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

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

Please refer to Slide 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, and I appreciate you calling in for our third quarter update. We’ll begin the call with a few summary comments regarding the third quarter of 2017, offer an update on the Southeastern merger and the pending Park Sterling combination and provide insight into our financial performance for the quarter.

Our team produced another quarter of very solid performance, and I’m very proud of the many ways our company continues to get stronger. Net income for the third quarter totaled $35 million or $1.19 per diluted share, which represents a return on assets and a return on tangible equity of 1.25% and 14.93%, respectively.

Adjusted net income equaled $35.7 million or $1.22 per diluted share and resulted in a return on assets and a return on tangible equity of 1.28% and 15.21%, respectively. The quarter and the year have been highlighted by steady and diverse loan growth, improved operating leverage and efficiency and exceptional asset quality.

However, as we move into a period of higher interest rates, our balance sheet strength becomes an even more important part of our company. Our balance sheet is built around significant core funding that is both local and granular with very little reliance on wholesale funding.

The strength of the balance sheet of South State has us very well positioned. Loan growth has been steady all year. Period-end loan growth this quarter was 4% annualized, but our average loan balances grew at a 9% annualized pace. We operate in many of the best markets in the Southeast, and we continue to benefit as these economies grow.

Credit quality has been and continues to be excellent. While mortgage and wealth revenues were down from the second quarter, the underlying trends are good in both businesses. Also, I want to touch on our merger activity.

Southeastern is right on track with the merger integration behind us and having achieved the efficiency targets we shift to building, and we have a great team in a great market to build on. The Park Sterling transaction is ahead of us, and we feel very good about our progress to date.

The combined platform gives us meaningful market share in markets where we overlap, including Charlotte and an excellent new market in Richmond. I will now turn the call over to John Pollok for more detail on our financial performance for the quarter..

Thank you, Robert. Starting on Slide number 5, we are very pleased to see our net interest income over the $100 million mark for the first time in our company’s history. Our margin was relatively flat linked quarter, moving down only 2 basis points as acquired loan yields declined 4 basis points and legacy yields increased 4 basis points.

Total interest earning asset yields were down 1 basis point as the higher-yielding acquired book now makes up less than 22% of total interest-earning assets as shown on Slide number 6. Average loans increased $188 million this quarter and represented almost 84% of our average total interest-earning assets.

A strong funding base allowed for a modest 2 basis point increase in our cost of interest-bearing liabilities. Our average demand deposit balances totaled over $2.6 billion this quarter, helping keep our overall cost of funds at only 17 basis points, up 1 basis point from the second quarter.

On Slide number 7, you can see the components of the $1.9 million decrease in non-interest income linked quarter after adjusting for an increase in securities gains. Most of the decline is due to the $1.7 million decrease in mortgage income.

About $1 million of the mortgage decrease is related to less secondary market activity and the rest is attributable to our mortgage servicing asset. Our mortgage servicing asset net of the hedge lost value this quarter as mortgage rates declined and the 10-year U.S. Treasury note yield increased. Turning to the expense side.

Total non-interest expenses decreased $5 million linked quarter on a $2.8 million reduction in merger and conversion-related cost and $2.2 million in expense reduction in almost every category of expense.

All of the cost saves expected from the Southeastern merger have been achieved, and you can see the positive impact in our third quarter sub 60 efficiency ratio on Slide number 8. On Slide number 9, you can see the continued progression in earnings per share growth, and the $3.55 adjusted EPS achieved year-to-date in 2017.

Finally, on Slide number 10, you can see during the third quarter, we had $0.96 in tangible book value growth. And for the year, we have grown $2.44 with tangible book value now totaling $33.66 per share. I will now turn the call over to Robert for some summary comments..

Thank you, John. We are pleased with these results through the three quarters of the year. Our company is better positioned than it has ever been, and we’re excited about the road ahead of us. That concludes our prepared remarks, so would ask the operator to open the call for questions..

[Operator Instructions] Our first question comes from Catherine Mealor from KBW. Please go ahead..

Thanks. Good morning..

Yes, Catherine..

Good morning..

Great quarter. First question is on the margin and just moving around the balance sheet. If you look at Slide 6, you talked about how your securities, balances and your short-term investments have declined linked quarter.

Can you help us think about how you’re thinking about that mixed shift in your balance sheet as we move into the back half of the year? Thanks..

Catherine, this is John. I think one of the main drivers there is, obviously, we’re getting ready to close the Park Sterling deal. We hope in the fourth quarter. So kind of repositioning our own balance sheet a little bit, so we did some cleanup there. And as we add Park, of course, they’re going to have over $400 million in securities.

So kind of look at it in terms of the second half of the year, kind of getting ready for that..

