SouthState Bank Corp (SSB) 2012 Q1 法說會逐字稿

Thank you for calling-in today to the SCBT Financial Corporation's 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 and Chief Financial Officer of SCBT Financial Corporation.

Good morning, and welcome to SCBT Financial Corporation's first quarter earnings conference call. With me today are Robert Hill, President and CEO and Joe Burns, Chief Risk Officer.

Our format today will be that Robert will provide some opening remarks, and then I will provide additional detail on our financial performance. We will conclude the call with a Q&A session with the research analysts community.

Before we begin, our listeners should be aware that our discussion contains some forward-looking statements regarding both our financial conditions and 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 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 and good morning everyone. And thank you all for joining us today, but we would particularly like to welcome former Peoples Bancorporation shareholders and employees, who as a result of the merger closing on Tuesday this week, are now part of SCBT.

We are excited to finalize this transaction and look forward to completing the integration process in the months ahead. We will be discussing the merger later in the call. But I'd like to first provide commentary on the first quarter's operating results.

Net income for the first quarter of 2012 totaled $7 million or $0.50 per diluted share, as credit cost and credit quality significantly improved. This earnings level represents return on average assets of 71 basis points and return on average equity of 7.37%, compared to 27 basis points and 2.94% respectively for the first quarter of 2011. Highlight for the quarter included significant asset quality improvements, which resulted in lower credit cost and a substantial increase in core deposits.

I want to discuss the significant improvement in asset quality metrics that we achieved in the first quarter and a little about what we might expect going forward. At quarter end non-acquired, non-performing assets decreased by $3.5 million, to $91.4 million or 2.26% of total assets. Classified loan balances were down $10 million to $156.1 million, which is the lowest level since the second quarter of 2009. Past-due loan balances were also down, the levels not seen since 2008.

Net charge offs for the quarter as a percentage of non-acquired, average loans totaled 66 basis points. We are very pleased to see these trends. We will continue to work to lower these to normal levels while being aware that some ups and downs are possible given the economic recovery cycle.

During the quarter, our non-interest checking balances grew by $99 million or 60% annualized, driving our total core deposit growth during the quarter to $161 million or 27% annualized. Our total core deposits now represent about 75% of our total deposit base. Our bankers are doing an excellent job of moving profitable customer deposit relationships and the resulting low cost deposit bases the source of strength for our company. I noted in my fourth quarter earnings call that our legacy loan growth which we had experienced for eight straight quarters was beginning to moderate.

During the first quarter of 2012 we continue to see some softening in loan demand and market forces driving loan competitors to offer some very aggressive long-term fixed rate. Our non-acquired loan portfolio decreased by $33 million during the quarter to $2.437 billion as of quarter end.

The higher risk segments of the portfolio contributed to most of the decrease. We experienced a decline of $32 million in the commercial real estate portfolio while seeing an increase in the consumer owner occupied and commercial owner occupied category. During the quarter we had new loan production and advances on loans totaling $139 million.

The pay outs and pay downs totaled $161 million. Of those pay downs the coastal area portfolio experienced $23 million much of which was in the CRE bucket. Our NPAs have been certainly high in the coastal area and we are encouraged by a $4.5 million decrease in NPAs in this market during the quarter which is just about 10%.

Also contributing to the decline in the portfolio was approximately $5 million in gross charge-offs and $7 million in transfers to OREO. We will remain disciplined in our pricing but would note that we are beginning to see some increases in the pipeline throughout most of our markets.

Our efficiency ratio improved 73.09% for the fourth quarter of 2011 to 72.02% for the first quarter of 2012. While we are pleased to see this improvement, we're not satisfied with the existing level, and are focused on further improvement. The linked quarter improvement is due to some branch consolidation efforts announced in the previous quarter as well as lower cost related to OREO. We anticipate the Peoples Bancorporation transaction will have a positive impact on this ratio as well as identified cost base are realized.

With one quarter behind us our areas of focus for the remainder of the year remain the same. We continue to focus on our principles of soundness, profitability and growth. We will continue to work to reduce our credit cost by reducing NPA levels, we will target controlling our overhead cost and improving our efficiency ratio, we will continue working on the integration of Peoples Bancorporation of carefully evaluating new M&A opportunities.

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

Thank you, Robert. I'll make some brief comments about our linked quarter performance followed by some discussion around the Peoples Bancorporation transaction which closed earlier this week.

