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 of questions with the research analyst community.

I’ll now turn the call over to Jim Mabry, South State Corporation Executive Vice President, in charge of Investor Relations and M&A..

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

Please refer to Slide number 2 for cautions regarding forward-looking statements and discussion regarding the use of non-GAAP measures. I would now like to introduce Robert Hill, our Chief Executive Officer, who will begin the call..

Good morning. We’ll begin the call with a few summary comments regarding the second quarter of 2017, offer an update on the pending merger with Park Sterling Corporation and provide insight into our financial performance for the quarter. Our results for the quarter build upon our first quarter success.

Net income for the second quarter totaled $31.8 million or $1.08 per diluted share, which represents a return on average assets and return on tangible equity of 1.15% and 14.16%, respectively.

Adjusted net income totaled $34.6 million or $1.18 per diluted share and represents a return on average assets and return on tangible equity of 1.25% and 15.34%, respectively. Performance across all areas of the company remained at high levels.

We continue to see opportunities to attract customers from the larger banks as evidenced by our strong loan growth for the quarter. We achieved annualized net loan growth of over 13% with strong growth in Charlotte, Savannah and Greenville.

Fee income businesses continue to perform well this quarter, and cost saves from the Southeastern merger were achieved as planned, resulting in a reduction in expenses. Our team also did a very nice job with expense management outside of merger expenses, which resulted in positive operating leverage for the quarter.

The merger with Southeastern has continued to go well. We have a very talented and experienced team in that market, and results from both Aiken and Augusta have added meaningfully to the quarter, and we’re excited about the opportunities for additional growth in these markets.

Recently, the regulatory applications for the pending merger with Park Sterling Corporation were filed. We are working closely with the team at Park Sterling and look forward to combining the companies later this year. I will now turn the call over to John Pollok for more detail on the financial performance for the quarter..

Thank you, Robert. Beginning with the balance sheet, the strong quarter of loan growth was funded by a reduction in short-term investments and a small decline in the investment portfolio.

Deposit balances were flat linked quarter, and Fed funds purchased and securities sold under repurchase agreements declined $18 million, and other borrowings were down $10 million. Core deposits represent 85% of our total funding. NPAs declined $4.3 million linked quarter and improved as a percentage of assets down to 0.31%.

Annualized non-acquired, net charge-offs totaled only 5 basis points for the third consecutive quarter. Turning to the earnings equation, Slide number 5 shows our net interest increase $1.6 million linked quarter, and our margin declined 7 basis points to 4.13%.

The net interest income increase is due to a $212 million increase in average interest-earning assets as shown on Slide number 6. The margin decline is a result of lower yields on the acquired loans this quarter, mostly driven by less accretion linked quarter from the Southeastern non-credit impaired loan portfolio.

This margin impact was offset some by higher yields in our legacy loan and investment portfolios from recent interest rate increases. Our overall cost of funds was unchanged linked quarter, holding at 16 basis points.

On Slide number 7, you can see the components of the $1.1 million increase in noninterest income, driven by increases in the acquired loan recoveries and a strong wealth management quarter. Wealth income was up 8.6% from the first quarter and totaled $6.4 million with assets under management reaching $5.1 billion.

Noninterest expenses decreased $18.2 million linked quarter due to a reduction of $16.7 million in merger and conversion-related costs. Excluding these items, adjusted noninterest expenses decreased $1.5 million to $82.2 million as most expense categories held flat or reflected the positive impact of the cost saves from the Southeastern merger.

We estimate that we have another $3 million in annual cost saves to achieve, and we think we’ll be on that run rate by the end of the third quarter. On Slide number 8, you can see the culmination of increasing revenues and decreasing expenses in our adjusted efficiency ratio of 59.7%.

We have been pushing to get to the sub-60 benchmark for some time and we are very pleased with the result. On Slide number 9, you can see the continued progression in earnings per share growth and the $2.33 adjusted EPS at the halfway point of 2017. This pace is 5% higher than 2016.

Finally, on Slide number 10, you can see the $0.93 quarterly growth in tangible book value to $32.70. I will now turn the call over to Robert for some summary comments..

Thank you, John. Our team is focused. We have good momentum throughout the company and are well positioned to see further gains. That concludes our prepared remarks, so I would ask the operator to open the call for questions..

We will now open the line for questions. [Operator Instructions] Our first question is from Catherine Mealor at KBW..

Thanks, good morning..

Good morning..

Good morning, Catherine..

Really great quarter. I wanted to first talk about the growth, which was really strong again this quarter. Could you talk a little bit about where this is coming from, both in terms of where in your markets and any lines of business in particular that you’re seeing accelerated growth? Thanks..

Catherine, this is Robert. Overall, I think the thing that about our portfolio that is pretty unique compared to many is the granularity of it. Our average loan size is about $115,000 and the bulk of our loans are less than just a few million dollars. So we continue to see really good granularity overall.

This quarter, we did have a few larger credits to close that helped certainly with the loan growth, but we’re seeing good diversity in size. We’re seeing, geographically, really good diversity, but Charlotte was the clear front runner this quarter. We have an extremely talented group in Charlotte, and we continue to add talent there.

So Charlotte was a market where we are seeing great opportunities for our bank and for our bankers to move share. So that’s been a big one. Greenville and Savannah as well this quarter were very, very strong, but it was really across the market – across the footprint. Charleston had a very strong quarter.

Our coastal markets, Wilmington, Hilton Head, Beaufort, all very strong. And I’d say in terms of kind of the business mix overall, it’s severalfold. One, our consumer businesses continue to go well, very steady. For a few years after the First Federal conversion, we – that portfolio of one to four family on our balance sheet, it would shrink.

