SouthState Bank Corp (SSB) 2011 Q2 法說會逐字稿

Good morning, and thank you for calling in today to the SCBT Financial Corporation Earnings Conference Call. Before we get started, I do want to remind you that we will be in listen-only mode for the first part of the call. Then we will open the line to your questions. To begin, I will turn the call over to John Pollok, Chief Operating Officer of SCBT Financial Corporation.

Good morning, and welcome to SCBT Financial Corporation's first (sic - see press release) quarterly earnings conference call. With me today are Robert Hill, President and CEO; Joe Burns, Chief Risk Officer; and Donnie Pickett, our Chief Financial Officer.

Our format today will be that Robert Hill will provide some opening remarks, then Donnie Pickett will provide additional detail on our financial performance. We will conclude the call with a question-and-answer session with our analysts and institutional investors.

Before we begin, our listeners should be aware that our discussion deals with both historical and forward-looking information. To the extent that the statements in this report relate to the plans, objectives or future performance of SCBT Financial Corporation, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectation and the current economic environment.

SCBT's actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. A discussion of factors affecting SCBT's business and prospects is contained in the Company's periodic filings with SEC. To the extent that any non-GAAP disclosures are made or discussed during this call, please refer to the earnings release for the appropriate reconciliations to GAAP.

I will now turn the call over to our President and CEO, Robert Hill.

Thank you, John. Good morning, everyone, and thank you for being with us.

We appreciate your interest in SCBT and are very pleased with our second quarter performance, which is our best core operating performance in eight quarters. Our strong credit culture through the years has allowed us to operate from a position of strength the past few years. We've improved our infrastructure to support our growing company and have been able to add talent by hiring teams of bankers.

As a result, we're now starting to see the benefits of these investments. We're excited about our growth, our earnings performance and the improvement in our credit trends. Having completed two FDIC deals in the past year, our team was able to integrate the Habersham Bank this quarter without any difficulties.

After careful analysis, we evaluated the CBT and Habersham locations to determine where we were overlapping, and as a result, we've consolidated some of these locations to increase our efficiency and we're on track for what we have told you would be at least 50% cost saves. We've also been very pleased with the customer response with very little to no loss of business and the very fine talent in the Habersham branches.

We continue to experience increased merger and acquisition activity. We'll continue to carefully evaluate opportunities that arise and we'll be disciplined to take action on deals, which are attractive both strategically and financially.

Now let me shift a little bit to our balance sheet. Our loan growth has certainly been a bright spot for us this quarter. Much of our growth has come through our talented teams of bankers across the state, many of which have been added over the last few years. We're also gaining new customers by moving very longstanding relationships from other banks. These new relationships are evident in the growth of our commercial and industrial, mortgage and commercial owner occupied loan categories. I'm very pleased with the quality and the quantity of the new relationships.

We also continue to be vigilant about growing our deposits. While less valuable today, we feel long term there will be critical differentiators for banks. While we have seen some run-off in our time deposits, this is primarily due to just reduction in our deposit rates. We've really not seen run-off at all of our customer relationships.

Deposit growth remains strong throughout our company with net checking account growth of 8% annualized in the first six months. That excludes any customers that we acquired through the Habersham acquisition, which was around 11,000.

Since June of 2010, we have increased our core deposits by $270 million. We have also improved our funding mix, and at the end of the quarter, CDs made up 33% of our deposit base compared to 43% at the same time last year. All of this has had a favorable impact on our margin.

I'm pleased with the improvement in our credit trends as well, which we began to see late last year. While the coastal markets of Beaufort and the Grand Strand still have a relatively higher concentration of classified assets, the inland markets of Greenville, Charlotte, the Columbia area appear to be stabilizing.

Approximately 21% of our loans are concentrated in coastal areas. We've seen a big improvement in our inland markets, while the coastal markets still have some stress. Our classified asset to capital level continues to fall, as does our charge-off rate and level of past dues.

NPAs are following a similar trend with inland market seeing improvement while coastal markets are slower to recover. We're beginning to see an apparent peaking credit deterioration as past dues are improving and the inflow of non-performing assets is beginning to stabilize. We continue to see a reduction in our C&D book with reductions of $32 million or 9% since the first quarter and 14% this year.

