Good morning, and welcome to the SouthState 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 for questions with the research analyst community. I will now turn the call over to Jim Mabry, SouthState Corporation Executive Vice President in charge of Investor Relations and M&A.
Contains forward-looking statements regarding our financial condition and results. Please 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 the call.
Good morning. We will begin the call with summary comments about the first quarter of 2018, offer an update on the merger with Park Sterling, and then provide further insight into our performance for the period. We are off to a strong start for 2018. Net income for the first quarter totaled $42.3 million, or $1.15 per diluted share. This represents a return on average assets and return on tangible equity of 1.19% and 14.69% respectively. Adjusting for merger-related expenses associated with the Park Sterling acquisition, earnings were $51.2 million or $1.39 per share, which represents a return on average assets and return on tangible equity of 1.44% and 17.60% respectively. I am very pleased with our team's accomplishments this quarter. Asset quality, expense control, deposit growth, and continued progress with the integration of Park Sterling were performance highlights.
We successfully completed the Park Sterling system conversion this past weekend and are excited to build upon this merger. Even with the focus on our conversion efforts and crossing $10 billion, we were able to experience growth in checking accounts and in loan activity. The ability to attract talented bankers and new customers comes from a culture that is focused on a relationship approach to banking, which has taken decades to build. Our board declared a quarterly cash dividend of $0.34 per share, $0.01 higher than last quarter, payable to shareholders of record as of May 11, 2018. I will now turn the call over to John Pollok for more detail on the financial performance for the quarter.
Thank you, Robert. Let's start on slide number four and take a look at the increase in net interest income and net interest margin linked quarter. We benefited from a full quarter's impact of Park Sterling, as seen in the $16.7 million increase in net interest income to $129 million. Interest-earning asset yields were up 16 basis points, the cost of interest-bearing liabilities increased 12 basis points, resulting in four basis points of expansion in our net interest margin. The yield on our non-acquired loan portfolio increased 10 basis points, and on slide number five, you can see that it represented about 53% of our interest-earning assets. Our interest-earning asset yield also benefited from a greater weighting of the acquired book.
The full quarter impact of the Park Sterling merger resulted in the acquired loan portfolio representing over 32% of interest-earning assets during the first quarter, compared to 25% in the fourth quarter. The yield on the acquired book declined linked quarter by 34 basis points to 6.23% but still contributed to a higher overall interest-earning asset yield due to the higher weighting. You can see the impact of purchase accounting accretion enhancing the contractual yield earned on our acquired loan portfolio, as well as the remaining discount to be accreted in future periods on slide number six. Slide number seven shows a $4.4 million improvement in non-interest income as our legacy lines of business showed strong performance and the period was also positively impacted by a full quarter of Park Sterling. Our adjusted efficiency ratio increased from 56.9% to 60.7%, as shown on slide number eight.
As a reminder, we have planned annual cost saves of $30 million in total. We have realized 40% of these cost saves through the first quarter. Our systems conversion was this past weekend, and we expect to achieve the remainder of the cost saves by the end of the third quarter. As you can tell from our muted loan growth, we continue to remix the Park Sterling loan portfolio, as is customary post-merger. We are also focused on reducing certain non-core funding acquired in the transaction. This quarter also had the impact of $2.8 million in one-time employee incentives as a result of our strong 2017 performance and the tax reform act. Slide number nine shows the great start to 2018 in earnings per share, and slide number ten shows the $0.44 growth in tangible book value during the quarter.
This was a nice increase given the significant merger cost and the AOCI impact from lower investment values due to the higher rate environment. I will now turn the call over to Robert for some summary comments.
Thank you, John. We look forward to the rest of 2018. We have a unique franchise. Great teams of people operating in fast-growing markets with a strong culture makes our company unique. We're well-positioned just behind the big banks to grow share. This bodes well for SouthState's continued success.
This concludes our prepared remarks, I'd ask the operator to open the call for questions.
We will now open the line for questions. If you'd like to ask questions, please press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jennifer Demba of SunTrust. Please go ahead.
Thank you. Good morning.
Hey, Jennifer. Good morning.
Just a question on the loan remixing for Park Sterling. Can you give us some details of maybe how many loans ran off that you exited during the quarter, and what you think you have left to do, and how long that will take? Also, second question, I know you've always seen opportunities to gain share from the bigger guys in your markets, but are you seeing outsized opportunities from Wells these days? Thanks.
