SouthState Bank Corp (SSB) 2012 Q3 法說會逐字稿

I would like to begin today's conference call by introducing Donna Pullen, Director of Public Relations for SCBT.

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 and Chief Financial Officer of SCBT Financial Corporation.

Good morning and welcome to the SCBT Financial Corporation's third-quarter earnings conference call. With me today are Robert Hill, President and CEO; John Windley, Chief Banking Officer; and Joe Burns, Chief Risk Officer.

Our format today will be that Robert Hill will provide some opening remarks; John Windley will provide an overview of the bank; 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, I want to remind our listeners that our discussion contains some forward-looking statements regarding both our financial condition and our financial results. We have included some slides for this call and I would first refer you to slide number 2 for cautions regarding our forward-looking statements. 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 third-quarter earnings results. Our performance this quarter resulted in net income of $9.1 million, or $0.60 earnings per share, which was reduced by $0.03 for merger-related costs compared to $8 million, or $0.55 per share for the second quarter. The third-quarter results include a full quarter's effect of the Peoples Bancorporation acquisition.

Our operating earnings of $9.4 million, or $0.63 per share, represent an operating return on assets of 87 basis points and an operating return on equity of 8.73%. Our performance this quarter was negatively impacted by a $1.9 million increase in OREO expenses from the second quarter. This was related to valuation write-downs primarily on two properties and we estimate the EPS impact of these write-downs to be $0.07 per share.

The quarter was highlighted by steady loan growth as we continue to attract excellent banking relationships, continued improvement in asset quality ratios and the efficiency ratio, increases in mortgage banking income and service charges on deposit accounts and an expanded net interest margin.

During the quarter, we continued to see asset quality improvement with our level of nonperforming assets as a percentage of total assets falling to 1.89%. Total classified assets dropped another $3 million from the second quarter to $157.5 million and on a year-over-year basis, this represents a 13% improvement.

Annualized net charge-offs for the quarter totaled 85 basis points, up slightly from 77 basis points last quarter. We continue to see some positive housing market data in our markets and in South Carolina, home prices rose over 6% since July of 2011, the highest year-over-year increase since August of '06. Although labor markets don't appear to be improving significantly, we anticipate some of this year's new business announcements will result in unemployment level improvements.

Given our steadily improved earnings and our improved credit performance and outlook, our Board of Directors has approved a $0.01 increase in our quarterly dividend to $0.18 per share. We have consistently paid $0.17 per quarter, even during the economic downturn and are glad we are able to reward our shareholders with this increase.

As we begin the fourth quarter, we look forward to closing the Savannah Bancorp transaction, continuing to improve our asset quality, efficiencies and performance metrics. I will now turn the call over to John Windley for some detail on loan growth, deposit mix and non-interest income.

Thank you, Robert. I wanted to first give you some specifics about what we are seeing in our markets with regard to loan growth. We grew the legacy loan book by $36 million or at an annualized rate of about 6% during the quarter. The majority of the growth came in the commercial owner-occupied and commercial and industrial portfolios while our commercial real estate exposure continued to decrease.

Most of the growth is coming along the Interstate 85 corridor from Charlotte to northeast Georgia. This area includes our recent Peoples acquisition and our Georgia footprint. We also experienced strong growth in the Columbia, South Carolina market. Many of our competitors continue to offer low fixed rates for extended terms on the commercial side, but we are being careful in that regard choosing instead to look for smart growth opportunities at fair returns.

On the deposit front, our total deposits decreased by $72 million during the quarter; although core deposits increased by $5 million. We saw a decrease of $55 million in certificates of deposit balances with increases in demand deposits and other core checking and savings balances. Our cost of funds dropped to 27 basis points from 30 basis points last quarter as our bankers continue to be disciplined in deposit pricing. We are making improvements in our marketshare and have recently moved up to number seven in deposit marketshare in South Carolina with our goal continuing to be in the top five in South Carolina in all of the markets we serve.