As we move forward, we're going to continue remain focused on the principle of soundness, profitability and growth. Our efforts have been focused on increasing EPS and returning to normalized earnings. I'm pleased with the steps we took this quarter to make this happen. I'm also pleased to announce a quarterly dividend of $0.17 per share, a dividend we have earned and maintained during this financial downturn.

We will continue to look for strategic opportunities to drive growth, including a disciplined and strategic approach to acquisitions. We have all the pieces in place to continue our solid performance and return to historical EPS levels.

I will now introduce Donnie Pickett, our CFO, who will provide additional information on our performance.

Thank you, Robert. I will make some summary remarks and then provide performance highlights on a linked quarter basis. Our net income of $4.9 million was up $2.5 million from last quarter. We're very excited about our performance and the momentum we are seeing.

Our bankers are continuing to win business and have produced another quarter of solid loan growth of $57 million. This is the fifth consecutive quarter of loan growth. Since the low point of the cycle, our legacy loan book has increased over $200 million. We continue to see positive signs on the credit front, although we believe we will see some volatility in our charge-off activity as we continue to work through the credit cycle. Our provision expense was down on decreased charge-off activity. Our non-interest income, excluding the Habersham gain and the indemnification asset accretion was up across the board.

In June, we completed our systems conversion and branch consolidations for the Habersham transaction. We expect to begin to realize additional cost savings for the Habersham transaction beginning next quarter. As we've said before, the cost save over Habersham's 2010 annual expense base is estimated at over 50%. Our acquired loan portfolio and the related indemnification asset have a significant impact on a number of financial statement line items, so I'll speak to that first.

Last quarter, we re-estimated the credit losses on the CBT loan portfolio. This credit loss re-estimation resulted in a $36 million improvement in credit performance of certain pools that is recognized as a yield enhancement over the remaining life of the loans.

The yield enhancement boosted the margins by $1.4 million in the first quarter and $4.5 million in the second quarter. We estimate that our margin normalized for the impact of the credit loss re-estimation would be 3.98% in the first quarter versus 4.11% in the second quarter. This change in credit loss assumptions has an opposite effect on the indemnification asset accounting.

The increase in the margin is largely offset by negative accretion on the indemnification asset recorded in non-interest income. The Habersham loan portfolio, which totals about $114 million at quarter-end has a yield of about 7%. The positive accretion on the Habersham FDIC indemnification asset had a positive impact of $880,000 during the quarter.

I will now turn my comments to our income statement starting with our margin. Our margin continued to perform well and was up $5 million on a linked quarter basis. In addition to the enhanced yield on the acquired loans, our margin benefited from growth in our legacy loan book and improved pricing on all of our deposit products. Our loan book is up 10% annualized linked quarter, principally in the consumer mortgage area and in commercial owner occupied loans. We are continuing to see a competitive marketplace for loans as rates remain under pressure.

We are always focused on growing our core deposits and have continued to produce, on an average basis, core deposits are up $87 million linked quarter. Time deposit run-off was $87 million since March and $113 million since year-end. We continued to manage deposit pricing and feel we have room in the future, given forecasted maturities.

As we've noted for some time, our margin is also impacted by our excess equity. We estimate that our excess liquidity depressed our margin by about 29 basis points in both the first and second quarters. On the credit side, non-acquired loan loss expense declined $5.1 million from the first quarter, as loan charge-offs declined and credit statistics continued to show improvement.

Our non-acquired allowance for loan losses totaled $48 million at quarter-end, which was flat as compared to the first quarter. The level of the reserve for legacy loans represents 70% of non-performing loans at June 30 compared to 68% as of March 31.

Our classified loans dropped for the fourth consecutive quarter to $164 million. This is almost $30 million less than a year ago. Non-performing loans were down $1.4 million linked quarter to $69 million, which represents 2.8% of period-end loans. Compared to a year ago, non-performing loans were down 10%.

