SouthState Bank Corp (SSB) 2011 Q3 法說會逐字稿

Thank you for calling in today to the SCBT Financial Corporation earnings conference call. Before we get started, we'd like to remind you that we'll be in listen-only mode for the first part of the call. Then we'll open the line for questions.

Now I'll turn the call over to John Pollok, Chief Operating Officer of SCBT Financial Corporation.

Good morning, and welcome to SCBT Financial Corporation's third quarter 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 will provide some opening remarks, then Donnie will provide additional detail on our financial performance. We will conclude the call with a Q&A session with the analyst community.

Before we begin, our listeners should be aware that our discussions contain some forward-looking statements regarding both our financial condition and our financial results.

These statements involve certain risks in that actual results in the future may differ from what we currently expect. These factors include among other things, changes in interest rates, economic conditions and competitive pressures within the financial services industry and legislative or regulatory requirements that may affect our businesses. A discussion of factors affecting SCBT's business and prospects is contained in the Company's periodic filings with the SEC.

To the extent that any non-GAAP disclosures are made or discussed during the 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 third quarter performance.

We're pleased to report a strong quarter for our Company, with net income of $10.3 million, or $0.74 a share. Year-to-date, we have reported net income of $17.8 million, or $1.30 per share. We're seeing the positive impact of our cost save strategies, margin expansion and strong fee income, all driving our pre-tax pre-provision cash flows and net income. We're pleased with the ROA of 1.04% and return on tangible equity of 13.83% for the quarter, and 61 basis points and 8.59% return on tangible for the year.

During the quarter, we benefited from expense reductions gained through the $1.5 million per quarter in Habersham integration cost saves, the 75% BankMeridian cost saves, and our branch consolidation plans, which we've rolled out this quarter.

We've experienced solid core deposit growth and organic loan growth this quarter and this year. As our competitors struggle through the economic crisis, our bankers continue to move relationships, further strengthening our market position.

Core deposit growth, excluding CDs and the Habersham Bank and BankMeridian acquisitions is up $312 million, which is an increase of 17% from the third quarter of 2010.

New customer growth remained strong throughout our Company, with net growth of over 6,000 new customers this year. This has also helped drive a 24% increase in bankcard service fees and a 6.5% increase in service charges.

We continue to improve our funding mix primarily through rate reductions on higher price CDs, and a 38% increase in non-interest bearing checking account balances. All of this has had a very favorable impact on our net interest margin and in our fee income.

We continue to maintain forward momentum with loan growth as well. Organic loan growth was $203 million, an increase of 9% from the third quarter of 2010, excluding acquired loans. We have been the beneficiary from the decision of many companies and individuals to move their long-term banking relationships to SCBT.

Non-interest income from mortgage loan originations continues to be strong with non-interest income from retail mortgage loans at $2.3 million, up $1.1 million from the previous quarter.

On the credit front, some challenges still persist, as non-performing loans remain elevated, but we are seeing positive trends with classified asset levels and past dues.

Our classified asset levels continue to steadily decline and our 30 to 89-day past due levels are the lowest they have been since the first quarter of 2007. We still have work to do on our non-performing asset levels. And while they have been relatively flat for several quarters, our management team desires a decline in these levels. We are seeing improvement in most of the markets we serve with the exception of some of the coastal markets.

We feel very good about our continued progress in many areas, most importantly, we like the revenue growth, the reduction in expenses and the impact this is having on our pre-provision cash flows. These improvements coupled with the better credit trends, have our Company well positioned to continue to be opportunistic in this turbulent environment.

As we near the end of 2011, we will remain focused on our founding principle of soundness, profitability and growth, and I'm pleased to announce a quarterly dividend of $0.17 per share, a dividend we have earned and maintained during this financial downturn.

I will now turn it over to Donnie Pickett, our CFO, who will provide additional information on our performance.

Thank you, Robert. I'll make some summary remarks and then provide performance highlights on a linked quarter basis. Net income for the third quarter was $10.3 million compared to $4.9 million for the second quarter. The BankMeridian acquisition, which was our second FDIC acquisition this year, closed on July 29 and resulted in an after-tax gain of $6.8 million. Our team has done a terrific job of working on the BankMeridian transaction following the completion of the Habersham conversion in June. We have dedicated employees who are experienced in completing and integrating FDIC acquisitions.

