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Edited Transcript of SSB earnings conference call or presentation 30-Jul-19 2:00pm GMT

Q2 2019 South State Corp Earnings Call

Columbia Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of South State Corp earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James C. Mabry

South State Corporation - EVP of IR & Mergers-Acquisitions

* John C. Pollok

South State Corporation - Senior EVP, CFO & Director

* Robert R. Hill

South State Corporation - CEO & Director

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Conference Call Participants

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* Christopher William Marinac

Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Nancy Avans Bush

NAB Research, LLC, Research Division - Research Analyst

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

* Tyler Stafford

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the South State Corporation Quarterly Earnings Conference Call. Today's call is being recorded. (Operator Instructions) I will now turn the call over to Jim Mabry, South State Corporation Executive Vice President in charge of Investor Relations and M&A.

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James C. Mabry, South State Corporation - EVP of IR & Mergers-Acquisitions [2]

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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 #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.

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Robert R. Hill, South State Corporation - CEO & Director [3]

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Good morning. I will begin this call with summary comments about the second quarter, observations on our overall performance. John Pollok will review the quarter in more detail, and we will then conclude the call with questions from the research analyst community.

Our focus continues to be on building long-term shareholder value, and this quarter marked continued progress towards that goal. Adjusted net income was $49.4 million or $1.40 per diluted share and represents a 1.28% return on average assets and a 15.79% return on tangible equity.

Net income totaled $41.5 million for the second quarter or $1.17 per diluted share. This represents a 1.08% return on assets and a 13.38% return on tangible equity.

In December of last year, we met with investors to provide further insights into our progress and the road ahead. As part of the conversation, we articulated longer-term financial performance targets. While we did not put a timetable on the achievement of those targets, our performance in the first 6 months of '19 have us off to a good start.

Among the highlights of the quarter was considerable improvements in adjusted operating leverage. We showed meaningful growth in revenues and demonstrated good expense control. Interest income growth was fueled by an increase in average loan balances, and fee income was up in all lines of business.

Ultimately, it is the ability to grow customer relationships that is critical to the creation of shareholder value, and our company continues to perform very well in this area.

The strength and integrity of our balance sheet is core to the success of South State. Capital levels remain strong. Asset quality metrics continue to be impressive, and funding remains a key competitive advantage. The quality of our funding mix continues to improve, with solid growth in noninterest-bearing deposits. Despite remaining active in share repurchases, our tangible book value grew $0.70 in the quarter to $37.85 per share, and capital levels remain strong. The Board of Directors has declared a cash dividend of $0.43. This is an increase of $0.03 from last quarter and represents a 22.9% increase in our dividend from a year ago.

I will now turn the call over to John Pollok for more detail on the financial performance for the quarter.

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [4]

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Thank you, Robert. Our comments this morning will focus on our margin, noninterest income and expense and capital management. We showed significant improvement in adjusted operating leverage this quarter, with nice increases in both net interest income and noninterest income, while limiting expense growth.

On Slide #5, you can see the $3.9 million improvement in net interest income. The margin declined 10 basis points as much of the growth in interest-earning assets was in short-term investments and the investment portfolio.

As shown on Slide #6, the growth in average loans was 4.9% linked quarter, which had a very positive impact on net interest income. Net interest income and the margin also benefited from $162 million increase in average noninterest-bearing checking accounts this quarter.

Our cost of funds increased to 71 basis points, up 4 basis points linked quarter as rates on deposit accounts were unchanged except for increases in certificates of deposit.

Slide #7 shows the impact of accretion this quarter, which is down to 6.1% of total interest income, as the balance of this portfolio continues to decline.

You can see those balances and the discount remaining on the portfolio on Slide #8. We had very strong improvement in noninterest income this quarter, as shown on Slide #9, led by a $2.9 million increase in mortgage banking income.

Fees on deposit accounts and wealth management were up $900,000 and $400,000, respectively. Our Capital Markets Group also had a very nice quarter, with $900,000 in income, due to the increase in back-to-back swap activity.

