SouthState Corporation
Q3 2013 Earnings Call Transcript

Published: 29 Oct 2013

[Operator:]

Good morning. And welcome to the First Financial Holdings Third Quarter Earnings Conference Call. Today’s call is being recorded and all participants will be in listen-only mode for the first part of the call. (Operator Instructions) Later we will open the line for questions. (Operator Instructions) I will now turn the call over to Donna Pullen, Director of Media and Investor Relations for SCBT.

[Donna Pullen:]

Thank you for calling in today to the First Financial Holdings third quarter earnings conference call. 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. I would now like to introduce John Pollok, our Chief Operating Officer and Chief Financial Officer who will begin our call.

[John Pollok:]

Thank you, Donna, and good morning to everyone on the call. With me today is Robert Hill, our Chief Executive Officer, who will provide an overview of the Bank and an update on the merger integrations. I will then provide detail on our financial performance which will include an overview of the merger which closed on July 26th. We will conclude the call with a Q&A session with the research analyst community. I will now turn the call over to our CEO, Robert Hill.

[Robert Hill:]

Thank you, John, and thanks to everyone joining us this morning. We are pleased to report our first combined results of operations since closing the merger with First Financial Holdings. This is a significant milestone for our company as we have closed the largest in state bank merger in South Carolina history. I’m very pleased in how the teams are working together with their early financial performance and the results from our first day of integration. While the size of the merger makes linked-quarter comparisons difficult this quarter, it is evident how financially powerful this combination can be. Our focus is on executing our integration plan. But first we want to get our lines of business and market consolidated in order to make sure our care for our existing customer relationships, as well as our development of new relationships was not interrupted. These banking groups are now one team and they are searching for a winning business. One example of this is our organic loan growth of over 11% this quarter. Another example is the stability of the newly acquired core deposit account balances as well as the growth of our legacy non-interest-bearing deposit account balances during the quarter. We’re also fortunate that we continue to add talented bankers to our team as they also see the opportunities ahead for our company. In the wealth management group, we achieved another solid performance during the quarter and also completed the conversion of the trust platforms. The wealth management group is making great progress and now has assets under management in care of $3.3 billion. We’ve also completed the review of our combined branch network and have announced the consolidation of 20 branch locations. Most consolidations have a full-service location in close proximity to the closing branch and the new facility is a more convenient and improved banking facility. We anticipate very little customer disruption as a result of these changes. These consolidations will begin in January and continue through next August. We're excited about the opportunities in the mortgage area as well as we prepare to sell directly to the agencies and retain the servicing of these assets. Legacy SCBT production in the past was sold into the secondary market with servicing released and we’re in the process of shifting that production to the legacy First Financial operations. This enhanced model should increase our margins and offer better customer experience. While much of our focus has been on merger integration as we prepare for our systems conversions in early third quarter of next year. We continue to see improvement in legacy SCBT asset quality numbers. The market that we serve are steadily improving and we’re seeing growth in many of our markets. I'll now turn the call over to John Pollok to give you some detail on our financial performance.

[John Pollok:]

