SouthState Corporation
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Welcome, everyone. Please note today's call is being recorded. I would now like to introduce Donna Pullen, Director of Public Relations and Special Projects for SCBT Financial Corporation.

[Donna S. Pullen:]

Thank you for calling in today to the SCBT Financial Corporation earnings conference call. [Operator Instructions] I will now turn the call over to John Pollok, Chief Operating Officer and Chief Financial Officer of SCBT Financial Corporation.

[John C. Pollok:]

Good morning, and welcome to SCBT Financial Corporation's Second Quarter Earnings Conference Call. With me today are Robert Hill, Chief Executive Officer; John Windley, Chief Banking Officer; Joe Burns, Chief Credit Officer; and Wayne Hall, who will be our President and Chief Risk Officer. Our format today will be that Robert will provide some opening remarks. John Windley will provide an overview of the bank. I will provide additional detail on our financial performance. Wayne and Robert will discuss some of the merger integration plans and then 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 contain some forward-looking statements regarding both our financial condition and our financial results. We have included some slides for this call that outline our results and our general comments this morning. Let me first refer you to Slide #2 for cautions regarding forward-looking statements and discussions regarding the use of non-GAAP measures. Upon the closing of our merger with First Financial Holdings today, our holding company name will change from SCBT Financial Corporation to First Financial Holdings, Inc., but the stock will continue to trade under the symbol SCBT. I will now turn the call over to our CEO, Robert Hill.

[Robert R. Hill:]

Thank you, John. Thanks to everyone joining us this morning. Today is a very exciting day for our company as we close our merger with First Financial Holdings, which we will discuss later in the call. But first, I'd like to share with you our second quarter earnings results. During the second quarter, we made key improvements in our strategic focus areas of soundness, profitability and growth. First, I'll address soundness. Our team's efforts delivered material asset quality improvements, highlighted by $17.3 million reduction in classified assets. On a year-over-year basis, this improvement represents a 23% reduction. Nonperforming assets also decreased. They declined $7.7 million during the quarter and now represent 1.36% of total assets. Annualized net charge-offs totaled 40 basis points, which are down from 56 basis points last quarter. These asset quality improvements led to lower credit cost, boosting our profitability during the quarter. And now let me turn to profitability. We achieved record operating earnings in the third quarter with continued improvement in our return on assets and our return on equity. Net income for the quarter totaled $12.5 million or $0.74 per diluted share, which was reduced by $0.03 for merger-related cost, compared to $10.6 million or $0.63 per share for the first quarter. Our operating earnings of $13.1 million or $0.77 per diluted share represented an operating return on assets of 1.04% and an operating return on equity of 10.17%. Our performance this quarter was positively impacted by lower credit costs. Our performance was hindered by a linked quarter drop in mortgage revenue and flat service charge revenue. While we had some improvement in our efficiency ratio, we have some work still to do in order to achieve our desired levels. And we are also pleased with the growth levels we achieved this quarter, in both non-acquired loans and in core deposits. We are seeing improved economic conditions, improved loan demand and strong core deposit growth. I'm particularly pleased with the post-integration progress we are making in the Savannah market. Given our steadily improved earnings and our improved credit performance and outlook, our Board of Directors has approved another $0.01 per share increase in quarterly dividend to $0.19 per share. We're very pleased with our EPS growth, but are not yet satisfied with our return on asset and return on equity levels, which will be a focus of ours during merger integration. I will now turn the call over to John Windley for some details on our growth in our markets.

