Q2 2023 SouthState Corporation Earnings Call

Speaker 1: One.

Thank you for standing by. My name is Ellie and I will be your conference operator for today. At this time, I would like to welcome you to the Amerius Bancorp conference call. All lines have been placed on mute to prevent background noises.

For now, I would like to hand you over to our first speaker for today, Nicole Stokes. You may now begin the conference.

Great, thank you Ellie, and thank you to all who have joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the investor relations section of our website at AmerisBank.com. I'm joined today by Palmer Proctor, our CEO , and John Edwards, our Chief Credit Officer. Palmer will begin with some opening comments.

and then I will discuss the details of our financial results before we open up for Q&A. But before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risk and uncertainties, and the actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filing.

measures in reference to the company's performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I'll turn it over to Palmer. Thank you, Nicole, and good morning, everyone. I appreciate you taking the time to join our call today. Thank you. Over.

I'm very pleased with the second quarter financial results that we reported yesterday. I want to focus on three main things this morning. First, our core profitability. Second, our improving credit metrics, including a strong allowance. And third, the strength of our Diversified Balance Sheet. These three measures really reflect the strong quarter we had and summarize the value in our company.

set aside reserves due to our economic model, specifically for forecasted future declines in commercial real estate pricing.

Even with this elevated provision expense, our ROA was almost 1%, and our PP&R ROA continues to be above 2%.

This is the second quarter in a row where we have a large provision expense driven by our forecast model and not related to credit deterioration in our loan portfolio. Our credit metrics improved this quarter, which is evidenced by our lower MPA ratio of just 30 basis points, excluding the Gini-Mays. After the provision this quarter, our allowance for credit losses...

excluding unfunded commitments represents a healthy 133 coverage ratio and 355 percent of net MPAs.

Our charge-alls for 28 basis points this quarter compared to 28 basis points the last quarter, but we had two extraordinary items, which we've got in our slide deck on page 21. If you exclude these two items, our charge-alls actually declined for the quarter.

And on the balance sheet, we said last quarter we were going to use deposit growth as a governor for our loan growth, and that's exactly what we did. Deposits grew 546 million and loans grew 474 million.

Approximately 40% or 189 million of that growth was in the mortgage warehouse lines, which we are expected to decline back down towards the end of the year.

We continue to have a strong capital position, in addition to having minimal impact to AOCI from our bond portfolio. Our TCE ratio improved to 880 at the end of the quarter.

And before I turn it over to Cole for more details on the financials, I'd like to summarize several reasons why we're confident in our future and ability to return shareholder value. And it really begins with our continued focus on growing tangible book value, which is evidenced by our 8% annualized growth rate and tangible book value this quarter.

Our core profitability with an above-peer PP&R ROA of over 2%.

A strong balance sheet with diversified earning assets in the strongest markets in the Southeast.

a healthy allowance for credit losses to absorb potential economic challenges. Of course, we've got a solid and granular core deposit base with low levels of uninsured, uncollateralized funding.

And then more importantly, a proven culture of expense control, which is evidenced by our 53% efficiency ratio, even in the current margin environment. And last but not least is our solid capital and liquidity position.

With that, I'll turn it over to Cole to discuss our financial results in more detail. Great, thank you Palmer. As you mentioned for the second quarter, we're reporting net income of $62.6 million or $0.91 per diluted share. Our return on assets was 98 basis points and our return on tangible common equity was $11.53.

And these were both after the $45.5 million provision expense. So, as Palmer mentioned, on a PP&R basis, we're still above 2% ROA.

We ended the quarter with tangible book value of $31.42 a share. That's an increase of 63 cents or 8.2 percent annualized. Our tangible common equity ratio increased to 8.80 at the end of the quarter. That's compared to 8.55 at the end of last quarter.

We continue to be well capitalized and we feel very comfortable with our capital and our dividend levels. We do have a share repurchase program outstanding until October 31st of this year. We repurchased about $8 million during the second quarter at an average price of $30.18. That leaves about $86.5 million left on the program.

We don't necessarily anticipate aggressively purchasing in the next few months. We also redeemed about $9.5 million of our subdebt at a discount this quarter after receiving regulatory approval to do so.

On the revenue side of things, our interest income for the quarter increased $26.2 million over last quarter and $119.4 million from the second quarter of last year. In comparison, our interest expense increased $28.3 million compared to last quarter and $101.2 million compared to the second quarter of last year.

Due to the rising deposit costs, our net interest margin declined 16 basis points from $376 last quarter to a still strong $360 this quarter. That's exactly in line with the guidance we gave last quarter and it actually came in on the higher side of our guidance.

