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SouthState Corp
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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.
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 look forward to providing an overview of the 2017 performance and then provide some insight on our near term focus. John Pollok will review the year in more detail. And then, we will conclude the call with questions from the research analysts.
Before commenting on recent performance, I want to reflect on how far South State has come in a relatively short period of time. Only five years ago, we were $5 billion an asset bank in good markets, but with relatively low deposit market share.
Adjusted returns on average earning assets were 86 basis points and adjusted return on tangible equity was 11.3%. During the past two years, we have almost tripled in asset size and taken returns on average assets and tangible equity to over 1.25% and 15% respectively. Today, we have almost 6% market share in our combined accounts of operation and have our sights set on winning more share [indiscernible] great markets.
We set out a number of years ago to have a deep and dense footprint and to be top five in market share. And I'm very pleased with the progress that has been made.
Now let me turn to 2017, the year saw a number of significant steps forward in the financial performance of the company was very strong. For the year net income was $87.6 million or $2.93 per diluted share representing 0.77% ROA and a 9.63% return on tangible equity.
Adjusted net income totaled $145.1 million or $4.85 per diluted share and represents a return on average asset and return on average tangible equity of $1.28% and 15.49% respectively. The year saw significant changes for the company among the developments for the completion of two acquisitions and crossing the $10 billion regulatory threshold. The merger with Southeastern Bank Financial Corporation was consummated at the beginning of this year. Teams in Augusta and Aiken recorded strong performances and are seeing meaningful opportunities for growth. This addition has contributed financially to South State, but more importantly, we have added tremendous talent in the market.
On November 30, we completed the Park Sterling acquisition, systems conversions will take place in the second quarter and the integration is progressing well. The merger adds 20 branches in the Charlotte market established a meaningful presence in Richmond Virginia and added density in our Carolinas and Georgia markets. We now have over 180 branches stretching from Richmond Virginia to Richmond Hill Georgia and serve over 700,000 customers.
Soundness is an important operating principle of South State. Several years ago, we set a goal of crossing the $10 billion threshold. I'm proud of our team's ability to navigate these regulatory challenges and still produce growth in our businesses. It's also gratifying to report that all lines of business said the core bank are performing at a very high level excluding the impact of Park Sterling annualized loan growth was approximately 8%. Production was balanced across markets and asset quality remained very strong.
Non-performing assets were 0.25% of assets at year-end and net charge-offs for the company totaled only 4 basis points for 2017. Funding continues to be a strength of the bank. Core deposits represent 85% of total deposits and the funding base is comprised of a large customer base with average deposit account size of $12,000.
I will now turn the call over to John Pollok for more detail on our financial performance this quarter.
Thank you, Robert.
Starting on Slide number 3, net income for the quarter totaled $2.4 million or $0.08 per diluted share. It was impacted by the revaluation of the deferred tax asset due to the Tax Reform Act as well as merger costs related to the Park Sterling merger which closed on November 30.
Adjusted net income which excludes these items was $41.4 million or $1.30 per diluted share. This represents an adjusted return on average assets and tangible equity of $1.33% and 15.83% respectively.
On Slide number four, you can see the merger expenses net of tax of $12.4 million for the quarter and the revaluation of the deferred tax asset of $26.6 million. We would expect the DTA impact to be earned back fairly quickly with a significantly lower effective tax rate going forward.
On Slide number 5, you can see the $12 million increase in net interest income for the quarter as a result of the addition of Park Sterling for one month. For the quarter, our margin expanded 7 basis points to 4.18%.
On Slide number 6, we show you the composition of our interest earning assets both in terms of the average balances for the quarter as well as the balances at year-end. As you can see, the acquired loan book made up 25% of interest earning assets for the quarterly average but represented a third of our total interest earning assets appeared in.
On Slide number 7, we have increased our disclosure to now include details behind the 6.57% yield earned on the total acquired portfolio this quarter. The acquired non-credit impaired portfolio, which represents 85% of the total acquired portfolio generated at 5.73% yield for the quarter. You can see the impact of purchase accounting accretion enhancing the contractual yield earned as well as the remaining discount to be accreted in future periods. The pace of the paydowns and payoffs of this portfolio going forward will obviously determine the impact of the total accretion recognized.
