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 2 for cautions regarding forward-looking statements and discussion regarding the use of non-GAAP measures.
I would now like to introduce Robert Hill, our Chief Executive Officer who will begin the call.
Good morning. I'll begin the call by providing an overview of the 2018 performance and then offer insight on our near-term focus. John Pollok will review the year in more detail, and we will conclude the call with questions from research analyst.
2018 was a year of significant transition for South State. While digesting over 60% growth from two recent mergers, repositioning the loan portfolio, making technology investments and absorbing the revenue reduction of Durban the company still increased adjusted EPS by a 13%. 2018 was a year for two of our three primary objectives were accomplished. Significant steps were made in building upon the soundness of the bank and profitability metrics continue to be very good.
Our growth however was slower than normal during 2018. In December we hosted an Investor Day in New York featuring our executive team and three members of our Board of Directors. The purpose of this day was to provide more clarity around our key strategic objectives. The company enters 2019 with a focus on growing what has been built over the last couple of decades. Our goal is to have success in all three of the primary objectives in 2019 by building a franchise that is deep and dense in great markets.
For the year, net income was $178.9 million or $4.86 per diluted share representing a 1.23% return on average assets and 14.93% return on tangible equity. Adjusted net income totaled $202.1 million or $5.50 per diluted share and represents a 1.39% return on assets and 16.76% return on tangible equity.
We made the strategic decision to reduce certain segments of the acquired loan portfolio around 3% and still experienced 4% net loan growth for the year. I'm particularly pleased with the 23% growth in commercial production excluding CRE.
Over the past several months, we have rolled out a new commercial treasury platform, conversion of existing customers is going smoothly and the expanded capabilities provided by the new system have already led to success and winning new customers to the bank.
Asset quality remains at record levels with total net loan losses of $125,000 for the year. Non-performing assets represented 0.28% of total assets, up only 3 basis points from a year ago. Our portfolio is diverse in both type and geography and is granular with an average loan size of less than $130,000.
Loans of South State are largely funded by core deposits. Creation of a strong reliable funding base has been a priority of the bank for decades. Our cost of funds was up for the year, funding strength remains a key competitive advantage at South State.
As a result of how profitability and lower balance sheet growth, capital levels continue to build. Total risk based capital climbed to 13.5% at year-end, while we were disappointing with the downward move in our stock price, it did provide an opportunity to put some of the access capital to work. The company repurchased 1 million shares of common stock during 2018 and the Board of Directors has just approved a new 1 million share buyback plan for 2019. The Board of Directors has also declared a quarterly cash dividend of $0.38 per share representing a $0.02 increase to shareholders of record as February 15, 2019.
I will now turn the call over to John Pollok for more detail on the financial performance for the quarter.
Thank you, Robert.
It was nice to see our revenues increase by $1.7 million this quarter compared to the third quarter. As lower net interest income was more than offset by higher non-interest revenues. Looking back over 2018, total revenue was at its highest point in the first quarter, which was our first full quarter after the Park Sterling merger.
Total revenues were lower in the second quarter of the year, mostly tied to lower mortgage banking income and lower acquired loan recoveries. And then of course the third quarter included the Darwin impact on our bank card revenue.
Beginning with Slide 5, you can see that our net interest margin decreased to 3.98% a decline of 6 basis points linked quarter with the total yield on interest earning assets flat, while the cost of interest bearing liabilities increased by 10 basis points. The yield on our interest earning assets remaining flat is primarily the result of $2.7 million less purchase accounting loan accretion, outweighing the nice improvement in our legacy portfolio yields.
The acquired loan yield was down 13 basis points and the legacy loan yield was up 9. The cost of interest bearing liabilities increase is due to the increased funding pressure from the recent Fed rate hikes, primarily impacting rates on transaction in money market accounts and certificates of deposit. Our total cost of funds increased 7 basis points for the quarter to 57 basis points.
Slide 6 shows you some of the repricing characteristics of our loan portfolio. Our contractual loan yields benefited from meaningful increases in LIBOR and prime rates during the quarter.
Slide 7 shows the higher yielding acquired book, represent a 25% of interest earning assets in the fourth quarter, compared to 27% in the third.
Slide 8 shows that loan accretion declined from 8.7% of total interest income in the third quarter to 6.7% in the fourth quarter. We can also see the impact that loan accretion has on our loan yields at the bottom of the slide. We had our first recast this quarter on the Park Sterling loan portfolio, which resulted in a $10.2 million credit release. This quarter had only one month impact of this release, which resulted in approximately $500,000 on additional loan accretion.