Our yield on earning assets increased 27 basis points, while our cost of interest-bearing liabilities increased 58 basis points.

Kind of the contributing factors to that 16 basis point margin compression were 19 basis points of the negative deposit mix. That's non-interest bearing transitioning to interest bearing. We had seven basis points of beta catch-up on the deposit side, and then all of that was offset by 10 basis points of expansion due to the higher loan yields and average balances.

Total non-interest income increased by $11.3 million and total non-interest expense increased this quarter by $9 million and that's really explained in three categories. First, we had a decline in our deferred FAS 91 cost of about $2.5 million.

Second, we had about 2.2 million increase in variable compensation related to the mortgage division, which was more than offset by their increased revenues. And then finally, we had an increase of 3.1 million in fraud, forgery, and litigation resolution expenses.

You know, we really continue to do a good job maintaining other controllable expenses. Our adjusted efficiency ratio was 53.41 this quarter, so even with the margin compression, we were within our 52 to 55 percent target range.

On the balance sheet side, assets declined as expected to $25.8 million from $26.1 billion last quarter.

Total loans increased $473.9 million, or 9.5% annualized.

We reduced excess liquidity by about $700 million by paying off $875 million of FHLB advances early this quarter.

And our total deposits increased by 545.7 million during the quarter, and that's core deposits increasing about 187.9 million and brokered CDs increasing 357.8 million.

So with that, I will wrap it up by reiterating how we've remained disciplined and focused on operating performance. We're optimistic about the remainder of 23. I certainly appreciate everyone's time today, and I'm going to turn the call back over to Ellie for the questions from the group. Thank you, Ellie.

Very much, Nicole. If you want to ask any questions, please press star and number one on your telephone keypad. We have our first question from Eric Spector from Raymond James. Your line is now open.

Hey, good morning everybody.

Congrats on a great quarter. I'm just dialing in for David Biester here. I just wanted to get some more color on the funding side, some of the trends throughout the quarter, and the timing of the non-interest-bearing outflows of that was earlier in the quarter, and whether they started to stabilize.

in May or June and how they're trending early here in July . Yep, so you're exactly right. We did see the more aggressive movement early on in the quarter because remember kind of all the silicon and signature and all of that noise that came in in March. We certainly kind of saw that settle down. What we're starting to see is that not the big movements. I would say now we're more in the...

And you know, we're still 33% of our total deposits are non-interest bearing, which is very robust. And we feel like if we can continue to keep that in that 30 to 33 range that that would be a win.

Got it. I appreciate the color. And then just wanted to get your thoughts on loan growth and where you're still seeing risk adjusted returns and how new loan yields are trending.

Would you expect to continue to see loan growth throughout the year and into next year? Just curious if you could provide any teller on that end.

Yeah, good question. I think what you'll see is a lot of our growth is reflected in the slide that came from some of the increased lending we had in our mortgage warehouse. And that reflects more the seasonality in the business, which we kind of touched on last quarter, that the mortgage volume has a tendency to kind of revert back to more historical time.

single digit growth rate, which is where we'll probably end up around the end of the year. So I don't expect to see any increased growth above and beyond that. And in terms of the yields on the portfolios, yes, I think, which is similar to what you're probably hearing from a lot of other peer banks.

We're getting a lot better yields on the portfolio across the board, and you name the vertical, and we're all getting better yields and getting better deposits. So I think that discipline is in place and has been, but that's certainly a relief to us just given all the deposit pressures that are out in the market.

Got it. Got it. Thanks. And then I guess just going off of funding costs and loan growth, I'd say margin is not an output, not an input, but just given rapidly rising funding costs, just curious how you think about DNI and NIM trajectory here going forward. I'm just assuming no more rate.

Great, I don't know what you guys have in your assumptions, but I'm just curious how you think about the nimtrog yep, so we do not have any more rate, we don't have any rate assumptions built into our guidance, so this is based on flat rate. We have programmatically gotten our balance sheet to be about as close to neutral as what we can get. We are about 1% plus or minus.

in both the plus or minus 100 field. So very, very close to neutral. I would say that the real question of driver of margin is exactly your first question, is that non-interest bearing mix. So for us about every hundred million dollars that goes from non-interest bearing and you have to assume it goes somewhere, so whether that goes in, you know, like a higher rate CD or a higher rate

say that we've troughed even though we're very close to neutral. I just think that that movement from non-interest bearing to interest bearing as well as competitor pressure and what some of our competitors are doing can still cause some pressure on the deposit side. So I feel like anything that we're going to gain on the loan re-pricing side, we will probably be giving up on the deposit side.