Slide #10 shows our linked quarter expense detail. Adjusted noninterest expense, which excludes branch consolidation and pension plan termination costs, was up $700,000 linked quarter, primarily in professional fees and marketing. We had good expense management this quarter, holding the adjusted expense growth to 2.8% annualized. Achieving the cost save initiatives that were previously announced, $13 million in pretax on an annualized basis, played a large part in the results. We achieved about $1.5 million in incremental cost saves this quarter and remain on track to achieve 75% of the saves in 2019.

As a result of the $8.3 million in revenue growth and limiting expense growth, our adjusted efficiency ratio improved from 62.5% in the first quarter to 59.8% this quarter, as shown on Slide #11.

Tangible book value improved to $37.85, as shown on Slide #12, over 9% growth from a year ago, despite being active in the share repurchases during most of this period. We give you an update on our share repurchase activity on Slide #13.

During the second quarter, we retired 641,200 shares and to date, this quarter, we have retired an additional 594,400 shares. We currently have 1,264,400 shares available for repurchase under the existing plan.

From a capital management standpoint, the repurchase activity, combined with some asset growth, has our tangible common equity to tangible assets ratio at 9%. The dividend declared by our Board this quarter represents 35% of GAAP earnings and 30% of adjusted earnings. These capital management efforts and operating leverage improvement this quarter result in a 15.8% adjusted return on tangible common equity.

I will now turn the call over to Robert for some summary comments.

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Robert R. Hill, South State Corporation - CEO & Director [5]

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We are optimistic about the balance of 2019 and continue to make progress on improvements in systems and processes to make us more efficient and prepare for future growth.

Our markets are exhibiting strong underlying economic activity. South State is well positioned, with a solid balance sheet and a great team to build upon the results of the first 6 months of 2019.

This concludes our prepared remarks, and I would like to ask the operator to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Stephen Scouten with Sandler O'Neill.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [2]

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So I'm curious if you could talk a little bit more about the leverage strategy you're undertaking with adding some of these borrowings, I think it's maybe $700 million over the past 2 quarters. Just kind of wondering where you are in that process? Is that something we should expect to continue and kind of, I guess, what's the driving force behind that in terms of expected balance sheet growth and otherwise that's leading this to be the right path for you?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [3]

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Stephen, this is John. I'll start on that. I think as we talked last quarter, we thought it was a really good opportunity to put a little bit of leverage on the balance sheet. I think companies our size, when you look at them, they have a little bit more leverage than we did. So we're kind of trying to look for an entry point, and we felt with where the yield curve was, it was a really good time to go in. And you can see the blended costs on that $700 million with dividend, it's close to 2%. So I'd say, first of all, we feel like that's kind of a permanent increase in the balance sheet. You can see it in our average earning asset growth. It's up 19% linked quarter. So we feel really good about that. You can see we did some work in the investment portfolio. We put on a little over $215 million of just kind of the traditional things that we buy in the investment portfolio, and Steve, that yielded us right at 3%. So feel good about some of the deployment. Obviously, we still have a lot of cash to fund our loan growth. And I think in the future, the good news is we still have more optionality around that. I think where we are right now, we're going to get this deployed, but we're going to continue to really look at that option in the future.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [4]

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Okay. Great. And then, if I'm thinking about expenses, you guys noted some of the remaining, I think it was $6.4 million, in annualized savings to come out in 3Q and 4Q from the efforts you've already been undertaking. Is that something where you would believe that we could actually see the expense run rate move down quarter-over-quarter? Or will that be spent on new hires or other continued investments?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [5]

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Stephen, this is John, again. Let me talk about expenses for a minute. So I think I'd go back to our long-term goals and kind of what we said at Investor Day is we were trying to stay in that 0 to 3% range. So we did it one quarter, that doesn't mean we'll do it every quarter. But I think when you kind of dig into the expenses, you can kind of see what we're doing. So if you look at our kind of our professional and marketing line on those professional fees, we're spending money, we announced our partnership with nCino. You've heard us talk about our digital road map some. So I think, as we said, we're investing there. I think the good news is the investment there doesn't mean that's at a permanent increase in the expense as we get some of these implemented. But I think, our view on the expense side, Stephen, is where we do best over a long period of time is try to stay in that 0% to 3% range.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [6]

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Okay. So no change there.