We had a strong quarter again in our Mortgage Banking and Wealth Management group divisions. Our Mortgage Banking group had increased fees for the quarter on strong production of over $290 million. We are also seeing some new construction opportunities in Charlotte and Charleston and are taking steps to strengthen our talent in these areas. We continue to increase mortgage marketshare throughout our franchise and currently ranked fifth in South Carolina.

Our Wealth Management group had another solid quarter and now has assets under management of over $1 billion. We have begun the planning process of integrating Minis & Co Inc., the registered investment advisory company of Savannah Bancorp, into our existing Wealth Management group platform to take advantage of the opportunities that an RIA provides.

In summary, we are very pleased with the careful and measured progress our bankers are making in a slowly improving economic climate. I will now turn the call over to John Pollok who will provide additional information on our financial performance.

Thank you, John. My comments this morning will center around our loan mix, net interest margin and our efficiency ratio. I will be referencing the slides we have provided for today's call. I wanted to first give you a breakdown of our current loan portfolio mix between non-acquired, FDIC-assisted and whole bank-acquired. As you can see from slide number 3, our portfolio mix has changed quite a lot since our first FDIC acquisition in January of 2010 when the FDIC-acquired portfolio made up 26% of our total loan portfolio. As of September 30, the FDIC-acquired portfolio only represents 14% of our total portfolio due to the whole bank purchase of Peoples Bancorporation.

Upon the closing of the Savannah Bancorp transaction, we estimate the FDIC-acquired loan portfolio will be down to about 12% of our total portfolio. While the FDIC-acquired portfolio is coming down as a percentage to our total portfolio, our bankers have been successfully originating new credits from these acquired footprints. In the Georgia markets, the portfolio of loans originated since the acquisition now totals $84 million with a weighted average rate of 4.71%.

Turning to slide number 4, you can see the impact that the credit releases had on the yield of our acquired loan book and on our margin. We evaluate the performance of these portfolios in the second month of every quarter and apply the required adjustments to the final month of a quarter-end. So the third quarter had the benefit of prior releases, as well as only one month of the current recast.

The third-quarter recast was the first time we evaluated our initial credit marks on the Bank Meridian transaction. The total credit release for the quarter was $28.9 million, of which $22.1 million was related to the Bank Meridian portfolio. Accordingly, our net interest margin improved to 5.03%, up from 4.69% linked quarter. As we now anticipate more cash flow from the bars on these portfolios, we adjust the FDIC indemnification asset through negative accretion. The negative accretion on the IAs reflected as a reduction to the non-interest income and our financials.

On the bottom of slide number 4, we have attempted to show you the impact of these releases as if the negative accretion were a component of the margin. Under this illustration, we estimate that the yield on the acquired loans for the quarter would be 5.75%, up from 4.65% in the second quarter and the overall margin would be up 13 basis points to 4.17% from 4.04% in the second quarter.

We have not adjusted our initial credit marks on the Peoples portfolio and the carrying value of the Peoples portfolio now represents approximately 42% of the total acquired portfolio. Of course, if we were to have any credit releases in the future recasts in this portfolio, they would all be upside potential with no IA offset.

While the non-acquired portfolio yield is coming down in this extended low rate environment, we have the potential for further releases in the acquired portfolios if the performance warrants. We also think we still have some repricing opportunities on the deposit side. We have approximately $250 million in certificates of deposit maturing prior to year-end with a weighted average cost of 47 basis points compared to our offering rate generally below 20 basis points. We continue to focus on our deposit mix with an emphasis on opening checking accounts.

On slide number 5, we show a quarter-by-quarter comparison of our efficiency ratio improvements and how they are affected by OREO cost, as well as merger and conversion costs. Our overall efficiency ratio has improved steadily this year from 73% at the beginning of the year down to 67%. Removing OREO costs and merger and conversion costs from the equation drops our efficiency ratio down to 59%. We are pleased with our progress to date and are continuing our efforts to reduce this ratio further.