Our pre-tax, pre-provision operating earnings, when excluding the BankMeridian gain and merger related expenses, totaled $15 million, which is almost $3 million more than the prior quarter. This is another encouraging sign of the earnings power of our expanding company. For the sixth consecutive quarter, our bankers produced legacy loan growth, which totaled $56 million for the third quarter. The level of loan growth did moderate at the end of the quarter.

Our provision expense was $4.1 million higher on a linked quarter basis as a result of higher charge-offs. Non-interest income when excluding the BankMeridian gain totaled $9.8 million for the third quarter, which was up about $1 million on higher mortgage banking income. Non-interest expense totaled $37.2 million for the third quarter, up from $35 million on a linked quarter basis, due to increases in merger related costs and OREO expenses.

We are seeing the benefits of the cost reductions from the Habersham conversion. Additionally, in the third quarter, we announced the consolidation of nine branches in the North East Georgia market, as we work to right-size the organization after the CBT and Habersham acquisitions. Most of these branches will close over the next few months. So we expect to realize the benefits beginning in the first quarter of 2012.

Now I will speak to the BankMeridian transaction in more detail. We have completed our initial valuation and recorded an $11 million dollar pre-tax gain. In the transaction, we added $94 million in loans and $5 million in OREO. These balances reflect our purchase accounting adjustments, which represent loss estimates of 38% and 67% respectively.

Total deposits added in the transactions were $200 million of which $141 million were CDs. So far, we are pleased with our retention of the BankMeridian core deposits. On the CD side, we took immediate action to reprice these deposits and have experienced the run-off we expected. Overhead costs added in the transaction were relatively minor and are expected to diminish over time as we will complete the systems conversion in a couple of weeks. We will have no new branch locations once our integration is complete. Our cost saves are estimated to be in excess of 75% of BankMeridian's annualized June 30, non-interest expense level.

Now I will address the accounting for the acquired loan portfolio and the related indemnification asset. Our third quarter cash flow re-forecast resulted in minor overall changes in our credit loss expectations. It was a $4.3 million impairment in a couple of CBT accounting pools, but with the [95-5] loss-sharing arrangement, there is little financial impact. Our total acquired loan yield was 11.71% for the quarter compared to 11.17% in the second quarter.

Most of the yield enhancement on the acquired portfolio resulted from improved credit loss expectations on the CBT portfolio first observed in the first quarter. The credit-loss improvement on the loans causes a corresponding reduction in the cash flows from the FDIC. The elevated yield on the acquired loans is largely offset by negative accretion recorded in non-interest income. Negative accretion was $3.5 million for the quarter, which was $400,000 more than last quarter.

Now I will turn to comments on our income statement starting with our margin. You will notice that our earnings template now separates acquired and non-acquired loan balances and yields. Our margin expanded 26 basis points to 4.93% in the third quarter. The yield on earning assets increased 18 basis points and the overall cost of funds decreased 8 basis points. The yield on earning assets was boosted by an increase in the acquired loan portfolio yield, as well as a reduction of lower yielding excess liquidity balances. As anticipated, much of the excess liquidity was absorbed by the BankMeridian transaction and the growth in our legacy loan portfolio.

We estimate that our excess liquidity levels depressed our margin by 6 basis points in the third quarter compared to 29 basis points in the second quarter. The improvement in cost of funds is a result of growth in our lower cost core funding of $145 million during the quarter, the decrease of $63 million in time deposits, and a drop in the overall cost of our CD portfolio. We would anticipate further capacity to reduce CD interest costs in the near-term, as approximately $250 million in certificates mature in the fourth quarter, with an average rate of 96 basis points.

On the credit side, the non-acquired provision for loan loss expense increased to $8.1 million from $4.2 million last quarter. Charge-offs were $7.2 million, and while elevated from the second quarter, they returned to an amount just less than the first quarter, evidence of the choppiness we expect in the current economic cycle.

In addition, we provided $1 million in provision expense, which increased the legacy loan loss reserve to $49 million. Our non-acquired non-performing loans totaled $73 million at quarter end, which was up $4 million from last quarter. We were encouraged that our classified loans dropped for the fifth consecutive quarter to $158 million, which is down $6 million from the second quarter.

Our 30 to 89 days past due loans also declined to $8.4 million, which is down $3 million. This is the third consecutive quarter that our 30 to 89 day past due loans have declined.

