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Park Sterling Corporation (NASDAQ:PSTB)

Provident Community Bancshares, Inc. Merger Announcement Conference Call

March 05, 2014 08:00 AM ET

Executives

Susan D. Sabo – Senior Vice President and Chief Accounting Officer

James C. Cherry – Chief Executive Officer

David L. Gaines – Chief Financial Officer

Analysts

Jefferson Harralson – Keefe, Bruyette & Woods, Inc.

Operator

Good morning and welcome to the Merger Announcement Conference Call for Park Sterling Corporation and Provident Community Bancshares, Inc. All participants will be in a listen-only mode. (Operator Instructions) after today’s presentation, there will be an opportunity to ask questions (Operator Instructions). Please note this event is being recorded.

Now I would now like to turn the conference over to Ms. Susan Sabo. Ms. Sabo please go ahead, ma’am.

Susan D. Sabo

Thank you, operator. During this call, forward-looking statements will be made regarding Park Sterling regarding the future operational and financial performance of Park Sterling and Provident Community. The forward-looking statements should be considered within the meaning of the applicable securities laws and regulations regarding the use of such statements.

Many factors could cause results to differ materially from those in the forward-looking statements. We encourage participants to carefully read the section on forward-looking statements incorporated in our press release issued this morning and in all documents Park Sterling filed with the SEC.

I would now like to turn the meeting over to Jim Cherry, Park Sterling’s Chief Executive Officer.

James C. Cherry

Thank you, Susan, and good morning to our listeners. We appreciate you are joining us. Excited to have this opportunity to discuss a very attractive merger between Park Sterling Corporation and Provident Community Bancshares, which is the parent of Provident Community Bank, which we announced earlier today.

In addition to the press release, you can also find an investor presentation on our website, which gives detailed information about our proposed merger and that we’ll be following during this call.

Joining me this morning are David Gaines, our Chief Financial Officer, and Nancy Foster, our Chief Risk Officer. David and I are going to cover the bulk of the prepared presentation, but Nancy will be available to answer any questions about our due diligence from the risk standpoint.

I’m going to start on Slide #3, here you see the primary merger benefits of the Park Sterling. We think this is a very attractive merger both from a strategic standpoint as well as from a financial and risk standpoint.

From a strategic standpoint, this does advance our strategy of building a regional community bank in the Carolinas and Virginia. It clearly strengthens our position in the important Charlotte-Gastonia-Concord MSA, which includes Rock Hill and as you will see in a moment, when you look at a map, it gives us a stronger branch density in the Upstate and Midlands regions of South Carolina.

It is an opportunity obviously for us to expand our product offering into markets that we are already familiar with through the increased branch density that I mentioned, but probably one of the most attractive parts of the transaction outside the financials is the very attractive deposit base of the franchise and it’s timing, given our growth expectations, our plans that we announced earlier when we were into Virginia, our commitment to generate in double-digit loan growth during 2014.

The deposits, which you will see in a moment are very strong from this franchise, will give us an opportunity to leverage those deposits and increase the financial returns of the transaction beyond the initial kind of day one base case scenario, that David will be describing in an moment.

From a financial standpoint, it meets or exceeds all of the financial criteria that we have used from an M&A standpoint provides us with a very low cost deposit base and a large investment portfolio which as I mentioned I think we can leverage and redeploy through loan originations.

And from a risk standpoint, it’s obviously an in-market transaction. We know these markets very well, we literally are in or surround them already and I think we have demonstrated to you and others that we have a very experienced due diligent team and our ability to do an integration on a very sound basis.

I should mention that like Park Sterling, Provident Community does use the Jack Henry SilverLake platform. So that obviously makes it much easier for us during the conversion process.

Now turning to Slide 4, to give you a brief highlight of the transaction itself, Provident Community is an 80 year-old franchise with 97% of their deposits being core. I mentioned already about the enhanced density of our markets and you will see that again in just a moment.