Our performance this quarter was driven by broad-based improvement in asset quality which led to a lower provision. With virtually every asset quality metric improving, our provision totaled $2.7 million for the quarter, down from $7 million last quarter.

Pre-tax pre-provision operating earnings were flat when compared to linked quarter. The impact of net interest income being down $887,000 and non-interest income being down $190,000 were offset by a decrease in non-interest expense of $1 million.

I will first discuss the changes in net interest margin. During the first quarter, our margin contracted 8 basis points from 4.78% to 4.7%. The yield on our earning assets decreased 16 basis points and the cost of interest bearing liabilities decreased 9 basis points.

Net interest income was down $887,000 linked quarter. The $29 million decline in average acquired loan balances as well as the reduction yield on the portfolio of 55 basis points accounted for the majority of the drop in total interest income. After evaluating various CBT and Habersham pools in the last month of the quarter, we released some of the credit mark due to improved performance of some of the pools.

So next quarter's yield absent any deterioration in performance should be enhanced as a result of a full quarter's benefit of the release. We have not yet adjusted any of the BankMeridian mark. We will be evaluating that performance during the second quarter, as we are coming up on a full year of cash flows to analyze.

The legacy loan portfolio yield increased by 8 basis points from the prior quarter, although average outstanding balances were down by $11 million. Due to lower levels of legacy loan and acquired loans as well as a large increase in low cost funding, we held larger balances of excess liquidity when compared to the prior quarter.

We estimate that the excess liquidity depressed the margin by 17 basis points this quarter compared to about 7 basis points last quarter. We continue to carefully manage deposit pricing and our margin has benefited from the improvements in our funding mix. Our lower cost funding has increased, while higher cost certificate of deposits have decreased resulting in overall cost of funds of just 36 basis points down from 44 basis points in the previous quarter.

Non-interest income for the first quarter totaled $9.5 million compared to $9.7 million in the fourth quarter due primarily to the lower NSF fees on deposit accounts. In prior years we have experienced a similar drop in NSF fees during the first quarter when compared to the linked quarter. So, we would anticipate this source of revenue to be up next quarter. Mortgage banking income was down $112,000 from the linked quarter and trust and investment services income was up $160,000.

Non-interest expense was down $1.3 million from the linked quarter led by a $2.1 million reduction in OREO and loan related expenses as we experienced less valuation adjustments on the properties. Most of the other categories remained relatively flat with the exception of salary and employee benefits which increased $1.1 million. This increase is a result of some merit increases, higher payroll taxes, as well as some increases in the retirement benefit expense.

These increases were partially offset by cost savings from branch closure efforts that began in the fourth quarter of 2011. We continue to concentrate on controlling overhead costs in our efforts to bring our efficiency ratio down. As Robert mentioned earlier the Peoples Bancorporation transaction was completed on Tuesday. Simultaneously we retired all of the $13 million of Peoples' preferred stock issued under the TARP program. Peoples' balance sheet has contracted by about $22 million during the prior six months with the loan portfolio decreasing by approximately $28 million.

So we'll likely see a decrease in the credit mark that we initially forecasted. Of course we are at the beginning stages of our valuation process with respect to the Peoples' balance sheet. Our estimate of one-time merger cost is now approximately $3.5 million slightly higher than our initial estimate of $3.2 million. We still anticipate cost saves of at least 30% of the Peoples' 2011 non-interest expense titles, 70% of which will be realized during 2012. With the transaction complete we are very excited about this merger's impact on our future performance.

That concludes my prepared remarks. So I'll now ask the operator to open the call for questions.

Thank you, sir. (Operator Instructions). William Wallace, Raymond James.

Good morning gentlemen, how are you? Hello?

Hello.

Can you hear me?

Yeah.

We can hear you Wallace.

Okay, great. I have a few questions, but maybe I'll start on the expense line items. Are you -- was your salary and employment expense, was that in line with your expectations that $18 million?

Wally, this is John. Yes it's right on our budget number for the year. If you look at kind of base salaries we were up less than 1% in terms of base salaries and we had a reduction linked quarter of about 8 FTEs. So yes it was.

Okay, okay. I know you had the reductions, so I guess I was expecting it to be a little bit lower, but so that's helpful, thank you. And then on the margin side of the equation, I guess the first question is with the PBCE deal, can you give us what you expect the margin impact or the dollar impact to be from accretion on a quarterly basis (inaudible)?