Thanks, John. And really great trends on your core funding. I think one of the lowest deposit betas we’ve seen this quarter. So that’s – no questions there. So we’ve flipped to the loan side, your loan yields increased I think about 4 bps linked quarter.

How do you think about how much of that was just from – of the June rate hike and then how loan pricing is trending so far this quarter? Thank you..

Catherine, this is Robert..

Hey, Robert..

I think, clearly, some of the increase has obviously been the last several quarters. We’ve not had to move on the deposit side the last few quarters, but we’ve seen pretty steady growth in our newly – our new production loans for the last probably at least four quarters. And so – and we see in the marketplace, just the ability to get a better yield.

So I think it’s just a combination of the two things, but clearly, we’re seeing it almost every deal. I mean, the yield is mostly north of four on everything that we’re producing that’s new..

Catherine, this is John. Our loan yields, if you go back to the fourth quarter 2016, they’re up about 50 basis points. So we’re really seeing some nice momentum there. And of course, as you know, our loan portfolio is very granular. Our average loan amount is still only $116,000. So a lot of small loans, but clearly you get better pricing in that space..

Great, that’s all I have. Great quarter, guys. Thank you..

The next question is from Jennifer Demba of SunTrust. Please go ahead..

Thank you. Good morning. Just question on the competitive environment and what’s evolving there with all the transactions that have occurred and are occurring in the North Carolina and South Carolina market.

Do you see that impacting your loan growth at all? Or obviously not pricing too much?.

Jennifer this is Robert. I don’t think there’s been meaningful disruption. I mean, the disruption is mostly has been with smaller market share banks in our footprint, and seeing most of the market share is controlled by the large banks.

So that’s where our focus is, and that’s what we’ve been really – for a couple of decades, is really focused on those banks to move share from them. Our period and loan growth numbers were 4%. But, if you look at the average balances, I mean we’re still 9% up. It’s very local. It’s very granular.

Our pipeline is better in the third quarter than it was in the second quarter. So there were some also some large, just natural payouts in our loans this quarter. So it all feels really good.

I think the opportunities, the companies that we’re talking to about their relationships, the opportunities that we’re having to move probably feels as good as it ever has been. So we still feel very good about kind of the high single-digit loan growth rate.

That kind of feels like where we can get the appropriate yield and have the appropriate growth rate..

Thanks Robert.

What’s your interest in M&A in 2018? Are you going to just focus on integrating Park Sterling? Or do you think you’d start looking again as the year progresses?.

I think our focus obviously, we’re on the cusp of closing Park. We just closed on the Southeastern or just converted the Southeastern transaction quarter before last. So our focus is clearly on execution of those two and merger integration there. But we have a lot of other opportunities, too. I mean, it’s about where can you create the most value.

And you see the progress we’ve made on the efficiency front over the last year. There still continues to be a lot of opportunity there. There’s a lot of opportunity to continue to digitize the bank and implement a lot of digital and more efficient options there.

And there are tremendous organic growth opportunities both in terms of talent, in terms of customers. So that’s where we see we can create the most value, and obviously we want to execute these mergers very well..

Thank you..

And the next question comes from Stephen Scouten of Sandler O’Neill..

Hi guys good morning..

Hi Stephen.

Hi Stephen..

Maybe first question on the organic growth rate. I know, Robert, you said kind of high single digits still feels about right.

But can you talk a little bit more about what you guys saw? I know you said maybe some pay-down activity, natural pay-down activity, but maybe what you saw geographically from where contributions were coming from, if that continued to be Charlotte and Charleston? Would that be fair to say or kind of what you’re seeing geographically across your footprint from a growth perspective?.

Yeah Stephen, this is Robert. So this was probably the most geographically diverse quarter we’ve had in a while, most balanced in terms of geographic diversity. I’ll start with Georgia. Augusta, obviously, just went through a conversion and we’re kind of – the dust is still settling in Augusta.

But if you take the other parts of Georgia, which we have a significant presence there, Savannah really up to the North Carolina line is Georgia had really an exceptional quarter, and it’s had a great year. But really strong growth in Georgia across-the-board. Charlotte has been great all year, continues to be. Lot of opportunities there.

We just have a great team in Charlotte, and we’ve been building that now for a decade. So really strong fundamentals across-the-board in Charlotte. Charleston has been really good, as you know. But the other parts of coastal South Carolina had been a little softer, but we really saw places like Hilton Head and Myrtle Beach.

Those types of markets have a strong third quarter. So it was a very diverse growth rate for the third quarter and feel very good about the pipelines, continuing that – to have a good balance amongst the markets..

Okay, yeah that’s helpful. And I mean you spoke to the strength of Georgia and I feel like I’ve heard you guys talk a little bit more, maybe more, I don’t know if aggressive is the right word, but a little more broadly on where your – the bank could go, geographically speaking.