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [7]

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Correct.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [8]

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Okay. Great. And then just last one, a little question for me, just on new loan yields. I think you said they were around 4.7% last quarter. Where were those coming on this quarter? And how do you think about those with the potential Fed cut in the coming quarters?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [9]

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They came down a tad this quarter. I think our view of the Fed cut is, it does give us an opportunity to maybe get a little bit more balanced, Stephen. I think, as you know, we have a pretty heavy residential loan book and obviously, those rates were kind of stuck as rates went up. And I think our view is, it gives us an opportunity to get more floaters on our balance sheet as we build the commercial bank. Today, when you look at our floaters, we have right under $5 billion, but over half of that is really hybrid arm. So we've got about $2.4 billion in floaters. You can see our capital markets income for the quarter. We are really starting to hit on all strides in our Capital Markets Group. And so that was really nice to see. I think, as rates come down, it does give us an opportunity really to focus there. On the flip side, on the mortgage side, I think one of the things that we all need to kind of see now in the new world as rates are coming down is, you're just going to see more refinances on the mortgage side. So when you kind of look at our loan book, now 30-year fixed rate mortgages are below 4%. Obviously, equity line balances are tied to the prime rate. So you're going to see some churn there, but of course, Stephen, that's going to lead to more fee income and you can really see our mortgage area really begin to click on all cylinders from a fee side.

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Operator [10]

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The next question comes from Jennifer Demba with SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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A question on your net interest margin outlook over the near term, with rate cuts likely coming here in the second half of the year?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [12]

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Yes, Jennifer, this is John. I think, clearly, managing the margin today has been difficult for all of us. We got to the end of the year, everybody thought there was going to be a lot of rate increases and here we go kind of the other way. So I think our outlook, if you kind of dig into our cost of funds, I think that's a good place to start. Outside of the CD book, we really saw stability on the deposit rates side this quarter. So I think that was really good news. And we saw a little bit increase in the CD book. So I'd say, I think, first of all, it does feel like rates are beginning to come down. We don't guess a lot on rates. We try to have -- always tried to manage maybe a little bit more towards neutral. I kind of go back to my comments with Stephen, we feel like we can get a little bit more balance between fixed and floating in this environment. And then ultimately, on the margin, for us, it gets back to the noninterest DDA growth. And you can see linked quarter, we had significant noninterest DDA growth. So Jennifer, we got to stay very focused on that as rates come down. Our treasury area, I'll give you one example. Our treasury area is really starting to hit on all cylinders. They completed their conversion of all the systems in April. And in fact, they've got over $100 million in new deposits that they've generated this year. So clearly, rates will come down, we are going to stay real focused on the funding. I think you all know us. We are going to be very measured by our funding cost. We've got checking accounts that have been with us 40 and 50 years. So we'll be measured as they come down, but it's good to see some stability, at least on the deposit side.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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So you're expecting some modest margin compression with these rate cuts, but you will keep focusing on the funding?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [14]

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I think you'll see some, but I also think, on the flip side of that, you're going to see more fee income. So take mortgage, is you're going to -- you're just going to see more on the fee income side. And so what we've always said on mortgage is when rates are coming down, you need to produce more fee income. When rates are at a very low point, you don't want to grow that book a fair amount. So I think some of the offset in that margin, not that it's totally correlated, but you can see it in our fee income this quarter, especially on the mortgage side and then the nice Capital Markets quarter we had.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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Okay. Separate question. What's your interest in further M&A at this point?

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Robert R. Hill, South State Corporation - CEO & Director [16]

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This is Robert. I guess, strategically -- maybe let me just start with where I see the company just overall and then how that plays into kind of where we go strategically. I think a few things. First is, where we are from a soundness perspective is pretty extraordinary. I mean, our balance sheet is very solid. Deposit base, as John mentioned, very granular. We're on pace to grow probably 12,000 new customers this year. Treasury is really kicking in. Capital stack is really, it's almost all common, we've got a lot of optionality there and credit. I mean, so from a credit perspective, really we're in a net recovery position for the year on our $11 billion book. So we just overall feel really good about strategically the soundness piece of the company, which is our #1 focus.

And then in the last 2 years, as we explained in December at the investor meeting, the building blocks were just being put in place and you look at commercial, treasury, capital markets, digital transformation on and on, tremendous headway getting the right platform in place.