Turning to non-interest income on Slide 10, we had improvements in all categories with the exception of mortgage banking. Mortgage banking was lower on about $150,000 less secondary market income, about $175,000 less mortgage servicing rights related income.
With secondary market activity down from prior periods, we have made some recent staff reductions in the mortgage area in an effort to improve our overall profitability in future periods. These on deposit accounts were up $900,000 on about $600,000 seasonally higher debit card income, and about $300,000 higher on service charges and these.
Wealth had another strong quarter with $7.6 million in income up from $7.5 million in the late quarter. Acquired loan recoveries were up $1.5 million and other income was up $1.4 million primarily from a successfully acquired credit impaired note sale.
Our efficiency ratio as shown on Slide 11 showed a nice improvement down to 59.4% from 62.3% in the third quarter mostly due to the absence of merger costs this quarter. Our adjusted efficiency ratio share showed only a slight improvement in late quarter as lower net interest income was more than offset by higher non-interest income and the adjusted non-interest expense was only $900,000 higher.
Slide 12 shows linked quarter variances and non-interest expense. The main variances this quarter were $1.2 million in lower FDIC assessment expense and a $1.2 million in higher professional fees and marketing expense and a $900,000 increase in OREO and loan related expense.
We continue to strive to limit non-interest expense growth while still investing in new strategic initiatives as can be seen in the increase in professional fees this quarter. To this end we are beginning the process of closing 13 branch locations most of which are expected to take place in the latter half of the second quarter. These reductions are anticipated to have cost saves about $1.5 million for 2019 and about $2.5 million on an annual basis.
Slide 13 shows GAAP EPS of $4.86 for 2018 compared to $2.93 for 2017, a 66% improvement. Adjusted earnings per share for the quarter totaled $35 bringing 2018 adjusted EPS to $5.50. This represents a 13% increase over 2017 a 66% improvement.
Adjusted earnings per share for the quarter totaled $1.35 bringing 2018 adjusted EPS to $5.50. This represents a 13% increase over 2017. Tangible book value as shown on slide number 14 shows a $0.93 increase in tangible book value to $36.30.
During the quarter we repurchased 900,000 shares of common stock at $66.76 per share, lowering capital by $60.1 million. This decline in capital was mostly offset by increases in net income, less dividends, and improvements in AOCI.
AOCI improved $19.6 million as the declining treasury yields improve the unrealized losses on the AFS Securities. The aforementioned 900,000 shares of common stock repurchase this quarter coupled with the 100,000 shares repurchased in the third quarter, completed the existing 1 million share authorization we had in place.
At year-end, our common shares outstanding totaled 35,829,549 shares and we have received approval for a new 1 million share authorization to aid in our capital planning efforts going forward.
I will now turn the call over to Robert for some summary comments.
Thanks John.
Strong asset quality, high capital levels, attractive core funding, a great team and the ability to do business in growing markets cause us to be excited about the future. We appreciate your interest in South State.
This concludes our prepared remarks and I would like to ask the operator to open the call for questions.
[Operator Instructions] And our first question comes from Jennifer Demba of SunTrust. Please go ahead.
Two questions for John Pollok. First, what prompted you to initiate this branch closing effort? And two, can you talk about your net interest margin outlook for the year, assuming we get no rate hikes?
I'll start off from the branch closings. I think as we've entered this year and we talked about at Investor Day is, we've spent a lot of time over the last few years integrating companies. And it was really pleased to see in the fourth quarter our GAAP earnings and our adjusted earnings are the same. And I think that really shows it gives us time to kind of focus more internally.
So, I think our goal is to really limit expense growth in the company while still investing in the company. And so if you kind of look at the branch piece of these 13 locations, that brings us down to about 155 branches. We started the year at a 182.
So, I think branch rationalization is just kind of part of something we got to stay focused on. When we weren't in as much M&A mode, we did this before. So, we're continuing to try to rationalize that branch structure. Those 13 offices that we're going to reduce, and that's going to reduce FTEs by another 50, which is really nice to see from the expense side.
So Jennifer, I think just kind of staying very focused there on the branches. If you switch over and you look at the digital side of our company is digital account openings to include loans are about 10% of the volume now, so you’re seeing customer habits are really switched there. And now on the deposit side about 20% of our deposits are really kind of through the digital channel. So you’re just seeing more and more adoption there, so that’s kind of some of the reasons why.
You know the margin outlook is just kind of tricky right. You know the yield curve is a little inverted in the middle. We still have a fair amount of acquired accretion coming through, obviously the Park Sterling release is going to help drive that. So Jennifer I hope that you know we can begin to see some stability in the margin as we enter the second half of the year.
