SouthState Bank Corp (SSB) 2011 Q4 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 would like to remind you that we will be in listen-only mode for the first part of the call. Then we will open the line for questions. Now, 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 fourth-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 discussion contains some forward-looking statements regarding both our financial condition and our financial results. These statements involve certain risks and that actual results in the future may differ from what we currently expect.

These factors may include, among other things, changes in interest rates, economic conditions and competitive pressures within the financial services industry. Legislative or regulatory requirements may also affect our business. 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. Thank you for joining us today. We are pleased to provide commentary on our year-end quarterly results. There are many highlights in 2011 and we are pleased with our overall results.

Our fourth-quarter performance is on track with our expectations, although our credit costs were a bit higher than we had hoped. Net income for the fourth quarter totaled $4.8 million, or $0.35 per share, bringing our annual 2011 net income to $22.6 million, or $1.63 per share. Our strong net interest margin and fee income are driving our performance as we concentrate on managing our credit costs and our overhead.

We announced three M&A transactions this year and I want to speak to those just for a minute because, obviously, those create less clarity in our numbers. I want to focus on that activity for a moment, as well as for our overall capital strengths. We completed two FDIC-assisted transactions this year, which resulted in pretax gains of $16 million. Our team is experienced in executing integrations and were able to quickly convert these institutions to our platform shortly after they were announced.

We are also very excited about our recent announcement of the acquisition of Peoples Bank Corporation. Peoples is located in the attractive I-85 Corridor and fits nicely with our branch locations in that area. Upon completion of the merger, the combined company will have approximately $4.5 billion in assets, $3.8 billion in total deposits and $3.2 billion in loans. We continue to enjoy a solid capital position with an estimated total risk-based capital ratio of 15.2% and Tier 1 leverage of 9.1%.

In connection with the Habersham transaction, we completed a capital raised of $35 million. This additional capital, together with capital retained through our earnings and prudent balance sheet management, provides us with a strong capital base to continue to consider both whole and FDIC-assisted acquisitions as opportunities arise.

We will continue to carefully evaluate M&A opportunities. We will be disciplined to take actions on deals, which are attractive strategically and financially. Our M&A activity, combined with our overall growth, will have a positive impact on our pre-tax pre-provision income going forward.

Now I will shift to loan and deposit growth. Our bankers continue to move relationships resulting in strong loan and deposit growth. Organic core deposit growth during 2011, excluding CDs and the Habersham Bank and BankMeridian acquisitions, totaled $315 million, which is an increase of 17% from December 31 of 2010. Our core deposits now represent 72% of our total deposits compared to 62% as of 2010 year-end.

During the year, we grew our customer base by over 25,000 customers through a combination of organic and acquired growth. We also grew the number of transaction accounts by 20,000 or 14% during the year. Organic loan growth totaled $174 million, or 8% for the year, but moderated at the end of the year. The commercial real estate portfolio also declined by about $100 million. We were very proud of our ability to attract these customers and believe it to be attributable to our talented teams of bankers and our overall position of strength in the markets that we serve.

Now moving to the credit front, we continue to work diligently to try and bring both our level of non-performing loans and associated credit costs down. Our total provision expense for the fourth quarter was down $1.3 million compared to the linked quarter, but this was offset by an $800,000 increase in our OREO expense, primarily due to valuation adjustments on coastal properties as some coastal markets remain weak.

Our total non-acquired, non-performing assets decreased to $94.9 million at year-end compared to $96.1 million at the end of the third quarter. Although they remain higher than our team desires, we continue to see improvement in most of our markets with the exception of some coastal markets.

Now I want to discuss our efforts on increasing non-interest income and controlling non-interest expense. One area of improvement we were very proud of is the drastic year-over-year increase in certain categories of non-interest income. Service charges on deposit accounts increased 6% compared to 2010. Bankcard service income increased over 30% and trust and investment services increased over 28%.

We are also focused on ensuring that our non-interest expense levels are in line with the overall size of our Company. To this end, we announced a branch consolidation initiative last quarter, which reduced our operating costs in the fourth quarter and will have a further impact in 2012.