Thank you, Robert. We achieved record operating earnings of $18.8 million, or $0.85 per diluted share for the third quarter. This equates to an operating return on average assets in an average common equity of 1.07% and 9.45%, respectively. Net income available to common shareholders totaled $11.5 million for the quarter, or $0.52 per diluted share. This was impacted by merger-related costs totaling $0.33 per diluted share. With the legal closing of the transaction on July 26 providing commentary on the linked quarter comparisons is not very meaningful. So I will focus my comments on some of the initial estimates and changes in the composition of our balance sheet. We issued approximately 7 million shares with this merger and the assets and liabilities assumed are recorded at fair value estimates and are subject to change. These estimates came in line with our pre-merger modeling. Our tangible common equity to tangible assets at the quarter end is 6.85% and with this earnings performance that we are expecting, we are now hopeful that we can repay the preferred equity by the end of the second quarter in 2014. We also recently close on a $30 million holding company line of credit to ensure that we have significant access to liquid resources. If you recall from our merger announcement discussions, one of the greatest opportunities that existed with this merger was the repayment of the legacy First Financial FHLB advances, utilizing some of our excess liquidity. This was completed on the day of closing with the repayment of approximately $233 million in advances. We have also made some significant investment portfolio decisions, selling approximately $175 million in securities. The sales consisted of private level CMOs, trust preferred CDOs, corporate bonds, agency mortgage-backed securities and municipal bonds that generally did not fit within our risk tolerance. Over the next several months, depending on market conditions, we intend to redeploy some of the excess liquidity from these sales back into the investment portfolio. I want to next turn to the income statement starting with our net interest margin. The margin improved to 5.11% for the quarter as we had an increase in our yield on earning assets. In the third quarter, average loans represented 82% of interest-earning assets as compared to 79% during the second quarter. We also had some credit releases due to the continued cash flow improvement in some of our acquired loan pools. Of course, they are all are margin headwinds, as competition for loans continues to put pressure on pricing. But let me point out that we have significant excess liquidity that can be deployed to help mitigate some of the margin pressure, the entire industry is feeling. On the non-interest income side, service charges on deposit accounts totaled $8.9 million, bank card services income totaled $6.5 million and trust and investment services income totaled $3.6 million. Of course, this does not include a full quarter’s impact from First Financial. In line with most of the industry, our mortgage banking income was down for the quarter as we are seeing less secondary market activity and more on balance sheet on opportunities. Purchase money transactions currently totaled about 60% of the pipeline with refinances totaling about 40%. We are picking up more income in the margin with opportunities and good construction loan activity. As Robert mentioned earlier, we are excited about some of the revenue synergy in the mortgage area, as we consolidate mortgage lending operations and sell legacy SCBT production directly to the agencies. With limited cost saves achieved during the first quarter of the combined operations and $10.4 million in merger cost, non-interest expenses totaled $75.4 million. We continue to anticipate realizing approximately $38 million in cost saves, with the majority of the saves realized after the systems conversions. I will now turn the call back over to Robert Hill for some closing comments.

[Robert Hill:]

Thank you, John. As you can tell, it has been a busy but very rewarding quarter. Our banking model continues to differentiate us in the market and our merger has positioned us well for the future, both financially and strategically. We look forward to reporting to you on our progress next quarter. That concludes our prepared remarks. And so I would ask the operator to open the call for questions

[Operator:]

(Operator Instructions) And our first question comes from Jefferson Harralson at KBW.

[Jefferson Harralson:]

Hi, thanks. I was hoping just to get a little help on what things look like next quarter. You provided some great information in the package as well. Can you talk about where your -- what your tier 1 and your tier common, the base for those two ratios are and may be what your risk-weighted assets are?

[John Pollok:]

Jefferson, this is John. We are going to file our Q at the end of next week. So we are still working on our risk weighted little bit on First Financial and so once we get all that add up, we’ll have everything out there for you next week on that.

[Jefferson Harralson:]

All right. Thanks. And did the loan mark coming around $118 million that we were looking for?

[Robert Hill:]

It did. It was a little bit higher but pretty close to that number. As you can imagine, one of the things that we are having to focus on especially this quarter, there was so much loan granularity, lot of small ones. So, I do think, this quarter you could see the marks vacillate a little bit as we get and do more loan penetration in terms of the review.

[Jefferson Harralson:]

Hi. Thanks. And last thing, it might be in here but the end of loan yield on acquired loan?

[Robert Hill:]

The ending loan yield on acquired loans? Yeah, if you look in the margin table for the quarter it was 792.

[Jefferson Harralson:]

Right. Perfect. Thanks, guys.

[Operator:]

Our next question comes from Jennifer Demba from SunTrust Robinson Humphrey.

[Jennifer Demba:]

Thank you. Good morning. You were able to generate nice loan growth in the quarter despite closing the deal, just curious as to what your outlook is over the next few quarters and what your pipelines looking like?