Our next question comes from Tyler Stafford of Stephens Inc. Please go ahead.
Maybe John just to start on the expense topic or Jennifer started. So at the Investor Day you laid out the 0% to 3% expense growth target for the year. I'm just wondering if this branch closures will help you get towards the bottom end of that range if they’re incremental to that or if you could actually see expenses decline year-over-year given the branch closures?
It's a little early in the year to really tilt tower, not sure.
Okay. And then I appreciate the new disclosures around the accretion and the recast, but just from a simple high level perspective, would you expect to grow net interest income year-over-year in 2019?
I would think as we enter the latter half of the year, depending on the growth, I would think we should be able to do that.
And then just lastly for me, was there any seasonality on the deposit side towards the end of the year that you'd expect to flow back on the balance sheet to start 2019?
No.
Okay. So those deposit balance declines weren’t seasonal?
Not at all. It doesn't appear - we’ve just got, we've got bigger deposits today. Now we've got some customers that have larger, larger deposits. We're still doing a really good job of opening checking accounts. I mean that's kind of our first full year with Parks, so again, seasonality is still a little harder to judge. But I think now as we kind of remix the balance sheet, kind of getting into the seasonality issue maybe it'll make more sense this year.
Our next question comes from Stephen Scouten of Sandler O'Neill. Please go ahead.
So I'm curious as to what you guys are seeing in your markets with your customers and obviously it look like you still had pretty strong organic production and growth ex the kind of acquired runoff. So, and obviously the markets were telling us something in 4Q, I don't think we're seeing in most bank earnings but I'm just kind of curious, what you're seeing and hearing from your borrowers and customers and how you think the overall economy is doing in your geography?
So Stephen, this is Robert. I'll start. Overall, our local economy is still pretty healthy and pretty, pretty steady. But in Q4, I spent a lot of time with a lot of businesses in our markets and got a really, a really, I think pretty good insight and how they were thinking and feeling. It was very interesting. It was diverse. It was - if it was a company that had an international component you could see a lot of uncertainty and kind of pulling the reins back in to try to figure out where they were headed because the purely domestic company. You just didn't see that same level of uncertainty. So kind of some mixed signals depending on the type of company that is operating in our markets. The tariff impact was not a huge deal to most companies, but you clearly saw it across the board in construction cost.
So you saw the impact there and across the board. What we do here is wage pressure, both skilled, entry level type jobs. We heard that pretty consistently. But so I'd say a little bit more of a headwind some spottiness of uncertainty mixed signals that will create probably overall a little bit of slowdown.
Now with that said in the second half of 2018 we saw our pipeline slowed down a little bit, not a lot, but December was a really good month for us. So we ended the year strong and our pipeline as we began moved into this year the pipeline popped up pretty good.
Now we do have about seasonality on deposits we typically do have a little bit of seasonality on the loan side. So the first quarter is typically not our strongest, but overall it looks like loan demand continues to be pretty, pretty steady.
Now I didn't touch on the residential side, but residential is pretty much off across the board. And so we're not off as much as many of our competitors are all 15% to 20%. I think we're down low single digits. So we're still having fairly good production there although it’s softer than we’re still having fairly good production there. All the softness and enhancement historically but we are seeing residential softening in many of our markets.
That's really helpful color. Thank you, Robert. Maybe thinking about the core NIM just for a second, I mean ex the accretion, I know that accretion is going to be somewhat lumpy and hard to predict but it looks like the core NIM was better this quarter by maybe 3 basis points or so, so a nice move there. Is that something on a core basis ex accretion we could continue to see some help or how can we kind of think about that maybe in 1Q 2019 with the benefit of December hike and then throughout the rest of the year if we don't get any additional hikes?
This is John. I'll start. I think the thing that we're excited about is we're really starting to see the new loan yields creep up. We're now getting loan yields almost up to the 470 range. And so, we are beginning to see that. I think on the funding side, it's still challenging. And so, I think that's still a little bit of an unknown there.
But over time, that's all going to settle out. I think as we've said we're going to continue to protect our deposit base. And so, over time that will begin to settle in. But we're we are we are excited to finally see some of the loan yields again to really move up.
And then maybe just lastly for me on the share repurchase from here. It looks like the stock is still trading a little bit below where you guys executed the repurchase in 4Q so would that be fair to assume if the shares stay around this level you all would remain aggressive with the incremental buyback authorization or is there capital threshold you want to stay above or how can we think about the pace of that buyback from here?