As we begin 2012, we remain focused on our principles of soundness, profitability and growth. We will focus on reducing our credit costs by making progress on reducing NPA levels. We will focus on controlling our overhead costs and improving our efficiency ratios. We will also be working on successfully integrating Peoples Bank Corporation while evaluating other M&A opportunities. These steps will help us to return our ROA and our ROE to historical standards. I am pleased to announce a quarterly dividend of $0.17 per share, a dividend we have maintained during this financial downturn.

I will now turn the call over to Donnie who will provide additional information on our financial performance.

Thank you, Robert. I will make some summary remarks and then provide highlights on a linked quarter basis. Net income for the fourth quarter was $4.8 million compared to $10.3 million for the third quarter. As you recall, the third quarter included a pre-tax gain of $11 million from the BankMeridian acquisition that closed on July 29. Our team has done a terrific job of integrating BankMeridian as we completed the systems conversion in November.

Our pre-tax pre-provision operating earnings, when excluding the bargain purchase gains and merger-related expenses, totaled $13.4 million, which is down from $14.9 million in the third quarter. This decline is primarily the result of a reduction in net interest income and elevated OREO costs.

I will first discuss the changes in our net interest margin. During the fourth quarter, our margin contracted from 4.95% to 4.78%. The yield on earning assets decreased 26 basis points and the cost of interest-bearing liabilities decreased 10 basis points. The yield on earning assets was impacted the most by a decline in the acquired loan portfolio yield, which declined from 12.03% in the third quarter to 10.82% in the fourth quarter. The acquired loan rate first became elevated in the first quarter of 2011 when we identified improved credit loss expectations on the CBT portfolio.

Contributing to the decline in the acquired loan yield is that the BankMeridian acquired portfolio, which has a lower yield than the CBT and Habersham-acquired loans, was included for three months this quarter versus two months last quarter. In addition, the CBT portfolio, which has a high yield, now represents about 50% of the acquired loan balance compared to about 60% in the prior quarter. The elevated yield on the acquired loans is largely offset by negative accretion recorded in non-interest income. Negative accretion on the indemnification asset was down $400,000 for the quarter to $3.1 million. The negative accretion is caused by the effects of the credit improvement on the CBT portfolio identified in the first quarter of 2011.

The legacy loan portfolio yield dropped 7 basis points due to competitive pressures in the marketplace. Our excess liquidity has diminished in impact and now depresses the margin by about 7 basis points in both quarters. Our legacy loan book continued to increase, although a bit less than we experienced earlier in the year. Loan growth was $9 million for the quarter and $174 million for the year. The primary driver of the growth is in the commercial owner occupied category.

We continue to manage deposit pricing while enjoying success in attracting and retaining core deposits. Linked quarter, our core deposits grew $46 million and year-over-year, they are up over 25%. Excluding acquisition impacts, core deposits are up over $300 million. Our overall cost of funds for the fourth quarter totaled 44 basis points, down from 52 basis points in the third quarter thanks to success in growing non-interest-bearing checking balances and a decrease in CDs.

On the credit side, the non-acquired provision for loan loss expense decreased to $7 million from $8.1 million last quarter. Charge-offs were down to $6.7 million from $7.2 million in the third quarter. The allowance for non-acquired loan losses now stands at $49.4 million, or 2% of outstanding balances, up from $49.1 million in the third quarter. While we continued to see some positive signs on the credit front, some coastal markets remained weak, which will likely translate into continued volatility in our credit costs.

Non-interest income for the fourth quarter totaled $9.7 million compared to $20.8 million in the third quarter, which included the bargain purchase gain of $11 million for BankMeridian. Excluding the acquisition gain and the indemnification asset accretion, non-interest income decreased by only $630,000 off a strong third quarter.

Mortgage banking income was down slightly due to lower secondary mortgage pipeline and pricing. Trust investment services income was also down, but for the year, it was up over 28% as we continue to enjoy success in this business. Non-interest expense totaled $36.5 million for the quarter, down $600,000 from the third quarter. Merger costs were down $1.2 million as we completed the BankMeridian conversion.