[John F. Windley:]

Thank you, Robert. During the quarter, we grew the legacy loan book by $61 million or at an annualized rate of about 9% during the quarter. The growth came in many different categories, with strong growth in residential lending, particularly in the construction to permanent portfolio. We also had nice increases in our commercial owner-occupied and commercial and industrial portfolios. The growth continues to come along the Interstate 85 corridor from Charlotte to Northeast Georgia, as well as in the Savannah, Georgia market and in the Charleston, South Carolina markets. This quarter's growth comes on top of a $33 million increase in the first quarter, which brings us to a year-to-date annualized rate of over 7%. On the deposit front, our total deposits decreased by $36 million during the quarter, with core deposits increasing by $26 million and certificates of deposit decreasing by $62 million. This continued change in the mix of our deposits away from certificates to core funding contributed to another small drop in our cost of funds, down to 20 basis points. Year-to-date, we have increased our number of transaction accounts by over 5,000. And during the quarter, the average of our noninterest-bearing checking balances increased by over $55 million over the first quarter averages. On the lines of business side, our mortgage banking income was down for the quarter, affected by both a change in the production mix as well as a change in interest rates. Much of the production in the second quarter was in the residential, construction and permanent portfolio, which increased over $16 million during the quarter. This increase in construction loan balances on our balance sheet is increasing our net interest income levels until construction is complete and the loan is sold into the secondary market. Of course, the recent uptick in mortgage rates also had an impact on the size of the outstanding mortgage pipeline. In our wealth management group, we had another solid quarter, with income of $2.4 million and assets under management of $1.8 billion. I will now turn the call over to John Pollok, who will provide additional information on our initial performance.

[John C. Pollok:]

Thank you, John. I wanted to first give you an update on the impact of the Savannah Bancorp merger. We are very pleased with the performance to date and have exceeded our goal of 35% cost saves. With the cost saves coming through a little better than planned and some revenue synergies being realized, we estimate that the Savannah EPS accretion impact will be an excess of our last projections. Our noninterest income totals were down by $1 million from the previous quarter, as increases in bank service charges income and trust and investment services income were more than offset by reduction in mortgage banking income. Bankcard services income totaled $4.2 million, up $350,000 from the linked quarter. Our net interest income improved linked quarter by $1.5 million, as we had interest income increases of approximately $500,000 due to the increased volume in our legacy loan portfolio and a $1 million increase in interest income on our acquired loan portfolio. During the quarterly recast process, we had significant cash flow improvements in our acquired loan portfolios, primarily coming from the CBT and people's portfolios. We should see a full quarter's impact of those releases in the third quarter. Our net interest income increased 7 basis points to 5.01%, as our yield on earning assets improved by 6 basis points and our cost of funds dropped 1 basis point. We still think we have a little room to drop our interest cost further as we have approximately $250 million in certificates repricing in the next 3 months, with the weighted average cost of 0.33% compared to the rate on recent renewals of 0.14%. Our efficiency ratio continued to improve during the quarter as our overhead expense decreased by $1.6 million, primarily the result of a decrease in merger-related expenses of $1.1 million. Salaries and employee benefits were up $500,000, half of which was due to the increase of 401(k) match expense. The increases in salaries and benefits expense were more than offset by reductions in most all other noninterest expense categories, led by a drop in OREO and loan-related expense of $300,000. The improvements in our efficiency ratio during the quarter were limited due to the decline we experienced in noninterest income levels, which we are focused on improving. Our credit cost for the quarter were substantially lower than the first quarter, as our need for provisioning decreased with significant improvement in asset quality indicators. Our current non-acquired allowance level totals 1.45% of respective loans and represents over 73% of nonperforming loan levels. Also positively impacted by lower credit cost from improved asset quality indicators, First Financial reported net income available to common shareholders of $6.9 million for the second quarter, up from $4.3 million for the first quarter. The combined earnings potential is very powerful and we estimate that excluding merger cost, the merger will be double-digit accretive during the first year. We believe our initial cost saves estimate of 30% is accurate, which we expect to fully realize by the end of 2014. I will now turn the call over to Wayne Hall to discuss the merger integration planning.

[R. Wayne Hall:]

Thank you, John. The past several months have been exciting for both SCBT and First Financial teams. As we have had the opportunity to interact more closely in building our integration teams. Our key focus is to build a best-in-class organization, with a solid and strong community bank culture. I am truly proud of our employees as they have come together as one team. An assessment of the bank has occurred at every level and angle. We want to enhance our customers' experience and satisfaction, as we consolidate our departments and products. There has been a tremendous effort in the evaluation of various systems of our banks. And we are confident that the consolidated platform will be first rate. This will require several hardware and software upgrades over future quarters and our expected core system conversion is planned for mid-year 2014. I will now turn the call over to Robert Hill with summary comments.