The acquired credit impaired portfolio generated 9.67% yield. This portfolio had very little impact from the Park Sterling merger as 97% of the portfolio was non-credit impaired. In total, the yield on the acquired loan portfolio for this quarter was 6.57% which is down 8 basis points from the prior quarter.
Switching to the non-interest components both non-interest income and non-interest expenses increased due to the Park Sterling merger. Slide number 8 shows the continued improvement in our adjusted efficiency ratio which was just under 57% for the quarter.
Slide number 9 gives an update on the Park Sterling merger. We are on track on our cost saves having achieved a small amount already in December and are looking forward to completing the systems conversion in the second quarter. As we normally do in post merger periods, we are doing some balance sheet repositioning such as selling a portion of the acquired investment portfolio in the shared national credit portfolio and paying down some borrowed money with the proceeds.
You can see the significant progress we have made over the years and earnings per share growth on Slide number 10. And Slide number 11 shows the $0.05 decline in tangible book value this quarter with two mergers during the calendar year, our tangible book value still improved $2.39 or 7.7% year-over-year.
I will now turn the call over to Robert for some summary comments.
Thank you, John.
We look forward to the years ahead for South State. We have been busy building market share over the last two years. We now have the opportunity to get better and become more efficient. In the near term, we have a keen focus on the successful conversion and integration of Park Sterling. We also intend to make meaningful advances in product offerings and processes that we expect will enhance our customers experience and enable us to make further market share gains. That concludes our prepared remarks.
So I would 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 of Sandler O'Neill. Please go ahead.
Good morning, guys. This is actually Peter Ruiz on for Stephen.
Hey, Peter. Good morning.
Hey, so I just wanted to maybe touch base first on loan growth. I mean organic growth is certainly strong here at a mid-teen pace. But it's kind of slowed a little bit from the maybe 20% to 30%, earlier in the year and maybe in 2016. Can you maybe give a little bit of color on what the pipeline looks like going into 2018 and what if maybe net growth can kind of rebound to a higher single-digit or maybe a lower double-digit pace.
Peter, this is Robert and just touch on overall.
Let me start with just kind of touching on 2017 is the first two quarters of 2017 were really strong. We also acquired Georgia Bank across southeastern in January of 17. So we had a lot going on in the first half, but the pipeline was strong. It continued to be strong through most of the rest of the year. We saw some slowdown towards the fourth quarter and has seen a little bit of slowdown as we start the year, but some of that may be seasonality. We'll just see. But overall we felt good about kind of mid to high single-digit numbers. That's what we thought for 2017 and so we ended up 2017 at about 8% annualized loan growth. That felt really good for us mainly because it was very balanced and we had 8% consumer growth, 8% C&I, 12% CRE growth and we had really good geographic dispersion really across the board. None of our markets really just took the lead -- it was -- the coastal markets, the central markets, the metro markets really across the board had felt like had very good balance in terms of our overall loan growth. I think 2018 is a little unusual from a loan growth perspective. We closed Park in November. So yes, we closed Park in November that in and of itself creates some turbulence in terms of the loan portfolio.
As with all of our mergers, we tend to buy and then kind of reposition, we take concentration management pretty seriously. So just for example, Park had a higher level of CRE and C&D than we do in the bank. So it kind of takes our levels up. And But, we're still well below the 300 and 100 levels. So we've got roughly $1 billion in runway to get to those 300, 100 level. So there's plenty of balance sheet strength to grow in those categories but that doesn't mean that's where we're headed. It just means we've got a lot of firepower left in terms of our balance sheet to grow it.
But our primary focus really will be to reposition the balance sheet to get inside the segments that we want inside our loan portfolio. So if you go back to the First Federal, when we bought them they were pretty much a thrift. So it took our portfolio up 45% of our loan book was too high. If you look today is 30% and over the last few years we've been repositioning that portfolio.