Total non-performing assets totaled $94 million, which is up slightly from $91 million at March. OREO increased $5 million to $25 million, as we continue to work through troubled loans. Much of the OREO increase was a result of a $2.4 million transfer from fixed assets, following the decision not to utilize the property for branch expansion.

Loans past due 30 to 89 days dropped for the third straight quarter and totaled $12.4 million, which is down $1 million from last quarter. These positive signs on the credit front are encouraging, but we would expect to see some volatility going forward.

Non-interest income was up $1.5 million or 14% linked quarter when excluding the Habersham gain, the negative accretion on the indemnification asset, and securities gains. Service charges were up $528,000, primarily due to the seasonality of NSF and overdraft fees. Our mortgage business had a good quarter and saw an increase in fees of $260,000 on increased volume.

Bankcard services were up $340,000 on increased debit card income, reflecting our growing customer base and higher usage. Our wealth business continues to accelerate its growth and has produced revenues of $1.5 million, an increase of $276,000. We anticipate further growth as they continue to increase assets under management.

Non-interest expense was up $824,000 from the first quarter due to increased salaries and employee benefits, which were up $1.4 million. The second quarter included three full months for Habersham employees versus a month and a half last quarter. Other increases in salaries and benefits relate primarily to variable compensation in our mortgage and wealth businesses.

OREO expenses were up $244,000 from the first quarter to $2.8 million. Of this, $1.6 million is associated with our legacy OREO, $250,000 relates to acquired OREO expenses, and $890,000 relates to the write-down on the transfer of branch property from fixed assets.

Lastly, our marketing and advertising expenses were down $620,000 as we remain focused on controlling our discretionary spending.

John, that concludes my prepared remarks. So I'll turn it back to you.

Thank you, Donnie. We will now open the call for questions.

(Operator Instructions) Jefferson Harralson, KBW.

Hi, thanks, guys. Can you hear me?

Yes, Jefferson, go ahead.

What is -- can you talk about the accretable yield estimate change from last quarter to this quarter? Is it just plus $36 million, and what is the total amount that you expect to be accreted in over time?

Jefferson, this is Donnie. I think when we talked last quarter, we said that the $36 million in credit improvement in those pools, we did our recast at February month-end. The last quarter, we had one month of that rate lift, and this quarter, we have three full months. So literally you can think of it. We said last quarter, it was $1.4 million benefit, and this quarter it's $4.5 million compared to the rate that the [loans were on the books] in the fourth quarter.

All right. Thanks. And how about the total amount of the discount that should be coming in over time now over the next four or five years? What's the complete -- I guess the gross estimate?

That's not a number we've disclosed at this point. It will be in our Q. But that $36 million is enhanced yield over that 6.35%.

Okay. So you're saying that -- so, are you saying whatever that number was is now up $36 million or are you saying that was 6.35% now, $36 million higher?

The yield, Jefferson, the yield on the covered assets are 11.17% in the $36 million benefit. The piece that came through lifted the rate from 6.35% to 11.17%.

Well, I got you. I got you. All right. Thanks, guys.

Christopher Marinac , FIG Partners.

Thanks, guys. Good morning. Thank you for hosting the call.

Thanks, Chris. Thanks for joining us.

I wanted to ask about classified assets, particularly in the disclosure you gave us today, what's happening underneath the surface between March and June? And you had some things pay off and some new classifieds come on, are these pretty much the same classified assets you've had here for several quarters?

Hello, it's Joe Burns. We obviously have had some inflow and outflow in our classified asset totals. One good thing that we continue to work on is getting things into OREO where we can deal with the properties and we continue to do that, and continue to move OREO properties out of that bucket as quickly as we can.

Okay. Do you have any visibility on whether we'll see kind of gradual changes the next quarter or two or what the aimed expectations there?

Really don't have a good feel for that at this point. I think we're going to continue to see some choppiness as the market continues to be soft on real estate, especially on the coast. With our markets being at 10% or right around 10% in unemployment, that and we're -- in South Carolina, especially we're continuing to see some slight declines in medium home prices. So I think with those elements there, we'll continue to see some choppiness.

