Q1 2021 South State Corp Earnings Call
And our markets are happening rapidly and the differentiation for what we bring to the market continues to grow.
2021 is the year that sets us up well to focus on the future for our team our customers and our shareholders.
Two challenges exist certainly they do but our team is focused and tackling these challenges very strategically and thoughtfully on.
I'll now turn the call over to John for more insight into the quarter.
Good morning, I Hope you and your families are doing well and staying healthy.
Each and every quarter over the past year, the economic backdrop changed considerably.
With record levels of fiscal and monetary stimulus and a successful vaccine program. It appears clear that the banking industry dodged, a bullet and will avoid a prolonged credit cycle.
The industry and South state and in particular are equipped with enormous amounts of liquidity capital and loan loss reserves.
Our balance sheet has never been stronger.
Given these positive developments and for consecutive quarters with net charge offs of either zero or one basis point, we released $58 million and loan loss reserves, leaving us with ample reserves remaining of one 8%.
The reserve release, coupled with another strong quarter and mortgage and correspondent banking and stable net interest income per.
Reduced earnings per share of $2 and <unk>.
Adjusting for merger expenses earnings per share came in at $2 17.
<unk> and our return on assets of one 6%.
And a return on tangible common equity of 22%.
With over 1 million deposit account holders and the additional government stimulus or core deposit surge by 30% and the quarter and our deposit costs fell to just 15 basis points.
The result of the deposit surge is that we currently have over $5 billion and excess cash to deploy.
On a positive note commercial and industrial loan balances increased for the third consecutive quarter.
But overall loan balances declined as the bulk of our residential loan production was directed to the secondary market.
Okay.
After a year and a half of dreaming planning and working.
The integration of center state and South State is almost complete.
Several of the departments and lines of business have already merged together and the main system conversion will occur next month.
The short term tangible goal of the merger was to become more efficient and our revenue challenged environment.
But the longer term.
And the more important strategic goal.
It was to create a new southeast regional bank that can successfully compete head to head with the largest banks and the south who control about two thirds of the market share.
By combining center state of South State, we've created a $40 billion regional bank and the most desirable markets and the country.
And 2020.
<unk> allows families the freedom to choose where they wanted to live and work and population in migration and accelerated in the South East.
Of the 10 cities and the United States with the most and migration.
Five of the top tier cities are core markets for South state.
Both Orlando and Tampa on the high for corridor and Florida.
And then Atlanta, Greenville, and Charlotte on the I 85 corridor.
As further evidence that south state is becoming the preferred alternative to the national banks.
We announced last week. The addition of 10, new commercial and middle market bankers that were recruited from the large banks during the quarter.
This follows recruiting success and the fourth quarter as well.
The quality of the bankers, we are attracting has never been better.
Our competitors appreciate the strength of south state's balance sheet, our new technology and capital market solutions.
And most importantly, the entrepreneurial culture that sets us apart.
Our strategy is working.
As we emerge later this summer for the recession, the pandemic and our systems conversion and South state is poised to generate significant growth and shareholder value and the years ahead.
I'll now turn it over to will to walk you through the first quarter results.
Thanks, John.
I'll cover some highlights on margin noninterest income and non interest expense as well as credit and the provision for credit losses.
Let's begin by talking about NIM.
Net interest income for the quarter totaled $262 million.
And comparing with Q4 of 2020 remember that we had two fewer days in Q1 cost us approximately $6 million.
I'll also note that we continue to operate with a significant cash and fed funds sold position.
And in the quarter, and almost $6 billion and averaging $5 1 billion versus Q4, and 2020 average balance of $4 8 billion.
Our net interest margin was three 2% for Q1 down two basis points from Q for $3 2014.
On a core core basis, excluding accretion and the impact of PPP loans, our NIM of 285 was down seven basis points from Q4 and $2 92.
If you normalized for the buildup in cash and fed funds sold and the quarter.
Our reported NIM would have improved about half a basis point versus Q4.
We began to see rates on new loans improve and the first quarter with first quarter, new production weighted average coupons and up four basis points from Q4 to $3 41.
We were still add and loans at rates below the portfolio yield, but the difference improved from the fourth quarter.
Our non PPP loan balances declined 185 million, a 3% annualized rate and a quarter with the decline concentrated and single family residential loans and helocs down $130 million.
Slide 18, and our presentation shows what we've done with our residential mortgage loan book and the last year as.