Again, don't think that we've hit the bottom yet, even though the model may show it. I think the practicality of what's going on in the market can cause a little bit more compression over the next few quarters.

Got it. I appreciate the color. Just one last question and then I'll step back.

Just on expenses, how do you think about like your core expense run rate and how you juggle these costs is at this point? Obviously with NII pressures versus continued investment in the franchise. Thanks for taking the questions. Sure There are definitely some things that are on the move. What we've seen kind of wage inflation stabilize over the last...

And so while we do a really good job of controlling expenses, I do see kind of a, you know, I think we've got it, really no difference what we've got it before, kind of that 3% to 5% increase in expenses next year. And that, again, we do a good job controlling what we can, but between the increased FDIC insurance costs.

then also kind of health insurance and some of those benefit costs. We're still in that kind of three to five percent and again that's excluding kind of the variable cost of mortgage. So if you kind of take out mortgage and look at everything else that's where I would guide that three to five percent increase in non-interest expense.

Got it. Thank you. Congrats again on a good quarter. Great. Thank you.

We have our next question coming from Brady Galey from KBW. Your line is now open.

Thanks. Good morning, guys. Morning, Brady.

So I heard the expense guidance for next year, but I was just wondering

When you look at expenses in the second quarter, they were a little heavier. I know you call out a couple of one-timers like that. I think fraud was up. But when you look at the back half of this year, how do you think about expenses? Could expenses take a step down?

dollars in the third quarter relative to 2Q just because 2Q had a couple of one-timers.

Yes, I'm glad that is exactly the messaging is that we did have these, you know, three one-timers or two. I don't know that the deferred FAS 91 fee, I think that will continue, but as far as, you know, the mortgage was variable, so when mortgage production comes back down kind of in the...

fourth quarter, so I think third quarter would be similar to second quarter, and then stepping down in the fourth quarter. And then the fraud forgery and again the litigation resolution, that would be a non-recurring or not expected to recur.

Okay, all right, and then I know you guys have guided to an efficiency ratio of 52 to 55%. You know, as the margin has been coming down, like if you look at the last three quarters, the efficiency ratio has gone from 50 to 52, now 54. Like it feels like,

just given the revenue headwinds, I mean for you guys and for the industry, but it feels like that efficiency ratio could potentially slip above that range in the near term. Is that, do you think that's possible, or is there stuff you can do like cost cutting on the expense side to keep it at 55 or below?

Yep, our target is still that 55% and while it did creep up a little bit more, and I think even when you go back to last year when we gave the guidance, started at, you know, 52 to 55, people said that's a really big range. What is the difference there? And we even said that's really where we see our margin. You know, 52 would be depending upon what rates do and a really a stronger margin.

we were halfway between the, or we're actually on the lower end of the 52 to 55, so the goal is still to stay under that 55 by the end of the year for the remainder of this year.

Okay, and then finally for me, the reserve took another step up this quarter. It's at a pretty robust level now. How do you think about continued reserve build from here? Do you think that if

macro factors continue to decline a little bit, you'll see some more reserve build or do you feel like you really kind of front-loaded it and you're going to be happy with where it's at for the near term? Yeah, no, you know our 98% of our provision is, from this quarter, is really model driven that's coming from those CRE pricing index. You know we use a one-year economic forecast, so...

I feel like until the forecast model starts showing some improvement versus declining CRE prices, and until it starts showing improving economic conditions, reserve bills could continue depending upon the forecast. But again, it's all driven by that forecast. This was not qualitative factors that drove this. This was model driven.

All right, great. Thanks for the color. You bet. We have our next question from Casey Whiteman from Piper Sandler. Your line is not open.

the color. You bet. We have our next question from Casey Whiteman from Piper Sandler. Your line is not open. Hey good morning.

moreso pity. Backing on some of the earlier questions, we may not have hit the bottom for the margin, but do you think that with Sloan growth that we maybe have reached an inflection point where we might see- and I stab e- just start to grow from the second quarter level in the back half of the year, or do do you think that's a little optimistic?

I think that we should definitely see NII stabilizing and potentially increasing, but again, so much of that is based on that on the deposit side. And I would say 80% of my guidance is I'm hesitant because of the shift of non-interest bearing to interest bearing. That's really the wild card in all this. If we could maintain

the mix that we have and grow deposits at that mix, then even margin could not take as deep of a trough. I think we're close on NII as a trough and potential growth, but again, it's really that deposit cost side is where we're more focused. We're seeing the pickup on the asset side as expected.

