SouthState Bank Corp (SSB) 2012 Q2 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 and Chief Financial Officer of SCBT Financial Corporation.

Good morning and welcome to as SCBT Financial Corporation's second-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 analyst community.

Before we begin, our listeners should be aware that our discussion contains some forward-looking statements regarding both our financial condition and financial results. These statements involve certain risks and the actual results in the future may differ but from what we currently expect. These factors may include among other things changes in interest rates, economic conditions, and competitive pressures. Legislative or regulatory requirements may also affect our business. A discussion of factors affecting SCBT's business and its 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 appropriate reconciliations to GAAP.

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

Thank you, John, and thanks to everyone joining us this morning. We are very pleased to share with you our second-quarter earnings results.

Our performance during the second quarter was exceptional and is the culmination of our growth and efficiency efforts over the last several years. Our balance sheet strength allowed us to be opportunistic during the economic downturn, with regard to organic growth, FDIC assisted deals and whole bank acquisitions. We began to see some benefits during the first quarter but this quarter's performance really demonstrates the overall impact of that strategy.

Net income totaled $8 million or $0.55 per diluted share on record operating earnings of $9.4 million or $0.63 per diluted share. Highlights of the quarter included meaningful asset quality improvements, successful integration of Peoples Bancorporation, solid legacy loan growth, fee income increases in every category, and a much improved efficiency ratio. We will discuss the People's transaction in more detail later but our results included the effect of the People's transaction for about two months as this transaction was closed at the end of April.

During the quarter, we made excellent progress in asset quality and feel more confident about the credit outlook. At quarter end, non-acquired nonperforming assets decreased at an annualized rate of 36% to $83 million, or 1.9% of total assets. Classified loan balances were down by an annualized rate of 54% to $135 million, which is the lowest level since the second quarter of 2009.

Annualized net charge-offs for the quarter as a percentage of non-acquired average loans totaled 77 basis points, which was up slightly from 66 basis points last quarter. The coastal markets continue to recover, particularly in the Hilton Head area.

On the economic front, we look for continuing improvement in unemployment rates in our markets due to recent major investments in manufacturing in our footprint such as the $200 million Caterpillar plant and distribution center to be built in Georgia. In South Carolina, 85 new businesses have announced they will be coming to the state in 2012 for a total investment of $3.9 billion in new manufacturing. South Carolina now leads the Southeast in manufacturing job growth and is the nation's top tire exporter. These signs of recovery are very positive indicators of some of the potential within our footprint. With the outlook for improved unemployment rates in our markets, coupled with significant improvement in NPAs, we feel like we have begun to turn the corner on sustained asset quality improvement.

We have now completed the conversion process for the Peoples Bancorporation acquisition which closed in April. We are glad to have the systems integration process behind us and we're very pleased with the customer retention to date as well as the quality and volume of new loan production coming from our team of bankers in these markets. The financial impact is evident in the significant increase in our pre-tax pre-provision operating earnings partially due to the People's transaction, which John will address later in his comments. The transaction had a significant positive impact on our efficiency ratio as well which, excluding merger related expenses, improved to 64.7% from 71.8% the previous quarter. We are pleased with the efficiency ratio improvements to date and look to improve further in the second half of the year.

As we discussed in our last earnings call, our loan pipeline was beginning to pick up and we are pleased to report legacy loan growth for the quarter of $43.9 million, or 7.2% annualized. The growth came from consumer and commercial owner-occupied loans and from commercial and industrial loans. Our commercial and consumer activity is very good right now with $325 million in the pipeline, $150 million of which we anticipate closing in the third quarter.

Our residential mortgage activity remains very high with over 1000 loans in the pipeline for a total of $240 million. We are forecasting this activity to lead to mid-single-digit growth in the third quarter. As always, we will remain disciplined in our underwriting and pricing and are encouraged by the level of activity we are seeing in our markets.

With half of the year behind us, our areas of focus remain the same. We continue to focus on our principles of soundness, profitability, and growth and to that end, we will work to further reduce our credit cost and NPA levels and further improve our efficiency ratio. We will continue to carefully evaluate other M&A opportunities as they arise.

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

Thank you Robert. I will make some brief comments about our linked-quarter performance, followed by some updates on the Peoples Bancorporation transaction.

Our performance this quarter was driven by increases in net interest income and non-interest income led by the Peoples results. We experienced a $5.4 million increase in our pre-tax pre-provision operating earnings when compared to the linked quarter. This is the result of net interest income being up by $3.5 million and non-interest income being up $2.3 million, partially offset by an increase in non-interest expense of $400,000. This excludes merger costs.