Okay. Very good. And then I guess as a general question. Where is your, I guess, thought, Robert, as you talk with other banks to just observe the industry in terms of kind of where are the people are? Do you think that credit marks are getting stable at all other banks or do you think we still have this adjustment period where there are still more issues being recognized in general in the Southeast?

I guess when you, Chris, when you asked about credit marks, are you talking about in terms of M&A activity, or are you just talking about and just -- normal operating bank?

Yes, more on an M&A perspective.

Yes. We've met with -- as we said before, we've met with a lot of banks over the last few years, and as we kind of get through the top of the house looking at some of their larger loans, we've typically never been able to get really past first days. What we are starting to see is, is I think we're getting closer and closer. I mean, each quarter as they continue to burn down through some of their losses, I think we're getting closer to the right level of marks where some of these deals could begin to work.

I'd say the coastal market is still tough to do that just because it's hard to value that real estate down there. But I think that some of the inland markets, what we're seeing are -- we're getting closer to the point where some whole bank deals over the next four, six quarters could have potential beginning to happen.

Great. Thanks very much.

Thanks, Chris.

William Wallace, Raymond James.

Good morning, gentlemen.

Thanks for joining us.

Thank you. I wanted to just ask a question on the accretion just for clarity. So, there was $4.5 million in the second quarter. That is additional accretion related to adjustments or is it $4.5 million in accretable yield?

That's $4.5 million in loan interest accretion over the 6.35% rate that was recorded in the fourth quarter.

Okay, okay. And so --

If you're looking at linked quarter, it would be the difference between $4.5 million and $1.4 million.

Okay.

We had one month of it in the first quarter and three full months in the second quarter.

Okay. And then we'll see the benefit from accretion, assuming no more adjustments. It will just be -- it will -- that will run-off as those loans run-off moving forward?

That's correct.

And you said for the core margin excluding accretion was 4.11%, is that what you said?

That's correct. We calculated that. I think we said last quarter, it was 3.98% and it's 4.11%. So we did see some margin expansion, not including the covered assets.

Okay. And then you also said that the excess liquidity that you're holding is adding about 29 basis points of compression, is that what you said?

That's right.

Okay.

And that was relatively stable from the first quarter.

Okay. Good. And then switching gears real quick on the non-interest expenses, the FDIC deposit assessment, is this a good run rate now?

I think that's -- we've adjusted it in the second quarter from the deposit balances that we have and some of the run-off we've seen, so that would appear to be probably a normalized run rate going forward.

Okay. And then lastly, on the reserves, you kept them flat on a dollar basis, more or less, do you feel like we're getting at a point now where you could start say potentially release some reserves, all else equal?

Yes, this is John. I think it's going to be choppy. So we're still kind of monitoring everything. So not ready to make that call yet. We'll just kind of see how the quarter goes.

Okay. Fair enough. That's it from me, guys. Thanks.

Thank you.

Mac Hodgson, SunTrust Robinson.

Hey, good morning.

Hey, Mac. Thanks for joining us.

Thanks for doing the call. Just maybe if you could elaborate on the kind of the competitive marketplace for loans out there, what trends you're seeing on pricing structure and from the large banks, small banks and types of credits and things like that?

Yeah, we've been really pleased with our volume deal flow. The turbulence that we've had, and I'm excluding Georgia, I'm really talking about the Carolinas because Georgia is obviously just a different issue. But in the Carolinas, you've had so much turbulence between the Wells acquisition, the TD acquisition, a lot of turbulence with the small banks. It's been -- we've been able to pick up a lot of new relationships. And as you all remember from a couple of years ago, we hired kind of during the height of the turbulence a lot of bankers. And I think we're starting to see now the impact that they're having.

So on the consumer side, we had -- let's say we did about $51 million worth of consumer loan production during the first six months of this year, which is probably the best. We've seen in a while, and we've not seen really a lot of competition on the consumer side. That's been a really strong niche for us.