I wanted to give you a quick update on the Savannah Bancorp transaction. The merger process is on track to close during the fourth quarter and we anticipate realizing about $9 million in cost saves, 90% of which will be realized in 2013. One-time costs are estimated to be $9.3 million on an after-tax basis.

While we are primarily focused on the closing of the Savannah Bancorp transaction now, there continues to be many opportunities on the M&A front and we will continue to carefully evaluate those opportunities as they arise. That concludes our prepared remarks and so I would ask that the operator open the call for questions.

(Operator Instructions). Jefferson Harralson, KBW.

Thanks and John, I was trying to follow your numbers there on the Bank Meridian reassessment. What was the impact this quarter on both spread income and on the IA by itself?

By itself, Jefferson, we typically have not broken those out by [themself] because it is only really one month of accretion. So next quarter, you will be able to see really a blended month in there.

Okay. So whatever this reassessment improved earnings by, that is an ongoing net impact we think for at least a year or two?

That's right. I think the way to think about it, Jefferson, is let's just step back and look at the year for a second is if you look at this year on FDIC-acquired portfolios, we have released about $63 million. So we have got $63 million in loans that we had initially thought we were going to have to charge off and now they are paying. And of course, each of our acquired portfolios, there is different loss share percentages and that's why it gets a little technical when you start trying to peel it all the way back because you have got clawbacks and those type of things. So if you look at the net release for the year over the lives of those loans, we have got about an $8 million pretax benefit that started this year.

So year to date, $8 million?

Well, it is $8 million in total off that $63 million. So it kind of blends in. So if you look at this quarter and just go back to the slide that we put out there for you and you look overall is we had $1.9 million in additional accretion on our FDIC-acquired loans and Peoples, then we added that in there. So it is $1.9 million in total extra accretion for the quarter.

All right. And I guess what is the best way for us to try to estimate how much of it will come in the future? Is it the cumulative mark on all the deals you have done so far? Is it the run rate plus what we have done with Meridian, plus maybe you add a little for Peoples? Or I guess what is the best way to try to analyze the future here?

Well, of course, we have to recast it every quarter, so the expected cash flows change and if you step back and let's look at the whole year again is we had about $75 million in paydowns through the year. So first quarter to second quarter, the acquired book went down $36 million and then it went down $32 million and now it has come down $17 million. So Jefferson, what we feel is, in a couple more quarters, you are going to have a fair amount of stability in that portfolio.

If you remember, the two banks we bought in Georgia were over 100 years old, so there was a real core loan book there. So I think you have got to kind of think about the next two quarters -- it is probably going to come down another $15 million or $20 million on average, so you can kind of see where the balance is going to be. And then I think if you look at where the yield is at the 5.75%, that yield right there is a probably fairly decent run rate assuming nothing changes in the recast.

Okay, thanks, guys.

Christopher Marinac, FIG Partners.

Thanks. John, I was wondering if you could give us a little color on sort of how customers were behaving this quarter from a loan perspective. Do you see folks pulling back or are they distracted at all about the big-picture issues or what would be your, I guess, take at this point?

Chris, I would say, right now, they are somewhat reserved. We are seeing some pockets of loan growth. Primarily along the I85 corridor is where most of the growth has occurred in South Carolina. But when you go out and visit with primarily commercial clients, there is a level of reservation right now that exists. And so I would say loan demand would be -- I would describe it as being relatively modest right now. As Robert said, we do continue to have some opportunities to take relationships from some of the larger players and that has supported our growth so far this year. But I would say somewhat reserved at this point.

Okay. And then a separate question, this has to do with the efficiency ratio. As you keep making progress on this each quarter, where do you think is I guess a point where you would be happy that it gets to as you look at the next year and integrate Savannah? Where, just as a -- not as a promise, but more as kind of a big-picture goal do you have on getting that down to?

Well, Chris, obviously -- this is John -- in the fourth quarter, we will bring Savannah in and their core efficiency ratio today is about 66%. And if you remember when we announced the Savannah deal, we said we would bring that over in about the 60% efficiency ratio after cost saves.