While we see some positive signs on the credit front, we continue to expect some volatility in our credit costs, as this economic cycle continues.

Non-interest income, excluding the impact of the BankMeridian gain and the indemnification asset accretion increased by $1.4 million from the second quarter. The increase was the result of income on a significantly expanded secondary mortgage loan pipeline.

Mortgage banking income was up $1.2 million linked quarter. Service charges were up $400,000 in large part due to the increase in the number of transaction accounts and the related volume.

Bankcard services totaled $3 million, and trust and investment income was $1.5 million, which is unchanged from the second quarter. These business areas continue their solid performance.

Non-interest expense was up $2.1 million from the second quarter, primarily due to an increase in merger costs, write-downs on OREO properties, and the additional overhead related to BankMeridian. Merger costs related to both the Habersham and BankMeridian acquisitions totaled $1.6 million in the third quarter compared to $600,000 in the second quarter.

OREO and loan-related expense increased $1.3 million, as we made valuation adjustments to several large coastal properties. Additional overhead related to the BankMeridian transaction totaled about $400,000. Advertising and marketing expenses was up $500,000 from the prior quarter, due to the timing of our spending in this area.

These increases were partially offset by a reduction in FDIC assessment and regulatory expense of $400,000, and a decrease of $700,000 in salaries and benefits. The salary and benefits cost reductions are due to staff reductions following the Habersham conversion in June. We anticipate additional annualized expense reductions of $3 million beginning in the first quarter of 2012, as we consolidate the branches in the Northeast Georgia market.

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

Thanks, Donnie. We'll now open the call for questions.

(Operator Instructions). Catherine Mealor, Keefe, Bruyette & Woods.

Good morning, everyone.

Hi Catherine.

As I'm sure you all saw, another bank in Charleston, First Federal announced a large loan sale this past quarter, where they sold a bunch of loans at about $0.41 on the dollar. How do you think this impacts your properties down in the coastal markets if at all and did that transaction have anything to do with the additional OREO writedowns that you took this past quarter?

(Technical difficulty). This is Joe Burns. We did have three large writedowns on coastal OREO properties this quarter. But if you look at our sales of OREO property overall, since the beginning of '09 we've sold 173 properties and we are getting basically $0.41 on the dollar, which is very close to the numbers that you mentioned. So I don't really think that the sale down in the coast really will impact us much at all.

The other thing I would just add there, Catherine is, overall, the amount of our total portfolio that is coastal, most of the coastal stress we've seen has been primarily in the Beaufort County area, and the Myrtle Beach area. And that's really a fairly small part of our total portfolio.

Okay. Thank you for the color. And how much of your total NPLs and OREO now are on the coast versus other parts of South Carolina?

Catherine, there are two coastal markets that make up about 17% of our legacy outstandings. That would be the Northern end and the Southern end Grand Strand in Beaufort. Of that 17% of outstandings, those represent 54% of our charge-offs this year, 40% of our classified assets and 44% of our non-performing loans.

Thank you. And one other question for Donnie on the net interest margin. How do you -- given the credit impairment you took this quarter on CB&T, [with some] of the better credit you've seen in the past, how do you foresee the loan yield on the covered portfolio trending over time?

Catherine, this is Donnie. The yield is solely elevated because of the actions we took with CBT in the first quarter. We've held the credit marks on all of the portfolios pretty stable since then. So I think going forward we had Meridian in there for two months rather than three. So I believe it's probably going to trend down a bit, but we kind of see it stable all things considered equal and holding credit, any credit release aside, which will go through that cycle close to the end of the year.

Okay, great. Thank you.

William Wallace, Raymond James.

Good morning, everyone.

Hey, William, thanks for joining us.

No problem. I wanted to try, if I could, to dig in a little bit more to the effects from the purchase accounting adjustments. So correct me if I am wrong, but your net interest income benefited due to positive cash flow adjustments on the acquired loan portfolios, most of which was offset by negative accretion on adjustments for the indemnification asset. Is that correct?

[That's right].

So, can you give me the dollar amount of benefit in net interest income from those adjustments?

Well, we disclosed now on the templates the acquired loan yield and then, also if you look on the non-interest income, we have the negative accretion displayed. So a big chunk of that negative accretion is a part of the elevated yield, if you will. So, hopefully that --

Well, there would have been some negative accretion related to prior adjustments as well, correct? I'm just trying to get a sense as to maybe if you could just tell me how much of the negative accretion was related to this quarter's adjustments? That would help.

