SouthState Corp
NYSE:SSB
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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 and thank you for joining. The third quarter results reflects strong asset quality, modest net loan growth and continued tangible book value growth, also levels were impacted by lower fee income, sound expense control and net interest margin contraction. Net income for the third quarter was 47.1 million or $1.28 per share. This represents a return on average assets of 1.28% and a return on average tangible equity of 15.29%. Adjusted for merger related expenses earnings were 49.1 million or $1.33 per share. This represents a return on average assets of 1.33% and a return on average tangible equity of 15.9%.
This has been the year of transition for South State and I'm pleased with the progress made in the third quarter. The merger with Park Sterling has gone well and is largely behind us. The loan and balance sheet repositioning we have undergone is mostly complete. Our North Carolina markets led the bank this quarter with double digit loan growth, and we have added 200 customers on to our new treasury platform.
While net loan growth is muted underlying loan production remains strong and loan pipelines are solid. We've experienced loan growth in both consumer and commercial owner-occupied loans. Our CRE loans were flat for the quarter and also year-to-date. We have hired a number of experienced producers this year that are contributing to production. We see the opportunity to continue making additions to the team going into 2019. The ability to hire top talent reflects our growing brand recognition and the proposition to work in a more entrepreneurial environment. We do face headwinds in the near term with lower fee income due to the impact of the Durbin amendment, higher levels of interest expense, and slower net loan growth. While overall revenue and balance sheet growth are below historical performance levels we have taken steps in 2018 to position South State for the long-term with a strong and liquid balance sheet and great optionality as we move forward.
Hurricane Florence has a significant impact on parts of our North and South Carolina communities. I'm proud of the response of our team to help customers and each other for many of the effects of the storm will require considerable resources and time to rebuild. We have made additional contributions to the cell state emergency relief fund and will be partnering with organizations in the communities most impacted. Our board has declared a quarterly cash dividend of $0.36 per share $0.01 higher than last quarter to shareholders of record as of November 9, 2018.
I'll now turn the call over to John Pollok for more detail on the financial performance for the quarter.
Thank you, Robert. Beginning with Slide number 4, we will give you an update on the Park Sterling merger. The integration complete we have hired additional talent and achieved our merger goals. Balance sheet repositioning, which is standard for us in post merger periods is mostly behind us. While this remixing has a short-term impact on earnings it has proven over the years to be beneficial in the long run. The end result is a core funded balance sheet with low concentration levels. We have also had a nice build in capital through earnings helping lower CRE to risk-based capital levels down from 227% at year-end to 212% at quarter end. CLD or risk-based capital from 91% to 76% for these same periods.
On Slide number 5, you can see that our net interest margin decreased 10 basis points linked quarter and our net interest income declined $1.3 million. Total interest income increased by $1.8 million, but interest expense increased by $3.1 million. Our total loan yield was flat linked quarter, although the legacy and acquired loan yields increased 6 and 8 basis points respectively.
This is a result of the change in mix shown on Slide number 6. The higher-yielding acquired book represented 30% of interest-earning assets in the second quarter compared to 27% in the third. Slide number 7, shows you the impact that loan accretion has on our loan yields, excluding loan accretion from both quarters, our total loan yield increased 5 basis points as competition for quality loan growth had an limiting impact on loan yield expansion in our markets. Of course we had significant competition for deposits as well. Our cost of funds increased linked quarter by 10 basis points to 50 basis points. As money market and certificate of deposit rates have expanded in our markets.
Our low cost of funds is benefited in this rising rate environment by a very limited use of wholesale funding, strong non-interest-bearing deposits the average of which increased by $35 million this quarter. Our period ending deposits declined this quarter by $24 million, 21 million of which was a reduction of brokered deposits. While we expect deposit costs across our footprint to continue to be under pressure during the Fed tightening cycle we like the optionality that is available to us due to our strong core funded balance sheet.