On the commercial side is where we've really had a lot of -- a really significant impact. A lot of the bankers where we've hired have brought over really long-term relationships. Mac, I had dinner with 25 of our customers from the upstate last Thursday night and these are businesses that a couple or three years ago, we just wouldn't had a shot of getting two and three generation type long-term businesses. And we're getting them, it's not because of the pricing, it's because of the turbulence and because of the relationships that their bankers had.

So, on a deal that [sharped out], yeah, you're seeing everybody chase it because everybody is looking for asset growth, but we've been able to generate a lot of business really without that. The other piece of business that I think has been a really good niche for us has always been the mortgage business. And you see our mortgage fees year-over-year off a little bit, but we're doing a lot more in-house mortgage lending, having some really good opportunities to put some shorter-term rates, but having some good mortgage opportunities to keep in-house.

So that's kind of what we're seeing on the mortgage, consumer and commercial front.

Okay, great. That's helpful. On the Habersham cost saves, you said Habersham will target over 50%. Is any of that in the run rate that the second quarter expense run rate or is that all to come?

We expect -- this is John, we expect next quarter to pick up about another $1.5 million in cost saves on Habersham. So that will get us to our total of 50% cost saves from their 2010 call report when you look at their expenses.

Okay, great. And then on asset quality, have you all given much consideration to do any sort of bulk loan sale? You don't have an elevated of NPAs to some of your peers, but it seems to be becoming more popular in the market, just curious if you all considered that at all?

Hello, this is Joe Burns. We've definitely looked at that and continue to consider it, but at this point, we really haven't found a compelling package to that. We could put together that really makes sense for us, but we'll continue to consider it. But at this point, we've been able to do much better through our special asset units and working on our own.

Okay. Great. Thanks.

Kenneth James, Sterne Agee.

Hi, good morning, gentlemen.

Good morning.

Good morning.

Wanted to talk about loan growth a little bit (inaudible) now used to see in this kind of a steady consistent loan growth every quarter out of most of the stuff I'm looking at. So you talked a lot about the teams you hired and the traction they were getting and do you think this rate of loan growth that you've been generating could even kind of increase? I'm sure you have an idea of the size of books of business that are cumulatively that those people had and what their potential is, with their gain and traction, you could even pick up from here?

Well, I think that as we begin to get traction in Georgia, which we are beginning to, we did -- we've done -- we did $14 million in non-covered loan growth this quarter in Georgia. So we're starting to get some traction in Georgia. There's certainly room to improve there. The North Carolina, our Charlotte market has really begun to build some pretty good pipeline. So we're optimistic that there's room for improvement there. I would say in South Carolina, it will be -- overall it would be steady. The pipeline is really strong, but our volume of activity has been very, very good.

So I would say you kind of pull all of that together, I think we're hoping for 10% annualized growth rate right now, we would see is being probably on the high end. But we would think it's hopefully consistently in the higher single digit level.

Okay. Thank you. That's helpful. And then just kind of backing up to the covered loans, refresh my memory. How often are you re-evaluating these portfolios? Is it every quarter?

Yes, this is Donnie. We re-estimate the cash flows the second month in the quarter. So we look at our credit statistics and partner with our credit folks to reassess the cash flows and that could adjust the yield or the credit standing of the different pools.

Okay.

But this quarter, there was no meaningful impact on that re-estimation, if you will, but we did go through the exercise.

Okay. I guess you probably can't speak or maybe not be able to give a projection here. But if I'm looking at your -- and this is for -- I guess a bit old data from the last Q, but -- the non-accretable discount, the accretable discount, your total discount, the accretable portion is smaller than as a percentage of the total. But as I feel a lot of places it makes me think maybe there's room for some of the -- maybe substantially more of that non-accretable bucket to come over as we go through time, if the kind of credit environment keeps going better. But I don't know, so maybe I'm looking at banks in Georgia. So maybe it needs that big pieces. Can you give any color there at all? I mean I know that's probably a hard question to answer.

Well, I guess what I would say there, and Joe or John might chime in. But we've -- in both of the deals that we have booked, we've marched through the threshold. And while we're moving through and charging things off and working through the portfolio, we still have a fairly healthy mark percentage that again, we evaluate every quarter. But we feel comfortable where we are and should the credit improve, there could be some of that for us, but we're still working through those books and we feel comfortable at where we are from a mark percentage.