[Robert R. Hill:]

Thank you, Wayne. Just to summarize, we are very pleased to be where we are today with our merger planning and are very pleased to welcome the First Financial employees and shareholders into our company. We are thankful for the dedicated efforts of the many people that helped get this merger to closing and are confident in our conversion and integration teams' ability to execute our plans. I am even more excited today about the financial and the strategic opportunities this merger creates than I was even when we first announced it. We look forward to updating you on our merger integration progress and to a great finish in the second half of 2013.

[Operator:]

[Operator Instructions] Our first question comes from Christopher Marinac at FIG Partners.

[Christopher W. Marinac:]

Robert, I was wondering if you could just give us an update on how you are feeling about the customers in terms of discount business pipeline and sort of where, I guess, folks demand has appeared any changes plus or minus the last quarter.

[Robert R. Hill:]

Chris, thanks for the question. This is Robert. I'm going to ask John Windley, can give you some probably additional color on that. But overall, the first quarter started off, I'd say, about as we expected kind of mid-single digit kind of growth rates. But this second quarter, we're really seeing loan demand pick up in most areas. And take mortgage, for example, while we've had some slowdown in our secondary pipeline and fees were off, we had very nice increase in our in-house construction and our in-house 1-to-4 family book. On the commercial side, same thing. You're seeing, I think, the confidence level pickup. You're seeing business is starting to take some proactive steps, buy new equipment, expand lines, and we continue to see what we've seen for the last 10 years, which is a continued frustration with many of the larger banks and some really good opportunities to move business. And then the Savannah, I'll just touch on the Savannah market, obviously this first quarter, we were going to the Savannah integration, which is very distracting, but the second quarter in Savannah, we have really come out of the gate strong down there, teams doing a great job and have a fair amount of traction there. John, anything else that you'd add?

[John F. Windley:]

Christopher, I'd just add that we've seen balanced growth, which I think is very encouraging. Robert mentioned the uptick in the construction side. But it's been kind of broad across all categories. And I think we've seen a renewed level of confidence with some of our consumers, borrowers as well. So both commercially and on the commercial side and the consumer side, we've seen broad improvement. The other thing that I would say too is, some of the increases in the longer-term rates that have been out in the market and the announcements that the Fed has made the potentially discontinue the easing, I think has had an impact on borrowers getting off the fence, if you will. And we've had an increase, significant increase in folks on the construction side that had been kind of sitting on the fence, and have moved, have gotten off the fence now. And so activity is definitely picked up in the second quarter and have a fairly robust pipeline for the third quarter as well.

[Christopher W. Marinac:]

Very well, guys, that's been very helpful. And then just, Robert, just a separate I guess follow up on the systems planning as you close and then the later integrate First Financial, is that timing down would be kind of mid-next year? Or is that moving at all?

[Robert R. Hill:]

Yes. We're shooting for probably July 14. We have conversion dates planned. We are going to make those public, but we're shooting for somewhere around July 14. Basically, Chris, on the integration, what we've done since announcement, the last 5 months has really been, I'd say, a learning process, learning the systems, the processes and the people of each company. And now we're kind of -- we've gone through that, we thought we really have a good handle on that piece. We've announced a couple layers down of senior level managers. They're beginning to build their teams and processes. And now we're going to begin to put the -- kind of the executional phase in place. And we will convert some lines of business before July. That would obviously be the core, but we've got some lines of business that are not dependent on our core operating system, and we'll begin to put those together into this year and the beginning of next.

[Operator:]

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

[John C. Pollok:]

Well, thank you for joining our call today. And next week, we will be attending the KBW Community Bank Conference in New York. And we really like to invite you to listen to our presentation, which will be webcast live at 11

[Operator:]

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