Slide number eight 8, shows a $6.1 million reduction in non-interest income linked quarter 4.8 million or $0.10 in EPS due to the Durbin amendment. The remainder of this reduction is $1 million in lower acquired loan recoveries and $500,000 in lower mortgage banking income. Like much of the industry we are seeing less secondary market activity with higher mortgage rates and are also continue to portfolio some adjustable-rate mortgages. Wealth management had another good quarter with $7.5 million in revenues.
Slide number 9 shows the increase in our adjusted efficiency ratio from 57.3% to 59.5%, mostly due to lower bankcard income due to Durbin. Noninterest expense totaled $100 million this quarter, down $10 million due mostly to lower merger and consolidation costs. Excluding these costs adjusted noninterest expenses totaled $95.8 million, down $600,000 this quarter. The main variances this quarter were higher salaries and employee benefits expense more than offset by lower information services expense FDIC and OREO expense.
Slide number 10 shows our adjusted earnings per share of $1.33 for this quarter, bringing the year-to-date total to $4.15. This year-to-date adjusted EPS represents a 17% increase from the first nine months of 2017. Slide number 11 shows a $0.73 increase in tangible book value to $35.37.
I will now turn the call over to Robert for some summary comments.
Thank you, John. This is the first time in two years that we do not have an acquisition or system conversion pending. We're using this opportunity to focus more intently on investments in systems and people to position the company for additional growth. I'm excited about the next few years and look forward to sharing our vision in more detail at our upcoming investor day in New York.
This concludes our prepared remarks, so I would like to ask the operator to open the call for questions.
[Operator Instructions] Our first question comes from Catherine Mealor of KBW. Please go ahead.
I'm seeing about revenue headwinds that we have had in the past couple of quarters with the margin and the repositioning of the balance sheet and then the fees. And in light of that is there anything on the expense side that you think where you still got leverage on the expense side where we can try to offset those revenue headwinds? And then at the end of your remarks Robert you mentioned that there are investments in systems and people that you are making right now because you are not in the middle of an acquisition then how would that offset some potential cost savings you could see on the expense side?
Catherine this is Robert, I'll start off. I think if you look at our overhead kind of ex accretible yield our efficiency levels are not where they could be. So I think there's a lot to do on the expense side that we look at every year there are a lot of various projects in place just to look at our processes the technology behind them and how do we improve that. And I think that's where I think that’s overarching where we are you will see a lot of those things begin to be implemented in 2019. So I think if you look at the expense and the revenue side overall, the number of revenue headwinds we have and we have been talking about now for a while have been meaningful. We have had the remixing on the balance sheet. We have had the Durbin amendment. We have had higher cost on our funds.
And all those things have given us some short-term revenue headwinds but they are starting to subside we're not they're not totally behind us but we certainlysay where at least the balance for revenue growth as we move into '19 and '20 begins to kind of turn the other way as we move past accretable yield, we do believe that at some point in time not the near term, but at some point in time the cost on deposits will begin to stabilize a little bit as the Fed stabilizes, so I do think there are expense opportunities, I think the efficiency ratio shows you despite the best number to look at ex-accretable yield and the opportunity there. But I really believe kind of what is going to end up building value for our shareholders is really the revenue growth and this year we felt like the priority was getting our balance sheet well positioned.
We've seen a lot of balance sheet that we felt were very full, and we wanted to make sure that our core funding was protected that we got this loan remix behind us that our credit continued to be diverse and our capital level was strong. And so there some years that we put expenses or revenues ahead I think this year was a year to make sure our balance sheet was in pretty good shape but with that said, I would say as we move into '19 that that balance sheet remix comes to an end the expense and revenue opportunities are better than they have been in the past, and there is more of an ability and time for management to focus on those and that's very much where we are today.
Okay, that's super helpful, thank you Robert and then one other thing on just the acquired run off. It seems like at your point and an inflection to where that's mostly complete what should we think about a normal pace of acquired run off to be moving forward?
