Good morning, and welcome to the South State Corporation Quarterly Earnings Conference Call. [Operator Instructions] I will now turn the call over to Donna Pullen, South State Corporations' Senior Vice President..

Thank you for calling in today to the South State Corporation earnings conference call. Before we begin, I want to remind our listeners that our discussion contains some forward-looking statements regarding both our financial condition and financial results.

We have included slides for this call that outline our results and our general comments this morning. Let me first refer to Slide number two 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 our call..

Good morning. I'll begin our call today with a few summary comments about our start of 2015 and then John Pollok, our Chief Financial Officer and Chief Operating Officer, will provide some detail on our operating performance.

We will then provide detail around our recently announced branch initiatives, prior to concluding the call with a Q&A session with the research analyst community. We started the New Year with the first financial integration fully behind us and we have really begun to see the power of this merger.

This is evident throughout our first quarter results with record mortgage earnings, strong core deposit growth, and continued growth in assets and our wealth management area. The end result is a year-over-year increase of 51% in net income.

From our linked quarter perspective, net income improved by 12.6% to $23.9 million which represents $0.99 per diluted share. Other highlights of the quarter include margin expansion and improved management in some expense categories. This was also the first quarter in a while where we had no merger and conversion related cost.

Return on average assets and average tangible equity totaled 1.23% and 16.21% respectively, and our efficiency ratio improved to 65%. As a result of this performance, the Board of Directors has declared a quarterly cash dividend of $0.24 per share, which is a $0.01 increase from the last quarter and a 20% increase from a year ago.

This quarter, we also continued to make improvements in asset quality, with a 10% improvement in the level of non-performing assets down to $71.7 million. NPAs to total assets now total 89 basis points, down from 1.02% linked-quarter.

Our non-acquired loan growth this quarter totaled $118 million or 13.7%, which did not cover the reduction in the acquired loan portfolio of $133 million. A shift in mortgage loan production to salable product contributed to the decline in total loans. We would also note the loan pipelines remain healthy.

The shift in production resulted in record mortgage banking income of $6.6 million for the quarter, as revenue synergies from the first financial merger are being realized. Mortgage banking income more than doubled from the first quarter of 2014.

We also had strong results from wealth management with income totaling $4.9 million, assets under care and management continued to grow totaling $4 billion at quarter end compared to $3.5 billion a year ago. Banking also produced very good results, opening nearly 13,000 new transaction accounts, a 30% increase from a year ago.

A few balance sheet changes during the quarter worthy to note include, the retirement of $46 million in high cost trust preferred securities and a $117 million increase in non-interest bearing deposits.

Increasing by $22.6 million this quarter, our total shareholder equity now exceeds $1 billion as retained earnings continue to strengthen our capital position. I will now turn the call over to John Pollok, to give you some more detail on our financial performance this quarter..

Thank you, Robert. On Slide number 6, you can see the increase in our net interest margin link-quarter due to a small improvement in loan yields and lower funding costs. Our cost of interest bearing liabilities declined from 29 basis points for the fourth quarter to 23 basis points this quarter.

The cost of significant sub deposit declining by 5 basis points and an improved funding mix were the primary factors contributing to lower funding cost. We anticipate our cost on other borrowings to decrease to around 4.7% due to the previously mentioned retirement of the $46 million in 7% trust preferred securities.

The gold colored bars on this slide represent the net interest margin adjusted for the effect of the amortization of the FDIC indemnification asset. This blended margin increased 11 basis points as the amortization expense declined linked-quarter from $4.2 million to $3.2 million.

This amortization expense which is reflected in non-interest income is expected to decline considerably next quarter as the commercial loss share coverage on the CBT FDIC-assisted portfolio ended in March. We should see the blue and gold bars continue to pull closure together as the negative impact of the amortization lessens going forward.

On Slide number 7, you can see our efficiency ratio improvement from a little over 69% in the fourth quarter to 65% this quarter. The improvement is primarily the result of no merger related expenses this quarter, compared to $4.6 million last quarter. Except merger expenses, non-interest expenses were basically flat.

Increases in salaries and benefits expense, as well as OREO expense were offset by decreases in discretionary expenses and lower passive losses from investment tax credits.

