. Unemployment rates are low. Businesses seem to be very profitable. The amount of risk in the market seems to be manageable and our loan portfolio, I think is reflection of that.

Great, that's helpful. And I presume that you'll continue to have potential revaluations in future quarters. You just take it one quarter at a time. Is that the right way to think about it?

Chris, this is John. Obviously, we got two more quarters before CECL, right. So yes, I would think you see that really over the next couple of quarters, then revaluation really changes, right. As we get into the CECL world it really begins to change. And so for us, as I think about CECL, we've gone out and looked at our kind of 10 year loss history with a few caveats. And so from a quantitative perspective, you look over the past 10 years is only about little over 60 basis points on the whole loan portfolio. Obviously, we got a layer of qualitative piece on top of that to kind of get to the total reserve. But when you think about the moving pieces, Chris, of reevaluation how it comes back in the income statement is you kind of look at where we are today. And there's really two pieces in our income statement. First of all, you'll notice in the acquired – loan accretion on the credit – in paired side [ph] and we had a really nice accretion quarter and about $1 million of that came from a loan that had a big, big [indiscernible]. Well, guess what, that more when comes to the accretion it would come through, really a reserve release and come back through kind of come back through the reserve. The other piece that's in there is when you look at our acquired non credit impaired charge offs, so we had 25 basis points. It was about 1.5 million in charge offs. And as you know, traditionally what we've done, we've basically paid for those charge offs in the acquired non credit book as we go through each quarter. Well, now that 1.5 million, it would have pushed up against a reserve and really wouldn't have come through the income statement. So you throw those pieces in there and then finally, we're breaking up our loan pools on the acquired credit impaired bucket, you're going to see more accretion come through our income statement. And the reason I say that is when you're in pools, I think as you know, the increase in is stretched out over the weighted average life of those pools, we actually have loans back from RCBT transaction 10 years ago on the pools was those payouts than that excess accretion is going to come in. So a couple more quarters of where we are, then I think you're going to see a lot of changes as we get into 2020.

Got you, sounds great John. Thank you for the additional color here, but I really appreciate it.

The next question comes from Nancy bush with NAB research. Please go ahead.

Good morning, gentlemen. How are you?

Good morning.

You mentioned the 900,000 in revenues that you got from the capital markets business. And I think you referenced swap activity as being a reason behind this. And I'm assuming that this is primarily the platform that you acquired with Park Sterling. When I asked a question about capital markets a couple of quarters ago, there seemed to be some ambivalence about further build out of this platform. And I'm wondering if you can just update us and if whether the results that you've received this quarter have changed your mind about how much you want to go or how further you want to go with that business?

Yeah, Nancy, this is Robert. I'd say if that was the perception that – it's just the wrong perception. We've been excited about really capital marches and treasury. We're part of Park Sterling that we were very committed to from the beginning. Now, how you execute on it and how you integrate it over a bigger platform. Those were certainly things that we had to kind of work through that took some time. But you're starting to see the fruits of those efforts over the last year. So we're fully committed to the business. We need it for our customers' number one, I think first and foremost, but we like the business as well. It adds value to the customers, it adds value to us, it helps our interest rate, risk management, it helps us compete in the marketplace. There's just a number of reasons we like it. We really like our team, Randy Royster, who leads our Capital Markets Group, is very talented, he's helped us really solidify a lot of commercial relationships across our footprint, but we've just really started. The pipeline there is robust and as is our commercial pipeline overall. So I feel like that line of business is just starting to mature inside our company, but still has a lot of progress, but fully committed, same as treasury. John mentioned the traction there, but 100 million in new deposits so far this year. 200 new relationships, so the things we've invested in over the last couple of years. This quarter, we're starting to see really some of the results of that.

I would just ask as an add on to that. I mean, there's been a lot of talk on second quarter conference calls about the turmoil that's taking place in the banking environment in the southeast and particularly in the Charlotte area and whether you're able to add people to the capital markets businesses, or indeed maybe to go into some new areas of capital markets as a result of some of this turmoil.

I think that – I think they're two – several areas that we're looking, we added 10 people in Q1 really across all business lines, commercial, private middle market, consumer, mortgage investment. I think capital markets is clearly an opportunity for growth both in terms of people and also customers. But you look at what we're doing overall till the digital transformation. And this kind of speaks to some of the turmoil in the market and the changes in the market, but the digital transformation of our company, in Q1 7% of our deposits came through our digital channels, in Q2 11%. So we're – I think our commercial footprint and commercial platform is much more robust than it was 18 months ago as is our consumer and both are getting good traction.

Okay, thank you.

Gentlemen, it appears there are no further questions in the queue.

Thanks, everyone for your time today. We will be participating in the Stephens Bank Forum in Little Rock, Arkansas beginning on September the 23. 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