Well, the negative accretion related to this quarter's yield is, well the blended yield would have been it's about $4 million as we've got positive accretion on the other transactions.

Okay. That's fantastic. That helps.

Does that help?

Yes. On the cost savings, you mentioned $3 million in annualized beginning in the first quarter of 2012. Is that net of any capital investments that you might have planned or is that gross?

Well, this is John. Yes, that's net of everything.

Okay. And then -- on your mortgage banking business, you had a strong quarter and you've got a large amount of loans held for sale. Coming into the fourth quarter, what does the volume look like in that business? Do you think we could see the banking income increase from the third quarter, or do you think it's going to -- I mean, obviously we'll start -- would expect to see a slowdown in volumes kind of after Thanksgiving. So I'm just trying to get a sense of where that line might go in the fourth quarter?

Well, we feel good about our volume in the fourth quarter. Obviously rates have ticked up a little bit, [Wallace]. So, feel good next quarter, probably be a little bit lower than the third quarter, but it's still a very, very strong pipeline, approximately $200 million is in our pipeline today.

Okay. Fantastic. Thanks a million, guys.

Mac Hodgson, SunTrust Robinson.

Hey, good morning. Question on the -- Robert, I think you mentioned that some of your coastal markets were showing improvement. I was curious kind of which ones, and which is the laggard out of the Myrtle Beach versus Beaufort County?

We kind of track our performance in past dues obviously and classified the capital levels and NPAs by region, and we've really seen the two laggards being the Myrtle Beach market and the Beaufort County market. They have -- if you look at the rest of our markets, they really are, from a past due standpoint, look pretty good. From a classified to capital standpoint, really look really good. But clearly those two are -- those two stand out.

Okay. And I think you also mentioned that loan growth might have moderated toward the end of the quarter. So, should we expect to see a lower level of maybe growth here in 4Q, and have you seen any changes and kind of ability to shift market share borrower willingness to move and demand things like that?

No, we -- last year, we hired a lot of bankers, a lot of teams, and we've seen the impact of that this year with 9% annualized loan growth and we continue to see a lot of takeaway opportunities. So I don't think that has slowed so much. What has slowed or changed has been the mortgage businesses. There's less in-house mortgage business because everything is going to secondary market. But other than that, it's probably slowed some, but 9% is a pretty healthy run rate. So, we've probably seen it slow some and we've seen the mix change on the mortgage side.

Okay. Got you. And then lastly on outlook for additional M&A. Could you just comment there on potential deal activity and interest in doing more acquisitions?

We did two this year and that we feel like is a pretty good cycle to do a couple, maybe three a year depending on the sizes. And so that has worked well. We have, over the last year, put a M&A team in place to be able to not only analyze deals but also integrate and execute these transactions. So we've put the infrastructure in place to be able to really let M&A be a core line of business for us.

There are a lot of opportunities. As you know, there are a lot of sellers. A lot of those banks so just cannot be bought, and at least our view of that. However, there are some that we feel like could be additive to our franchise, both [whole] bank and FDIC. And as we get further through this credit cycle, we feel like there are going to be some good opportunities for us there.

We have -- we've laid out some pretty, very defined hurdle rates that we're going to require these acquisitions to meet and they're hard to find where they meet those hurdles, but we think we're getting closer on some.

Could you share the hurdle rates, or is that just an internal thing?

That's internal.

Okay. I appreciate the color. Thanks.

Thanks, Mac.

Christopher Marinac, FIG Partners.

Yes, good morning, everybody.

Chris, good morning.

I wanted to ask about the preponderance of fixed rate lending going on in your markets, whether it'd be in South Carolina proper or in your North Carolina [calling] area? How often is that something that you're doing for key clients, and is it a competitive challenge from some of your larger bank brethren?

It's a great question. You are seeing a lot of banks throw out a lot of seven and 10-year fixed rates. And if you look at ours, we are still on our [Cindera] modeling that we were on our asset liability simulation. We are still asset sensitive. So we benefit when rates begin to move up. A lot of that's because of the core funding and growing their wholesale funding in the Company. But we have seen the market shift to some very aggressive pricing and some very long-term pricing. And we have -- most of our loans though are still priced five years or less.