The increases in salary and benefit expenses were higher primarily due to payroll taxes and OREO expenses were higher due to the write-downs from the auction of the 70 assets in February. We continue to take steps towards the driving the efficiency ratio lower.

On Slide number 8, you can see the improvements we have made in the operating earnings per share over the years, and the great start we are off to for 2015. I will now turn it over to Robert to discuss some of the branch initiatives that we think will help continue our EPS improvement..

Thanks, John. This quarter we focused on two branch initiatives, first we focused on optimizing our existing branch network. To this end, we announced the plan consolidation of 11 branches into existing South State offices, the closing of one ATM location and the sale of two branch offices.

On Slide number 9, you can see these branches have about $200 million in deposits. We anticipate very little customer disruption as the majority of these consolidated offices are in very close proximity to existing offices. Subject to regulatory approval, these consolidations will be completed over the next few quarters.

We estimate about $4.5 million in cost saves annually. By 2016, you should begin to see the impact of these savings in the third quarter. We estimate we will incur about $4.5 million in one time cost over the next several quarters as a part of this consolidation project.

These one time cost should be partially offset about 1 million in gains related to the sale of two of the branches which includes roughly $8 million in loans and $32 million in deposits. The second initiative was announced last week, we signed an agreement to purchase 13 Bank of America branches located across our existing footprint.

This purchase provides the perfect opportunity to round out our branch network in South Carolina and provides entering into six new markets. I will turn it over to John to give some details..

Thank you Robert. On Slide number 10 you can see that one branch is in Georgia and 12 are in South Carolina. We anticipate assuming approximately $580 million in deposits as well as approximately in $3 million in loans from this acquisition.

The average branch age is 45 years, and will provide us with great low cost funding, which you can see on Slide number 11. On Slide number 12 and 13, we give you some detail on the financial aspects of the transaction. Apart from the assumption of great low cost funding, the fee income in these branches significantly exceeds the overhead expenses.

From a modeling perspective, we have assumed a 15% run off in deposits, shock to fee income lower and the overhead hire and conservatively deployed the acquired funds. Subject to regulatory approval, we anticipate a closing in the third quarter.

We estimate the transaction will be immediately accretive and the impact in 2016 to be mid single-digit accretive. I’ll turn it back over to Robert for some summary comments..

Thank you, John. The branch map on Slide 14, will give you some insight into the impact of the branch initiatives and shows the overall impact these changes have on building out the entire State of South Carolina.

We’ve always said we wanted to be in a dominant position in each market we serve and this will certainly be the case in South Carolina with these additions.

With 92 offices, $5.4 million in total deposits, 85,000 new customers from the branch acquisition, and approximately 8% market share in South Carolina, this places our company in a position in South Carolina that would be very difficult to replicate.

These branch initiatives along with executing on process improvement and bank wide efficiency initiatives, should provide strong momentum toward our longer term earnings goals. That concludes our prepared remarks, and so I will ask the operator to open the call for questions..

[Operator Instructions] Our first question comes from Christopher Marinac at FIG Partners..

Thanks, good morning. John and Robert, just wanted to get a little more color on the accretion income and I saw the disclosure what you had in the changed linked-quarter.

Is there additional reclassifications that can occur this year and do you have any visibility on whether this level of yield on the acquired portfolio can be consistent from here?.

Chris, this is John, obviously it’s going to depend on a number of factors and we still have roughly a 6.5% credit more on a acquired loan portfolio. So credit should continue to improve there. We're seeing the weighted average life pension sum. As you know, first that we had a lot of residential mortgages in their portfolio.

So we’re seeing some acceleration of the payoff of those as you can see in our fee income or refinance on those into the secondary market, so there could be some..

Okay.

And then from the valuation that was on the branch acquisition from last week, what does that tell us about kind of what pricing is going and I just was curious if those were in different locations how different the pricing would have been if there were bigger metro cities versus kind of location those are in?.

Chris, this is Robert. Obviously we paid a little bit more than what some of the prior transactions had gone for and each deals unique to each buyer, so it's hard for me to say why they were priced that way for those. I know for us this was the only way to really complete the map in South Carolina.