If you look at the slide that we gave you, and we said without OREO costs it ought to be right below 60% and we kind of felt like in that high 58% to 60% range feels pretty good today. But obviously as we get through time, we will continue to evaluate that.

Okay, great. Just wanted to clarify. Thanks very much, John.

(Operator Instructions). William Wallace, Raymond James.

Thanks, good morning, guys. My question would be more of a follow-up to Jefferson's questions. So in your press release, you highlight $2.8 million of additional interest income on increase in cash flows for acquired covered loans. Is that not related to the recast?

It is.

It is related? Okay, so there is going to be more of that coming because that is only representative of one month.

Well, let's step back a second and let's break down the third quarter for you and see if this helps. If you remember, we added Peoples in two quarters ago, but we didn't have a full quarter run rate with Peoples in. So that is going to have some of your increase because you only had two-thirds there. In the third quarter, we get the full benefit of the release from the second quarter. So we had a little over an $11 million release in the second quarter, so we get a full benefit of that in the third. And then the last thing we did in the third quarter is we reevaluated our Bank Meridian transaction since it has been a year and of the almost $29 million release, $22 million related to that.

And so then what you have got to do is you have got to think through the loss share pieces of the releases. On Bank Meridian, we have got 80/20 loss sharing, but we also got a clawback. So when you think of a Bank Meridian release, you get about a 10% benefit of that gross number over the expected life of the loans.

On the CBT transaction, it is just very minimal today because you only get 5% of that benefit and then on the Habersham transaction, you get a 20% benefit from that through the future life. As you get through the next two quarters and you can see the trend down that we are not having as much runoff there, another quarter or two, we feel like that book will be very stable, will obviously be a small percentage of our overall book, but when you step back and you look at the credit marks that we had, we have a 24% credit mark still on our FDIC acquired book and then the loan mark on our Peoples transaction has gone from 12% to 14%. So there is still a fair amount there assuming everything continues to improve.

And the last thing I wanted to mention is also think through -- we had $63 million in improvement and in credit this year at the beginning of the year we thought those loans would end up being charged off is now those are performing, good customer loans that we are going to be able to keep throughout the future even after the FDIC loss share runs out.

I hear you there. I guess it is just there is so much noise with all the purchase accounting. I am just trying to help figure out how to forecast the purchase accounting specifically. So you are going to recognize the increased cash flows as they happen, then you will kind of amortize that indemnification asset impact?

That's right. We are not getting the cash from the FDIC anymore. We are getting the cash from the customer. So the thing where there is a little bit of disconnect is obviously there are periods of when the FDIC asset -- you can't claim losses anymore, but the lives of the loans that you have are not going to just act in tandem with that. So in some cases, you have a little bit of disconnect where you might have a little bit more negative accretion one month because of the time left on when you can make those claims.

Right. So all else is equal, you are going to actually see additional interest income from the Bank Meridian -- from the remaining impact of the recast in the third quarter. You will see additional interest income in the fourth quarter and additional negative indemnification asset accretion that will partially offset that? Is that correct?

Yes, yes.

Okay, thanks very much. And then on the merger costs, you say it's $9.3 million after-tax, is that right?

That's correct. That is what we disclosed when we announced the Savannah Bank transaction.

Right. And will we expect all of that in the fourth quarter?

You should expect the majority of that, that is correct.

Great, thanks, guys. I really appreciate it.

Mac Hodgson, SunTrust Robinson Humphrey.

Hey, good morning. Just another margin-related question, but, and you may have addressed this, John, but purchase accounting accretion, etc. aside, can you give us some color on your expectations for just the core legacy bank's margin trends?

Well, I think the core legacy bank is fairly stable today. Obviously, when you drill down into our template is where all banks are having pressure today is on their non-acquired book. And so when you go in the template and you look at that today, we have gotten it down to 4.73%. In linked quarter, that came down from 4.91%. The good news now is our production is going on basically at the same rate. So we feel like hopefully the reduction there is beginning to slow.