Wally, this is John again, I can't give you the dollar impact, but historically their margin has been right around 4% and we'll get into the evaluation and look at it. So I don't think it will have a huge negative impact, but obviously we have got to get the evaluation figured out and then we'll see where it kind of lands. So obviously this quarter will be a little bit messy, so I think once you start getting into the third quarter, you will be able to see the impact on it.

Yeah. I'm actually --

[They think like us] have continued to reduce excess funding on the CD side, so their pricing is coming down pretty nicely what we've seen so far.

And I was actually speaking more specifically to the actual accretion part of the equation because that will be a benefit to your margin.

That's correct.

And so I'm trying to get a sense as to what that might do over the next two quarters, once you've layered in?

Like I said we are in beginning part of the evaluation, I do believe it will have -- that part will have a positive impact, but we have just got a little bit more work to do.

Okay. And then you had 17 basis point compression related to liquidity, which compared to 7 basis points the prior quarter, will a lot of that liquidity be used with Peoples to get rid of some shorter term funding or higher cost deposits or anything? In other words can we see that 10 basis points come back in the second quarter?

I believe you can, I think if you remember when we announced the transaction, they had a fair amount of securities and cash on their balance sheet, but they like us are continuing to reduce CD pricing, so yeah I think it could come down some.

Okay. And then you said you are retaining their TARP?

No we paid their TARP off.

Paid.

It's been -- it was paid off from the day of closing.

Great. I will hop off and let somebody else in line. Thanks guys.

Christopher Marinac, FIG Partners.

Thanks good morning. I [got just] one first question, this has to do with seasonality or any of the improvements on charge-offs related to sort of the timing here and was there any risk that does back up a little bit in terms of loss rates on the non-acquired portfolio?

Chris this is Joe, I really don't consider any seasonality in the numbers. I do think we'll continue to see some choppiness this year as we continue to come out of the cycle, but I really wouldn't attribute anything to seasonality.

Okay great. I just want to clarify that and then John or Robert as you've closed Peoples this week, is there any reason that the CDI number would be different from what you first told us in December?

I don't believe so. This is John.

Okay. So we can see you in that same percentage.

That's correct.

Okay, great. And then I guess could I have you just talk about, a little bit about what's happening in your markets both economically as well as competitively both large banks and small banks and sort of how that dynamic has played out, any difference, or any color on what you've been seeing in the last quarter?

Chris, this is Robert. In the fourth quarter we saw some really aggressive long-term fixed rates out there and we decided to kind of not participate in that and that seems to have moderated some. So we've seen in the first quarter our pipeline really began to build. I'm looking at our pipeline report now and this is really at levels that were in-line with most of last year when we had pretty good loan growth and it's pretty spread out across -- evenly spread out across our markets.

We don't see much competition from the small bank side. We have seen more competition more from the regional banks in terms of from a pricing perspective. But we continue to pick up really good relationships a lot of the shrink and actually our overall production this quarter was pretty much in-line with our historical quarters. We just saw more churn of some of our problem loans this quarter. Coastal, coastal real estate beginning to move the commercial market, the C&I market and properties that make up those kind of areas are -- the pricing seems to be firming up and you're seeing some more activity there.

The coastal markets are certainly improving. Hilton Head and Myrtle Beach are still distressed but the Charleston market seems to certainly be improving. And overall I would say in the Carolinas is now, leave Georgia out of it because Georgia still has a long way to go to see economic improvement, but the Carolinas we've seen the lowest unemployment rates, we've seen in a while. It dipped below 9% in South Carolina, which is the lowest that has been in quite a while about three years. And we're having some pretty major economic announcement with things like Michelin, Bridgestone have made major employment announcements, Boeing rolls off the first Dreamliner in Charleston today. So there is a fair amount of activity, all of that has not transferred over to the residential market, we're still seeing some stress there, but we're seeing some positive things on the commercial side.

Okay, great. That's helpful color, thank you.

Kenneth James, Sterne Agee.

Hi good morning gentlemen.

Good morning.

Good morning.