Jennifer, this is John. I'll start. On the Park Sterling book, as you know, it's historically for us, we have a tendency to remix the loan book, look at the different asset classes. We've done a few things. I think as I mentioned last quarter, we have now sold about $68 million worth of their Shared National Credit book. We are in the process of unwinding their builder finance book. There was about $85 million in that book. Then, as you know, we have a tendency to kind of look at the CRE book. We're in the process of evaluating that. We had our systems conversion this weekend, so we just changed the signs. What happens this quarter is as we go out and meet with all the individual customers, we continue to kind of look at the book.
Typically, remixing for us, it takes six to 12 months to do that. I don't see that anything unusual compared to what we've done in the past. For this, Robert-
Any disproportionate opportunities from Wells in terms of hiring or customer acquisition these days?
Hey, Jennifer, this is Robert. I'll touch on just a couple of things. Before I touch on that, let me just touch on the portfolio. The underlying trends that we're seeing in terms of loan volume, obviously Q1 was very noisy, but the underlying trends are positive. If you kind of look market by market, we're seeing pretty good growth really from our non-merger impacted markets. The growth looks good. The pipeline, Q1 to Q4 was up about 11%, I think we feel good about the segments it's coming from. The consumer business has been strong. Commercial operating companies has been very strong and makes up a significant part of our pipeline. On the CRE side, we got about $1 billion in dry powder. Charlotte was obviously the most impacted from the merger, Charlotte had a fairly flat quarter.
Actually, we're down some as we remix some of that portfolio, but they have the most significant pipeline that we have in the company. Overall, feel like the underlying trends from a loan perspective are probably as good as they've been in a while. To switch gears on your other question. I think we've seen this for a while, and in terms of talent from larger banks, we've seen it for a while, of course, Wells included. I think it's twofold. I think one is obviously disruption at Wells and other larger institutions. Also there's the change in our company, and I think that may be impacting this as much as the disruption at the other companies.
We have a stronger platform than we've ever had, especially in the commercial bank, our treasury platform, our capital markets platform, that's just bringing over a higher caliber banker from these larger banks. We just brought one from Wells this past quarter who's a guy some of our bankers had a relationship with for a couple of decades. Very well known, a solid banker. A few years ago, we might not have had the platform to be able to attract that talent, and today we do. I think it's multifaceted. I think there's unhappiness or dissatisfaction from some bankers and also some support people inside the larger organizations, and we've got a more robust platform than we've had in the past to be able to attract them.
Thank you very much.
The next question is from Tyler Stafford of Stephens. Please go ahead.
Hey, good morning, guys. I wanted to start on maybe just following up on Jennifer's Park Sterling remix question. Given that repositioning, do you still think you can hit that mid to high single-digit pace for the back half of the year?
Hey, Tyler, this is John. I think it depends. Our view is we got to kind of get back to that number. Is it the second half of the year, the beginning of the next year? A little hard to tell. I will tell you, kind of in the second quarter, as Robert mentioned, our pipelines were good. The growth looks good. I think it's still a little early to tell exactly when that happens.
I do think, Tyler, it is front-end loaded. The Shared National Credit is $68 million. The builder finance book's around $80 million. All that is not unwound at this point, but is certainly being unwound. Our CRE concentrations, you saw our CRE to capital declined, and there's certain CRE segments that we're getting out. We're shifting banker focus away from more. Park was just a heavier CRE bank, so that can take a little bit of time to do. The pipeline looks good. The underlying trends look good. It's just a little noisy right now, but I think we feel good about the productivity side. The question is, how quickly do we move some of this stuff out of the bank?
Sure.
Tyler, when you come off a year of growing 60%, I think it's just a natural time to where you're going to remix the book. We had a heavy growth year last year with two acquisitions. This is something we've done before. Clearly, a part of our strategy is we try to grow the core bank.
Sure. No, that makes complete sense.
Just to add on to that is, we find it's better to do it right on the front end, is decide, all right, what are you going to be in, what are you not going to be in, what does the credit box look like? Everybody comes out of the gate kind of knowing what's going to fit and what's not going to fit. I think we've certainly gotten there quickly. There were a lot of similarities, credit culture-wise, between our two teams. We're trying to get it right on the front end, and that creates a little bit of the front-end loaded portion of the runoff.
Yep. Okay. I appreciate that color. Just on Park Sterling Builder Finance portfolio, you mentioned that the $80 million. Are you exiting that portfolio in its entirety or just more selectively culling the credits that you want out of that portfolio?
No, we're winding that portfolio down.
Got it.
Just to be clear, we do a lot of construction finance, but it's for the end user. This was more of a speculative builder finance group, there weren't a lot of what I would consider deep relationships. We would be one player amongst many with some of these larger builders, that's just not an area where we want to deploy our capital. We think we can deploy it in the mortgage space, the consumer space, and the middle market space more effectively.