So with all of that said, the first half of 2018 loan growth is going to be muted mainly because we're going to be in this kind of repositioning period with Park Sterling. And then we began to see growth begin to pick up in the second half of the year probably won't get up to a double-digit number in 2018. But we still think the second half of the year will be get back to a more normalized run rate.
That's really helpful I appreciate it. And I guess just maybe you guys mentioned that the Park Sterling acquisition -- the integration in cost saves are on track.
Is there any -- do you guys see anything at this point in terms of incremental opportunity to extract some additional cost saves here or is it still relatively in line with -- the first guided 35% in cost saves.
Peter, this is John. I think we're on track. I think where more of the opportunity is on the synergy side. We spent a lot of time with the Park team and we see tremendous opportunity on the retail side and the wealth side and the mortgage side.
So we really feel like on the synergy side, this year we're going to see some things that are going to be very, very helpful. We still got to get through the conversion of the first part -- first half of the year. But on the expense side we feel like we're still right on track.
Okay. That's great. I will step back for now. Thank you.
The next question comes from Tyler Stafford of Stephens. Please go ahead.
Hey, guys. This is Gordon McGuire filling in for Tyler Stafford.
Good morning.
First I just wanted to touch back on the balance sheet restructuring on Park Sterling. You already called out some of the line items that you'll be doing in this call. So I just wanted to see if you had any additional commentary on when you think you can be done with everything kind of restructured and normalized. And then, any potential impact to NIM from this?
This is John. Well, obviously, Park's only in our numbers for one month in the quarter. So clearly our NIM's going to be intact once we have Park in there for a full quarter. From the major balance sheet repositioning, we feel like all of that will be completed in the first quarter. The only thing that really won't is, Robert mentioned is going to be the remixing of the loan portfolio and that's going to take us some time like it has with all the other acquisitions we've done.
And then just kind of following up I appreciate the new disclosures around the accretion this quarter. What would be your expectations for the accretion this coming year? What kind of a good run rate for that with Park Sterling would be. And then, just any general thoughts on the core NIM trajectory from here.
Well, as I just mentioned part being in one month. I'll take a quarter or two to kind of get that to settle down for the run rate. But I turn your attention back to Slide number 7. So when you look at the acquired non-credit impaired bucket so you've got another $65 million in accretion that needs to pour in.
And then if you go up a line on there and you look at the acquired credit impaired bucket you know that $133 million that's going to probably pour in over a three to four year weighted average life.
That's helpful. I didn't see it in the press release, but I was wondering if you had any commentary on your tax rate expectations this year. And any thoughts around your capital levels and any deployment strategies within the new tax regime?
I will start on the tax rate and I'll get Robert to chime in on some of the things we're thinking about. We feel today that our tax rate probably a little bit under 23%. Clearly still under review, but our first past that's where it looks like we'll land.
From a deployment strategy, I think like most companies, we're going invest back in -- invest back into our company. There is clearly some things that we want to get done. Clearly just really excited to [indiscernible] whereas we're going to be faced with [indiscernible] in the second half of the year.
So, just a couple of additional comments. This is Robert. I mean first is obviously there are a lot of positives that come with the tax impact. Obviously, hurt our numbers in Q4. And so there is some tangible book value build that we did not get in Q4. So there is a sense that we want to at least close some of that gap as we evaluate dividend increases and things like that like to earn. Some of that $26 million back in terms of [indiscernible] build.
I think secondly is we're in the evaluation stage in terms of how we're going to deploy that revenue strength. It's obviously very impactful to the company, and I think there will be a combination and a balanced approach. I think we'll look at obviously what we need to do for the shareholder from a dividend perspective.
Certainly, what can we do from our strategic planning process and are there some things that we can accelerate into 2018 that might have been on the drawing board for 2019 or 2020. And so those are the things we're balancing. We have not made any final decisions around those investments or impacted shareholder but will in the coming quarters.
Great. Thank you. That's helpful. That's all my questions today. Thank you, guys.
The next question comes from Katherine Miller of KBW. Please go ahead.
Thanks. Good morning.
Good morning.
Hi, Katherine.