The merger consideration, it's 100% cash consideration, it’s $6.5 million with $1.4 million or $0.78 a share to common stake shareholders and $5.1 million or $550 a share to the preferred shareholder, which is the U.S. Treasury that has agreed to accept a 45% discount to that TARP investment in Provident Community.

We expect to realize $3 million to $3.5 million in pre-tax merger related expenses associated with this and we would expect most of those would be in the first 12 months to 15 months.

Cost saves, about 40% of the acquired non-interest expense base and we would anticipate getting 75% of those cost saves within the first year and I think we’ve demonstrated in prior mergers that have been much larger and more complex than this, the ability to meet our target cost saves both from a percentage standpoint and timing standpoint.

From a financial criteria, the base case earning scenario which David will share with you in a moment without leveraging or re-leveraging if you will with the investment and deposits that we are gaining, the base case would give us a better than 12% immediate share accretion, excuse me, with full cost saves, it would give us better than 12% and we’d also have less than a three year of tangible book value dilution payback and better than a 15% IRR.

The other considerations, there are no material management or Board of Director changes, but we do anticipate keeping some of the key personnel and branch personnel particularly of Provident Community engaged and Dwight Neese, who is the CEO of Provident Community will be our senior banker in the region.

The customary conditions for closing, they are including minimum net worth threshold, the approval of Park Sterling and Provident Community’s Boards which has already been accomplished with 100% approval and the approval of Provident Community’s common shareholders approval or final approval has made its way, I should say it, Provident Community’s preferred shareholder for Treasury which is already as I mentioned given us their preliminary written approval and then the requisite Federal and State regulatory approvals. We do expect to close the transaction in the second quarter.

Now looking on Slide 5, to the Pro Forma Franchise, you have a picture is worth a thousand words and you can see very clearly how well Provident Community fills in kind of a gap if you will between our Upstate Midlands franchise and the Charlotte franchise and you also see here, how it expands MSA in Charlotte from 17 to 20 locations there and increases our deposit share to over $900 million; it solidifies our number seven deposit share in the Charlotte MSA, which is the largest community bank deposit share in this MSA.

And then finally, looking on Slide 6, you see some of the deferred MSA metrics here. I’ve already mentioned Charlotte, but if you look at the attractive Greenville-Anderson-Mauldin MSA, we will be at 15th deposit market share, that’s an increase from 17. In the Spartanburg MSA of 11, that’s an increase from 19th market share. And in Columbia MSA, 14, that’s an increase from the 22nd market share. So in all of these cases, it’s improving our market share and density in this geography.

So with that brief overview, I’d like to turn to David and let him go through some of the financials. David?

David L. Gaines

Thank you Jim and good morning everyone. I’m now on Slide 7. If you take a look at the table, you can see the Provident Community is bringing about $323 million in assets to the table, but interesting a lot of that is in cash and securities, 58% to be precise.

If you would look at a trend line for Provident Community since December 2008, which is where we would generally begin our timeline from a due diligence benchmarking standpoint. What you’d see is the Dwight Neese team has really successfully managed their loan book down by almost 60%. In that period of time, they did that in order to mitigate what have become an uncomfortably high credit risk position and that’s something we’ve seen in many community banks in the Carolinas.

Those reductions have resulted today in a relatively low loan to deposit ratio of just 44%, which is why you got so much in cash and securities. Now the upside of that for the combined company is it really has an under-utilized deposit base that presents us with a great opportunity to enhance net interest income through loan originations. As Jim mentioned, that’s attractive generally from the stores of core deposit funding, but particularly given our organic growth efforts in the recent Richmond opening.

And just to size that for you, Jim has shared those base case financial model results that’s the EPS accretion, north of 12%, TBV payback within three, IRR 15%. The key assumptions for you in that, it’s really cost saving driven, which as Jim mentioned, we are pretty confident given our track record, and what we got in there is an assumption that we really haven’t done anything with those cash and securities. We are assuming a pretty short duration investment profile with the 2% yield in that base case model.