Net interest income increased by $3.5 million, due primarily to an increase in the volume of interest earning assets of $332 million during the quarter and a reduction in our cost of funds from 36 basis points to 31 basis points. The increase in earning assets is primarily attributable to the additional assets acquired in the Peoples transaction. Our margin remained basically flat from the previous quarter as the yield on earning assets decreased 10 basis points and the cost of interest-bearing liabilities decreased 7 basis points. The yield on the acquired loan portfolio, which includes previous FDIC assisted transactions as well as the Peoples transaction, decreased 38 basis points as the Peoples portfolio makes up a substantial portion of the total acquired portfolio but does not have the higher yield associated with the FDIC assisted portfolios.

After evaluating various CBT and Habersham pools in the last month of the quarter, we again released some of the credit mark due to the improved performance of some of the pools, but we have not yet adjusted any of the BankMeridian mark. The legacy loan portfolio yield decreased by 6 basis points from the prior quarter on relatively flat average outstanding balances. While we had an increase in period imbalances in a legacy loan portfolio, most of the originations took place in the latter part of the quarter.

Non-interest income for the second quarter totaled $11.7 million compared to $9.5 million in the first quarter due to increases in all categories. Mortgage Banking income was up $1.1 million. Service charges on deposit accounts were up over $400,000. Bank card services income was up $300,000, and trust and investment services income was up $245,000. The Peoples merger had a positive impact on these categories although not a full quarter's impact as the transaction closed in late April.

Other noninterest income was up $1.2 million, mostly due to the $1 million in recoveries from acquired assets. These increases were offset by an increase in negative accretion of $1.1 million on the FDIC indemnification asset resulting from the improved estimated cash flows in CBT and Habersham Bank covered pools.

Noninterest expense totaled $37.5 million, an increase of $2.3 million from the first quarter. The second quarter included $2 million in merger and conversion costs as well as approximately $2 million in additional overhead related to Peoples for the quarter.

While our provision expense was up $1.9 million when compared to linked-quarter, OREO expense reductions of $600,000 helped offset the negative impact. Our allowance for loan loss reserve totaled $47.3 million or 1.91% of total non-acquired loans, down from $47.6 million or 1.95% at the end of the first quarter. Our allowance coverage of nonperforming loans increased from 68% at the end of the first quarter to 82% at the end of the second quarter.

I want to give you an update on some of the final purchase accounting details related to the Peoples transaction. As we mentioned in the last earnings call, the Peoples loan portfolio was declining and we expect the final credit mark would likely come down as well. We initially estimated a credit mark of $45 million and the final credit mark came in about $3 million less, or $42 million. The goodwill number came in at $3.6 million compared to the initial estimate of $5.5 million, mostly due to lower credit mark. We initially estimated a 2% value on the transaction accounts compared to a 1.2% final valuation. CDI valuations are generally down due to the current low cost of wholesale funding alternatives.

Our total intangibles were initially estimated at a little over $10 million but came in at approximately $6.5 million, again mostly due to the lower credit mark. We initially estimated a minimal tangible book value earn-back period but as you can see, our tangible book value increased during the quarter by $0.62 due to the lower credit marks and a strong second-quarter earnings performance. With the systems conversion complete, we look forward to the merger's full-quarter impact on our future performance.

While we continue to evaluate future M&A opportunities, we are not top five in market share in some of our existing markets. We believe that potential provides us substantial growth opportunities.

That concludes my prepared remarks, so I will now ask the operator to open the call for questions.

(operator instructions). Frank Barlow, KBW.

My first question is related to expenses which beat our expectations by quite a bit this quarter, you know, despite the acquisition of Peoples. I suppose you'll see some sort of uptick in Q3 as it includes a full-quarter impact from the deal, but how should we be thinking about the expense line from here?

John, you are right. It's not in there full quarter. We got all the system conversions done. There's only about $500,000 more really in cost saves on Peoples. And I think the way you really should think about Peoples today is, this quarter, it was about $0.08 accretive on an operating basis. So it's coming out at a double-digit EPS accretion. And then next quarter, we think we're going to probably be $0.10 to $0.12 off Peoples. So double-digit EPS accretion overall.

But to answer your question, on the expense side with Peoples, it ought to be down about $500,000. Obviously, we have the merger-related expenses in there so, you'll see those come out, and then the big bear is going to be is how we do on OREO expense next quarter.

That's great color, thanks.

And my next question is related to the margin. With CDs now costing about 54 basis points, what leverage do you have on the funding side to offset the impact of the slow rate environment and the runoff of higher yielding assets?