Yes, this is John. We've dealt with a lot of the larger credits first. The portfolio is getting a lot more granular. And hopefully that statistic will help us as we go forward.

Ken, this is Robert again. Let me go back to your first question just for a second, for those that are new to the story to talk about one other thing on our loan growth, I did mention is, during the downturn, when things in -- I guess in '08, especially with Wells and Carolina, South Financial Group is, we hired their -- we hired South Financial Group's entire upstate team, commercial team. We hired their team in Charleston as well. And we hired a number of Wachovia bankers across the franchise. And we hired the Wachovia Wealth Management Group in the upstate.

So we had done a lot of investing in people and then it took -- and it takes a while, especially to bring over some of these long-term relationships. So some of the growth you're seeing is a result of probably those 3 or 4 key group hires.

Okay. Thank you, gentlemen, for the color.

Thank you.

Kevin Reynolds, Wunderlich Securities.

Good morning, gentlemen.

Good morning, Kevin. How are you?

Doing great. Good quarter, and I wanted to ask a question about -- we've had several quarters of investments in the franchise, hiring people, systems, et cetera and you made some acquisitions, and now we're starting to see, I think, the first really sort of clean strong quarter that shows the payback from that. How much -- if you were to sort of characterize where you are and kind of these investments you've made getting to a full run rate, do you think you're still very, very early in it or was this just an exceptional quarter where you sort of pulled forward market share gaining opportunities from the disruption that's been going on out there?

I'd say we're -- we're early in the process, I mean most of these hires have taken -- have been brought on board over the last year, 18 months and it takes six to 12 months to begin to really move some of these relationships. So I think there's still a fair amount of momentum that these folks are going to provide to us, and the momentum is not just from the new hires. I mean our existing teams are winning a lot of business because of the turbulence and the market as well. So our business development efforts are probably, and our pipeline is probably as strong as we've seen it, Kevin, in a couple of years.

Okay. And then so if we're going to look at that, I mean I know we've gotten kind of down into the details of the quarter and all the moving parts here and there, but it seems to me like what you're saying is you're very optimistic that what you put up here -- it sounds like it's a run rate and could potentially get better in the next few quarters if you're calling (inaudible) continue to bear fruit as they have?

Are you talking about loan growth or what --

A little bit of loan growth and then of course as it flows through to the bottom line, I know there are some moving parts on the loss share accounting and all that, but just the core operations of your firm?

I would say, right now where we are, I guess somewhat philosophically, as we went through the downturn, it was obviously protect our balance sheet and try to seize the opportunities that the disruption created. That's really what we did for a couple of years. And now our focus has shifted. Our focus is, now on moving market share, leveraging up those investments, and shifting more focus to driving our earnings. And so we've kind of in the last nine months really shifted gears from taking advantage of those opportunities, to leveraging those opportunities. So what we're excited about our quarter, in reality, we're at a 50 ROA. So we certainly are going to continue to push to drive that number closer to one.

Okay. Thanks a lot. Great quarter.

Christopher Marinac, FIG Partners.

Robert, I just wanted to ask a question, every so often we hear about other banks who want to come into South Carolina or North Carolina with the new operation or buying other bank. How easy or difficult is it today for another bank to come to South Carolina and try to -- when relationships and sort of replicate, if you will, kind of what you've done in the last few years?

I think it's -- I think they're -- is very difficult. South Carolina is a state where the relationships tend to just move more slowly and you don't have season long-term bankers in your company, is very hard to move relationships. And I think bankers today are much more skeptical about the teams that they join and making sure they're very selective in terms of the strength and stability and a long-term focus of that company. So I think that it's all going to end up depending on that level of talent that they can get, and I think it's a tough thing to do to come in and to build those teams.

Great. Thank you.

Thank you. I would now like to turn the conference over to Mr. John Pollok.

I'd like to thank everyone today for their participation in our first quarterly earnings call and their interest in SCBT. We hope you have a nice day and a great weekend.