I think what wasn't expected was all of the deposit pressure and the media pressure on the deposit side. And I don't think that's any different than any other, what you're hearing from your other banks, probably. But the good news there is, too, Casey, what we're seeing, at least in most of our markets, which are heavy-growth markets, as you know, is that the're looking at these Dead city investments

The rate wars in terms of a lot of the specials that were offered out there, those are all maturing or expiring in terms of the sign-up dates for those for some of the more aggressive banks out there. So that funding pressure, at least in most of our urban markets, is subsided. And so with that, and most people that have moved money have already moved it.

So, I think that we're hopefully getting towards the end of that era, which should benefit all of us in terms of a more relaxed deposit environment in terms of pricing.

Good to hear. And then, Palmer, can you walk us through just how you're thinking about and weighing uses of capital here now with the stock rebound?

Yeah, I think you all saw we did have a buyback this quarter, which is hard not to do when you're trading below tangible book bag at the time.

you know, a creative, tangential book, obviously non-dilutive. So we did have a small buyback, but for us it's, you know, that capital preservation. We're very comfortable with where the dividend is. We do have the buybacks in place. You know, that arrow is in our quiver, but I don't anticipate any activity there this quarter. So right now it's more about the capital preservation as we go forward.

Okay. Thank you, guys. You bet.

Ellie, our operator, are we ready for the next question?

Your next question comes from Brandon King with Truist Securities. Your line is open. Your line is open.

Hey, good morning. Thanks for taking my questions.

Good morning.

So I wanted to get more insight into your funding strategy going forward. What is kind of the expectation for broker deposits from here? Are you looking to kind of grow broker deposits or do you think you achieve more of your growth through more of those core deposits?

The goal and the intent is absolutely to grow core deposits and you know we talked about kind of the mortgage warehouse lines and how those grew in about 40% of our loan growth with that to kind of think about that being funded by some of the brokers but really the core we've said that within our company that we are going to let.

deposit growth, kind of be the governor on loan growth, and we are aiming for core deposit growth, not necessarily brokered. Having said that, we're still only at about 8% brokered, so there's room if we needed it from a liquidity standpoint, but the intent is to grow core deposits.

We would look at brokered or FHLB and then remember on our balance sheet typically near the end of the third quarter and fourth quarter we end up having a lot of cyclical municipal money come in so that would kind of start to flow in the remainder of this year as well kind of in the third quarter and fourth quarter so that's another funding source for us. Okay and could you also remind us for the municipal money what sort of rates would that come on by the balance sheet? Yeah we typically it's very competitive with what our current you know spot cost would be so you know money markets in that two and a half three percent.

Now, you know, that $150 to $175 savings around 1%, which they don't want to do savings, but those were kind of our spot costs at quarter end. So, assuming that those stay fairly level with no change in Fed rates, we would expect those municipal to come on that maybe a little bit less because they are collateralized.

Okay, and I'm assuming those will help maybe potentially pay down some broker deposits. What is kind of the duration of the broker deposits and what are you expecting to mature later this year?

Yeah, we have those structures, so they're very structured and we have a certain amount maturing every month, so that as we're able to grow core deposits, we can pay those off. But we have them structured, it's not like one big lumpy broker, we have them staggered from now to the end of the year to be able to keep our ratio kind of in that 11% is where we're targeting.

OK, that's helpful. And then I wanted to ask about the office loan that was charged off. Could you give us a sense of how large that loan was, and what were the potential unique factors regarding that situation compared to the rest of your office portfolio?

Well, Cam Brannon, the loan itself is something that we've been kind of in one.

part of collection or another for a little over a year. So it really has been something we've dealt with for a while. The original auto mount was...

in excess or right around the $10 million mark. So it's a smaller property relative to maybe what you have in mind, but it was an acquired loan. When we got down to the final foreclosure on it, we updated our appraisal as a

there is that the collection efforts on that started really over a year ago. So it's not really indicative of kind of where office is overall.

Okay, that's very helpful. That's all I had. Thanks for taking my questions.

Thank you, Brandon.

Your next question comes from Russell Gunther with Stevens. Your line is open.

Hey good morning guys. Just a quick follow-up on the loan growth discussion. I think you mentioned sort of a mid single-digit core target for the back half of the year. Just any color you can share in terms of what's going to drive that from a mixed perspective.

Yes, I think what you'll see is obviously the mortgage warehouse will moderate towards the end of the year, which is a big part of the growth you saw that was in excess of the mid-single digits. But it'll be pretty even across the board. We're still seeing and still have good opportunities in CNI.

and some owner-occupied CRE, and then obviously mortgage and some of the equipment finance. So I think the growth in all those areas is going to be pretty consistent. It won't be concentrated in any one area other than as we talked about with the mortgage warehouse.