[Robert Hill:]

Jennifer, this is Robert. I’ll say pretty steady. Pipeline is just under $400 million pipeline on the commercial side right now. The mortgage pipeline obviously is a little bit softer but some of our markets that are doing really well. Charlotte has been just really nice growth there, the Upstate of South Carolina, the Greenville area. And then, Charleston, our teams are together, they are coven and they are moving business. So we are having a really nice impact in Charleston, pretty quickly. And then the other one is we’re now a couple quarters, Savannah merger now behind us but I understand was saw and to see the pipeline (inaudible) as well. So, I think our organic growth should be fairly consistent in the next few quarters, the pipeline looks pretty good.

[Jennifer Demba:]

Thank you very much.

[Operator:]

Our next question comes from Christopher Marinac with FIG Partners.

[Christopher Marinac:]

Thanks. Good morning. Robert and John, I know that the system conversion of the couple of quarters from now but what is the timing of looking at your branches and any other [lot] changes that you made there?

[Robert Hill:]

Chris, this is Robert and I’ll start off, as we announced the changes, told the employees a few weeks ago and they will start in January and they will kind of run through August of next year. At least 10 of those were in the first quarter and 10 are in the second quarter. So to kind of say, we’re closed in, yeah 10 in the first quarter, 10 in the second quarter. Some of the first quarter, one though are the in-stores they had a low mark strategy. We are closed in some of the in-store branches and so really I’d say, the more meaningful branches are probably closed in the second quarter.

[Christopher Marinac:]

Okay. And then as the deposits from those go away, does that help put some of the excess liquidity to work, serve as to factor basis?

[Robert Hill:]

When you look at the branch overlap, I’m not saying there won’t be some CD run off, but we’re kind of -- we are doing that anyhow and our core deposit quarter really has been pretty strong. The branches are so closed together that we really aren’t going -- we don’t expect real meaningful deposit run off.

[John Pollok:]

They also had some broker deposits and some single relationship CD, so I do feel like we will see some of that run off as we kind of perch those out of the bank.

[Christopher Marinac:]

Okay, great. And then a separate question. This is on the wealth management business. What do you see as the opportunity both kind of near term and longer term as you want to grow your business legacy but also what you inherit to be customer base?

[Robert Hill:]

Well, we’ve been focused a lot on that. I think we are just getting to the point now, Chris where we really know what our combined business model is going to look like. We have not made all that public yet, but we certainly feel like its more profitable business model that need to -- either of us had standalone in the past. We also are continuing to find opportunities to add accounted wealth management bankers. And we brought two of those over this in the past month, one in Charleston and one in Columbia. So I think the opportunities, the couple fold, the large banks obviously are going after the 20 to 25 plus million dollar relationships. We are focused really on the more, the 1 to 25 kind of relationships. There is still a lot of good wealth management bankers that are available, that were -- who are going to be able to recruit over. And then, one business that we still don’t fully understand yet, that is part of the wealth group is the 401-k business that First Federal has API. So they have got just under a billion in assets under management there. It’s a servicing business and they also do some investment management consulting. So that’s one that I feel like we can certainly grow as well.

[Christopher Marinac:]

Great. That’s helpful. Thanks very much.

[Operator:]

Our next question comes from Peyton Green of Sterne Agee.

[Peyton Green:]

Yes. Good morning. I was just wondering if you could tell me what a good timeframe would be from an expectation perspective on deploying the cash? And then I know you are a bit cash heavy even at the end of the second quarter, I mean, what would you expect from a business model perspective to run with over time?

[John Pollok:]

Peyton, this is John. Obviously we are holding a fair amount. One of the things that we have to do first, we sold a fair amount out of the investment portfolio. We are going to begin to build that back up over the next couple of quarters. We feel really good about our organic growth that Robert mentioned earlier. So hopeful we will have more organic growth there. And then, I think it’s kind of wait and see, I think one of the things that we have really tried to focus on as we started doing more acquisitions is finding good core funding and if we have to carry some excess cash for a while we are fine with that. We obviously don’t want to go out and take a lot of interest rate risk today whether it would be in the investment portfolio on the loan side, but I would think over time we ought to be able to deploy the majority of that and then we probably at some point be $250 million to $300 million in cash.