And as gain on sale margins expanded and long term rates on mortgage loans declined on a portfolio of adjustable rate loans shrank, but our servicing book increased.
Our total residential mortgage loans under management increased from $8 6 billion to $10 billion or 16%.
While our residential loans on balance sheet declined by $600 million and are servicing for others increased approximately $2 billion.
And as gain on sale margins and loan yields change arm rates are likely to become more attractive to borrowers and this portfolio of trend is likely to reverse.
Purchase credit deteriorated loans also declined by $242 million during the quarter.
And our C&I loans grew by $28 million offset by declines in consumer and construction and CRE.
Our commercial pipeline building back up to approximately $4 2 billion at quarter end.
We feel encouraged about growth improving and the back half of the year.
On the deposit side, we continued to show incremental reduction and the cost of deposits down two basis points to 15 basis points for Q1, and our total cost of funds improved by five basis points.
Deposit inflows continued to be significant growing one 7 billion on the quarter benefited by the most recent round of PPP lending and stimulus payments received by customers.
With the continuation of record levels of on hand liquidity and the yield curve steepening on the quarter, we took the opportunity to invest a small portion of our cash and investment portfolio, which grew by approximately $820 million versus year end.
We were careful not to deploy much cash into investments when we were at rate bottoms with much of our investments and the quarter coming in the months of February and March after rates backed up.
As you can see on slide 13, and investments moved up to 13% of assets, but we're still below our fed funds sold balances which were at 14% of assets.
We remained below peer and securities to assets and well above peer and cash to assets. So we continue to have extensive dry powder, giving us some leverage to additional earnings through deployment as well as to higher rates.
Turning to noninterest income our noninterest income of $96 3 million was down slightly from Q4 and 97 eight.
Mortgage banking income was up $1 7 million as noted on slide 15, we produced $1 3 billion on the quarter and we remain purchase focused at 63 per cent of our volume again this quarter.
We did complete the integration onto one common mortgage loan origination system and mid January.
And we would expect that our pipeline also improved after the loan origination system conversion.
Growing to 945 million on this quarter up from $674 million at year end.
Turning to slide 16 correspondent income was up $1 million with lower interest rate swap revenue and our capital markets business offset by higher fixed income revenue fix.
Fixed income revenue grew due to better demand and the move and the yield curve and the addition of duck and Williams for two months of the quarter added $7 5 million of non interest revenue.
And we're glad to have acquired Duck and Williams the fixed income business was strong this quarter and the outlook is good with the excess liquidity on bank balance sheets, including those of the over 1000 correspondent banks we serve.
Yeah.
On non interest expense total NII, excluding merger related expenses was $219 million down approximately $1 million from Q4 took.
Took and Williams represented approximately $6 million and Nia, a little over half of which was commissions for the two months it was and the company this quarter excluding.
Excluding duck and Williams, our NII was $212 5 million.
We continue to be on schedule with our cost state realization.
And with our late May conversion date, we'll begin to see further expense savings in Q3 and Q4.
And at present, we expect Q4, NII to be and the $210 million to $215 million range. This.
This includes Duncan Williams for a full quarter and is after inflationary and merit increases across the company and beginning July one.
However, I'll remind you of the expense variability inherent and commission based revenue.
Our total merger related expenses are still on track to be within our original modeling with approximately $75 million remaining and most of that will occur and the second and third quarter of this year with some to trail and subsequent quarters.
I'll now discuss credit.
With respect to seasonal and the allowance significant improvement and economic projections impacting our loss drivers led to a meaningful reduction and the allowance for credit losses. These improved economic forecast caused us to record a negative provision for loan losses of $58 million.
For this quarter's weighting of Moody's economic scenarios, and our seasonal modeling, we weighted baseline and the more pessimistic F. Three scenarios equally versus that two thirds baseline one third is three waiting in queue for.
This quarter's weighting reflects uncertainty and the economic forecasts and vaccination and penetration and success, which uncertainty should lessen over time.
Looking ahead as we obtain additional clarity and therefore, our confidence and the economic forecasts, we would expect the weighting of the three scenario to reduce over time.
And all other factors constant and that would result in additional future reserve releases if that were to occur.
That would be incremental to any reserve releases caused by improvements and the economic forecasts themselves.
It's of course hard to predict the speed and the magnitude of such releases.
We are pleased that our actual losses have thus far been well below modeled expectations, but the nature of the pandemic driven recession and the fiscal response are not captured and the historical data driving these models.