Do you think you could see an expansion into maybe Atlanta or Jacksonville or other new markets similar to what you guys did in Charlotte where you kind of grow on an organic basis first de novo and then look to M&A? Or how are you thinking about new geographic expansions beyond where you are today?.

Well Stephen our primary focus is where we are. And if we never entered another new market, I mean if we didn’t go into another new market for the next 10 years. We have tremendous opportunity in our own backyard. So we’re in five of the top 10 fastest-growing MSAs in the Southeast. The other five are all in Florida.

So we’re where you want to be, and now we’ve got meaningful share where we want to be. So I feel very good about how we’re positioned and our opportunity just to move share and gain share where we are. And we have great teams in those markets, and we’ve been building them for a long time.

So I think all of that that really bodes well for our ability to focus and execute in the markets we have. In terms of M&A or geographic expansion, all comes down to us, to people. When the people are right and the team is right to move into a Jacksonville or an Atlanta or some other market, we would certainly consider it.

It’s not off the table altogether. But right now, we think there’s so much opportunity in our own backyard in terms of talent and customers and share that, that’s our primary focus..

Okay great and maybe one last one from me. It would just be on the mortgage front. I know you guys have talked the last several quarters about maybe holding more of the mortgage production, so we’d see a little bit of a decline in mortgage banking fee revenue.

Is that a continuation of what we’re seeing here this quarter? And did you hold more mortgage production on balance sheet this quarter? Or can you kind of walk me through the moving parts there in that dynamic?.

Stephen this it John. It is really a shift, it’s a shift we’ve been talking about really for the past several quarters.

As I mentioned a few minutes ago, when you see your average loan growth yields going up 50 basis points in less than a year is it typically means there are some good ARM business you can do on balance sheet, and so we’re able to keep that in-house.

Clearly, construction is very hot, so we’re doing a lot of construction lending to the end-user on one to four family, and you’re seeing that in our book. And actually, this quarter, we actually saw people beginning to buy lots again. So actually, a few lot loans that people are going to begin to build houses on.

So clearly, a shift really on balance sheet as the secondary market rates have kind of remained steady over the past six months or so. I think everybody’s refinanced..

I would think they figured that out by now but I have been continuously surprised with the legs of that refinance market. But that’s really helpful guys. Thanks so much and congrats on a good quarter..

Thanks Steve..

[Operator Instructions] The next question comes from Nancy Bush of NAB Research. Please go ahead..

Good morning gentlemen..

Good morning..

My first question is on wealth management. You had sort of flattish results there in a quarter that I – market trends would have said you should have been up.

Can you just tell us what’s going on there?.

Yes, so Nancy this is Robert. We just did some remixing. We had some remixing in some of our really thin margin assets that we were holding, so it shows our asset reduction. But you look – the revenues were fairly flattish, but the reason is in Q2. We have some fairly sizable onetime hits from just some tax work that we do in the second quarter.

So kind of the – second quarter is kind of an anomaly, an abnormally high number. Third quarter feels more in line. So nothing have surprised us there other than just kind of some remixing..

Okay. And I guess we go back to this loan growth question because your experience in loan growth this quarter seems to be very much in contrast to some of your competition. We’ve kind of heard consistently across-the-board, slowing C&I growth, businesses waiting until something happened in tax reform, et cetera.

Do you think you’re experiencing a competitive advantage, a geographic advantage? I mean, could you just sort of give us your lay of the land right now?.

I think it’s – one, I think it’s our markets that we’re in, I think if you’re not in, it just depends on where you operate. And we are in some really good markets that are economically having a lot of success. I mean, just look at Charleston.

I mean, there was – just last week or few weeks ago, $500 million new investment at Volvo, doubling their number of employees from 2,000 to 4,000, the things that are going on in Charlotte. I was in Richmond last week. The team there is exceptionally strong, very good culture fit, great opportunities.

And most of that market is controlled by the large banks as it is in the rest of the markets where we are. So again, that continues to be the opportunity that is in front of us. So I think, Nancy, what we’re seeing in terms of loan demand is, one, we’re in good markets and we’re seeing most of that growth coming from these growth MSAs.

I think, secondly, we’ve been in them for decades. And so our consistency of bankers, our consistency of brand, our consistency of polling efforts, many of these relationships, you don’t move them quickly. So I think our consistency of being in front of them over a long period of time has been very good.

And then I think it’s how the company is perceived is – today, in our markets, we certainly got meaningful market share in these markets. And when you’re a lower market share player as we – there was a time when we were, it is just much harder.