Steven, I'll start. I think we're going to continue to be active with where we are today. I think one of the things that we tried and impress on everybody in our company is the optionality that we have and clearly we’re generating a lot of capital, some value accretion is not real earnings, but it is real earnings, it is real capital. In fact when you look at accretion we have to work pretty hard on those loans to rehabilitate a lot of them.
So we continue to see that on the capital side our growth rate as we mentioned it was about 4% for the fourth quarter. So we got, we’ve got the optionality to do that. We’re not overly concentrated in CRE, the risk based capital. I think kind of at the end of the day we’re going to continue at these levels to kind of be active on the share repurchase.
Our next question comes from Catherine Mealor of KBW. Please go ahead.
I have a couple of small modeling questions. The first is back on credible yield. To the acquired noncredit paired accretion was about $3 million lower this quarter at $3.8 million. John how do you, how we think about what drove that decline and is this a better kind of base level to think about for next year for the acquired non-credit impaired book. Is that just kind of that accelerated recovery that I know are hard to predict?
Little hard to predict. A couple of things they’re on the on the quarter change. One in the third quarter we had a fairly large loan payout that generated a little bit of that and then we’re just seeing the remixing down. So if you kind of look at our acquired loan run off, it slowed and course when that slows that’s just less of that acquired non-credit impaired accretion coming in.
And so we did see some slowness there but you know at the end of the day Catherine it’s going to continue to be a little bit lumpy. It will trend down over time, but clearly the slowing of the run-off and not having some kind of onetime event, that we didn't have that this quarter.
And then the Park Sterling recast, can you clarify - because I think you said that about there was about $500,000 in additional accretion from that this quarter, but there was only a one month. And so we should get for a full quarter of - that we should get another $1 million bump from that next quarter? I'm thinking about that right?
Yes, that sounds reasonable.
And then the acquired credit - impaired or non-credit impaired buckets?
Excuse me repeat the question one more time?
Is that in the acquired credit impaired bucket or the non-credit impaired bucket?
That's in the acquired credit impaired bucket.
And then after that so you - is at the end of the quarter you added a $150 million of new borrowing. What was the average rate of those borrowings?
About $264 million.
And then last one, maybe a modeling question was - you mentioned that there were higher other fees. How much of that was in full reverses capital market?
How much of that - I didn't hear the first part of your question?
How much of - so you mentioned in the press release that others fees - the increase in other fees were some higher BOLI and capital markets fees? And is there any way to specify how much with the BOLI versus capital market?
No, I don't think that's right. You know our other fees were up because we sold a note out of the acquired loan book and that was really the driver. And that's what drove it up. Unfortunately, with the way the accounting works is some would say that should have come back through the NIM. But as we looked at selling and acquired loan note that was really the driver in that other category.
Our next question comes from Nancy Bush of NAB Research. Please go ahead.
Kind of forward-looking question for you. It seems like in the last few months, I have seen more mention of FinTech in both its positive and negative aspects for the banking industry than I've seen in quite a long time. And we seem to be getting to some sort of tipping point here about the subject of FinTech. And you've mentioned your digital account openings et cetera. How much time do you have to devote to FinTech, thinking about FinTech as a competitor or how it can be a positive for you? And is, is there some need now for heightened investment for technology?
So, Nancy this is Robert. I'll start. We’ve laid out our digital roadmap probably 24 months to 36 months ago. That included what we wanted to do with online account opening, online lending, what we wanted to do in the treasury management space. We're probably half way through that. We've got other things that we did in terms of outsourcing some things that really aren't core of our business or core of our customers and getting out of some things that we have traditionally been in.
So, I’d say, we’re really kind of got more laser focused just on our digital roadmap. It was laid out years ago, we kind of knew what the cost was going to implement and execute that, don't really see it spiking from here. And as you heard from John on the expense side, our goal is to find ways to operate more efficiently internally to help pay for the investments we have to make.
But just like Treasury - we've made huge investments in Treasury in both talent and technology and now our Treasury deposits are almost 25% of our total deposits.
And one of the unique things about our company is 81% of our accounts - of our dollars of deposits or transaction accounts, so a lot of volume. So I think we just rolled out the online lending platform and online account and billing platform in the last 18 months. So 10% there is a start, but there's also a lot more progress that we can make there.
And the last point I'd make is really just our interaction digitally with our customers continues to grow meaningfully both through marketing digital channels, which are fairly very price-attractive way to market our company and to connect. But now we have a digital relationship with about two-thirds of our customers. So it is ongoing and growing and but I think we can absorb the cost increases with making the business more efficient.