[Peyton Green:]

Okay, great. And then just in terms of some color on the loan production maybe versus (inaudible) upticking how would you characterize the overall production versus payoffs. And what’s your outlook for payoff activity. It has been a issue for a lot of banks we cover this quarter. We are just wondering if we do have any already in the fourth quarter, things look pretty good.

[John Pollok:]

Well, I start, Peyton. I think one of the things that we have tried to focus on the run-off is kind of some of the riskier assets and saying we did those three FDIC deals, we did two open bank deals that had high levels of classified capital and then obviously we did the merger. And so, if you go back and look at Savannah in Peoples, our two open bank deals. They were a little heavy in construction in land development. So we are continuing to try it to shrink those lines of business. Obviously on our FDIC deals, we ought to be getting down to more of the core bank and so that’s what we are trying to do in terms of the run-offs is to try to get that right size. Here on the growth side, obviously one-to-four family on balance sheet, our business is much better today. We’ve seen a whole lot more purchase money. Now, let Robert maybe comment a little bit on the commercial side.

[Robert Hill:]

I would say overall, I mean what we are seeing is shrinkage in the acquired books either because of the concentration levels in certain areas that we are not signed up or to credit grades that we are trying to move out of the banks. So, I think as much of remixing is as it is anything, I think the core relationships in terms of just the competitiveness of the market really not -- we’re not losing much business.

[Peyton Green:]

Okay. And I guess, is there -- I mean over the next couple of quarters, I mean would you expect there to be a pick up in the run off just and managing or do you get a sense that on balance or in total that’s really starting to flow?

[Robert Hill:]

Well, I think first, the First Federal book obviously is very new so and I think we’re starting to really get a handle on our FDIC deals. Those books, those acquired books now are fairly small and the run off is beginning to slow. Same thing with the Peoples acquisition, we’ve seen it kind of moderate and now begin just kind of turn back the other way and all those are a couple three years in the maturity. Savannah Bank is almost a year end, so it’s still very early there. So, I think there will be some more contraction in that portfolio, before we are at total stability and I would say, with First Federal there will be some contraction that the level that it will be is quite too early to tell.

[John Pollok:]

Yeah. Peyton, this is John. We’re going to contract in those acquired books, really throughout probably most of the next year. I think if you look at really all our transactions, the first year we see a fair amount of repositioning in the book. This was -- obviously, First Federal was a traditional thrift. There were some more balance sheet stuff on the mortgage side that will sell into the secondary market and we’ve really modeled all of our deals to have run off in the first year. And there were some lines of business that First Federal was in, that we pulled away from. They did a lot of wholesale lending and did some old balance sheet lending in markets outside of their footprint that we will not do. And they also were doing some yacht lending on the coast, North and South Carolina, Georgia and Florida that we will not do as well.

[Peyton Green:]

Okay. And I guess more and just in terms of the core portfolio that did you do day in and day out. I mean, it would seem like you didn’t see that much of a pick up in pay offs necessarily, or did just your originations pick up maybe compared to last quarter or quarter before?

[Robert Hill:]

Originations picked up but we didn’t -- we’re not seeing a lot of churn in the non-acquired loans that we’ve originated. And we’re not seeing a lot of churn in the credit, in the acquired portfolio that’s acceptable credit. We’re just really seeing most of the churn, most of the reduction in heavy CRE, probably lending construction and land development and a lot of classify or criticized loans?

[John Pollok:]

And, Payton, I think the market has gotten rational again. The first of the year, a lot of people were doing 10 and 15-year fixed rates and that’s something we did not do a lot of, and so we’re definitely seeing and so that’s obviously helped from a competition standpoint not having to compete with that.

[Peyton Green:]

Right. That color helps a lot. Thank you very much.

[Operator:]

This concludes our question-and-answer session. I will now turn the call back over to John Pollok.

[John Pollok:]

Thanks everyone for your time today. We will be participating in the Sandler O'Neill East Coast Financial Service Conference in Naples, Florida on November 14th. We look forward to reporting to you again next quarter.