On that note as shown on slide 19, we had another quarter of excellent loss results with a small net recovery.
Our past dues criticized and classified assets remain low our npa's declined for a third consecutive quarter and our deferrals dropped below 1%.
Our ending reserve levels, excluding PPP loans for 196% or one 8%, excluding the reserve for unfunded commitments still well above the approximately 115 basis point level and seasonal adoption.
Turning to capital.
With a negative provision expense and higher net income we formed capital at a higher rate this quarter with a 22% Roe TCE.
And with a negative provision were removed on ROIC.
<unk> would have been almost 16% on a balance sheet with a very strong CET one ratio over 12%.
Ending tangible book value per share grew to $42 and <unk> up 86 cents from Q4, compared with a year ago, which was the last quarter prior to our Maui closing tangible book value per share is up over $4, which is 10, 5% growth.
On a year of a pandemic and a significant merger.
As noted in the release, we will be calling 25 million and 6% sub debt when they call window opens in June.
Additionally, we will be redeeming a this quarter some older Trust preferred securities, we inherited and various acquisitions.
These trucks have a weighted average cost slightly above six 5% and a <unk>.
Fair value Mark of approximately $11 million that will be accelerated in Q2.
And the payback of this hit to earnings will be around four to five years.
Our strong capital position provides us with several opportunities for deployment, whether on organic growth capital returns to shareholders Fintech investments line of business acquisitions for traditional M&A.
With that I will turn it back to you John.
Alright, Thank you will between the merger seasonal adoption and P. P. P. There are a lot of moving parts for you to analyze.
We're firm believers, however that the simple and test the performance is the growth of tangible book value per share over time.
As will said, we're pleased to have grown tangible book value per share by 10, 5% during a challenging year.
I'll now turn the call back to the operator, so we can open the line for questions.
We will now begin the question and answer session.
You ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
Draw. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jarrod for them, but with Truest. Please go ahead.
Thank you good morning.
Morning.
Question.
Thoughts on growing the Securities book.
While we're waiting for demand.
And.
And so rates are up so it's a little more attack and how about what.
On growth.
Moreover, the short term.
And to defer it.
We had a couple of slides on the deck that I'll point you to.
Page 12, and our in our earnings deck and describe the buildup of liquidity over the past five quarters and the combined company.
And just a couple of comments there before I answer. Your question you can see that right before we announced our merger in January 2020, we had about $4 $7 billion of investable assets and the 10 year Treasury was sitting at 192.
If you fast forward to today, we have 10 $9 billion of investable assets and you have a 10 year treasury.
As it went through the trial is now back for the $1 70 for rate. So I think your question is and finally question.
And we manage the securities book over the last year remember when we put the two bags and together, we had a fair market value and counting and the second quarter on the 10 year was at its lowest level and so we sold off.
Portion of the of the Old Center State Securities just to wait until there was a better time to reinvest so.
I think.
I think we're really glad that we did there and was very strategic and that so.
So as you look at our portfolio today, our portfolio is around $5 billion and we have about $5 billion.
Cash is on what we'd normally show page 13 shows where our peers are and our.
Our peers.
As a percentage of debt investments.
Around 17% to 18%.
We're on the 14th.
And we look forward over the next several quarters, we would like to get somewhere in 16, and 17% of assets raised and just average it and over time and knowing that rate.
Continue to change and continue to move and we want to be long term focused but we also have as we understand what liquidity and we had originally thought and you can see that and that right. So that.
And that that 16 to 17 and set of assets with roughly another between 1 billion billion and a half.
Of Securities as we think and we'll continue to look at that every quarter.
Thank you.
One follow up.
Asset quality.
Yeah.
On losses have been incredibly low.
Recently and and over the longer term can you just talk about what you think right ranges.
Net charge offs, yes.
And that we should.
For South Dakota.
Michael.
And it looks like I'm guessing the losses come in much better than you would get.
Hey, Jeff for its John.
And level of charge offs naturally is going to change and it's cyclical business on.
And where we are on the cycle I think if you look back at the history of center State and South day, Youll see a consistency that both companies had been and the top quartile as it relates to charge offs and I do not see our underwriting standards changing I would anticipate that to be the case going forward as well.
Thank you.
Thank you.
The next question is for Michael Rose with Raymond James. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions.
Well I just wanted to get a sense for where we stand in terms of the cost savings that you've realized and there was $80 million how much of that has been and realized and obviously I understand your comments on the core expense base.