This is John, I think it'll be easier to tell at after we get past the next quarter that one more quarter to complete the remix but I think ultimately it's going to get back to net loan growth. So I think if you look at our track record in the past what we've always done as we've retrenched gotten the balance sheet where we've wanted to and then kind of I said right now we got to kind of get back to a mid-single digit net loan growth pace, get to that hurdle and then we've kind of gotten to mid-single digit, so I think ultimately it's going to get down to that net loan growth.
Our production levels are very strong, very, very strong on the production side. So it's not a production issue, but I think that we really believe as we've done in the past is retrenched to the balance sheet get the assets that you want get rid of the ones that you don't want. I think as I said in the call last year we grew 60% in 2017, so get to this last part of the retrenching and I think it's really all going to come out in the net loan growth number.
Our next question comes from Stephen Scouten of Sandler O'Neill. Please go ahead.
I was curious and maybe following up on those last comments you just made. If you could put any sort of color or numerical representation on the loan production, what you're seeing origination wise quarter-over-quarter or year-over-year to kind of focus that a little bit.
So if you look overall Q3 was our best loan production quarter this year. We get right at $900 million in loan production in Q3. That's all what we do on balance sheet that's obviously kind of secondary market type of mortgage lending. The 900 million in Q3, it was approximately 800 million in Q1 and Q2. So you had 7% loan growth in Q2 3% in Q3 but more production. This speaks to still some of the churn that I think we're in the later stages of for sure but that we have experienced this year. I think the other insightful thing to share is kind of where we are getting it, so I mentioned in my remarks North Carolina was up 10% in Q3. The year-over-year North Carolina was up 6%, South Carolina was up 9%. So Virginia had more of the builder finance book and that's been shrinking out of that so that's been a headwind in Virginia and Georgia just been a little slower grower.
So I think if you look at the overall number of 3% obviously not where we have been historically or where we wanted to be, but if you begin to look in the production and then where we are getting the growth we feel pretty good about, same thing with components I would say, the last comment would be consumer real estate nice growth commercial owner occupied 8%. The area that's really muted our loan growth this year is a third of our portfolio approximately is CRE non-owner occupied and that’s been flat. Again we did that. There is obviously been some churn but there is also -- was a remixing strategy there as well. So I think if you look, overall the production or by market or by segment overall, we feel pretty good about the loan volume and quality.
And I know if you may have said, you kind of coded a number out there as we think about 2019 but do you think net loan growth can kind of return to that high single digit kind of pace as we get past this balance sheet remixing?
So I think if you look at that volume level if -- without the remixing and some of the CRE remixing I think we would have been on that pace this year but I think that's what has muted it. So I think our production will continue to be strong because our pipeline continues to be strong our markets continue to be very robust. So there are a lot of new opportunities. So we feel good about that part. The only unknown that I would say Stephen is how much more of the CRE remixing that we see seems to be logical that it will begin to slowdown. But I want to see it first.
That makes sense. And just kind of thinking about the deposit side a little bit and how that impacts the NIM, I mean you talked I think about maybe John said pricing pressure will slowdown at some point but obviously not here in the near term. So have you been surprised by the level of increase on funding cost given the strength of your deposit base? And if so what do you think is causing that because just given how core funded you all are and the liquidity from the loan to deposit ratio perspective I was expecting a little bit less than what we have seen over the last two quarters? And maybe I should -- maybe it's just me or I'm wondering if you were thinking the same kind of thing based on what you are seeing.
Steven this is John. I would make a few comments. I think first we made this comment last quarter we remix that about $500 million of what I would call wholesale funding in the company. And so our view was let's see if we can core fund the bank, let's try to do without the advances presently, let's try to get rid of the brokerage CDs that’s kind of been a piece of the strategy. And then I think you began to see the betas change. There is I would say a lot of balance sheets that are full with FHLB advances and brokered deposits. And so competition wise you begin to see rates move. We believe as we always have is the most precious resource we have is a core funding of our company and so we didn't want to get too far behind. And so we feel that it will begin to settle out but clearly the last couple of quarters it's been very, very competitive.
And so if I am hearing you are correctly that you would think maybe there could come a point here down the line where you could -- your deposit base would differentiate itself from peers a little more so just given where you see some of it still being extended like you said on the wholesale borrowings and brokered funds and other things like that is that fair to say?