One other one on the margin. Turning to the funding side, how much of the -- I mean your funding costs are still really low. So I don't mean to knock it, but looking at your CD rate, it increased quite a lot linked quarter. How much of that was just from adding in the impact of Park Sterling versus an increase in your core CD rates?
There's probably about 4 or 5 basis points.
Okay. Was from Park Sterling?
Yes.
Okay. And as you think about the remix of your portfolio on the funding side what's your outlook for deposit betas and kind of any commentary you can give us on what you're seeing in your markets in terms of deposit behavior so far?
Katherine, this is Robert. I guess my general -- my general thoughts as you see a few outliers on the deposit side in terms of kind of chasing -- chasing rate because maybe their balance sheet structure is different than ours. We certainly don't see that from the large banks and really don't anticipate seeing that from the large banks. That's where the bulk of the deposit share is. As you know, we have a lot of customers and a lot of granularity in our deposit book. So we feel really good about our ability to kind of manage that piece and we've had good core funding growth kind of pretty consistently for decades. So overall feel really good.
I think the ultimate answer to your question is not just how much deposit rates go up. I really think it's around loan growth and loan demand. So as we move into the year and we see the level of demand. How big of an impact economically this tax reduction has how companies decide to spend or invest that money? I think that will end up really being the ultimate determination of kind of how deposit betas move.
And could you argue that in the first half of the year, when we'll probably see a little bit lower growth rate from the all that would probably put a little bit less pressure on the funding cost as well which will help that side of the balance sheet.
I do. We don't always just manage it exactly that way. I mean we look at funding is something we're going to need over decades not just a quarter or two. But we certainly don't feel the need to go out and just go out and attract a lot of excess funding just to build out the securities portfolio or just get a really thin margin. Ours is going to be around focus on core funding and help and support the growth we have in the loan portfolio.
Okay. And that's great. And then, another follow-up from the acquired side. What are your expectations for the pace of run-off on the acquired book?
Katherine, this is John. That's a great question I'm not sure they're all very different. And now Park doubled the size of our acquired loan book. But I think it'll take us a couple of quarters to kind of really get our get our arms around that.
Okay. And maybe one up on that. Was the size of the shared -- of this net portfolio that you are selling or you are pulling out of?
$68 million.
$68 million? Okay. And the timing of that is that already happened or that's the one quarter?
We're in process. We've done some of that in the fourth quarter, we have a little bit more to go out this quarter.
Okay. All right. That's all I got. Thank you.
The next question comes from Jennifer Demba of SunTrust. Please go ahead.
Thank you. Good morning.
Hi, Jennifer.
First on the back to the loan growth topic for 2018, excuse me, 2017; I'm just curious I mean the industry saw a lot of paydowns last year. Was that an impact, do you feel like to you guys disproportionately. And also did the competitive environment heat up in your markets given all the new entrants in expanding the other mergers in the market.
Jennifer, this is Robert. I don't really see where there was a competitive shift at all. Had we had -- we have not seen or really experienced that at all. We felt at the beginning of -- this time last year, we kind of said, we thought we have high-single digit loan growth 8 % and that's where we landed. So we felt like our overall kind of landed where we thought we would the timing was a little unique. Some of it came more front end loaded than back end loaded. But overall we thought 8% especially when you're bringing on a roughly a $1.2 billion $1.3 portfolio from Southeastern that you're working through in year one.
We overall felt pretty good, really about the pipeline and the types of business and the mix of business really all year. We probably feel as good about the four lines of business that we're in overall and their ability to grow organically as we have in a while. Now you did see in the marketplace this huge run up in certain segments, the CRE. Some of that we participated in, some we did not. But, you certainly saw multifamily being probably the number one. There's also hospitality. We certainly had done some multifamily lending and we had done some hospitality lending and we did slow down those segments in the second half of the year and we saw some of those go to the life insurance companies in the second half of the year. Those loans are chunkier and they tend to be a bigger hit when they pay out. And we did see a little bit more of that in the second half of the year.
Okay. Second question, you mentioned early in the call that you are planning to add to your product set, and maybe make some changes to your processes. Can you give us some more detail there?
