Business context and reporting period
The filing is SCBT Financial Corporation’s Form 10-K for the fiscal year ended December 31, 2011; the filing identifies the issuer as SCBT Financial Corporation, not Southstate Bank Corp. Through SCBT, N.A., it provides banking, mortgage, trust, and investment services in South Carolina, Mecklenburg County, North Carolina, and Northeast Georgia. At year-end it reported 70 financial centers, approximately $3.9 billion of assets, and 1,071 full-time-equivalent employees.
Growth included FDIC-assisted acquisitions of Habersham Bank in February 2011 and BankMeridian in July 2011. In December 2011, SCBT agreed to acquire Peoples Bancorporation; that transaction remained pending at year-end.
Financial performance and condition
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Total assets | $3.897 billion | $3.595 billion | Up 8.4% |
| Total loans, net of unearned income | $2.873 billion | $2.617 billion | Up 9.8%; includes acquired loans |
| Total deposits | $3.254 billion | $3.004 billion | Up 8.3%, primarily from acquisitions |
| Net interest income | $151.5 million | $122.6 million | Up 23.5% |
| Net interest margin, taxable-equivalent | 4.66% | 4.00% | Up 66 basis points |
| Provision for loan losses | $30.2 million | $54.3 million | Down $24.0 million |
| Noninterest income | $55.1 million | $137.7 million | Down $82.6 million, mainly due to lower acquisition gains |
| Noninterest expense | $143.0 million | $125.2 million | Up 14.2% |
| Net income | $22.6 million | $51.9 million | Down 56.4% |
| Diluted EPS | $1.63 | $4.08 | Down 60.0% |
| Return on average assets / equity | 0.58% / 6.10% | 1.43% / 15.45% | Lower, principally reflecting the much larger 2010 acquisition gain |
| Efficiency ratio | 68.77% | 46.68% | Higher; acquisition gains inflated the prior-year comparison |
Interest income rose to $171.7 million from $155.4 million, while interest expense fell to $20.3 million from $32.7 million. Management attributed stronger net interest income to lower funding costs and higher yields on acquired loans; the acquired-loan portfolio yield was 10.69%. Acquisition gains were $16.5 million in 2011, versus $98.1 million in 2010. Adjusted efficiency ratios excluding specified acquisition gains and other items were 73.0% for 2011 and 67.9% for 2010.
Cash flows were $150.6 million provided by operating activities, $119.7 million provided by investing activities, and $336.0 million used in financing activities. Cash and cash equivalents ended the year at $171.4 million, down from $237.1 million. Cash flow figures reflect bank acquisition activity and significant noncash adjustments and should be read with the cash flow statement.
At year-end, shareholders’ equity was $381.8 million and book value per share was $27.19. Regulatory capital ratios were 15.36% total risk-based capital and 9.12% Tier 1 leverage for the holding company; the bank was also reported well-capitalized. Deposits were $3.254 billion, short-term federal funds and repurchase-agreement borrowings were $180.4 million, and other borrowings were $46.7 million, including junior subordinated debt. No FHLB advances were outstanding. Reported liquidity sources included $221.0 million of federal funds credit lines, $79.6 million available at the Federal Reserve discount window, and $230.3 million of unused FHLB credit after letters of credit.
Asset-quality indicators were mixed. Non-acquired net charge-offs fell to $26.8 million, or 1.12% of average loans, from $44.3 million, or 1.99%. However, nonperforming assets excluding covered assets rose to $94.9 million from $86.5 million; the ratio to loans and repossessed assets increased to 3.82% from 3.74%. Total nonperforming assets including FDIC-covered assets were $161.0 million. The allowance was $49.4 million on non-acquired loans and $31.6 million on acquired loans; the non-acquired allowance equaled 2.00% of period-end loans.
Material changes versus the prior comparable period
- Two FDIC-assisted acquisitions increased assets, loans, deposits, and the geographic footprint. The acquisitions generated $16.5 million of 2011 gains, well below the $98.1 million gain from the 2010 CBT acquisition.
- Net interest income and margin improved as deposit and borrowing costs declined and acquired-loan yields increased. Non-acquired loan growth was nearly 8%.
- Lower net charge-offs reduced the loan-loss provision, but nonperforming assets and restructured loans increased; total troubled debt restructurings were $17.6 million versus $9.7 million.
- Operating costs increased, including salaries and benefits (up $8.1 million) and OREO and loan-related expense (up $9.1 million). Non-acquired OREO expense rose amid property write-downs.
- Core deposits, excluding time deposits, grew to 72% of total deposits from 62%. Excluding the two 2011 acquisitions, total deposits decreased $12.8 million.
- SCBT raised $34.8 million net through a February 2011 private placement of 1,129,032 common shares, contributing to higher capital ratios and diluting existing shareholders.
Outlook, risks, contingencies, and unusual items
- Management expected non-acquired net charge-offs to moderate in 2012 compared with 2011, while cautioning that real estate and broader economic pressures remained. The filing provides no quantified earnings or revenue guidance.
- The Peoples merger was expected to close in the second quarter of 2012, subject to regulatory and shareholder approvals and other closing conditions. It contemplated approximately 1.004 million SCBT shares. Two purported Peoples shareholders filed a lawsuit seeking to block the merger; SCBT said it considered the claims without merit and not expected to have a material adverse effect.
- Credit risk remains concentrated in real estate and the Southeast. Approximately 87.1% of loans had real estate as a primary or secondary collateral component; commercial real estate loans equaled 158.6% of total risk-based capital. Management noted coastal-market pressure and the possibility of further allowance increases.
- FDIC loss-share arrangements reduce, but do not eliminate, losses on covered acquired assets. They include compliance requirements, limited coverage periods, and possible “true-up” payments. The company estimated a $1.0 million BankMeridian true-up obligation at the end of the agreement; actual amounts depend on future realized losses.
- Time deposits assumed in the Habersham and BankMeridian acquisitions experienced expected run-off of approximately $148.5 million and $129.7 million, respectively, through year-end. Management described liquidity as adequate but noted deposit retention and access to secondary funding as risks.
- Low interest rates, changing yield curves, future regulation, compliance costs, competition, acquisition integration, pension funding, and real estate values could affect results. A 200-basis-point rate increase was estimated to increase one-year net interest income by approximately 0.7%; management said a comparable falling-rate simulation was not meaningful at prevailing near-zero rates.
- Unusual accounting and other items included the $10.1 million amortization of the FDIC indemnification asset in 2011, a $31.6 million acquired-loan allowance provision largely offset by a $30.0 million FDIC-related benefit, and $3.2 million of merger expense. The defined benefit pension plan was underfunded by $5.8 million, versus $1.6 million in 2010.
- The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also reported disclosure controls as effective.
Most important facts for investors to verify
- Whether earnings improve without reliance on acquisition gains, and whether expense growth and the efficiency ratio stabilize.
- Trends in nonperforming loans, OREO, restructurings, charge-offs, and the adequacy of both acquired and non-acquired loan-loss allowances.
- Realized losses, FDIC reimbursements, loss-share compliance, and potential true-up payments on acquired portfolios.
- Deposit retention, core-deposit growth, cash balances, and availability and cost of wholesale liquidity sources.
- Completion terms, dilution, integration costs, and litigation or approval risks for the pending Peoples acquisition.
- Capital, dividend capacity, and sensitivity to interest rates, regulatory changes, and pension funding requirements.