SouthState Bank Corp (SSB) 2012 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. At the end of our prepared remarks we will open the line for questions.

I will now turn the call over to John Pollok, our Chief Operating Officer and Chief Financial 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; John Windley, Chief Banking Officer; and Joe Burns, Chief Risk Officer.

Our format today will be that Robert 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 discussions contained some forward-looking statements regarding both our financial condition and our financial results. These statements involve certain risk in 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. Legislative or regulatory requirements may also affect our businesses. A discussion of factors affecting SCBT Financial Corporation 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 thanks to everyone joining us this morning. We are very pleased to share with you some highlights of 2012 and our fourth-quarter earnings results.

Before we get to the details of the fourth quarter I would like to share with you a couple of thoughts on the year as a whole. In 2012 we were able to improve our financial performance in the core bank as well as add two excellent merger partners that will continue to drive growth and improve financial performance. In April we completed the Peoples Bancorporation merger and in December we completed The Savannah Bancorp merger.

We experienced gains this year in each of our three primary focus areas of soundness, profitability, and growth. In the area of soundness our asset quality metric significantly improved during the year and nonperforming assets now total 1.58% of total assets compared to 2.44% a year ago. We produced significant reductions in classified assets, nonperforming loans, past-due loans, and loan losses.

In the area of profitability, we produced record operating earnings for the year. We also have had the opportunity for tremendous growth.

The total assets of the Company are now $5.1 billion, having grown 32% during the year. Our equity base is $507.5 million, which also increased 32% during the year. The market has recognized this performance and our shareholders were significantly rewarded with a total return of 41%.

We also experienced a very solid fourth quarter with record operating earnings and successfully closing The Savannah Bank merger. We were very pleased with the reception we have received in the Savannah market and are very impressed with the strong team in place and the opportunity for growth.

We also continued to experience improvement in soundness, profitability, and growth in the fourth quarter. Asset quality improved this quarter with our level of nonperforming assets falling to 1.58% from 1.89% linked quarter. Total classified assets dropped $14 million from the third quarter to $143.2 million. And on a year-over-year basis this represents a 22% improvement.

Annualized net charge-offs for the quarter totaled 64 basis points, down from 85 basis points last quarter. Our earnings performance this quarter resulted in net income of $5.9 million, or $0.38 earnings per diluted share, compared to $9.1 million, or $0.60 per share, in the previous quarter.

Merger costs associated with The Savannah Bancorp transaction impacted our EPS by $0.34. Our operating earnings for the fourth quarter totaled $11.1 million, or $0.72 per share, compared to $9.4 million, or $0.63 per share, last quarter. For the quarter, our annualized operating return on assets and our operating return on average equity totaled 0.98% and 9.8%, respectively.

Our organic growth for the fourth quarter also continued to be very encouraging as we continue to attract many new relationships across our footprint which also increased our non-interest income levels. Our primary areas of focus in 2013 will be to execute the Savannah merger well, continue our credit metric improvements, evaluate growth opportunities, and increase our ROA and ROE to historical levels.

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. During the quarter we grew the legacy loan book by $54 million or at an annualized rate of about 8.5%. We experienced growth in eight of our 12 geographic regions with very solid growth occurring along the Interstate 85 corridor from Charlotte to Northeast Georgia, as well as in the Charleston and Orangeburg markets. The majority of the growth came in the commercial owner-occupied category and commercial and industrial portfolios.

On the deposit front our core deposits now total over $3.2 billion with non-interest-bearing deposit balances now approaching $1 billion. Our certificate of deposit balances continue to shrink while our demand deposits and other core checking and savings balances increase. Our overall cost of funds improved to 23 basis points from 27 basis points last quarter as we continue to be disciplined in our deposit pricing.

We had another strong quarter in our mortgage banking and wealth management group divisions. Our mortgage banking group had increased fees over an already strong third-quarter with total mortgage banking income of $4.2 million or an increase of $700,000. Residential construction opportunities continue to present themselves in many of our markets, notably in Charlotte and Charleston.

Our wealth management group had another solid quarter with income of $1.7 million and assets under management of over $1 billion. We are continuing to integrate Minis & Co., the registered investment advisory company of Savannah Bancorp and Savannah Trust into our existing wealth management group platform.

In summary, we are excited about the opportunities the new year provides as our markets continue to show economic improvement and our team continues to deliver growth in net interest income as well as in non-interest income areas. I will now turn the call over to John Pollok who will provide additional information on our financial performance.

Thank you, John. I will be discussing our loan mix, our net interest margin, and our non-interest expense levels this morning, as well as an update on The Savannah Bancorp merger. I wanted to first give you an update on the breakdown of our current loan portfolio mix between non-acquired, FDIC-assisted, and whole bank acquired.

Our non-acquired book represents 71% of the total portfolio, our whole bank acquired book totals 22% and our FDIC-assisted acquired portfolio totals 7%. While the FDIC acquired portfolio is coming down as a percentage to our total portfolio, our bankers continue to be successful in originating new credits in these footprints.