Well, we've still got room in the CD book, Frank. If you look out, our next three quarters today, CDs are going on somewhere around 10 to 15 basis points. So, if you look at August, about 66 basis points is the average maturity rate and then in September another 56. So we still see some room there.

Obviously, if you look at our FDIC deals, we still have a tremendous mark on all those assets. On the Meridian portfolio, we are entering the end of the first year. Initially, we had a 38% credit mark and today we have a 44% credit mark on Meridian.

And then with Peoples just starting, we haven't released any of the accretable yield on terms of credit on that. So we still see a lot of room in our margin.

What we tried to tell you in the past is what is the effect of excess liquidity? What's the effect of the acquired a book in there? And we are still core wise probably somewhere around $450,000. So our margin is very stable but we still believe there's a few levers we can pull.

Thanks guys.

William Wallace, Raymond James.

My first question is a little bit maybe more on the expense side. You mentioned that you think you've still got some room on the efficiency ratio in the back half of this year. Do you have a target that we can shoot for in our models?

Well, I think you know what we kind of said when we announced the Peoples deal, you can see it in our ratios, our operating -- this is John again. Our operating efficiency ratios under 65, so all things being equal, we feel like we can probably push that down into the low 60s.

And while it's kind of pre I guess pre-downturn kind of before all of the mergers and things that have happened over the last few years is we were typically a low 60s kind of operator and we feel like we need to get back to that level and possibly with higher capital levels and all today, maybe slightly below it.

Okay. Well, it looks like you made some pretty good progress this quarter. On the credit front, in your prepared remarks, it sounds like you are suggesting that the NPA decline was really more granular rather than being driven by resolution of a couple of larger credits. Is that the case?

Yes, that's pretty much the case. This is Joe Burns. You know, as far as the dispositions of OREO, you know, not a lot of large numbers or transactions in there, so I think your statement is true.

And this is Robert. What I would say is if you look at the first six months of this year in terms of disposition or problem loans versus last year, this year it's almost double in terms of selling OREO properties. They are fairly small but we are turning them at a faster pace. This year for the first six months it's just under 500 properties. It was half that level last year. So we're just seeing more activity. And obviously, you look at our write-downs. We felt like that we're selling them for about what we've got them on the books for, so we feel like we've been pretty accurate in our write-downs but we've been able to churn these properties pretty nicely this year, a clear pickup from last year.

And then are you seeing a pretty good slowdown in inflows into nonaccrual?

We are. I think the size of the loan as far as flowing into nonaccrual has continued to come down. So, I think that's also accurate.

Overall -- this is Robert again Wally. Overall, on the kind of credit front, I'd say what we're seeing is the last two quarters, kind of a real shift. We were kind of -- the inflows and outflows were kind of steady and we were kind of treading water for a while in terms of our credit metrics. In the last two quarters we've seen clear improvement. And we are -- the inflows are smaller. We've dealt with most of our any significant size problems. So the inflows are smaller and the outflows and ability to get it OREO and then get it off the balance sheet is just happening faster.

Okay great. My last question is, on the Mortgage Banking line, a pretty good uptick in that as we've seen across the industry. So my question would be kind of coming into the third quarter with a good hunk of July behind us, how has the volume been and production, and what are you seeing on refi versus purchase in your mortgage bank?

Wally, hey, this is John again. The pipeline is extremely full. We feel very good about where our pipeline is. You know, it actually, the beginning of the quarter, we started seeing a lot more purchase businesses. It kind of got to like a 70/30 mix purchase/refi but the last several weeks, the volume of the refis has just gone up tremendously so we feel really good about our pipeline. The purchase business is still good, but there's just so much refi business out there today.

Is it approaching -- are you going north of 50% on refi or is it --?

Yes. I would say today but I would say because the volume is up so much. But we are doing more purchase business today than we've done in the last two or three years. You're seeing it in new construction. Folks are taking these lots now and as you all know, we have a fairly large lot loan portfolio that people are starting to build going into construction and so we're seeing a lot of activity in terms of construction and the refis.

So when you say that the pipeline is extremely full, would it be -- has that pipeline grown through the second quarter?

Yes, it sure has.

And is it bigger now in July than it was coming out of the last quarter?

Yes.

Okay, wow, thank you.

Christopher Marinac, FIG Partners.

Thanks. John and Robert, I was sort of alluding to the similar question that Wally just asked. It doesn't sound like customers are slowing down or expressing any caution or at least if they are it's not being reflected in the numbers. I just wondering if you could expand a little bit of about sort of where customer sort of attitudes are and is there any risk of just a softening as you get to year end?