And then the expense management. We've made investments in technology, but we've also improved our productivity. So we found ways to pay for those investments and that is feeling like that's on a really good path. So then it kind of goes to what's the future hold. And I think, first and foremost, for us, the forward momentum of the company feels really good. And I think you see a lot of it in our numbers this quarter. Obviously, net loan growth is not what we want, but if you look at our pipelines, the quality of the customers that we're bringing in, the momentum that we have, the talents of our teams, the productivity levels, that all feels really good in really area -- every area of the company. And a year ago, that was still kind of spotty. So my point in saying that is the foundation now is in a really much better place than it's been in a long time, and we feel great about our organic path.

But as you know, I mean, we're always open to create value for our shareholders and we want to build a great bank. So if there are opportunities to do that, we would certainly consider that just as we always have. But our primary focus is clearly on making sure we've got a strong foundation that's in place to really pursue whatever options are the best. And that hadn't really changed from where we've been in the past. I think what has changed is our foundation is just stronger than it has been in quite a while.

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Operator [17]

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The next question comes from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [18]

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I'm going to start on fee income. Obviously, you guys had a nice fee result this quarter. Can you talk about your mortgage production and gain on sale margins this quarter, what that was relative to last quarter as well? And then just curious if there was a fair value MSR impact this quarter as well?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [19]

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Stephen (sic) [Tyler], this is John. From a margin perspective, it held in there pretty well. We don't disclose exactly what our margin is on fees, but held in there very well. One of the unique things was really the movement of the kind of the 10-year in mortgage rates. So mortgage rates kind of hit a bottom and treasuries kept on going, right? So that really kind of helped, I'd say, on gain on sale when you look at it. From the MSR side, the last couple of quarters, Tyler, it's been a battle. Last quarter, didn't really make a whole lot of money on MSR. This quarter, we generate about $2 million in fees out of our MSR asset on a quarterly basis, we've got about half of that. And so I think on the mortgage side, we're seeing stability in the MSR. We added 5% in growth to that asset. So it's starting to build. We're getting more income stream. So if we could just get a little stability in the rates, I feel really good about where we are on the MSR asset. But clearly, mortgage rates go below 4, does the bottom kind of hold there to the 10-year? I think that's a question nobody really, really knows. Now on the flip side, if you just kind of go over to the production is, as I mentioned earlier in the call, our view in mortgage is we like to use our balance sheet, but we also like to generate secondary market business. So you're going to see, as Robert talked about our growth, there is just going to be more pressure to grow the mortgage portfolio on balance sheet. It's going to create more fees in the secondary market. So we feel really good about the momentum on the fee side. But ultimately, this is how you want your mortgage book to work. As rates go down, you want to get that churn and have those hybrid arms, as we talked about earlier, either refinanced into the second -- get refinanced in the secondary market or they will go and pick a new arm product.

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Tyler Stafford, Stephens Inc., Research Division - MD [20]

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Okay. I appreciate that. Just following up on Jenny's earlier question, just if we do get a cut tomorrow, just curious if you could size up just a range for us to think about in terms of margin pressure with the July cut, if we do get one?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [21]

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Well, I wouldn't know exactly what -- how much it would be, but typically, like, if you look kind of -- if you look at our of betas, when rates come down, they average 15% to 25% of the cut. So kind of depends on the bucket. But clearly, there should be some pressure you would think on the funding side as it comes down. But I also think on the loan side, as Robert mentioned, I mean, our pipelines are really good. We went out and did this leverage strategy. We got more liquidity. I think we've really got a great entry point because of the yield curve and so, Tyler, from the growth perspective, I think our view is that ought to help there. And then obviously, I think, as you think about the pressure, you also got to consider what -- as we mentioned earlier, what's going to happen on the fee side.

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Tyler Stafford, Stephens Inc., Research Division - MD [22]

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Sure. Okay. Just looking at, I guess, profitability and just ROA, the leverage strategy is, obviously, helping South State achieve that longer term 16% to 18% ROTC. I'm just curious if there a corresponding ROA target that we should think about?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [23]

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Nothing that we put out there, but I get it. Clearly want a higher ROA. I think our view was, over time, we kind of talked earlier about kind of permanently taking the balance sheet size up some. And so we grew those average earning assets 19% linked quarter, and we did those transactions. So I think our view is over time, I would much rather, instead of putting over $200 million in the investment portfolio, but we did get 3% yields on that, you're going to see that shift into the loan growth. I think that's going to help us a lot.