Right. So you don't see here some kind of new point of disruption going on? You see yourself as being able to stick with the plan that you've had for a while and there are not new applications and things popping up that you're going to suddenly find a need to invest in?
I think the technology costs seems manageable. I think it's about penetration and how do you market it, how do you communicate with your customer, how do you interact with those customers a large number of our new accounts the largest component of our customer base is our millennials.
So I think there are lot of things that we are doing on that front that aren’t that expensive. I think it’s more of a mindset shift in getting some of these foundational pieces in place that we needed and time to focus on it.
[Operator Instructions] And our next question comes from Christopher Marinac of FIG Partners. Please go ahead.
I wanted to ask about new hires this year and will they be centered primarily in Charlotte and Richmond or perhaps just talk about the new hires and the footprint?
Yes, I'll start and then John can maybe talk about the kind of maybe and the net FTE changes overall for the company for the year. But that's kind of the net number. The specifics is we've invested a lot in Richmond, have done a great job recruiting talent there on the commercial side, as well as the Charlotte market. Those teams have - but we've added talent in both those places.
We've done it in other parts of the footprint, but I would say Raleigh, Richmond and Charlotte have been the primary areas of focus for the company. Same thing - that's the commercial bank. Same thing really in wealth well as we didn't have much presence in those markets in the banks that we acquired didn't have a strong wealth presence so we're certainly investing in the wealth businesses and having really good success there as well.
So really across the board those would be the three primary markets. The other is we've been able to hire back to digital online the way we think about our company, the way we deliver. We've been able to add some great talent in a number of technical areas inside the company be it risk management, be it mortgage lending just to help us change how we think about how we deliver and operate our company.
So I’d say Richmond, Raleigh, Charlotte, and then some more technical expertise have been the kind of the two primary areas.
So following what Robert said, we’re down 117 FTEs for the year. We were 38 linked quarter and then we're going to be down another 50 just from the branch closing. So I think you know it’s just continued focus on trying to be more efficient and then trying to reinvest in on the sales side, but clearly there will continue to be a focus.
And, John just the last question on the reclass of Park Sterling, is that sort of on a three year timetable to kind of collect the most of that, is that a realistic timeframe?
I think it is. I think one of the things and I mentioned it earlier about accretion is not free, some of these loans we have rehabilitated and some we have moved out of the bank. But clearly as you do that, sometimes you get an extension on it, right, Chris. So the accretion could go out over a longer period of time, but I think a three year time horizon right now makes a lot of sense, as the balances get a lot smaller. That will continue to really drive out the weighted average life.
Our next question comes from Blair Brantley of Brean Capital. Please go ahead.
I just had a follow-up on the CRE commentary. Just given some of the flexibility you have, just wanted a better view of how you're looking at those different segments and by market too, as to what the opportunities are and just kind of pricing and structure and things like that.
Blair, I'll start and John can chime in. But if you look at our CRE, if you look at our overall commercial production last year, it was up pretty nicely, but our CRE production was really flat. A lot of churn, we’ve seen a lot of churn in that portfolio. There’s been a lot of, somewhat irrational competition. We had a transaction at the day that was priced and I think it was the Charlotte market and it was 15 years fixed rate and 15 years interest only.
So, we found out, we pick our spots. Most of the relationships that we have on the CRE side are very robust and long-term. It's not just a transaction here or there. But overall, I think that that is not a high growth area for the company. I think it will be steady consistent production, but we're not, we're at a little over 200% CRE to risk-based capital.
We have a lot of power firepower over a billion dollars in firepower but you're not going to see us move that number up to 300%. That won’t happen either, but we're being selectively opportunistic. There's still pretty good demand in most of our markets for CRE, so our pipeline remains healthy, so it's not negative but it's not huge growth either.
And Blair, what I would add is, you know the run-off slow and right. So, I think that's what we're beginning to see, so that should just kind of help with those balances some, we already have less runoff as we get through the year.
And then in terms of the average earning asset balances, would you expect that growth to kind of mirror loan growth or what’s, any update there.
No. I think that's a fair statement. Yes, it would mirror the loan growth.
There are no further questions, so I'll now turn the call back over to John Pollock.
Yes. One thing I wanted to go back to on Catherine's question. So Catherine on the other non-interest income that boldly capital markets increase. So I was thinking you were talking linked quarter, that's year-over-year. And the main reason that is up year-over-year is if you remember in the fourth quarter of last year, we only had one month of Park Sterling, and of course this year we've got a full - we've got them in for a full quarter.
Thanks everyone for your time today. We will be participating in the KBW Financial Services Conference in Florida beginning on February the 13th. 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.