Okay great, thanks Palmer. And then just switching gears, last couple for me would be from a net charge-off perspective. So just curious on what came out of Balboa this quarter. Was it just that you know the 2.3 that was charged off or was there kind of additional losses there?

As a follow-up, I'd be curious as a reminder as to what you think from a lifetime loss perspective is for that portfolio.

The losses in the Equipment Finance Division actually in the second quarter were almost spot on what they were in the first quarter, which was about $9.9 million. So the 2-3 was extraordinary.

As Palmer mentioned earlier, it really was a group of non-performing loans that were 100% reserved at the acquisition date. We went through collection efforts since that time and decided that that had kind of run its course and that we decided that the remaining balance of those loans is the way.

You know, the...

The whole portfolio is somewhat of a barometer of the business cycle. That's a little bit reason why we've got a little higher amount of charge-off run rate today than we saw last year. But you know, I don't anticipate that it's...

It certainly would grow from this point. I think it's stable to probably trending a little bit lower going forward. So, it certainly is well managed and somewhat anticipated. It was anticipated when we did due diligence back 18 months ago that we would

side which is what is contributing to keeping us above 2% PP&R. So I need to kind of balance the one against the other.

Yep, understood and I appreciate the color there. And then just last one, the follow up.

As you think about the bank as a whole, how are you guys thinking about potential net charge-off range for kind of this year and next? That's a great question and you know the pre-pandemic normal, I guess if you tried to pull out a bit of normal for us.

pre-pandemic was around 19 basis points for the five years or so that preceded the pandemic. And so, you know, I think that 18 to 25 basis points is likely to be kind of the normal for us.

in a normal business environment. So, I think that's sort of what I would look at as a normalized rate.

Okay, great. That's it for me, guys. Thanks for taking my questions.

Thank you. Your next question comes from Christopher Maranac with Janney Montgomery

Thanks. Good morning. I just want to keep on the theme of Balboa.

What should the risk adjusted losses be for that portfolio as we go forward as the charge-offs may modify a little bit as you just said and then also kind of has loan yields reset for the portfolio?

That's a great question. So, when we, I guess there's a couple of different numbers to share with you on that, Chris. You know, we modeled it in the one and a half range, which is kind of the five years preceding the acquisition date.

last year, you know, we we achieved much less than that. But if you take sort of the 19 months since the acquisition in early December of 2021 and take all of the losses we've had and annualize it back, it's it's about 180.

So, you know, when you take it in a longer outlook, I guess, than just the quarter or the month, that kind of thing, then you start seeing more normalized rates. I think that, you know, on a three to five year sort of average, we're probably going to see...

that number, that kind of 1-8 to maybe 2-2, is sort of a fluctuation but sort of more normalized, especially from what we saw in the first quarter or first half of this year. And remember, we did have a...

collateral. The primary losses were coming out of love, scared by trucks, meaning duty trucks. And so we did have a glut of those which drove down the valuation of that when we took those to sell.

A little bit of strengthening there will impact losses also. So there's several things, but I think in terms of longer run, you're probably looking at kind of that 1-8-2-2.

Great, that's really helpful. And going back to 2021, this really was a surrogate for not buying security, so you're still way ahead of that from that deployment of excess cash.

Absolutely.

My follow up just has to go back to the deposit base and maybe Nicole as deposits kind of stabilize in terms of rates over the next few quarters.

What should the kind of average relationship be? I mean, is it in that four or five-year category on average for all of your customer relationships, or is it longer in some cases? It is longer. We actually did an analysis, and interestingly, it split almost a third, a third, and a third, is that a third are very, very long-time customers. They go...

you know, back many, many years. And then about a third is kind of in the last, kind of in between, like the last five years prior to the pandemic. And then the other third is kind of new since the pandemic. It's a third, a third, a third, almost evenly split.

So, we definitely have some long tenure in our in our deposit portfolio, which is part of why it's so granular and why our average balance is so small. We don't have a large lumpy deposit. I mean, we are just very much core funded.

Right. Which you would expect a 50-year-old bank to have some of that. So, when you look at our 10-year plus, there's a huge swath of that's about a third of it. And then, as Nicole said, then you have your five to ten is another third and then less than that. So, it is very granular. Super. Thank you for that. It's very helpful.

Thank you. Seeing no further questions, I will now turn the call back over to the presenters. Great. Thank you very much, and I'd like to thank everybody again for listening to our second quarter earnings call. Clearly, our discipline in creating strength in the balance sheet, in the loans, deposits, and capital...

This concludes today's conference call. Thank you for your attendance. You may now disconnect. Thank you for your attendance.