They have 45 year old offices, they have significant share in the markets they are, and 85,000 customers right in the middle of our footprint. So, that is the reason why it was very valuable to us. Obviously the EPS impact is meaningful that really completed the entire state footprint and it was a pretty unique opportunity for us..

I guess Robert, it's fair to say that the payback period is comfortable given the accretion that comes into that as you outlined?.

Chris this is John, absolutely..

Okay, great guys. Thank you so much..

Our next question comes from Jennifer Demba of Suntrust..

Thank you, good morning.

On the Bank of America branch, do you see any revenues fees [indiscernible] with these offices Robert?.

Jennifer, I would say there is, we're picking up 85,000 customers and we’re buying $3 million in loans. So, I definitely think there’s a lot of opportunity both to look at those branches and how they operate today, and how that applies to our footprint bank wise. So I think they’re positive on that front.

But also I think when you pick up 85,000 customers that don't have a car loan, or a mortgage or any other relationship with you, there will be opportunity to expand that and cost so that customer base is significant. Obviously in our pro forma there are no revenue synergies, but our opportunity to cross-sell 85,000 customers is meaningful..

Is there any thought to consolidate any branches within those?.

We're going to evaluate it. Obviously in our couple of markets there is some pretty close overlap. But that is not our focus today. Our focus today is making sure that we retain the customer base and we’ll look at the traffic patterns just like we did with the first financial merger.

We will watch those traffic patterns, see customer behavior and then determine what the best way is to serve those customers..

Jennifer, this John. I think as in the past what we’ve always try to do is preserve that low cost core funding and you're talking about a transaction that's going to add over $260 million in checking account balances. So, number one is to make sure we preserve that..

Great. Thank you very much..

[Operator Instructions] And our next question comes from Stephen Scouten at Sandler O'Neill..

Good morning, gentlemen. Thanks for taking my call. Question for you guys on forward expense run rate.

It's good to see the detail the $4.5 million around the annualized cost saves and it sounds like most of those will show up kind of 3Q and 4Q and then I guess what could we see additionally in terms of your deeper dive in your expenses and maybe the goal to get under 60% efficiency ratio, if you can frame up that in any way?.

Seven, this is John. As we announced at the beginning of the year, we're kind of in our Phase 2 efficiency process. So we're benchmarking really everything throughout the company. So the first initiative was really to look at our branches. We got that behind us, but really everything is under review and in terms of the expenses today.

We completed an OREO auction in the first quarter. The CBT loss as we've talked about a lot over the last quarters is that was our really our largest assisted deal and as you can imagine there was a lot of expense associated with that.

So we're hopeful that OREO cost will continue to improve and then obviously it doesn’t show on the expense side, but the negative accretion that runs through the non-interest income side with CBT going away, that piece of it will materially decrease as we move forward. Also on the funding side, we talked about the retirement of the troughs.

We didn't get a full quarter of that. So you should see some improvement there on the interest expense side..

Steven, this is Robert, just a couple of things I would add is we really started last fall post integration with First Financial kind of our next step last fall was really to look at our expense run rate, which obviously had been murky with all the integration and merger related expenses.

So as that began to settle out, we want to put in a detailed expense review company wide. We came out obviously in the first quarter with a meaningful part of that, which is the branch consolidation, but it's just the first part. And the expense increase is a lot and that you saw in the first quarter was mostly around salary and benefits in OREO.

In the salary and benefits were some higher commissions, but the bulk of that increase was really FICO expense that's more not a one-time expense, but certainly more front-end loaded.

Net on the FTE front, we were able to reduce 30 FTEs in the first quarter and as we further roll out more of these efficiency projects throughout the year, I think you'll continue to see our FTE base contract..

Okay.

That's helpful and I know you guys kind of put out there maybe a longer term number of getting into a $5 EPS, can you maybe frame up for us what your vision is for getting there? Is that predicated on additional M&A or is that something where you feel like with what you have and the franchise you have today, that maximizing efficiency you can get to that number and if so what else needs to be done to get there?.

Steven, this is Robert, we didn't get a comp frame around that number when we mentioned it. But we clearly feel like it's a very reasonable achievable target in a reasonable period of your time. I don't think there is magic to it.