Now if you can take that 2% yield and push it up by 50 basis points through loan originations or even longer duration securities or something, that EPS accretion is going to go from 12% up to the 20% range or better, the TBV payback is going to come down into the two-year range or better and your IRRs are going to get in the 25%, 30% range or better. So that’s what Jim is alluding to. The real financial driver, while it’s very attractive just pure deposits and cost save, you’ve got significant list opportunity, if you can do something more with those deposits on a better risk return basis.

Now if you turn to Slide 8, there are significant benefits to the Provident Community we think in this transaction. First, their shareholders are going to get a strong premium toward the company’s current value suggests and they are going to receive it in cash, which gives certainty to that value for them.

Second, the constituents are going to gain a solution to the consent order and written agreement and getting with a partner who has got a proven track record merging with partner with a written agreement and that I would think improves their certainty to close.

And third, the combined company as Jim mentioned really provides Provident Community with a much stronger balance sheet, distribution network and product capabilities to meet the financial needs of those customers and communities they serve so well today.

If you look at Slide 9, you got a pro forma balance sheet. This does include the preliminary acquisition accounting fair value adjustments and then what you can see is the partnership increases, Park Sterling’s total assets to roughly $2.3 billion and total deposits to roughly $1.9 billion.

If you’ll turn to Slide 10, you will see our pro forma loans. Now, this one is before the fair market value adjustments and what you’ll see is, it causes just a slight shift in our loan mix.

And if you turn to Slide 11, which is the pro forma deposits and again this is before any fair value adjustments. What you can see is the partnership as Jim has mentioned does enhance our deposit mix and that’s due to the fact that Provident Community brings a very strong core deposit franchise with it.

And you can see that a little bit on Slide 12. And Slide 12 really shows you a couple of ways we think about deposits that we are looking at a merger partner and the first when we look at is that, upper right chart and what you can see is that Provident Community has not needed to artificially inflate the rates that bank deposits to maintain those customer relationships. Quite the opposite, Dwight and his team have done a very nice job, managing the cost of those deposits down over the last couple of years. We view that as a real positive in our assessment of a potential partner.

Second, if you look at the chart on the bottom, you can see that the cost Park Sterling is paying for those deposits is relatively modest compared to the other transactions in our target markets since August of 2010. We view that as our benchmark because most of you will recall that’s when we executed our public offering.

And we are measuring that as a total deal value to total acquired deposits and what you will see is, this transaction represents a 2.47% ratio, that is actually our most attractive deposit acquisition from pure cost standpoint, I mean as you can see each of our deals has actually been better than the average of 9.7% over this time.

Now, we didn’t update the chart for the deal that got announced yesterday in Charlotte, but it looks to us like it would fall above that line. So our deal would still look pretty similar to what you see in this chart today.

If you look on Slide 13, where you will see some pro forma capital and liquidity measures, again these do include our preliminary estimates for the fair value adjustments and the key message thus here is that, we have sufficient capital and liquidity after doing this deal to support additional growth initiatives whether it’s organic or M&A.

What the grey bar does here is, we’ve adjusted these measures, sorry, the dark blue is what happens just pro forma put the companies together normal sort of transaction. What we’ve put in the grey bar is the fact that we’ve always delevered the balance sheet of our merger partners by repaying their short-term debt or home loan borrowings. So that’s something, we would fully expect to do here and you can see what happens if you go ahead and pay off that debt, which we just need that extra liquidity. But TCE ratios, the [Indiscernible] ratios improve just under 10% for Tier 1, you are just over 10% for TCE/TA.

And if you’ll turn the page, from a credit due diligence standpoint, it is a brief overview over. The credit process really was in scope. We are very consistent with what we’ve done in past transactions. Quite advantage we had here is the fact that we really do operate in the same markets today. And Nancy and her team as they went through the files, we knew many of Provident Community’s customers and that was certainly comforting.