I think you said two attended $2 15 for the for the second quarter, but it does seem like on the fee side.
Duncan and Williams and kind of strong activity and in some of those are a few.
And the lines of business, even mortgage we just talked about pipelines being up.
Might you expect.
Those expenses, maybe be a little bit higher.
Sure Michael maybe I'll start with you.
And if you will.
Second quarter of last year.
Quarterly.
Our non interest expense was 222 and 223 million.
So over 80 million cost save estimate.
That'd be 20 quarter.
And within that eight.
<unk> 8 million on a two mid quarter, and it's really the offset and the non interest income on related to our.
Current contracts are negotiated.
And out there as opposed to anybody.
So if you took out to 'twenty two to 'twenty three dropped up 18 notes that you're about to or for that.
For the <unk>.
Duncan and lay up which as you saw on this quarter and there are two months and on a we're about $6 1 billion net.
And it's going to vary with revenue.
And then and it gives us good revenue quarter.
And to have and in this environment with the interest rate and liquidity and where they are.
And that and then also and we have and July.
The annual Merit increases for our staff, which is more on.
And inflationary type that's about $2 5 million per quarter. So this rate.
And on that back.
<unk> to 'twenty, two 'twenty, three minus 18 inch and above the two of them for two of.
Got it and merit increases.
And say to us and then definitely on.
And what their quarter.
And our quarter looks like for somewhere in that.
That range for 210 to 15 for the fourth quarter, we have.
A little bit more and cost save recognition and the second and third quarter.
It gets you down to 10 to 15 and and maybe.
It could be on the low end of that and commission.
Revenue.
On the higher and it's much better non sugar.
Okay I appreciate the the reconciliation there and and maybe just on the on the margin front, obviously, a lot of moving pieces, but with PPP and the.
And the PAA, but if we exclude both of those those items would you expect the margin to kind of core margin come down just given the securities purchases that you made.
You know what appear to be later in the quarter and then you know future securities purchases and just repricing lower loan yields as we move forward.
Sure Michael its Steve and let me just take you through a couple of.
Thoughts as we work through it.
Page 21, and our deck, we talked about our core deposit franchise and I just think it's important to highlight that particularly as a rate continued to move and they certainly are moving higher.
Going to be and a really key for our long term success relative to our margin.
But as you look at our at.
Our core deposit and yes.
33% on them on DDA and 56% on them are in and checking accounts and when you look at the graph to our peers, 56% versus our peers of 35.
Really should outperform and a higher rate environment. So.
And we think about the long term, that's where we think there's a ton of value to get directly to your question on page 10, We show our core margin ex accretion over the last several quarters and just the things I would point out for you there and.
Core margin dollars, which is really what we're focused on primarily just because of the growth and the balance sheet, but youll see them and the first quarter. It was $231 2 million with two fewer days and the fourth quarter. If you normalize the number of day for the fourth quarter that the core margin for the core dollars would've been dead flat.
And so as we think about the the rest of the year, we're flattening off this quarter next quarter and in court.
For margin dollars and.
And then as we think about deploying that cash into securities and cash and frankly more importantly into loans over the next 12 months, that's going to provide some tailwind.
To the core margin and dollars. So hopefully that gives you the framework that to help you model.
And guys. Thank you very much Steve and and maybe just finally for me just on the day.
The M&A front on.
And I know, we've got systems conversion coming up that you guys are going to build capital here pretty pretty nicely, especially if.
You do have some more reserve releases and the PPP It comes off.
What would the combined organization now be looking for in a transaction maybe both in terms of size.
And Mark and I assume would be and your expanded footprint, but would just love any color there. Thanks.
And Michael It's John I think we've been pretty consistent and our communication that 2021 is all about getting the foundation in place for the future. So we've been very internally focused on getting it done right and I believe we are.
And as we get past the conversion and the second quarter and think about the future. There is a whole lot more clarity now about the economy and to your point, we are generating a fair amount of capital.
The way, we looked at and Michael is we just want to be positioned to be opportunistic and deploying that capital.
And we think and our markets with the way the economy is coming back and it's gonna be strong organic growth opportunities, we do think theres going to be M&A opportunities and our preference would be to.
And in the markets that we're currently already in and then there's also opportunities we believe to invest and ourselves to buybacks.
So I think we've got all three options on the menu and.
So.
And we'll just have to see quarter by quarter and what's the best option for our company.
Right and I appreciate you taking all my questions.