Sure. I'd say the biggest one, it kind of goes a little bit by Katherine's question as well on funding. If you look at how we're positioned now, we are number one or two in a lot of our markets, but we're top 5 in a lot of our markets in terms of market share. And the biggest opportunity in front of us is really the market share that the large banks have because there's a pretty big gap between us and the small banks and other interests and our players in our markets just because they don't have significant market share.
So what we're seeing is more opportunities for more C&I, more middle market type companies. So we're rolling out with Park a new Treasury platform. So it really elevates the opportunities we have on the treasury management platform. We've got a really good group of Treasury people leadership and people in that area to tag that area. So that's a really main one that we're focused on this year. We did a gap analysis in 2017 on all of our digital type products and we have a strategic plan over the next three years that we are using to close any gaps that remain in terms of our digital processor or digital products.
Some of those with the tax cut we may accelerate and be able to do a little bit faster, but we think we'll be able to close the timeline of that pretty quickly. And then, obviously, we said for the year for 2018, Park Sterling is our number one focus for the year. We want to get past that. And if you kind of equate that back to 2017 that was our number one goal for 2017 for Southeastern as well.
If you look they had the number two mortgage producer in terms of dollars, number one in terms of units in our mortgage group in 2017. They had the top two investment service producers during the year. So having a good execution and integration and [effectives] [ph] of that team as Southeastern helped us in a big way this year. Park is going to be the same way. And that's where we're going to be focused heavily for the first six months of the year is making sure we do that we execute that well that we get similar results. And then the second half of 2018 is really where we'll begin to accelerate some of these technology investments going forward.
Thanks so much.
[Operator Instructions] The next question comes from Christopher Marinac of FIG Partners. Please go ahead.
Thanks. Good morning, Robert. I wanted to continue your line of thinking on the last question as pertains to kind of the upside in these markets, if we use Charlotte as an example. Is it fair that you're still in the first or second inning of that market compared to where you want to be? It's part of the conversation you started at the Investor Day last fall.
So I mean, we are early. We have been there for 10 years, right? So, we have been kind of calling from the bottom up. We've been kind of call on from the bottom up. Now we're up to number six in market share and we have 26 offices now in that market. Have a great team and we have a very robust platform whether it's wealth or mortgage, retail, Park Sterling was more of a commercially focused bank. We think we bring those other lines of business to really build a much robust delivery system that market that we have in the past same in Richmond kind of same dynamic there and same dynamic in Raleigh. But it is it has been meaningful but it's not just there Chris.
I mean if you look just take Charleston for example. As you know one of the markets where we are number two in market share. We have the same number of branches in Charleston and the same math kind of applies to even a [green bowl] [ph] or a Savannah. But we have the same number of branches in Charleston that Wells Fargo has. And we have roughly $1.2 billion, $1.4 billion for deposits in that market. They have almost twice that.
So the infrastructure in Charlotte and Charleston and Savannah in other markets, we don't have at it all that we need in Raleigh, in Richmond we have great infrastructure and great leadership. But I think it's really across our whole footprint now is we just have a lot of the infrastructure that we have in place. So we could go in and our market share could increase meaningfully with very little addition in terms of kind of branch infrastructure.
Got it. That's very helpful. And then just to continue on Raleigh for a second, is that a market where just a handful of changes on the infrastructure makes a big difference that because of technology you don't have to have a massive footprint just put this incrementally more will help.
Yes, absolutely. I think that's going to be a branch like market for us and it's going to be a team heavy market. We've begun to add talent on the commercial side. We've got a vertical out of business in the dental health care area; will begin to build that out. We brought in a new Head of our Mortgage Group in Raleigh and all this has been done just since we closed Park Sterling in November. So making some really good inroads there as in Richmond.
Okay, great. And last question is for John. The accretion that we saw in the fourth quarter, is any of that kind of sort of accelerated or I know it's not one time per se, but just curious if that how much of that was scheduled versus not scheduled?
Yes. Of course, Chris, we're going to have some paydowns when we look at this. But when you look at that that $11.1 million about $2.5 million of that was due to prepayments.