Salaries and employee benefits are down $400,000, reflecting reduced costs following the integration of BankMeridian and the branch closures in Georgia. OREO and loan-related expenses remain elevated and increased $800,000 during the quarter, primarily related to valuation and carrying costs on OREO properties.

Lastly, our income tax rate declined from 35.8% in 2010 to 32% in 2011. The decline from 2010 and the acquisition gains and the greater proportion of tax-free income in 2011 is the cause of this decrease. That concludes my prepared remarks, so I will turn it back to you, John.

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

(Operator Instructions). William Wallace, Raymond James.

Good morning, guys. My first question is -- just wondering maybe if you guys could help me out with margin a little bit. How much of the compression in the quarter was driven by lower purchase accounting accretion levels?

William, this is Donnie Pickett. The compression on a linked quarter basis was almost entirely associated with the acquired portfolio.

Okay. So kind of core margin was flat then?

That's right.

And then there is 7 basis points of pressure related to excess liquidity?

Yes, that's correct. And that is consistent with where we were last quarter on that compression.

Right. And then the level of pressure to margins should decline progressively through 2012 and 2013 as your purchase loans run off, correct?

Well, you need to remember that the yield on the acquired loans and the credit assessment and the accretion on the indemnification asset are all interconnected. The negative accretion went down about $500,000 linked quarter. So this portfolio is a rundown portfolio because we are not adding new loans to it, but we do have an appropriate credit reserve against it of 40%. So we are continuing to evaluate the credit. As we evaluate that credit, any credit release would boost the margin and reduce -- and also increase the negative accretion.

So are you suggesting that, as you are looking at the credit now, that perhaps trends are improving from the current marks?

Well, I will say it this way. We had CBT on the books for five quarters before we reassessed credit and CBT is at a 95/5 loss share. Habersham and BankMeridian are at 80/20 loss share and we have reserved those about the same as CBT. We have been aggressive at working through the portfolio recording charge-offs and so forth. So we are hopeful that future credit assessments may come to us, but we are just going to have to wait and see there.

Okay, okay. And then I know it is still early as it relates to Peoples and you guys are probably still evaluating the mark for that portfolio, but is there any way you could kind of give us a first take about how much we might see as far as benefit to margin from the addition of accretion on that purchase in the third quarter, assuming it closes at the end of the second quarter?

Well, right now, we're at -- this is John -- we are evaluating our pools and so we have got a lot of work to do on the accounting side to get the loans in the different pools. So it is a little early to be able to predict that.

Okay. And then I will ask one last question on credit and let somebody else hop in, but can you tell us about the NPA inflows in the quarter and also the classified asset trends?

Sure. Let me get to that right quick. Really, as far as NPA inflows in the fourth quarter, we basically had four larger transactions flow in to the tune of about $7 million that we were actually able to decrease NPAs in the fourth quarter. So we have been able to be successful and work out strategies and OREO sales and other instances.

As far as the total classifieds, we are continuing to see some inward migration and you can imagine, since we had some larger NPAs, we also had some larger classifieds flow in. But we are focusing on obviously moving those down as we get into 2012 on our workout strategies.

So the classified asset balances are up in the fourth quarter over the third quarter?

Yes, they are.

Can you give us an idea of magnitude?

Yes, I believe it is in the template.

Oh, is it?

Yes, it is about $5 million or $6 million.

Okay.

No, excuse me. $4 million linked quarter.

Okay, great. Thanks, guys.

Jefferson Harralson, KBW.

Hi, thanks. I am going to ask another kind of accretable yield type of accounting question. So help me if I have some of the terms incorrect. I guess how much in total accretable discount has still to run back through the margin over time? And what is the non-accretable dollar amount and have we had any changing between those two accounts in the last quarter.

Jefferson, this is Donnie. We disclosed in the 10-K tables the breakout between accretable and non-accretable. I don't have those numbers handy right now, but I will tell you that the kind of carrying value to the UPB is about a 40% discount. Some of that is accretable, some of that is non-accretable. We are now disclosing the yield in our templates. So that is about as far as I could go with breaking it apart for you.