As mentioned earlier, Provident Community has been very proactive since the end of a wait addressing credit risk in their portfolio. These actions have included taking a reasonably good charge-off through the cycle of just over 9% over the last several years. And maybe more importantly they’ve reduced that overall portfolio by almost 60% as we mentioned and if you look at some of the higher risk buckets like in A,C&D they’ve reduced that by a 80% over the cycle.

And one of the things we actually really liked about their book is that, first it has a modest duration profile. Dwight his team did not get trapped in that sort of ten year lending phenomenon that you all have heard us say. We didn’t really were not big hands on either.

And second, it’s well structured he’s got covenants, he’s got guarantees and what that means is if something does go wrong with the credit, you have something to work with. In the end, we did estimate about a $13 million credit mark which is about 10.7% of the remaining portfolio.

Nancy is here, if you are having more questions but right now, I’m going to kick it back to Jim for some closing comments.

James C. Cherry

Thank you, David. When you look at this, it’s a very attractive combination both from a strategic standpoint probably the most attractive combination from a financial standpoint especially as the way that it fits in with our growth objectives that we’ve shared with you. And I think you can see how that leveraging can really make this even more attractive. So and with those comments, we’ll go ahead Keith and open this up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And question comes from Jefferson Harralson of KBW.

Jefferson Harralson – Keefe, Bruyette & Woods, Inc.

Hi thanks guys. Can I just ask you a question on the 12% EPS accretion? I don’t know have the slides in front of me, I hope that would too much but I think I heard you say was that it’s just really just over in the current earnings stream with the cost savings. Does that include also the potential shrinking of the balance sheet that you plan with the transaction? Everyone is keeping their balance sheet the same that sort of simulate the leverage. Is that possible over time?

James C. Cherry

Yes and that’s kind of holding at the same Jefferson and so we’ve not, in some degree you got some negative carry in there. So it’s probably a little more conservative view than we would even expect in a normal base and I would say honestly, the yield is down from what they are earning today. So again we have tried to put what we think is a very achievable scenario in front of you all for that basic which is still, we think a very attractive transaction for our shareholders.

Jefferson Harralson – Keefe, Bruyette & Woods, Inc.

And just an accounting question, with the discount that you are getting from the government, then the accounting game and how to model that?

James C. Cherry

Effectively, it is considered value for the merger and so effectively it just would reduce the goodwill you would otherwise be paying if you want to think about it that way. What we technically will do Jefferson is we will literally sort of concur with closing the merger, we purchased the stock from Treasury, that’s why it’s consideration from us for the transaction and then once we acquired the company, which happens one milliseconds later you are retiring.

Jefferson Harralson – Keefe, Bruyette & Woods, Inc.

Got it.

James C. Cherry

So you are retiring your own capital effectively at discount, if you want to think it that way.

Jefferson Harralson – Keefe, Bruyette & Woods, Inc.

Okay. Thanks guys.

Operator

(Operator Instructions) all right there are no more questions at present time, so I would like to turn the call back over to management for any closing comments.

James C. Cherry

Great. Thank you, Keith and we thank our listeners for being on here and then this is fairly straight forward transaction, only closing comment I would like would be about the continued emphasis on our part of building what I would I call a real franchise and I think we’ve been very consistent and disciplined about that. We looked only to markets that we felt or even contiguous to where we were on fitting with our initial objective of building presence in the higher growth markets of the Carolinas and Virginia.

We now have a very attractive footprint which stretches from North Georgia, end of Virginia and I think when you look at the I call dots on the map, there is a great deal of logic to what we are continuing to build. We maintain that commitment to building in that fashion and think this is a good anticipation [ph] of that commitment.

Thank you again for being with us and we look forward to sharing future news with you.

Operator

Thanks. Our conference is now concluded. Thanks for attending today’s presentation. You may now disconnect your lines. Have a nice day.

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