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Tyler Stafford, Stephens Inc., Research Division - MD [24]

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Okay. And then lastly, for me, John, the earnings release talked about how the share buyback positively impacted EPS by $0.01 this quarter. And then later, the release stated that the tangible book value was impacted by $0.66, due to the buyback. So I'm just wondering what the TBV earnback is on your repurchase and just how you think about kind of book value dilution and earnback associated with repurchases, and I'll hop out.

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [25]

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Well, I think if you're thinking traditionally on tangible book value earnback from an M&A perspective, it's clearly a longer time frame. But hey, these are assets I know, assets that we put on the books, assets that we've marked. We're very bullish on what we've been able to do from a share purchase reside of what it does for the shareholders. So clearly, a little bit longer period of time than on the M&A, but you're investing in something that you know very, very well.

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Operator [26]

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(Operator Instructions) The next question comes from Christopher Marinac with Janney Montgomery Scott.

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Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [27]

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Wanted to look at the change in staffing, the FTE numbers, year-over-year. Is that change possibly similar, either in percentage terms or just absolute numbers in the next year? Or is the bulk of that shift already behind you?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [28]

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Chris, this is John. We're continuing to look at staffing levels, how we run our lines of business, that's just a constant thing that we do. To say that the FTE reduction would be the same next year, I don't know that. We are beginning to approach our budget season for next year. So we'll begin to look at where we want to invest, is there a way to make things more efficient. So it will be something we will continue to look at.

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Robert R. Hill, South State Corporation - CEO & Director [29]

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Chris, just to kind of add on, this is Robert, is we will, obviously, continue to add as we always have, is just continue to add revenue producers. We added 8 in Q1, I believe, 10 in Q2. That's just kind of a normal process, the same as John is talking about on kind of the productivity and efficiency side is on the revenue side. That's been a pretty consistent number for us the last 2 quarters.

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Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [30]

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That's great. I appreciate it. And then when we step back and look at the change in kind of valuation on the acquired book and how that has sort of progressed as you had revaluations most quarters, what does that tell us on sort of the broader credit picture, either in general on your footprint or in your portfolio, specifically? It just seems that you made -- you've had a lot of success on how that has looked for you, but I'm curious what it tells you about the health and your footprint?

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Robert R. Hill, South State Corporation - CEO & Director [31]

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Well, the -- I think the soundness portion and the credit culture in our company is kind of where it all starts. And we were talking the other day about net loan growth not being quite where we wanted to be, but productivity being good and at what point in the cycle are you and really in the downturn, financial crisis, a recession, times like now where you just have some churn in the book and a little slower net loan growth or really robust times, our credit philosophy doesn't really change. So it's kind of time-tested, it's cycle tested, and we kind of stick to it. So I think, ultimately, what it says is, we have a really good credit culture. I think that's what -- we're very selective, we underwrite well, we pick quality customers. I think on top of that, but we are in both rural markets and we are in growth markets. And both right now are tending to perform extraordinarily well. We're seeing businesses that are well-capitalized that aren't over-leveraged. You've certainly seen some one-offs in terms of credit in the industry over the last quarter or 2, but we've not witnessed any of that in our markets. Unemployment rates are low. Businesses seem to be very profitable. The amount of risk in the market seems to be manageable, and our loan portfolio, I think, is reflection of that.

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Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [32]

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Great. That's helpful. And I presume that you will continue to have potential revaluations in the future quarters or just take it one quarter at a time. Is that the right way to think about it?

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John C. Pollok, South State Corporation - Senior EVP, CFO & Director [33]

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Chris, this is John. Obviously, we've got 2 more quarters before CECL, right? So yes, I would think you'd see that really over the next couple of quarters. Then revaluation really changes, right? As we get into the CECL world, it really begins to change. So for us, as I think about CECL, we've gone out and looked at our kind of 10-year loss history with a few caveats. And so from a quantitative perspective, if you look over the past 10 years, it's only about a little over 60 basis points on the whole loan portfolio. Obviously, we've got a layer of qualitative piece on top of that to kind of get to the total reserve. But when you think about the moving pieces, Chris, of revaluation, how it comes back into the income statement is, kind of look at where we are today. And there's really 2 pieces in our income statement. First of all, you'll notice in the acquired loan accretion on the credit impaired side is, we have really nice accretion this quarter and about $1 million of that came from a loan that had a big, big mark on it. Well, guess what, that bar wouldn't come through the accretion, it would come through really a reserve release and come back through -- kind of come back through the reserve.