Yes, I don't think there's been I would say any really deterioration. I think we see it somewhere over the last few quarters. Now, we saw loan demand really soften at the end of last year. It carried over into the first quarter of this year, but we really saw that reverse itself. You see our organic loan growth was very solid, 7% this quarter. We think that will continue for the rest of the year. The pipeline on the loan demand side is pretty good. So, I'd say it's consistent. We've not really seen it back up any.

Now, the exceptions to that obviously are construction related businesses and real estate related businesses but outside of those sectors, we've seen it improve and coastally we've seen it improve as well.

Okay. And then from a pricing standpoint, or maybe even a structure standpoint, are there times that you're going beyond a five or seven-year window on new deals? Speak a little bit about structure and kind of what competitively you are facing?

I think there are always many times that we do it, but I would say it's clearly the exception, not the rule. Most of our pricing is going to be seven years or less, most of it five years or less.

Okay, very good. And then the last point, just any update on the Wealth Management side or sort of the ability to kind of get net new business of assets under management there.

Yes, I -- Chris, John is flipping to some numbers to give you some specifics, but this is Robert again -- is we hired Wells Fargo team and Bank of America team in our Wealth area over the last couple of years and it has been a really solid 12, 18 months for us from a revenue generation side and profitability as we are approaching the $1 billion mark. We've always said that was kind of the hurdle, was we needed to get to $1 billion in Assets Under Management to really see meaningful earnings coming out of that unit. And we're almost there. We are a little over $900 million in total assets today. So, we're seeing that area really grow revenue growth, and their performance is solid. John can give you some specifics.

Yes, I think, when you look at our Wealth Management group, if you look at the end of the year, Assets Under Management are up about 5%. It's up about $50 million, so overall we are up to $944 million. And so you just see continued growth there. And as Robert mentioned, we just continue to add to that team and just see a lot of opportunity there.

Very good guys. Thanks for the color.

(operator instructions). Mac Hodgson, SunTrust Robinson.

I wanted to follow up on expenses again just to be sure I understood the comments on the Peoples acquisition and the $500,000. So, should we think, John, as far as going forward on expenses, it's a kind of total run rate expense -- is it exclusive of OREO should come down $500,000 or would that be offset by maybe the full-quarter impact of Peoples or just to be sure I'm thinking of that correctly?

The expenses would come down $500,000 all things being equal. And I think the thing that I hope everybody can see is coming you can get on that side and so what we're trying to do for you is try to take that month that we didn't have there and put it back in. So we just -- we feel like next quarter, if this quarter was -- it added $0.08, next quarter is going to add probably $0.10 to $0.12 in earnings.

Then a question on credit. You made the comment I think, Robert, that you feel like you turned the corner definitely positive credit commentary. How should we think about that as it relates to credit costs? There was an uptick in provision this quarter. Was it somewhat of an aberration, given the trend you're seeing? And should we expect it to come back down closer to the first-quarter level or how would you look at that?

This is John. And I think when you think about our credit going forward, when you step back and look at our metrics, obviously our charge-offs are coming down, so when you look at kind of our run rate, and we look over last two years, last year, the run rate on average is coming down in terms of charge-offs. So all things being equal, we see the same improvement. You're going to see more release in the reserve. We're going to have some loan growth obviously. Hopefully, it will be mid to upper single digits, but you're going to see the reserve probably continue to pull back if the credit metrics continue to do what they're doing.

Great. And one last one on M&A environment. Robert, if you wouldn't mind elaborating on just the level of activity you feel like that's going on in discussions? I know you commented that it's been very active in the last several quarters. Just curious if that trend has changed at all recently.

It has not. It has continued to be extremely active. There are a lot of dialogue going on. I would say it's even become increasingly active in the last couple of quarters. So, year end, people get into first of this year kind of look at where they're going. So there are an awful lot of discussions. As you know, we look at a lot of transactions. Our hit rate, as we've said before, is 15-to-1. We kind of look at 15 to kind of get 1 but we are looking, when we do one, we want it to be a very solid deal. But the activity level continues to be very robust.

Great, I appreciate it. Thanks so much.

Thank you. I show no further questions at this time and would like to turn the conference back to Mr. John Pollok for closing remarks.

I'd like to remind everyone that we'll be presenting at the KBW Community Bank Conference in New York next week which will be webcast live on July 31 at 10 A.M. We sure do appreciate all your interest in our company and look forward to talking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This does include the program and you may all disconnect at this time.