I will now discuss net interest income and the margin. As part of our quarterly acquired loan recast process, we had credit releases totaling $6.6 million in the FDIC-assisted portfolios as a result of the improved cash flow forecast. We have not adjusted our initial credit marks on the Peoples portfolio and the carrying value of the Peoples portfolio now represents approximately 18% of the total acquired portfolio.

Of course, we have initially estimated our day one marks on the Savannah portfolio, and now, together with the Peoples portfolio, the whole bank acquired portfolio represents over 75% of the total acquired book. The yield on the acquired loan book dropped from 12.7% in the third quarter to 11.37% in the fourth quarter as a result of adding the lower-yielding Savannah Bank portfolio into the mix.

This drop in the acquired loan yield along with a drop in the legacy loan yield of approximately 7 basis points, as well as an increase in liquidity during the quarter, resulted in a drop in our net interest margin of 15 basis points to 4.88% from the linked quarter. The increase in liquidity balances of approximately $70 million are primarily from an increase in interest-bearing liabilities. While we earn a positive spread on these balances and they contribute to a linked-quarter increase in net interest income, we estimate they weighed down the margin by 9 basis points.

Taking a look at our non-interest expenses we saw an increase, absent merger costs, of $3.1 million linked quarter, mostly in the salary and benefits area. Of course, we had a partial month of expenses related to the Savannah transaction in the fourth quarter and had additional benefits expense related to an increase in our 401(k) match and incentive accruals. We also had some additional expense related to new hires during the quarter.

In conclusion, we continue to be very excited about The Savannah Bancorp merger. We closed the transaction December 13 and our post-closing tangible book value is right on target with an expected tangible book value dilution earnback period of less than three years. However, the EPS accretion is now estimated at around $0.50 per share.

We continue to anticipate realizing about $9 million in cost saves, 90% of which we will realize in 2013 with an expected systems conversion in mid-February.

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

(Operator Instructions) Mac Hodgson, SunTrust Robinson Humphrey.

Good morning. Thanks for all the detail and comments. Just a couple of questions. One, I was curious what is driving the improved accretion outlook on the Savannah deal. Is there anything kind of specific you could point to?

Mac, this is John. I think as we got in there and looked at it I think initially we told you we would shrink that company back a couple hundred million in assets. And we have already accomplished shrinking back some really high cost liabilities; back about $100 million.

As we got in there and looked at it, the cash flows once we did the valuation just looked a lot stronger, so the margin is just going to be a little bit stronger than we thought initially.

And help us with that, I guess, going forward. How should we think about the margin outlook from here?

In total?

Yes, just as we look through 2013 how should the NIM trend?

I think it should be fairly flat for the first couple of quarters, but obviously, as that FDIC assisted book continues to come down, you could see a little bit of compression as you get out to the third and fourth quarters. The wildcard there is when you look at the amount of excess liquidity that we have that increased almost $80 million linked quarter, and as we have told you all in the past, you can see in the template we are only earning about 53 basis points on that.

Got you, okay. And, Robert, you kind of mentioned focal areas for 2013; one being increased ROE and ROA to historical levels. What do you all see as those target levels to be?

Obviously, capital levels and expectations have changed a fair amount, but pre-downturn we were fairly consistent at a 1% to 1.10% ROA and a 12% to 13% ROE. Those are certainly levels we will strive to return to.

Okay, great. Appreciate it, thanks.

[Kathryn Miller], KBW.

Just a quick follow-up from Mac on the margin. Just digging a little bit deeper on to the loan yields which, John, you mentioned came down, or at least the acquired loan yields came down from 12.7% to 11.4%. So once you have a full quarter of Savannah, because really I guess this quarter you really only had half a month.

So as you think about next quarter with a full quarter of Savannah where do you think generally we should see that acquired loan yield going, I guess with that into account? And then any other cash flows from your other acquisitions?

Kathryn, it's obviously going to still be a little noisy. The Savannah loan yield, once it gets in there it's obviously going to bring down that overall yield some but, obviously, from a net interest margin standpoint I think when you get to the bottom line it's going to continue to rise.

Last quarter our FDIC-acquired book it shrunk about $17 million. This quarter it came down about $30 million, and I think if you remember back to last quarter we said in a couple more quarters that ought to begin to slow. That was a little bit higher than we thought.

Then the other thing is the average life of our loans extended a little bit on that acquired book. So Kathryn, I think in terms of margin, once we get a full quarter in there next quarter with Savannah it really ought to start getting a lot clearer exactly where it is going to land. But in terms of net interest income dollars we really believe there will be a nice increase.

And can you give the loan yield for just the Savannah book?

We will have all of that in our K, but I am not ready to disclose that yet.

Okay, that is okay. Then I just noticed that there was a big movement into the tax exempt securities. Can you just talk a little bit about your strategy there?