Okay. And you still have a fair amount cash to put the work to, so on a relative trade-off basis there is still -- you can still move the needle on decisions you make there, correct?

Chris, this is John. Yes, yes we can.

Okay. And then I guess my follow up just as separately is, can you just give us some overview about the progress you are making on sort of new relationships, on organic stuff in and around Metro Atlanta, particularly Gainesville, just leveraging off of what you have in North East Georgia?

Yes, I'd say really good progress. I had dinner a few weeks ago with 10 customers and prospects from the Gainesville market and 10 customers and prospects from the Athens market, both of which we feel are good stable growth markets for us from -- in our CBT footprint, our Georgia footprint. And I got really good feedback. There's tremendous turbulence over there. There is still a lot of weak competitors over there and there are a lot of people looking for a stable home. So we are really getting some good traction in those two markets as we are in the others. But in those two particular markets we are lower down in the totem pole in terms of market share. But we have good solid presence and good bankers in those markets and we think those both give us good opportunity to take share.

Great. Thank you for the color.

Kevin Reynolds, Wunderlich Securities.

Good morning, everybody.

Hi, Kevin.

My question, I think we've kind of touched on this one in a lot of different ways. But I'm just curious how business conditions or how your commercial customer psychology might have changed over the course of the quarter as we had the broader market sell-off early when everyone was kind of in a panic and then as we've started to come back here in October, have your customers changed the way they think about going about their business? And have you seen any impact on your business from your calling effort? Maybe not so much what was in the numbers in the quarter, but how you have the pull-through of your calling effort on the pipeline?

We have clearly seen, yes, I'd say in the last 90 days kind of the confidence in the overall economic growth has slowed some. A lot of our growth has been takeaway business. So we've not seen a lot of businesses expanding and investing. We've seen some, but not many. But I would say, overall, I would say the companies that I'm talking to an awful lot are more cautious today than they were a few months ago.

Okay. And then, I guess, one other question. I can't recall if this has been asked yet or not, but fee income-wise any regulatory impacts from -- on like card fees and all that would be coming out, that we ought to be adjusting for?

Kevin, this is John. Our vendor currently can handle the two-tier system. So we're still waiting still analyzing to see what will come out in the future. And obviously have to have some plans in place if that changes, but today there is really not any change for us.

Okay, okay. Thanks. Good quarter.

Kenneth James, Sterne Agee.

Hi , good morning.

Hi, Kenneth.

Good morning.

On the deposit service charges, if I could just follow up, good strong number this quarter. Is that growth all from the acquisitions or kind of how would your line item, if it had been running at $5.5 million a quarter say for the past five quarters, how does that relative to where we're this quarter?

I don't know, Kenneth that I can give you the exact break out. We can get back to you on the exact amount, but the bottom line is we've seen core, non-acquired organic transaction account growth of about 6,000 year-to-date. And we are seeing a pretty healthy run rate there. So, there is obviously a piece that came from the acquired, although I'd say most of that is Habersham, really Meridian had very low, did have a very low number of transactions account period or service charge income. So ex-Habersham, which you saw earlier in the year, really the most of the growth has been organic checking account growth.

Okay. And then on the FDIC portfolio evaluation, the negative accretion, does it more or less stay the same going forward unless it's changed by another valuation?

Well, certainly another valuation would change -- could change it, if we released credit. But all other things equal --

All else equal, does it -- I mean it's going to amortize out [when it's going to end up] relatively stable?

It declines as the loan balances decline, and it's recognized kind of on a -- in proportion to the income on the loan side.

Okay. And on the provision this quarter, the small negative, I guess, kind of net credit valuation you had, the two, I guess it was about $216,000. Is that in your provision number? Is that on the kind of the income statement -- the [8.3 to 3] or is it somewhere else?

Yes, yes.

Okay. So kind of your core provision for your loan portfolio non-covered was [8.1]?

That is right. That is right.

Okay, I think that's all I had. Thanks, gentlemen.

Thank you (technical difficulty).

Thank you. This does conclude the question-and-answer session of today's program. I'd like to turn the program back to management for any further remarks.

I'd like to thank everyone for their participation in our third quarter earnings conference call and their interest in SCBT. We look forward to discussing our fourth quarter results with you in January. Thanks, again.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.