They could but I'm pretty happy with 50 basis points and cost of fund regardless of what the beta is, I mean that's a when you put it out there and look at that it's a pretty strong cost of funds.
Our next question comes from Jennifer Demba of SunTrust. Please go ahead.
Thank you, I have two questions. First of all. Can you quantify how much you've exit out of the Park Sterling portfolio since the transaction closed and then my second question is on hiring and what your plans are and what you did in the third quarter if any and what your plans are and then over the next three quarters?
Jennifer this is John I'll take the first part of that. I'd say on the Park Sterling I'm not going to give you an exact number, but I feel like this quarter going kind of be getting close to being complete on that on the remixing that doesn't mean we will have a credit or to as we get further out but we will come out of that book. But kind of going back to what Robert said we had 10% loan growth in North Carolina, so we feel like we're very close to having most of that piece of it done.
Jennifer on the people side it's been a good year, we've added about 22 FTEs this year the pipeline continues to be good and the productivity of those new people it takes a little time for them to ramp up, but overall the production has been nice.
Would you envision hiring a similar number in 2019?
We tend to focus on the quality or the banker who they are at the time in the market so we're we've been in constant recruiting mode for 25 years so it's just a kind of the part of our DNA it's not a number that we kind of set out that we got to go higher X number it's really more just an ongoing focus in all of our markets and we see what opportunities are there and we tend to take advantage of them. We've always seen that as the best way to create shareholder value and we're having good looks at great people. So we think that will continue.
Our next question comes from Tyler Stafford of Stephens. Please go ahead.
I just want to start just on the loan growth is there a good proxy for us to think about in terms of how much of the acquired loan runoff gets refinanced into the non-acquired portfolio?
Steve, on last quarter it was a little over 100 million.
Okay, it's Tyler actually. On the loan portfolio can you just remind us how much is floating and adjustable versus fixed and just what the repricing base rates are between LIBOR and front?
Sure. This is John. So when you look at our loan portfolio about 55% of it's fixed that’s about 6 billion 45% is variable so it's right at 5 billion. When you look at that variable piece 45% of that are really hybrid arms. When you break down the indexes so 2.5 billion float with an index and I will talk about that in a second. Two billion in our hybrid arms, and then we have a little bit in the what I would call the other adjustable categories. When you look at the variable-rate pieces of that 25% prime base 65% of it is LIBOR base and the rest of its kind of tied to a treasury. If you step back and look at our overall loan portfolio because obviously we have some fixed rate loans that are going to reprice in a fairly short period of time, I would think of it in third so about a third reprices inside a year a third reprices between one and five years and then a third over that.
So with the prior deposit cost outlook that you made and then obviously that benefit that you should get in the fourth quarter from the loan repricing side would you expect core margin flattish from here just given stronger or 4Q on the asset side?
Yes, I would think we are still going to be under some deposit pressure. I still think we've got, when you look out in the market I still think you are going to see deposit pressure be there. But I think one of the things when you think about our production we are getting more variable-rate production. So today when you look at it and look at our production is a little over 60% of that is variable-rate.
Okay, got it. And then just last one for me on the fees the deposit fee this quarter. It was unclear to me how much was related to Durbin versus the waived fees related to the hurricane? Should there be any of that hurricane fees that bounce back and if so how much?
There should be the Durbin piece of that was about $4.8 million, or about $0.10 and the hurricane piece of that on the fee side was a little over $100,000. So it's fairly minimal.
Our next question comes from Christopher Marinac of FIG Partners. Please go ahead.
John you mentioned wanting to get ahead of the higher rates with some of the movement in the third quarter. To what extent does that mean if customers who are just a little sensitive but not extremely sensitive and when do they get to visit those customers if rates continue to rise in 2019?