I think you probably touched on my question a bit, but I wondered if you could talk about it, it just seems like on the deposit side you've seen some -- I guess acceleration in the growth and probably tied to market share gains, but the loans seem to be going the other way. And you talked about demand possibly softening and I understand the some of the lumpiness of the workout of troubled credits and all, but just speaking to the demand softening, can you elaborate that a little more and do you think maybe it's because it's just a blip and South Carolina was a little stronger than everywhere else earlier?

We had eight consecutive quarters of loan growth and this is not going to -- I mean it's not going to grow every quarter. We certainly slowed the loan growth engine down, some at the end of last year mainly to protect the margin. And you can see that in our margin -- you can see actually our non-acquired portfolio, the yield on our loans actually improved a little bit.

So, we felt like protecting that was more important than continuing to match long-term 10 or 15 or 20 year fixed rate loans. So we just pulled our horns in a little bit. I think had a little bit of feeling that maybe there was a little bit less demand. But I think that is -- it tends to be returning to normal level. There is not anything I think that's alarming to us.

Okay. And then look at kind of some of the fee income lines. The growth in bank card I mean is that strictly kind of tied to the deposit new accounts is that strictly new number -- number of new accounts or what's going to drive in that?

Yeah, it's new account volume and this is Robert again. We had core checking account growth last year of about 10% and we're having very healthy retail account growth and commercial account growth, but a lot of account growth that's what's driving the fee income.

Okay. And how do you feel about is there anything that went on the regulatory world I mean I know there is some pending stuff that's not very clear, but they would give you any concern at all about deposit service charges second half of this year and next year.

I don't think you see anything in the short term that causes us great concern. Obviously, there is a lot of uncertainty on the regulatory front. We'd just continue to monitor it, but I don't think there is anything in the near term that's problematic.

Also want to just touch on your initial question on the deposit side. The non-interest DDA growth was probably unprecedented it was a significant growth, there probably is a little seasonality in that number. You've got the tax issues, you've got some beginning of the year companies that are sitting on a little bit more liquidity. We had a couple of customers in there that had an event that created a lot of liquidity. But I would say the majority of it is not that and it was pretty evenly spread out across all of our branches, so we did have a -- there is a little lumpiness in that non-interest DDA number.

All right, thank you very much.

Kevin Reynolds, Wunderlich Securities.

Good morning everybody.

Hi, Kevin.

Good morning.

Most of my questions have been answered, I was going to -- and I apologize if you have already talked about this, I got on the call little bit late. Outlook for acquisitions and I think specifically not so much whole bank but we've noticed here recently that Bank of America is lost or has shed some branches in different markets. Do you think there is any chance of things like that maybe not specifically them but things like that where big bank shrinking down and you could maybe pick up a few branches here or there across your footprint as you are right in the middle of a lot of those?

We hope for years that that would transpire and it certainly makes sense that it would at some point in time but we are hopeful that it will happen. We've hoped for years that it would happen, the timing and the catalyst that would create that event. Who knows but we'd be ready to take advantage of those opportunities because there are a number of them in our footprint.

Okay, okay. And then I guess going back to whole bank and I think and I apologize if you already addressed this, but the pace of failures have slowed down, yeah there are still a ton of problem banks over and particularly in George and some of the Carolinas. Do you think that picks up or do you think we are at the point now where they survive or they just don't really have much of a future and how -- what is your view on those kinds of transactions?

On the failed bank side the -- they are just overall just less attractive franchises. I mean by the time you boil down the company to kind of its core there is just not much core company left. So, there are some opportunities there that could still be attractive. I think the activity level has got to hasten because there is just a lot of them that will continue to need to find resolution but there is not, so I think there will be a lot more but they are small, there is not much core bank there.

So our appetite is we are going to look but our appetite is not real strong but opportunities like Peoples Bank where it's a bank that had good capital levels that had -- we were able to identify the credit mark pretty easily, had a real core bank, a real positive pre-tax pre-provision earning strength, but we were able to bring them and provide value for their shareholders and good EPS accretion for ours; those are the most attractive opportunities for us.

Okay, thanks a lot and very good quarter.

Mac Hodgson, SunTrust Robinson.

Hey good morning.

Good morning.

Hey Mac.

John, you mentioned a possible decline in the gross mark on Peoples, is that solely related to the loan runoff in their book or has there also been asset quality improvement?

A little bit of both, they've, they have done a good job on reducing OREO and reducing their NPAs and obviously some of the runoff, but a little bit of both.

Okay, great so I guess we should expect the original kind of projected capital ratios at closing to come out a little bit better than expected?