The next question is from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
And I was just kind of curious maybe if you could talk to the kind of expected pace of new hires for the year I'm, assuming there's expectations that can already built into kind of on expense guidance.
Wondering what you see as the opportunity set and as you look to continue to drive growth.
Yeah, Thanks, Steve and we've had good success in the fourth quarter and the first quarter and hiring.
And we hired 10, new middle market and commercial bankers and the first quarter and wouldn't be surprised if that doesn't continue and the five to 10 per quarter range for the next two or three quarters is just a lot of disruption with some of the biggest things and our market and.
And look for that to continue.
Fortunately, we've been able to continue to add and have not been standard. The expense that is greatly so I don't know that its going to be a big needle mover in terms of expense.
But I'd love to see and continue with the current pace for at Boddington.
Okay, Great and then.
John as you mentioned you guys are and some of the best markets and the country for many and migration perspective, So I don't know that new markets and necessarily on the radar, but wondering if you're considering team lift outs or otherwise to expand and Danny any new msas across the footprint.
It's not a high focus right now and we're just part of the rationale of South state incentive state coming together is the six state footprint that we're currently in and so you think about what's going on and Atlanta, Greenville, Charlotte and Orlando, Tampa, and there's plenty of opportunities and the markets. We're in we've got some.
Scale on those markets that would love to continue to have greater density and those markets and we're really going to focus on hiring efforts in those markets.
Great perfect and thanks for the color I appreciate it guys.
The next question is from Catherine Mealor with K B W. Please go ahead.
Thanks, Good morning.
Good morning.
And just to circle back maybe first on the expense conversation well and wanted to clarify about mortgage expenses that you have.
Mortgage conditions are net and feed and so a decline in mortgage revenue, perhaps don't necessarily result in a day change and the expense base is that the correct way to think about that.
Yeah.
And I've talked about before we do.
Net identifiable cost associated with mortgage production against revenue produced.
Approximately net but we do have and then.
And fixed income business. For example is one that has.
The Commission base.
The same is true of our.
Rx business those are both commission based business lines as well and so fixed income demand change investment hasn't changed the commission expenses there.
Got it okay, and Mark and I think that the fixed income bat and mortgage that makes sense, okay and.
And then how about on on loan growth.
Yeah, Yeah, the loans decline a little debt this quarter.
It seems like Youre optimistic about Greg can prove and the back half of the year. Ken are you still kind of thinking about a low to mid single digit growth rate or do you think that could be even better and the back half a day and particularly just given the kind of population growth and economic trends youre seeing and some of your markets.
Yeah, Kathryn and I met with the board yesterday, and I feel like were.
Operating and eight cylinder engine has been firing on about six cylinders because of the pandemic.
On the conversion and the MLP.
Once we get the conversion behind us and the second quarter I really feel like we're gonna be back and running on all eight cylinders.
And encouraged to see and the last three quarters consecutive growth in C&I and although the total commercial has been somewhat flat.
The main headwind for loan growth has really been on the residential mortgage and HELOC area and not because of a lack of volume and we did $1 $3 billion and residential last quarter. We just felt like it was a better use of capital to direct those loans for the secondary market, where we had record high gain on sale and low long term rate, let's say.
And now and as rates start to move up it's more likely that we're going to pull more of those arm loans onto the balance sheet.
And looking ahead once we get past the conversion and the second quarter, our expectations and the second half of the year are for loan growth to return back to mid single digit growth you think about the companies historically have been a 5% to 10% and growers through the cycle.
We are going for more residential on the loan portfolio and the second half. We've had all these new hires that are building their pipelines and they're going to start putting net production on the books and the second half and there's been a lot of construction lending and the first half for the year that will fund up and the second half for the year. So you think about the few.
Sure the second half for this year to go into 2022, the economies reopening.
Sumer and business as we believe we are going to start spending their cash and we think that loan growth could really accelerate from here.
Great. That's very helpful. Thank you.
The next question is from Kevin Fitzsimmons with D. A Davidson. Please go ahead.
Hey, good morning, everyone.
Right.
Just on.
Obviously, it's been a long road with the M O and in the debt markets and the size and scale have been and obvious benefit from there so not to get ahead of ourselves here because you're still.
Buttoning up this one but when you come away from this deal looking at the scale you up and now because of that that we've seen a lot of merger activity and it seems like it's all about scale. Its all about spreading these investments out over a broader asset base.
How do you feel about.
And the size scale, you have now for going forward and get John given what you said about all the growth opportunity you have on your footprint or.