Okay, perfect. Thank you very much guys. Appreciate it
.
The next question comes from Nancy Bush of NAB Research. Please go ahead.
Good morning, gentlemen. Quick question on your fiduciary and asset management businesses. Where do you stand in terms of the size of that business. Is it adequately sized for the new footprint and are you bringing new customers in there?
Nancy, this is Robert. So just last year overall revenues were up in that area year-over-year 28 %. Some of that is Southeastern related Southeastern have a very strong wealth group and wealth team. We are seeing but Q3 -- just Q3 to Q4, we grew 6 %. So we had a strong fourth quarter and we're really seeing it really across the board. One, we have the ability to continue to add some really nice talent. We have gone from being kind of one of many players in that space to really one of just a few. So we're getting the phone calls early in the wealth group where we used to be in mostly just a competitive situation with the team that we have in place we go toe to toe with the larger money managers very, very well.
So the sales portion has been really good. The new, the new recruitment of wealth managers and also training new customer base that's going well. The equity markets have obviously played into our favor to help that line of business as well. So that has helped GBT has a very strong wealth base. So that's really been additive.
Park Sterling was not as strong and well. But the opportunities obviously in Charlotte and Richmond and Raleigh especially with the commercial banks that we have in those markets present really the upside. So I think the other markets do as well. The Charlotte, Richmond and Raleigh, they're significant wealth potential in this market.
And that would lead me to just a follow up question. Do you have as you grow larger, is there a need to sort of proportionately grow the fee businesses and are there fee businesses that you're not in now that might be the targets of some of this reinvestment of tax riches.?
Nancy, we talk about that a lot and we've really like the four lines of business we're in. And really like them markets that we are in. So our focus is going to be taking advantage of the market position that we're in, in really good markets and executing on our four lines of business. I think the technology investments and the like that will make will be the transition of existing customers to more self-service type technology. It will be things that we can do just to make our overall process more efficient inside the bank. But, it will be primarily focused on the four lines of business that we're in now.
We are in some more regional businesses. We've been in the mobile home finance business for years, so that's an area where we will continue to look at expansion. We also have rolled out this vertical in general over the last 12 months, we really liked that a lot. That's something we think we can certainly build further around our footprint. But our primary focus is not to go to some line of business that we don't know well or haven't done for a long period of time. We just see too much opportunity in front of us with retail wealth mortgage and commercial and really each line of business to improve both technologically, improve in terms of our process and the market is just -- the market is really ripe for continued growth in those four lines.
And just quickly -- go ahead.
This is John. I think the overall theme is we just have a lot of optionality in our company whether its the line of business, capital concentration. So I think our view is we think about going forward as we want to maintain that optionality, so we can take advantage of what the market will give us.
And just quickly with Park Sterling you inherited or you acquired a sort of capital markets platform and I think last quarter you had seen some opportunities that that was bringing. Can you just kind of comment on that? You know sort of the scale of that platform and if that's something you're going to be investing in?
I mean, this is Robert. The capital markets, I think it speaks to really the whole commercial bank. It's not there are pieces and parse Treasury, there's capital markets. There's the commercial lending space.
Let me just speak to really commercial overall is five years ago of our size, it was very difficult to compete with some of the larger commercial opportunities in our footprint. Today we're getting those opportunities. And you have to bring all of the weapons to that to that situation. You have to bring a balance sheet that can support the credit facility. You have to bring the Treasury products that can support a sophisticated treasury management platform. You have to bring the capital markets that can help. Their CFOs manage their companies and their interest rate risk and us ours the way that that are healthy and strategically attractive.
So I think all those pieces fit together is what we were excited about with the Park Sterling merger. And we're in the infancy there but we're getting the answer there, the opportunities to go and attack that market spaces there. Now, we have the product set to do it. And I just see capital markets as one piece of that overall commercial strategy.
Okay. Thank you.
There are no additional questions at this time. So I will now turn the call back over to John Pollok.
Thanks for your time today. We will be participating in the KBW conference in Florida beginning on February, 8 and we look forward to reporting to you again soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.