They will come out a little bit better on the leverage ratio, if you kind of look quarter end it's probably up another 10 basis points or so, so I think we had about [850s to about 860s but] it looks like preliminary right now.

Okay, great.

(inaudible)little bit better.

And then just a comment on ability to move problem assets, if you had much luck recently here at this quarter and I guess lately in moving land and lot non-performers, are you seeing any uptick in demand from homebuilders for those types of properties?

Mac this is Joe. We are seeing some uptick in demand and we have been able to move some of those properties out. If you look at what we sold in the first quarter, about 60% of that was commercial real estate and 40% was owner-occupied. So we are seeing some demand.

And of the gains that we had, the recoveries that we had this quarter.

Yeah, $1.4 million in loan recoveries. About 60% of that was related to four larger recoveries and the vast majority of that 60% was coastal land exposure. So we're seeing some recoveries also.

And what's the, if you have it, what's the percentage of, I guess non-performing loans and OREO that you considered land or lots I guess?

I've got that Mac. Okay, if you look at NPAs in the first quarter on the non-accrual side, well total NPAs $91 million. On the construction and land development piece about $37 million of the $91 million were construction and land development and then another $14 million or so in commercial non-owner occupied.

Those would mostly be land?

That's just land.

And we can circle back afterwards.

Well of the $36 million in construction and land development, when you break that down, I mean the vast majority is land, only about $5 million of that would not be land.

Okay, okay great. That's all I had. Thanks.

You bet.

Thank you, sir. (Operator Instructions). Jefferson Harralson, KBW.

Hi, thanks. I was going to follow-up on Kevin's as to how big of a issue is TARP repay for these potential acquirees and the ability or the -- is there a fear that their TARP is going to get auctioned, is there a worry that it goes up 9% or these -- or the banks I don't know becoming more comfortable that it's just a kind of semi-permanent piece of their capital structure?

Jefferson this is Robert. We've obviously talked a lot [to the Board] over the last couple of years and I don't get the sense that the auction of it is really a cause of concern. To me the ultimate cause of concern and most of them have is they don't see it as a permanent source of capital, and it's got to be refinanced and obviously the pricing is going to go up, the cost of it is going to go up over time.

But the bigger issue is the dilution created by the new shares that would have to be issued in order to make that a permanent capital need, because in most companies it is a permanent capital need. So, to me that's the -- and talking to the Boards and management team that's the underlying issue is trying to issue the shares to be able to pay it back and the amount of dilution they're going to have to have an the ultimate EPS impact, that's very hard to recover from.

And how about the flip from 5% to 9% in 2014, is that something that they're kind of really don't want to do or is it something that they're just going to learn to live with?

I think that they don't have many options. And so I think most of them are just kind of baking that into the short-term EPS impact. But I think the overriding issue is not that increase in cost on that preferred stock, the ultimate issue is being able to permanently raise enough common to replace it.

Okay. All right. Thanks guys.

William Wallace, Raymond James.

Hey just one question, one follow-up as it relates to your reserves. You released about $1.8 million of your reserves this quarter. Was any of that specific reserves or is that a function of your equation and dropping off charge-offs or declining classifieds?

William, some of it was specific but the vast majority of our release would be to the general pools of loans. The release on any specific allocations would be a pretty small piece of it.

So then what drove the big shift from building in small amounts on a quarterly basis to such a big release this quarter, and I am assuming it's an input in your equation that drove it?

Well we looked at the improvement in credit metrics. We looked at the fact that our past dues, past due numbers were much improved and really lowest we've seen in a good while. We also have considered the coverage of the reserve to non-performing loans and that continues to be robust. So the five basis points is [about $1,250 million] basically movement in the reserve. We also did have more run-off in our more risky loans construction and land development down about $32 million, $33 million or so.

So when you factor all of that in that's the reason for the movement. Historically our specific reserves have only made up 15% to 20% of the overall reserve really during the entire cycle. So although we vigorously review those the movement, that piece of the movement would -- really wouldn't make up that much of the -- of the actual change.

Okay fair enough. That's helpful, thanks.

Thank you, sir. (Operator Instructions). Presenters, at this time I'm showing no additional questioners in the queue. I would like to turn the call back over to management for any additional or closing remarks.

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

Thank you, sir. And again ladies and gentlemen this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees you may disconnect at this time.