If you move up to the top and look at our earning assets and just look at our Fed funds position, you have got a little over $210 million and we are making about 53 basis points on that. So we continue to value core deposits. We are carrying still a fair amount of cash on our balance sheet and if we can continue our organic loan growth, we will continue to bleed that cash over from roughly 53 basis points today into our new production that we are making in excess of 4.70%.

So we feel like there is a lot of cash there and then if you look at our certificate of deposit book with a weighted average rate of 48 basis points, and we know we have got $250 million of that maturing between now and the end of the year, there is still some more room there to be able to pick up margin.

So we feel like today the margin -- the wind is still at our back. Obviously, that can change very quickly. I think as we get through the end of the first quarter of next year, we get Savannah in, get all the purchase accounting marks in and then we kind of have our core FDIC acquired book, it will get a little bit easier to go out and model our margin into the future.

Okay, great. And then back on the recasting of the covered loans and the improvement in cash flows there, would you say it is more a function of the aggressiveness with which you all mark down the book on the front end or have you seen material improvement in market collateral values, etc. of late that is driving some of that as well? Just trying to get a sense of I guess the underlying change in collateral values that you are seeing in your markets.

I think on the front end, if you think back to January of 2010 when we entered Georgia, the economy was in much worse state than it is today, so we were conservative on the front end. We didn't load our estimates with tons of discounts on the front end. We wanted to see what the true credit mark was.

I can't tell you if some people will think it is conservative, some people will think it is aggressive. What I can tell you is we still have a 24% mark on our FDIC-acquired book and we have a 14% mark on the Peoples Bancorporation. And obviously today there are a number of deals being announced with marks less than that.

Got you. Okay, then, yes, that kind of leads me into the last question on M&A. Robert, just curious to get your updated thoughts on -- I think it was referenced in the prepared comments that there is still maybe a lot of opportunities out there. Just trying to get some color on if you have seen any changes in Board behavior, management team behavior now that we are starting to get more open bank transactions announced. And then maybe if you could quantify the size transaction you would be comfortable doing with your capital base and then obviously Savannah you're closing soon.

Sure. I think that what we are seeing is fairly consistent behavior to what we have been seeing the last few years. I would say the number of opportunities and inflow of calls is about the same as it has been really for the last two to three years. It's that time of year where people are doing their budgets, they are looking at it next year, they are trying to figure out how they are going to make money. And I think it's a time where a lot of Boards are still really reflecting on the long-term viability of creating shareholder value.

And as I have said before, there is still a disconnect unfortunately in many of these community banks around the emotional side of being a community bank versus the building value side of being a community bank. So we run into that. The Boards that have, and Savannah Bank is a good example, have very astute Board members that have a lot of big investment in their company as they are trying to figure out what is the best thing to do for the shareholder overall.

So if you can take the emotional piece out and look at the financial piece, many of these companies, there is no way for them to build value unless they sell. So we continue to feel like the inflows and the opportunities in the coming year are going to continue to be pretty steady.

Our main focus today obviously is Savannah, getting that transaction closed here in the coming weeks and I think that is a good example. I mean that was a bank -- a good example of what we are looking for. It's a bank with really dominant marketshare. It had good legacy and a good core customer base. It has a good management team and they just had that overhang of credit. And we are going to be able to take that away and get them re-focused on building and growing and generating revenue again.

So that is the transition we are going through right now. And that is the kind of target we will continue to look at. And size-wise, that is the size ranges -- they are about $1 billion and the size target that we continue to look at is anywhere from probably $500 million to probably $2 billion, $2.5 billion.

Okay, great. I appreciate the color. Thanks.

That concludes today's question-and-answer session. At this time, I would like to turn the conference call back over to Mr. John Pollok for closing remarks.

Thanks to everyone for participating today and for their interest in SCBT. We would like to remind everyone that we will be presenting at the Sandler O'Neill East Coast Financial Services Conference on November 15. Thanks again.

Ladies and gentlemen, we thank you for attending today's conference call. It has now concluded. You may now disconnect your telephone lines.