I think what we're doing in terms of driving our expenses down, getting organic growth, growing 13,000 customers in the quarter, lending and deploying the excess liquidity that we have now and $580 million more that we will have with the Bank of America deposit acquisition we certainly feel like it's going to take us right down that path..

Okay. Great and maybe just one last follow-up on that excess liquidity you mentioned, obviously that increased here this quarter and as you said will increase with the deposits, the new deposits in the branches.

How long do you think that or would you anticipate that will take for you to deploy that excess liquidity?.

I think it's hard to tell. We've been watching this portfolio kind of remix a little bit over the last 18 months. After the first federal merger there were obviously a former savings and alone had a lot of mortgage assets on the balance sheet.

So step one when we announced, is we said, we're going to remix and we've done that really with every acquisition we've done. A year ago, we had about a net decline of $75 million and net loan growth acquired and non-acquired together in this quarter is down to about $50 million. Fourth quarter we actually exceeded the acquired run-off.

So I think you're seeing us gain traction there pretty meaningfully. The pipeline is very strong. The opportunities to growth organically are very good. So the exact timing that we'll deploy it, we have about $500 million today in excess liquidity. We're acquiring another approximately $500 million.

So we'll have a $1 billion, which gives us a good runway to really absorb the loan growth over the next two years..

Great. Sound good. Thanks guys. I appreciate it..

The next question comes from Blair Brantley at BB&T..

Good morning, everyone.

Actually a follow-up to your comment rather about the total loan growth and prospects, how should we think about the paydowns and what we saw this quarter from the acquired book and how should we think about that going forward?.

Blair, this is John. Let me start. If you look back over the last several quarters, the acquired run off has definitely slowed. This quarter, the residential piece remixed a little bit more. So where we really feel like we're getting closer to the point where it's just purely amortization off the books, we got a few other credits we want to get rid of.

But I think as we said last quarter is really the goal is to begin to outrun off the acquired loan run-off, which if you look year-over-year, we've made a lot of progress and then we got to kind of get our growth back to mid single digits and so that's what we're hoping as we get later in the year we can really begin to do that..

So that mid single digit sort of growth is more of a mix to your kind of focus..

Hopefully later this year. We did it in the fourth quarter of last year, but we ought to be able to begin to outrun it a little bit hopefully as we get through the year..

Okay.

And thinking in terms of the core loan yields I thought it was up a couple of basis points, could you provide any color as to what you're seeing out there in pricing and competition expectation there?.

Yes, loan yields are hovering right around 4% is kind of what we're seeing. We do a lot of small loans, which obviously helps us on the loan yield side, but roughly around 4%..

Okay. And then for the acquired loan yield, they were a little bit lower than they would I was expecting given the leap last quarter.

Was there anything that happened this quarter that may have impacted that or what's kind of driving that side of it?.

No, we had a big release last quarter. Obviously the acquired loan yield went up. So it was affected by that and it was also affected by faster pre-payments due to the residential portfolio at First Federal. So we actually saw a little bit pick up, but it did increase linked quarter..

I am also seeing it because of the pretty this quarter that jumped about 40 basis points in the lead class, I was thinking because the lead class is larger in the longer duration loans that maybe we've seen a little bigger pick up or we're seeing a similar pick-up. So that's why I asked the question..

Well as you know, it's based on the cash flows that come out. So it's not all just the credit release, but it did pick up some, but probably not like you said, not as much as you thought..

Was there any potential of that to increase as time passes or did you touch on that side of it?.

Well again as I mentioned earlier, we had a loan mark today over 6% and if credit continues to improve, there could be further releases there. I don't anticipate anything as large as we saw in the fourth quarter that obviously with the reserve on those credits still over 6%, there is some potential there..

Okay. Great. Thank you..

[Operator Instructions] There are no further questions. I'll now turn the call back over to Donna Pullen.

Thanks everyone for your time today. We will be participating in the Gulf South Bank Conference held in New Orleans beginning on May 5 and the SunTrust Robinson Humphrey Annual Conference in New York beginning on May 19 and we look forward to reporting to you again soon..

The conference has now concluded. You may now disconnect..