Yep, understood. Okay. Just on the deposit side of the house, can you help us parse out how much of the deposit cost increase was Park Sterling related from kind of full quarter average versus just the normal market pricing you're seeing across the legacy SouthState portfolio?
Tyler, this is John. It's a little hard to say. I think when you step back and you look at that side of the balance sheet for us is one of the things that we wanted to focus on was kind of getting rid of the non-core funding. FHLB advances, some sub-debt, some brokered CDs. Our strategy has been to kind of go back into the market, get a little bit more aggressive on the deposit pricing, and replace that. As you can tell in our deposit growth for the quarter, we were up nicely. Clearly wanted to be a little bit more aggressive because we wanted to replace that non-core funding. Now our loan to deposit ratio is back down to about 92%.
Clearly makes it a little noisy trying to split it out that way when you're trying to replace that much non-core funding. We clearly got a little more aggressive on the CD side. I think when you step back and you look at our non-interest DDA growth, we're growing core checking accounts in the bank. Over 25% of our funding now is non-interest DDA. Our strategy was a little bit different because of the transaction, not just because rates were going up and it was a little more competitive. We want to replace that non-core funding.
Tyler, just to kind of add on. I mean, it's kind of a similar story to the loan growth. It's just noisy, but the underlying trends we feel really good about. Obviously we remixed, but non-interest DDA, as John said, did grow 9%. Probably our strongest new account growth quarter we've ever had. A lot of new account volume. I think a lot of that goes to really two areas. We picked up a much more robust treasury platform with Park Sterling. We have a significant pipeline on the treasury side, and our team is doing a really outstanding job there. That conversion took place this weekend, and we'll be migrating the SouthState customers to that platform between now and the end of the year. The new customer pipeline for that has been very robust. We've expanded our digital delivery.
We had 20% year-over-year growth in our mobile deposit platform. Now 66% of all our deposits are coming in a digital format. We just see positive momentum underlying the overall deposit side of the bank.
Tyler, one last thing. If you go back to the third quarter of last year, it's kind of Park Sterling's last release, and their cost of funds was almost 60 basis points. Kind of, I think about it big picture, take that 60 basis points, got a full quarter now, and we were up about 10. We're pretty pleased with what we've been able to accomplish on that side, bringing in those cost of funds and ours are only going up about 10.
Yeah, no, that's a great point. You guys have clearly done a great job remixing both sides of the balance sheet so far. Thanks so much for taking my questions. That's it for me.
Thanks, Tyler.
The next question is from Catherine Mealor of KBW. Please go ahead.
Thanks. Good morning.
Catherine.
Can we talk about the expenses a little bit? Are you able to give us an outlook for how expenses should trend next quarter? I guess we'll have the $2.8 million bonus come out and probably some higher seasonality, then the full impact of the cost savings. Is there a way to just kind of look at the puts and takes for what the expense run rate could move to over the next couple of quarters? Thanks.
Catherine, this is John. Let me see if I can take a shot at that for you. When you look at Park, they had annualized expenses of about $86 million a year. We announced about $30 million in cost saves. We realized 12 of that. We've got about $18 million to go on an annualized basis. If you look at next quarter, we realize 40% now. We ought to be in that 60% range. As we get to the end of the third quarter, we feel like we'll realize about 100% of that.
Okay, that's helpful. Any way to quantify the seasonality of one Q as well? I think you mentioned in the press release higher FICA taxes and things like that.
I'm not sure I could totally give you that in dollars, clearly you have the FICA taxes. We have raises that go in during that time. I think historically, where we've been successful on the expense side is when we can kind of contain core expenses under that 3% growth rate. That's something that we focused on a lot. That'd probably be the color I would give you around as you think about looking at our expense growth rate over the last few years.
Okay. That's helpful. Back to the margin, how about on legacy loan yields? I think your non-acquired loan yields were up about 10 basis points linked quarter. Any commentary on asset betas and as rates continue to rise, how quickly you think you'll be able to move legacy loan yields higher? How much is increased competition offsetting some of that?
Catherine, this is John. I'll start. What we were excited to see is our legacy loan yields now back in the first quarter are north of 4%. We're closing in. As you can see, our legacy book was up 10 basis points linked quarter. Park made us more asset sensitive. We kind of went from what I would say a book of about 60% fixed rate. Now we're about 55% fixed rate. One of the great things about the churn you're seeing in our portfolio, right, more asset sensitivity. Didn't grow a lot, a lot of churn there. As Robert mentioned, the pipelines are full. That clearly has a big impact on the margin. Our average loan amount is still holding in there a little over $125,000, is what we've seen. Seeing some nice growth on what I'd say the small side. The mortgage business.