Chris, I think the way I would answer to that is our strategy has been as rates have moved up is to not get too far behind. So you have that piece but then you have kind of the remixing pieces. A lot of people talk about the loan remixing but clearly you have deposit remixing when you take a strategy that we do on the loan side. So as you throw that piece in there and then ultimately look at FHLB advances today I mean they are over 270. So I think our view was let's pass this increase on, try to get it back more to our core customers as we thought about rates. And then the last piece I would throw in there when we think of whether funding betas in general is how we do win on the noninterest DDA growth side, Robert mentioned in his comments that we had over 200 new customers go in the treasury system is we see that as the piece that can continue to kind of bring down our cost of funds, so were very, very focused on that piece to try to get more non-interest DDA and low cost funding in the bank.
Okay that's helpful, thanks for that and if you look at the progress both in similar than that's been how it's been compare the two it was the upside how different is the upside for the two markets?
Chris you broke up, you said Richmond and what other market?
Richmond and Charlotte.
I think this is Robert. I would just start off but I think those are tremendous markets I think as right now if you look at Charlotte, Richmond, Raleigh, Greensboro, Charleston for us it's about 60% of our overall production for the company's coming from those five markets so today is a meaningful contributor and today when I think we just said that kind of the tip of the iceberg in terms of the opportunities in Richmond and Charlotte. Charlotte obviously we just have much more market share it's a much more meaningful part of our company it's our biggest overall market in terms of our deposit base that we have anywhere. So we've got a meaningful brand presence a meaningful brand and we've been in that market for 10 years, so this is just we've got a lot of traction building in Charlotte.
In terms of talent, in terms of brand recognition, in terms of volume, so I think the long-term potential for Charlotte for us is significant. I think Richmond the bank that Park Sterling bought it was still newly integrated and then obviously integrating with us they had a more of a builder finance focused and we're converting that to really being focused on wealth mortgage retail and commercial, so that takes a little bit of time to turn that but we have a tremendous team out there and really, really strong leadership. So it feels good going into 2019 about the opportunities for loan growth in both of those markets. And if you think about this year obviously it's been good but not as good as it can be and Virginia is just been more of a tread water year to get through conversion and remix the loan book.
Our next question comes from Nancy Bush of NAB Research. Please go ahead.
A couple of questions about the deposit environment. I mean I've been around for a while, and I know you guys have as well. And just how does the competitive nature of this environment, compared to what you've seen in the past because I think we went into this year kind of thinking that it wasn't going to be as competitive as it has turned out to be. And the second part of that question is, I'm sure you saw the article in the Wall Street Journal yesterday about that loss of non-interest-bearing deposits throughout the industry, when that's happening to you how much were you able to recapture?
Nancy I'll start I think when you look at our company we're very strong in retail and so we have net checking account growth, so I think many banks are really struggle in that, so we feel really good on our net checking account growth. Our mobile adoption is really good. We continue to see that piece very well in our markets. I feel really, really good about that. Like you I'm surprised that how rates have moved this year, but I think we got to the inflection point where there were a lot of full balance sheets and so there's only so many brokerage CDs you can do, and there's only so much you can take out on FHLB advances so that has really kind of accelerated some of the pricing. And so I think our view back to that $500 million that we remixed in wholesale funding is I think our view was try to get ahead of it a little bit.
We do think it's going to begin to level out at some point. And then I think loan pricing will begin to catch up. On the loan side for us the one thing that we are not going to sacrifice is quality. I think you can look at our credit metrics and that's something that is kind of the foundation of our company. So I guess we get later in the next year that loan pricing will begin to catch up a little bit more but if you are going to get there on the funding side is don't be too far behind because you don’t have to take it up anyway. So we tried to be fairly aggressive to make sure we don't get too far behind but at the end of the day I go back to where we are and that 50 basis points cost to funds I feel really good where we are from a funding side.
This is Robert just to add a couple of points. I think as John mentioned, we have heavy in retail we've got about over 700,000 retail customers. So, a lot of granularity in that portfolio from the deposit side, but we just rolled out our online account opening product. And we had 1500 new checking accounts open up. So we feel really good. Just our core customer base continues to grow and typically -- we grow checking accounts, we tend to grow deposits, at a pretty nice rate as well. And then on the commercial side we mentioned the 200 new treasury relationships but if you look at our markets two things. Overall, we have 7% deposit market share but we only have 4% I'm taking all the counties we operate in combined. But we only have 4% commercial market share.