We wanted it to shrink, and we churned and pushed more secondary. We see more opportunity for more on-balance-sheet mortgage lending.

And then in the commercial space, which has really been the predominant driver for our growth is we’ve just seen a lot of opportunity both in terms of C&I business and middle-market business and private banking to do a lot of opportunities there, and with companies and individuals that three or five years ago we probably would not have had as good an opportunity with just because of the size and complexity of our company.

So it’s very – it’s been quite diverse, but geographically, very diverse in terms of size and also in terms of type of loan..

Catherine, this is John. The other thing I would add is our new and renewed loan yield now is up 40 basis points the last two quarters, so we’re getting almost a 4% yield on our new and renew production on the loan side..

And Catherine, just to kind of go back, you’re talking about loan growth, but we’re really seeing it across all lines of business. It’s not really just kind of a loan situation for us. As you know, we identified 20 years ago the markets we wanted to be in and where we wanted to have meaningful share, and now we have that.

I mean, so we’re not just in good markets. We’re in good markets with really a meaningful position in that market and feel great about our presence. And so we’re seeing – the positive results you see in wealth, they’re kind of the same thing. Our brand is strong. We have very talented teams, and it’s having an impact in the markets where we are..

Right. And this might be hard to quantify, and maybe it’s just anecdotal commentary, but I mean, there’s just been a ton of dislocation in the North Carolina market.

How much of that do you think is playing into your ability to improve the growth? Or is it just a combination of, to your earlier point, just building market share really substantially at this point in your life cycle. Thanks..

I think the term – I think any time we have market turbulence, it tends to play in our favor because we’re kind of – we’re just kind of a steady ship. We kind of know what we do and we try to do it every quarter and be consistent, both in our performance from a growth perspective, but also in our delivery for our customer.

And so I think that consistency helps us when there’s turbulence in the market, and we’re certainly seeing a lot of that in North Carolina. But the turbulence in North Carolina, the thing I will say is, most of the share is held by the big guys.

And if you look across our footprint, it’s really the national banks that really hold most of the share in the markets that we compete in – and that’s really our primary focus, and that’s where we’re seeing the most opportunity for share gains..

Great. Thank you. Maybe one last follow-up on mortgage. Can you give an outlook on what you’re seeing in the mortgage business? Revenue is a little softer than I thought we would see quarter-over-quarter, but just love to get an update on your outlook for that business going forward. Thank you..

Catherine, this is John. Yes, I think in the mortgage business, we are seeing a shift. Yes, our fees are down linked quarter, but as we’ve mentioned in the past, what we try to do as rates begin to move back up is do more ARM business. So we had over $90 million linked quarter in growth on on-balance-sheet mortgage.

So I think that’s what you’ll see is maybe a little less fees, more growth. But one of the phenomenas out there now is when you kind of break the business down, 80% of it is purchased and only 20% is refi. We’re seeing a tremendous amount of under occupied and secondary homes being built throughout our state.

So in our construction and land book, obviously, that’s where the construction loans ago. So really, a shift more to purchase and clearly a shift now that we can begin to put some ARMs on balance sheet..

Great. All right, thank you. Good quarter..

The next question is from Stephen Scouten at Sandler O’Neill..

Hey, guys. Good morning..

Good morning..

Hey, Stephen..

Question for you on kind of the NIM trend. I mean, it looked like, as I look at the balance sheet, that some of the liquidity came off towards the end of the quarter and that there could be some incremental benefits coming in 3Q.

Is that accurate? And would you expect some core benefits in the NIM in 3Q?.

Well. Clearly, the core NIM is doing better when your legacy loan yields are up 40 basis points with the amount of production that we have. That’s clearly going to help the core NIM. I think if you go back to Slide 5, you’re beginning to see where our NIM is. If you look at the last three quarters, we’ve kind of been in the 4.09% to 4.13% range.

But yes, clearly, the rate increases have helped there. And as you know, Stephen, we think one of the strengths of our company that’s been undervalued is just our core funding. It’s hard to believe that we have 450,000 checking accounts today. So we added over 12,000 transaction accounts last quarter.

So we’re pretty excited to see some lift on the loan yield side, but we continue to do very, very well on the core funding side..

Okay, makes sense.

Maybe just as it pertains to Southeastern, where are you guys currently on achieving the cost saves from that deal, and kind of how much more could we see come out from that transaction in the next couple of quarters?.

Yes, we’ve made great progress over there on the cost saves side. So if you look at our estimates, we’ve got about another 750,000 per quarter to go on the cost saves side at the Southeastern..

And that should come mostly next quarter or throughout the next several….

Next quarter. That’s correct, next quarter..

Okay, great. And then maybe kind of lastly, more high-level question. In BB&T was talking yesterday a lot more positively about the regulatory environment, kind of what they’re seeing.

I’m wondering at kind of your size, are you using any real positive momentum as it pertains to regulators kind of touch on the bank? And any change that you see coming down the pipe that could help you guys materially on the regulatory front?.

Stephen, this is Robert. I think our regulators for the last few years have been pretty consistent in their message and expectation for us, especially as we got closer to the $10 billion hurdle. We have a very good relationship. The dialogue’s been very open and direct.

It felt like we’ve been able to adequately meet their expectations pretty much across the board. And I don’t really see a meaningful shift in terms of relief, but I also think that the rules of the road are pretty clear and we’ve been able to manage through that pretty well..

Okay, great. I’ll appreciate the color and congrats on over the next quarter, guys..

[Operator Instructions] There are no further questions, so I will now turn the call back over to John Pollok..

Thanks, everyone, for your time today. We will be participating in the Stephens Bank CEO Forum in Arkansas, beginning on September 18, and we look forward to reporting to you again soon..

The conference has now concluded. Thank you for attending. You may now disconnect..