And today, we’ve got a really good market presence and good share and I think our – we typically get the first or second phone call. And if somebody’s frustrated or unhappy or things are changing at a larger institution, we’re the bank that’s getting called. And I think those were the dynamics that are playing out in our favor..

Nancy, this is John. The other thing I would add is, we only rebranded a few years ago. So it’s hard to believe we had five brands a few years ago. So having our South State brand I think the brand is really starting to take hold, but it’s still relatively new. So I think a lot of people are really beginning to see how broad our reach is.

I was, Nancy, with a – on a customer call a couple of weeks ago with John Windley, the President of our Bank and a company that’s at a large firm. They had a multifaceted request that was part under-occupied real estate, there was a line of credit involved, there was a treasury piece.

And as the proposal they got from a larger bank was came from each segment – one proposal from each segment. We bring the whole bank to the table and it’s very integrated, and that works quite well and differentiates us in the market..

All right, thank you very much..

The next question is from Tyler Stafford of Stephens. Please go ahead..

Hey, good morning, guys..

Good morning..

The first one, just one follow-up on Stephen’s earlier question around mortgage. Do you have what the mortgage.

Do you have what the total production was this quarter and the gain on some margins of the loans that you did sell?.

On the gain on sale on mortgage?.

Yes..

Yes. If you look at our production for the third quarter, it was about $195 million. And almost 60% of that was on balance sheet. So about 40%, we sold into the secondary market. And our margins have the tendency to kind of be in the high 2s..

Okay. Let’s see, the other expenses this quarter were down a few million dollars.

Is that just a reflection of the last bit of Southeastern cost savings falling out? Or is there anything onetime that wasn’t there this quarter?.

On the other non-interest expense?.

Yes..

Yes. I think last quarter, we had – our appraisal expense was up a little bit so that was down a fair amount. We had a few less operational losses than we had in the second quarter. We just did a better job in those categories. It wasn’t really anything any specific to the merger..

Okay.

Do you guys have a Park Sterling conversion date set yet?.

We’re going to convert sometime in the first quarter. We have a number of how we look at it, so it’s going to be sometime in the first quarter, we’re going to do it..

Okay. And then just lastly for me. I think there was a comment in the earnings release about the decline in non-interest-bearing deposits.

I was just curious if there’s anything seasonally that lower that deposit and the non-interest-bearing? Or if that’s just kind of your posture on not feeling the need right now to give out more yield for those deposits if they’re asking for it?.

Well, that was a period-end balance. So if you look at the averages, the averages are up about 7.5% linked quarter..

Right, so okay..

That’s a period end number..

Yes, okay, all right. Thanks..

The next question comes from Blair Brantley of Brean Capital. Please go ahead..

Hey, good morning everyone..

Hi, Blair..

I just want to circle back on your Richmond comments. I was just curious about your view on Park Sterling because it looks like they’ve lost some deposit share over the last year.

So I just wanted to get your updated views on what you’re seeing from a competition standpoint and what that market going forward with the overall franchise?.

Yes, I think the – I mean, you’d – they could probably answer this better than I can.

They could answer this better than I can answer this, but my guess is that was from the first capital merger and just the deposits that are naturally kind of held in the bank and maybe aren’t real true sticky deposits, and they weeded some of that out as they brought the two companies together, and that impacts the market share data.

So that’s what I think you’re seeing there. But the productivity of that team, the opportunities, the quality is excellent and culturally, a great fit. So Richmond is, if you look through Bank of America, Wells Fargo, BB&T and SunTrust, I mean those are the big players. They’ve got all of the share.

And so the opportunities there for us to really build a meaningful company over time is significant. So it’s – I think that’s a great platform in which to build on, and we’re ready to get the deal closed so we can get on with it..

Yes, Blair, this is John. I grew up there, so their locations, in my opinion, are in really good spots. We think we’ve got tremendous opportunities up there on the deposit side and really all of our lines of business when we integrate mortgage and wealth up there, but I think we’ve got a lot of opportunity in Richmond on the deposit side..

Yes. When I was up there last week, the two areas, mortgage, I think they’ve got one originator. I mean, we can easily have 10x that. And then on the wealth side, our platform is just a lot more robust. So we give the team, which they have a very good wealth team up there, but we give them just a lot more firepower to – and product to sell.

So I think the thing that is unique about the Richmond bank is that they’ve been kind of really successful in a couple of lines of business. I think we can be really successful in all four lines..

Okay, thanks.

And then I don’t know if you mentioned that, but was there any storm impact for this quarter for you guys?.

No, very little. We had to implement some of our disaster recovery plan and move a few people around, but very minimal for us..

Okay, great. Thank you, guys..

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 Sandler O’Neill East Coast Services Conference in Florida beginning on November 15, and we look forward to reporting to you again soon..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..