Okay. Look forward to the K then. Talk to you later.

Kenneth James, Sterne Agee.

Hi, good morning. In reference to credit costs earlier being a little higher than you expected, when you say that, are you referring just to the provision or the OREO expense and write-downs as well kind of put together? And then where I am going with that I guess is OREO expense kind of creeped up through the year, but your OREO has come down here in the fourth quarter and just wondering what your outlook is for that line item.

The outlook for OREO?

Expense.

OREO expense. We think OREO expense could be fairly flat in '12 versus '11. We do expect it to come down some, but as we continue to work out our credits and move those through the OREO bucket, we think that we will continue to see costs almost as much as we had in '12, but I think we will get some improvement. I think we will see improvement in '12 on the net charge-off side as we continue to work through the problem assets.

So in dollar terms or percentage terms, you maybe expect to see more improvement on the loan loss provision line than I guess on the OREO expense line?

Yes.

Okay. And then on the expenses, we talked about some cost savings you still kind of had to work or be reflected from some of the systems conversions and stuff. Do you feel like those are fully baked in now or was there anything else left to kind of -- straggling items to be cut that we could see in the first half of '12?

This is Donnie. We did the systems conversion for BankMeridian in November, so we probably only have maybe two months to save there. The branch closures that we announced in Georgia, most of those closed during the fourth quarter and I think we told everyone that the full-year benefit there was going to be about $3 million to the full-year run rate. So a quarterly run rate there pre-tax is 750 and there might be a couple hundred thousand that is in there for the fourth quarter. But we would expect to see more run rate say on the Georgia closures in 2012.

Okay. And I will throw in my FDIC accounting question here. I was looking at your acquired non-performers and it is all in OREO and how does that work? If you dispose of a piece of OREO and you get a price on the mark, does that come through interest income as well or would that come through somewhere else?

No, that comes through the OREO and loan-related expense line on the non-interest income section of the income statement net of the benefit of the FDIC receivable. So for CBT, that is a 95% benefit and for Habersham and BankMeridian, that would be an 80% benefit. But we do mark those assets pretty carefully when they are sitting in OREO, so we are hopeful that we will sustain -- realize what we have them on the books for and then even then, if it is different, it is very nominal in terms of impact because of that loss share.

All right. Thanks a lot, guys.

(Operator Instructions). Christopher Marinac, FIG Partners.

Thanks, good morning. I was curious if you could walk us through on the classifieds how difficult is it to get a credit upgrade within the system? We have seen some of that around the industry in various parts of the country. I was curious as to what inside your credit metrics causes upgrades to occur.

Well, we are eventually looking for the well-defined weakness in the credit to be mitigated. That can be done in a lot of ways with different types of credits, but you are basically looking for cash flow coverage. In a company situation, a return to profitability, if they had been losing money and a reduction in leverage both personally and companywide.

There is a lot of different aspects to it. It is sometimes more of an art than a science, but basically to sum it up, substandard credit has a well-defined weakness and to be able to upgrade to credit, you have got to mitigate the well-defined weakness for a sufficient period of time, probably at least six to nine months.

That's helpful. Thank you. And I guess as a follow-up separate is just the question back to the average balance sheet. The 8.5% or so growth we had this quarter of the non-acquired loans, is that a good run rate do you think or what is a good expectation for this year?

This is Robert. We had a pretty good year in terms of organic growth overall. Fourth quarter has slowed down some primarily, not totally, but primarily because we saw some very low, long-term fixed rates hit the market and we just decided that we weren't going to play in that arena. So we have been very careful with our interest rate risk management and not getting drawn out too long at too low of a spread. So I think that will impact our growth some next year, but we still believe that kind of a mid-single digit number is attainable.

Great, thank you very much.

There are no further questions from the analyst community.

I'd like to thank everyone for their participation today and for their interest in SCBT. We look forward to talking with you again during our next call.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.