“Market-Perform” rating / $75.00 Price Target (new) / HQ = Columbia, SC / $1.7 Bil. Mkt. Cap.
SSB-South State reported 1Q-2015 EPS of $0.99 which met Street consensus but missed the FIG estimate by $0.05. We were optimistic for an upside surprise after a 4Q14 EPS miss and the company’s capacity to lower expenses and improve NIM-Net Interest Margin. Both expenses and NIM behaved well in the quarter, just not the pace of progress we had hoped. Fortunately, two pending moves by SSB should benefit future EPS, outlined below:
- Branch closing scheduled in the near-future should benefit quarterly operating expense after one-time charges during 2Q and 3Q-2015. SSB is rationalizing these locations as part of its ongoing efforts to boost efficiency and target investments outside of branch infrastructure.
- 13 branches in more rural locations of South Carolina (1 in Georgia) are being acquired for a 5.5% Deposit Premium from BAC-Bank of America. Low deposit costs (i.e., 10 basis points) and heavy checking account focus should immediately benefit both spread income and fees, which drives better quarterly EPS.
- Spread income declined linked-quarter on lower day count, adjusting for this the “NII Per Day” actually rose by 1.6% from 4Q14.
- Operating Expenses rose 0.6% from 4Q, not a large change but still below the –0.2% pace of Revenues. This is the second straight quarter without positive operating leverage (i.e., SSB’s 4Q trends were +1.3% on Revenues vs. +2.7% on Expenses). We expect this reverses in 2Q & 3Q given cost reductions stated above.
- Credit was uneventful with small net recoveries and lower NPA ratio sub-1.0% of Loans+OREO. Provision covered net Loan growth at a 74 basis point level (i.e., provision-to-non-acquired Loan increase).
- Core ROA-Return on Assets was 1.23%, on par with 4Q14 and still well above most community bank peers. A strong NIM-Net Interest Margin aided by a tailwind of discounts earned on acquired Loans.
- Quarterly cash dividend was increased by a penny to $0.24 — the adjusted yield is now 1.37%.
SSB shares reflect high expectations for future EPS growth and even better ROA. The stock trades at 264% of tangible book value and 15.6x our 2016 EPS estimate. While this P/E could expand in the future, we are establishing a new $75.00 Price Target or 16.7x 2016 EPS and 230% of forward tangible book at year-end 2016.