The other piece that's in there is when you look at our acquired noncredit impaired charge-offs, and we have 25 basis points, it was $1.5 million in charge-offs. And as you know, traditionally, what we've done, we've basically paid for those charge-offs in the acquired noncredit and book as we go through each quarter. Well, now that $1.5 million, it would have pushed up against a reserve and really wouldn't have come through the income statement. So you throw those pieces in there. And then finally, we're breaking up our loan pools on the acquired credit-impaired bucket, you're going to see more accretion come through our income statement. And the reason I say that is when you're in pools, I think, as you know, the accretion is stretched out over the weighted average life of those pools. We actually have loans back from our CDT transaction 10 years ago on the pools, was those pay out, then that excess accretion is going to come in. So a couple of more quarters of where we are, then I think you're going to see a lot of changes as we get into 2020.

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Operator [34]

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The next question comes from Nancy Bush with NAB Research.

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [35]

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You mentioned the $900,000 in revenues that you've got from the Capital Markets business, and I think you referenced swap activity as being the reason behind this. And I'm assuming that this is primarily the platform that you acquired with Park Sterling. When I asked a question about Capital Markets a couple of quarters ago, there seemed to be some ambivalence about further build-out of this platform. And I'm wondering if you can just update us and if whether the results that you've received this quarter have changed your mind about how much you want to go or how further you want to go with that business?

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Robert R. Hill, South State Corporation - CEO & Director [36]

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Nancy, this is Robert. I'd say, if that was the perception, that's just -- it's just the wrong perception. We've been excited about really Capital Markets and treasury were a part of Park Sterling that we were very committed to from the beginning. Now how you execute on it, how you integrate it over a bigger platform, those were certainly things that we had to kind of work through that took some time, but you're starting to see the fruits of those efforts over the last year. So we're fully committed to the business. We need it for our customers, #1, I think, first and foremost, but we like the business as well. That adds value to the customers, that adds value to us. It helps our interest rate risk management. It helps us compete in the marketplace. There is just a number of reasons we like it. We really like our team. Randy Royther, who leads our Capital Markets Group, is very talented. He's helped us really solidify a lot of commercial relationships across our footprint. But we've just really started. The pipeline there is robust, and as is our commercial pipeline overall. So I feel like that line of business is just starting to mature inside our company. It still has a lot of progress, but fully committed, same as Capital Markets -- I mean, excuse me, same as treasury. John mentioned the traction there, but $100 million in new deposits so far this year, 200 new relationships. So the things we've invested in over the last couple of years, this quarter, we are starting to see really some of the results of that.

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [37]

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I would just ask as an add-on to that, I mean, there has been a lot of talk on second quarter conference calls about the turmoil that's taking place in the banking environment in the Southeast and particularly in the Charlotte area and whether you're able to add people to the Capital Markets businesses or indeed maybe to go into some new areas of Capital Markets as a result of some of this turmoil?

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Robert R. Hill, South State Corporation - CEO & Director [38]

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I think that -- I think there are 2 -- several areas that we're looking. We added 10 people in Q1, really across all business lines, commercial, private, middle market, consumer, mortgage investment. I think Capital Markets is clearly an opportunity for growth, both in terms of people and also customers. But you look at what we're doing overall too on the digital transformation, and this kind of speaks to some of the turmoil in the market and the changes in the market, but the digital transformation of our company, in Q1, 7% of our deposits came through our digital channels. In Q2, 11%. So we are -- I think our commercial footprint and commercial platform is much more robust than it was 18 months ago, as is our consumer, and both are getting good traction.

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Operator [39]

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Gentlemen, it appears there are no further questions in the queue.

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Robert R. Hill, South State Corporation - CEO & Director [40]

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Thanks, everyone, for your time today. We will be participating in the Stephens Bank Forum in Little Rock, Arkansas beginning on September 23. We look forward to reporting to you again soon.

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Operator [41]

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