So if we just level out or normalize our commercial share with our total share, then that has a pretty meaningful impact for us. And then the others back to Chris's question on Richmond and Charlotte, there are more businesses and those in Richmond and Raleigh, Charlotte there are more business opportunities in those three markets that we have in our rest of our footprint combined. So I think the treasury and commercial opportunities on the funding side there fairly meaningful.
And if I could just do a Segway with that and to Park Sterling, I know Park Sterling is integrated and at some point you don't want to think about Park Sterling versus the rest of the company. But from a color standpoint, what has worked out better than expected about that deal? And maybe if you care to disclose worse than expected.
I think on the better than expected front how quickly we got traction in terms of just business development. We've had the churn in the lines of business that we elected to get out of or relationships that we chose to exit but outside of that our retention of customers has been really, really, good. I would say the other the upside surprise there has really been Richmond, while we're early there. We have -- our executive team has spent time recently on a call day in Richmond that feels great about that market great about that team and so like there's tremendous upside there.
And then the last piece is the treasury component, and the treasury component. That's about 10% annualized increase in our treasury of number of customers in Q3 and we really just we have not even fully integrated that treasury platform, so that will be done by Q1 of '19 that's kind of the last component to fully integrate. So I think those there are others but I would say those overall would be the things I would outline that would be the most meaningful I think capital markets has been a little slower to get traction than I would have thought I think there is tremendous upside in capital markets but I think there were some changes that we need to make in terms of just from our discipline of pricing credits and the flow of when we bring capital markets in to make sure we do that the right way. I think that's an area that has the potential that we have not fully tapped yet as well. The retail component, while we've had good retention they were not heavy much of a retail focused company and I think there's plenty of upside there, but we really hadn't seen a lot of new productivity out of those retail branches yet.
Our next question comes from Blair Brantley of Brean Capital. Please go ahead.
Going back to loan growth and kind of the flexibility you guys have on the CRE side based on kind of just the guidelines and ratios. How are you dealing that market given some of the elevated churn and competition we're seeing out there other peers and also non-bank lenders.
Blair, this is John, I would I think the main thing is we're not full so our good relationships if they've got an opportunity we have the ability to do it. So I think that would be that the overriding thing I would say in the CRE market. And it kind of goes back to really everything as one of the things we focus on a lot is the not to be to over concentrated in any line of business so really all the lines of business on the loan side, we have customers, we are paying for decades, so they’ve got an opportunity we're going to be there to be able to try to do that for them.
I would just add Blair that our focus on the CRE front has been a lot of high networked families in our CRE books who have CRE as a portion of their overall kind of investment strategy and that's has been a really good place overall, for us to be but some of those families have decided to take chips off the table over the last year and while we've had competition certainly for some non-bank lenders and larger CRE deals it's really, I'd say that's really kind of not been the main reason for our lack of CRE growth it's really been a. the remixing that we chose to do. And then b. we've just had some more of our various to long-term very wealthy CRE investors decide to take money off the CRE table.
And then going to the capital, I thought you'd bought back a little bit of stock this quarter any update on that view there cause with your building capital and…
Blair, this is Johm. We have typically most years going back and bought a little bit just can't really stop the share creep so that's why we've done it. We still have a plenty of authorized shares out there. We have always found the way to kind of deploy our capital but looking at where the markets are today, clearly looking at our share count as something that we will continue to discuss as we do capital planning. But I think our view is always been we found a way to deploy it but clearly where the market is today we clearly have the ability to do, and we have the authorized shares out there. So it is something that we continue to look at.
[Operator Instructions] There are no further questions. So I will now turn the call back over to John Pollok.
Thanks everyone for your time today. We will be participating in the Sandler O'Neill Financial Services Conference in Florida beginning on November 6, and hosting an Investor Day in New York on December 12. 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.