SCBT Financial Corporation (filing identified in metadata as Southstate Bank Corp) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012 unless otherwise stated. The filing issuer is SCBT Financial Corporation, a South Carolina bank holding company operating through SCBT, N.A. The quarter’s results are not necessarily indicative of full-year results.
Financial results and condition
- Earnings: Net income was $7.0 million, versus $2.5 million in Q1 2011. Diluted EPS was $0.50, compared with $0.19.
- Interest income and margin: Net interest income increased 18.9% to $39.0 million; net interest margin was 4.66% on a non-taxable-equivalent basis and 4.70% on a taxable-equivalent basis. Non-taxable-equivalent margin rose 54 basis points year over year but fell 7 basis points from Q4 2011.
- Credit costs and asset quality: Provision for loan losses was $2.7 million, down from $10.6 million. Annualized net charge-offs were 0.66% of average non-acquired loans, versus 1.53% a year earlier. Non-acquired nonperforming assets were $91.4 million, down from $94.9 million at year-end; including covered assets, nonperforming assets were $153.4 million. The allowance was $82.0 million, including acquired-loan allowances, and 1.95% of non-acquired loans.
- Noninterest items: Noninterest income was $9.5 million, down from $15.9 million, primarily reflecting the absence of the $5.5 million Habersham acquisition gain recorded in Q1 2011 and greater negative accretion on the FDIC indemnification asset. Noninterest expense increased 2.9% to $35.2 million. The efficiency ratio was 72.0%, versus 70.2% in Q1 2011.
- Balance sheet and liquidity: Total assets were $4.05 billion; net loans were $2.72 billion; deposits were $3.36 billion; and shareholders’ equity was $386.5 million. Cash and cash equivalents were $403.2 million, compared with $171.4 million at December 31, 2011. The company reported no brokered deposits and said liquidity was adequate. Available facilities included $331.0 million in federal-funds lines, $78.1 million at the Federal Reserve discount window, and an FHLB facility of $282.7 million, with no advances outstanding on those facilities at quarter-end.
- Funding and capital: Federal funds purchased and repurchase-agreement funding totaled $235.4 million; other borrowings were $46.4 million. The company and bank were classified as well capitalized. Company Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 14.55%, 15.82%, and 9.23%, respectively.
- Cash flows: Operating activities provided $40.3 million, investing activities provided $37.3 million, and financing activities provided $154.3 million. Cash increased $231.8 million during the quarter. Financing inflows included deposit growth and higher short-term borrowings.
Material changes and management commentary
- Year-over-year earnings improvement reflected higher net interest income and lower loan-loss provision, partly offset by lower noninterest income and higher operating expenses. Deposit repricing and a shift toward lower-cost funding reduced interest expense.
- Total non-acquired loans were $2.44 billion, down from $2.47 billion at year-end but up from $2.35 billion a year earlier. Management described growth in owner-occupied commercial and consumer real estate lending, alongside reductions in construction and commercial non-owner-occupied loans.
- Management said excess liquidity, lower acquired-loan balances, and lower acquired-loan yields pressured margin relative to Q4. It expected acquired-loan yields to increase in Q2 2012, partly offset by increased negative accretion on the FDIC indemnification asset. No full-year earnings or financial guidance is provided.
- The FDIC loss-share receivable was $231.3 million. Management disclosed projected cash flows about $32.9 million below its carrying value, to be recognized as negative accretion over time; it expected $28.3 million in loss-share claims, including reimbursable expenses, after quarter-end.
- On April 24, 2012, after quarter-end, SCBT completed its acquisition of Peoples Bancorporation. Peoples reported $524.0 million in assets, $276.3 million in loans, and $448.0 million in deposits at March 31. Aggregate consideration, including the purchase and cancellation of Peoples’ TARP preferred stock, was $44.7 million. Purchase accounting remained incomplete, and the filing does not provide a clear goodwill estimate.
Risks, contingencies, and unusual items
- Management highlighted credit and real-estate-market risk, interest-rate and liquidity risk, regulatory and compliance costs, and integration risks associated with the Peoples acquisition. It also cautioned that loan-loss estimates are judgmental and may change.
- Commitments to extend credit and standby letters of credit totaled $697.5 million; management did not anticipate material losses from them.
- A purported shareholder class action challenged the Peoples merger. SCBT entered into a settlement memorandum of understanding on April 17, 2012; court approval and final settlement were not assured as of the filing.
- The filing reported effective disclosure controls and no significant first-quarter change in internal control over financial reporting. It reported no material change in market-risk disclosures from the 2011 Form 10-K.
Important facts for investors to verify
- Confirm the reporting-company identity: this filing is for SCBT Financial Corporation, although the request metadata names Southstate Bank Corp.
- Track whether expected acquired-loan yield improvement is realized and how negative FDIC indemnification-asset accretion affects reported income and margin.
- Review subsequent credit trends, especially nonperforming assets, classified loans, potential problem loans, charge-offs, and non-covered OREO.
- Verify Peoples integration progress, final acquisition accounting and goodwill, and the outcome of the merger-related lawsuit settlement.
- Assess the sustainability of deposit growth and excess liquidity, the use of short-term funding, and the effect of changing interest rates on margins.