We've shifted to more on balance sheet, so the 3-1s and 5-1 arm business, we like a lot. We like seeing that now that the rates there are a little bit better. I think we feel pretty good about pricing. Is it competitive? Absolutely. Good loans are, especially on the commercial side, are extremely competitive. I think, as Robert mentioned, though, now we've just got more firepower. We have a robust capital markets area where we can go out and compete on some bigger deals but not have to take all the interest rate risk. Our new treasury platform, we've just put that in. We have a number of customers that have tested that, and we've got a fairly good list of prospects that I think we'll be able to bring over.
I think when you think about betas in general, I think as you know, we focus on core funding. When 81% funded by core deposits, we continue to focus on growing that non-interest DDA, our betas have just performed better. As I mentioned, I think in Tyler's question, it gets a little noisy when you're trying to kind of wean the non-core funding off the balance sheet. Beta-wise, we know it's going to be more competitive out there. I think when you look at that remix of the loan portfolio, where our yields are going, we feel good on the loan side that we'll be able to continue to drive our yields up.
Great. Thanks for the color.
Again, if you have a question, please press star then one. Our next question comes from Christopher Marinac of FIG Partners. Please go ahead.
Thanks. Good morning. John and Robert, could you tell us a little bit about the things you are avoiding within the loan portfolio, whether that's types of deals, structure, just some sort of color.
This is Robert. I'll start. Christopher Marinac, fundamentally, we just believe in relationships. I think the dividing line for us primarily is relationship versus transaction. That doesn't always go perfectly down one regulatory segment of credit or type of way of structure. If it's just a transaction, we tend to just not be interested. We find that we get the best returns when we've got a whole relationship and we've got good funding. I'd say that the major dividing line is transactional businesses like Shared National Credit or like the Builder Finance group. Went into national builders to take a piece just to get credit outstanding. That's just not really what we do. Shared National Credit's really the same way. I'd say that would be the ultimate dividing line. CRE has certainly been very hot for a while.
I would say the multi-family space, the hospitality space, certainly we've seen a lot of growth in those areas, especially in the markets that we're in. We don't see any weaknesses occurring in those markets, but we certainly have seen a lot of demand, and we're careful there. Then we've seen some businesses that have economy's been good, and we've seen some that have leveraged up. Companies that have leveraged up on their balance sheet are ones that we're going to be a little bit more cautious about. That's a broad range. I think the big differentiator is relationship versus non. John, anything to add?
I think what I would add is we want to be able to get the deposits to fund our bank. If we, as Robert said, the transactions that don't come with deposits is something we're really not interested in. We feel like the way the rates are moving is you've got to be able to core fund your bank. If you look at wholesale funding prices today, and you consider those in some of the betas, is those things are moving at an extremely fast pace. It gets back to really, can we round out the relationship? Can we be their bank? As Robert mentioned, for us to be the second or third partner in a relationship, that's not really something we're interested in.
I think what we're really excited about now, when you take that treasury platform and the quality of the hires that we're getting in the middle market space, we feel like we can grow our balance sheet. We feel like we can fund it from a core perspective. At the end of the day, we got a lot of options left, right? We still have the ability to pull the trigger on the wholesale side if we needed it. Ultimately, what we see today, it just seems like $1 of earnings is valued the same, whether it's coming from a transaction or core relationship, and we just view that very differently today than it looks like it's being out there in the what some people are doing.
Chris, we've been making sure that we've got the platform and the talent that can deliver to all size companies, we expect to be the first call. I don't think it's just commercial banking. I think we're absolutely there in our mortgage area. We're absolutely there in our consumer bank. Our wealth area wasn't there a few years ago. Now they're clearly there today. Our commercial bank has been in segments, but not all segments. I think we're moving our commercial bank into where we're going to be the first call for these customers, that's the position that we expect the company to be in.
This is great, guys. Thank you for all the background. John, just a quick follow-up. The original merger charge on Park Sterling that you gave us way back when, is that still a good figure today?
It feels like we're going to come in a little bit lower than our original number, we still got a couple of quarters today to go. Today, looking at merger costs, it's probably going to be about $20 million next quarter and about $5 million the quarter after that. It feels like we're probably a little under our original estimate.
Okay. South.
There are no additional questions at this time. I will now turn the call back over to John Pollok.
Thanks, everyone, for your time today. We will be participating in the SunTrust Robinson Humphrey Financial Services Conference in New York beginning on May the 22nd. 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.