We added the Savannah book in there. Obviously that had some impact, but we are continuing to look for opportunities there. Obviously it is really hard to get yield on things out there that we purchase. We are not taking any risk in the investment portfolio, but we are just continuing to look for opportunities that might be there.

So are you saying you are extending the duration of your securities portfolio a little bit?

Just a little bit, not a whole lot though. Trying to stay fairly short.

All right, thanks. Nice quarter, guys.

(Operator Instructions) Christopher Marinac, FIG Partners.

Thanks, good morning. Robert or John, can you talk about the incremental pricing on new loans being done today, whether you would want to use a C&I or CRE example or something else? I am just curious at the margin what a new loan is coming on the books at.

Chris, obviously it varies. Let me just tell you in the aggregate for the quarter our new loan yields came on at about 4.43% for the quarter. We have obviously loans that are less than that and some that are more than that.

I think the thing overall is we are staying -- we are still hitting a lot of singles and doubles, a lot of $250,000 to $2.5 million credits that don't get as price sensitive, and we are being pretty successful in that area. So we feel that 4.43% has been pretty consistent in that 4%, 4.5% for a number of quarters now.

Okay, great. Then in Savannah talk about, I guess if you can elaborate on, new loan opportunities that you envision, either that you have seen very early on or as you envision as this year plays out.

Chris, this is John Windley. We have experienced some nice loan growth in Savannah. If you look at the economics of the Savannah area, a lot of things are turning down there now -- housing, the port, tourism, and so forth.

What we found in that portfolio, being number three in market share and being in that market for 25 years with a great community bank franchise, there are a number of opportunities that we have been able to take advantage of. And I would say probably in the two areas medical continues to expand and we have had opportunities there where we booked and closed some transactions.

And also businesses that are related to the port. C&I companies that are port-related, they have some extensive relationships with companies of that nature as well.

So just since the closing in the middle of December we experienced about $8 million in loan growth in Savannah between closing and the end of the year. Have an excellent team of bankers down there and think that momentum will continue, particularly as the economy in Savannah continues to improve.

Very good, John. Thanks very much for the color.

Kenneth James, Sterne Agee.

Good morning, everyone. Curious on the margin and accretion outlook tied to that. Since most of what we are talking about this quarter is traditional deals and an improved outlook on those portfolios, if we can expect the FDIC amortization expense to kind of remain stable or any big revaluations within those portfolios obviously?

Kenneth, this is John. Are you talking about the negative accretion?

Yes.

Well, it is front-end loaded so as we pass through time, assuming we don't have any more releases, it will begin to bend down.

Okay. I mean it's over the life of the portfolios so it would be, if nothing else changed from here, it would be a fairly slow slope down, correct? I'm just trying to figure out is this going to drop off, be cut in half one quarter in 2013.

No, but you have got to remember the indemnification asset obviously there is a sunset period on that. So the timing on FDIC deals you can't really match it all the way up to the life of the loan because, take for example on CBT, in a couple more years we have a piece of that that we won't have coverage anymore on from the FDIC.

So sometimes when you're looking at accretion and you are looking at negative yield the timing of the life of the loan and the negative accretion is really not going to totally match up. So it is something that we watch constantly.

Okay, all right. Just kind of a question on the environment, maybe as it speaks to M&A. Have you noticed any changes since we spoke last quarter, given companies going through year-end budgeting process, etc.? Would you say conversations are up, down, or about the same?

Kenneth, this is Robert. We would say that it has been pretty wide open for about three years now, so I would say it really hasn't increased. It certainly hasn't slowed down any.

So I think the level of activity in discussions has been consistent as what I have told you in prior quarters and it continues to be about the same pace.

Okay. Thanks, guys. Thanks for the color.

Mac Hodgson, SunTrust Robinson Humphrey.

I just had one quick follow-up on expenses. I was curious how much was the kind of unusual I guess one-time 401(k) match incentive accruals that hit in the fourth quarter. Just trying to get a decent thought on kind of a legacy run rate for SCBT going into next year.

Mac, I am going to get that for you. If you kind of look at incentives and the accrual for the 401(k), it is about $700,000. I think one of the things is as you think through our salary and benefit expense for the quarter is we have the conversion of Savannah Bank in mid-February, so what we did this quarter is we went on and hired the support folks that we would need to run that organization.

So we added some support this quarter and then as we get through next quarter, so mid-February, we will have the cost saves in there. You will start to see the significant reduction there in FTEs from that transaction. We closed four offices in that transaction, which I think you are going to see overall in the salary and benefits is it will kind of peak really in the first quarter and then begin to trend down to capture all those expense saves.

Okay, got it. Great, thanks.

This is Robert. We had 157 employees at Savannah at kind of year-end. We do the conversion there in the coming weeks and that will reduce by about 60 over the first quarter.

Okay, great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Pollok for any closing remarks.

Thanks to everyone for participating today and for their interest in SCBT. We look forward to talking with you next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.